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 PersonalCare Insurance of
Illinois, Inc.
Report No. lC-GE-OO-lO-050
Date: January 20, 2011
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UNITED STATES OFFICE OF PLRS(H,NEL :vlANAGLMENT
Wa"hingtl1ll. DC 20-.\-1:'
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AUDIT REPORT
Federal Employees Health Benefits Program
Community-Rated Health Maintenance Organization
PersonalCare Insurance of Illinois, Inc.
Contract Number 2042 - Plan Code GE
Downers Grove, Illinois
Report No. lC-GE-OO-lO-OSO Date: 1/20/2011
Michael R. Esser
Assistant Inspector General
for Audits
www,opm.goy www,usajobs.goy
UNITED STATES OFFICE OF PERSONNEL MANAGEMENT
\Va"hingtn!l. DC 20.+)5
Office uf the
Inspecrur General
EXECUTIVE SUMMARY
Federal Employees Health Benefits Program
Community-Rated Health Maintenance Organization
PersonalCare Insurance of Illinois, Inc.
Contract Number 2042 - Plan Code GE
Downers Grove, Illinois
Report No. lC-GE-OO-IO-OSO Date: 1 (20(2011
The Office of the Inspector General performed an audit of the Federal Employees Health Benefits
Program (FEHBP) operations at PersonalCare Insurance of Illinois, Inc. (Plan). The audit
covered contract years 2006 through 2009 and was conducted at the Plan's office in Downers
Grove, Illinois. Additional audit work was performed in our field offices in Jacksonville,
Florida, and Cranberry Township, Pennsylvania.
This report questions $1,837,168 for inappropriate health benefit charges to the FEHBP in
contract year 2008, including $180,663 for related lost investment income. For contract year
2008, we determined that the FEHBP rates were overstated by $1,656,505 due to defective
pricing. The FEHBP rates were overstated because the Plan discounted the rates given to one
similarly sized subscriber group but did not apply this discount to the FEHBP rates. The FEHBP
rates were developed in accordance with the Office of Personnel Management's rules and
regulations in contract years 2006, 2007, and 2009.
Consistent with the FEHBP regulations and contract, the FEHBP is due $180,663 for lost
investment income, calculated through December 31, 2010, on the defective pricing finding. In
addition, we recommend that the contracting office recover lost investment income starting
January 1,2011, until all defective pricing amounts have been returned to the FEHBP.
www,opm.gov www.usajobs.gov
CONTENTS
EXECUTIVE SUMMARY i
I. INTRODUCTION AND BACKGROUND 1
II. OBJECTIVES, SCOPE, AND METHODOLOGY 3
III. AUDIT FINDINGS AND RECOMMENDATIONS 5
Premium Rates 5
1. 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)
Appendix (PersonaiCare Insurance of Illinois, Inc.'s November 23, 2010, response to
the draft report)
I. INTRODUCTION AND BACKGROUND
Introduction
We completed an audit of the Federal Employees Health Benefits Program (FEHBP) operations
at PersonalCare Insurance of Illinois, Inc. (Plan). The audit covered contract years 2006 through
2009 and was conducted at the Plan's office in Downers Grove, Illinois. The audit was
conducted pursuant to the provisions of Contract CS 2042; 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
rate, which is defined as the best rate March 31
offered to either of the two groups closest 4,000
in size to the FEHBP. In contracting with 3,500
community-rated carriers, OPM relies on 3,000
carrier compliance with appropriate laws 2,500
and regulations and, consequently, does
2,000
not negotiate base rates. OPM
1,500
negotiations relate primarily to the level
1,000
of coverage and other unique features of
the FEHBP. 500
o
2006 2007 2008 2009
The chart to the right shows the number • Contracts 1,496 1,394 1,288 1.142
of FEHBP contracts and members o Members 3,648 3,044 2,650 2,247
reported by the Plan as of March 31 for
each contract year audited.
1
The Plan participated in the FEHBP from 1986 through 2009 and provided health benefits to
FEHBP members in Central Illinois. The last full-scope audit of the Plan covered contract years
2000 through 2002, 2004, and 2005. All issues identified in the prior audit have been 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 the preparation of this report and are
included, as appropriate, as 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.
