oversight

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

Published by the Office of Personnel Management, Office of Inspector General on 2013-02-21.

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, Inc.



                                           Report No. 1C-IG-00-12-049

                                                February 21, 2013
                                          Date: ____________________




                                                      -- 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, Inc.
                                    Contract Number CS 2892 - Plan Code IG
                                              Columbia, Maryland



                 Report No. 1C-IG-00-12-049                                                02/21/13
                                                                                     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, Inc.
                        Contract Number CS 2892 - Plan Code IG
                                  Columbia, Maryland


         Report No. 1C-IG-00-12-049                           02/21/13
                                                        Date:_____________________


The Office of the Inspector General performed an audit of the Federal Employees Health
Benefits Program (FEHBP) operations at Coventry Health Care, Inc. (Plan). The audit covered
contract years 2007 through 2011, and was conducted at the Plan’s office in Columbia,
Maryland.

This report questions $630,216 for inappropriate health benefit charges to the FEHBP in 2007,
2008, and 2009, including $76,606 for lost investment income, calculated through January 31,
2013. We found that the FEHBP rates were developed in accordance with applicable laws,
regulations, and the Office of Personnel Management rules and regulations for contract years
2010 and 2011.

For contract year 2007, we determined that the FEHBP’s rates were overstated by $73,406 due to
defective pricing. More specifically, the Plan did not apply the correct SSSG discount to the
FEHBP’s rates, incorrectly applied a lower industry factor to an SSSG than the FEHBP, and
incorrectly applied a state-mandated loading to the FEHBP.

For contract year 2008, we determined that the FEHBP’s rates were overstated by $228,870 due
to defective pricing. More specifically, the Plan did not apply the correct SSSG discount to the
FEHBP’s rates and incorrectly applied a prescription benefit adjustment to the FEHBP.

                                                i
For contract year 2009, we determined that the FEHBP’s rates were overstated by $251,334 due
to defective pricing. More specifically, the Plan did not apply the correct SSSG discount to the
FEHBP’s rates and incorrectly applied a prescription benefit adjustment to the FEHBP.

Consistent with the FEHBP regulations and contract, the FEHBP is due $76,606 for lost
investment income, calculated through January 31, 2013, on the defective pricing findings. In
addition, the contracting officer should recover lost investment income on amounts due for the
period beginning February 1, 2013, until all defective pricing amounts have been returned to the
FEHBP.

Also for contract years 2007, 2008 and 2009, the Plan did not maintain its FEHBP reconciliation
documents as required by the OPM contract and rating instructions.




                                                ii
                                                        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 ........................................................................................... 10

     3. Record Retention...................................................................................................... 11

IV. MAJOR CONTRIBUTORS TO THIS REPORT.......................................................... 12

      Exhibit A (Summary of Questioned Costs)

      Exhibit B (Defective Pricing Questioned Costs)

      Exhibit C (Lost Investment Income)

      Appendix (Coventry Health Care, Inc.’s December 4, 2012, response to the draft report)
                     I. INTRODUCTION AND BACKGROUND
Introduction

We completed an audit of the Federal Employees Health Benefits Program (FEHBP) operations
at Coventry Health Care, Inc. (Plan). The audit covered contract years 2007 through 2011. The
audit was conducted pursuant to the provisions of Contract CS 2892; 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.
                                                                FEHBP Contracts/Members
The FEHBP should pay a market price                                    March 31
rate, which is defined as the best rate
offered to either of the two groups closest           1,800
in size to the FEHBP. In contracting with             1,600
community-rated carriers, OPM relies on               1,400
carrier compliance with appropriate laws              1,200
and regulations and, consequently, does               1,000
not negotiate base rates. OPM negotiations              800
relate primarily to the level of coverage               600
and other unique features of the FEHBP.                 400
                                                        200
The chart to the right shows the number of                0
                                                                 2007   2008   2009       2010   2011
FEHBP contracts and members reported by             Contracts     241    504    766        715    798
the Plan as of March 31 for each contract           Members      474     974   1,489   1,387     1,686
year audited.




                                                1
The Plan has participated in the FEHBP since 2006 and provides health benefits to FEHBP
members in the state of Maryland. This is the first audit of the Plan conducted by our office.

