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 2017-02-24.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

U.S. OFFICE OF PERSONNEL MANAGEMENT
    OFFICE OF THE INSPECTOR GENERAL
             OFFICE OF AUDITS




                Final Audit Report

        AUDIT OF THE FEDERAL EMPLOYEES HEALTH
           BENEFITS PROGRAM OPERATIONS AT
            HEALTH NET OF CALIFORNIA, INC. -
                   SOUTHERN REGION

                                            Report Number 1C-LP-00-16-022
                                                   February 24, 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. - Southern Region 

Report No. 1C-LP-00-16-022                                                                                                                  February 24, 2017


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

The primary objective of the audit                             This report identifies an understated OPM MLR penalty of
was to determine if Health Net of                              $137,197 for contract year 2013. We determined that portions
California, Inc. - Southern 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 11, 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
    E&M                            Evaluation and Management
    FEHBAR                         Federal Employees Health Benefits Acquisition Regulation
    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. – Southern 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.................................................9


                 A. 2013 Medical Loss Ratio Penalty Underpayment ...................................................9 


                 EXHIBIT A (Summary of Medical Loss Ratio Penalty Underpayment) 


                 EXHIBIT B (2013 Medical Loss Ratio Penalty Underpayment) 


                 APPENDIX (Health Net of California, Inc. – Southern 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. - Southern 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-LP-00-16-022
 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 is shown in the chart below.
                                                                                          FEHBP Contracts/Members
In contracting with community-                                                                   March 31
rated carriers, OPM relies on
carrier compliance with
                                                                   16,000
appropriate laws and regulations
                                                                   14,000
and, consequently, does not
negotiate base rates. OPM                                          12,000

negotiations relate primarily to                                   10,000

the level of coverage and other                                      8,000
unique features of the FEHBP.                                        6,000

                                                                     4,000
The Plan has participated in the
                                              2,000
FEHBP since 1980 and provides
health benefits to FEHBP                          0
                                                           2012               2013
members in Southern California.             Contracts      6,639              5,308
A prior audit of the Plan covered           Members       14,593             11,555

contract year 2011. That audit
determined that the Plan’s rating of the FEHBP was in accordance with the applicable laws,
regulations, and the OPM rating instructions.

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-LP-00-16-022
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
                                                    $90.0
 findings and conclusions based on our
                                                    $80.0
 audit objectives.                                  $70.0
                                                                  Millions




                                                                                 $60.0
                                                                                 $50.0
 This performance audit covered contract                                         $40.0
 years 2012 and 2013. For these years,                                           $30.0
 the FEHBP paid approximately $160.2                                             $20.0
                                                                                 $10.0
 million in premiums to the Plan.                                                 $0.0
                                                                                              2012                        2013
                                                                             Revenue          $83.4                       $76.8
 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-LP-00-16-022
 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 calculations 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 11, 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-LP-00-16-022
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 18 claim
Coordination of               claims for
                                                                                                    lines greater than
Benefits –                    members greater                                  $                                                   Judgmental                   No
                                                             claims                                 or equal to
Medicare 2013                 than or equal to
                                                                                                    $45,000 totaling
                              age 65
                                                                                                    $1,509,561.
                                                                                                    Selected all
                                                                                                    members from the
                                                                                                    universe.
                                                                                                    claims, one for
                                                                                                    each member,
                              Queried members                                                       totaling $22,720.
                              greater than or                                                       The claims were
Dependent
                              equal to age 26 members1;                         $                   selected by                    Judgmental                   No
Eligibility 2013
                              designated as      claims                                             sorting the
                              dependent                                                             universe claims
                                                                                                    data by member
                                                                                                    last name and
                                                                                                    then selecting the
                                                                                                    first claim for
                                                                                                    each member.
                                                                                                    Selected all
                                                                                                    members from the
                                                                                                    universe.
                                                                                                           claims, one
                              Queried medical
                                                                                                    for each member,
                              claims for
Member Eligibility                                                                                  totaling
                              members greater             members;             $                                                   Judgmental                   No
2013                                                                                                $3,674,703. The
                              than or equal to              claims
                                                                                                    claims were
                              $90,000
                                                                                                    selected by using
                                                                                                    a no duplicate key
                                                                                                    function within
                                                                                                    SAS EG.