FEHBP Premiums Paid to Plan
We conducted this performance audit in
accordance with generally accepted government $20
auditing standards. Those standards require that $15
we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a
reasonable basis for our findings and conclusions
based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis
for our findings and conclusions based on our
audit objectives. _Revenue
This performance audit covered contract years 2006 through 2009. For these contract years, the
FEHBP paid approximately $47.5 million in premiums to the Plan. The premiums paid for each
contract year audited are 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
3
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 conducted 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 Downers Grove, Illinois, during June
2010. Additional audit work was completed at our offices in Cranberry Township, Pennsylvania,
and Jacksonville, Florida.
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 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 system.
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 RECOMMENDATIONS
Premium Rates
1. Defective Pricing $1.656.505
The Certificate of Accurate Pricing the Plan signed in contract year 2008 was defective. In
accordance with federal regulations, the FEHBP is therefore due a price reduction for this
year. Application of the defective pricing remedy shows that the FEHBP is entitled to a
premium adjustment totaling $1,656,505 (see Exhibit A). We found that the FEHBP rates
were developed in accordance with OPM's rules and regulations for contract years 2006,
2007, and 2009.
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.
The Plan selected as the SSSGs in 2008. We agree with
the Plan's SSSG selection of Our review of the rates
charged to the SSSGs s~received a_percent discount that was not
applied to the FEHBP. - , , - d i d not receive a discount.
We found that the discount associated with ~as due to a demographics factor that
was not applied and an unsupported change in the structure of the group. The Plan stated the
group was divided into two distinct sub-groups based on regions, but the Plan's rate
model contained only one rating for the entire group. The Plan further stated the sub-group
structure was calculated outside of the Plan's rate model. The regions were identified as the
region and all other locatiory the second or main region. The Plan further
stated the group received ~ercent increase while the main group received a
_as
• percent increase, thereby producing an overall increase o.percent. Because the rates
charged and the sub-group structure for the_region was unsupported, we audited
one group, thereby identifying a _percent discount. As a result, we applied
the _percent discount in the development of our FEHBP audited rates. A comparison of
our audited line 5 rates to the Plan's reconciled line 5 rates shows that the FEHBP was
overcharged $1,656,505 (see Exhibit B).
5
Plan's Comments (See Appendix):
other locations sub-group and an .percent increase for th
a.
The Plan states that~id not receive a discount because the group was rated with
two distinct sub-groups instead of as a whole. The Plan states it provided the group with two
distinct rates, one for each sub-group. The Plan calculated percent increase for the all
sub-group. When
weighted together, the separate increases equaled the needed _percent increase calculated
for the group as a whole. The Plan states both rates were offered to the group. The Plan
further states that prior to the first billing cycle of the 2008 contract period, all enrollees
associated with the area elected not to renew with the Plan leaving only the all
other locations sub-group, which received th.percent increase. The Plan states it offered
the rates in good faith with the enrollment available at the time of rating. Therefore, the Plan
believes it applied the correct percentage increase to the group's rates and no discount was
granted to the group. The Plan supplied documentation showing that two separate rates were
offered to the group; a rate with a_ercent increase for the all other locations sub-group and
a rate with an_ercent increase for the sub-group. The Plan also supplied
documentation showing the rate containing the.percent increase was charged in the 2008
contract year.
The Plan did not address the unapplied demographics factor stated in the draft report.
OIG's Response to the Plan's Comments:
Although we agree with the Plan's timeline with regards to the creation of the two distinct
sub-group ratings and we agree with the two separate rate increases, we disagree that two
separate rates were implemented. The Plan did not provide support showing that
accepted the two distinct sub-group rating methodology. The Plan only provided support
showing the renewal rates billed to the all other locations sub-group. The Plan states this was
the only bill because all enrollees associated with the_location did not renew with
the Plan prior to the first billing cycle of the 2008 rates. ~is assertion, we requested
an enrollment report of the enrollees associated with th~location to support none
were included in the March 2008 billing cycle. After analyzing both the 2007 enrollment
report used to carve out the_ _ location enrollees and the_March 2008
billed rates, we found that 17 enrollees from the _ _location enrollment report were
billed the all other locations rate. Because only the rate containing the .ercent increase
was charged to the entire group, no matter the location, we continue to assert that _
received a .percent discount in 2008 and the FEHBP is entitled to this discount.
Recommendation 1
We recommend that the contracting officer require the Plan to return $1,656,505 to the
FEHBP for defective pricing in contract year 2008.
