oversight

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 2017-02-27.

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 

            HEALTH NET OF CALIFORNIA, INC. -
                   NORTHERN REGION 


                                            Report Number 1C-LB-00-16-015 

                                                   February 27, 2017 

                                                                -- CAUTION --

This report has been distributed to Federal officials who are responsible for the administration of the subject program. This non-public version may
contain confidential and/or proprietary information, including information protected by the Trade Secrets Act, 18 U.S.C. § 1905, and the Privacy Act,
5 U.S.C. § 552a. Therefore, while a redacted version of this report is available under the Freedom of Information Act and made publicly available on
the OIG webpage (http://www.opm.gov/our-inspector-general), this non-public version should not be further released unless authorized by the OIG.
                 EXECUTIVE SUMMARY 

                    Audit of the Federal Employees Health Benefits Program Operations at                                                                    

                                Health Net of California, Inc. - Northern Region 

Report No. 1C-LB-00-16-015                                                                                                                        February 27, 2017


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

The primary objective of the audit                                 This report identifies an overstated OPM MLR credit of
was to determine if Health Net of                                  $47,528 for contract year 2013. We determined that portions
California, Inc. - Northern Region                                 of the MLR calculation were not prepared in accordance with
(Plan) was in compliance with the                                  the laws and regulations governing the FEHBP and the
provisions of its contract and the                                 requirements established by OPM. Specifically, our audit
provisions of the laws and regulations                             identified the following:
governing the Federal Employees
Health Benefits Program (FEHBP).                                         	 In contract years 2012 and 2013, the Plan did not apply
                                                                            the allocation method proportionately and appropriately
What Did We Audit?                                                          to determine the tax expenses related to the FEHBP for
                                                                            the MLR submissions. The 2012 errors did not result in
Under Contract CS 2002, the Office                                          a material adjustment to the 2012 MLR submission.
of the Inspector General (OIG)
performed an audit of the FEHBP                                          	 In contract years 2012 and 2013, the Plan included fees
operations at the Plan. We verified                                         not allowed by the FEHBP to determine the tax
whether the Plan met the Medical                                            expense. The 2012 errors did not result in a material
Loss Ratio (MLR) requirements                                               adjustment to the 2012 MLR submission.
established by the U.S. Office of
Personnel Management (OPM) in                                            	 The Plan included medical and pharmacy claims not
contract years 2012 and 2013. We                                            allowed by the FEHBP in the incurred claims used to
also verified whether the Plan                                              develop the 2013 MLR submission.
developed the FEHBP premium
rates using complete, accurate, and                                The audit also showed that the rating documentation provided
current data in contract years 2012                                was sufficient to support the 2012 and 2013 FEHBP premium
and 2013. Our audit fieldwork was                                  rates.
conducted from February 1, 2016,
through October 17, 2016, at the
Plan’s office in Woodland Hills,
California and in our OIG offices.



 _______________________
 Michael R. Esser
 Assistant Inspector General
 for Audits                                                                       i

This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary information that may
                                    be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
                                                   ABBREVIATIONS


            CFR                            Code of Federal Regulations
            FEHBAR                         Federal Employees Health Benefits Acquisition Regulations
            FEHBP                          Federal Employees Health Benefits Program
            HMO                            Health Maintenance Organization
            HNCA                           Health Net of California, Inc.
            MLR                            Medical Loss Ratio
            OIG                            Office of the Inspector General
            OPM                            U.S. Office of Personnel Management
            Plan                           Health Net of California, Inc. – Northern Region
            SSSG                           Similarly-Sized Subscriber Group




                                                                              ii
This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary information
                           that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
    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.................................................8


                         A. 2013 Medical Loss Ratio Credit Overpayment .......................................................8 


                         EXHIBIT A (Summary of Medical Loss Ratio Credit Overpayment)



                         EXHIBIT B (2013 Medical Loss Ratio Credit Overpayment)



                         APPENDIX (Health Net of California, Inc. – Northern Region’s December 5, 2016, 

                         response to the Draft Report)



                         REPORT FRAUD, WASTE, AND MISMANAGEMENT




This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary information that
                                may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
   IV. MAJOR CONTRIBUTORS TO THIS REPORT
               I. BACKGROUND
       This final report details the audit results of the Federal Employees Health Benefits Program
       (FEHBP) operations at Health Net of California, Inc. - Northern Region (Plan). The audit was
       conducted pursuant to the provisions of Contract CS 2002; 5 United States Code Chapter 89; and
       5 Code of Federal Regulations (CFR) Chapter 1, Part 890. The audit covered contract years
       2012 and 2013, and was conducted at the Plan’s office in Woodland Hills, California.

