Audit of the Federal Employees Health Benefits Program Operations at Group Health Plan

Published by the Office of Personnel Management, Office of Inspector General on 2011-06-16.

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

                                         •                                                                      •
                                                                U.S. OFFICE OF PERSONNEL MANAGEMENT
                                                                      OFF ICE OF T HE INSPECTOR GENERAL
                                                                                         OFF ICE OF AUDITS

Final Audit Report
S ubject:

           Audit of the Federal Employees Health Benefits
            Program Operations at Group Health Plan

                                                   Report No. IC-M M-OO-IO-OS9

                                                    Date: Ju n e 16 , 20 1 1

                                                                  - CAUT I ON ­

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                                UNITE D STATES OFFICE OF PERSONNEL MANAGEME NT

                                                     Washin gton , DC 20415

  Office of the
Inspec tor Ge nera l

                                                  AU DI T REPORT

                                        Federal Employees Heal th Benefits Program
                                     Comm unity-Ra ted Health Maintenance Organization
                                                     G roup Health Plan
                                          Cont ract Number 1930 - Plan Code MM
                                                     St. Louis, Missour i

                            Repo rt No. IC -M M-OO-IO-059                  Da te: June 1 6, 20 1 1

                                                                               M ichael R. Esser
                                                                               Assista nt Inspector General
                                                                                 for Audits

         www .opm. lI: OY                                                                             www.u laJ ob l .lI:0Y
                                 UNITED STATES OFF ICE OF PERSONNEL MANAGEM ENT
                                                            w ashington, DC   zeus

  Office of lhe
Inspcct n.. (kfl('fal

                                                   EXECUTIVE S UMMA RY

                                      Fede ra l Employees Health Ben efits I)ro~ r.lm

                                   Community- Ra ted Health M aintenan ce Organbatton

                                                   G ro up Hea lth Plan

                                        Contract Number 1930 · 1)la n Code 1\11\1

                                                   St. Loui s, Misso uri

                          Repo rt No.   I C- ~I ~I- O O-IO-05 9                 [Jate:   June 1 6 , 2 0 1 1

         The O ffice of the Inspector General perform ed an aud it of the Federal Employees Health Benefit s
         Program (F EHBP) opera tio ns at Group Health Plan (Plan). The audit cove red contract years
         2007 throu g h 2009 and was conducted at the Plan' s office in St. Louis. Missouri. Additional
         field work was performed at our fi eld offices in Jackson ville. Florida. and Cranberry TO\\'11Ship.
         Pennsylvania .

         This report q uestions S 189.6<) 1 for inappropriate health benefit charges to the FEl IBP in contract
         year 200K. The questioned amount includes $ 169.699 for defecti ve pricing and $ 19.992 du e the
         FHIB I' lo r lost investment income. calcu lated through April 30. 20 11. We fo und that the
         FEIIBI' rates were developed in acco rdance with the Offi ce of Personnel Management' s rule s
         and regulations in 2007 and 2009.

         For contract yea r 2008 . ' ve determined that the FEIIBP' s rates were overstated by $ 169.699
         beca use the FEf IBP d id not receive the largest rate d iscoun t given to a Sim ilarl y Sized
         Su bscriber G roup.

         Consistent wi th the FEIIBP regulations and contract. the FEIIBP is d ue $ 19.992 for lost
         investment income. ca lculated through April 30.20 1L on the de fec tive pricing find ing. In
         addition. we recommend that the contracting officer reco ver lost investment income starting
         May I. 20 11. until all de fecti ve pricin g amounts have bee n returned to the FEHBP.

          .......opm ,c D Y



     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 (Group Health Plan, Inc February 16, 2011, response to the draft report)
                     I. INTRODUCTION AND BACKGROUND


We completed an audit of the Federal Employees Health Benefits Program (FEHBP) operations
at Group Health Plan (Plan) in St. Louis, Missouri. The audit covered contract years 2007
through 2009. The audit was conducted pursuant to the provisions of Contract CS 1930; 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.


