oversight

Audit of the Federal Employees Health Benefits Program Operations at AvMed Health Plans

Published by the Office of Personnel Management, Office of Inspector General on 2011-09-30.

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 AvMed Health Plans


                                         Report No. lC-ML-OO-ll-004

                                         Date:            09/30/11




                                                     -- 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 (18lJ.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 Co 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




                                      EXECUTIVE SUMMARY





                               Federal Employees Health Benefits Program

                            Community-Rated Health Maintenance Organization

                                         AvMed Health Plans

                               Contract Number CS 2876 - Plan Code ML

                                          Gainesville, Florida




                    Report No. lC-ML-OO-ll-004                        Date:   09/30/11


      The Office of the Inspector General performed an audit of the Federal Employees Health Benefits
      Program (FEHBP) operations at AvMed Health Plans (Plan), The audit covered contract years
      2005,2007,2009, and 2010 and was conducted at the Plan's office in Gainesville, Florida,
      Additional field work was performed at our offices in Jacksonville, Florida and Washington,
      D.C. Based on our audit, we have accepted the Plan's rating of the FEHBP for all years reviewed
      and have no questioned costs. However, the Plan did not fully comply with the records retention
      clause of its FEHBP contract for the years covered by this audit.




        www.ccm.acv                                                                       www.usajobs.gov
                             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

                                             AvMed Health Plans

                                   Contract Number CS 2876 - Plan Code ML

                                              Gainesville, Florida




                        Report No. lC-ML-OO-ll-004                        Date: _ _-,---,
                                                                                  09/30/11     _




                                                                       Michael R. Esser
                                                                       Assistant Inspector General
                                                                         for Audits



        www.op m.g ov                                                                         www.us ajoeagov
                                                        CONTENTS


                                                                                                                                Page

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

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

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

III. AUDIT FINDING AND RECOMMENDATIONS ......................................................... 5

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

     Records Retention ............................................................................................................ 5

IV. MAJOR CONTRIBUTORS TO THIS REPORT ............................................................ 8

     Appendix (AvMed Health Plan’s August 1, 2011, response to the draft report)
                     I. INTRODUCTION AND BACKGROUND

Introduction

We completed an audit of the Federal Employees Health Benefits Program (FEHBP) operations
at AvMed Health Plans (Plan) in Gainesville, Florida. The audit covered contract years 2005,
2007, 2009, and 2010. The audit was conducted pursuant to the provisions of Contract CS 2876;
5 U.S.C. Chapter 89; and 5 Code of Federal Regulations (CFR) Chapter 1, Part 890. The audit
was performed by the Office of Personnel Management’s (OPM) Office of the Inspector General
(OIG), as established by the Inspector General Act of 1978, as amended.

Background

The FEHBP was established by the Federal Employees Health Benefits Act (Public Law 86-382),
enacted on September 28, 1959. The FEHBP was created to provide health insurance benefits
for federal employees, annuitants, and dependents. The FEHBP is administered by OPM’s
Healthcare and Insurance Office. The provisions of the Federal Employees Health Benefits Act
are implemented by OPM through regulations codified in Chapter 1, Part 890 of Title 5, CFR.
Health insurance coverage is provided through contracts with health insurance carriers who
provide service benefits, indemnity benefits, or comprehensive medical services.

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

The FEHBP should pay a market price rate,                       FEHBP Contracts/Members
                                                                       March 31
which is defined as the best rate offered to
either of the two groups closest in size to            4,500

the FEHBP. In contracting with                         4,000

community-rated carriers, OPM relies on                3,500
                                                       3,000
carrier compliance with appropriate laws
                                                       2,500
and regulations and, consequently, does not
                                                       2,000
negotiate base rates. OPM negotiations
                                                       1,500
relate primarily to the level of coverage and
                                                       1,000
other unique features of the FEHBP.
                                                         500
                                                            0
The chart to the right shows the number of                      2005     2007     2009    2010
FEHBP contracts and members reported by             Contracts   2,033    1,936    1,765   1,776
the Plan as of March 31 for each contract           Members     4,416    4,284    3,763   3,706
year audited.


