oversight

Audit of the Federal Employees Health Benefits Program Operations at Presbyterian Health Plan, Inc

Published by the Office of Personnel Management, Office of Inspector General on 2010-10-15.

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

                                                    U.S. OFFICE OF PERSONNEL MANAGEMENT
                                                          OFFICE OF THE INSPECTOR GENERAL
                                                                           OFFICE OF AUDITS




Final Audit Report
Subject:

   Audit of the Federal Employees Health Benefits
Program Operations at Presbyterian Health Plan, Inc.



                                          Report No. lC-P2-00-10-008

                                          Date:October 15, 2010




                                                     -- CAUTION -­
This audit report bas been distributed to Federal officials who are responsible for tbe administration of the audited program. This
audit report may contain proprietar)' data which is protected by Federal law (18 U.S.c. ]905). Therefore, wbile this audit report is
available under the Freedom of Information Act and made available to the public on the OIG webpage, caution needs to be exercised
before releasing the report to the general public as it may contain proprietary information that was redacted from the publicly
distributed copy.
                       UNITED STATES OFFICE OF PERSON EL MANAGEMENT
                                           Wa hington, DC 20415


   Office of the
Tn pector General




                                            AUDIT REPORT



                                Federal Employees Health Benefits Program

                             Community-Rated Health Maintenance Organization

                                      Presbyterian Health Plan, Inc.

                                 Contract Number CS 2627 - Plan Code P2

                                        Albuquerque, New Mexico




                    Report   o. lC-P2-00-10-008                   Da~:   October 15, 2010




                                                                  ~~
                                                                  Assistant Inspector General
                                                                    for Audits



      www.opm.gov
                                                                                      www.usajobs.gov
                          UNITED STATES OFFICE OF PERSONNEL MANAGEMENT

                                                Washingt n. DC 10415


   Office of the
In pector General




                                         EXECUTfVESU~ARY





                                Federal Employees Health Benefits Program

                             Community-Rated Health Maintenance Organization

                                      Presbyterian Health Plan, IDe.

                                 Contract Number CS 2627 - Plan Code P2

                                        Albuquerque, New Mexico




                    Report No. lC-P2-00-10-008                      Date: October 15, 2010

         The Office of the Inspector General performed an audit of the Federal Employees Health Benefits
         Program (FEHBP) operations at Presbyterian Health Plan, Inc. (Plan). The audit covered contract
         years 2007 through 2009 and was conducted at the Plan's office in Albuquerque, New Mexico.

         This report questions $1 154,630 for defective pricing in contract years 2008 and 2009. The
         questioned amount includes $1,075,400 for inappropriate health benefit charges and $79,230 due
         the FEHBP for lost investment income, calculated through September 30, 2010. We found that
         the FEHBP rates were developed in accordance with the Office of Personnel Management's rules
         and regulations in 2007.

         For contract year 2008, we determined that the FEHBP's rates were overstated by $496,521 due
         to defective pricing. More specifically, the Plan used an inconsistent application of the incurred
         but not reported (IBNR) factors for the FEHBP when compared to the IBNR methodology used
         for both similarly sized subscriber groups (SSSG). The Plan also did not apply an SSSG
         discount to the FEHBP's rates.

         For contract year 2009 we determined that the FEHBP's rates were overstated by $578,879 due
         to defective pricing. More specifically the Plan incorrectly charged the FEHBP al percent state




        www.opm.goY                                                                            www.usaJobs.goY
assessment to cover the ew Mexico Health Insurer Alliance and the     ew Mexico Medical
Insurance Pool mandate.

Consistent with the FEHBP regulations and the contract, the FEHBP is due $79,230 for lost
investment income, calculated through September 30, 20 I0, on the defective pricing findings. In
addition, the contracting officer should recover lost investment income on amounts due for the
period beginning October 1,2010, until all defective pricing amounts have been returned to the
FEHBP.