        Additionally, we reviewed a sample of non-covered benefits from the 2013 medical claims data.
        We filtered the Plan’s medical claims data for 1,677 potentially non-covered procedure codes
        from an OIG list of compiled non-covered benefit procedure codes from other health plans. Of


        1
          Some of these members also appeared within the Dependent Eligibility 2013 Pharmacy Claim sample. Together
        the Dependent Eligibility reviews covered a total of 28 members.

                                                                                    5                           Report No. 1C-LP-00-16-022
            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 1,677 procedure codes, 61 were included in the claims data, encompassing 518 claims,
totaling $84,637. From those 61 procedure codes, we selected:

    	    Procedure codes which are known to be non-covered based on our audit group’s claims
          manual and the FEHBP benefit brochure (1 procedure code, 18 claims);

    	    Procedure codes that showed up on multiple lists from other health plans (1 procedure
          code, 3 claims);

    	    The top three most expensive procedure codes based on the total paid for the procedure
          divided by the number of occurrences (3 procedure codes, 4 claims);

    	    The top five procedure codes which have the highest frequency of occurrences (5 

          procedure codes, 160 claims); and 


    	    Two other procedures codes based on auditor judgment (2 procedure codes, 12 claims).

From the 12 procedure codes identified above, we judgmentally selected one claim for review
per procedure code. Based on the results of our initial review, we expanded our review by
judgmentally selecting an additional 32 claims from the 12 procedure codes in our original
sample. Total claims reviewed were 44 claims, totaling $41,030. The results were not projected
to the universe.

Finally, we reviewed a sample of evaluation and management (E&M) claims with and without
the modifier 25 from the 2013 medical claims data. Modifier 25 allows multiple E&M claims
from the same provider on the same date to be billed and adjudicated in the Plan’s system. We
filtered the Plan’s medical claims data for 222 E&M procedure codes, which resulted in
claims, totaling            . Next, we created two sets of data from the        claims; one with
the modifier 25 and one without the modifier 25. Using the SAS Enterprise Guide random
sample function, we selected a random sample of 10 claims with modifier 25 that were greater
than or equal to $100. From the set of data created without the modifier 25, we used the SAS
Enterprise Guide random sample function to select 50 claims that were greater than or equal to
$100. We judgmentally selected 10 claims without the modifier 25 from the 50 random claims
based on high dollar and high utilization. This resulted in a sample of 20 claims, totaling $7,307,
that were sent to the Plan. The results were not projected to the universe.




                                                                        6	                          Report No. 1C-LP-00-16-022
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.
                     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?
                                                                                                  Removed duplicate
                                                                                                  patient IDs and
                                 Queried
                                                                                                  selected the first
                                 pharmacy
High Dollar Scripts                                                                               claims for each
                                 claims greater                claims           $                                                 Judgmental                   No
2013                                                                                              unique ID; 14
                                 than or equal
                                                                                                  claims from
                                 to $7,500
                                                                                                  universe totaling
                                                                                                  $151,031.
                                                                                                  Selected all
                                                                                                  members from the
                                                                                                  universe.
                                 Queried
                                                                                                        claims, one
                                 pharmacy
                                                                                                  for each member,
Member Eligibility               claims for
                                                           members;           $                   totaling $221,325.              Judgmental                   No
2013                             members
                                                             claims                               The claims were
                                 greater than
                                                                                                  selected using a no
                                 $4,800
                                                                                                  duplicate key
                                                                                                  function within
                                                                                                  SAS EG.
                                                                                                  Selected all
                                                                                                  members from the
                                                                                                  universe.
                                 Queried
                                                                                                  claims, one claim
                                 members
                                                                                                  for each member,
Dependent Eligibility            greater than or
                                                          members2;               $               totaling $1,464.                Judgmental                   No
2013                             equal to age
                                                            claims                                The claims were
                                 26 designated
                                                                                                  selected using a no
                                 as dependent
                                                                                                  duplicate key
                                                                                                  function within
                                                                                                  SAS EG.