       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 the U.S.
       Office of Personnel Management’s (OPM) Healthcare and Insurance Office. The provisions of
       the Federal Employees Health Benefits Act are implemented by OPM through regulations
       codified in 5 CFR Chapter 1, Part 890. Health insurance coverage is provided through contracts
       with health insurance carriers who provide service benefits, indemnity benefits, or
       comprehensive medical services.

       In April 2012, OPM issued a final rule establishing an FEHBP-specific Medical Loss Ratio
       (MLR) requirement to replace the similarly-sized subscriber group (SSSG) comparison
       requirement for most community-rated FEHBP carriers (77 FR 19522). MLR is the proportion
       of FEHBP premiums collected by a carrier that is spent on clinical services and quality health
       improvements. The MLR for each carrier is calculated by dividing the amount of dollars spent
       for FEHBP members on clinical services and health care quality improvements by the total
       amount of FEHBP premiums collected in a calendar year. The MLR is important because it
       requires health insurers to provide consumers with value for their premium payments by limiting
       the percentage of premium dollars that can be spent on administrative expenses and profit. For
       example, an MLR threshold of 85 percent requires carriers to spend 85 cents of every premium
       dollar on claims and limits the amount that can be spent on administrative expenses and profit to
       15 cents of every dollar.

       The FEHBP-specific MLR rules are based on the MLR standards established by the Affordable
       Care Act (P.L. 111-148) and defined by the U.S. Department of Health and Human Services in
       45 CFR Part 158. In 2012, community-rated FEHBP carriers could elect to follow the FEHBP-
       specific MLR requirements, instead of the SSSG requirements. Beginning in 2013, however, the
       MLR methodology was required for all community-rated carriers, except those that are state-
       mandated to use traditional community rating. State-mandated traditional community-rated
       carriers continue to be subject to the SSSG comparison rating methodology.

       Starting with the pilot program in 2012 and for all non-traditional community-rated FEHBP

                                                                                1                                   Report No. 1C-LB-00-16-015
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                                may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
       carriers in 2013, OPM required the carriers to submit an FEHBP-specific MLR. This
       FEHBP-specific MLR calculation required carriers to report information related to earned
       premiums and expenditures in various categories, including reimbursement for clinical services
       provided to enrollees, activities that improve health care quality, and all other non-claims costs.
       If a carrier fails to meet the FEHBP-specific MLR threshold, it must make a subsidization
       penalty payment to OPM within 60 days of notification of amounts due.

       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.

       The number of FEHBP contracts and members reported by the Plan as of March 31 for each
       contract year audited are shown in the chart below.
                                                                                                   FEHBP Contracts/Members
       In contracting with community-                                                                     March 31
       rated carriers, OPM relies on
       carrier compliance with
                                                                              7,000
       appropriate laws and regulations
       and, consequently, does not                                            6,000

       negotiate base rates. OPM                                              5,000
       negotiations relate primarily to
                                                                              4,000
       the level of coverage and other
       unique features of the FEHBP.                                          3,000

                                                                              2,000
       The Plan has participated in the
                                                      1,000
       FEHBP since 1980 and provides
       health benefits to FEHBP                           0
                                                                   2012              2013
       members in Northern California.              Contracts      3,854             2,989
       A prior audit of the Plan covered            Members        6,179             4,636

       contract year 2011 and questioned
       $207,321 for inappropriate health benefit charges to the FEHBP. All findings associated with
       the prior audit have been resolved.

       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 comments were considered in preparation of this report and are included,
       as appropriate, as an Appendix to the report.



                                                                                2                                    Report No. 1C-LB-00-16-015
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                                may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
  IV. OBJECTIVES,
  II.  MAJOR CONTRIBUTORS
                  SCOPE, ANDTO THIS REPORT
                            METHODOLOGY
       OBJECTIVES

       The primary objective of this performance audit was to determine whether the Plan was in
       compliance with the provisions of its contract and the laws and regulations governing the
       FEHBP. Specifically, we verified whether the Plan met the MLR requirements established by
       OPM and paid the correct amount to the Subsidization Penalty Account, if applicable.
       Additional tests were also performed to determine whether the Plan was in compliance with the
       provisions of other applicable laws and regulations.

       SCOPE

       We conducted this performance audit in accordance with generally accepted government
       auditing standards. Those standards require that we plan and perform the audit to obtain
       sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions
       based on our audit objectives. We
                                                               FEHBP Premiums Paid to Plan
       believe that the evidence obtained
       provides a reasonable basis for our
                                                          $70.0
       findings and conclusions based on our
                                                          $60.0
       audit objectives.
                                                                                      $50.0
                                                                          Millions




                                                                                      $40.0
       This performance audit covered contract 

                                                                                      $30.0
       years 2012 and 2013. For these years, 

                                                                                      $20.0
       the FEHBP paid approximately $113.4 
                                          $10.0
       million in premiums to the Plan.

