U.S. OFFICE OF PERSONNEL MANAGEMENT
OFFICE OF THE INSPECTOR GENERAL
OFFICE OF AUDITS
Final Audit Report
AUDIT OF THE FEDERAL EMPLOYEES HEALTH
BENEFITS PROGRAM OPERATIONS AT BLUE CARE
NETWORK OF MICHIGAN, INC. – EAST REGION
Report Number 1C-K5-00-15-007
August 28, 2015
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the general public as it may contain proprietary information that was redacted from the publicly distributed copy.
EXECUTIVE SUMMARY
Audit of the Federal Employees Health Benefits Program Operations at Blue Care
Network of Michigan, Inc. – East Region
Report No. 1C-K5-00-15-007 August 28, 2015
Why Did We Conduct the Audit? What Did We Find?
The primary objectives of the audit This report questions $65,824 for inappropriate health benefit
were to determine if Blue Care charges to the FEHBP in contract year 2009. The questioned
Network of Michigan, Inc. – East amount includes $57,270 for defective pricing and $8,554 due the
Region (Plan) offered the Federal FEHBP for lost investment income, calculated through June 30,
Employees Health Benefits Program 2015. We found that the FEHBP rates were developed in
(FEHBP) premium rates using accordance with applicable laws, regulations, and the U.S. Office
complete, accurate and current pricing of Personnel Management’s (OPM) Rate Instructions to
data, and that the rates were Community-Rated Carriers for contract years 2010 through 2012.
equivalent to the Plan’s Similarly
Sized Subscriber Groups (SSSGs), as The Plan incorrectly applied the SSSG discount to the FEHBP line
provided in Federal Employees 1 rates and special benefit loadings. Per OPM’s rating instructions,
Health Benefits Acquisition SSSG discounts are to be applied to the line 5 rates. As such, we
Regulation 1652.215-70(a). applied an SSSG discount of percent to the FEHBP line 5
Additional tests were performed to rates.
determine whether the Plan was in
compliance with the provisions of the Consistent with the regulations and contract, the FEHBP is due
laws and regulations governing the $8,554 for lost investment income, calculated through June 30,
FEHBP. 2015 on the defective pricing finding. In addition, we recommend
that the contracting officer recover lost investment income starting
What Did We Audit? July 1, 2015, until all defective pricing amounts have been returned
to the FEHBP.
Under contract CS 2011, the Office of
the Inspector General completed a
performance audit of the FEHBP’s
rates offered for contract years 2009
through 2012. Our audit fieldwork
was conducted from October 20, 2014
through October 31, 2014 at the
Plan’s office in Southfield, Michigan.
_______________________
Michael R. Esser
Assistant Inspector General
for Audits
i
ABBREVIATIONS
FEHBAR Federal Employees Health Benefits Acquisition Regulations
FEHBP Federal Employees Health Benefits Program
OIG Office of the Inspector General
OPM U.S. Office of Personnel Management
Plan Blue Care Network of Michigan, Inc. – East Region
SSSG Similarly Sized Subscriber Group
U.S.C. United States Code
ii
IV. MAJOR CONTRIBUTORS TO THIS REPORT
TABLE OF CONTENTS
Page
EXECUTIVE SUMMARY ......................................................................................... i
ABBREVIATIONS ..................................................................................................... ii
I. 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 ....................................................8
Exhibit A (Summary of Questioned Costs)
Exhibit B (Defective Pricing Questioned Costs)
Exhibit C (Lost Investment Income)
Appendix (Blue Care Network of Michigan, Inc. – East Region’s May 13, 2015
response to the draft report)
REPORT FRAUD, WASTE, AND MISMANAGEMENT
IV. MAJOR CONTRIBUTORS
I. BACKGROUND
TO THIS REPORT
This final report details the audit results of the Federal Employees Health Benefits Program
(FEHBP) operations at Blue Care Network of Michigan, Inc. – East Region (Plan). The audit
covered contract years 2009 through 2012, and was conducted at the Plan’s office in Southfield,
Michigan.
The audit was conducted pursuant to FEHBP contract CS 2011; 5 United States Code (U.S.C.)
Chapter 89; and 5 Code of Federal Regulations Chapter 1, Part 890. The audit was performed by
the U.S. Office of Personnel Management’s (OPM) Office of the Inspector General (OIG), as
established by the Inspector General Act of 1978, as amended.
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, and is administered by OPM’s
Healthcare and Insurance Office. Health insurance coverage is provided through contracts with
health insurance carriers that provide service benefits, indemnity benefits, or comprehensive
medical services.
