oversight

Audit of the Federal Employees Health Benefits Program Operations of Health Plan of Nevada

Published by the Office of Personnel Management, Office of Inspector General on 2009-02-05.

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

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                                                             US OFFICE OF PERSONNEL MANAGEMENT.
                                                               . OFFICE OP·TBEINSPECIQj{(jENERAt
                                                                                 OFFICE OF AUDITS




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     . :rhiSliudit rep~rthasbeell distributed to Federal offic.ials who areresponsible (or the .adminlstralion of the aUdit~d p~ognm. This audit·
       repo.~lmaYcont~inpropi"ieta:rydaill. which is p!"oleeted by Federa:l laW (18li.s:C.1905); lIkrf;ilQre,wlilletllis audit report is av~ihible .   . ...; .
    . under the Freed.om oUnf~~Ji'iatio'ii Act, caution needs to .be exercised before reJeasi~g therepOTh!lthegeneralpublJc~ . ..•.. .....
                          UNITED STATES OFFICE OF PERSONNEL MANAGEMENT

                                                 Washington, DC 20415


   Office of the
Inspecto! General




                                               AUDIT REPORT



                              Federal Employees Health Benefits Program

                           Community-Rated Health Maintenance Organization

                                        Health Plan of Nevada

                              Contract Number CS 1942 - Plan Code NM

                                         Las Vegas, Nevada




                       Report No.   lC-NM~OO-08-049             Date: February 5, 2009




                                                                   Michael R. Esser
                                                                   Assistant Inspector General
                                                                     for Audits




        -_ .. _--------------- - - - - - _ . _ - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - ­
        www.opm.gav                                                                               www.usaJobs.goy
                         UNITED STATES OFFICE OF PERSONNEL MANAGEMENT

                                                Washinglon, DC 20415


   Office of the
Inspector General




                                        EXECUTIVE SUMMARY





                              Federal Employees Health Benefits Program

                           Community-Rated Health Maintenance Organization

                                        Health Plan of Nevada

                              Contract Number CS 1942 - Plan Code NM

                                         Las Vegas, Nevada



                      Report No.1C-NM-OO-08-049                Date: February 5, 2009


       The Office ofthe Inspector General performed an audit of the Federal Employees Health
       Benefits Program (FEHBP) operations at Health Plan of Nevada (Plan). The audit covered
       contract years 2003 through 2008 and was conducted at the Plan's office in Las Vegas, Nevada.
      .This report questions $2,158,941 for inappropriate charges to the FEHBP in 2004, 2007, and
       2008, including $94,261 for lost investment income. We found that the FEHBP rates were
       developed in accordance with the applicable Jaws, regulations, and OPM's rating instructions in
       contract years 2003, 2005, and 2006.

        The questioned costs are a result of the Plan applying an incorrect discount to the FEHBP rates
        in 2004 because of an error in its calculation of a discount for                               the
        Plan giving                                   a 2 year contract startin in 2006, which resulted in a
        discount 0         percen ; an    e an glvmg                                  a 2 year contract
        starting in 2007, which resulted in a"percent discount. We applied these discounts to the
        FEHBP's rates and determined that the FEHBP was overcharged $2,064,680.

        Consistent with the FEHBP regulations and contract, the FEHBP is due $94,261 for lost
        investment income, calculated through January 31, 2009, on the defective pricing findings in
        2004,2007, and 2008. In addition, the contracting officer should recover lost investment income
        on amounts due for the period beginning February], 2009, until all defective pricing amounts
        have been returned to the FEHBP.




        www.opm.gov                                                                            www.usaJobs.gov
                                     CONTENTS


                                                                                   Page

   EXECUTIVE SUMMARY	                                                                   i


 I. INTRODUCTION AND BACKGROUND	                                                        1


II.	 OBJECTIVES, SCOPE, AND METHODOLOGy                                                 3


III.	 AUDIT FINDINGS AND RECOMMENDAnONS                                                 5


   Premium Rates                                                                        5


   1. Defective Pricing	                                                                5


   2. Lost Investment Income	                             ,     _                       8


IV.	 MAJOR CONTRIBUTORS TO TI-IIS REPORT                                                9


   Exhibit A (Summary of Questioned Costs)


