oversight

Audit of the Federal Employees Health Benefits Program Operations at Health Net of California Southern Region

Published by the Office of Personnel Management, Office of Inspector General on 2011-12-22.

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
Subject:

    Audit of the Federal Employees Health Benefits 

   Program Operations at Health Net of California ­
                   Southern Region 




                 Report No. lC-LP-OO-ll-027

                 Date:   December 22.   2011
                             UNITED STATES OFFICE OF PERSONNEL MANAGEMENT
                                               Washington. DC 20415


   Office of the
in:-.pcctor General




                                             AUDIT REPORT 




                                    Federal Employees Health Benefits Program 

                                 Community-Rated Health Maintenance Organization 

                                     Health Net of California - Southern Region 

                                      Contract Number 2002 - Plan Code LP 

                                            Woodland Hills, California 




                        Report No. lC-LP-00-ll-027                     Date:   12/22/11




                                                                      Michael R. Esser
                                                                      Assistant Inspector General
                                                                        for Audits




         www.opm.goll                                                                        www.usajobs.goll
                           UNITED STATES OFFICE OF PERSONNEL MANAGEMENT 

                                                Washington. DC 20415 



  Orticc of the
Inspector General




                                        EXECUTIVE SUMMARY 





                                Federal Employees Health Benefits Program 

                             Community-Rated Health Maintenance Organization 

                                Health Net of California - Southern Region 

                                  Contract Number 2002 - Plan Code LP 

                                        Woodland Hills, California 




                    Report No. lC-LP-00-JJ-027                      Date:    1 2! 2 2! 11

       The Oflice oCthe Inspector General performed an audit of the Federal Employees I Iealth Bendits
       Program (FEHBP) operations at Health Net of California -- Southern Region (Plan). The audit
       covered contract years 2008 through 2010 and was conducted at the Plan's ornce in Woodland
       I Ii lis. California. ;\dditional field work was pcrfornled in Jacksonville. Florida and Cranberry
       Township. Pennsylvania.

       The report questiolls $277.265 for inappropriate health benclit charges to the FElmp in contract
       year 2008. The questioned amount included $244,814 for defective pricing and $32.451 due thc
       FEIII3P f(lr lost investment income. calculated through Novembc,r 30. 2011. We detellnincd that
       the FEI!HP rates were developed in accordance with the Oflicc of Personncl ManCl!,!emcnt's rules
       and regulations in 2009 and 2010.

       For contract year 2008. we dclcllnined that the FFfIBI"s rales were overstated by $244.814 due
       to defective pricing. More specifically. the Plan did not apply a similarly sized subscriber group
       diseou11lto the FEI-IBP's rates. In addition. the Plan did not credit the FEIIBP's rates for a state­
       mandatcd assessment that was included in the retention charge.

       Consistent with the F1,HBI' regulations and contract the FUmp is due $32.451 for lost
       investment income. calculated through "Iovell1ber 30. 2011 on the defective pricin!,! linding. In




        www.opm.gov                                                                              www.usajobs.gov
addition, we recommend that the contracting officer recover lost investment income starting
December 1, 2011 until all defective pricing amounts have been returned to the FEHBP.




                                               ii

                                                         CONTENTS


                                                                                                                                 Page

     EXECUTIVE SUMMARY............................................................................................... i

 I. INTRODUCTION AND BACKGROUND ..................................................................... 1

II. OBJECTIVES, SCOPE, AND METHODOLOGY ......................................................... 3

III. AUDIT FINDINGS AND RECOMMENDATIONS ....................................................... 5

    Premium Rate Review ....................................................................................................... 5

    1. Defective Pricing............................................................................................................ 5

    2. Lost Investment Income ................................................................................................. 6

IV. MAJOR CONTRIBUTORS TO THIS REPORT ............................................................ 7

     Exhibit A (Summary of Questioned Costs)

     Exhibit B (Defective Pricing Questioned Costs)

     Exhibit C (Lost Investment Income)

     Appendix (Health Net of California – Southern Region November 16, 2011 response
               to the draft report)
                      I. INTRODUCTION AND BACKGROUND

Introduction

We completed an audit of the Federal Employees Health Benefits Program (FEHBP) operations
at Health Net of California – Southern Region (Plan). The audit covered contract years 2008
through 2010 and was conducted at the Plan’s office in Woodland Hills, California. The audit
was conducted pursuant to the provisions of Contract CS 2002; 5 U.S.C. Chapter 89; and 5 Code
of Federal Regulations (CFR) Chapter 1, Part 890. The audit was performed by the Office of
Personnel Management’s (OPM) Office of the Inspector General (OIG), as established by the
Inspector General Act of 1978, as amended.