                                              $0.0
                                                                                                      2012                       2013
                                                                                     Revenue          $62.3                      $51.1
       The Office of the Inspector General’s
       (OIG) audits of community-rated carriers
       are designed to test carrier compliance
       with the FEHBP contract, applicable laws and regulations, and the 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:
                                                         3                      Report No. 1C-LB-00-16-015
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                                may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
                   The rates charged to the FEHBP were developed in accordance with the Plan’s
                    standard rating methodology and the claims, factors, trends, and other related
                    adjustments were supported by complete, accurate, and current source documentation;
                    and

                   The FEHBP MLR calculations were accurate, complete, and valid; claims were
                    processed accurately; appropriate allocation methods were used; and, that any other
                    costs associated with its MLR calculation were appropriate.

       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 February 1, 2016, through February 12, 2016, at the
       Plan’s office in Woodland Hills, California. Additional fieldwork was completed through
       October 17, 2016, at our offices in Jacksonville, Florida; Cranberry Township, Pennsylvania; and
       Washington, D.C.

       METHODOLOGY

       We examined the Plan’s MLR calculations and related documents as a basis for validating the
       MLR. Further, we examined claim payments and quality health expenses to verify that the cost
       data used to develop the MLR was accurate, complete, and valid. We also examined the
       methodology used by the Plan in determining the premium in the MLR calculations. Finally, we
       used the contract, the Federal Employees Health Benefits Acquisition Regulations (FEHBAR),
       and the rate instructions to determine the propriety of the Plan’s MLR calculation.

       To gain an understanding of the internal controls in the Plan’s claims processing system, we
       reviewed the Plan’s claims processing policies and procedures and interviewed appropriate Plan
       officials regarding the controls in place to ensure that claims were processed accurately. Other
       auditing procedures were performed as necessary to meet our audit objectives.

       The tests performed, along with the methodology, are detailed below by Medical and Pharmacy
       claims:

                                                                                4                                    Report No. 1C-LB-00-16-015
This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary information that
                                may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
                       Medical Claims Sample Selection Criteria/Methodology 

                                                                                                                                                        Results
 Medical Claims                     Universe              Universe               Universe          Sample Criteria                                     Projected
                                                                                                                                Sample Type
  Review Area                       Criteria             (Number)                (Dollars)            and Size                                           to the
                                                                                                                                                       Universe?
                                                                                                   Judgmentally
                             Queried medical
                                                                                                   selected 29 claims
Coordination of              claims for
                                                                                                   greater than or
Benefits –                   members greater                                 $                                                   Judgmental                  No 
                                                            claims                                 equal to $50,000,
Medicare 2013                than or equal to
                                                                                                   totaling
                             age 65 
                                                                                                   $2,969,953.
                             Queried
Deceased Member                                                                                    Selected all
                             members greater
2013                                                                             $                 members from the                   N/A                   N/A
                             than or equal to             members
                                                                                                   universe.
                             age 95
                                                                                                   Selected all
                                                                                                   members from the
                                                                                                   universe.
                                 Queried members                                                   claims, one for
                                 greater than or                                                   each member,
Dependent
                                 equal to age 26         members;                $                 totaling $890.                     N/A                   N/A 
Eligibility 2013 
                                 designated as             claims                                  The claims were
                                 dependent                                                         selected using a
                                                                                                   no duplicate key
                              
                                                                                                   function within
                                                                                                   SAS EG.
                                                                                                   Selected all
                                                                                                   members from the
                                                                                                   universe.

                                                                                                   claims, one for
                             Queried medical
                                                                                                   each member,
Member Eligibility           claims greater
                                                         members;            $                     totaling                           N/A                   N/A
2013                         than or equal to
                                                           claims                                  $4,106,471. The
                             $100,000
                                                                                                   claims were
                                                                                                   selected using a
                                                                                                   no duplicate key
                                                                                                   function within
                                                                                                   SAS EG.




                                                                                     5                                 Report No. 1C-LB-00-16-015
  This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary information that
                                  may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
                             Queried medical
                             claims with
                             procedure codes
                             59840, 59841,
                             59850, 59851,
                                                                                                  Selected the
Non-Covered                  59852, 59855,
                                                              claim               $               claim from the                      N/A                   N/A
Benefits 2013                59856, 59857,
                                                                                                  universe.
                             59866,
                             59870, S0190,
                             S0191, S0199,
                             S2260, S2265,
                             S2266, S2267