6
2. Lost Investment Income $180,663
In accordance with 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 2008. We determined that the FEHBP is due $180,663 for lost investment
income, calculated through December 31,2010 (see Exhibit C). In addition, the FEHBP is
entitled to lost investment income for the period beginning January 1, 2011, until all defective
pricing 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 oflost 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 did not address this issue.
Recommendation 2
We recommend that the contracting officer require the Plan to return $180,663 to the FEHBP
for lost investment income for the period January I, 2008 through December 31, 20 I O. In
addition, we recommend that the contracting officer recover lost investment income on
amounts due for the period beginning January 1,2011, until all defective pricing amounts
have been returned to the FEHBP.
7
IV. MAJOR CONTRIBUTORS TO THIS REPORT
Community-Rated Audits Group
Auditor-in-Charge
Auditor
8
Exhibit A
PersonalCare Insurance of Illinois, Inc.
Summary of Questioned Costs
Defective Pricing Questioned Costs:
Contract Year 2008 $1,656.505
Total Defective Pricing Questioned Costs: $1,656,505
Lost Investment Income: $180,663
Total Questioned Costs: $1,SF.I68
EXHIBITB
PersonalCare Insurance of Illinois, Inc.
Defective Pricing Questioned Costs
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate
Overcharge
To Annualize Overcharge:
3/31/08 enrollment
Pay Periods
Subtotal
Total 2008 Defective Pricing Questioned Costs $1.656.505
EXHIBITC
PersonalCare Insurance of Illinois, Inc.
Lost Investment Income
Year 2008 2009 2010 Total
Audit Findings:
I. Defective Pricing $1,656,505 $0 $0 $1,656,505
Totals (per year):
$1,656,505 $0 $0 $1,656,505
Cumulative Totals:
$1,656,505 $1,656,505 $1,656,505 $1,656,505
Avg. Interest Rate (per year):
4.9375% 5.250% 3.1875%
Interest on Prior Years Findings:
$0 $86,967 $52,801 $139,768
Current Years Interest:
$40,895 $0 $0 $40,895
Total Cumulative Interest Calculated
Through December 3 I, 2010:
$40,895 $86,967 $52,801 $180,663
Appendix
PERSONALCARE
November 23, 2010
U.S. Office of Personnel Management
Office of the Inspector General
1900 E Street, NW
Room 6400
Washington, D.C. 20415-1100
Dear_
We feel that the 2008_renewal pricing was not defective. In addition to what has
already been provided, enclosed you will find supporting documentation and a timeline that
supports our 2008 _ renewal.
Timeline events:
• 5/3112007 we released our 2008 renewal to _ Formula renewal rates of
_ w e r e entered into the on-line renewal database. Please see Attachment A
which represents a screen shot of the on-line renewal database.
• 7/25/2007 we provided_a split rcnewal illustrating the rate action f o r _
o ~ and All Other locations o f _ On a composite basis the split renewal
equaled a formula increase of Please see Attachment B I where split renewal
rates were e-mailed f r o m _ (Account Manger, PersonalCare) toil••
. Attachment B2 is the split renewal exhibit included in the e-mail.
• 8/29/2007 we provided_pre-65 rates for b o t h _ and All Other locations.
Please see Attachment C which is a copy of the e-mail correspondence between
_(Account Manager, PersonalCare) and . This
documentation is provided to confiml • was a
• 9/6/2007 we were notified b~hat PeronalCare would be offered to all eligible
~mplovees in the 2008 Ian vear. Please see Attachment D which is a copy of
the e-mail from
Below is additional documentation to confirm the sold rates:
• A screen print of the final rates from the _on-line renewal database for employees
in the All Other locations. Please see Attachment E. This is confirmation t h a t _
renewed only the All Other location.
• January 2008 invoice confirming final rates paid by _ in 2008. Please see
Attachment F. Similar to the bullet above, this is confirmation that_renewed
only the All Other location.
PERSONALCARE
r
We believe this additional infonnation will provide sufficient evidence that a discount was not
applied to the 2008 _renewal. Ify~ uestions or would like to discuss
further, please call me at or _ a
PersonalCare
cc: _PersonalCare
ersonalCare
PersonalCare
,====~'
I PersonalCare
aPM
Audit of the Federal Employees Health Benefits Program Operations at PersonalCare Insurance of Illinois, Inc.
Published by the Office of Personnel Management, Office of Inspector General on 2011-01-20.
Below is a raw (and likely hideous) rendition of the original report. (PDF)