   Exhibit B (Defective Pricing Questioned Costs)


   Exhibit C (Lost Investment Income)


   Appendix (Health Plan of Nevada's December 17,2008, response to the draft report)

                      I. INTRODUCTION AND BACKGROUND

Introduction

We completed an audit of the Federal Employees Health Benefits Program (FEHBP) operations
at Health Plan of Nevada (Plan) in Las Vegas, Nevada. The audit covered contract years 2003
through 2008. The audit was conducted pursuant to the provisions of Contract CS 1942; 5
U.S.C. Chapter 89; and 5 Cod~ of Federal Regulations (CFR) Chapter 1, Part 890. The audit was
perfonned by the Office of Personnel Management's (OPM) Office of the Inspector General, 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 Center for Retirement and Insurance Services. The provisions ofthe Federal Employees
Health Benefits Act are implemented by OPM through regulations codified in Chapter l> Part
890 of Title 5, CFR. Health insurance coverage is provided through contracts with various
health insurance carriers that 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 the

  FEHBP. In contracting with community-rated
              5,000                     ...
  carriers, aPM relies on carrier compliance with
         4,500                     :-:                 1-:
. appropriate laws and regulations and,                    4,000                     :::                 I::
  consequently, does not negotiate base rates.             3,500                     :-:
                                                           3,000                                         I::
                                                                                     ;:: ~
  aPM negotiations relate primarily to the level
  of coverage and other unique features of the             2,500                                         :-:
                                                                                                   f-          r­
                                                            2,000
  FEHBP.                                                                                   r­      r-    [::   f­


The chart to the right shows the number of

                                                            1,500
                                                            1,000
                                                                    2003
                                                                             I::
                                                                           2004
                                                                                     i;,ill
                                                                                   2005     2006
                                                                                                .. .. •
                                                                                                   I
                                                                                                       2007
                                                                                                                      ~
                                                                                                                    2008
FEHBP contracts and members reported by the
         I_ Contracts   2,037 2,252 2,398 2,340 2,367 2,360
Plan for March 31 of each contract year
             10 Members     4,142 4,567 4,804 4,637 4,552 4,539
audited.
The Plan began participating in the FEHBP in 1984 and provides health benefits to FEHBP
members throughout Las Vegas, Nevada. The last audit of the Plan conducted by our office was
a full scope audit of contract years 2000 through 2002. As a result of that audit, we found that
the Plan's rating of the FEHBP was in accordance with the applicable laws, regulations, and
aPM rating instructions for the years audited.

The preliminary results of this audit were discussed with Plan officials at an exit conference and
through 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 final 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
FEllBP 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.



We conducted this performance audit in                                      FEHBP Premiums Paid to Plan
accordance with generaJly accepted
government auditing standards. Those
standards require that we plan and perform the                        $17
audit to obtain sufficient, appropriate evidence
to provide a reasonable basis for our findings                        $12
and conclusions based on our audit objectives.
We believe that the evidence obtained provides                         $7

a reasonable basis for our findings and
                                                                       $2
conclusions based on our audit objectives.
                                                                _Revenue
This performance audit covered contract years
2003 through 2008 1• For contract years 2003
through 2007, the FEHBP paid approximately $51 million in premiums to the Plan. The
premiums paid for each contract year audited are shown on the chart to the right.

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

We obtained an understanding ofthe 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 systems and such other auditing procedures as we
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 an SSSG); and

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



I   The Subscription Income Report for 2008 was not available at the time this report was completed.

                                                           3
In conducting the audit, we relied to varying degrees on computer-generated billing, enrolJrnent,
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 conducted at the Plan's office in Las Vegas, Nevada, during June and
July 2008. Additional audit work was completed at our office in 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 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                                                                    $2,064,680

  The Certificates of Accurate Pricing the Plan signed for contract years 2004, 2007, and 2008
  were defective. In accordance with federal regulations, the FEHBP is therefore due a price
  adjustment for each year. We applied the defective pricing remedies for the years in question
  and determined that the FEHBP is entitled to premium adjustments totaling $2,064,680 (see
  Exhibit A). We found that the FEHBP rates were developed in accordance with the
  applicable laws, regulations, and aPM rating instructions in contract years 2003, 2005, and
  2006.

