oversight

Audit of the Federal Employees Health Benefits Program Operations at Humana Medical Plan, Inc. - South Florida

Published by the Office of Personnel Management, Office of Inspector General on 2013-07-10.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                                     U.S. OFFICE OF PERSONNEL MANAGEMENT
                                                           OFFICE OF THE INSPECTOR GENERAL
                                                                            OFFICE OF AUDITS




                                   Final Audit Report
Subject:

    Audit of the Federal Employees Health Benefits
  Program Operations at Humana Medical Plan, Inc. –
                     South Florida



                                           Report No. 1C-EE-00-13-006

                                           Date: July 10, 2013




                                                      -- CAUTION --
This audit report has been distributed to Federal officials who are responsible for the administration of the audited program. This audit
report may contain proprietary data which is protected by Federal law (18 U.S.C. 1905). Therefore, while this audit report is available
under the Freedom of Information Act and made available to the public on the OIG webpage, caution needs to be exercised before
releasing the report to the general public as it may contain proprietary information that was redacted from the publicly distributed copy.
                                                     AUDIT REPORT



                                   Federal Employees Health Benefits Program
                                Community-Rated Health Maintenance Organization
                                   Humana Medical Plan, Inc. – South Florida
                                    Contract Number CS 2110 - Plan Code EE
                                              Louisville, Kentucky



                 Report No. 1C-EE-00-13-006                                          Date: 7/10/13




                                                                                      Michael R. Esser
                                                                                      Assistant Inspector General
                                                                                        for Audits



                                                      -- CAUTION --
This audit report has been distributed to Federal officials who are responsible for the administration of the audited program. This audit
report may contain proprietary data which is protected by Federal law (18 U.S.C. 1905). Therefore, while this audit report is available
under the Freedom of Information Act and made available to the public on the OIG webpage, caution needs to be exercised before
releasing the report to the general public as it may contain proprietary information that was redacted from the publicly distributed copy.
                               EXECUTIVE SUMMARY




                       Federal Employees Health Benefits Program
                    Community-Rated Health Maintenance Organization
                       Humana Medical Plan, Inc. – South Florida
                        Contract Number CS 2110 - Plan Code EE
                                  Louisville, Kentucky


         Report No. 1C-EE-00-13-006                      Date: 7/10/13


The Office of the Inspector General performed an audit of the Federal Employees Health
Benefits Program (FEHBP) operations at Humana Medical Plan, Inc. - South Florida (Plan). The
audit covered contract years 2010 through 2012, and was conducted at the Plan’s office in
Louisville, Kentucky.

This report questions $101,227 for inappropriate health benefit charges to the FEHBP in contract
year 2010, including $6,270 for lost investment income through May 31, 2013. We found that
the FEHBP rates were developed in accordance with applicable laws, regulations, and the Office
of Personnel Management’s rules and regulations for contract years 2011 and 2012.

For contract year 2010, we determined that the FEHBP’s rates were overstated by $94,957 due to
defective pricing. More specifically, the Plan did not apply the correct SSSG discount to the
FEHBP rates.

Consistent with the FEHBP regulations and contract, the FEHBP is due $6,270 for lost
investment income, calculated through May 31, 2013, on the defective pricing finding. In
addition, the contracting officer should recover lost investment income on amounts due for the
period beginning June 1, 2013, until all defective pricing amounts have been returned to the
FEHBP.

                                                i
                                                        CONTENTS

                                                                                                                              Page

     EXECUTIVE SUMMARY .............................................................................................. i

 I. INTRODUCTION AND BACKGROUND ..................................................................... 1

II. OBJECTIVES, SCOPE, AND METHODOLOGY ......................................................... 3

III. AUDIT FINDINGS AND RECOMMENDATIONS ....................................................... 5

     Premium Rate Review ..................................................................................................... 5

     1. Defective Pricing ........................................................................................................ 5

     2. Lost Investment Income ............................................................................................. 6

IV. MAJOR CONTRIBUTORS TO THIS REPORT............................................................ 7

     Exhibit A (Summary of Questioned Costs)

     Exhibit B (Defective Pricing Questioned Costs)

     Exhibit C (Lost Investment Income)

     Appendix (Humana Medical Plan, Inc.-South Florida’s June 17, 2013, response to the draft
     report)
                     I. INTRODUCTION AND BACKGROUND
Introduction

We completed an audit of the Federal Employees Health Benefits Program (FEHBP) operations
at Humana Medical Plan, Inc. – South Florida (Plan). The audit covered contract years 2010
through 2012, and was conducted at the Plan’s office in Louisville, Kentucky. The audit was
conducted pursuant to the provisions of Contract CS 2110; 5 U.S.C. Chapter 89; and 5 Code of
Federal Regulations (CFR) Chapter 1, Part 890. The audit was performed by the Office of
Personnel Management’s (OPM) Office of the Inspector General (OIG), as established by the
Inspector General Act of 1978, as amended.