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
which is defined as the best rate offered to                        March 31

either of the two groups closest in size to         7,000
the FEHBP. In contracting with
community-rated carriers, OPM relies on
carrier compliance with appropriate laws
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.

The chart to the right shows the number of               0
                                                              2007        2008         2009
FEHBP contracts and members reported by                       3,157       2,649        2,312
the Plan as of March 31 for each contract        Members      6,298       5,112        5,143
year audited.

The Plan participated in the FEHBP from 1983 through 2009 and provided health benefits to
FEHBP members in the St. Louis/Metro East Area, Central Missouri, and Southern and Central
Illinois. The last audit conducted by our office was a full scope audit and covered contract years
2002 through 2006. All issues 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’s comments were considered in the preparation of this report and are
included, as appropriate, as the Appendix.



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

We conducted this performance audit in accordance with
generally accepted government auditing standards.                        $30
Those standards require that we plan and perform the

audit to obtain sufficient, appropriate evidence to                      $20
provide a reasonable basis for our findings and
conclusions based on our audit objectives. We believe                    $10
that the evidence obtained provides a reasonable basis
for our findings and conclusions based on our audit                      $0
objectives.                                                                    2007      2008      2009
                                                                    Revenue    $31.2    $29.5     $24.5
This performance audit covered contract years 2007
through 2009. For these contract years, the FEHBP paid
approximately $85.2 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 SSSGs); and

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

In conducting the audit, we relied to varying degrees on computer-generated billing, enrollment,
and claims data provided by the Plan. We did not verify the reliability of the data generated by
the various information systems involved. However, nothing came to our attention during our
audit testing utilizing the computer-generated data to cause us to doubt its reliability. We believe
that the available data was sufficient to achieve our audit objectives. Except as noted above, the
audit was performed 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 St. Louis, Missouri, during August
2010. Additional audit work was completed at our offices in Jacksonville, Florida, and
Cranberry Township, Pennsylvania.


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.

Premium Rates

1. Defective Pricing                                                                     $169,699

  The Certificate of Accurate Pricing the Plan signed for contract year 2008 was defective. In
  accordance with federal regulations, the FEHBP is therefore due a price adjustment for this
  year. Application of the defective pricing remedy shows that the FEHBP is entitled to a
  premium adjustment totaling $169,699 (See Exhibit A). We found that the FEHBP rates were
  developed in accordance with OPM rules and regulations in contract years 2007 and 2009.

  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.


  The Plan selected                             as the SSSGs for contract year 2008. We agree
  with these selections. Our review of the SSSG rates shows that           was rated differently
  than                and the FEHBP. Therefore, we re-rated                  and the FEHBP
  using the methodology used for             Our analysis shows that        received a      percent
  discount and                 did not receive a discount. In the 2008 reconciliation, the Plan
  gave the FEHBP a         percent discount. Since the FEHBP is entitled to a discount
  equivalent to the largest discount given to an SSSG, we recalculated the FEHBP rates using
  the     percent discount given to           A comparison of the audited rates to the reconciled
  rates shows that the FEHBP was overcharged $169,699 in contract year 2008 (see Exhibit B).

  Plan’s Comments (See Appendix):

  The Plan acknowledges that the current premium for            in 2008 was not calculated
  accurately in the original rate development provided at the time of the on-site audit. The Plan
  states that because         has two rating segments and several different rate structures, the
  Plan performs some renewal calculations outside the normal rating system. Support for these
  calculations was provided to re-rate the FEHBP and both SSSGs using the same method.
  Based on this analysis, the Plan contends that the FEHBP was not overcharged in 2008.

  OIG’s Reply to The Plan’s Comments:

  We reviewed the documentation provided by the Plan and recalculated the rates for
                and the FEHBP for contract year 2008 using the most current month to
  determine the most current premium. Our analysis shows that the Plan provided          with a
  discount of    percent for contract year 2008.             did not receive a discount. We
  applied the       discount to the re-developed FEHBP rates and determined that the Plan
  owes the FEHPB $169,699.