Community-rated carriers participating in the FEHBP are subject to various federal, state and
local laws, regulations, and ordinances. While most carriers are subject to state jurisdiction,
many are further subject to the Health Maintenance Organization Act of 1973 (Public Law 93-
222), as amended (i.e., many community-rated carriers are federally qualified). In addition,
participation in the FEHBP subjects the carriers to the Federal Employees Health Benefits Act
and implementing regulations promulgated by OPM.
The FEHBP should pay a premium rate that is
FEHBP Contracts/Members
equivalent to the best rate given to either of the March 31
two groups closest in size to the FEHBP. In
contracting with community-rated carriers, OPM 800
relies on carrier compliance with appropriate 700
laws and regulations and, consequently, does not 600
negotiate base rates. OPM negotiations relate 500
400
primarily to the level of coverage and other
300
unique features of the FEHBP. 200
100
The chart to the right shows the number of 0
2009 2010 2011 2012
FEHBP contracts and members reported by the Contracts 374 356 373 367
Plan as of March 31 for each contract year Members 619 586 731 680
1 Report No. IC-K5-00-15-007
audited.
The Plan has participated in the FEHBP since 1984 and provides health benefits to FEHBP
members in the East Michigan area. The Plan’s prior OIG audit was a rate reconciliation audit
covering contract year 2008. There were no findings or questioned costs identified.
The preliminary results of this audit were discussed with Plan officials at an exit conference and
in subsequent correspondence. A draft report was also provided to the Plan for review and
comment. The Plan’s comments were considered in the preparation of this report and are
included, as appropriate, as the Appendix to the report.
2 Report No. 1C-K5-00-15-007
IV. OBJECTIVES,
II. MAJOR CONTRIBUTORS
SCOPE, ANDTO THIS REPORT
METHODOLOGY
Objectives
The primary objectives of this performance audit were to determine if the FEHBP premium rates
were developed using complete, accurate and current data, and were equivalent to the Plan’s
Similarly Sized Subscriber Groups (SSSG), as provided in Federal Employees Health Benefits
Acquisition Regulation (FEHBAR) 1652.215-70(a). Additional tests were performed to
determine whether the Plan was in compliance with the provisions of the laws and regulations
governing the FEHBP.
Scope
We conducted this performance audit in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions
based on our audit objectives. We believe that the evidence obtained provides a reasonable basis
for our findings and conclusions based on our audit objectives.
FEHBP Premiums Paid to the
This performance audit covered contract years Plan
2009 through 2012. For these years, the FEHBP
paid approximately $13.2 million in premiums to $5
the Plan. $4
Millions
$3
OIG audits of community-rated carriers are
$2
designed to test carrier compliance with the
FEHBP contract, applicable laws and regulations, $1
and the Rate Instructions to Community-Rated $0
Revenue
Carriers (rate instructions). These audits are also 2009 $3.1
designed to provide reasonable assurance of 2010 $2.9
detecting errors, irregularities, and illegal acts. 2011 $3.6
2012 $3.6
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 developed using complete, accurate and current
data, and were equivalent to the best rate given to the SSSGs; and
3 Report No. 1C-K5-00-15-007
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
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 from October 20, 2014 through October 31, 2014 at the
Plan’s office in Southfield, Michigan. Additional audit work was completed at our offices in
Jacksonville, Florida and Cranberry Township, Pennsylvania.
Methodology
We examined the Plan’s Federal rate submissions and related documents as a basis for validating
its Certificates of Accurate Pricing. In addition, we examined the rate development
documentation and billings to other groups, such as the SSSGs, to determine if the FEHBP rates
were reasonable and equitable. Finally, we used the contract, the FEHBAR, 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 Report No. 1C-K5-00-15-007
IV. AUDIT
III. MAJORFINDINGS
CONTRIBUTORS TO THIS REPORT
AND RECOMMENDATIONS
Premium Rate Review
1. Defective Pricing $57,270
The Certificate of Accurate Pricing the Plan signed for contract year 2009 was defective. In
accordance with Federal regulations, the FEHBP is therefore due a rate reduction for this
year. Application of the defective pricing remedy shows that the FEHBP is due a premium
adjustment of $57,270 (see Exhibit A). We found that the FEHBP rates were developed in
accordance with applicable laws, regulations, and OPM’s rules and regulations in contract
years 2010 through 2012.
The FEHBP is due a
FEHBAR 1652.215-70 provides that carriers proposing rates to
rate reduction of
OPM are required to submit a Certificate of Accurate Pricing
$57,270 for defective certifying that the proposed subscription rates are complete, accurate
pricing in contract and current. Furthermore, FEHBAR 1652.216-70 states that the
year 2009. subscription rates agreed to in the contract shall be equivalent to the
subscription rates given to the community-rated carrier’s SSSGs, as
defined in FEHBAR 1602.170-13. SSSGs are the Plan’s two employer groups closest in
subscriber size to the FEHBP. If it is found that the FEHBP rates were increased because of
defective pricing or defective cost or pricing data, then the rates shall be reduced in the
amount by which the price was increased because of the defective data or information.
