U.S. OFFICE OF PERSONNEL MANAGENIENT
OFFICE OF THE INSPECTOR GENERAL
OFFICE OF AUDITS
Final Audit Report
Subject:
Audit of the Federal Employees Health Benefits
Program Operations at Preferred Care
Report No. lC-GV-OO-lO-004
Date: July 27, 2010
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UNITED STATES OFFICE OF PERSONNEL MANAGEMENT
Washington, DC 20415
Office of the
Inspector General
AUDIT REPORT
Federal Employees Health Benefits Program
Community-Rated Health Maintenance Organization
Preferred Care
Contract Number CS 2371 - Plan Code GV
Rochester, New York
Report No. lC-GV-OO-lO-004 Dak: July 27, 2010
Michael R. Esser
Assistant Inspector General
for Audits
www.opm.gov www.usajobs.gov
UNITED STATES OFFICE OF PERSONNEL MANAGEMENT
Washington, DC 20415
Office of the
Inspector General
EXECUTIVE SUMMARY
Federal Employees Health Benefits Program
Community-Rated Health Maintenance Organization
Preferred Care
Contract Number CS 2371 - Plan Code GV
Rochester, New York
Report No. lC-GV-OO-lO-004 Date: July 27, 2010
The Office of the Inspector General performed an audit ofthe Federal Employees Health Benefits
Program (FEHBP) operations at Preferred Care (Plan). The audit covered contract years 2006
through 2009 and was conducted at the Plan's office in Rochester, New York.
This report questions $746,845 for inappropriate health benefit charges to the FEHBP in contract
years 2006 through 2009. The questioned amount includes $685,407 for defective pricing and
$61,438 due the FEHBP for lost investment income, calculated through July 31, 2010.
For contract year 2006, we determined that the FEHBP's rates were overstated by $30,306
because the Plan charged broker commissions to the FEHBP. Broker commissions have been
identified as an unallowable cost under 48 Code of Federal Regulations (CFR) 1631.205-75
Selling Costs part (a).
For contract year 2007, we determined that the FEHBP's rates were overstated by $64,093
because the Plan charged the FEHBP both broker commissions and a state assessed market
stabilization fee. Broker commissions have been identified as an unallowable cost under 48 CFR
1631.205-75. New York's market stabilization fee is an unallowable cost under Carrier Letter
www.opm.gov www.usajobs.gov
2003-16, the Federal Employees Health Benefits Act, and the Omnibus Budget Reconciliation
Act of 1990 at United States Code (U.S.C.) sub code 8909(1).
For contract year 2008, we determined that the FEHBP's rates were overstated by $374,167
because the Plan charged broker commissions to the FEHBP. Broker commissions have been
identified as an unallowable cost under 48 CFR 1631.205-75 Selling Costs part (a).
For contract year 2009, we determined that the FEHBP's rates were overstated by $216,841
because the Plan charged the FEHBP a state assessed market stabilization fee. New York's
market stabilization fee is an unallowable cost under Carrier Letter 2003-16, the Federal
Employees Health Benefits Act, and the Omnibus Budget Reconciliation Act of 1990 at U.S.C.
sub code 8909(1).
Consistent with the FEHBP regulations and contract, the FEHBP is due $61,438 for lost
investment income, calculated through July 31, 2010, on the defective pricing findings. In
addition, we recommend that the contracting officer recover lost investment income starting
August 1,2010, until all defective pricing amounts have been returned to the FEHBP.
11
CONTENTS
Page
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 ............................................................. 9
Exhibit A (Summary of Questioned Costs)
Exhibit B (Defective Pricing Questioned Costs)
Exhibit C (Lost Investment Income)
Appendix (MVP Health Care's May 20, 2010, response to the draft report)
I. INTRODUCTION AND BACKGROUND
Introduction
We completed an audit ofthe Federal Employees Health Benefits Program (FEHBP) operations
at Preferred Care (Plan). The audit covered contract years 2006 through 2009 and was conducted
at the Plan's office in Rochester, New York. The audit was conducted pursuant to the provisions
of Contract CS 2371; 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
Retirement and Benefits 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 various health insurance carriers
that 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 rate, FEHBP Contracts/Members
which is defined as the best rate offered to March 31
either ofthe two groups closest in size to
the FEHBP. In contracting with
community-rated carriers, OPM relies on
carrier compliance with appropriate laws
and regulations and, consequently, does not
negotiate base rates. OPM negotiations
relate primarily to the level of coverage and
other unique features of the FEHBP.
The chart to the right shows the number of
FEHBP contracts and members reported by
the Plan as of March 31 for each contract
year audited.
1
The Plan has participated in the FEHBP since 1988 and provides health benefits to FEHBP
members throughout the Rochester area. The last full-scope audit ofthe Plan covered contract
years 2001 through 2005. All issues related to that audit have been resolved.
The preliminary results of this audit were discussed with Plan officials at an exit conference and
through subsequent correspondence. A draft report was also provided to the Plan for review and
comment. The Plan's comments were considered in the preparation ofthis final 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 auditing standards.