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




                                                 2
                II. OBJECTIVES, SCOPE, AND METHODOLOGY

Objectives

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

Scope
                                                                      FEHBP Premiums Paid to Plan

We conducted this performance audit in
accordance with generally accepted government                        $7

auditing standards. Those standards require that                     $6




                                                      Millions
we plan and perform the audit to obtain                              $5

sufficient, appropriate evidence to provide a                        $4
reasonable basis for our findings and                                $3
conclusions based on our audit objectives. We                        $2
believe that the evidence obtained provides a                        $1
reasonable basis for our findings and                                $0
                                                                           2007   2008   2009   2010   2011
conclusions based on our audit objectives.                       Revenue   $1.8   $4.0   $5.8   $5.5   $6.6


This performance audit covered contract years
2007 through 2011. For these contract years, the FEHBP paid approximately $23.7 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 conducted during March 2012 in Columbia, Maryland, and additional
audit work was completed at our offices located 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 Review

1. Defective Pricing                                                                    $553,610

   The Certificates of Accurate Pricing Coventry Health Care, Inc. (Plan) submitted to the
   Office of Personnel Management (OPM) for contract years 2007, 2008, and 2009 were
   defective. In accordance with federal regulations, the Federal Employees Health Benefits
   Program (FEHBP) is therefore due a rate reduction for these years. Application of the
   defective pricing remedy shows that the FEHBP is entitled to premium adjustments totaling
   $553,610 (see Exhibit A). We found that the FEHBP rates were developed in accordance
   with applicable laws, regulations, and OPM rules and regulations for contract years 2010 and
   2011.

   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 a similarly sized subscriber group (SSSG). SSSGs are the Plan’s two
   employer groups closest in size to the FEHBP. If it is found that the FEHBP was charged
   higher than the market price rate (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 rate.

   In contract year 2007, the FEHBP was rated using a community rating by class (CRC)
   methodology and the SSSGs were rated with a blend of adjusted community rating (ACR)
   and CRC. For contract years 2008 through 2011, if a group had less than 12,000 member
   months, a blend of CRC and ACR was used. If the group had over 12,000 member months
   during their experience period then the Plan used an ACR methodology to develop the rates
   for the group. The ACR methodology is based on group specific claims experience, which is
   adjusted by factors such as trends, pooling charges, retention, and margin factors, to
   determine the required per-member-per-month (PMPM) revenue needed for the renewal
   period. This required PMPM is then converted to a set of tiered rates (i.e., single, family)
   using group specific family size and contract mix.

   2007

   We selected                       and            as the SSSGs for contract year 2007. Our
   analysis of the rates charged to the SSSGs shows that                       received an
   percent discount and               received a     percent discount. The Plan also applied a
         industry factor for one of the SSSGs,                      According to OPM’s rating
   instructions, the FEHBP must receive the lowest industry factor given to an SSSG, but it
   cannot be higher than 1.00. Therefore, we applied                          discount factor of
           (1.0 –      percent x       ) to the FEHBP’s audited line 5 rates. Our analysis shows
   that the Plan applied a discount factor of        (or an                discount) to the
   FEHBP’s rates.

                                                5
Lastly, the Plan applied a      compliance adjustment factor to the FEHBP rates, which is a
state-mandated charge for small groups. It was determined that this factor is not applicable
to the FEHBP because it is state mandated. Per OPM’s rating instructions, the imposition of
taxes, fees, or other monetary payment on FEHBP premiums by any State are prohibited.
Therefore, the compliance adjustment was removed from our audited FEHBP rates.

A comparison of our audited line 5 rates to the Plan’s reconciled line 5 rates shows that the
FEHBP was overcharged $73,406 (high and standard options) in 2007 (see Exhibit B).

Plan’s Comments (see Appendix):

The Plan agrees that the SSSG,                     received an      percent discount.
However, the Plan feels the      percent discount includes the discount related to the
industry factor. The Plan agrees with the exclusion of the compliance adjustment from the
audited FEHBP rates.

OIG’s Response to Plan’s Comments

Our        percent                      discount was calculated using a       industry factor.
The        percent discount would only include the impact of a         industry factor if the
factor was changed to 1.00 in our audited rates. However, that was not the case since the
audited rates for                      included an industry factor of     . The 2007 OPM rate
instructions state that the total discount is calculated by multiplying the other discount by the
industry factor. In the case with                       a discount of      percent was calculated
and an industry factor of        was used. The total discount factor for
equaled          , which was the largest discount of the two SSSGs. Since the FEHBP is
entitled to the largest discount given to either of the two SSSGs, we applied the discount
factor of          to the FEHBP’s audited line 5 rates.