2009
We agree with the Plan’s selection of and the as SSSGs for
contract year 2009. The Plan applied an SSSG discount of percent to the FEHBP line 1
rates and special benefit loadings. Our analysis confirmed that received a
percent discount and the received an percent discount.
However, the Plan incorrectly applied the SSSG discount to the FEHBP line 1 rates and
special benefit loadings. Per OPM’s rate instructions, SSSG discounts are to be applied to the
line 5 rates. As such, we applied the percent discount to the FEHBP line 5 rates.
A comparison of our audited line 5 rates to the Plan’s reconciled line 5 rates shows that the
FEHBP rates were overcharged $57,270 (see Exhibit B).
5 Report No. 1C-K5-00-15-007
Plan’s Comments (see Appendix):
The Plan claimed that although they did not apply the discount to the Line 5 rates, they do not
consider this to be "defective pricing." The Plan provided supporting rating exhibits that were
consistent with prior years, and the intention was to provide the FEHBP with the best market
rate offered. Their two main concerns were:
a. The 2009 rate submission and rate reconciliation templates provided by OPM in the
instruction packages are not consistent. There is a line 5b - discount on the rate
submission template, but there is not a corresponding discount line on the 2009 rate
reconciliation template. The discount section (lines 5b (i) and (ii)) was not added to
the rate reconciliation template until 2010. Because there was no designated discount
line on the 2009 reconciliation template, there was no place for the Plan to show
where the discount had been applied.
b. The Plan does not calculate Extension of Coverage, Medicare, Children's or
Enrollment Discrepancy loadings for any other group customers (lines 4a-4e in the
rate submission and reconciliation templates). Because these types of loadings are
not used by any other customers, the application of the discount factor to rates shown
on Lines 1 through 2n is appropriate.
OIG’s comments:
We disagree with the Plan’s response, and maintain that the findings outlined in the draft
report are accurate based on the OPM rate instructions.
Recommendation 1
We recommend that the contracting officer require the Plan to return $57,270 to the FEHBP
for defective pricing in contract year 2009.
2. Lost Investment Income $8,554
In accordance with FEHBP regulations and the contract between OPM and the Plan, the
FEHBP is entitled to recover lost investment income on the defective
pricing finding in contract year 2009. We determined the FEHBP is The FEHBP is due
due $8,554 for lost investment income, calculated through June 30, lost investment
income on the
2015. In addition, the FEHBP is entitled to lost investment income
defective pricing
for the period beginning July 1, 2015, until all defective pricing finding in the
amounts have been returned to the FEHBP. amount of $8,554.
6 Report No. 1C-K5-00-15-007
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):
The Plan did not provide any comment on the lost investment income finding.
Recommendation 2
We recommend that the contracting officer require the Plan to return $8,554 to the FEHBP for
lost investment income, calculated through June 30, 2015. We also recommend that the
contracting officer recover lost investment income on amounts due for the period beginning
July 1, 2015, until all defective pricing amounts have been returned to the FEHBP.
7 Report No. 1C-K5-00-15-007
IV. MAJOR CONTRIBUTORS TO THIS REPORT
COMMUNITY-RATED AUDITS GROUP
, Auditor-in-Charge
, Lead Auditor
, Auditor
, Senior Team Leader
, Group Chief
8 Report No. 1C-K5-00-15-007
EXHIBIT A
Blue Care Network of Michigan, Inc. - East Region
Summary of Questioned Costs
Defective Pricing Questioned Costs
Contract Year 2009 $57,270
Total Defective Pricing Questioned Costs $57,270
Lost Investment Income $8,554
Total Questioned Costs $65,824
Report No. 1C-K5-00-15-007
EXHIBIT B
Blue Care Network of Michigan, Inc. - East Region
Defective Pricing Questioned Costs
Contract Year 2009 - High Option
Self Family
FEHBP Line 5 - Reconciled Rate $ $
FEHBP Line 5 - Audited Rate $ $
Bi-weekly Overcharge $ $
To Annualize Overcharge:
March 31, 2009 enrollment
Pay Periods 26 26
Subtotal $26,805 $30,465 $57,270
Total Defective Pricing Questioned Costs $57,270
Report No. 1C-K5-00-15-007
EXHIBIT C
Blue Care Network of Michigan, Inc. - East Region
Lost Investment Income
Year 2009 2010 2011 2012 2013 2014 30-Jun-15 Total
Audit Findings:
1. Defective Pricing $57,270 $0 $0 $0 $0 $0 $0 $57,270
Totals (per year): $57,270 $0 $0 $0 $0 $0 $0 $57,270
