oversight

Audit of the Federal Employees Health Benefits Program Operations at Coventry Health Care of Kansas, Inc.

Published by the Office of Personnel Management, Office of Inspector General on 2013-06-03.

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 Coventry Health Care of
                        Kansas, Inc.


                                          Report No. 1C-HA-00-12-069

                                          Date:         June 3, 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
                                   Coventry Health Care of Kansas, Inc.
                              Contract Number CS 1948-A - Plan Code HA/9H
                                          Kansas City, Missouri



              Report No. 1C-HA-00-12-069                                                    06/03/13
                                                                                     Date: _________________




                                                                                      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
                          Coventry Health Care of Kansas, Inc.
                     Contract Number CS 1948-A - Plan Code HA/9H
                                 Kansas City, Missouri


         Report No. 1C-HA-00-12-069                         Date: 06/03/13


The Office of the Inspector General performed an audit of the Federal Employees Health
Benefits Program (FEHBP) operations at Coventry Health Care of Kansas, Inc. – plan codes HA
and 9H (Plan). The audit covered contract years 2009 and 2010. The audit was conducted at the
Plan’s office in Kansas City, Missouri and included plan codes HA and 9H.

This report questions $127,617 for inappropriate health benefit charges to the FEHBP in contract
year 2009. The questioned amount includes $115,153 for defective pricing and $12,464 for lost
investment income. 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 year 2010.

For contract year 2009, the Plan incorrectly calculated the benefit change factors for the
standard, high and high deductible health plan (HDHP) options.

Consistent with the FEHBP regulations and contract, the FEHBP is due $12,464 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 (Coventry Health Care of Kansas, Inc.’s February 12, 2013, response to the draft
       report)
                       1. INTRODUCTION AND BACKGROUND


Introduction

We comp leted an audi t of the Federal Employees Health Benefits Program (FE HB P) operations
at Co ventry Health Ca re of' Kansas, Inc. - plan co des HA and 9H (Plan). Th e audi t cove red
contract years 2009 and 20 10, and wa s conduc ted at the Plan ' s office in Ka nsas City, M issour i.
The audit wa s co nducted pursuant to the provisions of Co ntract CS 1948-A; 5 u.s.c. Cha pter
89 ; and 5 Code of Federal Regulations (CFR) Chapter 1, Part 890 . Th e audit wa s performed by
the Office of Personnel Ma nagement' s (OPM) Office of the Inspe ctor Ge ne ral (DIG), as
established by the Inspector General Ac t of 1978, as amende d.

Background

The FE HEP wa s established by the Federal Employees Health Ben efi ts Ac t (Public Law 86 ­
382), enac ted a ll September 28 , 1959. The FEHBP wa s crea ted to provide health insuran ce
benefits for federal employees, annuitants, and dependents . The FEHBP is administered by
OPM ' s Healthcare and Insur an ce Office . Th e provisions of the Federal Employee s He alth
Benefits Ac t are implemented by O PM through regulations co dified in Chapter I , Part 890 of
Title 5, CFR . Health insurance co verage is provided thr ough co ntracts with health insurance
carriers who provide servi ce benefits, indemnity ben efi ts, or comprehensive medical serv ices .

Community-rated ca rrie rs parti c ipating in the FEHBP are subject to various fede ral, state and
local laws, regul ations, and ordina nce s. While most carriers are subject to state j ur isdiction,
many are further subj ect to the Health Ma intena nce Orga niza tion Ac t of 1973 (Public Law 93­
222), as amended (i.e., many co mmunity-rated carriers are federa lly qualified ). In addition,
parti cipation in the FE HB P subjects the carriers to the Federal Employees Health Ben efits Ac t
and implementing regula tions promulgated by OPM.

The FE HB P should pay a market pri ce rate,                         FEHBP Contra cts/Members
                                                                            March 31
which is de fine d as the best rate offered to
eithe r of the two groups closest in size to
the FE HB P. In co ntracting with                         12,000

community-rated carriers, OPM re lies on                  10,000
carrie r co mpliance with appro pria te laws
                                                           8,000
and regulations and, consequently, does not
negoti ate base rates. OPM negotiati ons                   6,000
re late primaril y to the level of cove rage and           4,000
othe r unique features of the FEHBP.
                                                           2,000

The cha rt to the right shows the number of                    o
                                                                           2009             2010
FEHBP co ntrac ts and members reported by              • Contracts        5,135            4,8 15
the Plan as of Ma rch 3 1 for each co ntract           t1Members          11,273           10,175
yea r audited.



                                                   I
The Plan has participated in the FEHBP since 1984 and provides health benefits to FEHBP
members in the Kansas City Metropolitan Area (Kansas and Missouri) and the Wichita, Salina,
and Central Kansas areas. The last full scope audit of the Plan conducted by our office covered
contract years 2006 through 2008. 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
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
                                                                    $50
We conducted this performance audit in
accordance with generally accepted government
                                                                    $40
auditing standards. Those standards require that




                                                      Millions
we plan and perform the audit to obtain
                                                                    $30
sufficient, appropriate evidence to provide a
reasonable basis for our findings and conclusions
                                                                    $20
based on our audit objectives. We believe that
the evidence obtained provides a reasonable
                                                                    $10
basis for our findings and conclusions based on                                2009                 2010
our audit objectives.                                            Revenue       $48.4                $44.1


This performance audit covered contract years
2009 and 2010. For these years, the FEHBP paid approximately $92.5 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
                                                 3
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 Kansas City, Missouri during August
2012. 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. 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 RECOMMENDATIONS


Premium Rate Reyiew

1. Defectin Pricing                                                                        $115.153

  TIle Certificate of Acc urate Pricin g the Plan signed for contract year 2009 wa s defective. In
  acco rdance with federa l regulations, the FEHBP is therefore due a rate reduction for this year.
  Applica tion of the defective pricing rem edy shows that the FEHBP is due a premium
  adjustme nt totaling $115,153 (see Exhibit A). We found that the FEHBP rates were
  developed in acco rdance with app licable laws, regulati ons, and OPM ' s rules and regulations
  in contract year 20 10.

