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
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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
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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.
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
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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
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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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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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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
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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
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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.
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
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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.
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
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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
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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.
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
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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.
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
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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
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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.
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
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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.
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)