oversight

Audit of the Federal Employees Health Benefits Program Operations at HMO Health Ohio

Published by the Office of Personnel Management, Office of Inspector General on 2016-09-23.

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

         AUDIT OF THE FEDERAL EMPLOYEES HEALTH
          BENEFITS PROGRAM OPERATIONS AT HMO
                      HEALTH OHIO

                                            Report Number 1C-L4-00-16-013
                                                  September 23, 2016


                                                                -- 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 (http://www.opm.gov/our-inspector-general), 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 

               Audit of the Federal Employees Health Benefits Program Operations at
                                        HMO Health Ohio
Report No. 1C-L4-00-16-013                                                                     September 23, 2016


Why Did We Conduct The Audit?            What Did We Find?

The primary objectives of the audit      This report questions $3,483,988 for inappropriate health benefit
were to determine if HMO Health          charges to the FEHBP in contract years 2011 and 2012. The
Ohio (Plan) developed the Federal        questioned amount includes $3,177,807 for defective pricing and
Employees Health Benefits Program        $306,181 for lost investment income. Specifically, our audit
(FEHBP) premium rates using              identified the following:
complete, accurate, and current data,
and that the rates were equivalent to       	 The Plan has two separate entities and lines of business.
the Plan’s Similarly Sized Subscriber          However, our audit was limited to the review of one entity
Groups (SSSG), as provided in                  and line of business due to the FEHBP’s contracting
Federal Employees Health Benefits              arrangement with the Plan. In spite of this arrangement, we
Acquisition Regulation 1652.215-               found the Plan used data from both entities to influence the
70(a). Additional tests were                   rates for an SSSG, the                   , in contract years
performed to determine whether the             2011 and 2012. As a result:
Plan was in compliance with the
provisions of the laws and regulations                    1) The                    received a     percent
governing the FEHBP.                                         discount in contract year 2011. We applied this
                                                             discount to the FEHBP rates, which resulted in a
What Did We Audit?                                           $1,953,801 overcharge to the FEHBP.

Under contract 2015, the Office of the                    2) The                    received a    percent
Inspector General (OIG) completed a                          discount in contract year 2012. We applied this
performance audit of the FEHBP’s                             discount to the FEHBP rates, which resulted in a
rates offered for contract years 2010                        $1,224,006 overcharge to the FEHBP.
through 2012. Our audit fieldwork
was conducted from November 2,              	 The FEHBP is due $306,181 for lost investment income on
2015, through February 22, 2016, at            the identified overcharges calculated through August 31,
the Plan’s office in Cleveland, Ohio           2016.
and in our OIG offices.
                                         We found that the FEHBP rates were developed in accordance
                                         with applicable laws, regulations, and the U. S. Office of Personnel
                                         Management’s rules and regulations in contract year 2010.

 _______________________
 Michael R. Esser
 Assistant Inspector General
 for Audits
                                                      i
              ABBREVIATIONS


FEHBAR   Federal Employees Health Benefits Acquisition Regulations
FEHBP    Federal Employees Health Benefits Program
HMO      Health Maintenance Organization
OIG      Office of the Inspector General
OPM      U.S. Office of Personnel Management
Plan     HMO Health Ohio
PPO      Preferred Provider Organization
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


          1. Defective Pricing .....................................................................................................5 


          2. Lost Investment Income.........................................................................................10 


  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 (HMO Health Ohio’s response to the draft report, received on May 10, 

          2016) 


          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 HMO Health Ohio (Plan). The audit was conducted pursuant to FEHBP
contract CS 2015; 5 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 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. 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 premium rate                                   March 31
that is equivalent to the best rate given to
                                                     2,500
either of the two groups closest in size to
the FEHBP. In contracting with                       2,000
community-rated carriers, OPM relies on
carrier compliance with appropriate laws             1,500

and regulations and, consequently, does
                                                     1,000
not negotiate base rates. OPM
negotiations relate primarily to the level             500
of coverage and other unique features of
                                                         0
the FEHBP.                                                         2010        2011      2012
                                                   Contracts       1,310       1,199     939
                                                   Members         2,168       2,014     1,517
The chart to the right shows the number
of FEHBP contracts and members
reported by the Plan as of March 31 for each contract year audited.
The Plan has participated in the FEHBP since 1985 and provides health benefits to FEHBP
members in the Northeast Ohio area. However, as of December 31, 2012, the Plan opted to
cease its FEHBP participation. A prior audit of this plan code was conducted in 2010. There
were no findings reported for the prior audit.



