U.S. OFFICE OF PERSONNEL MANAGEMENT
OFFICE OF THE INSPECTOR GENERAL
OFFICE OF AUDITS
AUDIT OF THE FEDERAL EMPLOY EES H EALTH
BENEFITS PROGRAM OPERATIONS AT HEALTH NET
O F CALIFORNIA - NO RTHERN REGION
Report Nu m ber I C-LB-00-14-043
Marcb 23, 20 15
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EXECUTIVE SUMMARY
Audit ofthe Federal Employees Health Benefits Program Operations at Health Net
o Cali ornia - Northern Re ion
Why Did we Conduct the Audit? " That Did we Find?
The objectives of thi s performance This report qu estions $207 ,32 1 for inapp ropriate health bene fit
audit were to de termine if He alth Net charges to the FEHBP in co ntract year 20 II . The questione d
of Ca liforn ia - Northern Region amount includes $ 193,5 14 for defective pricing and $13 ,807 due
the FEHBP for lost investment income, ca lculated through
(Plan) offered the Federal Employe es
February 28, 20 15.
He alth Benefits Program (FEHBP)
market price rates and whe ther the The Plan had high and standa rd options for the FEHBP in contract
loadings to the FEHBP rate s we re year 20 11. W e determined that the Pla n ' s high and standard option
reasonable and equitable. Additional rates were ov ers tated by $ 183,587 and $9,927, respectively, due to
tests we re pe rformed to de termi ne defective pricing. For both options , the Plan did not apply the
w het he r the Plan wa s in complia nc e correct SSSG discount to the FEHBP rates.
with the provi sions of the laws and
Consistent with the regulations and co ntract, the FE HBP is due
regulati ons gove rn ing the FEHBP.
$ 13,807 for lost investment income , calculated through
February 28, 20 15 on the defective pri cing finding. In addition, we
" That Did we Audit?
recommend tha t the contracting officer recover lost investment
income start ing March I , 20 15, until all defecti ve pri cing amounts
Under contract CS 2002, the Office of.
have bee n returned to the FEHBP.
the Inspector General completed a
performan ce audit of the FEHBP rates
offered for contrac t year 20 11. Our
audit fieldwork was co nduc ted from
May 5, 20 14 through May 9, 20 14 at
the Plan ' s office in Woodland Hills,
Ca liforn ia. Additiona l audit work
wa s completed at our office s in
Jacksonville, Florida and Cranberry
Township, Pennsylvan ia.
~1i("ha('1 R Esser
Assistant Inspector General
for A udits
ABBREVIATIONS
CFR Code of Federal Regulations
FEHBP Federal Employees Health Benefits Program
FEHBAR Federal Employees Health Benefits Acquisition Regulations
OA Office of the Actuaries
OIG Office of the Inspector General
OPM U.S. Office of Personnel Management
PLAN Health Net of California – Northern Region
SSSG Similarly Sized Subscriber Group
U.S.C. United States Code
ii
TABLE OF CONTENTS
Page
EXECUTIVE SU~L"ARY I
ABBREVIA TIO~S 11
I. BACKGROUND 1
II. OBJECTIVES, SCOPE, AND METHODOLOGY 3
IlL AUDIT FINDINGS AND RECO~IMENDATIONS 5
Premium Rat e Review 5
1. Defective Pricing 5
2. Lost Investm ent Income 6
IV. MAJOR CONTRIBUTORS TO THIS REPORT 7
Exh ibit A (Summary of Questioned Costs) 8
Exh ibit B (Defective Pricing Questioned Co sts) 9
Exh ibit C (Lost Investment Income) 10
Appendix (Health Net of Califoru ia, Inc.'s October 16, 2014 response to the draft
report) 11
REPORT FRAUD, WASTE, AND MISMANAGEMENT 12
I. BACKGROUND
This fina l report details the findings, conclusions, and recommendations re sulting from the audit
of the Federa l Employee s Health Benefit s Program (FEHBP) operations at Health Net of
Ca lifornia - Northern Region (Plan) .
The audit cove red contract year 20 11, and wa s conducted at the Plan ' s office in Woodland Hi lls,
Californ ia. TIle audit was conducted pursuant to the provisions of Contract CS 2002; 5 u.s.c.
Cha pter 89 ; and 5 Code of Fed eral Regulations (CPR) Chapter 1, Part 890 . TIle audit wa s
pe rformed by the u.s. Office of' Personnel Manageme nt' s (OPM) O ffice of the Inspector
General (DIG) , as establishe d by the Inspect or General Act of 1978, as ame nded.
