Office of Personnel Management, Office of Inspector General | U.S. Office of Personnel Management | Audit of the Federal Employees Health Benefits Program Operations at Health Net of California, Inc.

Audit of the Federal Employees Health Benefits Program Operations at Health Net of California, Inc. - Northern Region

Published by the Office of Personnel Management, Office of Inspector General on 2011-10-19.

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

U.S. OFFlCE 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 Health Net of California, Inc.
- Northern Region

Report No. lC·LB·OO·Il·024

Date: octd ber 19, 2011

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UN ITED STATES OFFICE OF PERSONNEL MANAGEMENT
Washington. DC 20415

Offi~ of the
Inspector General

EXECUTIVE SUMMARY

Federal Emp loyees Health Benefits Program

Community.Rated Health Maintenance Organization

Health Net of California, Inc. - Northern Region

Contract Number 2002 - Plan Code LB

Woodland Kills, California

Report No. IC-LB-OO-I 1-024 Date: October 19, 20 11

The Office of the Inspector General performed an audit of the Federal Employees Health Benefits
Program (FEHBP) operations at Health Nel of Cali forrua, Inc. - Northern Region (Plan). The
audit covered contract years 2008 through 2010 and was conducted at the Plan' s office in
Woodland Hill s, Ca lifornia. We found that the FEI-IBP rates were developed in accordance with
applicable laws, regulations, and the Office of Personnel Management ' s rating instructions for
lhe years audited.

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UN ITED STATES OFFICE OF PERSONNEL MANAGEMENT
Washington, DC 20415

Office of the
InspeciOf General

AUDIT REPORT

Federal Employees Health Benefits Program

Community-Rated Health Maintenance Organization

Health Net of California, Inc. - Northern Region

Contract Number 2002 - Plan Code LB

Woodland Hills, California

Report No. lC-LB-OO-II-024 Date: Octob e r 1 9 . 2011

;/y&Michael R. Esser
Assistant Inspector General
for Audits

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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 Health Net of California, Inc. – Northern Region (Plan). The audit covered contract years
2008 through 2010 and was conducted at the Plan’s office in Woodland Hills, California. The
audit was conducted pursuant to the provisions of Contract CS 2002; 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 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 carriers to the Federal Employees Health Benefits Act
and implementing regulations promulgated by OPM.

The FEHBP should pay a market price FEHBP Contracts/Members
rate, which is defined as the best rate March 31

offered to either of the two groups closest 18,000
in size to the FEHBP. In contracting with 16,000
community-rated carriers, OPM relies on 14,000
carrier compliance with appropriate laws 12,000
and regulations and, consequently, does 10,000
not negotiate base rates. OPM 8,000
negotiations relate primarily to the level 6,000
of coverage and other unique features of 4,000
the FEHBP. 2,000
0
2008 2009 2010
The chart to the right shows the number 8,831 6,281 6,527
Contracts
of FEHBP contracts and members Members 17,492 11,564 10,901
reported by the Plan as of March 31 for
each contract year audited.

1
The Plan has participated in the FEHBP since 1980 and provides health benefits to FEHBP
members in Northern California. The last audit conducted by our office was a full scope audit
and covered contract years 2005 through 2007. There were no issues identified during that audit.

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

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
FEHBP Premiums Paid to Plan

We conducted this performance audit in
$100
accordance with generally accepted government
auditing standards. Those standards require that $75

Millions
we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a $50
reasonable basis for our findings and conclusions
$25
based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis $0
for our findings and conclusions based on our 2008 2009 2010

audit objectives. Revenue $87.8 $66.8 $73.2

This performance audit covered contract years 2008 through 2010. For these years, the FEHBP
paid approximately $227.8 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 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 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

3
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 Woodland Hills, California, during
April 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. Further, we examined claim payments to verify that the cost data used to
develop the FEHBP rates was accurate, complete, and valid. 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 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 applicable laws,
regulations, and OPM’s rating instructions to carriers for contract years 2008 through 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