                    Pharmacy Claims Sample Selection Criteria/Methodology


                                                                                                                                                        Results
Pharmacy Claims                     Universe                                                       Sample Criteria                  Sample             Projected
                                                           Universe            Universe
  Review Area                       Criteria                                                          and Size                       Type                to the
                                                          (Number)             (Dollars)
                                                                                                                                                       Universe?
                                                                                                  Selected all
                                                                                                  members from the
                                                                                                  universe.
                                                                                                      claims, one
                                 Queried
                                                                                                  claim line for each
                                 pharmacy
High Dollar Scripts                                                                               member, totaling
                                 claims greater            members;           $
                                                                                                  $218,531. The
                                                                                                                                       N/A                  N/A
2013
                                 than or equal               claims
                                                                                                  claims were
                                 to $5,000
                                                                                                  selected using a no
                                                                                                  duplicate key
                                                                                                  function within
                                                                                                  SAS EG.
                                 Queried
                                 members                                                          Selected all
Deceased Member
                                 greater than or
                                                           members
                                                                                   $              members from the                     N/A                  N/A
2013
                                 equal to age                                                     universe.
                                 95
                                                                                                  Selected all
                                                                                                  members from the
                                                                                                  universe.
                                 Queried
                                                                                                  claims, one claim
                                 members
                                                                                                  line for each
Dependent Eligibility            greater than or
2013                             equal to age
                                                           members;               $               member, totaling                     N/A                  N/A 
                                                             claims                               $110. The claims
                                 26 designated
                                                                                                  were selected using
                                 as dependent
                                                                                                  a no duplicate key
                                                                                                  function within
                                                                                                  SAS EG.

                                                                                  6                                    Report No. 1C-LB-00-16-015
  This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary information that
                                  may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
       We also examined the rate build-up of the Plan’s 2012 and 2013 Federal rate submissions and
       related documents as a basis for validating the Plan’s standard rating methodology. We verified
       that the factors, trends, and other related adjustments used to determine the FEHBP premium
       rates were sufficiently supported by source documentation. We also 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.

       Finally, we examined the Plan’s financial information and evaluated the Plan’s financial
       condition and ability to continue operations as a viable ongoing business concern.




                                                                                7                                    Report No. 1C-LB-00-16-015
This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary information that
                                may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
III. AUDIT FINDINGS AND RECOMMENDATIONS

       A. 2013 MEDICAL LOSS RATIO CREDIT OVERPAYMENT                                                                                       $47,528

             In order to assess the appropriateness of the Plan’s premium rates in 2012 and 2013, it was
             required to file an MLR ratio submission under OPM’s MLR program. The MLR program
             replaced the SSSG requirements with an MLR threshold. Simply stated, the MLR is the ratio
             of FEHBP incurred claims (including expenses for health care quality improvement) to total
             premium revenue determined by OPM.

             For contract year 2012, the MLR pilot program carriers must have met the OPM-established
             MLR threshold of 89 percent. Therefore, 89 cents of every health care premium dollar must
             have been spent on health care expenses. If the MLR threshold was less than 89 percent, the
             carrier owed a subsidization penalty equal to the difference between the threshold and the
             carrier’s actual MLR.

             The Plan calculated an MLR of           percent for contract year 2012, which met the OPM-
             established MLR threshold. However, during our review of the Plan’s submission, we
             identified the procedural findings listed below, which resulted in adjustments to the Plan’s
             MLR calculation. These adjustments, however, resulted in no penalty due for this contract
             year.

             For contract year 2013, the OPM-established MLR threshold was 85 percent. Therefore, 85
             cents of every health care premium dollar must have been spent on health care expenses. If
             carriers met the MLR threshold, no penalty was due. In contract year 2013, OPM also
             created an MLR corridor from the established threshold of 85 percent to 89 percent. If the
             MLR was less than 85 percent, a carrier would owe a subsidization penalty equal to the
             difference between the threshold and the carrier’s actual MLR. If the MLR was over 89
             percent, the carrier received a credit equal to the difference between the carrier’s reported
             MLR and 89 percent, multiplied by the denominator of the MLR. This credit can be used to
             offset any future MLR penalty and is available until it is used up by the Plan or the Plan exits
             the FEHBP.

             The Plan calculated an MLR of           percent for contract year 2013. Since this ratio
             exceeded the OPM-established threshold of 89 percent, the Plan received an OPM credit of
             $1,063,711. However, during our review of the Plan’s MLR submission, we identified
             additional issues that resulted in an audited MLR that was lower than that calculated by the
             Plan. Consequently, this audit determined that the Plan’s credit from OPM should be

                                                                                8                                   Report No. 1C-LB-00-16-015
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                                may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
             reduced by $47,528 for contract year 2013. The specific issues that led to the lower credit
             include the following.

             1) Tax Allocation

                  The Plan is under the legal entity of Health Net of California, Inc. (HNCA), which is a
                  subsidiary of Health Net, Inc. HNCA is comprised of three comprehensive health
                  coverages: individual, small employer group, and large employer group, along with other
                  business segments. The Plan’s large employer group contains five market segments, one
                  of which is the Health Maintenance Organization (HMO) Fully Insured Group. While
                  the FEHBP is part of the HMO Fully Insured Group, the Plan separates the FEHBP
                  (north and south) into their own sub-categories of the HMO Fully Insured Group. In
                  spite of this separation however, expenditures are not tracked at an FEHBP-specific level.