Background

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

Community-rated carriers participating in the FEHBP are subject to various federal, state and
local laws, regulations, and ordinances. While most carriers are subject to state jurisdiction,
many are further subject to the Health Maintenance Organization Act of 1973 (Public Law 93-
222), as amended (i.e., many community-rated carriers are federally qualified). In addition,
participation in the FEHBP subjects the carriers to the Federal Employees Health Benefits Act
and implementing regulations promulgated
                                                             FEHBP Contracts/Members
by OPM.                                                             March 31

The FEHBP should pay a market price rate,               20,000
which is defined as the best rate offered to
either of the two groups closest in size to the         15,000
FEHBP. In contracting with community-
rated carriers, OPM relies on carrier                   10,000
compliance with appropriate laws and
regulations and, consequently, does not
                                                         5,000
negotiate base rates. OPM negotiations
relate primarily to the level of coverage and
                                                              0
other unique features of the FEHBP.                               2008     2009     2010
                                                      Contracts   7,209    7,572    8,821
The chart to the right shows the number of        Members         16,714   18,173   19,083
FEHBP contracts and members reported by
the Plan as of March 31 for each contract year audited.

                                                  1
The Plan has participated in the FEHBP since 2008 and provides health benefits to FEHBP
members in Southern California. This is the first audit of the Plan conducted by our office since
the start of its participation in the FEHBP.

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 included, as
appropriate, as the Appendix.




                                                 2
                II. OBJECTIVES, SCOPE, AND METHODOLOGY

Objectives

The primary objectives of the audit were to verify that the Plan offered market price rates to the
FEHBP and to verify that the loadings to the FEHBP rates were reasonable and equitable.
Additional tests were performed to determine whether the Plan was in compliance with the
provisions of the laws and regulations governing the FEHBP.
                                                                           FEHBP Premiums Paid to Plan
Scope
                                                                    $100
We conducted this performance audit in                               $90
                                                                     $80
accordance with generally accepted government                        $70




                                                      Millions
auditing standards. Those standards require that                     $60
                                                                     $50
we plan and perform the audit to obtain                              $40
sufficient, appropriate evidence to provide a                        $30
                                                                     $20
reasonable basis for our findings and                                $10
conclusions based on our audit objectives. We                         $0
                                                                               2008        2009          2010
believe that the evidence obtained provides a
                                                                 Revenue       $63.9       $73.6         $83.1
reasonable basis for our findings and
conclusions based on our audit objectives.

This performance audit covered contract years 2008 through 2010. For these contract years, the
FEHBP paid approximately $220.6 million in premiums to the Plan. The premiums paid for
each contract year audited are shown on the chart above.

OIG audits of community-rated carriers are designed to test carrier compliance with the FEHBP
contract, applicable laws and regulations, and OPM 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:

        • The appropriate similarly sized subscriber groups (SSSG) were selected;

        • the rates charged to the FEHBP were the market price rates (i.e., equivalent to the best
          rate offered to the SSSGs); and

        • the loadings to the FEHBP rates were reasonable and equitable.



                                                 3
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 testing 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 at the Plan’s office in Woodland Hills, California during
April 2011. Additional audit work was completed at our offices in Jacksonville, Florida and
Cranberry Township, Pennsylvania.

