oversight

Audit of the Federal Employees Health Benefits Program Operations at TakeCare Insurance Company

Published by the Office of Personnel Management, Office of Inspector General on 2015-01-29.

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 TakeCare Insurance


                           Company




                                          Report No. 1C-JK-00-14-032

                                          Date:                January 29, 2015




                                                      -- 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


                                       TakeCare Insurance Company


                                   Contract Number 2825-A Plan Code JK


                                             Tamuning, Guam





               Report No. 1C-JK-00-14-032                                              Date: January 29, 2015




                                                                                      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


                             TakeCare Insurance Company


                         Contract Number 2825-A Plan Code JK


                                   Tamuning, Guam




         Report No. 1C-JK-00-14-032                      Date: January 29, 2015


The Office of the Inspector General performed an audit of the Federal Employees Health
Benefits Program (FEHBP) operations at TakeCare Insurance Company (Plan). The audit
covered contract years 2009 through 2012, and was conducted at the Plan’s office in Tamuning,
Guam.

This report questions $163,557 for inappropriate health benefit charges to the FEHBP in contract
years 2011 and 2012. The questioned amount includes $153,532 for defective pricing and
$10,025 due the FEHBP for lost investment income, calculated through December 31, 2014. We
found that the FEHBP premium rates for contract years 2009 and 2010 were developed in
accordance with the Office of Personnel Management’s Rate Instructions to Community-Rated
Carriers.

In contract years 2011 and 2012, we determined that the FEHBP rates were overstated by
$136,133 and $17,399, respectively, due to defective pricing. Specifically, the Plan applied the
dependent age loading to the FEHBP rates after the retention charge. However, the Plan applied
the dependent age loading before the retention charge for a Similarly Sized Subscriber Group
(SSSG) in contract year 2011, and for both SSSGs in contract year 2012. We recalculated our
audited FEHBP rates by applying the dependent age loading before the retention charge to be

                                                i
consistent with the SSSGs. In addition, the Plan did not apply an SSSG discount to the FEHBP
rates in contract year 2011.

Consistent with the regulations and contract, the FEHBP is due $10,025 for lost investment
income, calculated through December 31, 2014 on the defective pricing finding. In addition, we
recommend that the contracting officer recover lost investment income starting January 1, 2015,
until all defective pricing amounts have been returned to the FEHBP.




                                               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 ............................................................................................. 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 (TakeCare Insurance Company’s August 15, 2014, response to the draft


     report)


                     I. INTRODUCTION AND BACKGROUND

Introduction

We completed an audit of the Federal Employees Health Benefits Program (FEHBP) operations
at TakeCare Insm ance Company (Plan). The audit covered contract years 2009 through 2012,
and was conducted at the Plan's office in Tamuning, Guam . The audit was conducted pmsuant
to the provisions of Contract CS 2825-A; 5 U.S. C. Chapter 89; and 5 Code of Federal
Regulations (CFR) Chapter 1, Pmi 890. The audit was perfon ned 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 insm ance
benefits for federal employees, annuitants, and dependents. The FEHBP is administered by
OPM's Healthcare and Insmance Office. The provisions of the Federal Employees Health
Benefits Act are implemented by OPM through regulations codified in Chapter 1, Pmi 890 of
Title 5, CFR. Health insmance coverage is provided through contmcts with health insmance
cmTiers who provide service benefits, indemnity benefits, or comprehensive medical services.

Community-rated cmTiers pati icipating in the FEHBP are subject to vm·ious federal, state and
local laws, regulations, and ordinances. While most caniers are subject to state jmisdiction,
many m·e fmi her subject to the Health Maintenance Organization Act of 1973 (Public Law 93-
222), as amended (i.e., many community-rated cmTiers m·e federally qualified). In addition,
pmiicipation in the FEHBP subjects the cmTiers to the Federal Employees Health Benefits Act
and implementing regulations
promulgated by OPM.                                     FEHBP Contracts/Members
                                                               March 31
The cha1i to the right shows the number
of FEHBP contracts and members
rep01ied by the Plan as of March 31 for
each contract year audited.

The FEHBP should pay a mm·ket price
rate, which is defmed as the best rate
offered to either of the two groups closest
in size to the FEHBP. In contracting with
community-rated caniers, OPM relies on
catTier compliance with appropriate laws
and regulations and, consequently, does
not negotiate base rates. OPM
negotiations relate primarily to the level
of coverage and other lmique featm es of
the FEHBP.
                                               1
The Plan has participated in the FEHBP since 1998 and provides health benefits to FEHBP
members on the island of Guam. The Plan’s prior audit covered contract years 2005 through
2008. All findings associated with 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 are included,
as appropriate, as the Appendix to the report.