  Recommendation 1

  We recommend that the contracting officer require the Plan to return $169,699 to the FEHBP
  for defective pricing in contract year 2008.

2. Lost Investment Income                                                                     $19,992

  In accordance with the FEHBP regulations and the contract between OPM and the Plan, the
  FEHBP is entitled to recover lost investment income on the defective pricing finding in
  contract year 2008. We determined the FEHBP is due $19,992 for lost investment income,
  calculated through April 30, 2011 (see Exhibit C). In addition, the FEHBP is entitled to lost
  investment income for the period beginning May 1, 2011, until all defective pricing finding
  amounts have been returned to the FEHBP.

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

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

  Plan’s Comments (See Appendix):

  The Plan believes the discount presented in the draft report is in error; therefore, no lost
  investment income is due.

  OIG’s Response to the Plan’s Comments:

  The defective pricing finding still exists and the lost investment income amount shown is
  based on the current amount due the FEHBP.

Recommendation 2

We recommend that the contracting officer require the Plan to return $19,992 to the FEHBP
for lost investment income for the period of January 1, 2008 through April 30, 2011. In
addition, we recommend that the contracting officer recover lost investment income on
amounts due for the period beginning May 1, 2011, until all defective pricing amounts have
been returned to the FEHBP.


Community-Rated Audits Group

                      , Auditor-In-Charge

                 , Auditor

                  , Auditor


                , Senior Team Leader

                                                              Exhibit A

                                  Group Health Plan, Inc.
                                Summary of Questioned Costs

Defective Pricing Questioned Costs:

      Contract Year 2008                                      $169,699

Lost Investment Income                                         $19,992

Total Questioned Costs                                        $189,691
                                                                        Exhibit B

                              Group Health Plan, Inc.
                         Defective Pricing Questioned Costs

2008 Contract Year
                                               Self           Family
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate


To Annualize Overcharge:
   March 31, 2008 Enrollment
   Pay Periods                                  26             26

Total Questioned Costs                                                 $169,699
                                                                                                            EXHIBIT C

                                                       Group Health Plan, Inc.
                                                       Lost Investment Income

  Year                                        2007       2008             2009       2010       2011       Total
Audit Findings:

1. Defective Pricing                           $0      $169,699            $0         $0         $0       $169,699

                        Totals (per year):     $0      $169,699             $0         $0         $0      $169,699
                       Cumulative Totals:      $0      $169,699          $169,699   $169,699   $169,699

            Avg. Interest Rate (per year):   5.5000%   4.9375%            5.25%     3.1875%    2.6250%

        Interest on Prior Years Findings:      $0         $0              $8,909     $5,409     $1,485    $15,803

                  Current Years Interest:      $0       $4,189             $0         $0         $0        $4,189

    Total Cumulative Interest Calculated
              Through April 30, 2011:          $0       $4,189            $8,909     $5,409     $1,485    $19,992
 (~ G H P
                                                                                                      Ap pend ix

r      ~ r f}~ f' n tr lJ   Hp o /( /I for t' PI o n                        r  Hi'lJ lt ll far t'

                                                                            2011 fEB 24 AM 7: 43

                                                       February 16, 20 11

Chie f, Community-Rated Aud its Group
Unit ed States Office of Personn el Management
O ffice o f the Inspector General
1900 E S treet NW, Room 6400
Washington, DC 204 15- 1100

        Re: Draft report of Gro up Hea lth Plan, Inc. operati ons under FEH BP 2007-2009

       This letter and its attachments respond to your correspondence of January 18, 2011
enclosing the draft report ("D raft Report") detailing the results of the Office of inspector
Ge neral's (UOIG") audi t of the Fed eral Em plo yees Health Benefits Plan ("FEHBP") operations
at Group Health Plan. Inc. ("GHP " or "the Plan") for contract years 2007 through 2009. Per
your req uest, \....e are al so enclosing a CD w ith o ur comments along wi th this hard co py.