2008

We selected                     and                       as the SSSGs for contract year
2008. Our analysis of the rates charged to the SSSGs shows that
received an      percent discount.                   did not receive a discount. Our
analysis shows that the FEHBP received a total discount of      percent (high and standard
options). Per OPM’s rating instructions, the FEHBP should be given the largest discount
granted to an SSSG. Therefore, we applied the       percent                        discount
to the FEHBP’s audited line 5 rates.

The Plan also incorrectly changed the FEHBP’s prescription benefit relativity factor.
According to the Plan’s 2008 FEHBP benefit brochure, there were no changes in the
prescription benefit from 2007 to 2008. Therefore, we used the same prescription benefit
relativity factor as was used in the prior year.

A comparison of our audited line 5 rates to the Plan’s reconciled line 5 rates shows that the
FEHBP was overcharged $228,870 (high and standard options) in 2008 (see Exhibit B).

                                             6
Plan’s Comments (see Appendix):

The Plan agrees with the         percent discount given to                             However,
the Plan disagrees with the finding related to the incorrect prescription benefit relativity
factor for the FEHBP. The Plan referenced Section 5 of the 2008 FEHBP benefit brochure
which explains the prescription benefits for the FEHBP. Also, the Plan states that the
prescription benefit relativity factor does not measure a change from prior year to the
prospective year; rather it measures the change in utilization from a base benefit to the described
benefit.

OIG’s Response to Plan’s Comments

In 2007, the FEHBP prescription benefit was a “10/20/45 unlimited”, which was the same as
the Plan’s base prescription benefit. Prescription benefits that differ from the base
prescription benefit have a relativity factor. If a group’s prescription benefit is better than the
base prescription benefit, the relativity factor is greater than 1.00. Conversely, if a group’s
prescription benefit is worse than the base prescription benefit, the relativity factor is less
than 1.00. Since the FEHBP’s prescription benefit was the same as the Plan’s base
prescription benefit, the relativity factor should be 1.00.

For 2008, the Plan changed the FEHBP prescription benefit in their rate model to “10/20/45
No Deductible – Prior Authorization Lite”, which has a relativity factor of        The 2007
and 2008 FEHBP benefit brochures have exactly the same language explaining the
prescription benefits. The Plan’s base prescription benefit remained a “10/20/45 unlimited”
in 2008. The relativity factor should be 1.00, since the FEHBP benefit brochures do not
indicate any changes, nor did the Plan discuss this benefit change with OPM.

2009

We selected                                and                        as the SSSGs for
contract year 2009. Our analysis of the rates charged to the SSSGs shows that
                received an      percent discount.                         received a
percent discount. Our analysis shows that the FEHBP received a total discount of
percent (high and standard options). Per OPM’s rating instructions, the FEHBP should be
given the largest discount granted to an SSSG. Therefore, we applied the        percent
                        discount to the FEHBP’s audited line 5 rates.

The Plan also incorrectly changed the FEHBP’s prescription benefit relativity factor.
According to the Plan’s 2007, 2008, and 2009 FEHBP benefit brochures, there were no
changes in the prescription benefits from 2007 to 2009. Therefore, we used the same 1.00
prescription benefit relativity factor as we used in 2007 and 2008.

A comparison of our audited line 5 rates to the Plan’s reconciled line 5 rates shows that the
FEHBP was overcharged $251,334 (high and standard options) in 2009 (see Exhibit B).



                                               7
Plan’s Comments (see Appendix):

The Plan believes that                               meets all of the criteria set forth in the
OPM rate instructions for special adjustments to SSSG rates based on estimated new
business. The criteria from the rate instructions and the Plan’s validation for each criterion
are as follows:

1) The Carrier can give a reasonable justification

   The SSSG,                                 is a slice account for the Plan. The broker for
   the SSSG notified the Plan that another carrier was presenting a rate which would
   potentially drive the healthier members away from the Plan. Therefore, the Plan would
   be in jeopardy of underfunding for the prospective year.

2) The method is not intended to give a discount

   The Plan, desiring to take into account any change in experience basis given the
   notification of potential adverse selection, and wishing to avoid the loss of a large
   customer, ran an additional quote capture which included an experience period one
   month later than the original quote for the SSSG                                   The Plan
   feels this cannot be considered a discount but instead is a revised basis which accurately
   projects the rates based on changes to the original assumptions of risk to the Plan.