                                               II
                                      CONTENTS




   EXECUTIVE SUMMARY	                                                               i


 I. INTRODUCTIO       AND BACKGROUND	                                               1


II.	 OBJECTIVES, SCOPE, A 0 METHODOLOGY                                             3


III.	 AUDIT FINDINGS AND RECOMMENDAnONS                                             5


   Premium Rates                                                                    5


   1. Defective Pricing	                                                            5


   2. Lost Investment Income	                                                       8


IV.	 MAJOR CONTRIBUTORS TO THIS REPORT                                              9


   Exhibit A (Summary of Questioned Costs)


   Exhibit B (Defective Pricing Questioned Costs)


   Exhibit C (Lost Investment Income)


   Appendix (presbyterian Health Plan, Inc. 's September 8,2010, response to the

             draft report)

                     I. INTRODUCTION AND BACKGROUND


Introduction

We completed an audit of the Federal Employees Health Benefits Program (FEHBP) operations
at Presbyterian Health Plan, Inc. (Plan) in Albuquerque, New Mexico. The audit covered
contract years 2007 through 2009. The audit was conducted pursuant to the provisions of
Contract CS 2627; 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
Retirement and Benefits 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         12,000
the FEHBP. In contracting with
                                                    10,000
community-rated carriers, OPM relies on
carrier compliance with appropriate laws             8,000
and regulations and, consequently, does not
                                                      6,000
negotiate base rates. aPM negotiations
relate primarily to the level of coverage and        4,000
otber unique features of the FEHBP.
                                                     2,000

The chart to the right shows the number of                o-i'-'===-T'-===-T'--===-or
                                                               2007        2008         2009
FEHBP contracts and members reported by                                    5.438        4,728
                                                • Contracts    5,438
the Plan as of March 31 for each contract       o Members      11,864     11,864        10.051
year audited.
The Plan has participated in the FEHBP since 1991 and provides health benefits to FEHBP
members in all counties of New Mexico. The last audit conducted by our office was a full scope
audit and covered contract years 2003, 2004, and 2006. All matters related to that audit have
been resolved.

The preliminary results ofthis 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.




                                                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.


                                                               FEHBP Premiums Paid to Plan

We conducted this performance audit in
ac~ordance with generally accepted government                $56
auditing standards. Those standards require that
                                                       III   $54
we plan and perform the audit to obtain                t::
                                                       ,g
sufficient, appropriate evidence to provide a                $52
                                                       ~
reasonable basis for our findings and conclusions
                                                             $50
based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis            $48
for our findings and conclusions based on our                       2007      2008      2009
audit objectives.                                      • Revenue   $50.7     $55.5      $55.4


This performance audit covered contract years 2007 through 2009. For these contract years, the
FEHBP paid approximately $161.6 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 aPM 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.

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

                                                 3

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 performed at the Plan's office in Albuquerque, ew Mexico, during
March 20 IO. Additional audit work wa completed at our field offices 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. Further we examined claim payments to verify that the cost data us d to
develop the FEHEP 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 Haith Benefits Acquisition Regulations (FEHBAR), and OPM's Rate Instructions to
Commtmity-Rated Carriers to determine the propriety of the FEHBP premiLUns 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

Premium Rates

1. Defective Pricing                                                                 $1,075,400

  The Certificates of Accurate Pricing the Plan signed for contract years 2008 and 2009 were
  defective. In accordance with federal regulations, the FEHBP is therefore due a price
  adjustment for these years. Application ofthe defective pricing remedies shows that the
  FEHBP is entitled to premium adjustments totaling $1,075,400 (see Exhibit A). We found
  that the FEHBP rates were developed in accordance with OPM's rules and regulations for
  contract year 2007.

  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 conj unction 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.