The FEHBP wa s establishe d by the Federal Emp loyee s Health Ben efits Act (Public Law 86
382), enacted on September 28, 1959. The FEHBP wa s created to provide he alth insur ance
be nefit s for Fe deral employees, annuita nts, and dependents. The FEHBP is adm inistered by
OPM' s Healthcare and In surance O ffice . Health insura nce coverage is provided through
contracts with he alth insur ance carriers tha t provide serv ice bene fits, indemnity be nefits, or
comprehensive medi cal serv ices .
Comm unity-rated carriers participating in the FE HBP are subj ect to various Federal, state and
local laws, regu lati ons, and ordinances. Wh ile most carriers are subj ect to state juri sdicti on,
ma ny are further subj ect to the Health Maintenance Organization Act of 1973 (Public Law 93
22 2), as amende d (i.e., ma ny community-rated carriers are federa lly qua lified). In addition,
parti cip ation in the FEHBP subj ects the carriers to the Federal Employe es Health Benefi ts Act
and implementing regulat ions promulgated by OP1.1.
The FEHBP should pa y a market price rate, w hich is defined as the be st rate offered to either of
the two gro ups cl osest in size to the FEHBP . In contrac ting with comnnmity-rated caniers,
OPM re lies on carrier compliance
with appropriate laws and regu lati ons FEHBP
and, consequent ly, does not negoti ate
ba se rates. OPM negoti ati ons relat e
Contracts / Members
primaril y to the level of cove rage and March 31,2011
other uni qu e features of the FE HBP.
The chart to the righ t shows the
8,000
number of FEHBP contrac ts and
me mbers reporte d by the Plan as of 6,000
March 3 1,20 11. +,000
The Plan has parti cipated in the
FEHBP since 1980 and provides
2011
health ben efits to FEHBP members • Con tracts +,
in Northeru Ca liforu ia . The Pla n ' s • Mnnbers 7,778
prior audit covered contract years
I Report No. IC-L B-OO-1 4-043
2008 through 2010. All findings associated with that audit have been resolved.
The preliminary results of this audit were discussed with the 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.
2 Report No. 1C-LB-00-14-043
II. OBJECTIVES, SCOPE, AND METHODOLOGY
Objective
The pri mary objectives of thi s pe rforman ce audit we re to determine if the Plan offere d the
FEHBP mark et pri ce rates and that the loadings to the FEHBP rates were reasonabl e and
equitable. Additiona l tests we re performed to de termi ne whe ther the Plan wa s in compliance
with the provi sions of the laws and regulations go ve rn ing the FEHBP.
Scope
We conduc ted this performance audit in accorda nce with gene rally accepted go ve nunent
auditing standards. Those standa rds require that we plan and pe rform the audit to obtain
suffi cient, appropriate evidence to provide a rea sonable basis for our findings and conclusions
based a ll our audit objective s. We believe that the evidence ob tained provides a rea sonable basis
for our findings and conclusions based on our audit objectives .
This performance audit cove red contrac t year 20 11. For this year, the FE HBP paid
approxima tely $64 .7 million in premiums to the Plan .
DIG audits of community-rated carrie rs are de signed to test carrier comp lianc e with the FEHBP
contrac t, applica ble laws and regulati ons, and DPM Rate Instructi ons to Comm unity-Ra ted
Carr iers (rate instructions). These audits are also designed to provide reasonabl e assuranc e of
dete cting erro rs, irregularities, and ille gal acts .
We ob taine d an understanding of the Plan 's internal control stru cture, but we did not use tills
informati on to determine the nature , timing, and ex tent of our audit pro cedures. However , the
audit included such tests of the Plan 's rating sys tem and such other auditing procedures
conside red nece ssary under the circumstance s. Our review of internal controls wa s limited to the
pro cedures the Plan has in place to en sur e that:
• The appropriate Similarly Size d Subscriber Groups (SSSGs) we re selected;
• the rates cha rged to the FEHBP were the market pri ce rates (i.e., equiva lent to the best
rate offered to the SSSGs) ; and
• the loadings to the FEHBP rates we re rea sonable and equitable .
