oversight

Audit of the Federal Employees Health Benefits Program operations at AmeriHealth HMO, Inc.

Published by the Office of Personnel Management, Office of Inspector General on 2011-03-24.

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

                                                        u.s. OFFICE OF PERSOJ'..NEL TviA.NAGETviENT
                                                                    OFFICE OF THE INSPECTOR GENERA.L
                                                                                     OFFICE OF AUDITS




                                     Final Audit Report

Subject:



                Audit of the Federal Employees Health Benefits
                Program operations at AmeriHealth HMO, Inc.




                                             Report No. lC-FK-OO-lO-058


                                            Date:          March 24 ( 2011




                                                               --CAUTJO:'l!-­
This audit report hJ35- been distriburcd to Fcdenll officialSi- who <"Ire rc~pons-ible for tile admini~~ralion 0[' th~ ~udited program. This ,wd,t
repcn m<lY contain proprictuy dala which i~ protected b)' Fedend Jaw (18 ll.S.C. 19(5). Therefore. wldlc this audit report is :n'llilllbJe
under the; Frc;edom of Information ;\ct and made .nailable to rile pHblic on thl: OlG webp:Jge, caution needs to be exerci~cd before
relel:l:l-ing the. report!O the gennal p~lblic. as it may contni" IH"OQrlc(ary ill formation that mlS redacted from the publiely distributed copy.
                            C~ITED   STATES OfFICE OF PERSONNEL \[A,,'AGL\JENT


   Onlcc of tr.e
Inspect,X Cien,-:r2J




                                             AUDIT REPORT




                                Federal Employees Health Benefits Program

                             Community Rated Health 'Vlaintenance Organization

                                         AmeriHealth H'VIO, Inc.

                                 Contract Number CS 1893 - Plan Code FK

                                            Iselin, ]\ew Jersey





                       Report No. lC-FK-OO-10-058            Date: 3/24/2011




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                                                             .' !\lid\aei It Esser
                                                                Assistant Inspector General
                                                                   for Audits




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                              U,ITED STATES OHICE OF PU,SOI\NlcL kl.\I\ACEtvlE\'T


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                                           EXECUTIVE SCMMARY





                                    Federnl Employees Health Benefits Program

                                 Communit)' Rated Health :\Iaintenance Organization

                                              AmeriHcalth HMO, Inc.

                                     Contract :'lumber CS 1893 - Plan Code FK

                                                  Iselin, :'lew .Jersey





                         Report No. lC-FK-OO-10-OS8                Date:     3/24/2011



           The Offlce of the Inspector General perfoDlled an audit of the Federal Employees Health
           Benefits Program (FEHBP) operations at AmeriHealth H\10, Inc. (Plan) The audit covered
           contract years 2007 through 20 I 0 and was conducted at the Plan's office in Iselin, New Jersey.
           This repon questions $212..942 for inappropnate health benefit charges in contract years 2007
           through 2009. including $22.225 for related Inst investment income. We found that the FEHBP
           rates were developed In accordance with the Office 01' Personnel \1anagement's rules al,d
           regulations in contract year 20 IO.

           In 2007 through 2009. the Plan incorrectly appltecl the discuunt tu Ime i of the FEHBP rates. [n
           2007. the similarly sized subscriber group (SSSG) discount represented a total rate discount.
           encompassing all costs, including base medical costs and other benefit riders. Ho,vever, the
           discount was applied to the FEHBP's medical costs only (ie, line 1). exclusive of the fEHBP's
           benefn riders. Applying a total rate discount to the FEHBP's base med:cal rate IS inconsistent
           treatment; therefore, we removed the discount from line ] and applied it to line 5. For 2008 and
           2009, the proposal ip.structions state all discounts should be applied to line 5 of the FEHBP
           reconciled rates. Accordingly, we removed the discount from line 1 and computed the audited
           FEHBP rates by applying the largest discoup.t given to an SSSG to line 5 of the FEHBP rates
           As a result, tile FEHBP rates were overstated by $49,224, $1 19.028, and 522.465 !l" 2007
           through 2009, tespectively.




         ~,ww.opm_go~
Consistent with the FEHBP regulations and contract, the FEHBP is due $22,225 for lost
investment income, calculated through December 31, 20 I0, on the defective pricing findings in
2007 through 2009.

The Plan agreed with the findings and remitted a check for $212,942.