  Carriers proposing rates to aPM are required to submit a Certificate of Accurate Pricing
  certifying that the proposed subscription rates, subject to adjustments recognized by aPM, are
  market price rates. aPM regulations refer to a market price rate in conjunction with the rates
  offered to an SSSG. Ifit is found that the FEHBP was charged rates that exceeded the market
  price (i.e., the best rate offered to an SSSG), a condition of defective pricing exists, requiring
  a downward adjustment ofthe FEHBP premiums to the equivalent market price.

  2004

  The Plan selected
  for contract year 2004. We agree with these selections.
  the contract year with three subgroups ­
  and
  rates. Starting in July, the group decided to include both                     into t h e _
                      Ian. However, the billed rates for all enro ees remame a e _
  _         rates. The Plan calculated ~ercent discount as a result of the combination of
  the three groups and applied this discount to the FEHBP rates. However, we calculated a
  _percent discount. Accordingly, we redeveloped the FEHBP rates by applying t h e _
  percent SSSG discount. A comparison of the audited rates to the reconciled rates shows that
  the FEHBP was overcharged $52,414 in 2004 (see Exhibit B).

  Plan's. Comments (See Appendix):

 The Plan states that the                           was not included in the calculation of
 the average premium ra110 m e         or s eet or t e
 group. The original ratio of   should b~ This correction reduces the discount to
 _percent and results in $52,090 due the ~

  OIGJs Response to the Plan's Comments:

  We reviewed th~worksheet submitted by the Plan and· agree that the
  _category was not included in the calculation of the average premium ratio.


                                                 5

 We also agree with the revised discount o f . percent given to the
_group and that this discount should be applied to the FEHBP rates. However, our
: = o n shows that the FEHBP is due $52,414 for 2004, not $52,090.



The Plan selected
for contract year
that                                 had a two year contract starting in 2006. However, in
calculating any potential discount as a result of the two year contract, the Plan used the same
enrollment data from the calculation of the 2006 -'djustment factor instead of using
emollment data that would be available at the time the 2007 rates were developed.
Accordingly, we recalculated                                      rates using current enrollment
data for the calculation of the        adjustment factor. As a result,
_received a_percent discount, instead ofth~ercent discount calculated
by the Plan and applied to the FEHBP rates. Therefore, we redeveloped the FEHBP rates by
applying th~percent SSSG discount. A comparison of the audited rates to the
reconciled rates shows that the FEHBP was overcharged $444,115 in contract year 2007 (see
Exhibit B).

Plan's Response (See Appendix):

 The Plan disagrees with updating the enrollment data in the middle of a two year contract.
 The Plan states that using updated enrollment to evaluate the rates charged to an SSSG
 introduces "hindsight" into the process which the Plan says is contrary to the principles of
 community rating. The Plan further states that there is no basis in OPM's regulations or rating
 instructions for this approach. The Plan states that the only instruction relating to rates that
 extend beyond 12 months requires that premium adjustments be made or the rate extensions
 will be considered as a discount. The Plan states that it complied with this requirement at the
-_~ime_ofthe 2007 rate reconciliation when it gave the FEHBP a~ercent discount in
 connection with the rates charged to

 OIG's Response to theptan's Comments:

 OPM's 2007 Rate Reconciliation Instructions state that, "If an SSSG's rate is extended
 beyond twelve months ...a premium adjustment that reflects the entire value of the extension
 must be made for the SSSG in the following year, or the rate extension will be considered a
 discount." In determining the discount, the Plan used the same enrollment data from the
 calculation of the 2006_adjustment factor. To be consistent with the methodology
 used to develop the FEHBP's and the other SSSG's rates, enrollment data that was available
 at the time the 2007 rates were developed should have been used for the calculation of the
~djustment factor. Therefore, we recalculated                                             rates
 using current enrollment data for the calculation of the        adjustment factor. As a result,
                                  received a _     percent discount, which we applied to the
 FEHBP rates.



