oversight

Audit of the Federal Employees Health Benefits Program Operations at New West Health Services

Published by the Office of Personnel Management, Office of Inspector General on 2012-06-04.

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

                                                         CONTENTS

                                                                                                                                   Page

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

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

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

III.   AUDIT FINDINGS AND RECOMMENDATIONS ......................................................... 5

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

       1. Defective Pricing ........................................................................................................... 5

       2. Lost Investment Income............................................................................................... 11

IV. MAJOR CONTRIBUTORS TO THIS REPORT ............................................................. 13

       Exhibit A (Summary of Questioned Costs)

       Exhibit B (Defective Pricing Questioned Costs)

       Exhibit C (Lost Investment Income)

       Appendix (New West Health Services’ February 10, 2012, response to the draft report)
                           I. INTRODUCTION AND BACKGROUND
Introduction

We completed an audit of the Federal Employees Health Benefits Program (FEHBP) operations
at New West Health Services (Plan). The audit covered contract years 2006 through 2011, and
was conducted pursuant to the provisions of Contract CS 2873; 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.
                                                                          FEHBP Contracts/Members
The FEHBP should pay a market price                                              March 31
rate, which is defined as the best rate
offered to either of the two groups closest                       900
in size to the FEHBP. In contracting with                         800
community-rated carriers, OPM relies on                           700
carrier compliance with appropriate laws                          600
and regulations and, consequently, does                           500
not negotiate base rates. OPM                                     400
negotiations relate primarily to the level of                     300
coverage and other unique features of the
                                                                  200
FEHBP.
                                                                  100
                                                                    0
The chart to the right shows the number of                                2006   2007   2008   2009   2010   2011
FEHBP contracts and members reported                          Contracts    308    337    339    373    333    333
by the Plan as of March 31 for each                           Members     681    856    817    870    752    752

contract year audited. 1


1
    The Plan reported 852 contracts as of March 31, 2006. OPM’s contracts were used for this year.
                                                          1
The Plan has participated in the FEHBP since 2003 and provides health benefits to FEHBP
members throughout most of Montana. This is our first audit of the Plan.

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 on December 15,
2011 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
accordance with generally accepted                            $4.0
government auditing standards. Those                          $3.5
standards require that we plan and perform                    $3.0


                                                 Millions
the audit to obtain sufficient, appropriate                   $2.5
evidence to provide a reasonable basis for                    $2.0
our findings and conclusions based on our                     $1.5
audit objectives. We believe that the                         $1.0
evidence obtained provides a reasonable                       $0.5
basis for our findings and conclusions based                  $0.0
                                                                      2006   2007   2008   2009   2010   2011
on our audit objectives.                                    Revenue   $2.5   $2.9   $3.2   $3.6   $3.4   $3.7

This performance audit covered contract
years 2006 through 2011. For these
contract years, the FEHBP paid approximately $19.3 million in premiums to the Plan. The
premiums paid for each contract year audited are shown on the chart above.

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

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

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

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

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



                                                 3
In conducting the audit, we relied to varying degrees on computer-generated billing and
enrollment 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 conducted in July 2011, and additional audit work was completed at our
offices located in Cranberry Township, Pennsylvania and Jacksonville, Florida.

Methodology

We examined the Plan’s federal rate submissions and related documents as a basis for validating
the market price rates. In addition, we examined the rate development documentation and
billings to other groups, such as the SSSGs, to determine if the market price was actually charged
to the FEHBP. Finally, we used the contract, the Federal Employees Health Benefits Acquisition
Regulations, 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 policies and procedures, interviewed appropriate Plan officials, and
performed other auditing procedures necessary to meet our audit objectives.




                                                 4
Our calculation of lost investment income is based on the United States Department of the
Treasury’s semiannual cost of capital rates.

Plan’s Comments (see Appendix):

The Plan did not comment on our lost investment income finding.

Recommendation 2

We recommend that the contracting officer require the Plan to return $116,542 to the FEHBP
for lost investment income, calculated through March 31, 2012. We also recommend that the
contracting officer recover lost investment income on amounts due for the period beginning
April 1, 2012, until all defective pricing amounts have been returned to the FEHBP.




                                            12
            IV. MAJOR CONTRIBUTORS TO THIS REPORT

Community-Rated Audits Group

                 , Auditor-in-Charge

                   , Auditor



                   Chief

                 , Senior Team Leader




                                        13
                                                                      Exhibit A

                               New West Health Services
                             Summary of Questioned Costs



Defective Pricing Questioned Costs


      Contract Year 2006                                   $172,495
      Contract Year 2007                                   $271,495
      Contract Year 2009                                   $170,141
      Contract Year 2011                                   $382,812


     Total Defective Pricing Questioned Costs                          $996,943


Lost Investment Income:                                                $116,542


Total Questioned Costs                                                $1,113,485
                                                                               Exhibit B
                                                                              Page 1 of 2
                                    New West Health Services
                                Defective Pricing Questioned Costs


2006
                                                         Self        Family
  FEHBP Line 5 - Reconciled Rate
  FEHBP Line 5 - Audited Rate

  Overcharge

  To Annualize Overcharge:
     3/31/2006 enrollment
     Pay Periods                                          26          26
  Subtotal

  Total 2006 Defective Pricing Questioned Costs                                  $172,495

2007
                                                         Self        Family
  FEHBP Line 5 - Reconciled Rate
  FEHBP Line 5 - Audited Rate

  Overcharge

  To Annualize Overcharge:
     3/31/2007 enrollment
     Pay Periods                                          26          26
  Subtotal                                                      6

  Total 2007 Defective Pricing Questioned Costs                                  $271,495
                                                                               Exhibit B
                                                                              Page 2 of 2
                                    New West Health Services
                                Defective Pricing Questioned Costs

2009
                                                         Self        Family
  FEHBP Line 5 - Reconciled Rate
  FEHBP Line 5 - Audited Rate

  Overcharge

  To Annualize Overcharge:
     3/31/2009 enrollment
     Pay Periods                                          26          26
  Subtotal

  Total 2009 Defective Pricing Questioned Costs                                  $170,141

2011
                                                         Self        Family
  FEHBP Line 5 - Reconciled Rate
  FEHBP Line 5 - Audited Rate

  Overcharge

  To Annualize Overcharge:
     3/31/2011 enrollment
     Pay Periods                                          26          26
  Subtotal

  Total 2011 Defective Pricing Questioned Costs                                  $382,812

Total Defective Pricing Questioned Costs                                         $996 943
                                                                                                                       EXHIBIT C

                                                          New West Health Services
                                                           Lost Investment Income



  Year                               2006       2007         2008         2009        2010       2011      31-Mar-12      Total
Audit Findings:

1. Defective Pricing                $172,495   $271,495       $0         $170,141      $0       $382,812      $0        $996,943


              Totals (per year):    $172,495   $271,495       $0         $170,141       $0      $382,812      $0        $996,943
             Cumulative Totals:     $172,495   $443,990    $443,990      $614,131    $614,131   $996,943   $996,943     $996,943

   Avg. Interest Rate (per year):   5.4375%    5.5000%     4.9375%       5.2500%     3.1875%    2.5625%    2.0000%

Interest on Prior Years Findings:     $0        $9,487      $21,922      $23,309     $19,575    $15,737     $4,985       $95,015

         Current Years Interest:     $4,690     $7,466        $0          $4,466       $0        $4,905       $0         $21,527

       Total Cumulative Interest
  Calculated Through March 31,
                          2012:      $4,690    $16,953      $21,922      $27,775     $19,575    $20,642     $4,985      $116,542