Background

The FEHBP was established by the Federal Employees Health Benefits Act (Public Law 86-
382), enacted on September 28, 1959. The FEHBP was created to provide health insurance
benefits for federal employees, annuitants, and dependents. The FEHBP is administered by
OPM’s Healthcare and Insurance Office. The provisions of the Federal Employees Health
Benefits Act are implemented by OPM through regulations codified in Chapter 1, Part 890 of
Title 5, CFR. Health insurance coverage is provided through contracts with health insurance
carriers who provide service benefits, indemnity benefits, or comprehensive medical services.

Community-rated carriers participating in the FEHBP are subject to various federal, state and
local laws, regulations, and ordinances. While most carriers are subject to state jurisdiction,
many are further subject to the Health Maintenance Organization Act of 1973 (Public Law 93-
222), as amended (i.e., many community-rated carriers are federally qualified). In addition,
participation in the FEHBP subjects the carriers to the Federal Employees Health Benefits Act
and implementing regulations promulgated by OPM.

The FEHBP should pay a market price                             FEHBP Contracts/Members
                                                                       March 31
rate, which is defined as the best rate
offered to either of the two groups closest           7,000
in size to the FEHBP. In contracting with
                                                      6,000
community-rated carriers, OPM relies on
carrier compliance with appropriate laws              5,000
and regulations and, consequently, does               4,000
not negotiate base rates. OPM negotiations
                                                      3,000
relate primarily to the level of coverage
                                                      2,000
and other unique features of the FEHBP.
                                                      1,000
The chart to the right shows the number of                0
FEHBP contracts and members reported by                            2010        2011       2012
                                                    Contracts      2,873       2,633      2,448
the Plan as of March 31 for each contract           Members        6,795       6,441      5,992
year audited.



                                                1
The Plan has participated in the FEHBP since 1989 and provides health benefits to FEHBP
members in the South Florida area. The last audit of the Plan conducted by our office was in
2009, and covered contract years 2006 through 2009. The prior audit identified a procedural
issue with the Plan claims data submission. During our prior review of the Plan’s claims data
submissions for 2007 through 2009, we noted several claims that were inappropriately
unbundled. The noted exceptions were addressed; however, there were no monies due the
FEHBP. All issues related to that audit were resolved.

The preliminary results of this audit were discussed with Plan officials at an exit conference and
in subsequent correspondence. A draft report was also provided to the Plan for review and
comment. The Plan’s comments were considered in preparation of this report and included, as
appropriate, in the Appendix.




                                                 2
                II. OBJECTIVES, SCOPE, AND METHODOLOGY

Objectives

The primary objectives of the audit were to verify that the Plan offered market price rates to the
FEHBP and to verify that the loadings to the FEHBP rates were reasonable and equitable.
Additional tests were performed to determine whether the Plan was in compliance with the
provisions of the laws and regulations governing the FEHBP.

Scope
                                                                    FEHBP Premiums Paid to Plan

We conducted this performance audit in
accordance with generally accepted government                       $35
auditing standards. Those standards require that                    $30




                                                      Millions
                                                                    $25
we plan and perform the audit to obtain
                                                                    $20
sufficient, appropriate evidence to provide a                       $15
reasonable basis for our findings and conclusions                   $10
based on our audit objectives. We believe that                       $5
the evidence obtained provides a reasonable                          $0
                                                                           2010      2011         2012
basis for our findings and conclusions based on                  Revenue   $29.3     $32.3        $28.3
our audit objectives.

This performance audit covered contract years 2010 through 2012. For these years, the FEHBP
paid approximately $89.9 million in premiums to the Plan, as shown on the chart above.

OIG audits of community-rated carriers are designed to test carrier compliance with the FEHBP
contract, applicable laws and regulations, and OPM rate instructions. These audits are also
designed to provide reasonable assurance of detecting errors, irregularities, and illegal acts.