       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.



       2
        Some of these members also appeared within the Dependent Eligibility 2013 Medical Claim sample. Together the
       Dependent Eligibility reviews covered a total of members.

                                                                                    7                          Report No. 1C-LP-00-16-022
           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.
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.




                                                                        8                           Report No. 1C-LP-00-16-022
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 PENALTY UNDERPAYMENT                                                                                   $137,197

      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 the 85 percent threshold, a carrier owed a subsidization penalty equal to
       Federal enrollees did      the difference between the threshold and the carrier’s actual
        not receive full value    MLR. If the MLR was over 89 percent, the carrier received a
         for their premium        credit equal to the difference between the carrier’s reported MLR
            dollars due to        and 89 percent, multiplied by the denominator of the MLR. This
               expense
                                  credit can be used to offset any future MLR penalty and is
           overpayments.
          Consequently, in        available until it is used up by the Plan or the Plan exits the
           addition to the 
      FEHBP.
           penalty paid of 

          $426,729, another 
     The Plan calculated an MLR of            percent for contract year
         $137,197 is owed to      2013. Since this ratio was under the established threshold of 85
            the Program.          percent, the Plan paid a penalty to OPM of $426,729. However,

                                                                          9                            Report No. 1C-LP-00-16-022
  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.
    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 owes OPM an additional subsidization penalty of $137,197 for
    contract year 2013. The specific issues that led to the additional penalty 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 income and payroll taxes, we
          determined that the allocation was based on member months. However, the Plan
          calculated the member month ratio by dividing the FEHBP South member months by the
          member months for the HMO Fully Insured Group, instead of using the member months
          of the large 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 the
          actual expenses incurred. We determined that a more appropriate methodology to
          calculate the member month ratio was to divide the FEHBP South 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.

                                                                        10                          Report No. 1C-LP-00-16-022
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 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 the
          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.


                                                                        11 	                        Report No. 1C-LP-00-16-022
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 current. However, 48 CFR 52.203-5(a) states, “The Contractor
               to exclude        warrants that no person or agency has been employed or retained
            unallowable fees to solicit or obtain this contract upon an agreement or
                from the         understanding for a contingent fee.” A contingent fee is defined as
            FEHBP’s MLR          any commission, percentage, brokerage, or other fee that is
              calculation.       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

                                                                        12                          Report No. 1C-LP-00-16-022
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 capitation manual adjustments and within its own claims category, which
               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 coordination of benefits review, we reviewed a sample of 18 claims for 16
                 The Plan did not members age 65 or over to determine whether the sampled
                  have sufficient     claims were properly coordinated and paid by the Plan. The
                 controls in place results of our review identified one claim, totaling $       ,
                    to exclude        which was incorrectly coordinated and paid for contract year
                   unallowable        2013. The Plan stated that an examiner failed to coordinate
                 claims from the      benefits and that the overpayment had been set up for
                 FEHBP’s MLR          recoupment and a refund had been received. However, 45
                   calculation.       CFR 158.140(b)(ii) requires that overpayment recoveries
                                      received from providers be deducted from the incurred claims
               reported in the Plan’s MLR numerator. Consequently, we removed the erroneously
               paid claim of $        from the MLR numerator.

               Plan Response:

               The Plan agrees that the specified claim above was not properly coordinated and
               paid.

               During our review of overage dependents, we reviewed a sample of medical and
               pharmacy claims for 28 members age 26 or over 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

                                                                        13                          Report No. 1C-LP-00-16-022
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 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
               28 dependent members, we determined that the Plan did not maintain proper
               certification of disability for 6 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 and 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 six overage dependents from the
               MLR numerator for contract year 2013.