                                               1                           Report No. 1C-L4-00-16-013
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 response was considered in preparation of this report and is included, as
appropriate, as the Appendix to the report.




                                                 2                   Report No. 1C-L4-00-16-013
IV. OBJECTIVES,
II.  MAJOR CONTRIBUTORS
                SCOPE, ANDTO THIS REPORT
                          METHODOLOGY

 Objectives
 The primary objectives of the 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
                                                                       FEHBP Premiums Paid to Plan
 accordance with generally accepted government
 auditing standards. Those standards require that
                                                                     $18
 we plan and perform the audit to obtain sufficient,
                                                                     $16
 appropriate evidence to provide a reasonable basis    Millions
                                                                     $14
 for our findings and conclusions based on our                       $12
                                                                     $10
 audit objectives. We believe that the evidence                       $8
 obtained provides a reasonable basis for our                         $6
                                                                      $4
 findings and conclusions based on our audit                          $2
 objectives.                                                          $0
                                                                             2010        2011        2012
                                                                  Revenue    $16.1       $15.2       $12.7

 This performance audit covered contract years
 2010 through 2012. For these years, the FEHBP
 paid approximately $44 million in premiums to the Plan.

 OIG audits of community-rated carriers are designed to test carrier compliance with the FEHBP
 contract, applicable laws and regulations, and the 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 had in place to ensure that:

         The appropriate SSSGs were selected;




                                                 3                           Report No. 1C-L4-00-16-013
        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

        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 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 November 2, 2015, through February 22, 2016, at the
Plan’s office in Cleveland, Ohio. Additional audit work was completed at our Cranberry
Township, Pennsylvania; Jacksonville, Florida; and Washington, D.C. offices.

Methodology
We examined the Plan’s Federal rate submission 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-L4-00-16-013
III. AUDIT FINDINGS AND RECOMMENDATIONS

1. Defective Pricing                                                                   $3,177,807

  The Certificate of Accurate Pricing HMO Health Ohio signed for contract years 2011 and
  2012 was 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 $3,177,807 (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 year 2010.

       The Plan          FEHBAR 1652.215-70 provides that carriers proposing rates to OPM
   improperly used       are required to submit a Certificate of Accurate Pricing certifying that
  data from both of      the proposed subscription rates are complete, accurate and current.
 its business entities   Furthermore, FEHBAR 1652.216-70 states that the subscription rates
    to influence an      agreed to in the contract shall be equivalent to the subscription rates
     SSSG’s rates,       given to the community-rated carrier’s SSSGs as defined in FEHBAR
      resulting in       1602.170-13. SSSGs are the Plan’s two employer groups closest in
   defective pricing     subscriber size to the FEHBP. If it is found that the FEHBP rates were
    overcharges of       increased because of defective pricing or defective cost or pricing data,
     $3,177,807 in       then the rates shall be reduced in the amount by which the price was
 contract years 2011     increased because of the defective data or information.
       and 2012.

  Separate Lines of Business

  The Plan has two separate entities for which it conducts business. Medical Health Insuring
  Corporation of Ohio, also known as HMO Health Ohio, offers health maintenance
  organization (HMO) products. Medical Mutual of Ohio offers preferred provider
  organization (PPO) products.

  During our review of the                      in 2012, we found that the Plan was basing
  various factors of their rate calculation on combined HMO and PPO subscriber contracts.
  This prompted us to gather more information from the Plan about these entities and whether
  they were separate lines of business. The Plan stated the two entities were separate lines of
  business and, therefore, our SSSG selection should only be based on the HMO population,
  since that was the product that was offered to the FEHBP.