Methodology

We examined the Plan’s federal rate submissions and related documents as a basis for validating
the market price rates. Further, we examined claim payments to verify that the cost data used to
develop the FEHBP rates was accurate, complete, and valid. In addition, we examined the rate
development documentation and billings to other groups, such as the SSSGs, to determine if the
market price was actually charged to the FEHBP. Finally, we used the contract, the Federal
Employees Health Benefits Acquisition Regulations, and OPM’s Rate Instructions to
Community-Rated Carriers to determine the propriety of the FEHBP premiums and the
reasonableness and acceptability of the Plan’s rating system.

To gain an understanding of the internal controls in the Plan’s rating system, we reviewed the
Plan’s rating system’s policies and procedures, interviewed appropriate Plan officials, and
performed other auditing procedures necessary to meet our audit objectives.




                                                 4
              III. AUDIT FINDINGS AND RECOMMENDATIONS

Premium Rate Review

1. Defective Pricing                                                                    $244,814

   The Certificate of Accurate Pricing that Health Net of California – Southern Region (Plan)
   signed for contract year 2008 was defective. Therefore, in accordance with federal
   regulations, the Federal Employees Health Benefits Program (FEHBP) is due a rate reduction
   for this year. Application of the defective pricing remedy shows that the FEHBP is entitled
   to a premium adjustment totaling $244,814 (see Exhibit A). We found that the FEHBP rates
   were developed in accordance with the Office of Personnel Management’s (OPM) rules and
   regulations for contract years 2009 and 2010.

   Federal Employee Health Benefits Acquisition Regulation (FEHBAR) 1652.215-70 provides
   that carriers proposing rates to OPM are required to submit a Certificate of Accurate Pricing
   certifying that the proposed subscription rates, subject to adjustments recognized by OPM,
   are market price rates. OPM regulations refer to a market price rate in conjunction with the
   rates offered to a similarly sized subscriber group (SSSG). SSSGs are the Plan’s two
   employer groups closest in subscriber size to the FEHBP. If it is found that the FEHBP was
   charged higher than a market price rate (i.e., the best rate offered to an SSSG), a condition of
   defective pricing exists, requiring a downward adjustment of the FEHBP premiums to the
   equivalent market price rate.

   2008

   We agree with the Plan’s selection of             and       as SSSGs for contract year 2008.
   Our analysis of the rates charged to the SSSGs shows that            received a      percent
   discount and         received a       percent discount. The Plan applied a      percent
   discount to the FEHBP’s rates.

   In addition, we reviewed the FEHBP’s rates and found that the Plan failed to remove a state-
   mandated assessment from its retention loading. The assessment is charged by the California
   Department of Managed Health Care to fund its program.

   State assessments are unallowable costs identified by the 2008 Community Rating
   Instructions, which prohibits the imposition of taxes, fees, or other monetary payment,
   directly or indirectly, on FEHBP premiums by any State, the District of Columbia, or the
   Commonwealth of Puerto Rico, or by any political subdivision or other governmental
   authority of those entities. As a result, we re-developed the FEHBP’s rates by removing the
   assessment and applying the appropriate discount. A comparison of the reconciled line 5
   rates to our audited line 5 rates shows that the FEHBP was overcharged $244,814 in contract
   year 2008 (see Exhibit B).


                                                5
  Plan’s Comments (see Appendix):

  The Plan concurs with our findings.

  Recommendation 1

  We recommend that the contracting officer require the Plan to return $244,814 to the FEHBP
  for defective pricing in contract year 2008.

2. Lost Investment Income                                                                  $32,451

  In accordance with the FEHBP regulations and the contract between OPM and the Plan, the
  FEHBP is entitled to recover lost investment income on the defective pricing finding in
  contract year 2008. We determined that the FEHBP is due $32,451 for lost investment
  income, calculated through November 30, 2011 (see Exhibit C). In addition, the FEHBP is
  entitled to lost investment income for the period beginning December 1, 2011, until all
  defective pricing finding amounts have been returned to the FEHBP.

  FEHBAR 1652.215-70 provides that if any rate established in connection with the FEHBP
  contract was increased because the carrier furnished cost or pricing data that were not
  complete, accurate, or current as certified in its Certificate of Accurate Pricing, the rate shall
  be reduced by the amount of the overcharge caused by the defective data. In addition, when
  the rates are reduced due to defective pricing, the regulation states that the government is
  entitled to a refund and simple interest on the amount of the overcharge from the date the
  overcharge was paid to the carrier until the overcharge is liquidated.