3) It is the Carrier’s policy to make such adjustments

   The Plan regularly refreshes experience period bases for quotes that present changes to
   the original assumptions of risk to the Plan, to the degree it is an automated, documented
   process. The Plan allows an underwriter to also make changes to demographic and other
   assumptions. In the case with                                   the Plan adjusted the
   demographic factor from        to      .

The Plan feels the difference in the FEHBP audited rates and its billed rates should not be
considered a discount of       percent.

The Plan also disagrees with the finding that it incorrectly changed the FEHBP’s prescription
benefit relativity factor. This factor adjusts the experience for benefit changes which may
have occurred from the experience period to the current period, or when a significant shift of
enrollment from one plan to another occurs (i.e., current census compared to the experience
period census). The Plan believes they correctly applied the factor of           in this manner,
and it has requested that the original value of         be used to calculate the audited FEHBP
line 5 rates.

OIG’s Response to Plan’s Comments

The OPM rate instructions allow special adjustments to SSSG rates based on estimated new
business in rare cases. The scenario described by the Plan is not related to new business and

                                              8
it does not meet the criteria set forth in the OPM rate instructions for special adjustments to
SSSG rates. The SSSG,                                     is a slice account for the Plan and they
clearly gave them a discount in order to avoid losing membership. The broker for
                         notified the Plan that the other carrier came in with a much lower rate
and that the Plan was at risk of significant membership loss or even losing the account. In
order to avoid losing membership, the Plan gave                                    a discount of
     percent.

The first criterion in the OPM rate instructions is not satisfied because the potential of losing
business due to the rates being too high is not an OPM-accepted reason for a special
adjustment to the SSSG rates.

The second criterion in the OPM rate instructions requires a special adjustment not be
intended as a discount. After reviewing the correspondence from the broker and bills for
                               it is apparent that the Plan manipulated the experience in order
to give the group a discount. In addition, no support was provided for using an experience
period one month later than the original experience period. Also, the Plan’s data for
                        calls for a demographic factor of approximately        which accounts
for the change in demographics from the experience period to the current period. The broker
suggested the demographic factor was not accurate so the Plan changed it to        . In the
Plan’s response to the draft report, they provided data showing the demographic factor was
the same for November 2008 and November 2009, but the demographic factor used in the
November 2008 renewal is adjusted for the change in demographics from the experience
period to the current period. The demographic comparison provided by the Plan was not
appropriate.

The third criterion in the OPM rate instructions states that it must be the carrier’s policy to
make such adjustments. The changes made by the Plan must be documented and supported.
The Plan did not support that the special adjustments were part of their policies. Also, the
broker’s email shows the intent was to give the group a rate lower than the Plan’s rating
methodology requires. The adjustments made to the November 2008 rates for
                 must be treated as a discount and applied to the FEHBP’s Line 5 rates.

The FEHBP was rated with         percent creditability in 2009. The rates were developed with
a blend of CRC and ACR. Therefore, there are two separate prescription benefit factors.
However, the plan incorrectly used            for the CRC prescription benefit factor. As
previously discussed, the 2007 FEHBP prescription benefit was a “10/20/45 unlimited”,
which was identical to the Plan’s base prescription benefit. Again, if a group’s prescription
benefit is better than the base prescription benefit, the relativity factor is greater than 1.00.
Conversely, if a group’s prescription benefit is worse than the base prescription, the relativity
factor is less than 1.00. Since the FEHBP’s prescription benefit was the same as the Plan’s
base prescription benefit, the relativity factor should be 1.00.

For 2009, the Plan changed the FEHBP prescription benefit in their model to “10/20/45 No
Deductible – Prior Authorization Lite”, which has a relativity factor of     . The FEHBP
benefit brochures for 2007, 2008, and 2009 have exactly the same prescription benefit. Also,

                                              9
   the Plan’s base prescription benefit remained the “10/20/45 unlimited” for 2008 and 2009.
   The prescription benefit factor should be 1.00 since the FEHBP benefit brochures do not
   indicate any changes, nor did the Plan discuss this benefit change with OPM.