  We do not agree that these entities are separate lines of business. According to OPM’s Rating
  Instructions, separate lines of business must “meet all of the following criteria:


                                                5                   Report No. 1C-L4-00-16-013
       It must be a separate organizational unit, such as a division.
       It must have separate financial accounting with ‘books and records that provide
        separate revenue and expense information.’
       It must have a separate work force and separate management involved in the design
        and rating of the healthcare product.”

The fact that the Plan blends HMO and PPO rates for certain SSSGs proves the entities are
not separate lines of business as the revenues are affected for each entity. In addition, through
discussions with the Plan, the workforce is shared between the two entities.

However, we determined that OPM’s contract for health benefits was with HMO Health
Ohio, which offered HMO products. Therefore, we agreed with the Plan that we should only
be auditing HMO groups. This also means that the Plan should not be using PPO data in any
capacity when calculating the rates for its HMO population.

Plan Response (see Appendix):

The Plan states that regardless of the entity structure, under Ohio law HMO and PPO
products are two distinct types of business with two distinct types of rating formulas. Since
the Plan only offers its HMO product to FEHBP members due to its contracting
arrangement with OPM, only commercial groups offering an HMO product are
appropriate to select as the SSSGs.

OIG Comment:

It is not uncommon for the OIG to audit plans offering different product lines such as an
HMO and a PPO, even if the FEHBP purchases a different product line than an SSSG.
However, our decision to audit only SSSGs purchasing an HMO product is based solely on
the contract between OPM and the Plan. As mentioned above, OPM’s contract is with HMO
Health Ohio, which only offers HMO products. Therefore, we limited our SSSG selections to
commercial groups who also purchased insurance through HMO Health Ohio.

2011

The Plan selected           and the                    as the SSSGs for contract year 2011.
We agree with the Plan’s selections. Our analysis of the rates charged shows that the
          received a       percent discount, which was not applied to the FEHBP’s rates.
Our review also showed that            did not receive a discount.




                                              6                   Report No. 1C-L4-00-16-013
The                      offered both an HMO and PPO product to its members. However, as
discussed above, we limited our review of the                       to its HMO product due to
the FEHBP’s contracting arrangement with HMO Health Ohio. Yet, in deriving the
          ’s final rates, we discovered that the final rates were a blend of its HMO and PPO
rates. Since the Plan refused to provide documentation supporting the                        ’s
PPO rates, we only considered the group’s HMO rates in our audited rate calculations. A
comparison of our audited rates to the group’s billed rates resulted in a         percent discount
to the                    .

Because the FEHBP is entitled to a discount equivalent to the largest discount given to an
SSSG, we recalculated the FEHBP’s rates using the          percent discount given to the
            . A comparison of our audited line 5 rates to the Plan’s reconciled line 5 rates
shows the FEHBP was overcharged $1,953,801 in contract year 2011 (see Exhibit B).

Plan Response (see Appendix):

The Plan does not agree that any amounts are due to OPM in 2011.

OIG Comment:

We disagree with the Plan’s position and are questioning $1,953,081 for defective pricing in
contract year 2011. See the “OIG Comment Regarding the Blending of HMO and PPO
Rates” below for further explanation.

2012

The Plan selected the                  and                       as the SSSGs for contract
year 2012. We agree with the Plan’s selections. Our analysis of the rates charged shows that
the                   received a    percent discount, which was not applied to the FEHBP’s
rates. Our review also showed that                     did not receive a discount.

As in 2011, the                     offered both an HMO and PPO product to its members in
2012. However, we again limited our review of the                       to its HMO product due
to the FEHBP’s contracting arrangement with HMO Health Ohio. In deriving the
           ’s rates we determined that the Plan made multiple errors. First, the Plan used the
group’s total HMO and PPO contracts in determining its pooling level, resulting in a pooling
level of $          and a pooling charge of      percent. However, since our audit was limited
to the HMO population as discussed previously, we only used the group’s HMO contracts to
derive the group’s audited rates, resulting in a pooling level of $       and a pooling charge
of      percent.