               Plan Response:

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

               Finally, we reviewed a sample of 44 claims based on non-covered procedure codes to
               determine if any non-covered benefits were paid by the Plan. We identified a
               procedure code, 92310, related to the fitting of contact lenses that was being paid by
               the Plan although it was defined as a non-covered benefit per the 2013 FEHBP
               Benefit Brochure. The Plan stated that these claims went through the Plan’s auto
               adjudication process and its system has since been updated to deny claims with this
               procedure code. Eighteen claims were paid for the non-covered benefit, totaling
               $      . We removed these claims from the MLR numerator for contract year 2013.

               Plan Response:

               The Plan agrees that a non-covered service for procedure code 92310 was
               incorrectly adjudicated in its claims system during contract year 2013.

    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

                                                                        14                          Report No. 1C-LP-00-16-022
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 MLR subsidization penalty. However, the audited MLR calculation for contract year
    2013 resulted in an MLR subsidization penalty underpayment of $137,197. (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 MLR for 2013
    only requires an additional payment of $133,676, instead of $137,197 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 there is an MLR subsidization penalty
    underpayment of $137,197 for contract year 2013.

    Recommendation 1

    We recommend that the contracting officer require the Plan to return $137,197 to the MLR
    subsidization penalty account for contract year 2013.

    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.

    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.
                                               15                  Report No. 1C-LP-00-16-022
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 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.




                                                                        16                          Report No. 1C-LP-00-16-022
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 - Southern Region 

                 Summary of Medical Loss Ratio Penalty Underpayment 



Contract Year 2012

Medical Loss Ratio Penalty                                                                                                 $0


Total Penalty Due OPM                                                                                                      $0


Contract Year 2013


Medical Loss Ratio Penalty                                                                                            $563,926


Amount Paid                                                                                                           $426,729


Total Penalty Due to OPM                                                                                              $137,197




                                                                                                         Report No. 1C-LP-00-16-022
 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. - Southern Region
                          2013 Medical Loss Ratio Penalty Underpayment

                                                                                                     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: Coordination of Benefit Claims
 Less: Dependent Claims
 Less: Non-Covered Benefits Claims
 Adjusted Incurred Claims
 Quality Health Improvement Expenses
 Total Adjusted Incurred Claims

 Premium Income                                                                           $76,762,319                     $76,762,319
 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)                                                            %                            %
 Penalty Calculation (If (d) is less than (a), ((a-d)*c)                                                                    $563,926
 Amount Paid to OPM                                                                                                         $426,729
 Questioned Costs                                                                                                           $137,197




                                                                                                        Report No. 1C-LP-00-16-022
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 – Southern Region DRAFT Audit Report 1C-LP-00-16-022

Dear               :

Your letter to                   dated October 19, 2016, communicated the findings, conclusions, and
recommendations from the Health Net of CA, Inc. – Southern Region DRAFT Audit Report 1C-LP-00-16-022.
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.

The draft audit report identified the following dollar adjustments to the MLR calculations for contract years
2012 and 2013, respectively:
                                                                                                           Report No. 1C-LP-00-16-022
   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.
                                                                             2012                   2013
(1) Unallowable Fees in Tax Allocations
       (i)     City Business License Fees
       (ii)    Appointment Fees

(2) Double Counting of Oncology Costs

(3) Improper Claim Payments
       (i)    Related to Overage Dependents
       (ii)   Related to Procedure Code 92310
       (iii)  Related to Coordination of Benefits

(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 an additional
payment in the 2013 contract year in the amount of $133,676. Health Net of CA believes that this is the
appropriate MLR 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-LP-00-16-022
   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 

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                                               Government concerns everyone: Office of
                                                   the Inspector General staff, agency
                                                employees, and the general public. We
                                              actively solicit allegations of any inefficient
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                                               mismanagement related to OPM programs
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                                                  U.S. Office of Personnel Management
                                                  1900 E Street, NW
                                                  Room 6400
                                                  Washington, DC 20415-1100
                     
                                                                                                                         
                                                                                                                         

                                                                                                         Report No. 1C-LP-00-16-022

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