                                                        During our review of the Plan’s allocated Federal and State
                   The Plan’s method
                                                        income and payroll taxes, we determined that the allocation was
                     of allocating tax
                                                        based on member months. However, the Plan calculated the
                   expenses overstated
                                                        member month ratio by dividing the FEHBP North member
                  the expense amounts
                                                        months by the member months for the HMO Fully Insured
                    used to derive the
                                                        Group, instead of using the member months of the large
                     FEHBP’s MLR.
                                                        employer group.

                  45 CFR §158.170(b) requires that the Plan’s allocation method be based on a generally
                  accepted accounting method that is expected to yield the most accurate results. Many
                  entities operate within a group where personnel and facilities are shared. Shared expenses
                  must be apportioned pro-rata to the entities incurring the expense.

                  Based on the above criteria, we found that the Plan’s methodology used to allocate the
                  Federal and State income and payroll taxes to the FEHBP was not applied
                  proportionately or appropriately, and was not based on a generally accepted accounting
                  method. Also, it is not suitable to treat the FEHBP as its own entity since expenses are
                  not tracked at the FEHBP-specific group level and the methodology is not related to
                  actual expenses incurred. We determined that a more appropriate methodology to
                  calculate the member month ratio was to divide the FEHBP North member months by the
                  Total Large Group member months. We used this methodology for the member months
                  because the FEHBP sub-categories are part of the HMO Fully Insured Group which is
                  part of the Total Large Group. This methodology can be supported using the
                  Supplemental Health Care Exhibit and yields a more accurate result.


                                                                       9                                            Report No. 1C-LB-00-16-015
This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary information that
                                may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
                  As a result of using the adjusted allocation methodology based on Total Large Group
                  member months, we have removed $              in Federal Payroll Taxes, $   in Federal
                  Income Taxes, and added $        in State Income Taxes to the overall tax amount for
                  contract year 2012. Additionally, we have removed $          in Federal Payroll Taxes,
                  $     in Federal Income Taxes, and $ in State Income Taxes for contract year 2013.

                  Plan Response:

                  The Plan disagrees with the tax allocation finding in 2012 and 2013. It maintains that
                  the method of allocation it used applies costs proportionally and appropriately to the
                  FEHBP and is consistent with generally accepted accounting methods.

                  The Plan asserts that its “general ledger system applies a method consistent with
                  generally accepted accounting methods to allocate costs to the specific market segment
                  within which the FEHBP resides: HMO Fully Insured Large Group. Health Net of
                  CA allocates from this market segment level aggregated federal and state income and
                  payroll taxes down to the FEHBP in proportion to the covered population using
                  FEHBP member months divided by total HMO Fully Insured Large Group member
                  months. Both member months for the population and the tax amounts for the total
                  population are consistent, facilitating an apples-to-apples allocation.”

                  The Plan also states that if it were to change its approach to the OIG’s recommended
                  approach, the allocated amount to the FEHBP would not be consistent with its general
                  ledger amounts or its annual statement and other filings with regulators. It states that
                  the OIG’s methodology would “add complexity to the Plan's allocation process and
                  financial tracking without addressing any identified material deficiencies that exist in
                  the current allocation methodology.”

                  OIG Comment:

                  The OIG disagrees with the Plan’s position and contends that our method of deriving the
                  member month ratio is a more appropriate accounting method. We base this position on
                  two factors:

                      i.	     The FEHBP sub categories are part of the HMO Fully Insured Group, which is
                              part of the Total Large Group; and

                     ii.	     Although the Plan separated the FEHBP from the HMO Fully Insured Group, it
                              did not track FEHBP expenses at a group-specific level.



                                                                       10	                                          Report No. 1C-LB-00-16-015
This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary information that
                                may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
                  Consequently, we maintain that dividing the FEHBP member months by the Total Large
                  Group member months yields a more accurate allocation result.

             2)	 Inclusion of Unallowable Fees

                  The Plan allocated a portion of the City Business License fees to the FEHBP. According
                  to 5 United States Code 8909(f)(1), the imposition of taxes, fees, or other monetary
                  payment, directly or indirectly, on FEHBP premiums by any governmental authority of
                  those entities is prohibited. The Plan agrees that the City Business License fees should
                  not have been allocated to the FEHBP State taxes. We have removed the allocated City
                  Business License fees of $        and $       for contract years 2012 and 2013,
                  respectively, from the Plan’s State tax calculation. 


                  The Plan also allocated a portion of its Appointment fees to the FEHBP tax calculation. 