   The prescription benefit adjustment factor in the ACR model adjusts the experience for the
   benefit changes that have occurred from the experience period to the current period. In the
   Plan’s response, they stated that the benefit adjustment factor can also be adjusted when a
   significant shift of enrollment from one plan to another occurs (i.e., current census compared
   to the experience period census). The prescription benefit adjustment factor should only be
   used to account for benefit changes. Furthermore, the Plan did not document a significant
   shift in enrollment as discussed in their response. According to the FEHBP benefit
   brochures, there were no prescription benefit changes from 2007 to 2009. In addition, the
   Plan’s underwriting guidelines do not mention the benefit adjustment factor is used for
   significant enrollment changes. Therefore, we used a prescription benefit adjustment factor
   of 1.00 in the 2009 FEHBP rates, instead of the 1.0546 prescription benefit adjustment factor
   that the Plan used in their ACR model.

   Recommendation 1

   We recommend that the contracting officer require the Plan to return $553,610 to the FEHBP
   for defective pricing in contract years 2007 through 2009.

2. Lost Investment Income                                                                  $76,606

   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 $76,606 for lost
   investment income, calculated through January 31, 2013 (see Exhibit C). In addition, the
   FEHBP is entitled to lost investment income for the period beginning February 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 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 did not respond to this finding.

                                                10
  Recommendation 2

  We recommend that the contracting officer require the Plan to return $76,606 to the FEHBP
  for lost investment income for the period January 1, 2007, through January 31, 2013. In
  addition, we recommend that the contracting officer recover lost investment income on
  amounts due for the period beginning February 1, 2013, until all defective pricing amounts
  have been returned to the FEHBP.

3. Record Retention

  The Plan did not maintain its FEHBP rate reconciliation documents as support for its 2007,
  2008, and 2009 rates. Further, the Plan did not select SSSGs in these years. Although we
  ultimately completed sufficient, alternative testing to determine the adequacy of the
  FEHBP’s rates, the OPM contract and rating instructions require small carriers to keep its
  rate reconciliations and SSSG data on file and make them available during OPM audits. In
  these years, the records were not available due to personnel changes within the Plan. Poor
  record retention practices increase the risk of FEHBP overcharges.

  Plan’s Comments (see Appendix):

  The Plan did not respond to this finding.

  Recommendation 3

  We recommend that the contracting officer require the Plan to establish written record
  retention policies and procedures to ensure compliance with the FEHBP contract and to
  provide copies of these policies and procedures to OPM within 90 days of this report.




                                              11
            IV. MAJOR CONTRIBUTORS TO THIS REPORT
Community-Rated Audits Group

                  , Auditor-in-Charge

               , Auditor

               , Auditor

_______________________________________________________________________

                  Chief

              , Senior Team Leader




                                        12
                                                                      Exhibit A


                              Coventry Health Care, Inc.
                             Summary of Questioned Costs



Defective Pricing Questioned Costs


        Contract Year 2007                                  $73,406
        Contract Year 2008                                 $228,870
        Contract Year 2009                                 $251,334


        Total Defective Pricing Questioned Costs                      $553,610


Lost Investment Income:                                                $76,606


Total Questioned Costs                                                $630,216
                                 Coventry Health Care, Inc.
                              Defective Pricing Questioned Costs
                                                                              Exhibit B
                                                                             Page 1 of 3
2007

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

Biweekly Difference

To Annualize:
   March 31, 2007 Enrollment
   Pay Periods                                 26        26

Subtotal                                                           $54,612

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

Biweekly Difference

To Annualize:
   March 31, 2007 Enrollment
   Pay Periods                                 26        26

Subtotal                                                           $18,794

Total 2007 Questioned Costs                                                  $73,406
                              Coventry Health Care, Inc.
                           Defective Pricing Questioned Costs
                                                                             Exhibit B
                                                                            Page 2 of 3
2008

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

Biweekly Difference

  To Annualize:
   March 31, 2008 Enrollment
     Pay Periods                            26        26

Subtotal                                                        $260,335

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

Biweekly Difference

  To Annualize:
   March 31, 2008 Enrollment
     Pay Periods                            26        26

Subtotal                                                        ($31,465)

  Total 2008 Questioned Costs                                               $228,870
                                 Coventry Health Care, Inc.
                              Defective Pricing Questioned Costs
                                                                               Exhibit B
                                                                              Page 3 of 3
2009

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

Biweekly Difference

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

Subtotal                                                           $192,044

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

Biweekly Difference

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


Subtotal                                                           $59,290

Total 2009 Questioned Costs                                                   $251,334

