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
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)