                                               7                   Report No. 1C-L4-00-16-013
The Plan also incorrectly applied a completion factor of       to the adjusted pooled claims.
Based on the support provided, we determined the completion factor to be        .
Additionally, the Plan incorrectly rated the                as      percent credible based on
its total HMO and PPO contracts. We found the credibility level should have been percent
based solely on its HMO contracts.

Finally, in deriving the                  ’s rates, we again discovered that the rates were a
blend of its HMO and PPO rates. Since the Plan refused to provide documentation supporting
the                    ’s PPO rates, we only considered the group’s HMO rates in our audited
rate calculations. After adjusting the audited rates for the other above-mentioned
adjustments, we compared these rates to the group’s billed rates. The result of this
comparison showed that the                       received a      percent discount.

Because the FEHBP is entitled to a discount equivalent to the largest discount given to an
SSSG, we recalculated the FEHBP’s rates using the        percent discount given to the
         . A comparison of our audited line 5 rates to the Plan’s reconciled line 5 rates
shows the FEHBP was overcharged $1,224,006 in contract year 2012 (see Exhibit B).

Plan’s Response (see Appendix):

The Plan agrees that the pooling level, pooling charge, and credibility factor should have
been based on the                   ’s HMO contracts in 2012. The Plan also agrees with
our audited completion factor of        . The change to the credibility factor alone may
result in a small refund due to OPM. The changes to the pooling charge would not have a
material impact on the rates. In total, any changes the OIG suggests would not be material
and there are no amounts due to OPM.

OIG Comment:

We disagree with the Plan’s position and are questioning $1,224,006 for defective pricing in
contract year 2012. See the “OIG Comment Regarding the Blending of HMO and PPO
Rates” below for further explanation.

Plan Response Regarding the Blending of HMO and PPO Rates (see Appendix):

The Plan disagrees with our approach of not blending the HMO and PPO rates for the
            in 2011 and 2012. The result of not blending the rates created a discount to
the                 , which we then applied to the FEHBP rates. The Plan argues:




                                             8                   Report No. 1C-L4-00-16-013
1.	 In a previous audit conducted in 2010, the Plan states we agreed that the blending of
    PPO and HMO rates was appropriate and did not result in any additional discounts to
    the selected SSSGs. The Plan relied on this assessment for future rating of the SSSGs.

2.	 The Plan provided an excerpt from their state filing which states rates may be re-
    allocated between HMO Health Ohio and Medical Mutual of Ohio. The excerpt also
    shows a sample calculation for how the rates would be re-allocated. The Plan states
    they followed the guidance provided in the filing when renewing rates for the
              .

3.	 Finally, the Plan provided a reallocation calculation for the                 in 2011.
    The Plan states the re-allocation between HMO and PPO rates does not cause an
    overall discount. It only changes the amount of premium which should be collected
    under each product (95 percent of which is enrolled in the PPO product and 5 percent
    of which is enrolled in the HMO product), which ultimately affects the rates charged to
    the employees of the group.

OIG Comment Regarding the Blending of HMO and PPO Rates:

We would like to make it clear that we believe the practice of blending rates between two
different products such as HMO and PPO is acceptable. In this case, the Plan has two
different entities that provide two different products. If a commercial group has both
products, the rates are blended to arrive at the final rates.

However, there are other factors we need to take into consideration to determine our final
position. HMO Health Ohio signed a contract with OPM to offer only an HMO product for
each year under review. Therefore, our SSSG selections were limited to commercial groups
purchasing insurance through HMO Health Ohio. As mentioned previously, the
           offered both an HMO and a PPO product to its members. The PPO portion of the
rates was developed by Medical Mutual of Ohio. The HMO and PPO rates are then re-
allocated in a revenue neutral manner.

The Plan would like us to accept the                      ’s PPO rates, despite the fact that the
PPO enrollment makes up 95 percent of the group’s total enrollment, without auditing those
rates. In other words, the Plan wants us to accept the re-allocation of the rates based on
verification of only 5 percent of the group’s total rate development. In order for us to re-
allocate the group’s rates as the Plan suggests, we would have to audit the PPO rate build-up,
as any identified discounts or overcharges would affect the HMO rates during the re-
allocation.