           Total Defective Pricing Questioned Costs:                          $553,610
                                                                                                                                EXHIBIT C

                                                       Coventry Health Care, Inc.
                                                        Lost Investment Income



  Year                                  2007        2008        2009          2010        2011        2012        31-Jan-2013     Total
Audit Findings:

1. Defective Pricing                    $73,406     $228,870    $251,334             $0          $0          $0            $0     $553,610


                   Totals (per year):   $73,406     $228,870    $251,334            $0          $0          $0             $0     $553,610
                  Cumulative Totals:    $73,406     $302,276    $553,610      $553,610    $553,610    $553,610       $553,610     $553,610

       Avg. Interest Rate (per year):    5.500%      4.938%       5.250%       3.188%      2.563%      1.875%        0.1146%

    Interest on Prior Years Findings:          $0     $3,624     $15,869       $17,646     $14,186     $10,380           $634      $62,339

             Current Years Interest:     $2,019       $5,650      $6,598             $0          $0          $0            $0      $14,267

Total Cumulative Interest Calculated
         Through January 31, 2013:       $2,019       $9,274     $22,467       $17,646     $14,186     $10,380           $634      $76,606
                                         Appendix


December 4, 2012


Chief, Community-Rated Audits Group
U.S. Office of Personnel Management
Office of the Inspector General
800 Cranberry Woods Drive, Suite 130
Cranberry Township, PA 16066

SUBJECT: PLAN RESPONSE TO REPORT 1C-IG-00-12-049

Dear

I am pleased to respond to your draft report of the OIG’s findings on behalf of Coventry
Health Care, Inc., Columbia MD.

Contract Year 2007

The Plan respectfully disagrees with the overall findings of the OIG for Contract Year
2007 in regard to the application of the industry factor applying as a separate finding to
be applied to the audited line 5 rates:

“Lastly, the Plan applied a     industry factor for one of the SSSGs, Shore
BancShares. According to OPM’s rating instructions, the FEHBP must receive the
lowest industry factor given an SSSG, but it cannot be higher than a 1.00.
Therefore, we changed the FEHBP’s industry factor to        in our audited rates.”

Within the contract year 2007 reconciliation instructions (EXHIBIT 1.pdf, Letter, 2007-
03; Date of Release, 02/21/2007, Attachment, OPM Reconciliation Guidelines – 2007),
page 20 gives the following example of how the industry factor is to be considered. Using
this example, it is inarguable that the application of an industry factor is considered part
of the overall discount given to a group.

Pp 20.
Reconciliation            SSSG #1                          SSSG #2
Instructions EXAMPLE
of TCR / CRC
COMPARISON SHEET
Federal Group
1. Group Renewal   1-1-07                   1-1-07                2-1-07
Date
2. Rating Method   CRC                      CRC                   CRC
(a)
3. Capitation (b)  $100.00                  $98.00                $101.00
4. Age/Sex Factor  .92                      .98                   1.04
5. Industry Factor .95                      .95                   .98
(c)
                                           Appendix


6. Other Discounrs      .98                      1.00                  .95
7. Total Discount       .95 x .98               .95 x 1.00             .95 x .98
(d)
8. 1st Level Step­      1.30                     1.12                  1.22
Up Factor (e)
9. Self Rate (I)        $ 111.35                $ 102.19               $ 119.31
10. Family/Self         2.71                    2.80                   2.55
Ratio
11. Family Rate         $30 1.76                $286 .13               $304.24
(a) If all three methods are not the same, explain why.
(b) Il\IPORTA..." lT! If th ese ca pttatfou rates are not the sa me, explain why in QS15.

(c) The Federal group receives the lowest industry factor < 1.0 given to an SSSG.

(d) Il\IPORTA..."lT : The Federal group receives at least the lowest total discount given to an
        SSSG. ill this case , one SSSG received a total discount of (.95 x 1.00) and the other
        received a total discount of (.95 x .98) Therefore the Federal group would get a
        discount of (.95 x .98) , the lower of the two. Note: The Federal group can rece ive
        the largest discount.
(e) Show How Factors Are Derived.
(I) $100 x .92 x (.95 x .9 8) x 1.3 ~ $111.35

Referring to this example, the total discount on a group is calculated by the multiplication of
the industry factor (line 5 in the example) and the other discounts applied (line 6 in the
example) for the SSSGs, and the discount given to the Federal group is the lower of the two
discount factors.


