oversight

Audit of the Federal Employees Health Benefits Program Operations of PacifiCare of Nevada

Published by the Office of Personnel Management, Office of Inspector General on 2009-09-08.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

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                          UNITED STATES OFFICE OF PERSONNEL MANAGEMENT

                                             Washington, DC 20415


   Office of the
Inspector General




                                             AUDIT REPORT



                                   Federal Employees Health Benefits Program

                                Community-Rated Health Maintenance Organization

                                             PacifiCare of Nevada

                                     Contract Number 2899 - Plan Code K9

                                              Cypress, California




                       Report No. 1C-K9-00-09-007                    Da~:   September 8, 2009




                                                                      Michael R. Esser
                                                                      Assistant Inspector General
                                                                        for Audits




        www.opm.goll                                                                        www.usajobs.gOIl
                         UNITED STATES OFFICE OF PERSONNEL MANAGEMENT
                                            . Washington, DC 20415

   Office of the
Inspector General




                                       EXECUTIVE SUMMARY





                               Federal Employees Health Benefits Program

                            Community-Rated Health Maintenance Organization

                                         PacifiCare of Nevada

                                 Contract Number 2899 - Plan Code K9

                                          Cypress, California




                    Report No. lC-K9-00-09-007                  Da~:   september 8, 2009


        The Office of the Inspector General performed an audit of the Federal Employees Health Benefits
        Program (FEHBP) operations at PacifiCare of Nevada (Plan). The audit covered contract years
        2004 through 2008 and was conducted at the Plan's office in Cypress, California. The audit
        showed that the Plan's rating of the FEHBP was in accordance with applicable laws, regulations,
        and the Office of PerSOlmel Management's rating instructions for the years audited.




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                             CONTENTS



                                          Page

     EXECUTIVE SUMMARy                      i


 I. INTRODUCTION AND BACKGROUND            1


n.   OBJECTIVES, SCOPE, AND METHODOLOGy    3


m.   RESULTS OF AUDIT                      5


IV. MAJOR CONTRIBUTORS TO THIS REPORT      6

                     I. INTRODUCTION AND BACKGROUND


Introduction

We completed an audit ofthe Federal Employees Health Benefits Program (FEHBP) operations
at PacifiCare of Nevada (plan). The audit covered contract years 2004 through 2008 and was
conducted at the Plan's office in Cypress, California. The audit was conducted pursuant to the
provisions of Contract CS 2899; 5 U.S.c. Chapter 89; and 5 Code of Federal Regulations (CPR)
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, amlUitants, and dependents. The FEHBP is administered by OPM's
Center for Retirement and Insurance Services. The provisions ofthe 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 earners to the Federal Employees Health Benefits Act
and implementing regulations promulgated by OPM.

The FEHBP should pay a market price rate,                     FEHBP ContractsJMembers

which is defined as the best rate offered to                         March 31


either of the two groups closest in size to          5,000
the FEHBP. In contracting with                       4,500
community-rated carriers, OPM relies on              4,000
                                                     3,500
carrier compliance with appropriate laws
                                                     3,000
and regulations and, consequently, does not
                                                      2,500
negotiate base rates. OPM negotiations                2,000
relate primarily to the level of coverage and         1,500
other unique features of the FEHBP.                   1,000
                                                       500
The chart to the right shows the number of                o
                                                              2004    2005    2006    2007    2008
FEHBP contracts and members reported by         • Contracts   2,045   1,690   1,526   1,5281,374
the Plan as of March 31 for each contract       o Members     4,672   3,514   3,171   3,125   2,785
year audited.

                                                1
The Plan has participated in the FEHBP since 1983 and provides health benefits to FEHBP
members throughout the Las Vegas and Clark County areas. The last audit conducted by our
office covered contract years 1998 through 2000,2002, and 2003~ All questioned costs
associated with that audit have been resolved.

The preliminary results ofthis audit.were discussed with Plan officials at an exit conference and
through subsequent correspondence. A draft report was also provided to the Plan for review and
comment. The Plan's response to the audit report contained sufficient documentation to resolve
the draft report's findings.




                                                2

                II. OBJECTIVES, SCOPE, AND METHODOLOGY


Objectives

The primary objectives of the audit were to verify that the Plan offered market price rate~ to the
FEHBP and to verify that the loadings to the FEHBP rates were reas~nable 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.



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                    FEHBP Premiums Paid to Plan
conclusions based on our audit objectives.
                                                                   $15
This performance audit covered contract years 2004
through 2008. For these years, the FEHBP paid
                                                                   $10
approximately $54 million in premiums to the Plan. The
premiums paid for each contract year audited are shown
on the chart to the right.                                          $5

OIG audits of community-rated carriers are designed to
test carrier compliance with the FEHBP contract,                    $0

applicable laws and regulations, and OPM rate                .Revenue
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 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, ~n:follment,
and claims data provided by the Plan. We did not verify the reliability of the data generated by
the various infonnation 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 ofthe United States.

The audit fieldwork was performed at the Plan's office in Cypress, California, during January
2009. Additional audit work was completed at our office in Cranberry Township, Pennsylvania.

Methodology

We examined the Plan's federal rate submissions and related documents as a basis for validating
the market price rates. In addition, we examined the rate development documentation and
billings to other groups, such as the SSSGs, to determine if the market price was actually charged
to the FEHBP. Finally, we used the contract, the Federal Employees Health Benefits Acquisition
Regulations, and OPM's Rate Instructions to Community-Rated Caniers to deteffi1ine the
propriety of the FEHBP premiums and the reasonableness and acceptability ofthe Plan's rating
system.

To gain an understanding of the internal controls in the Plan's rating system, we reviewed the
Plan's rating system's policies and procedures, interviewed appropriate Plan officials, and
perfoffi1ed other auditing procedures necessary to meet our audit objectives.




                                                 4

                                III. RESULTS OF AUDIT


Our audit showed that the Plan's rating of the FEHBP was in accordance with the applicable
laws, regUlations, and OPM's rating instructions to carriers for contract years 2004 through 2008.
Consequently, the audit did not identify any questioned costs and no corrective action is
necessary.




                                                5

            IV,; MAJOR CONTRIBUTORS TO THIS REPORT

Community-Rated Audits Group

                 Auditor-In-Charge

                     Lead Auditor


                    Chief

                  , Senior Team Leader




                                         6