Those standards require that 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.
This performance audit covered contract years 2006
through 2009. For these years, the FEHBP paid
approximately $84.7 million in premiums to the Plan.
The premiums paid for each contract year audited are
shown on the chart to the right.
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 (Le., equivalent to the best
rate offered to SSSGs); and
• the loadings to the FEHBP rates were reasonable and equitable.
3
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 governrnent auditing standards,
issued by the Comptroller General of the United States.
The audit fieldwork was performed at the Plan's office in Rochester, New York during October
2009. Additional audit work was completed at our offices in 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. 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 $685,407
The Certificates of Accurate Pricing the Plan signed for contract years 2006 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 $685,407 (see Exhibit A).
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. Ifit is found that the FEHBP was
charged higher than a market price (Le., 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 reviewed the FEHBP's rates and found that the Plan charged broker commissions to the
FEHBP. The broker commission was built into the community rate. Broker commissions are
unallowable costs identified by United States Code of Federal Regulation Title 48 - Federal
Acquisition Regulations System Chapter 16 - Office of Personnel Management Federal
Employees Health Benefits Acquisition Regulation Part 1631 Contract Cost Principles and
Procedures 1631.205-75 Selling Costs part (a).
We re-developed the FEHBP's rates by applying a credit to offset the broker commission. A
comparison of the reconciled line 5 rates to our audited line 5 rates shows that the FEHBP
was overcharged $30,306 in 2006 (see Exhibit B).
We reviewed the FEHBP's rates and found that the Plan charged both broker commissions
and a market stabilization fee to the FEHBP. The broker commission and market
stabilization fee were built into the community rate. The market stabilization fee is an
assessment imposed by the state ofNew York to fund a pool used to pay high cost claims for
individual and small group insurance policies.
Broker commissions are unallowable costs identified by United States Code of Federal
Regulation Title 48 - Federal Acquisition Regulations System Chapter 16 - Office of
Personnel Management Federal Employees Health Benefits Acquisition Regulation Part 1631
- Contract Cost Principles and Procedures 1631.205-75 Selling Costs part (a).
5
The market stabilization fee is an unallowable cost associated with Carrier Letter 2003-16,
the Federal Employees Health Benefits Act, and the Omnibus Budget Reconciliation Act of
1990 at U.S.C. sub code 8909(f). The regulation states, "No tax, fee, or other monetary
payment may be imposed, directly or indirectly, on a carrier or an underwriting or plan
administration subcontractor of an approved health benefits plan by any State ... with respect
to any payment made from the Employees Health Benefits Fund." This regulation excludes
the FEHBP from surcharges that subsidize indigent care and other health care initiatives
through pooled funds.
We re-developed the FEHBP's rates by applying a credit to offset both the broker
commission and the market stabilization fee. A comparison of the reconciled line 5 rates to
our audited line 5 rates shows that the FEHBP was overcharged $64,093 in 2007 (see Exhibit
B).
We reviewed the FEHBP's rates and found that the Plan charged broker commissions to the
FEHBP. The broker commission was built into the community rate. Broker commissions are
unallowable costs identified by United States Code of Federal Regulation Title 48 Federal
Acquisition Regulations System Chapter 16 Office of Personnel Management Federal
Employees Health Benefits Acquisition Regulation Part 1631 - Contract Cost Principles and
Procedures 1631.205-75 Selling Costs part (a).
We re-developed the FEHBP's rates by applying a credit to offset the broker commission. A
comparison of the reconciled line 5 rates to our audited line 5 rates shows that the FEHBP
was overcharged $374,167 in 2008 (see Exhibit B).
We reviewed the FEHBP's rates and found that the Plan charged a market stabilization fee to
the FEHBP. This market stabilization fee was built into the community rates for 2009. The
market stabilization fee is an assessment imposed by the state ofNew York to fund a pool
used to pay high cost claims for individual and small group insurance policies.
The market stabilization fee is an unallowable cost associated with Carrier Letter 2003-16,
the Federal Employees Health Benefits Act, and the Omnibus Budget Reconciliation Act of
1990 at U.S.C. sub code 8909(f). The regulation states, "No tax, fee, or other monetary
payment may be imposed, directly or indirectly, on a carrier or an underwriting or plan
administration subcontractor of an approved health benefits plan by any State ... with respect
to any payment made from the Employees Health Benefits Fund." This regulation excludes
the FEHBP from surcharges that subsidize indigent care and other health care initiatives
through pooled funds.
6
We re-developed the FEHBP's rates by applying a credit to offset the market stabilization
fee. A comparison of the reconciled line 5 rates to our audited line 5 rates shows that the
FEHBP was overcharged $216,841 in 2009 (see Exhibit B).
Plan's Comments (See Appendix):
The Plan concurs that brokers commissions and market stabilization fees were improperly
charged to the FEHBP.
Recommendation 1
We recommend that the contracting officer require the Plan to return $685,407 to the FEHBP
for defective pricing in contract years 2006 through 2009.
