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)