.%
Referring to the 2007 Contract year, the Plan agrees that the SSSG _
        discount. Referring a~e and to the 2007 contract year, the Plan
further agrees that the SSSG                    received a
total value of the indust factor disCOlUlt iven the ou as
                                                                                received a

                                                                % discount. comprised of the
                                                                  %, and the other diSCOlUlt
given the group as .     %.. (EXHIBIT z .xls,                   SIC factor discount
calculation)

The Plan does not disagree with the other findings as listed with the exception of the financial
result that intuitively comes from the reversa l of the industry factor assessment, necessitating
a revi sion of the defective pricing result within the draft findings (EXH IBIT 3.xls, Line 5
2007 FEHBP audited rates and defective pricing calculation). A comparison of the revi sed
audited line 5 rates for the already-applied industry factor discount indicates the last
paragraph of the finding may reasonably be revised to:

" A comparison of our audited line 5 r ates to the Plan ' s re conciled line 5 r ates shows
that the FEHBP owes the Pl an a refund of S141,440 for the high option, and $48,807
for the st andard option in 2007."
                                   Appendix


Contract Year 2008




                Deleted by OIG – Not Relevant to the Final Report
                                          Append ix


calculation). A comparison of the revised audited line 5 rates for the already-applied industry
factor discount indicates the last paragraph of the finding may reasonably be revised to:

"A comparison of our audited line 5 r ates to the Plan ' s re conciled line 5 rates shows
that the F EHBP was overc ha rged $256,669 for the hi gh op tion in 2008. The
st an da r d option was undercharged $32,562 in 2008, which should be refunded to the
Plan."

Con tr act Year 2009

The Plan respectfully disagrees with the findings of the OIG for Contract Year 2009 in regard
to the findings that it incorrectly changed the FEHBP 's prescription drug benefit relativity
factor. A review of the Plan 's 2009 Benefit brochure (EXHffiIT 8.pdf, Plan Benefit
Brochure, 2009), page 8, indicates a caveat which states in part:

"Do not rely only on these change descriptions: this Section is not an official statement of
bene fits. For that, go to Section 5 Benefits."

Section 5 lists the official statement benefits within the brochure for all options. The High
and Standard Options (beginning on page 45, section 5(f)) and the HOHP Option (beginning
on page 84, section 5(f)) lists official statements of benefits for pharmacy which are complete
and without err or.

In addition, the phannacy Adjustment for Change In Plan factor adj usts the experience for
benefit changes which may have occurred from the experience peri od to the current
period, or when a significant shift of enrollment from one plan to another in the current
census compared to the experience period membership in each plan (EXHIBIT 9.doc,
ERNIE V2 F0I111ula Document_v4-22-09, pa ge 15, 7.1.1). The benefit adjustme nt
rep resent s the expe cted claims utilization chang e due to the enrollme nt shift. Therefore,
a group can have a benefit adjustment other than 1.00 even when there is 110 change ill
bellefit p lans offered during an experience period. The Plan believes it correctly applied
the factor _        ) in this manner. and it respectfully requests that the origina l value of
_        be used to calculate the audited line 5 rates of the FEHBP.

The Plan also respectfully disagree s with the findi ng s of the OIG for Contract Year 2009
~ that the Plan issued a                         11%      discoun t for the SSSG .


On pa ge 7 of the FEHBP Rec onciliation instru ctions for 200 9, the Plan refers to the
following (EXHffiIT to.pdf, FEHBP Reconciliation Iustructions, 2009) :

"Special Adjustments to SSSG Rates

We will consider adjustments to SSSG rates based on estimated new business if:
       1) TIle carrier can give a reasonable justification
       2) TIle method is not intended to give a discount
       3) It is the carrier's policy to make such adjustments."
                                           Append ix



The Plan believes that                                 one of the two SSSGs for the Maryland


                       0. %
Plan for Contract Year 2009, meets all the cri teria of having special adju stments to its rates,
and therefore, the differential from the FEHBP audited rates and its billed rates should not be
considered a discount             as stated by the OIG in its draft findings.

    • Criteria I: the carrier can ive a reasonable 'nsti Ication for the adjustment in rate .
Justification: The employer group ,                               is a slice account for
Coventry of Maryland. On 02/ 19/2008, the Plan was notified that another carrier which
shared the account population was presenting a rate which would cause adverse selection
within the Coventry of Maryland population for                                   potentially
driving the healthier population to enroll in the competing earner' s p an an t ierefore,
placing the Plan in jeopardy of underfunding for the prospective year (EXHIBIT l l .pdf
Confidential Broker Commun ications Email. circled comments).