2. Lost Investment Income $61,438
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 2006 through 2009. We determined that the FEHBP is due $61,438 for lost
investment income, calculated through July 31,2010 (see Exhibit C). In addition, the FEHBP
is entitled to lost investment income for the period beginning August 1, 2010, 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 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 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 concurs.
Recommendation 2
We recommend that the contracting officer require the Plan to return $61,438 to the FEHBP
for lost investment income for the period January 1, 2006, through July 31,2010. In addition,
we recommend that the contracting officer recover lost investment income on amounts due for
7
IV. MAJOR CONTRIBUTORS TO THIS REPORT
Community-Rated Audits Group
Auditor-In-Charge
Staff Auditor
Staff Auditor
Senior Team Leader
9
Exhibit A
Preferred Care - Rochester, NY
Summary of Questioned Costs
Defective Pricing Questioned Costs:
Contract Year 2006 $30,306
Contract Year 2007 $64,093
Contract Year 2008 $374,167
Contract Year 2009 $216,841
Total Defective Pricing Questioned Costs: $685,407
Lost Investment Income: $61,438
Total Questioned Costs: $746,845
Exhibit B
Page 1 of2
Preferred Care - Rochester, NY
Defective Pricing Questioned Costs
2006
FEHBP Line 5 Reconciled Rate
FEHBP Line 5 - Audited Rate (Revised 6/4/2010)
Overcharge
To Annualize Overcharge:
3/31/06 enrollment
Pay Periods
Subtotal
Total 2006 Defective Pricing Questioned Costs $30.306
2007
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate
Overcharge
To Annualize Overcharge:
3/31/07 enrollment
Pay Periods
Subtotal
Total 2007 Defective Pricing Questioned Costs $64.093
2008
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate
Overcharge
To Annualize Overcharge:
3/31108 enrollment
Pay Periods
Subtotal
Tota12008 Defective Pricing Questioned Costs $374,167
Exhibit B
Page 2 of2
Preferred Care - Rochester, NY
Defective Pricing Questioned Costs
High Option
2009
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 $208,340
Standard Option
2009
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 $216,841
EXHIBITC
Preferred Care - Rochester, NY
Lost Investment Income
Year: 2006 2007 2008 2009 2010 Total
Defective Pricing: $30,306 $64,093 $374,167 $216,841 $0 $685,407
Totals (per year): $30,306 $64,093 $374,167 $216,841 $0 $685,407
Cumulative Totals: $30,306 $94,399 $468,566 $685,407
A vg. Interest Rate (per year): 5.4375% 5.5000% 4.9375% 5.2500% 3.2500%
Interest on Prior Years Findings: $0 $1,667 $4,661 $24,600 $12,994 $43,922
Current Years Interest: $824 $1,763 $9,237 $5,692 $0 $17,516
Total Cumulative Interest Calculated
Through July 31, 2010: $824 $3,430 $13,898 $30,292 $12,994 I $61,438
APPENDIX
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mvphealthcare.com
May 20. 2010
Audits Group
U.S. Office of the Inspector General
1900 E Street. NW
Room 6400
Washington, D.C. 20415-1100
RE: Report No. 1C-GV-00-1 0-004
Dear_:
Enclosed please find a CD in Microsoft word tormat as well as hard copies of the response to your letter
of March 24, 2010 addressed to Mr. David OUker. Chief Executive Officer. MVP Health Care (MVP)
regarding Report No. 1C-GV-00-10-004, audit of Preferred Care tor the time period 2006-2009.
The Office of Personnel Management/Office of Inspector General (OIG) has calculated a balance due of
$914,049 for contract audit years 2006 through 2009 ($847,099 for defective priCing and $66.950 for lost
investment income). After a thorough review. MVP has concluded that the figure should be amended to
$734,765 ($686,285 for defective pricing and $48,480 for lost investment income). MVP accepts
responsibility for the inclusion of broker commissions in the FEHB rate and concurs with the removal and
credit back to FEHB of those funds plus interest. However in 2006 and 2007 we believe there is a
computation error where a monlhly amount is multiplied by 26 (pay period application) resulting in an
overage of amount due as calculated by OIG. In 2008 the removal of broker commission is calculated
correctly. Also in 2008, MVP disagrees with the SSSG discount as it pertains to the broker commission.
Please see attached broker commission schedules outlining the revised payment schedule, thus
removing the discount cited in the comparison to . The priCing for _ _ _ _
was rated in compliance with the formula and this amount should be excluded from ~
MVP agrees with the findings for 2009 regarding the removal of the market stabilization fee. The attached
documentation provides further detail for the year by year differences.
Thank you for your consideration of these items to aid in the preparation of the final audit report.
Please direct any questions you may have relative to this application to my attention.
Sincerely,
Vice President, Underwriting & Analysis
Audit of the Federal Employees Health Benefits Program Operations at Preferred Care
Published by the Office of Personnel Management, Office of Inspector General on 2010-07-27.
Below is a raw (and likely hideous) rendition of the original report. (PDF)