                                              9	                   Report No. 1C-L4-00-16-013
  However, the Plan states that because the PPO rates were developed by a separate line of
  business, we are not able to audit the PPO rates. As we explained in the beginning of the
  report, we do not believe Medical Mutual of Ohio is a separate line of business based on the
  guidance provided by OPM in the Rating Instructions. However, because our contract is with
  HMO Health Ohio, we cannot pursue obtaining documentation from Medical Mutual of Ohio
  unless the Plan agrees to provide it. The Plan was adamant against providing any
  documentation relating to their PPO business during this audit.

  In regards to the previous audit covering contract years 2006 through 2009, it is incumbent on
  the Plan to follow the regulations and instructions in place for each year in developing the
  FEHBP’s and SSSGs’ rates and not rely on previous audit results in determining the
  appropriateness of a rating methodology. That being said, our current audit findings are not
  indicative of a disagreement with the Plan’s rating methodology. In fact, we agree that the
  blending of a group’s rates amongst different product lines can produce a valid rate for the
  group. However, for audit purposes, when this type of methodology is utilized, we need to be
  able to audit the rates for both product lines to determine the validity of the final blended rate.
  In this instance the Plan refused to produce the documentation needed to support the
             ’s PPO rate. Therefore, we were only able to audit its HMO rate, which by the
  Plan’s own admission covers only 5 percent of the group’s total enrollment. Because we
  were not provided with rating documentation to support the PPO product’s rates, we had no
  choice but to base our audit results on the discount that was given to the HMO product.

  As a result, we calculated an audited rate adjustment factor based on HMO-only data with
  which the Plan agrees. We applied this factor to the group’s HMO billed rates in each year to
  calculate our final audited renewal rates.

  Recommendation 1

  We recommend that the Contracting Office either require the Plan to reimburse the FEHBP
  $3,177,807 for defective pricing, or provide sufficient documentation to support the rate
  build-up for the                   ’s PPO product’s rates in 2011 and 2012 so that the revenue
  neutrality resulting from the blending of the HMO and PPO rates can be validated.

2. Lost Investment Income                                                                  $306,181

  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 $306,181 for lost
  investment income, calculated through August 31, 2016 (see Exhibit C). In addition, the




                                                10                    Report No. 1C-L4-00-16-013
FEHBP is entitled to lost investment income for the period beginning September 1, 2016,
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               The FEHBP is due
carrier furnished cost or pricing data that was not complete,                $306,181 in lost
accurate, or current as certified in its Certificate of Accurate           investment income
Pricing, the rate shall be reduced by the amount of the overcharge           due to FEHBP
caused by the defective data. In addition, when the rates are                 overcharges.
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 Response (see Appendix):

The Plan did not comment on the lost investment income finding.

Recommendation 2

We recommend that the contracting officer require the Plan to return $306,181 to the FEHBP
for lost investment income, calculated through August 31, 2016. We also recommend that the
contracting officer recover lost investment income on amounts due for the period beginning
September 1, 2016, until all defective pricing amounts have been returned to the FEHBP.




                                            11                   Report No. 1C-L4-00-16-013
IV. MAJOR CONTRIBUTORS TO THIS REPORT

COMMUNITY-RATED AUDITS GROUP

        , Auditor-in-Charge

               , Auditor


            , Senior Team Leader

             , Group Chief




                                   12   Report No. 1C-L4-00-16-013
IV. MAJOR CONTRIBUTORS
              EXHIBIT A TO THIS REPORT


                                HMO Health Ohio
                            Summary of Questioned Costs



 Defective Pricing Questioned Costs


      Contract Year 2011                         $1,953,801
      Contract Year 2012                         $1,224,006