We obtained an understanding of the Plan’s internal control structure, but we did not use this
information to determine the nature, timing, and extent of our audit procedures. However, the
audit included such tests of the Plan’s rating system and such other auditing procedures
considered necessary under the circumstances. Our review of internal controls was limited to the
procedures the Plan has in place to ensure that:

        • The appropriate similarly sized subscriber groups (SSSG) were selected;

        • the rates charged to the FEHBP were the market price rates (i.e., equivalent to the best
          rate offered to the SSSGs); and

        • the loadings to the FEHBP rates were reasonable and equitable.

In conducting the audit, we relied to varying degrees on computer-generated billing, enrollment,
and claims data provided by the Plan. We did not verify the reliability of the data generated by
the various information systems involved. However, nothing came to our attention during our
audit testing utilizing the computer-generated data to cause us to doubt its reliability. We believe
that the available data was sufficient to achieve our audit objectives. Except as noted above, the
                                                  3
audit was conducted in accordance with generally accepted government auditing standards,
issued by the Comptroller General of the United States.

The audit fieldwork was conducted at the Plan’s office in Louisville, Kentucky, during October
2012. Additional audit work was completed at our office located in Washington, D.C.

Methodology

We examined the Plan’s Federal rate submissions and related documents as a basis for validating
the market price rates. In addition, we examined the rate development documentation and
billings to other groups, such as the SSSGs, to determine if the market price was actually charged
to the FEHBP. Finally, we used the contract, the Federal Employees Health Benefits Acquisition
Regulations, and OPM’s Rate Instructions to Community-Rated Carriers to determine the
propriety of the FEHBP premiums and the reasonableness and acceptability of the Plan’s rating
system.

To gain an understanding of the internal controls in the Plan’s rating system, we reviewed the
Plan’s rating system policies and procedures, interviewed appropriate Plan officials, and
performed other auditing procedures necessary to meet our audit objectives.




                                                4
               III. AUDIT FINDINGS AND                RECOM~IENDTIONS

Premium Rate Reyiew

1. Defectin Pricing                                                                      $94.957

  TIle Certificate of Acc urate Pricin g the Plan signed for contract year 20 10 wa s defective. In
  acco rdance with fede ral regulations, the FEHBP is therefore due a rate reducti on for this year.
  Applica tion of the defective pricin g rem edy shows that the FEHBP is entitled to a premium
  adjustme nt totaling $94,957 (see Exhibit A). We found that the FEHBP rates were deve loped
  in acco rdance with applicable laws, regulation s, and OPM 's rule s and regu lations in contract
  years 20 11 and 20 12.

  Carriers proposing rates to a PM are required to submit a Certificate of Acc urate Pricin g
  certifyi ng that the prop osed subscription ra tes, subject to adjustments recognized by OPM, are
  market price rates. OPM regul ations refer to a market price rate in conjunction with the ra tes
  offered to an SSSG. SSSGs are the Plan' s two employer groups closest in size to the FEHBP.
  If it is found that the FEHBP was charged higher than the market pri ce rate (i.e., the best rate
  offered to an SSSG) , a condition of de fective pri cing exists, re quiring a downward adj ustment
  of the FEHBP premiums to the equi valent m arket price rate.



  TIle Plan selected the
  as SSSGs for contract year 20 10. We agree with these selections.

  Om analysis of the rates charge d to the SSSGs sho ws that


 I!        received a . p e rcent discount and the

       percent discount . The Plan originally applied a     percent discount to the FEHBP in
  the reconciliation. However, the FEHBP is entitled to a discount equi valent to the largest
  di sCOllllt~o an SSSG. We recalcul ated the FEHBP rates using the " p ercent discount
  given to _ A comparison of our audi ted rates to the Plan ' s reconc~ate s shows that
  the FEHBP wa s overcharged $94,957 in contract year 20 10 (see Exhibit B).

  Plan 's Comments (s.ee Appendix)

  TIle Plan had no issues or concerns with this fmding.

  Recommendation 1

  We recommend that the contract ing officer re quire the Plan to returu $94,957 to the FEHBP
  for defective pri cing in contract year 20 10 (see Exhibit B).




                                                 5

2. Lost Investment Income                                                                    $6,270

  In accordance with the FEHBP regulations and the contract between OPM and the Plan, the
  FEHBP is entitled to recover lost investment income on the defective pricing finding in
  contract year 2010. We determined that the FEHBP is due $6,270 for lost investment income,
  calculated through May 31, 2013 (see Exhibit C). In addition, the FEHBP is entitled to lost
  investment income for the period beginning June 1, 2013, until all defective pricing finding
  amounts have been returned to the FEHBP.