Cumulative Totals: $57,270 $57,270 $57,270 $57,270 $57,270 $57,270 $57,270 $57,270
Avg. Interest Rate (per 5.250% 3.188% 2.563% 1.875% 1.563% 2.063% 2.125%
year):
Interest on Prior Years $0 $1,825 $1,468 $1,074 $895 $1,181 $608 $7,051
Findings:
Current Years Interest: $1,503 $0 $0 $0 $0 $0 $0 $1,503
Total Cumulative Interest $1,503 $1,825 $1,468 $1,074 $895 $1,181 $608 $8,554
Calculated Through
June 30, 2015:
Report No. 1C-K5-00-15-007
APPENDIX
`
May 13, 2015
Chief, Community-Rated Audits Group
U.S. Office of Personnel Management
Office of the Inspector General
800 Cranberry Woods Drive
Suite 270
Cranberry Township, PA16066
RE: Draft Audit Report 1C-K5-00-15-007
Dear :
The Office of Inspector General performed an audit of the Federal Employees Health Benefits Program (FEHBP)
operations at Blue Care Network of Michigan (BCN) for the East region – plan code K5. The audit covered contract
years 2009 through 2012 and we received a Draft Audit Report dated March 18, 2015 outlining one finding related
to 2009.
Typically, the carrier response to a Draft Audit Report is due no later than 30 days from the date of the report. BCN
requested a 30-day extension from your office on April 8 and you agreed to a new due date of May 15, 2015.
2009
The audit report states that the Certificate of Accurate Pricing signed for contract year 2009 was defective.
Regulations state that if it is found that the FEHBP was charged higher than the market price rate (i.e. best rate
offered to a Similarly Sized Subscriber Group or SSSG), a condition of defective pricing exists, requiring a
downward adjustment of FEHBP premiums to the equivalent market price rate.
BCN’s 2009 initial rate submission for plan code K5 included an estimated SSSG discount factor, and the
subsequent 2009 rate reconciliation included the final SSSG discount factor.
The auditor agreed with BCN’s SSSG selection and the final discount factor. OPM’s 2009 Rating Instructions
stated that SSSG discounts should be applied to Line 5 rates; however, BCN applied the SSSG discount factor to
rates shown on Lines 1 through 2(n). The rate on Line 1 reflects the cost of the base certificate, and rates on Lines
2(a) through 2(n) reflect the cost of each special benefit loading or rider.
Although BCN did not apply the discount to the Line 5 rates, we do not consider this to be “defective pricing”.
BCN provided supporting rating exhibits that were consistent with prior years and the intention was to provide
FEHBP with the best market rate offered. Our two main concerns are outlined below.
Report No. 1C-K5-00-15-007
FEHBP Audit Response
May 13, 2015
Page 2
The 2009 rate submission and rate reconciliation templates provided by OPM in the instruction packages
are not consistent. There is a line 5b - Discount on the rate submission template, but there is not a
corresponding Discount line on the 2009 rate reconciliation template. The Discount section [Lines 5b (i)
and (ii)] was not added to the rate reconciliation template until 2010. Because there was no designated
Discount line on the 2009 reconciliation template, there was no place for BCN to show where the discount
had been applied.
BCN does not calculate Extension of Coverage, Medicare, Children’s or Enrollment Discrepancy loadings
for any other group customers (Lines 4a-4e in the rate submission and reconciliation templates). Because
these types of loadings are not used by any other customers, the application of the discount factor to rates
shown on Lines 1 through 2n is appropriate.
DELETED BY OIG – NOT RELEVANT TO THE FINAL REPORT.
DELETED BY OIG – NOT RELEVANT TO THE FINAL REPORT.
We would be happy to meet prior to the issuance of the Final Audit report to review any discrepancies in data and to
answer any questions you may have with regard to the information we have provided with this response. Please feel
free to contact my colleague at for any additional information.
Sincerely,
Susan A. Kluge
Senior Vice President, Chief Financial Officer and Treasurer
SAK/
Attachments
Cc: - Vice President, BCN Underwriting and Actuarial Services
- Account Manager
- Director, BCN Rating and Underwriting
Report No. 1C-K5-00-15-007
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Mismanagement
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Report No. 1C-K5-00-15-007
Audit of the Federal Employees Health Benefits Program Operations at Blue Care Network of Michigan, Inc. - East Region
Published by the Office of Personnel Management, Office of Inspector General on 2015-08-28.
Below is a raw (and likely hideous) rendition of the original report. (PDF)