  2008

  We agree with the Plan's selection 0                            as the SSSGs for
  contract year 2008. Our analysis of the rat~ the SSSGs shows that
               did not receive a discount and_ _ received ~iscount. The
  Plan did not apply the~ercent discount that           eceived to the FEHBP's rates in
  contract year 2008.

  In addition, we reviewed the FEHBP's rates and found that the Plan was using an inconsistent
  rating methodology in its application of the incurred but not reported (IBNR) factors. The
  Plan originally rated the FEHEP using an annual IBNR factor but rated both SSSGs using
  monthly IBNR factors.

  We applied the monthly IBNR factors to the FEHBP's monthly medical claims data, based on
  the 2008 Community Rating Instructions, which state that the carrier should use the same
  rating method for the Federal group as it uses for the SSSGs. We accept different rating
  methods in some situations. If, however, the carrier rates an SSSG using a method
  inconsistent with the carrier-established policies, the Federal group is entitled to a discount
  based on the SSSG rating method applied to the Federal group. When we applied the monthly
  IBNR factors to the FEHBP's medical claims data, the Incurred Completion Factor was
  reduced from _        to_



                                                5
 We re-developed the FEHBP s rates by applying the monthly IBNR factors to the medical

 claims data and by applying th.     percent discount, granted to                 to the line 5

 rates. A comparison of the reconciled line 5 rates to our audited line 5 rates shows that the

 FEHBP was overcharged $496,521 in 2008 (see Exhibit B).


 Plan's Comments (See Appendix):

 The Plan does not dispute the lB R finding for 2008.

  However, the Plan disagrees with the finding regarding thellll percent discount that _
_       received. The Plan states that                had.pre-65 retirees that were billed a
  higher premium than the rest of the                active employees group in the first quarter of
  2007, when the 2008 renewal was being calculated. The calculation of the" percent
  discount did not consider the higher rates billed to the.pre-65 retirees in 2007.

 In addition the"pre-65 retirees terminated coverage before January 1,2008 (March 31
 2007 and May 31, 2006 respectively) and were not covered in any month of 2008. Detailed
 bills were included for each month of2008 to show that neither subscriber was covered in
 2008.

  Based on this information the Plan disputes the finding that _ w a s given a discount
  o~percent; therefore, they state that the defective pricing amount for 2008 should be
  reduced by approximately $120,000, plus any interest on that amount.

 DIG's Response to the Plan's Comments:

 We acknowledge the Plan s agreement with the IB R finding and the subsequent application
 of the monthly IBNR factors to the FEHBP's rates in contract year 2008.

 We disagree with the Plan's assertion that the.pre-65 retirees received a higher billed rate
 in the first quarter of 2007. While on-site, we obtained copies of the March 2007 bills, which
 show th~re-65 retirees receiving the same rate as the active enrollees (_single
 a n d _ employee and spouse). The 2007 billed rates affect the calculation of the current
 per me~h (PMPM) rates, which we calculated at a lower amount than the Plan
 used in                  rate development. The variance in the current PMPM leads to an
 increased rate change and ultimately an increased rate for 2008.

  We also disagree with the Plan's assertion that removing the"pre-65 retirees and the _

 _          from the quoted rate model, due to termination, would negate the discount that

               received. When we removed                     from the single tierl,• • • 

 _ r o m the employee and spouse tier and                            from the total members,

  the discount for             slightly increased to .percent.


 Another issue that we have with the Plan's argument is the fact that the Plan states that one of
 the pre-65 retirees terminated as of May 31, 2006. The enrollment system report that was

                                                6
 provided in the Plan's response to the draft report supports the date of tennination, but the
 bills that were provided on-site continue to show the pre-65 enrollee being billed by the Plan
 until at least March 2007.

  The information provided by the Plan does not change our original conclusion that _
_       received a discount due to the fact that the bills show the pre-65 retirees being charged
  the same amount as the active members. We continue to contend that_received a
"percent discount and this discount was not applied to the FEHBP rates.