  Our calculation of lost investment income is based on the United States Department of the
  Treasury's semiannual cost of capital rates.

  Plan’s Comments (see Appendix):

  The Plan agrees and will include lost investment income calculated through the current date
  when it remits payment to OPM for defective pricing charges.

  Recommendation 2

  We recommend that the contracting officer require the Plan to return $32,451 to the FEHBP
  for lost investment income for the period January 1, 2008 through November 30, 2011. In
  addition, we recommend that the contracting officer recover lost investment income on
  amounts due for the period beginning December 1, 2011, until all defective pricing amounts
  have been returned to the FEHBP.




                                                6
            IV. MAJOR CONTRIBUTORS TO THIS REPORT

Community-Rated Audits Group

                , Auditor-in-Charge

                   , Auditor

                    , Auditor
   _______________________________________________________________________

                   Chief

                , Senior Team Leader




                                       7
                                                                           Exhibit A


                              Health Net of California - Southern Region
                                    Summary of Questioned Costs



Defective Pricing Questioned Costs:


      Contract Year 2008                                      $244,814


                  Total Defective Pricing Questioned Costs:                $244,814


      Lost Investment Income:                                               $32,451


                       Total Questioned Costs:                             $277,265
                                                                                     Exhibit B

                               Health Net of California - Southern Region
                                  Defective Pricing Questioned Costs

2008 - High Option
                                                 Self              Family
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate

Overcharge

To Annualize Overcharge:
   3/31/08 enrollment
   Pay Periods                                          26                  26
Subtotal                                           $
Total 2008 - High Option Defective Pricing Questioned Costs                      $241,435

2008 - Standard Option
                                                 Self              Family
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate

Overcharge

To Annualize Overcharge:
   3/31/08 enrollment
   Pay Periods                                           26                 26
Subtotal
Total 2008 - Standard Option Defective Pricing Questioned Costs                   $3,379

Total Defective Pricing Questioned Costs                                         $244,814
                                                                                                         EXHIBIT C



                                             Health Net of California - Southern Region
                                                     Lost Investment Income



  Year                                         2008              2009              2010      2011       Total
Audit Findings:

1. Defective Pricing                         $244,814             $0                $0        $0       $244,814


                        Totals (per year):   $244,814             $0                $0         $0      $244,814
                       Cumulative Totals:    $244,814          $244,814          $244,814   $244,814   $244,814

            Avg. Interest Rate (per year):   4.9375%           5.2500%           3.1875%    2.5625%

        Interest on Prior Years Findings:       $0              $12,853           $7,803     $5,751    $26,407

                  Current Years Interest:     $6,044              $0                $0        $0        $6,044

    Total Cumulative Interest Calculated
           Through November 30, 2011:         $6,044            $12,853           $7,803     $5,751    $32,451
                                                      APPENDIX

From:
To:
Cc:
Subject:                                          • "I­   ••• p         ••
Date:                Wednesday, November 16, 201112:30:29 PM




Thank you fDr the opportunity to review and comment on OPM's Draft Audit
report for plan LP.

Health Net of California recognizes and does not contest the findings in
OPM's Draft Audit Report No. lC-LP-00-11-027 (OctDber 20, 2011), covering
the 2008 - 2010 plan years for Health Net of CA Plan LP. Health Net of
California does not question the overstatement of contract year 2008 rates
by $244,814 as identified in this audit report, nor do we question the
determination of lost investment income.

With respect to the payment of amounts due to OPM, does Health Net wait
until the Final Audit Report is issued, or should the amounts be remitted
before then? In either case, how should we account for lost investment
income starting October 1, 2011, to the time of payment, as identified in
the Draft Audit Report?

Lastly, it is our understanding that we do not need to submit our response
on CD since we are not contesting any of the findings. Please let me know
if that is not the case.

Thanks,
 --------------------- ------------------------------ - -------------------   --   ---------------- --------




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