                    The Plan did not     As explained by the Plan, Appointment fees are fees paid by
                     have sufficient     brokers and agents to any regulatory agency to keep its license
                   controls in place to  current. However, 48 CFR 52.203-5(a) states, "The Contractor
                  exclude unallowable    warrants that no person or agency has been employed or
                      fees from the      retained to solicit or obtain this contract upon an agreement or
                     FEHBP’s MLR         understanding for a contingent fee.” A contingent fee is defined
                       calculation.      as any commission, percentage, brokerage, or other fee that is
                                         contingent upon the success that a person or concern has in
                  securing a Government contract. Therefore, we have removed $ and $ from the
                  FEHBP tax calculation for contract years 2012 and 2013, respectively. 


                  Based on the adjusted payroll tax allocation methodology and the removal of the 

                  unallowable fees, we determined that the FEHBP’s total calculated taxes are $                                                     and
                  $       for contract years 2012 and 2013, respectively.

                  Plan Response: 


                  The Plan agrees that specified unallowable fees were included in the tax allocations.



             3)	 MLR Claims Data

                  a) Oncology Claims

                        During our MLR calculation review for contract years 2012 and 2013, we determined
                        that the oncology claims costs were accounted for twice. The costs were included in
                        the capitation manual adjustments and within its own claims category, which
                                                                       11	                                          Report No. 1C-LB-00-16-015
This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary information that
                                may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
                        overinflated the MLR numerator. We have removed $         and $    in oncology
                        costs from the audited MLR calculation for contract years 2012 and 2013, 

                        respectively. 


                        Plan Response:

                        The Plan agrees that the oncology claims costs were accounted for twice, and
                        should be removed from the audited MLR calculation for contract years 2012 and
                        2013.

                  b) Improper Claim Payments for Contract Year 2013

                        During our review of the Plan’s MLR submission for contract year 2013, we
                        determined that the incurred claims amount was incorrect. Specifically, the Plan
                        included medical and pharmacy claim amounts not allowed by the FEHBP.

                        In our review of overage dependents, we reviewed a sample of medical and pharmacy
                        claims for 22 members age 26 or older that were not identified as subscribers,
                        spouses, or disabled dependents to determine if the Plan stopped coverage timely or
                        retained the appropriate support for the members. According to the FEHBP’s
                        certificate of coverage, dependent coverage ends once dependents turn 26 years of
                        age, unless they are incapable of self-support. Based on our review of the 22
                        dependent members, we determined that the Plan did not maintain proper certification
                        of disability for 9 of the dependents. Standard Contract CR-2013, Section 1.11(b),
                        requires the Plan to make available records for audit in accordance with the record
                        retention period specified within the FEHBAR, 48 CFR 1652.204-70. Furthermore,
                        48 CFR 1652.204-70 requires the Plan make available records applicable to a contract
                        term, including individual enrollee and/or patient claim records for a period of six
                        years after the end of the contract term. According to the Plan, the storage of the
                        disability documentation had been in a microfiche based system that had been
                        replaced by a new system. In the upgrade process, the disability documentation was
                        lost. Without proper disability certification for these dependents, we were unable to
                        verify that the dependents were eligible for coverage during 2013. Consequently, we
                        removed a total of $          for the nine overage dependents from the MLR numerator
                        for contract year 2013.




                                                                       12                                           Report No. 1C-LB-00-16-015
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                                may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
                        Plan Response:

                        The Plan agrees that it did not maintain proper certification of disability for
                        disabled dependents for the term of the disability.

                                                  During our non-covered benefit review, we identified a list
                           The Plan did not
                                                  of non-covered procedure codes and queried the Plan’s
                             have sufficient
                                                  claims data to determine if any non-covered benefits were
                          controls in place to
                                                  paid by the Plan. We identified a procedure code, 59841,
                         exclude unallowable
                                                  related to elective abortions, that was paid by the Plan
                            claims from the
                                                  although it was defined as a non-covered benefit per the
                            FEHBP’s MLR
                                                  2013 FEHBP Benefit Brochure. The Plan stated that it was
                              calculation.
                                                  paid due to a manual processing error. The processor did
                        not correctly override Health Net's system logic, thus allowing the claim to be paid.
                        We determined that one claim was paid for the non-covered benefit, totaling $      .
                        We removed this claim from the MLR numerator for contract year 2013.

                        Plan Response:

                        The Plan agrees that a non-covered service for procedure code 59841 was
                        incorrectly adjudicated in its claims system during contract year 2013.

                        Finally, we reviewed a sample of 22 high dollar script claims to determine if they
                        were properly paid by the Plan. We identified one claim for             that was
                        incorrectly paid.           is an injectable drug, which is covered under the 2013
                        FEHBP Benefit Brochure at a 20 percent liability up to a maximum of $200 per day.
                        However, we determined that the patient only paid $100 for the claim. In turn, the
                        Plan overpaid the claim by $100 since the patient did not pay their full liability. The
                        Plan acknowledged the payment error and stated that an incorrect code was manually
                        applied to the authorization, which showed a $100 liability. We have removed the
                        $100 overpayment from the MLR numerator for contract year 2013.

