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 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. 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 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. 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 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 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 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. 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 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. 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 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. 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 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. 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.
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)