oversight

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

Published by the Office of Personnel Management, Office of Inspector General on 2011-06-08.

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

                                                    CONTENTS 

                                                                                                                    Page


      EXECUTIVE SUMMARY…. ......................................................................................... i


  I. INTRODUCTION AND BACKGROUND .................................................................... 1 


II. OBJECTIVES, SCOPE, AND METHODOLOGY ......................................................... 3 


III. RESULTS OF THE AUDIT............................................................................................ 5 


IV. MAJOR CONTRIBUTORS TO THIS REPORT............................................................ 6 

                     I. INTRODUCTION AND BACKGROUND

Introduction

We completed an audit of the Federal Employees Health Benefits Program (FEHBP) operations
at PacifiCare of Nevada (Plan) in Cypress, California. The audit covered contract years 2009
and 2010. The audit was conducted pursuant to the provisions of Contract CS 2899; 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 various 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.                                                           FEHBP Contracts/Members
                                                                      March 31
The FEHBP should pay a market price rate,
                                                          2,500
which is defined as the best rate offered to
either of the two groups closest in size to the           2,000
FEHBP. In contracting with community-rated
                                                          1,500
carriers, OPM relies on carrier compliance
with appropriate laws and regulations and,                1,000
consequently, does not negotiate base rates.
OPM negotiations relate primarily to the level              500

of coverage and other unique features of the                  0
FEHBP.                                                             2009           2010
                                                       Contracts   1,262          1,255

The chart to the right shows the number of             Members     2,464          2,452

FEHBP contracts and members reported by
the Plan as of March 31 of each contract year audited.

                                                  1

The Plan has participated in the FEHBP as a community-rated comprehensive medical plan since
1983 and provides comprehensive medical services to FEHBP members throughout Nevada.
The last audit of the Plan conducted by our office was a full scope audit of contract years 2004
through 2008. There were no findings during the previous audit. The Plan ceased participation
in the FEHBP effective December 31, 2010.

The preliminary results of this audit were discussed with Plan officials at an exit conference.
Since the audit showed that the Plan’s rating of the FEHBP was in accordance with the
applicable laws, regulations, and instructions, we did not issue a draft report.




                                                 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

We conducted this performance audit in                               FEHBP Premiums Paid to Plan
accordance with generally accepted
government auditing standards. Those
standards require that we plan and perform the                     $12
audit to obtain sufficient, appropriate evidence                   $10
to provide a reasonable basis for our findings
                                                        Millions
                                                                   $8
and conclusions based on our audit objectives.
                                                                   $6
We believe that the evidence obtained
                                                                   $4
provides a reasonable basis for our findings
and conclusions based on our audit objectives.                     $2
                                                                   $0
                                                                           2009            2010
This performance audit covered contract years                  $10.10         $9.96
                                                  Revenue
2009 and 2010. For these contract years, the
FEHBP paid approximately $20.1 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 systems 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 an SSSG); 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 performed 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 Cypress, California, during March
2011. Additional audit work was completed at our offices in Cranberry Township, Pennsylvania
and Jacksonville, Florida.

Methodology

We examined the Plan’s federal rate submissions and related documents as a basis for validating
the market price rates. In addition, we examined the rate development documentation and
billings to other groups, such as the SSSGs, to determine if the market price rate 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’s policies and procedures, interviewed appropriate Plan officials, and
performed other auditing procedures necessary to meet our audit objectives.




                                                 4

                            III. RESULTS OF THE 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 2009 and 2010.
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

                   , Auditor


                   , Chief

              , Senior Team Leader




                                             6