                                                1
The Plan has participated in the FEHBP since 2003 and provides health benefits to FEHBP
members in south Florida. The last audit conducted by our office was a limited scope rate
reconciliation audit and covered contract year 2008. There were no issues identified during that
audit.

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 the preparation of this report and are
included, as appropriate, as the Appendix.




                                                 2
                II. OBJECTIVES, SCOPE, AND METHODOLOGY

Objectives

The primary objectives of the audit were to verify that the Plan offered market price rates to the
FEHBP and to verify that the loadings to the FEHBP rates were reasonable and equitable.
Additional tests were performed to determine whether the Plan was in compliance with the
provisions of the laws and regulations governing the FEHBP.

Scope
                                                                       FEHBP Premiums Paid to Plan

We conducted this performance audit in                           $18
accordance with generally accepted government
                                                                 $17
auditing standards. Those standards require that



                                                      Millions
we plan and perform the audit to obtain                          $16
sufficient, appropriate evidence to provide a                    $15
reasonable basis for our findings and conclusions
                                                                 $14
based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis                $13
                                                                          2005    2007     2009      2010
for our findings and conclusions based on our
                                                             Revenue     $14.4    $17.2   $14.9      $16.4
audit objectives.

This performance audit covered contract years 2005, 2007, 2009 and 2010. For these contract
years, the FEHBP paid approximately $62.9 million in premiums to the Plan. The premiums
paid for each contract year audited are shown on the chart above.

OIG audits of community-rated carriers are designed to test carrier compliance with the FEHBP
contract, applicable laws and regulations, and OPM rate instructions. These audits are also
designed to provide reasonable assurance of detecting errors, irregularities, and illegal acts.

We obtained an understanding of the Plan’s internal control structure, but we did not use this
information to determine the nature, timing, and extent of our audit procedures. However, the
audit included such tests of the Plan’s rating system and such other auditing procedures
considered necessary under the circumstances. Our review of internal controls was limited to the
procedures the Plan has in place to ensure that:

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

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

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


                                                 3
In conducting the audit, we relied to varying degrees on computer-generated billing, enrollment,
and claims data provided by the Plan. We did not verify the reliability of the data generated by
the various information systems involved. However, nothing came to our attention during our
audit testing utilizing the computer-generated data to cause us to doubt its reliability. We believe
that the available data was sufficient to achieve our audit objectives. Except as noted above, the
audit was conducted in accordance with generally accepted government auditing standards,
issued by the Comptroller General of the United States.

The audit fieldwork was performed at the Plan’s office in Gainesville, Florida, during February
2011. Additional audit work was completed at our field offices in Jacksonville, Florida, and
Washington, D.C.

Methodology

We examined the Plan’s federal rate submissions and related documents as a basis for validating
the market price rates. Further, we examined claim payments to verify that the cost data used to
develop the FEHBP rates was accurate, complete, and valid. In addition, we examined the rate
development documentation and billings to other groups, such as the SSSGs, to determine if the
market price was actually charged to the FEHBP. Finally, we used the contract, the Federal
Employees Health Benefits Acquisition Regulations (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 FINDING AND RECOMMENDATIONS

Premium Rate Review

Based on our audit, we have accepted the Plan’s rating of the FEHBP for contract years 2005,
2007, 2009, and 2010 and have no questioned costs. However, we found the following issue that
merits corrective action and follow-up:

Records Retention

During the years covered by this audit, the Plan did not fully comply with the records retention
clause of its FEHBP contract. After several requests, the Plan failed to provide sufficient and
appropriate documentation supporting the benefit adjustment factors used in the rate
development for the FEHBP and SSSGs. Although we ultimately completed sufficient,
alternative testing to gain reasonable assurance that the FEHBP received a market price rate, the
FEHBP contract requires that the Plan retain and make available all records supporting its rate
submission for a period of six years after the end of the contract term to which the records relate.

Plan’s Comments (See Appendix):

The Plan does not agree with our finding or recommendations. The Plan believes the
information provided during the review is consistent with the information provided in past audits
and supportive of the benefit change factors.

