oversight

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)

           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