                                                 2


                II. OBJECTIVES, SCOPE, AND METHODOLOGY



Objectives

The primary objective of this performance audit was to determine if the Plan offered the FEHBP
market price rates based on the rates given to the Similarly Sized Subscriber Groups (SSSGs).
We also verified 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                                     $40
government auditing standards. Those                                   $35
                                                                       $30
standards require that we plan and perform the

                                                         Millions
                                                                       $25
audit to obtain sufficient, appropriate evidence                       $20
to provide a reasonable basis for our findings                         $15
and conclusions based on our audit objectives.                         $10
We believe that the evidence obtained provides                          $5
a reasonable basis for our findings and                                 $0
                                                                              2009     2010     2011    2012
conclusions based on our audit objectives.                          Revenue   $34.8    $35.7    $35.9   $37.5


This performance audit covered contract years
2009 through 2012. For these years, the
FEHBP paid approximately $143.9 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 to Community-Rated
Carriers (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 SSSGs were selected;

        		 the rates charged to the FEHBP were 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.

                                                   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 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 Tamuning, Guam during March 2014.
Additional audit work was completed at our offices in Jacksonville, Florida and Washington,
D.C.

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 the rate instructions 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                                                                   $153,532

  The Certificates of Accurate Pricing the Plan signed for contract years 2011 and 2012 were
  defective. In accordance with federal regulations, the FEHBP is therefore due a rate reduction
  for these years. Application of the defective pricing remedy shows that the FEHBP is due a
  premium adjustment totaling $153,532 (see Exhibit A). We found that the FEHBP rates were
  developed in accordance with applicable laws, regulations, and the rate instructions in contract
  years 2009 and 2010.

  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. SSSGs are the Plan’s two employer 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 pricing exists, requiring a
  downward adjustment of the FEHBP premiums to the equivalent market price rate.

  2011

  We agree with the Plan's selection of              and                      as the SSSGs for
  2011. Our analysis of the SSSG rates shows that                received a
  discount. The discount was due to the Plan using the wrong rate increase percentages for
  several of                subgroups. We used the rate increase percentages that the Plan’s
  rating methodology called for, which produced a               discount for the group.
              did not receive a discount. We recalculated the FEHBP rates applying the
          SSSG discount.

  Our analysis of the FEHBP rates shows that the Plan applied the dependent age loading after
  the retention charge. However, the Plan applied the dependent age loading before the
  retention charge for             . We recalculated our FEHBP rates by applying the
  dependent age loading before the retention charge to be consistent with the SSSG.

  A comparison of our audited line 5 rates to the Plan’s reconciled line 5 rates shows that the
  FEHBP was overcharged $76,976 for the high option, and $59,157 for the standard option.
  (see Exhibit B).

  Plan’s Comments (see Appendix):

  The Plan disagrees with the application of a             discount to the FEHBP rates because
  of issues with              rate calculation. The adjustment for the wellness incentive
  program should have been         per member per month (PMPM) and not             PMPM

                                                5


based on the wellness incentive documentation. The               PMPM was used conservatively
on the rate model. The Plan argues that applying this to the                  rating and using it
as a basis for the defective pricing is not fair to the Plan given that               was
overcharged, which is not detrimental to the FEHBP. If the Plan is allowed to use the actual
wellness incentive factor, this would have resulted in a                load instead of a discount.

The Plan also states that the dependent age loading was discussed and approved by the OPM
Office of the Actuaries (OA) and the Plan should not be penalized for this issue given this
approval by the OA.

OIG’s Response to the Plan’s Comments:

Our analysis of the SSSG rates shows that               received a discount of                  .
The discount was due to the Plan using the wrong rate increase percentages for several of
          subgroups. We used the rate increase percentages that the Plan’s rating
methodology called for, which produced a               discount for the group.

The dependent age loading was discussed by the OA and the Plan. However, the
correspondence shows that the OA was merely clarifying the location in the worksheets and
not approving the Plan’s methodology in the application of the dependent age loading.
Furthermore, per the FEHB Program Carrier Letter 2010-10 (Part I, page 12), “the carrier is
expected to use the same rating method for the Federal group as it uses for the SSSGs though
different rating methods are acceptable in some situations. If, however, the carrier rates an
SSSG using a method inconsistent with the carrier-established policies, the Federal group is
entitled to a discount based on the SSSG rating method applied to the Federal group.”
Therefore, we recalculated our FEHBP rates by applying the dependent age loading before the
retention charge to be consistent with the SSSG.