      Total Defective Pricing Questioned Costs                       $3,177,807


 Lost Investment Income                                                $306,181


 Total Questioned Costs                                              $3,483,988




                                                              Report No. 1C-L4-00-16-013
IV. MAJOR CONTRIBUTORS
              EXHIBIT B TO THIS REPORT


                                  HMO Health Ohio
                          Defective Pricing Questioned Costs


 Contract Year 2011
                                                      Self     Family
   FEHBP Line 5 - Reconciled Rate                 $            $
   FEHBP Line 5 - Audited Rate                    $            $

   Bi-weekly Overcharge                           $            $

   To Annualize Overcharge:
      March 31, 2011 Enrollment
      x 26 Pay Periods                              26           26
   Subtotal                                      $909,090    $1,044,711

 2011 Defective Pricing Questioned Costs                                  $1,953,801

 Contract Year 2012
                                                      Self     Family
   FEHBP Line 5 - Reconciled Rate                 $            $
   FEHBP Line 5 - Audited Rate                    $            $

   Bi-weekly Overcharge                           $             $

   To Annualize Overcharge:
      March 31, 2012 Enrollment
      x 26 Pay Periods                              26            26
   Subtotal                                      $618,040      $605,966

 2012 Defective Pricing Questioned Costs                                  $1,224,006

 Total Defective Pricing Questioned Costs                                 $3,177,807




                                                                Report No. 1C-L4-00-16-013
                                                     EXHIBIT C


                                                       HMO Health Ohio 

                                                     Lost Investment Income 





   Year                                  2011           2012         2013          2014          2015        31-August-2016   Total

Audit Findings:



1. Defective Pricing                   $1,953,801     $1,224,006            $0            $0            $0              $0    $3,177,807




                Totals (per year):     $1,953,801     $1,224,006            $0            $0            $0              $0    $3,177,807
              Cumulative Totals:       $1,953,801     $3,177,807   $3,177,807    $3,177,807    $3,177,807        $3,177,807


   Avg. Interest Rate (per year):        2.5625%        1.8750%      1.5625%       2.0625%       2.2500%           2.1875%


Interest on Prior Years Findings:               $0      $36,634      $49,653       $65,542       $71,501            $46,343    $269,673



          Current Years Interest:        $25,033        $11,475             $0            $0            $0              $0      $36,508




Total Cumulative Interest Calculated
         Through August 31, 2016:        $25,033        $48,109      $49,653       $65,542       $71,501            $46,343    $306,181




                                                                                                         Report No. 1C-L4-00-16-013
                                      APPENDIX




May 10, 2016


Chief, Community-Rated Audits Group                         Via Email
United States Office of Personnel Management
Washington, D.C. 20415

       Re: Audit of HMO Health Ohio 2010 - 2012


Dear             ,

This letter is Medical Mutual’s response to the draft audit report issued by your office on March
7, 2016. Medical Mutual respectfully disagrees with the amount of calculated inappropriate
benefit charges as detailed in our comments below.

Defective Pricing

   a.	 Separate Lines of Business - The draft audit report notes that Medical Mutual’s wholly
       owned subsidiary, Medical Health Insuring Corporation of Ohio (MHICO) offers HMO
       products while Medical Mutual of Ohio offers PPO products. The report states that the
       auditors became aware of these two separate product lines during the course of this audit.
       We would like to make sure that you are aware that this division of products has existed
       for many years. DELETED BY OIG – NOT RELEVANT TO THE FINAL REPORT
       But regardless of whether the HMO plans and PPO plans are in one company or two
       companies, under Ohio law they are two distinct types of business with two distinct types
       of rating formulas. This is why an SSSG offering an HMO, not a PPO, is the appropriate
       group to choose as an SSSG. This is only a point of clarification, not a disagreement
       with the audit itself.

   b.	                     Pricing – 2011 and 2012

         i.	 Medical Mutual agrees that in 2012,                   pooling and pooling charge
             should have been calculated using only the HMO population, and that the pooling and
             pooling charge calculations provided by OPM are accurate. Further, we agree that the
             correct completion factor is     . We do not believe this calculation was an error