  Carriers proposing rates to a PM are requ ired to submit a Cert ificate of Acc urate Pricin g
  certifyi ng that the prop osed subscription rates, subject to adjustments recognized by OPM, are
  market price rates. a PM regulations refer to a market price rate in conjunction with the rates
  offered to an SSSG . SSSGs are the Plan ' s two empl oyer groups closest in subscriber size to
  the FEHBP. If it is found that the FEHBP was charged higher than the market price rate (i.e.,
  the best rate offered to an SSSG), a condition of defective pri cing exists, requ iring a
  down ward adjustme nt of the FEHBP premiums to the equivalent market price rate.



  We agree with the Plan ' s selections of
  for contract year 2009. Om analysis 0
  neither group rece ived a discount.

  Our analysis of the rates charge d to the FEHBP shows that the Plan incorrectly calculated the
  bene fit change factors for the standard, high and high deductible health plan (HDHP) options.
  Based on the support provided by the Plan , our audited bene fit change factors from the curre nt
  period (2008) to the renewal period (2009) compared to the Plan ' s bene fit change factors are
  as follows:

                o tions 2008 to 2009
            Standard Option
            Hi r Ontio n
            HDHP 0 tion

  A compa rison of our audited line 5 rates to the Plan 's reconciled line 5 rate s shows that the

  FEHBP wa s overcharged $115,153 (see Exhibit B) for all options in 2009.


  Plan ' s Com ments (see Appendix):


  TIle Plan agrees with om finding.




                                                  5
  Recommendation 1

  We recommend that the contracting officer require the Plan to return $115,153 to the FEHBP
  for defective pricing in contract year 2009.

2. Lost Investment Income                                                                $12,464

  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 2009. We determined that the FEHBP is due $12,464 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.

  Federal Employees Health Benefits Acquisition Regulation 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 agrees with our finding.

  Recommendation 2

  We recommend that the contracting officer require the Plan to return $12,464 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


                           Coventry Health Care of Kansas, Inc.
                              Summary of Questioned Costs



Defective Pricing Questioned Costs:


      Contract Year 2009                                   $115,153


               Total Defective Pricing Questioned Costs:              $115,153


      Lost Investment Income:                                          $12,464


                  Total Questioned Costs:                             $127,617
                                                                             Exhibit B

                   Coventry Health Care of Kansas City, Inc.
                      Defective Pricing Questioned Costs

2009

Standard Option (Plan code HA)
                                                        Self       Family
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate

Bi-weekly Result                                    (          (

To Annualize Overcharge:
 March 31, 2009 Enrollment
 Pay Periods                                            26             26
Subtotal                                        (

Total 2009 Standard Option Audit Variance                                   ($41,734)

High Option (Plan code HA)
                                                        Self       Family
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate

Bi-weekly Result                                                   $

To Annualize Overcharge:
 March 31, 2009 Enrollment
 Pay Periods                                            26             26
Subtotal

Total 2009 High Option Defective Pricing Questioned Costs                   $218,055

HDHP (Plan code 9H)
                                                        Self       Family
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate

Bi-weekly Result

To Annualize Overcharge:
 March 31, 2009 Enrollment
 Pay Periods                                            26             26
Subtotal

Total 2009 HDHP Option Audit Variance                                       ($61,168)

Total Defective Pricing Questioned Costs For 2009                           $115,153
                                                                                                                   Exhibit C

                                              Coventry Health Care of Kansas, Inc.
                                                    Lost Investment Income



                                                                                                    As of
  Year                                       2009         2010          2011         2012        May 31, 2013      Total
Audit Findings:

1. Defective Pricing                         $115,153            $0            $0           $0               $0    $115,153



                        Totals (per year):   $115,153           $0            $0           $0               $0     $115,153
                       Cumulative Totals:    $115,153     $115,153      $115,153     $115,153         $115,153     $115,153

           Avg. Interest Rate (per year):     5.250%        3.188%        2.563%      1.875%           1.375%

       Interest on Prior Years Findings:            $0       $3,671       $2,951       $2,159               $660      $9,441

                  Current Years Interest:      $3,023            $0            $0           $0                $0      $3,023

   Total Cumulative Interest Calculated
              Through May 31, 2013:            $3,023        $3,671       $2,951       $2,159               $660     $12,464
                                                                                                   APPF.NDI X




February 12, 2013
                                                               RECEIVEDF£B 20 !ill

US Office of Personnel Management

Offi ce of the Inspector General

800 Cranberry Woods Drive, Suite 270

Cranberry Township, PA 16066




-
n us letter is in response 10 the Draft Audit Report of Coventry Health Care of Kansas, Inc.
(Report No. 1C-HA-OQ. 12· 069). First, I wanted to express our appreciation for the w ork: that the
examiners perform ed both prior to and dwing the onsac audit review process. I also wanted to
thank you for prov ided additional information to assist Coventry in reviewing the fin dings listed
in the draft report.

After review of the draft 1(,.1'0rl aud supplemental information provided, Coventry Health Care o f
Kansas, Inc. accepts the Office of Personncl Manegcmenr's findings and will comply with the
recommendations listed.




-
If you have any questions or require additional information, please feci free to contact me a~


Sincere ly,




DI rector, Policy and Compliance

Coventry Health Care 0 f Kansas, Inc.


cc: File




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