 We agree with the Plan's selection 0                                   as the SSSGs for
 contract year 2009. Our analysis of the rates charged to the SSSGs shows that neither group
 received a discount.

 We reviewed the FEHBP's rates and found that the Plan charged alpercent loading for an
 insurance pool assessment. The insurance pool assessment loading is a state mandated charge
 for the New Mexico Medical Insurance Pool (NMMIP) and the New Mexico Health Insurer
 Alliance (NMHIA). The NMMIP is a state assessment that allows for coverage of uninsured
   ew Mexico state residents. The MHIA is an alliance of the New Mexico Insurers that

 allows underwriting of indi iduals and small businesses. This allows the risk to be spread

 across all insurers.


 State assessments are an unallowable cost identified by the 2009 Community Rating
 Instructions which prohibits the imposition of taxes, fees, or other monetary payment, directly
 or indirectly, on FEHBP premiums by any State, the Dish-jet of Columbia, or the
 Commonwealth of Puerto Rico or by any political subdivision or other govemmental authority
 of those entities.

 We re-developed the FEHBP's rates by removing the insurance pool assessments. A
 comparison of the reconciled line 5 rates to our audited line 5 rates shows that the FEHBP was
 overcharged $578,879 in 2009 (see Exhibit B).

 Plan's Comments (See Appendix):

 The Plan does not dispute this finding for 2009.

 Recommendation 1

 We recommend that the contracting officer require the Plan to return $1,075,400 to the

 FEHBP for defective pricing in contract years 2008 and 2009.





                                               7

2. Lost Investment Income                                                                    $79,230

  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 findings due the
  FEHBP in contract years 2008 and 2009. We determined that the FEHBP is due $79,230 for
  lost investment income, calculated through September 30, 2010 (see Exhibit C). In addition,
  the FEHBP is entitled to lost investment income for the period beginning October 1,2010,
  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 oflost 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 does not dispute lost investment income being calculated for the lBNR finding in
  2008 or the state assessment finding in 2009. The Plan does not agree with the SSSG discount
  finding in 2008 and feels that lost investment income should not be calculated for the amount
  related to that finding.

  OIG's Response to the Plan's Comments:

  We disagree with the Plan's assertion that lost investment income should not be calculated for
  the SSSG discount finding in 2008. We feel that the finding is correct and will continue to
  assess lost investment income for the full amount of findings in contract years 2008 and 2009.

  Recommendation 2

  We recommend that the contracting officer require the Plan to return $79,230 to the FEHBP
  for lost investment income for the period January 1,2008 through September 30, 2010. In
  addition, we recommend that the contracting officer recover lost investment income on
  amounts due for the period beginning October 1, 2010, 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

                 Auditor

                 Auditor


                   Chief

                 Senior Team Leader




                                        9

                                                                             Exhibit A


                                       Presbyterian Health Plan, Inc.
                                       Summary of Questioned Costs



Defective Pricing Questioned Costs:


      Contract Year 2008                                         $496,521
      Contract Year 2009                                         $578,879


               Total Defective Pricing Questioned Costs:                    $1 075,400


      Lost Investment Income:                                                  $79,230


                   Total Questioned Costs:                                  $1,151.630
                                                                                                  Exhibit B
                                                                                                 Page 1 of2




                                               Presbyterian Health Plan, Inc.

                                             Defective Pricing Questioned Costs




2008 - High Option
                                                                                    Family
FEHBP Line 5 - Reconciled Rate




                                                                  • •
FEHBP Line 5 - Audited Rate

Overcharge

To Annualize Overcharge:
   3/31/08 enrollment
   Pay Periods                                                       26               26
Subtotal                                                          $115,489         $365,922

Total 2008 - High Option Defective Pricing Questioned Costs                                   $48],411

2008 - Standard Option
                                                                    Self            Familv
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate

Overcharge

To Annualize Overcharge:
   3/31/08 enrollment
   Pay Periods                                                       26              26
Subtotal                                                           $4,593          $10,517

Total 2008 • Standard Option Defective Pricing Questioned Costs                               $15,110

Total 2008 Defective Pricing Questioned Costs                                                 $496,521
                                                                                                    Exhibit B

                                                                                                   Page 2 of2





                                                Presbyterian Health Plan, Inc.

