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 -- CA UTIOI' - This a udi t rtopor t ha s b.....n d istributed t o FHleral officials who are rt's p ons ib l.. for t h e admin istration of th e a udit.... p r ogra m . Tbi. audit report m a)" co n ta in proprietary d a t a w hi ch i . pr o" ·c'.... b y Federal law (18 I:.S .c. 1905). The rd ore, w h ile t hi s audit r ep or t i. anibbl.. nud... t he F r<'<'dom of In formati on Act a n d mad.. anila bl.. t o t he p ublic on th .. O IG we b page (hllp:llw..·....op",.g_lo" ,...i1l.p""tor-g<'nn'ol), n o tio n n....d . to b.. Hun.HI b"for.. r elea sin g t b.. r eport t o th e general p ublic 3. it rn a)' co n lain proprieta'T information th a t was rHiac led fro m th e pu blicly d i. lributod COP)', 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)