The Plan believes the spreadsheets showing the benefit summaries for each plan design, and the
capture of the benefit change factor between the standard benefit plan and the differing benefit
plans, is adequate for our purposes. The Plan believes it is “impractical and unnecessary” to
supply the granular, or more detailed, information in support of the benefit change factor.

In support of this position, the Plan detailed the following two-step process used to estimate the
value of a benefit change.

   1) A third party, proprietary actuarial pricing model is used to express the current plan
      design (medical or drug) relative to a standard benefit whose value is 1.000. For
      example, if the benefit relativity factor associated with a group’s current benefits is
      1.0750, the Plan considers this entire benefit plan as approximately 7.5 percent richer
      than the standard benefit plan.

   2) The same actuarial pricing model is used to value the new benefit plan, and it too is
      expressed relative to the standard plan. Again, if the benefit relativity factor associated
      with a group’s proposed benefit plan is 1.0500, the Plan considers this entire plan as


                                                 5
       approximately 5 percent richer than the standard benefit plan. This indicates that the
       group’s new benefit plan represents a small reduction in benefits.

The Plan does not attempt to value each component of a requested benefit change when more
than one cost sharing variable or coverage limit is being altered. Instead, the Plan values both the
current benefit plan and the proposed benefit plan in their entirety. The Plan believes this
approach inherently recognizes any interaction or offsetting effects between simultaneous benefit
changes, and an attempt to isolate the value of each component can result in an over/under
valuation, creating an inaccurate premium. Each change to plan design should not be considered
in a vacuum, but rather as part of a change to an entire plan.

“It is therefore impractical to share support for benefit change factors because deconstructing
benefit change factors is not done at the time of quoting and is quite often impossible. In
addition, it would likely result in nothing short of sharing an entire software application
(certainly a violation of any third-party agreement), which encapsulated all of the actuarial
assumptions needed to calculate the value of a benefit plan. Now, and as with prior audits, a
complete understanding of the benefit changes and their value is achieved through a quick review
of the benefit change factors and summaries. Any other prepared documentation would be
superfluous.”

OIG’s Response to the Plan’s Comments:

The Plan’s response does not adequately address our finding, or provide new information that
changes our position. The Plan’s comments clearly indicate that the benefit adjustment factor
information provided during the audit was at a summary level. The Plan’s comments also
indicate that the “granular” level support is retained, but that it is “impractical to share” this
information. Since the Plan is unwilling to provide sufficient and appropriate documentation
supporting the benefit adjustment factors used in the rate development for the FEHBP and
SSSGs in all years covered by this audit, we maintain our audit finding and recommendations.

Recommendation 1

We recommend that the contracting officer require the Plan to implement a corrective action plan
that includes steps to ensure that sufficient and appropriate documentation, including detailed
support for benefit adjustment factors, is maintained in its files and available for OIG review during
audits, as required in the contract. This corrective action plan should be provided to the contracting
officer within 90 days of the date of the final report.

Recommendation 2

We recommend that the contracting officer assess the maximum penalty allowed in the contract
between OPM and the Plan for its violation of the records retention clause.

In addition, we recommend that the contracting officer inform the Plan that:

                                                   6
•   OPM expects it to fully comply with the records retention provisions of the contract and all
    applicable regulations;

•   it should maintain copies of all pertinent rating documents that show the factors and
    calculations the Plan uses in developing the actual rates for the FEHBP and the groups
    closest in size to the FEHBP for each unaudited year;

•   it should maintain copies of the enrollment reports and other necessary supporting documents
    for the FEHBP and the groups closest in size to the FEHBP for each unaudited year; and

•   the applicable community-rated performance factors described in FEHBAR 1609.7101-2 will be
    enforced if information requested during audits is not provided.




                                              7
            IV. MAJOR CONTRIBUTORS TO THIS REPORT


Community-Rated Audits Group

                 , Auditor-In-Charge

                   , Auditor

                     , Auditor
   _______________________________________________________________________

                   , Deputy Assistant Inspector General for Audits

                  ., Chief

               , Senior Team Leader




                                           8
                                                               Appendix
                                                                                                     AvMED
                                                                                                     HEALTH PLANS
                                                                     2011 AUG ·'1 I\H 10: :    i



                          Chief, Community-Rated Audits Group
                          Ll.S. Office of Personnel Management
                          Office of the Inspector General
                          1900 E Street, NW
                          Room 6400
                          Washington, D.C. 20415-1100

                          Dear_

                          We are writing in response to Draft Audit Report No. lC-Ml-00-ll-004, Dated July 5,
                          2011.