        Compliance with the Office of Personnel Management ("OPM") regulations and rating
requi rements is a core compliance commitment of GHP. The Plan has worked hard to adhere to
FEHBP requirements and to maintain solid documentation for its rating practices. We viewed
with concern therefore the tentative finding in the Draft Report of rating deficiencies that could
result in amounts due to OPM. We do appreciate the opportunity to address these points prior to
issuance of final audit recommendations by the DIG.

       GHP has carefully reviewed the Draft Report and additional work papers provided by
your office. GHP respectfully disagrees with principal findings and conclusions in the Draft
Report. We provide comments and infonn ation below on the adverse draft audit findings for
contract year 2008. We note that no rating deficiencies were found, and no recovery amounts
were recommended, for contract years 2007 and 2009. That is the nann to which we aspire.

        For contract year 2008, the Draft Report concludes tha                 did not receive a
discount and that ~ i d receive a discount that should be applied to FEHBP did receive a
discount. There is no question as 10 the validity of the rating model in use at the time or the
consistency in which it was used. The question that has been raised is to the current premium
used for _        The report recommends a recovery of $445,734 for the difference between the
_      concession given to the FEIIBP account and the _       audited concession by OPM. This

 550 M aryville Centre Drive, Sui te 300 • St. Louis. " 10 63141 • Toll-free: ROO~ 743 -390 1 • w\V\v,ghp. com
                         •                                            •
difference is the result of a difference in the current premium calculation on our renewal and the
 audited current premium rate.

          Th e Plans customary current rate calculation is to usc the last thre e months of run-out 10
 arriv e at the current premium for the renewal calcu lation . This is how it was done for both .
_         and FEHBP. However, _            has 2 rating segments and several different rate
structures which necessitate The Plan to perform some of the renewal calculations outside of
 ERNI E. As noted on the draft report the premi um for segment 2 wasn 't pulling through in
 ERNIE. The calculation for the 2 rating segments was done outside of ERNIE (see attached). In
 the attached ~ocum ent the current premium was calculated at the time of the renewal.
 Also. attached is the 2008 Premium Rate Calculation document which uses one month of
 premium to calculate_ d FEHBP current premium.

         The ~rem i um used in the original renewal calculation was _  The premium
 for the most recent month available at the time of the renewal was ~ is a difference

        The               premium used in the original renewal calculations was _        The
 premium for the most recent month ~eri ence available at the time of the renewal was
!!!!I_This results in a difference o ~r the difference between                    receiving a
_      ncrease instead of ~ increase.

        The FEHBP premium used in the original renewal calculation was _                  The
 premium for the most recent month     of experience available at the time of the renewal was
_          This results in a difference of _ or the difference between FEHBP receiving a
 formula increase 01_      increase instead or .

 The Plan' s documentation provided results in less than a ~ifTerence in renewal action. Thi s
 provides proof that the methodology used in the         renewal was valid.

         Finally, Ute calculation of the FEHBP renewal rates is based on our rating formula that
 matches the guidance provided by the aPM in the Call Letter. T he needed premium is calculated
 on a per member per month dollar amount, then a step-up factor is applied to develop the rales.
 The exact same rating formula is used for the FEHBP and all SSSG's. It is GHP's belief that
 there is no finding for contract year 2008 .


        The Draft Report recommends recovery of lost investment income, calculated from the
 amount of the preliminary defective rating find ings. In light of the supporting data provided and
 explanation of current premium calculation, the Plan believes there is not an overcharge liability
 and therefore no lost investment income.
                        •                                            •
T he Conclusio n

       The Plan has fully addressed the tentative adverse findings in the Draft Audit Report.
Full review of the submitted in formation should satisfactorily resolve all outstanding matt ers.

        The Plan appreciates the opportunity to addre ss these outstanding issues and would be
willing to discuss any additional questions you might have after review of this res ponse. We are
hopeful this information is sufficient to resolve this matter.


                                              VP of Underwriting