                        Plan Response:

                        The Plan agrees that one claim for                                    was incorrectly paid during contract
                        year 2013.




                                                                       13                                           Report No. 1C-LB-00-16-015
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                                may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
             Conclusion

             We recalculated the Plan’s 2012 and 2013 MLR submissions with the adjustments described
             above. The audited MLR calculation for contract year 2012 resulted in no underpayment of
             the MLR subsidization penalty. However, the audited MLR calculation for contract year
             2013 resulted in a reduction of the OPM MLR credit by $47,528. (See Exhibit B)

             Plan Response:

             The Plan disagrees with the OIG’s tax allocation adjustments to the 2012 and 2013 MLR
             calculations and agrees with the remaining adjustments. Based on this position, applying
             the adjustments for the unallowable fees, oncology claims, and improper payments to the
             2012 MLR calculation only changes the submitted MLR of          percent to      percent,
             and changes the 2013 MLR calculation from the submitted MLR of            percent to
             percent. The Plan agrees with the OIG that the change in MLR for 2012 does not require
             an adjustment to the MLR credit. However, it contends that the change in the MLR for
             2013 only requires a reduction of the MLR credit in the amount of $46,041 instead of
             $47,528 as reported in the draft report.

             OIG Comment:

             The OIG disagrees with the Plan and asserts that our adjustments to the Plan's 2012 and 2013
             MLR calculations were in accordance with the regulations. We maintain that the Plan did
             not apply the allocation method proportionately and appropriately to determine the tax
             expenses related to the FEHBP for the 2012 and 2013 MLR submissions as required by 45
             CFR 158.170(b). Consequently, while we concur that there should be no adjustment to the
             2012 MLR calculation, we maintain that a $47,528 reduction in the OPM MLR credit is
             owed to OPM for contract year 2013.

             Recommendation 1

             We recommend that the contracting officer instruct OPM’s Office of the Actuary to reduce
             the Plan’s 2013 MLR carryover credit by $47,528.

             Recommendation 2

             We recommend that the contracting officer require the Plan to use the entire large group
             member months when deriving the FEHBP’s State and Federal income and payroll tax
             allocations.
                                                 14                              Report No. 1C-LB-00-16-015
This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary information that
                                may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
             Recommendation 3

             We recommend that the contracting officer require the Plan to remove the City Business
             License fees and Appointment fees and any other unallowable fees from the MLR
             denominator for future submissions.

             Recommendation 4

             We recommend that the contracting officer require the Plan to test and implement proper
             system configurations to prevent non-covered benefit claims from being adjudicated.

             Recommendation 5

             We recommend that the contracting officer require the Plan to maintain proper certification
             of disability for disabled dependents for the term of the disability.

             Recommendation 6

             We recommend that the contracting officer require the Plan to institute internal controls to
             mitigate the use of incorrect and unsupported data in the MLR calculation prior to filing with
             OPM.




                                                                       15                                           Report No. 1C-LB-00-16-015
This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary information that
                                may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
                                                              EXHIBIT A

                                 Health Net of California - Northern Region 

                              Summary of Medical Loss Ratio Credit Overpayment 



         Contract Year 2012

         Medical Loss Ratio Penalty                                                                                                   $0


         Total Penalty Due OPM                                                                                                        $0


         Contract Year 2013


         Credit Calculated                                                                                                     $1,016,183


         Credit Received                                                                                                       $1,063,711


         Total Credit Adjustment                                                                                                ($47,528)




                                                                                                                         Report No. 1C-LB-00-16-015
This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary information that may
                                    be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
                                                                EXHIBIT B


                                       Health Net of California, Inc. - Northern Region
                                        2013 Medical Loss Ratio Credit Overpayment

                                                                                                                 Plan                    Audited
              2013 FEHBP MLR Lower Threshold (a)                                                                 85%                      85%
              2013 FEHBP MLR Upper Threshold (b)                                                                 89%                      89%

              Claims Expense
              Incurred Claims (Medical and Pharmacy)
              Less: Oncology Claims
              Less: Dependent Claims
              Less: Non-Covered Benefits Claims
              Less: Rx Scripts
              Adjusted Incurred Claims
              Quality Health Improvement Expenses
              Total Adjusted Incurred Claims

              Premium Income                                                                         $51,143,399                      $51,143,399
              Taxes and Regulatory Fees
              Federal / State Taxes and Fees
              Less: Federal Payroll Taxes
              Less: Federal Income Taxes
              Less: State Payroll, Real Estate, Personal Property
                    Taxes
              Less: State Income Taxes
              Less: Regulatory Authority Licenses and Fees
              Adjusted Federal / State Taxes and Fees
              Total Adjusted Premium (c)