2012

Our analysis of the FEHBP rates shows that the Plan applied the dependent age loading after
the retention. However, the Plan applied the dependent age loading before the retention
charge for both SSSGs in contract year 2012. We recalculated our audited FEHBP rates by
applying the dependent age loading before the retention charge to be consistent with the
SSSGs.

A comparison of our audited line 5 rates to the Plan’s reconciled line 5 rates shows that the
FEHBP was overcharged $10,328 for the high option, and $7,071 for the standard option (see
Exhibit B).

Plan’s Comments (see Appendix):

The Plan states that the dependent age loading was discussed and approved by the OA, and
the Plan should not be penalized for this issue.


                                               6


  OIG’s Response to the Plan’s Comments:

  Our response to the Plan’s comments on the dependent age loading issue for 2012 is the same
  as for 2011 (see page 6).

  Recommendation 1

  We recommend that the contracting officer require the Plan to return $153,532 to the FEHBP
  for defective pricing in contract years 2011 and 2012.

2. Lost Investment Income                                                                    $10,025

  In accordance with FEHBP regulations and the contract between OPM and the Plan, the
  FEHBP is entitled to recover lost investment income on the defective pricing findings in
  contract years 2011 and 2012. We determined the FEHBP is due $10,025 for lost investment
  income, calculated through December 31, 2014 (see Exhibit C). In addition, the FEHBP is
  entitled to lost investment income for the period beginning January 1, 2015, until all defective
  pricing amounts have been returned to the FEHBP.

  FEHBAR 1652.215-70 provides that, if any rate established in connection with the FEHBP
  contract was increased because the carrier furnished cost or pricing data that was not
  complete, accurate, or current as certified in its Certificate of Accurate Pricing, the rate shall
  be reduced by the amount of the overcharge caused by the defective data. In addition, when
  the rates are reduced due to defective pricing, the regulation states that the government is
  entitled to a refund and simple interest on the amount of the overcharge from the date the
  overcharge was paid to the carrier until the overcharge is liquidated.

  Our calculation 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):

  “If OIG is accepting these responses, there is not corresponding lost investment income 

  resulting from defecting pricing.”
	
                                    
	

  OIG’s Response to the Plan’s Comments:

  In accordance with FEHBP regulations and the contract between OPM and the Plan, the 

  FEHBP is entitled to recover lost investment income on the defective pricing findings in 

  contract years 2011 and 2012. 


  Recommendation 2

  We recommend that the contracting officer require the Plan to return $10,025 to the FEHBP
  for lost investment income, calculated through December 31, 2014. We also recommend that
  the contracting officer recover lost investment income on amounts due for the period
                                                7


beginning January 1, 2015, until all defective pricing amounts have been returned to the
FEHBP.




                                             8


            IV. MAJOR CONTRIBUTORS TO THIS REPORT


Community-Rated Audits Group

                  , Auditor-In-Charge

                , Staff Auditor

                    , Staff Auditor


                  , Chief

                , Senior Team Leader




                                        9


                                                              Exhibit A 


                          TakeCare Insurance Company
                          Summary of Questioned Costs



Defective Pricing Questioned Costs


        Contract Year 2011                         $136.133


        Contract Year 2012                          $17.399


        Total Defective Pricing Questioned Costs               $153,532 



Lost Investment Income                                          $10,025 



Total Questioned Costs                                         $163.557 

                                                                  Exhibit B 

                                                                 Page 1 of2 

                           TakeCare Insurance Company
                          Defective Pricing Questioned Costs


Contract Year 2011

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

 Bi-weekly Overcharge
                                               --..
                                                Self


                                                       --..
                                                       Family




 To Annualize Overcharge:
    March 31, 2011 enrollment
                                                 •       •
    Pay Periods
 Subtotal

 Total High Option
                                                -
                                                26


                                                        -26



                                                                $76,976

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

 Bi-weekly Overcharge                            ..      ..
 To Annualize Overcharge: 

    March 3 1, 2011 enrollment 

                                                 •       ..
    Pay Periods
 Subtotal

 Total Standard Option
                                                 -
                                                26


                                                        -26



                                                                $59,157

Tota12011 Defective Pricing Questioned Costs                    $136~133
                                                                   Exhibit B 

                                                                  Page 2 of2 

                            TakeCare Insurance Company
                           Defective Pricing Questioned Costs