     • Criteria 2: the meth od is not intended to gil'e a discount.
Rationale: The Plan, desiring to take into account any change in experi ence basis given the
notification of potential adverse selection, and wishing to avoid the loss of a large customer,
fan an additional quote capture which included an ex erience eriod one month later than the
ori ginal on 02/20/2008 for the SSSG                                 Based on acrual data, this
experi ence period cannot be considered "discounted" but instead is a revised basis on which
to accurately project rates based on changes to the original assumptions of risk to the Plan.

Criteria 3: It is the carrier 's p olicy to make such adjustments.
Process: The Plan regularly refreshes experience period bases for quotes that present changes
to the original assumptions of risk to the Plan, to the degree it is an automated, documented
process (EXHIBIT 12.doc, ERNIE V2Training Manual_UW Version_v041309, page 57). In
addition, an UW may also make changes to demographic an~articularly
in slice cases. In fact, considering the revised experience for _                     the Plan
felt confident that no virtually changes in prospective demographics would take place, and so
assigned the adjustment for c ha~ factor a value of 1.000 within its
calculations (EXHIBIT 13.xls. _                          QID 73242). A close examination of the
age-sex factors of the 9/1/2008 quote relative to the 9/ 1/2009 quote for
_         in fact shows the proof of this assumption being accurate: the CRC age-sex factor for
9/112008 was•          . while the CRC age-sex factor for 9/ 1I200~
unchanged at            (EXHIBIT Ia.xls, age-sex comparison for _                         2008
and 2009).

                         ecrfull requests a reversal of the finding that a discount was given to
                                 As the Plan agree s that                          wa s grven a
     % discount, this discount, and not a discount 0       %, should be applied to the audited
line 5 FEHBP fates for 2009 (EXHIBITl5 .xls, Line 5 2009 FEHBP audited rates and
defective pricing calculation).

The Plan does not disagree with the other findings as listed with the exception of the financial
result that intuitively comes from the reversal of the harmac adiu stment for change in plan
factor and the finding that no discount for                             discount exists:
                                           Appendix




                    Deleted by OIG – Not Relevant to the Final Report




Referring to the 2008 Contract year, the Plan agrees that the SSSG                received a
    % discount.




                    Deleted by OIG – Not Relevant to the Final Report




The Plan also disagrees with the findings that it incorrectly changed the FEHBP’s
prescription drug benefit relativity factor. A review of the Plan’s 2008 Benefit brochure, page
8, indicates a caveat which states in part:

“Do not rely only on these change descriptions; this Section is not an official statement of
benefits. For that, go to Section 5 Benefits.”

Section 5 lists the official statement benefits within the brochure for all options. The High
and Standard Options (beginning on page 44, section 5(f)) and the HDHP Option (beginning
on page 84, section 5(f)) lists official statements of benefits for pharmacy which are complete
and without error (EXHIBIT 6.pdf, Plan Benefit Brochure, 2008).

In addition, the manual prescription drug benefit relativity factor does not measure a change
from prior year to the prospective year: it measures the change in utilization from a base rate
to the described benefit. Changes in utilization patterns occur over time even if the benefits
remain identical. Therefore, it is reasonable to conclude that even when benefits are identical
over successive years, the benefit relativity for a specific benefit level can and often does
change over those years.


The Plan does not disagree with the other findings as listed with the exception of the financial
result that intuitively comes from the reversal of the industry factor and pharmacy benefit
relativity assessments, necessitating a revision of the defective pricing result within the draft
findings (EXHIBIT 7.xls, Line 5 FEHBP 2008 audited rates and defective pricing
                                           Appendix

reversing these necessitates a revision of the defective pricing result within the draft
findings.

“A comparison of our audited line 5 rates to the Plan’s reconciled line 5 rates shows
that the FEHBP was undercharged $150,125 for the high option in 2009, while the
standard option was undercharged $15,400 in 2009: this amount should be refunded
to the Plan.”


Please do not hesitate to contact me should you require more information or have
questions.


Sincerely,



Coventry Health Care, Inc.
1100 Circle 75 Parkway, Suite 1400
Atlanta, GA 30339