              FEHBP Medical Loss Ratio Calculation (d)
              Credit Calculation (If (d) is greater than (b), ((d-b)*c)                                                                $1,016,183
              OPM Credit Received                                                                                                      $1,063,711
              Credit Reduction                                                                                                          ($47,528)




                                                                                                                         Report No. 1C-LB-00-16-015
This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary information that may
                                    be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
                                                                 APPENDIX
                                                                                                                      Health Net of California, Inc.
                                                                                                                      2370 Kerner Blvd.
                                                                                                                      San Rafael, CA 94901




        December 5, 2016


        Chief, Community-Rated Audits Group
        U.S. Office of Personnel Management
        1900 E Street, NW
        Room 6400
        Washington, DC 20415-1100
        Re: Health Net of CA – Northern Region DRAFT Audit Report 1C-LB-00-16-015

        Dear                   :

        Your letter to              dated October 31, 2016, communicated the findings, conclusions, and
        recommendations from the Health Net of CA, Inc. – Northern Region DRAFT Audit Report 1C-LB-
        00-16-015. Health Net agrees with three of the four findings regarding the MLR submissions for the
        2012 and 2013 FEHBP contract years, specifically that (1) specified unallowable fees were included
        in the tax allocations, (2) some oncology claims costs were accounted for twice, and (3) specified
        improper claim payments were made for contract year 2013. Health Net of CA does not agree with
        the fourth finding regarding the method applied when allocating federal and state income and payroll
        taxes. Health Net of CA maintains that the method of allocation is both consistent with generally
        accepted accounting methods and applies costs proportionally and appropriately to the FEHBP.

        The Health Net of CA general ledger system applies a method consistent with generally accepted
        accounting methods to allocate costs to the specific market segment within which the FEHBP resides:
        HMO Fully Insured Large Group. Health Net of CA allocates from this market segment level
        aggregated federal and state income and payroll taxes down to the FEHBP in proportion to the
        covered population using FEHBP member months divided by total HMO Fully Insured Large Group
        member months. Both the member months for the total population and the tax amounts for the total
        population are consistent, facilitating an apples-to-apples allocation. This allocation approach is
        consistent with generally accepted accounting methods.

        If we were to change our applied approach in the manner recommended in the draft audit report, and,
        instead, allocate taxes from the higher level of aggregated taxes at the Total Large Group coverage
        level down to the FEHBP, the amount allocated to the FEHBP would not be consistent with our
        general ledger amounts, and, therefore, would not be consistent with our annual statement and other
        filings with regulators. This would also add complexity to the allocation process and financial
        tracking without addressing any identified material deficiencies that exist in the current allocation
        methodology.



                                                                                                                         Report No. 1C-LB-00-16-015
This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary information that may
                                    be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
          The draft audit report identified the following dollar adjustments to the MLR calculations for contract
          years 2012 and 2013, respectively:

                                                                                         2012                  2013
          (1) Unallowable Fees in Tax Allocations
              (i)   City Business License Fees
              (ii)  Appointment Fees ($84) ($82)

          (2) Double Counting of Oncology Costs

          (3) Improper Claim Payments
              (i)   Related to Overage Dependents
              (ii)  Related to Procedure Code 59841
              (iii) Related to Rx Copayments

          (4) Allocation of Fed/State Income & Payroll Taxes
              (i)    Federal Payroll Taxes
              (ii)   Federal Income Taxes
              (iii) State Income Taxes

          Health Net of CA maintains that the adjustments in Section (4) above should not be made to the 2012
          and 2013 MLR calculations. If we apply only the adjustments in Sections (1), (2), and (3), above, the
          MLR calculation for 2012 changes from the submitted MLR of          % to     %; the MLR
          calculation for 2013 changes from the submitted MLR of         % to       %. The change in MLR
          for 2012 does not require any payment from Health Net of CA or any adjustments to MLR credits.
          The change in MLR for 2013 requires a reduction in the 2013 contract year MLR credit in the
          amount of $46,041. Health Net of CA believes that this is the appropriate MLR credit adjustment to
          the 2013 contract year.



                                              Deleted by OIG - Not Relevant to the Final 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,




          Director, Actuarial Services 

          Health Net of CA 



                                                                                                                        Report No. 1C-LB-00-16-015
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                                    be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
                                                                                                                                  



                                               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
                             
                                                                                                                                  
                                                                                                                                  


                                                               -- CAUTION --		                                       Report No. 1C-LB-00-16-015
This report has been distributed to Federal officials who are responsible for the administration of the subject program. This non-public version may contain
confidential and/or proprietary information, including information protected by the Trade Secrets Act, 18 U.S.C. § 1905, and the Privacy Act, 5 U.S.C. § 552a.
Therefore, while a redacted version of this report is available under the Freedom of Information Act and made publicly available on the OIG webpage
(http://www.opm.gov/our-inspector-general), this non-public version should not be further released unless authorized by the OIG.