oversight

Audit of Blue Choice Rochester, New York

Published by the Office of Personnel Management, Office of Inspector General on 2010-07-22.

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 Blue Choice



                                        Report No. lC-MK-OO-lO-005

                                         Date:       July 22, 2010




                                                     -- 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.
                          UNITED STATES OFFICE OF PERSONNEL MANAGEMENT

                                            Washington, DC 20415



   Office of the
Inspector General




                                            AUDIT REPORT




                                 Federal Employees Health Benefits Program

                              Community-Rated Health Maintenance Organization

                                               Blue Choice

                                 Contract Number CS 2506 - Plan Code MK

                                           Rochester, New York




                      Report No. lC-MK-00-10-005                    Date:   July 22, 2010




                                                                    Michael R. Esser
                                                                    Assistant Inspector General
                                                                      for Audits




        www.opm.goY                                                                        www.usajobs.goY
                         UNITED STATES OFFICE OF PERSONNEL MANAGEMENT
                                               Washington, DC 20415


   Office of the
Inspector General




                                        EXECUTIVE SUMMARY





                                Federal Employees Health Benefits Program

                             Community-Rated Health Maintenance Organization

                                              Blue Choice

                                Contract Number CS 2506 - Plan Code MK

                                          Rochester, New York




                    Report No. lC-MK-00-10-005                        Da~:July   22. 2010

         The Office of the Inspector General performed an audit of the Federal Employees Health Benefits
         Program (FEHBP) operations at Blue Choice (Plan). The audit covered contract years 2006
         through 2009 and was conducted at the Plan's office in Rochester, New York.

         This report questions $2,486,049 for inappropriate health benefit charges to the FEHBP in
         contract years 2007,2008, and 2009. The questioned amount includes $2,301,947 for defective
         pricing and $184,102 due the FEHBP for lost investment income, calculated through June 30,
         2010. We found that the FEHBP rates were developed in accordance with the Office of
         Personnel Management's rules and regulations in 2006.

         For contract years 2007 through 2009, we determined that the FEHBP's rates were overstated by
         $607,957 in 2007, $462,788 in 2008, and $1,231,202 in 2009 due to defective pricing. More
         specifically, the Plan did not apply a similarly sized subscriber group discount to the FEHBP's
         rates in each year in question.

         Consistent with the FEHBP regulations and the contract, the FEHBP is due $184,102 for lost
         investment income, calculated through June 30, 20 I0, on the defective pricing findings. In
         addition, the contracting officer should recover lost investment income on amounts due for the
         period beginning July 1,2010, until all defective pricing amounts have been returned to the
         FEHBP.




        www.opm.goY                                                                          www,usajobs.goY
                                     CONTENTS



                                                                            Page

   EXECUTIVE SUMMARY	                                                         i


 I. INTRODUCTION AND BACKGROUND	                                             1


II.	 OBJECTIVES, SCOPE, AND METHODOLOGY                                      3


III.	 AUDIT FINDINGS AND RECOMMENDATIONS                                     5


   Premium Rates                                          :                  5


   1. Defective Pricing	                                                     5


   2. Lost Investment Income	                                                6


IV.	 MAJOR CONTRIBUTORS TO THIS REPORT                                       8


   Exhibit A (Summary of Questioned Costs)


   Exhibit B (Defective Pricing Questioned Costs)


   Exhibit C (Lost Investment Income)


   Appendix (Blue Choice's June      2010, response to the draft report)

                     I. INTRODUCTION AND BACKGROUND


Introduction

We completed an audit of the Federal Employees Health Benefits Program (FEHBP) operations
at Blue Choice (Plan) in Rochester, New York. The audit covered contract years 2006 through
2009. The audit was conducted pursuant to the provisions of Contract CS 2506; 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
Retirement and Benefits 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 rate,                     FEHBP Contracts/Members
which is defined as the best rate offered to                         March 31

either of the two groups closest in size to           8,000
the FEHBP. In contracting with                        7,000
community-rated carriers, OPM relies on               6,000
carrier compliance with appropriate laws              5,000
and regulations and, consequently, does not
                                                      4,000
negotiate base rates. OPM negotiations
                                                      3,000
relate primarily to the level of coverage and
                                                      2,000
other unique features of the FEHBP.
                                                      1,000

The chart to the right shows the number of                o
                                                              2006     2007     2008    2009
FEHBP contracts and members reported by         • Contracts   3,331    3,465    3,634   2,881
the Plan as of March 31 for each contract       o Members     7,176    7,487    7,851   5,504
year audited.