In conduc ting the audit, we relie d to varying degree s on computer-ge nerated billing, enrollme nt,
and claims dat a provided by the Plan . W e did not verify the re liability of the da ta ge nera ted by
the various information sys tems involved . However , nothing came to our atte ntion dur ing our
audit testing utilizing the computer-ge ne rated dat a to cause us to doubt its reliability . We believe
tha t the ava ilable data wa s sufficient to achiev e our audit objectives. Except as noted above , the
audit wa s conduc ted in accorda nce with gene rally acc epted government auditing standards,
issued by the Comptroller Ge ne ral of the U nited Sta tes .
3 Rep ort No. 1C- LB-OO- 14-043
The audit fieldwork was performed from May 4, 2014 through May 9, 2014 at the Plan’s office
in Woodland Hills, California. 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
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 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.
To test the Plan’s compliance with the FEHBP health benefit provisions related to coordination
of benefits with Medicare, we selected a judgmental sample of potential uncoordinated claim
lines. To select our sample, we queried the Plan’s FEHBP claims data for any members over the
age of 65, resulting in a universe of 1,214 claim lines. We then sorted by the Insurance Amount
Paid and judgmentally selected all claim lines over $20,000. This resulted in a sample of 17
claim lines. We sent the 17 claim lines to the Plan for review to determine if the claims were
properly coordinated with Medicare. The results of this sample were not projected to the
universe.
4 Report No. 1C-LB-00-14-043
III. AUDIT FINDINGS AND RECOMMENDATIONS
Premium Rate Review
1. Defective Pricing $193,514
The Cert ifica te of Acc urate Pricin g the Plan signed for contract year 20 11 wa s defective. In
accordance with Federal regulation s, the FEHBP is therefore due a rate redu ction for this
yea r. Application of the defective pricin g remedy shows that the FEHBP is due a premium
adjustment of $193,514 (see Exh ibit A).
Carriers proposing rates to a PM are requi red to submi t a Cert ifica te of Acc urate Pricing
cert ifying that the proposed subscription rates, subject to adjustments recognized by OPM, are
market pri ce rates. aPM regulations refer to a market price rate in conjunc tion with the rates
offered to an SSSG. SSSGs are the Plan ' s two employer group s closest in subscriber size to
the FEHBP. If it is found that the FEHB P was charged higher than the market price rate (i.e.,
the best rate offered to an SSSG), a condition of defective pri cing exists, requiring a
down ward adj ustment of the FEHBP premiums to the equi valent market price rate.
~e with the Plan ' s selection of and _
_ as SSSGs for contract year 20 11. The SSSGs and FEHBP were rated using an
a.
Adjusted Commun ity Rating methodology . The Plan = ied a . percent SSSG discoun t to
the FEHBP high and standard options. An additional . percent underwri ting discoun t wa s
applied to the FEHB P standard 0 tion . Our ana lysis of the rates charged to the SSSGs shows
that rec eived percent discount, and _
We determined that the FEHBP high and standard option rates were overstated by $ 183,587
and $9,927, respectively, due to defective pricing. Spec ifica lly, the Plan did not apply the
correct SSSG discount to the FEHBP high and standard option rates. The Plan incorrectly
used 65,135 shared risk member exposures in the calculation of 's pooling
point charge . We applied 78,03 8 shared risk member exposures based on the supportin
do~rovided by the Plan . The adj ustment increased the~from
to _ . TIlis error in the rate development contribute d to _'s
aud ited disco unt.
We recalculated the FEHBP hi gh and standard option rates and applied the SSSG disco unt of
• percent to our audited rates. A comparison of our audited line 5 rates to the Plan ' s
reconciled line 5 rates shows that the FEHB P rates were overcharged $ 193 ,5 14, for both the
high and standard options in contract year 20 11 (see Exh ibit B).
5 Report No . 1C-LB-00-14-043
Plan’s Comments (see Appendix):
The Plan agrees with our finding.
Recommendation 1
We recommend that the contracting officer require the Plan to return $193,514 to the FEHBP
for defective pricing in contract year 2011.
2. Lost Investment Income $13,807
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 2011. We determined the FEHBP is due $13,807 for lost investment income,
calculated through February 28, 2015. In addition, the FEHBP is entitled to lost investment
income for the period beginning March 1, 2015, 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 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 lost investment income.
Recommendation 2
We recommend that the contracting officer require the Plan to return $13,807 to the FEHBP
for lost investment income, calculated through February 28, 2015. We also recommend that
the contracting officer recover lost investment income on amounts due for the period
beginning March 1, 2015, until all defective pricing amounts have been returned to the
FEHBP.