                                               II
                                     CONTENTS



   EXECUTIVE SUMMARy	                                i


 I. INTRODUCTION AND BACKGROUND	                     1


II.	 OBJECTIVES, SCOPE, AND METHODOLOGy              3


III.	 AUDIT FINDINGS AND RECOMMENDATIONS             5


   Premium Rate Review                               5


   I. Defective Pricing	                             5


   2. Lost Investment Income	                        7


IV.	 MAJOR CONTRIBUTORS TO THIS REPORT               8


   Exhibit A (Summary of Questioned Costs)


   Exhibit B (Defective Pricing Questioned Costs)


   Exhibit C (Lost Investment Income)

                     I. INTRODUCTION AND BACKGROUND


Introduction

\\'e completed an audit of the Federal Employees Health Benefits Program (FEHBP) operations
at AmeriHealth HMO, Inc, (Plan), The audit covered contract years 2007 through 2010 and was
conducted at the Plan's offices in Iselin, Nevi Jersey, The audit ,vas conducted pursuant to the
provisions of Contract CS 1893; 5 U,S,c. Chapter 89: and 5 Code of Federal Regulations (CFR)
Chapter L Part 890, The audit ,vas perfomled by the Office of Persormel 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 La,v 86­

382), enacted on September 28,1959, The FEHBP ,vas created to provide health insurance

benefits for federal employees, arlliuitants, and dependents. The FEHBP is administered by

OPM's Healthcare and Insurance Oftlce, The provisions of the Federal Employees Health

Benefits Act are implemented by OPM through regulations coditled in Chapter 1, Part 890 of

Title 5, CFR, Health insurance coverage is provided through contracts viith various health

ins'Jrance carriers ,vho provide service benefits, indemnity benefits, or comprehensive medical

serVIces,


Community-rated caITiers participating in the FEHBP are subject to various federal, state and

local laws, regulations, and ordinances, While most caITiers are subject to state jurisdiction,

many are further subject to the Health Maintenance Organization Act of 1973 (?ublic Lavv 93­

222), as amended (i,e" many communi tv-rated cmiers are federally qualitied), In addition,

participation in the FEHBP subjects the caITiers to the Federal Employees Health Benefits Act

and implementing regulations promulgated by

OPM,
                                                           FEHBP Contracts/Members
                                                                               March 31
The FEHBP should pay a market price rate,                       ,/
                                                        4,500             F'
,vhich is defined as the best rate offered to                     I­
                                                        4,000 , /
either of the t,vo groups closest in size to the
                                                                  I­
FEHBP. In contracting ,vith community-rated             3,500 , /
carriers, OPlvI relies on carTier compliance            3,000   V-                      -
                                                                                                       F'
,vith appropriate lavis and regulations and.                      .---­
                                                        2,500 , /
consequently, does not negotiate base rates,                    , / f-=
                                                                                                            ;­         ""   .---­
                                                        2,000
OPlvI negotiations relate primarily to the level                                                                        '­
                                                        1,500 , /              ~.               t1'!
of coverage and other unique features of the
FEHBP,                                                  1,000                -              r-~-
                                                                                                               !"'I
                                                                                                                "           -
                                                          500
                                                                             :-1
                                                                                 "
                                                                                            -    I
                                                                                                            I- 'I
                                                                                                                4,1
                                                                                                                            I­
The chart to the right shows the number of                  0
                                                                     2007
                                                                             L.. '.
                                                                                2008
                                                                                            ,
                                                                                            "". '"
                                                                                                2009
                                                                                                               ' -.1
                                                                                                            "'" 2010 ""
FEHBP contracts and members reported by
                                                   ~Contracts        1,997      ',546           1,450         1,262
the Plan as of !vlarch 31 of each contract year
audited,                                           DMembers          4,423      2596        I   2,,986        2,473
The Plan has participated in the FEHBP since 1980 and provides comprehensive medical
services to FEHBP members throughout the State of New Jersey. The last audit of the Plan
conducted by our office was a full scope audit of contract years 2003 through 2006. All issues
related to that audit have been resolved.

The preliminary results of this audit were discussed with Plan officials at an exit conference. A
draft report was also provided to the Plan for review and comment. The Plan agreed with the
findings and remitted a check for $212,942, representing full payment for the findings.




                                                2

                  II. OBJECTIVES, SCOPE. AND i\lETHODOLOGY

Objectives

The primary objecrives ofthe audit were to verify that the Plan ofrered 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 FEHBl'




We conducted this performance audit in                                       FEHBP Premiums Paid to Plan
accordance with generally accepted
government auditing standards. Those
standards require that we plan and perlixn: the                        $20

audit to obtain sufticiel:L appropriate evidence
                                                                       $15
to provide a reasonable basis for our findings
and conclusions based on our audit objectives.                         $10
v"e believe that the evidence obtained
provides a reasonable basis for our fjndings
and conclusions based on our audit objectives.