                          We do not agree with three areas of Page 1 in the Draft Report:

                              •	 The statement: "We noted that the plan provided detailed supporting

                                 documentation for the benefit change factors In past audits. However, for the

                                 years under review in this audit, the Plan stated that it did not retain the

                                 tnformatlon."

                              •	 Recommendation 1
                              •	 Recommendation 2

                          We reach this conclusion by drawing a very Important distinction:

                          The supporting documentation for a benefit change consists of the capture of a benefit
                          change factor and the corresponding benefit summaries. We retain this Information for
                          all groups, in all years. Further, we supplied these factors and summaries for each of
                          the SSSG and Federal group benefit changes in each audit year.

                          The supporting documentation for a benefit change factor is far more granular. We
                          absolutely retain this information; however it is impractical and unnecessary to supply
                          this information. To understand why involves understanding the two-step
                          process AvMed uses to estimate the value of a benefit change:

                              1) Athird-party, proprietary actuarial pricing model is used to express the current

                              plan design (medical or drug) relative to a standard plan whose value is 1.0000. let

                              us suppose the benefit relativity factor associated with a group's current plan is

                              1.0750. In other words we would consider this entire plan to be approximately 7.5%

                              rlcherthan the standard plan in our portfolio.


                              2) The same actuarial pricing model is used to value the new benefit plan, and it

                              too Is expressed relative to the standard plan. Let us suppose the benefit relativity

                              factor associated with a group's proposed plan is 1.0500. in other words we would

                              consider this entire plan to be approximately 5% richer than the standard plan in our



                          Page 1 of3


,--~ I ,00/f''' ' " ' '           4300 NW 89th Blvd, Gainesville, FL 32606 • Phone (352) 372·8400 • www.avmed.org
                                   Appendix




   portfolio - indicatingthat the group's new plan represents a small reduction in
   benefits.

   Note that AVMed's pricing approach does not attempt to value each component of a
   requested benefit change when more than one cost sharingvariable or coverage
   limit is being altered. Instead, it values both the current plan and the proposed plan
   in their entirety. Such an approach inherently recognizes any interaction or
   offsetting effects between simultaneous benefit changes. For instance, if a
   deductible and out of pocket maximum are changing at the same time a service is
   being removed from being subject to the deductible and out of pocket maximum,
   our approach will capture the value of the entire change, but will not allow one to
   see how much value is placed on the deductible change versus the other changing
   components. lndeed, there is no true way of isolating the value of the out of pocket
   and deductible alterations, because the underlying probability distribution (chosen
   to match a set of covered services) has changed as a result of one fewer service
   category now being subject to those components. In fact, an attempt to isolate the
   value of each component can result in an over/under valuation, creating an
   inaccurate premium. Each change to a plan design should not be considered in a
   vacuum, but rather as part of a change to an entire plan.

It istherefore impractical to share support for benefit change factors because
deconstructlng benefit change factors is not done at the time of quoting and is quite
often impossible. In addition, It would likely result in nothing short of sharing an entire
software application (certainly a violation of any third-party agreement),
which encapsulates all ofthe actuarial assumptions needed to calculate the value of a
benefit plan. Now, and as with prior audits, a complete understanding of the benefit
changes and their value is achieved through a quick review of the benefit change factors
and summaries. Any other prepared documentation would be superfiuous.


Thank you forthe opportunity to respond to the Draft Audit Report. Please contact me
with any follow-up questions.


                                             Sincerely,




                                             Corporate Actuary

                                             AvMed Health Plans





Page 2 of3
                               Appendix



   cc:                     ASA, MAAA
         Actuarial Manager
         AvMed Health Plans



         Director of Commercial Group Underwriting
         AvMed Health PlaTTS



         -
         VP, Underwriting
         A vMed Health Plans




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