                                                 1

The Plan has participated in the FEHBP since 1989 and provides health benefits to FEHBP
members in the New York Counties of Monroe, Livingston, Wayne, Ontario, Seneca, and Yates.
The last audit conducted by our office was a rate reconciliation audit and covered contract year
2005. All matters related to that audit have been resolved.

The preliminary results of this audit were discussed with Plan officials at an exit conference and
in subsequent correspondence. A draft report was also provided to the Plan for review and
comment. The Plan agrees with our findings. The Plan's comments were considered in the
preparation of this final report and are included, as appropriate, as the Appendix.




                                                 2

                II. OBJECTIVES, SCOPE, AND METHODOLOGY


Objectives

The primary objectives ofthe 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

We conducted this performance audit in
accordance with generally accepted government               $30
auditing standards. Those standards require that            $25
we plan and perform the audit to obtain                     $20
sufficient, appropriate evidence to provide a               $15
reasonable basis for our findings and conclusions           $10
based on our audit objectives. We believe that               $5
the evidence obtained provides a reasonable basis            $0
for our findings and conclusions based on our
audit objectives.                                     • Revenue



This performance audit covered contract years 2006 through 2009. For these contract years, the
FEHBP paid approximately $99.3 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.

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

                                                 3

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 Rochester, New York, during October
and November 2009. Additional audit work was completed at our field offices in Cranberry
Township, Pennsylvania and Jacksonville, Florida.

Methodology

We examined the Plan's federal rate submissions 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 (FEHBAR), 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 Rates

1. Defective Pricing                                                                    $2,301,947

   The Certificates of Accurate Pricing the Plan signed for contract years 2007, 2008, and 2009
   were defective. In accordance with federal regulations, the FEHBP is therefore due a price
   adjustment for these years. Application of the defective pricing remedies shows that the
   FEHBP is entitled to premium adjustments totaling $2,301,947 (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 year 2006.

   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 an SSSG. If it is found that the FEHBP was charged higher than a market
   price (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.

   2007

   We disagree with the Plan's selection of
   _ a s the SSSGs for contract year 2007. The Plan did not originally include
   experience rated preferred provider option (PPO) or point-of-service (POS) groups in its
   support for the 2007 SSSG selections. We obtained the enrollment data that included PPO
   and POS rou s and determined that the 2007 SSSGs were • • • • • • • • • •


   Our analysis of the rates charged to the SSSGs shows that -,eceived a.percent
   discount and _received ~ercentdiscount. The Plan did not apply the"percent
   discount that _received to the FEHBP's rates in contract year 2007. Therefore, we re­
   developed the FEHBP's rates by applying the_ercent discount to the line 5 rates. A
   comparison of the reconciled line 5 rates to our audited line 5 rates shows that the FEHBP
   was overcharged $607,957 in 2007 (see Exhibit B).



  We disagree with the Plan's selection of
  ~ s the SSSGs for contract year 2008. Again, the Plan did not originally include
  experience rated PPO or POS groups in its support for the 2008 SSSG selections. We
  obtained the enrollment data that included PPO and POS groups and determined that the
  2008 SSSGs were


                                                 5

   Our analysis of the rates charged to the SSSGs shows t h a t _ d i d not receive a
   discount and"received a •          percent discount. The Plan did not apply t h e . percent
   discount that RIT received to the FEHBP's rates in contract year 2008. Accordingly, we re­
   developed the FEHBP's rates by applying t h e . percent discount to the line 5 rates. A
   comparison of the reconciled line 5 rates to our auoited line 5 rates shows that the FEHBP
   was overcharged $462,788 in 2008 (see Exhibit B).



   We disagree with the Plan's selection 0
   _ a s the SSSGs for contract year 2009. As in previous years, the Plan did not
   originally include experience rated PPO or POS groups in its support for the 2009 SSSG
   selections. We obtained the enrollment data that included PPO and POS oups and
   determined that the 2009 SSSGs were




   Recommendation 1

   We recommend that the contracting officer require the Plan to return $2,301,947 to the
   FEHBP for defective pricing in contract years 2007, 2008, and 2009.

   Plan's Comments:

   The Plan concurs with the findings presented above, which reflect adjustments, based on the
   Plan's comments, to the 2008 calculated discount and amount overcharged.

2. Lost Investment Income                                                                $184,102

   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 findings due the
   FEHBP in contract years 2007, 2008, and 2009. We determined that the FEHBP is due
   $184,102 for lost investment income, calculated through June 30, 2010 (see Exhibit C). In
   addition, the FEHBP is entitled to lost investment income for the period beginning July 1,
   2010, 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

                                                  6

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.