                                              Defective Pricing Questioned Costs




2009 - High Option

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

Overcharge

To Annualize Overcharge:
   3131/09 enrollment
   Pay Periods                                                        26               26
Subtotal                                                           $130,266         $385,382

Total 2009 - High Option Defective Pricing Questioned Costs                                    $515,648

2009 - Standard Option
                                                                     Self            Family
F HBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate

Overcharge

To Annualize Overcharge:
   3/31109 enrollment
   Pay Periods                                                       26                26
Subtotal                                                            11.794          $51 437

Total 2009 ­   tandard Option Defective Pricing Questioned Costs

Total 2009 Defective Pricing Questioned Costs                                                  $578,879



Toal Defective Pricing Questioned Costs                                                        $1,075.400
                                                                                                                              EXHIBITC

                                                         Presbyterian Health Plan, Inc.
                                                            Lost Investment Income




  Year                                           2007                  2008               2009             2010              Total
Audit Findings:

I. Defective Pricing                                         $0            $496521           $578,879                  $0      $[,075,400



                           Totals (per year):                $0            $496,521           $578879                $0        $1,075,400
                          Cumulative Totals:                 $0            $496,521         $1,075,400       $1,075,400

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

           Interest on Prior Years Findings:                 $0                    $0            $26,067          $25,709            $51,776

                       Current Years Jnterest:               $0               $12,258            $15,196               $0            $27,454

       Total Cumulative Interest Calculated
             Through eptember 30, 20 I0:                     $0               $12,258            $41,263          $25,7091           $79,230
                                                                                        Appendix



   !. PRESBY             ERIAN	                            2010 SEP 14 PM 3: 08


  eplember 8, 2010



Chief Community-Rated udits Group

U. . Office of Personnel Management

Office ofIn peclor Gen ral

1900 Stre t, NW

Room 6400

Washington D. .20415-110


Re:	    Presb terian Respon e to Draft [Proposed Report - OPM

        Report umber: 1C-P2-00-1 0-008

        Oat : June J 7 20 10


Dear_

Thank you for the oPPOltunity to respond to the Draft Report for PHP FEHBP plan. Following

are responses 10 the arious finding.


2008­

The OIG audit team calculated a discount I _ f o r the Januar 1 2008                    renewal.

              had.pre 65 r tiree lhat were billed a higher premium than the rest ofthelc• • •
       active employees in the first qua11er 0[2007 when the January 1,2008 renewai 'vvas being
calculated. The.pre 65 retit'ees were:




  he pre umption of the OIG audit team in arriving at th~discount was that the
individuals were billed at the lower activ rates in 2008.
                                                                                      e_
 lowe er, we have sine b en able to do additional research back to the relevant points in tim
 I am attaching the April 2007 demographic report which shows the
_           in the retiree class.

            term inated co erag with us effecti e 3/31/2007.

               retroactively terminated cov rage back to 5/3112006.

                              terminated coverage before January 1, 2008 and \ ere not covered
 in any month of 2008. I am including the detailed bills for ach month of2008 to show that
• • • • • • • "\las cover din 2008.

 Based on this information we dispute the finding that     was given a discount of
_therefore the defective pricing amount for 2008 F HBP should be reduced by
 approximately $120,000 plus any interest 011 that amount.

 OTHER FINOr GS

 Pr sbyt rian does not disput the I NR finding for 2008 or th   tat Assessment finding for

 2009.



 Thanks for your consideration related to tlus finding.




 ~ nior Actuarial Assistant

 Presbyterian Haith Plan