                                              6
The Plan selected
for contract ear 2
that                               had a two year contract starting in 2007. However, in
calculating any potential discount as a result of the two year contract, the Plan used the same
enrollment data from the calculation of the 2007            adjustment factor instead of using
enrollment data that was available at the time the 2008 rates were developed. Accordingly,
we recalculated                                   rates using the current enrollment data for the
calculation o f t h e _ adjustment factor. As a result, we determined that alii percent
discount was given to                                   Therefore, we applied this discount to
the FEHBP rates. A comparison 0 the audited rates to the reconciled rates shows that the
FEHBP was overcharged $1,568,151 in contract year 2008 (see Exhibit B).

Plan's Comments (See Appendix):

The Plan states that OPM's instructions regarding multi-year rate agreements require a plan to
use the current year's rating methodology when determining any discount in the second and
subsequent years of the rate agreement. The Plan states that its evaluation of
• • • • • • rates was consistent with OPM's instructions. Further, the Plan states that
according to OPM's rate reconciliation instructions, a plan may not update the FEHBP
enrollment data to reflect the impact of open season. Therefore, to be consistent with the
established ratin methodolo , the Plan used the enrollment data it used in developing
                                 2007 _       factor.

OIG's Response to the Plan's Comments:

The Plan states that it followed OPM's instructions by using the current year's methodology
to determine any discount in the second year 0                                     two year
contract. We disagree. The methodology used to eve op
current rates (i.e., the 2007 rates) was based on rating factors, including enrollment, that were
available at the time the rates were developed. Therefore, to evaluate the 2008 rates, the Plan
should use the rating factors, including enrollment, that were available at the time the 2008
rates were develo ed. This is the methodolo we used in calculating t h e . percent
discount given to

Further, the Plan states that aPM does not allow plans to update the FEHBP's enrollment to
reflect open season changes; therefore, the Plan applied the same approach when developing
                                  rates. We agree that OPM does not allow plans to update the
FEHBP's enrollment between the proposal and reconciliation to reflect the impact of open
season changes. However, that limitation applies within the same year. For example, the Plan
cannot use one set of enrollment statistics to develop the proposed 2008 rates and then use a
different set of enrollment statistics to develop the reconciled 2008 rates. The issue with
                               is not the same. The Plan used the same set of enrollment
statistics to develop both the 2007 and potential 2008 rates. Using the enrollment data that



                                              7

  was available at the time 2008 rates were developed is not inconsistent with OPM's
  instructions.

   In conclusion, we developed                                 2008 rates as the Plan would
        done had the group not had a two year contract and determined that the group received a
  •     percent discount in 2008 that was not applied to the FEHBP rates.

  Recommendation 1

  We recommend that the contracting officer require the Plan to return $2,064,680 to the
  FEHBP for defective pricing in 2004,2007, and 2008.

2. Lost Investment Income                                                                   $94,261

  In accordance with FEHBP regulations and the contract between OPM and the Plan, the
  FEHBP is entitled to recover lost investment income on the defective pricing findings in
  contract years 2004, 2007, and 2008. We determined that the FEHBP is due $94,261 for lost
  investment income, calculated through January 31,2009. In addition, the FEHBP is entitled
  to lost investment income for the period beginning February 1,2009, until all defective
  pricing amounts have been returned to the FEHBP.

  FEHBAR 1652.215-70 provides that, ifany rate established in connection with the FEHBP
  contract was increased because the carrier furnished cost or pricing data that was 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.

 ··Drir calculation of lost investment income is based on the United States Department of the
   Treasury's semiannual cost of capital rates.

  Plan~s   Response (See Appendix):

  The Plan did not provide any comments regarding the lost investment income finding.

  Recommendation 2

  We recommend that the contracting officer require the Plan to return $94,261 to the FEHBP
  forlost investment income, calculated through January 31,2009. In addition, we recommend
  that the contracting officer recover lost investment income on amounts due for the period
  beginning February 1,2009, until all defective pricing amounts have been returned to the
  FEHBP.