  FEHBAR 1652.215-70 provides that, if any rate established in connection with the FEHBP
  contract was increased because the carrier furnished cost or pricing data that was not
  complete, accurate, or current as certified in its Certificate of Accurate Pricing, the rate shall
  be reduced by the amount of the overcharge caused by the defective data. In addition, when
  the rates are reduced due to defective pricing, the regulation states that the government is
  entitled to a refund and simple interest on the amount of the overcharge from the date the
  overcharge was paid to the carrier until the overcharge is liquidated.

  Our calculation of lost investment income is based on the United States Department of the
  Treasury's semiannual cost of capital rates.

  Plan’s Comments (see Appendix)

  The Plan had no issues or concerns with this finding.

  Recommendation 2

  We recommend that the contracting officer require the Plan to return $6,270 to the FEHBP for
  lost investment income, calculated through May 31, 2013. We also recommend that the
  contracting officer recover lost investment income on amounts due for the period beginning
  June 1, 2013, until all defective pricing finding amounts have been returned to the FEHBP.




                                                  6
            IV. MAJOR CONTRIBUTORS TO THIS REPORT

Community-Rated Audits Group

                  Auditor-in-Charge

                , Auditor


                  ., Chief

              , Senior Team Leader




                                      7
                                                              Exhibit A


                 Humana Medical Plan, Inc. - South Florida
                     Summary of Questioned Costs



Defective Pricing Questioned Costs


         Contract Year 2010                         $94,957


         Total Defective Pricing Questioned Costs              $94,957


Lost Investment Income                                          $6,270


Total Questioned Costs                                        $101,227
                                                                                         Exhibit B

                                    Humana Medical Plan, Inc. - South Florida
                                      Defective Pricing Questioned Costs



2010                                                                   Self     Family

High Option
  FEHBP Line 5 - Reconciled Rate
  FEHBP Line 5 - Audited Rate

  Bi-weekly Overcharge

  To Annualize Overcharge:
    March 31, 2010 Enrollment
    x 26 Pay Periods                                                   26        26
  Subtotal                                                                               $88,609

Standard Option
  FEHBP Line 5 - Reconciled Rate
  FEHBP Line 5 - Audited Rate

  Bi-weekly Overcharge

  To Annualize Overcharge:
    March 31, 2010 Enrollment
    x 26 Pay Periods                                                   26        26
  Subtotal                                                                                $6,348




Total Defective Pricing Questioned Costs                                                 $94,957
                                                                                                                     Exhibit C

                                             Humana Medical Plan, Inc. - South Florida
                                                    Lost Investment Income



  Year                                         2010             2011              2012            31-May-2013          Total
Audit Findings:

1. Defective Pricing                               $94,957                $0                $0                  $0         $94,957


                        Totals (per year):         $94,957               $0               $0                  $0           $94,957
                       Cumulative Totals:          $94,957          $94,957          $94,957             $94,957

          Avg. Interest Rate (per year):          3.1875%          2.5625%           1.8750%            1.3750%

       Interest on Prior Years Findings:                 $0            $2,433            $1,780             $544               $4,757

                  Current Years Interest:             $1,513              $0                $0                  $0             $1,513

   Total Cumulative Interest Calculated
              Through May 31, 2013:                   $1,513           $2,433            $1,780             $544               $6,270
_L...-                                                       APPENDIX
                                                                                                                        _

 From:
 Se n t :                               Mond ay, Jun e 17, 2013 12:49 PM
 To:
 Subj ect :                              RE: Humana Revision to Aud it ors w orkp aper C 4 15 - lC-EE -OO -13-006 - 4 -25-2013



• • •11apologize for my lack of respo nse, ple ase pro ceed w it h the Final Aud it Repo rt using t he 6,40% SSSG d iscount
 and Hu mana w ill con cur w ith t his find ing .




-From :
 sen.'i1 : T~ue:;da
 TO:_1i!I

              ~_~y, May 21. 2013 10:45 AM
                                                               - - - ---­

 Subject: RE: Bumara Revision to Auditors w orkpeper C 4 15 - l C-EE-OO' 13-00G - 4-25-2013

 Importance: High



-The s p re a d~ o u provided needed t o be uQdated. The average members for t he
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 Sent: Frida y, May 17, 2013 4:16 pr-1

 To:

 Subject: Humana Revision to Audito rs Workpaper C 4 15 · lC-EE-OO- 13-006 - 4-25-2013


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