This perfonnance audit covered contract years
                                                   I!II Re'venue $18 9	             S':63
2007 through 20 10. For contract years 2007
through 2009. the FEHBP paid appro, imateJy
$50.8 millio11 in premiems to the Plan. 1 The premiums paid for each contract year audited are
shown on the chart above.

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

We obtained an understanding orthe Plan's internal control structure. but we did not use this
infonnation to determine the nature, timing, and extent of our audit procedures. HOIveveL the
audit included such tests of the Plan's rating systems and such other auditing procedures
considered necessary under the circumstances Our review of internal controls was limited to the
procedures the Plan ha5 in placc 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 .. eqUlvalen! to the best
          rate offered to an SSSG): and

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


  The premiums   pa~d   for 2010 were not a'vailable at the rirne this report was compleTed
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
audit was performed in accordance with generally accepted government auditing standards,
issued by the Comptroller General of the United States.

The audit fieldwork was performed at the Plan's office in Iselin, New Jersey, during August
2010. Additional audit work was completed at our offices in Washington, D.C., Jacksonville,
Florida, and Cranberry Township, Pennsylvania.

Methodology

We examined the Plan's federal rate submissions and related documents as a basis for validating
the market price rates. Further, we examined claim payments to verify that the cost data used to
develop the FEHBP rates was accurate, complete, and valid. In addition, we examined the rate
development documentation and billings to other groups, such as the SSSGs, to determine if the
market price rate was actually charged to the FEHBP. Finally, we used the contract, the Federal
Employees Health Benefits Acquisition Regulations (FEHBAR), 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 systems.

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




                                                 4

             III. AUDIT FINDINGS AND RECOMMENDAnONS

Premium Rate Review

1. Defective Pricing                                                                   $190,717

  The Certificates of Accurate Pricing the Plan signed for contract years 2007 through 2009
  were defective. In accordance with federal regulations, the FEHBP is therefore due a rate
  reduction for these years. Application of the defective pricing remedies shows that the
  FEHBP is entitled to premium adjustments totaling $190,717 (see Exhibit A). We found that
  the FEHBP rates were developed in accordance with OPM's rules and regulations in contract
  year 2010.

  FEHBAR 1652.215-70 provides that carriers proposing rates to OPM are required to submit a
  Certificate of Accurate Pricing certifying that the proposed subscription rates, subject to
  adjustments recognized by OPM, are market price rates. OPM regulations refer to a market
  price rate in conjunction with the rates offered to an SSSG. If it is found that the FEHBP was
  charged higher than a market price (i.e., the best rate offered to an SSSG), a condition of
  defective pricing exists, requiring a downward adjustment of the FEHBP premiums to the
  equivalent market price.



  We agree with the Plan's selection 0                       as the SSSGs for contract
  year 2007. Our analysis of the SSSGs' rates shows that_eceived a ~ercent
  discount and Grinspec Trust received a.percent discount.

  Our analysis of the FEHBP rates shows that the Plan applied an_percent discount to line
  I of the FEHBP rates. We do not agree with applying the discount to line 1, which represents
  the FEHBP's base medical costs, exclusive of any benefit riders. The SSSG discount
  represents a total rate discount, encompassing all costs, including base medical and other
  benefit riders. Therefore, applying the discowlt to the FEHBP's line I rates is inconsistent,
  and we calculated our audited FEHBP rates by removing the discount from line I and
  applying the largest SSSG discount identified during our review to line 5.

  Since OPM requires the FEHBP rates to be at least equivalent to the best rates given to an
  SSSG, we recalculated the FEHBP rates by applying the factors, trends, and the.percent
  discount given to Grinspec Trust. A comparison of our audited line 5 rates to the Plan's
  reconciled line 5 rates shows that the FEHBP was overcharged $49,224 in 2007 (see Exhibit
  B).




  We agree with the Plan's selection of
                 as the SSSGs for contract year 2008. Our analysis of the SSSGs' rates shows




                                               5
that                              received a.percent discount and                        eceived
a.percent discount.

Our analysis of the FEHBP rates shows that the Plan applied an.percent discount to line
 I of the FEHBP rates, as well as a.percent discount to the prescription drug (Rx) portion
of the rate. As stated in the 2008 proposal instructions, all discounts should be applied to line
5 of the FEHBP reconciled rates. Accordingly, we calculated our audited rates by removing
the discounts from line I and the Rx rate and applying the largest SSSG discount identified
during our review to line 5.

Since OPM requires the FEHBP rates to be at least equivalent to the best rates for an SSSG,
we recalculated the FEHBP rates by applying the factors, trends, and the_ercent
discount given to                   A comparison of our audited line 5 rates to the Plan's
reconciled line 5 rates shows that the FEHBP was overcharged $119,028 in 2008 (see Exhibit
B).




The analysis of the SSSGs' rates shows that                               received a n _
percent discount and                        eceived a      percent discount.