6 Report No. 1C-LB-00-14-043
IV. MAJOR CONTRIBUTORS TO THIS REPORT
COMMUNITY-RATED AUDITS GROUP
, Auditor-in-Charge
, Auditor
, Senior Team Leader
, Group Chief
7 Report No. 1C-LB-00-14-043
EXHIBIT A
Health Net of California - Northern Region
Summary of Questioned Costs
Defective Pricing Questioned Costs
Contract Year 2011 $193,514
Total Defective Pricing Questioned Costs $193,514
Lost Investment Income $13,807
Total Questioned Costs $207,321
8 Report No. 1C-LB-00-14-043
EXHIBIT B
Health Net of California - Northern Region
Defective Pricing Questioned Costs
Contract Year 2011 - High Option
Self Family
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate
Bi-weekly Overcharge
To Annualize Overcharge:
March 31, 2011 enrollment
Pay Periods 26 26
Subtotal $183,587
Contract Year 2011 - Standard Option
Self Family
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate
Bi-weekly Overcharge
To Annualize Overcharge:
March 31, 2011 enrollment
Pay Periods 26 26
Subtotal $9,927
Total 2011 Defective Pricing Questioned Costs $193,514
9 Report No. 1C-LB-00-14-043
EXHIBIT C
Health Net of California - Northern Region
Lost Investment Income
Year 2011 2012 2013 2014 28-Feb-15 Total
Audit Findings:
1. Defective Pricing $193,514 $0 $0 $0 $0 $193,514
Totals (per year): $193,514 $0 $0 $0 $0 $193,514
Cumulative Totals: $193,514 $193,514 $193,514 $193,514 $193,514 $193,514
Avg. Interest Rate (per
year): 2.563% 1.875% 1.563% 2.063% 2.125%
Interest on Prior Years
Findings: $0 $3,628 $3,024 $3,991 $685 $11,328
Current Years Interest: $2,479 $0 $0 $0 $0 $2,479
Total Cumulative Interest
Calculated Through
February 28, 2015: $2,479 $3,628 $3,024 $3,991 $685 $13,807
10 Report No. 1C-LB-00-14-043
APPENDIX
Health Net of Californ ia, Inc.
6'
2370 Kerner Blvd
Sa n Rafael , CA 94901
www.healthnetcomfuc
Health Net'
October 16, 2014
~ty-Rated Audits Group
u.s. Office of Personnel Management
800 Cran berry Woods Drive
Suite 270
Cranberry Township. Pennsylvania 16066
Re: Health N"t't of CA -N"ortherD Region DRAFT Audit Report l C-LB-OO-14-043
Dea r " :
In response to your letter to Steven Sell dated September 17, 2014, Health Net ofCA has one comme nt
regarding the findings, conclusions, and recomm endations from the Health Net ofCA - No rthem Region
DRAFT Audit Report lC-LB-OO-14-043. Health Net agrees that the audit report correctly identifies that
Health Net ofCA incorrectly applied 65.135 shared risk member exposures when calculating _
_ 's pooling charges; we agree that 78,038 member exposures should be used to calcu~
oolin charges.
DELETED BY OIG - :"OT RELEVA..'" TO THE FI~AL REPORT.
This results in a total annual overchar e in 2011 of$ 193.514 before charges for lost investment income;
I •
• •
DELETED BY OIG - :"OT RELEVA..'" TO THE FI~AL REPORT.
Please let us know if you have any questions about the foregoing comments. or if there is additional
support that we can provide to assist you.
Sincerely,
~ices
Health Net of CA
II Report No . 1C-LB-00-14-043
Report Fraud, Waste, and
Mismanagement
Fraud, waste, and mismanagement in
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
mismanagement related to OPM programs
and operations. You can report allegations
to us in several ways:
By Internet: http://www.opm.gov/our-inspector-general/hotline-to-
report-fraud-waste-or-abuse
By Phone: Toll Free Number: (877) 499-7295
Washington Metro Area: (202) 606-2423
By Mail: Office of the Inspector General
U.S. Office of Personnel Management
1900 E Street, NW
Room 6400
Washington, DC 20415-1100
12 Report No. 1C-LB-00-14-043
Audit of the Federal Employees Health Benefits Program Operations at Health Net of California - Northern Region
Published by the Office of Personnel Management, Office of Inspector General on 2015-03-23.
Below is a raw (and likely hideous) rendition of the original report. (PDF)