Recommendation 2

We recommend that the contracting officer require the Plan to return $184,102 to the FEHBP
for lost investment income for the period January 1, 2007 through June 30, 2010. In addition,
we recommend that the contracting officer recover lost investment income on amounts due
for the period beginning July 1,2010, until all defective pricing amounts have been returned
to the FEHBP.

Plan's Comments:

The Plan concurs.




                                              7

            IV. MAJOR CONTRIBUTORS TO THIS REPORT
                      ;




Community-Rated Audits Group

                    Auditor-In-Charge

   ~uditor


                 Auditor


                   Chief

                 Senior Team Leader




                                        8

                                                 Exhibit A


                         Blue Choice
                   Summary of Questioned Costs

Defective Pricing Questioned Costs:

      Contract Year 2007
                            $607,957
      Contract Year 2008
                            $462,788
      Contract Year 2009
                          $1,231.202

Total Defective Pricing Questioned Costs           $2,301,947

Lost Investment Income                               $184,102

Total Questioned Costs                             $2.486.049
                                                                       Exhibit   n


                                                  Blue Choice
                                    DefeetlvePricmg Questioned Costs


                 2007 Contract Year

    Plan's Reconciled Rates

     Audited Rates

     Biweekly Overcharge

    To Annualize:

     x March 31, 2007 Headcount

     x Pay Periods

     Subtotal

Total 2007 Defective Pricing Questioned Costs                               $607,957

                  2008 Contract Year

     Plan's Reconciled Rates

     Audited Rates

     Biweekly Overcharge

     To Annualize:

     x March 31, 2008 Headcount

     x Pay Periods

     Subtotal

Total 2008 Defective Pricing Questioned Costs                               $462,788

          2009 Contract Year - High Option

     Plan's Reconciled Rates

     Audited Rates

     Biweekly Overcharge

     To Annualize:

     x March 3 L 2009 Headcount

     x Pay Periods

     Subtotal

Total 2009 - High Option Defective Pricing Questioned Costs               $1,043,365

        2009 Contract Year - Standard Option

     Plan's Reconciled Rates

     Audited Rales

     Biweekly Overcharge

     To Annualize:

     x March 31. 2009 Ileadcount

     x Pay Periods

     Subtotal

Total 2009 - Standard Option Detective Pricing Questioned Costs             $187,837

Total 2009 Defective I)ricing Questioned Costs                            $1,231.202


Total Defective Pricing Questioned Costs                                  $2.3111.947
                                                                                                  Exhibit C



                                                   Blue Choice

                                             Lost Investment Income



  Year
                                     2007         2008          2009   June 30, 2010                   Total
Audit Findings:


Defective Pricing                       $607,957     $462,788   $1,231,202              $0           $2,301,947


                 Totals (per year):
    $607,957     $462,788   $1,231,202              $0           $2,301,947
                Cumulative Totals:
     $607,957   $1,070,745   $2,301,947      $2,301,947           $2,301,947

     Average Annual Interest Rate:
      5.5000%      4.9375%     5.2500%          3.2500%

   Interest on Prior Years Findings:
         $0      $30,018      $56,214         $37,407              $123,639

             Current Years Interest:
    $16,719      $11,425      $32,319              $0               $60,463

          Total Cumulative Interest
     $16,719      $41,443     $88,533          $37,407    I        $184,102
            Through June 30, 2010

                                                                                               APPENDIX





                                           June 23, 2010



U.S. Office of Personnel Management
Offic~eneral
Attn: _ _
1900 E Street, NW
Room 6400
Washington, D.C. 20415-1 ]00



Dear_

Enclosed is the response to the draft audit report issues May 11,2010. For the covered years of2006,
2007, and 2009 we have no objections to the findings detailed therein. For the 2008 plan year we have the
following comments:

      1) Benefit changes to the plan labeled "PPO C", worth.were not accounted for in the • .
      2) Benefit changes to the plan labeled "POS B" which len ecame "Custom POS 1", worth
         were not accounted for in the analysis
      3) Benefit changes to the plan labeled "POS D" which then became "Custom POS 2", worth_
         were not accounted for in the analysis



should place the final discounta_
      4) Starting 2007 Med D Rx rates are incorrect in the development.

Details supporting the changes listed above are attached for your consideration. Inclusion ofthese changes
                                            Upon adjustments of the calculated discount for 2008, we
expect that there will also be a downward adjustment of the lost investment income calculation.

Please forward any questions to me at• • • • • •




                                                                  Manager of Underwriting

Cc:
       Director Rating and Underwriting


       Chief Underwriter


       lnternal Auditor

       Edward DeHerde
       Chief, Health Insurance Group III
       Insurance Services Program