                                                  8

             IV. MAJOR CONTRIBUTORS TO THIS REPORT


Community-Rated Audits Group

                    Auditor-in-Charge

                    Staff Auditor

                   Staff Auditor


                     Chief

                             Senior Team Leader




                                            9

                                                                           Exhibit A


                                         Health Plan of Nevada

                                      Summary of Questioned Costs




Defective Pricing Questioned Costs:


      Contract Year 2004                                      $52,414

      Contract Year 2007                                     $444,115

      Contract Year 2008                                    $1,568,151





                Total Defective Pricing Questioned Costs                  $2,064,680


      Lost Investment Income                                                 $94,261


                     Total Questioned Costs                               $2,158,941
                                                                                    Exhibit B

                                         Health Plan of Nevada

                                   Defective Pricing Questioned Costs




                                                Self               Family
FEHEP Line 5 - Reconciled Rate




                                                 • •
FEHBP Line 5 - Audited Rate

Overcharge




                                                 • •
                        i
To Annualize Overcharge:
   3/31/04 enrollment
   Pay Periods                                         26                     26
Subtotal                                          $12,243                $40,171

Total 2004 Defective Pricing Questioned Costs




FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 • Audited Rate

Overcharge

To Annualize Overcharge:
   3/31101 enrollment
   Pay Periods                                         26                     26
Subtotal                                         $117,066            $327,049

Total 2007 Defective Pricing Questioned Costs                                       $444,]]5




FEHBP Line 5 - Reconciled Rate
FEHEP Line 5 - Audited Rate

Overcharge

To Annualize Overcharge:
   3/31/08 enrollment
   Pay Periods                                         26                     26
Subtotal                                         $414,800          $1,153,351

Total 2008 Defective Pricing Questioned Costs                                      $1.568,151

Total Defective Pricing Questioned Costs                                           $2,064,680
                                                                                                                                                      EXHIBITC

                                                                         Health Plan of Nevada
                                                                        Lost Investment Income



  Year                                       2004             2005                2006             2007             200B             2009             Total
Audit Findings:

I. Defective Pricing                                $52,414              $0                  $0       $444,115       $1,568,151                 $0      $2,064,680


                        Totals (per year):          $52,414               $0                  $0      $444,1 [5      $1,568,151               $0       $2,064,680
                       Cumulative Totals:           $52,414          $52,414             $52,414      $496,529       $2,064,680       $2,064,680       $2,064,680

            Avg. Interest Rate (per year).          4.250%           4.375%          5.4375%          5.5000%          4.9375%          5.6250%

        Interest on Prior Years Fi ndings:              SO            $2,293              $2,850           $2,883          $24,516          $9,678        $42,220

                  Current Years Interest:            $1,114              SO                  SO           SI2,2[3          $38,714              SO        $52,041

     Total Cumulative Interest Calculated
             Through January 31, 2009:               $1,114           $2,293              $2,850          $15,096          $63,230          $9,6781       $94,261
                                        ~                                      Appendix

      20DBOEC 23 AM 7: ItIEALTH PLAN OF NEVADA
                     A UnltedHealthcare Company

                                   December 17, 2008

                                                       VIA UPS OVERNIGHT

  Chief; Community-Rated Audits Group
  U .8. Office of Personnel Management
. Office of the Inspector General
  1900 E Street, NW
  Room 6400
  Washington, DC 20415

       Re:	    Health Plan of Nevada, Inc.
               Draft Audit Report No. lC-NM·00-08-049

Dear

       This letter and accompanying exhibit respond to the above-referenced draft
audit report (the "Draft Report") on the Federal Employees Health Benefits
Program ("FEHBP") operations at Health Plan of Nevada, Inc. (the "Plan") for
contract years 2003 through 2008. A CD containing this response is enclosed.

       The Draft Report contains preliminary findings that the Plan engaged in
defective pricing in contract years 2004, 2007 and 2008, and questions $2,444,266
for inappropriate health benefit charges to the FEHBP excluding lost investment
income. The Draft Report found that the Plan's rates to the FEHBP for contract
years 2003, 2005 and 2006 were developed in accordance with Office of Personnel
Management ("OPM") rules and regulations.

      As discussed below, the Plan disagrees that it engaged in defective pricing in
2004, 2007 and 2008. Moreover, the only adjustment due the FEHBP in connection
with these three years is a slight additional discount for 2004.