Our analysis of the FEHBP rates shows that the Plan applied an.percent discount to line
1 ofthe FEHBP rates, as well as an _percent discount to the Rx portion of the rate. As
stated in the 2009 proposal instructions, all discounts should be applied to line 5 of the
FEHBP reconciled rates. Accordingly, we calculated our audited rates by removing the
discounts from line 1 and the Rx rates and applying the largest SSSG discount identified
during our review to line 5.

Since OPM requires the FEHBP rates to be at least equivalent to the best rates for an SSSG,
we recalculated the FEHBP rates by applying the factors, trends, and the~ercent
discount given to                                 A comparison of our audited line 5 rates to
the Plan's reconciled line 5 rates shows that the FEHBP was overcharged $22,465 in 2009
(see Exhibit B).

Plan's Comments:

The Plan submitted a check, dated February II, 20 11, totaling $212,942 ($190,717 defective
pricing plus $22,225 lost investment income). This evidences concurrence by the Plan to our
defective pricing findings and no further action is required.




                                              6
  Recommendation 1

  After receiving the draft report, the Plan returned $190,717 to the FEHBP for defective
  pricing in contract years 2007 through 2009. Since we verified that the Plan returned
  $190,717 to the FEHBP, no further action is required.

2. Lost Investment Income                                                                   $22,225

  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 findings in
  contract years 2007 through 2009. We determined that the FEHBP is due $22,225 for lost
  investment income, calculated through December 31,2010 (see Exhibit C).

  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 were 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 govemment 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 oflost investment income is based on the United States Department of the
  Treasury's semiannual cost of capitat rates.

  Plan's Comments:

  The Plan submitted a check, dated February II, 20 II, totaling $212,942 ($190,717 defective
  pricing plus $22,225 lost investment income). This evidences concurrence by the Plan to our
  lost investment income finding and no further action is required.

  Recommendation 2

  After receiving the draft report, the Plan returned $22,225 to the FEHBP for lost investment
  income on the defective pricing findings in contract years 2007 through 2009. Since we
  verified that the Plan returned $22,225 to the FEHBP, no further action is required.




                                                  7

              IV. MAJOR CONTRIBUTORS TO THIS REPORT


Community-Rated Audits Group

                Auditor-In-Charge

~uditor




                Chief

               Senior Team Leader




                                    8

                                                                       Exhibit A

                                        AmcriHealth HMO, Inc.
                                      Summary of Questioned Costs


Defective Pricing Questioned Costs:

      Contract Year 2007                                     $49,224
      Contract Year 2008                                    $119,028
      Contract Year 2009                                     $22,465



                Total Defective Pricing Questioned Costs:              $190,717

      Lost Investment Income:                                           $22.225

                     Total Questioned Costs:                           $212,942
                                                                             Exhibit B
                                                                            Page 1 of2

                                       AmeriHealth HMO, Inc.
                                  Defective Pricing Questioned Costs




FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate

Overcharge

To Annualize Overcharge:
   3/31/07 enrollment
   Pay Periods                                                         26
Subtotal

Total 2007 Defective Pricing Questioned Costs                                $49.224
                                                                                  Exhibit B
                                                                                 Page 2 of2

                                        AmeriHealth HMO, Inc.
                                   Defective Pricing Questioned Costs

2009 - High Option
                                                                        Family
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate

Overcharge

To Annualize Overcharge:
   3/31/09 enrollment
   Pay Periods
Subtotal

Total 2009 High Option Defective Pricing Questioned Costs                         $21,814

2009 - Standard Option

FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate

Overcharge

To Annualize Overcharge:
   3/31/09 enrollment
   Pay Periods
Subtotal

Total 2009 Standard Option Defective Pricing Questioned Costs

Total 2009 Defective Pricing Questioned Costs                                     $22.465
                                                                                          EXHIBITC

                                      AmeriHealth HMO, Inc.
                                      Lost Investment Income




   Year                             2007        2008           2009          2010         Total

 Audit Findings:


  1. Defective Pricing                $49,224    $1 J 9,028      $22,465            $0        $190,717



              Totals (per year):      $49,224    $119,028        $22,465            $0        $190,717
             Cumulative Totals:       $49,224    $168,252       $190,717      $190,717        $190,717

   Avg. Interest Rate (per year):     5.500%      4.938%        5.2500%       3.1875%

Interest on Prior Years Findings:          $0      $2,430         $8,833        $6,079         $17,342

          Current Years Interest:      $1,354      $2,939             $590          $0             $4,883

       Total Cumulative Interest

             Calculated Through

            December 31, 2010:         $1,354      $5,369         $9,423        $6,079
        $22,225