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    because the factor used (      ) was intended to be applied to running paid rather than
    incurred and paid claims to provide customers with a more accurate picture of their
    experience. However, the intent of the change in factor is for display purposes, not to
    change the actual completed incurred claims, and therefore, we can accept OPMs
    calculation. Finally, we agree with OPMs use of an % credibility factor based
    solely on HMO contracts. This change may result in a small refund to OPM, but we
    believe the pooling change alone is immaterial.

ii.	 Medical Mutual strongly disagrees with the conclusion that its blending of HMO and
     PPO rates in calculating the                     ’s renewal rates (current income) was an
     improper calculation that provided the                       with an additional discount
     in its HMO premiums that was not afforded to the FEHB plan. This conclusion is not
     consistent with OPM historical audit practice and not consistent with our HMO rate
     filings. MHICO’s HMO rating formula has been filed with and approved by the Ohio
     Department of Insurance and is clear that when a group offers both PPO and HMO
     products with Medical Mutual, the renewal rate calculations will be blended so that
     the prices reflect the actuarial value and the differences in benefits. Specific arguments
     regarding Medical Mutual’s position are set forth below.

   1.	 This rating methodology has been in place for several years and was actually
       discussed with the OPM auditors in the last two audits of the HMO Health Ohio
       plan. OPM conducted its previous audit in 2010 covering the years 2006-2009.
       During that audit, the auditor agreed that the blending of rates was appropriate and
       did not result in any additional discount provided to DELETED BY THE OIG –
       NOT RELEVANT TO THE FINAL REPORT an SSSG plan in 2007 or
       DELETED BY THE OIG – NOT RELEVANT TO THE FINAL REPORT an
       SSSG in 2009. The result of that audit was that “. . . the Plan’s rating of the
       FEHBP was in accordance with applicable laws, regulations, and OPM’s rating
       instructions to carriers for contract years 2006 through 2009. Consequently, the
       audit did not identify any questioned costs and no corrective action is necessary.”

       Medical Mutual relied on this 2010 finding in continuing to calculate blended
       renewal rates for the                  plan during the 2011 and 2012 periods.

       DELETED BY THE OIG – NOT RELEVANT TO THE FINAL REPORT

   2.	 MHICO filed a specific formula for calculation of renewal rates with the Ohio
       Department of Insurance. This formula must be the basis for determining renewal
       rates, and was a key element of the 2015 audit. OPM auditors reviewed the
       MHICO (HMO Health Ohio) filing, and reviewed the calculations of the FEHBP
       rates and the rates for the SSSGs to determine if the renewals were calculated
       according to the filing. OPM auditors received the entire filing, but Attachment 3
       is the relative portion of the filing, which specifically mentions the reallocation
       (blending) between MHICO and MMO products in Step C of the calculation. The
       second page of Attachment 3 is also part of the filing and is a rating example



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                showing the blending, and is consistent with our process in renewing the
                          and other groups with HMO and PPO offerings for the last decade.

             3.	 Lastly, the use of the calculated rate increases from 2011 for the
                 is demonstrated in Attachment 4. Note that the process of re-allocation does not
                 give an overall discount to the                     , it simply changes the
                 presentation of the total cost (95% of which is PPO because only 5% of the
                 enrollment is in the HMO product), into a single increase for this single group,
                 which maintains an actuarially sound difference in cost between the PPO and
                 HMO employee plan offerings. There is no HMO product discount in the overall
                 rates charged to                    .

Based on the above, it is Medical Mutual’s position that there are no errors in the calculation of
the FEHB rates due to the blending of the                    HMO and PPO rates. Therefore, we
do not agree that any amounts are due to OPM for the 2010 – 2012 audit. Please feel free to call
me (               ) or            (               ) with any questions.

Sincerely,




Senior Vice President, General Counsel & Secretary




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               Report Fraud, Waste, and
                   Mismanagement 

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                     Government concerns everyone: Office of
                         the Inspector General staff, agency
                      employees, and the general public. We
                    actively solicit allegations of any inefficient
                          and wasteful practices, fraud, and
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                         U.S. Office of Personnel Management
                         1900 E Street, NW
                         Room 6400
                         Washington, DC 20415-1100
  
                                                                                 
                                                                                 




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