I.	    Contract Year 2004

       For contract year 2004, the Draft Report agrees with the Plan's similarly
sized subscriber group ("SSSG") selections of
                                  The

                                             each with separate billed rates. In
mid 2004, the ~ e r ecombined into the                                     . The
billed rates for~ainedat the                              ates. In the 2004
reconciliation, the Plan determined that the

                        Good health takes a good plan"~
              P.O. Box 15645. Las Vegas, Nevada 89114-5645. (702) 242-7200
OPMOIG
December 17, 2008
Page 2



received a_discount as a result of combining the three subgroups, and
therefore gave the FEHBP the same discount. However, the Draft Report
calculated a        discount for the SSSG. Based on that calculation, the Draft
Report recommends that the Plan overcharged the FEHBP by $385,674.

       The Plan disa rees with the Draft Report's calculation of the additional
discount for the                                 group and the resulting overcharge
amount for the FEHBP. Upon further review of the group's rating, the Plan
identified an error in the calculation of the average Premium Ratio_in the
                            worksheet originally prepared by the Plan and in the
audited_worksheets for the period 611/04-12/31/04. Specifically, the
                          ategory was excluded from the calculation. (See Excel file
A,                                  xIs, tab                           '). The
premium ratio is also used in the derivation 0      e s ep up actor, w ich is used to
convert the adjusted per member per month premium rate into an employee only
premium rate. The original step up factor was_and the corrected factor is
_        (See Excel file B,                   4-25-04)7-04Corrected.xls, tab
"                           ") This correction in step up factor generates a final
                   o and an additional adjustment to the FEHBP of $52,090. (See
                              2004 Rev.xls.)

II.    Contract Year 2007

       . _For contract year 2007, the Draft Report agrees with the Plan's SSSG
-selections of                                                                      In
 2007,                                     as m t e second year 0 a two year contract.
 For purposes of determining whether the SSSG received a discount in 2007 as a
 result of the two year contract, the Plan, consistent with its established rating
 practice, compared the pricing factors used in the original rating of the group to
 updated trend and other pricing factors. Based on that analysis, the Plan
 determined that the SSSG received a~1o discount and reported this discount in
 the 2007 rate reconciliation.

         The Draft Report contains preliminary findings that
_received a _discount in 2007 as a result oft e two year contract
and recommends that the Plan return an additional $444,115 to the FEHBP. The
difference between the Plan's discount calculation and the Draft Report's discount
calculation is solely attributable to the Draft Report using updated enrollment data
(i.e., the enrollment data that the Plan would have used if the group had a 12
month contract for 2007) to develop the           adjustment factor. In evaluating
OPMOIG
December 17, 2008
Page 3



the group's 2007 rates for purposes of the 2007 reconciliation, the Plan used the
enrollment data that was available at the time of the original rating for the two
year contract to develop the _adjustment factor. The Plan disagrees with the
Draft Report's use of updated enrollment data in analyzing the second year of a two
year contract. Such an approach is not appropriate and is not provided for in OPM's
rating instructions.

       Specifically, there is no reason to review the enrollment data from the middle
of the two year contract period to assess the Plan's rates for the group. That data is
relevant for the limited purpose of determining whether the group is in fact an
SSSG based on its size. The only enrollment data that is relevant to an evaluation
of the rates charged the S8SG is the enrollment data used in the original rating of
the group. Were OPM to take the position that updated enrollment data must be
used for rate evaluation purposes, such a position would inappropriately shift the
focus to whether health plans had, in retrospect, guessed right, rather than
focusing, as the OIG always has, on whether the plans rated the 888Gs properly
based on information available at the time their rates were set.

       Finally, there is no basis in OPM's regulations or rating instructions for the
approach taken in the Draft Report. Neither the 2007 Community Rate
Instructions nor the Reconciliation Guidelines for 2007 Rates provide for the
approach used in the Draft Report. The Instructions and Guidelines do refer to
enrollment data as of March 31 st of the coverage year, but that is in reference" to the
identification of the 888Gs, not the evaluation of the rates charged the 888Gs.l
Using updated enrollment data to evaluate the rates charged a group introduces
"hindsight" into the rating process, which is contrary to principles of community
rating. The only instruction relating to rates that extend beyond 12 months
requires that premium adjustment be made or the rate extension will be considered
as a discount. The Plan complied with this requirement at the time of the 2007 rate
reconciliation when it gave the FEHBP a          % discount in connection with the
rates charged