Contract Year 2012

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

 Bi-weekly Overcharge
                                               Self




                                               ..      --..
                                                        Family




 To Ann ualize Overcharge: 

    March 31, 2012 enrollment 

                                                •        ..
    Pay Periods
 Subtotal

 Total High Option
                                               -
                                               26

                                                         -26



                                                                 $ 10,328

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

  Bi-weekly Overcharge                         ..        ..
  To Annualize Overcharge: 

     March 31, 2012 enrollment 

                                               •         ..
     Pay Periods
  Subtotal

  T otal Standard Option
                                               -26


                                                         -26



                                                                 $7,071

Total2012 Defective Pricing Questioned Costs                     $17.399
                                                                                                            EXHIBITC

                                                     TakeCare Insurance Company
                                                       Lost Investment Income



  Year                                        2011               2012              2013       2014           Total
Audit Findings:

1. Defective Pricing                         $136,133           $17,399             $0         $0           $153,532



                        Totals (per year):   $136,133          $17,399               $0         $0          $153 ,532
                       Cumulative Totals:    $136,133          $153,532           $153,532   $153,532       $153,532

            Avg. Interest Rate (per year):   2.563%             1.875%            1.563%     2.063%

        Interest on Prior Years Findings:      $0               $2 ,552            $2,399     $3,167         $8, 118

                  Current Years Interest:     $1,744             $163               $0         $0            $1 ,907

    Total Cumulative Interest Calculated
           Through December 31, 2014:        $1,744             $2,715            $2,399     $3,167     I   $10,025
                       P.O. Box 6578 Tamuning, Guam 96931
                       Telephone: (671) 646-69 56 Fax (671 ) 647-3520




August15,2014 



Chief, Community Rated Audits Group
United States Office of Personnel Management
Office of the Inspector General
800 Cranberry Wood Drive
Suite 270
Cranberry Township, Pennsylvania 16066

Re: TakeCare Insurance Company, Inc. ("TakeCare") Response to Office of the
Inspector General ("OIG") Draft Audit Report (Audit Report No. lC-JK-00-14-032)

Dear-:

Thank you for the opportunity to respond to the audit findings as stated on the OIG
draft audit report for TakeCare (Audit Report No. 1C-JK-00-14-032) dated July 17,
2014 .

The following responds to the audit findings stated in the OIG Draft report:

         1. Defective Pricing

           TakeCare does not agree with the application of a ­         discount on the
           Federal Employee Health Benefit Plan ("FEHBP") · because of issues
           with Similarly Sized Subscriber Group ("SSSG") 1 -                       rate
           calculation. As discussed with the on-site auditors, the adjustment for the
           wellness incentive program should have bee~ per member per month
           ("pmpm") and not -         pmpm based on the attached wellness incentive
           documentation (Exhibit A). The               m was used conservatively on
           the rate model. Applying this to the              rating and used it as basis
           for the defective pricing is not fair to TakeCare given that we have
           overcharged the SSSG 1 -                 group which is no t detrimental to
           the FEHBP. If TakeCare is allowed to use the actual wellness incentive
           factor based on Exhibit A, this would have resulted to a - load instead
           of a discount based on the attached                rate calculation (Exhibit
           B) and Calculation of Load/Discount (Exhibit C).
          Likewise, the dependent age loading was discussed and approved by the
          OPM Office of the Actuaries and TakeCare should not be penalized for this
          issue given this approval by the Office of the Actuaries. Attached is the
          email correspondence and documentation on this issue (Exhibit D).

      2. Lost Investment Income

          If OIG is accepting these responses, there is not corresponding lost
          investment income resulting from defecting pricing.

We anticipate that our responses are sufficient to address all audit findings in this draft
report and these issues will be deemed resolved in the final audit report for TakeCare.

Please do not hesitate to contact me with any concerns or questions.




Jeffrey Larsen
President and Plan Administrator
TakeCare Insurance Company, Inc.
P.O. Box 6578 Tamuning Guam 96931
(671) 300-7101


   1. Exhibit A - 2011 Wellness Reward Documentation




Cc with enclosures:
               , Deputy Assistant Director, Federal Employee Insurance Operations,
OPM
             Chief Health Insurance Group III, OPM 

                Health Insurance Group Ill, OPM 

     Actuaries Group, OPM
 Senior Team Leader
  , Auditor In-Charge
 Staff Auditor
     Staff Auditor
Senior Product & Pricing Manager and Actuary, TakeCare