oversight

Audit of the Federal Employees Health Benefits Program Operations at Health Net of California, Inc. - Southern Region

Published by the Office of Personnel Management, Office of Inspector General on 2014-10-09.

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, Inc.
                   – Southern Region


                                          Report No. 1C-LP-00-14-044

                                          Date:            October 9, 2014




                                                      -- CAUTION --
This audit report has been distributed to Federal officials who are responsible for the administration of the audited program. This audit
report may contain proprietary data which is protected by Federal law (18 U.S.C. 1905). Therefore, while this audit report is available
under the Freedom of Information Act and made available to the public on the OIG webpage, caution needs to be exercised before
releasing the report to the general public as it may contain proprietary information that was redacted from the publicly distributed copy.
                                                     AUDIT REPORT



                                   Federal Employees Health Benefits Program
                                Community-Rated Health Maintenance Organization
                                  Health Net of California, Inc. – Southern Region
                                      Contract Number 2002 - Plan Code LP
                                            Woodland Hills, California



                 Report No. 1C-LP-00-14-044                                             Date:        October 9, 2014




                                                                                      Michael R. Esser
                                                                                      Assistant Inspector General
                                                                                        for Audits




                                                      -- CAUTION --
This audit report has been distributed to Federal officials who are responsible for the administration of the audited program. This audit
report may contain proprietary data which is protected by Federal law (18 U.S.C. 1905). Therefore, while this audit report is available
under the Freedom of Information Act and made available to the public on the OIG webpage, caution needs to be exercised before
releasing the report to the general public as it may contain proprietary information that was redacted from the publicly distributed copy.
                              EXECUTIVE SUMMARY




                     Federal Employees Health Benefits Program
                  Community-Rated Health Maintenance Organization
                    Health Net of California, Inc. – Southern Region
                        Contract Number 2002 - Plan Code LP
                              Woodland Hills, California


        Report No. 1C-LP-00-14-044                    Date: October 9, 2014


The Office of the Inspector General performed an audit of the Federal Employees Health
Benefits Program (FEHBP) operations at Health Net of California, Inc. – Southern Region
(Plan). The audit covered contract year 2011, and was conducted at the Plan’s office in
Woodland Hills, California. We found that the FEHBP rates were developed in accordance with
applicable laws, regulations, and the Office of Personnel Management’s Rate Instructions to
Community-Rated Carriers for the year audited.




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                                                    CONTENTS

                                                                                                                   Page

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

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

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

III. RESULTS OF THE AUDIT ............................................................................................ 5

IV. MAJOR CONTRIBUTORS TO THIS REPORT ............................................................ 6
                     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 year 2011, 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 by OPM.

The FEHBP should pay a market price                         FEHBP Contracts/Members
                                                                   March 31
rate, which is defined as the best rate          18,000
offered to either of the two groups closest
                                                 16,000
in size to the FEHBP. In contracting with
                                                 14,000
community-rated carriers, OPM relies on
                                                 12,000
carrier compliance with appropriate laws
                                                 10,000
and regulations and, consequently, does
not negotiate base rates. OPM                       8,000

negotiations relate primarily to the level          6,000
of coverage and other unique features of            4,000
the FEHBP.                                          2,000
                                                       0
                                                                            2011
The chart to the right shows the number         Contracts                   7,310
of FEHBP contracts and members                  Members                    16,361
reported by the Plan as of March 31 for
the contract year audited.


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The Plan has participated in the FEHBP since 1980 and provides health benefits to FEHBP
members in the Southern California Region. The last audit conducted by our office was a full
scope audit and covered contract years 2008 through 2010. That report questioned $277,265 for
defective pricing in contract year 2008. The Plan concurred with the findings, and all issues
were resolved.

The preliminary results of this audit were discussed with Plan officials at an exit conference and
in subsequent correspondence. Since the audit concluded that the Plan’s rating of the FEHBP
was in accordance with applicable laws, regulations, and OPM Rate Instructions to Community-
Rated Carriers (rate instructions), a draft report was not issued.




                                                2
                II. OBJECTIVES, SCOPE, AND METHODOLOGY
Objectives

The primary objectives of the audit were to determine if the Plan offered the FEHBP market
price rates and 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.

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 believe that the evidence obtained provides a reasonable basis
for our findings and conclusions based on our audit objectives.

This performance audit covered contract year 2011. For this year, the FEHBP paid
approximately $85.6 million in premiums to the Plan.

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:

        • 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.

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.



                                                 3
The audit fieldwork was performed at the Plan’s office in Woodland Hills, California during
May 2014. Additional audit work was completed at our offices in Jacksonville, Florida and
Cranberry Township, Pennsylvania.

Methodology

We examined the Plan’s federal rate submission and related documents as a basis for validating
the market price rates. In addition, we examined the rate development documentation and
billings to other groups, such as the SSSGs, to determine if the market price was actually charged
to the FEHBP. Finally, we used the contract, the Federal Employees Health Benefits Acquisition
Regulations, and the rate instructions to determine the propriety of the FEHBP premiums and the
reasonableness and acceptability of the Plan’s rating system.

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




                                                4
                            III. RESULTS OF THE AUDIT
Our audit showed that the Plan’s rating of the FEHBP was in accordance with applicable laws,
regulations, and the rate instructions for contract year 2011. Consequently, the audit did not
identify any questioned costs and no corrective action is necessary.




                                               5
            IV. MAJOR CONTRIBUTORS TO THIS REPORT

Community-Rated Audits Group

                   Auditor-in-Charge

                  Staff Auditor


                   Chief

                 Senior Team Leader




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