1The 2007 Community Rating Guidelines provide at page 8 that: "All group enrollments including
new groups (the Federal group and the SSSG enrollments) should be the latest 2007 enrollment
available to the carrier (but no later than March 31,2007)."
OPMOIG
December 17, 2008
Page 4



III.	   Contract Year 2008

       The findings and recommendation for contract year 2008 are similar to those
for 2007. The Draft Report agrees with the Plan's SSSG selections of
                                                      For 2008,
         was in the second year of a two year rate contract. The Draft Report
contains preliminary findings that the SSSG received a _      discount by using
updated enrollment data to calculate the _adjustment factor for contract year
2008. Consistent with 2007 and the Plan's established rating practice, the Plan
used the original enrollment data for purposes of the 2008 rate reconciliation. For
the reasons discussed in Section II above, the Plan disagrees with the Draft
Report's use of updated enrollment data to calculate the_adjustment factor
in evaluating                                 2008 rates. 2

      Also, the 2008 Rate Instructions include the following discussion at page 13
regarding multi-year rate agreements:

           If a group has negotiated a multi year contract and is determined to
           be an SSSG, the following rules will apply:
               . If the SSSG is in the first year ofthe'multi year contract, the
               current methodology for determining reasonableness of rate will
               be applied. For the second and all subsequent years of a multi
               year contract, SSSG discounts or overcharges will be determined
               by applying the current year methodology to the current year
               rate. If a discount is determined to have been applied to the
               SSSG, the previous years in the multi year contract will be used
               to determine if the carrier included additional costs due to the
               multi year rate contract. If this is the case, the discount applied
               to the SSSG may be offset by these costs.



2 The Plan has identified an error in the billed premium rate used by the auditors for members
enrolled in the HMO D20 benefit plan. Specifically, the ~orksheetprepared by the auditor
(Revised SSSG ~udited Rate Development.xls) contains the correct rate of ~
However, the 2008 Lead Schedule also prepared by the auditors uses an incorrect rate of $• • •



                                                                                 $_
(see tab labeled "Lead Schedule" in workbook named "2008 FEHBP Audited Rate Development
Rev.xls"). Using the correct billed rate results in a discount calculation of~lo. See tab "Lead
Schedule Rev" in same spreadsheet. Copies of the April 2008 Facets invoice and April 2008 premium
remittance memo are enclosed. The documents show the billed rate and paid rate of
OPMOIG
December 17,2008
Page 5



In addition the Reconciliation Instructions for 2008 Rates provide at page 6 as
follows:

         Multi-Year Rate Agreements
         If a group has negotiated a multi-year contract and is determined to
         be an 8SSG, the following rules will apply:

         First year of a multi-year agreement - The process of determining
         discounts as defined above applies.

         Second and all subsequent years of a multi-year agreement - The
         process of determining discounts as defined above applies. Any
         additional costs incurred in previous years of the multi-year rate
         agreement will be considered when determining the discount.

                                                              2008 rates and of
                                        ra es or purposes 0 he FEHBP rate
reconciliation in each of the two years was consistent with the OPM instructions
quoted above.

       Finally, the 2008 instructions do not provide for the approach used in the
Draft Report. Consistent with its current methodology, the Plan recalculated the
888Gs' rates using the enrollment data used in the original rating of the groups but
updated trend and other pricing factors. This is the same approach that the Plan
follows and is required by OPM for the FEHBP. That is, in performing the FEHBP
rate reconciliation, a plan may use updated rates and pricing factors but may not
update the FEHBP enrollment data to reflect the impact of open season. To do so,
could artificially increase or decrease the group's rates. Thus, consistent with its
established rating methodology and the methodology used for the FEHBP, the Plan
used the original enrollment data in its anal sis of
2008 rates and of

IV.   Conclusion

       Based on the foregoing, no adjustment is due the FEHBP for contract years
2007 or 2008 as the Plan properly accounted for the 888Gs' two year rate contracts.
For contract year 2004, the FEHBP is entitled to an additional discount of $52,090.
OPMOIG
December 17, 2008
Page 6



       Please don't hesitate to contact me if you have any questions or require
additional information. I can be reached at

                                       Sincerely,




                                       Chief Operating Officer

Enclosures