oversight

Audit of the Federal Employees Health Benefits Program Operations at Lovelace Health Plan

Published by the Office of Personnel Management, Office of Inspector General on 2010-09-27.

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

                                                            u.s. OFFICE OF PERSONNEL t\1ANAGEMENT
                                                                        OFFICE OF THE INSPECTOR GENERAL
                                                                                         OFFICE OF AUDITS




Final Audit Report
Subject:

         Audit of the Federal Employees Health Benefits
          Program Operations at Lovelace Health Plan



                                                Report No. lC-QI-OO-IO-026

                                               Date: September 27, 2010




                                                             -- CAUTION -­

This .audit repon has betn dislrihuteiJ to Federal      (Jmdal~   n hQ arc responsihle   f(lT   tnt" admil1istralion of the audited program. This
audit report may ('(jnt:li n prOpl"ieTury d.. la which is. protected I)~ FtdtT31 LlW \ IS USC 1905). Theft,fore, while lhi~ audit report is
::i\'ailalJle untier til(' Freedom of Infnrmaiioll Act and m:ldr 1I ....airabh: fo the: public on thf' OJ(; wel"lpagJ;, raution nrrds 10 be CHrcis.-.:d
bdon' rele:lsinc; lht' rqwrt Lo Hit' ~cJ:cral puhl!'::-I'" it Ill"~' ("Qlltain pnlpril:'l:lry infOl"m.<tkm Ihal ~ a" red:H,'H'd fl'E;m ttl\' puhlidy
dislrlbuie-d ,:opy.
                         UNITED STArES OFHCE OF PERSONNEL MANAGEMENT
                                           \\:ashington, DC 20415

   Office of the
inspector Gen.eral




                                            AUDIT REPORT



                                 Federal Employees Health Benefits Program

                              Communit)'-Rated Health Maintenance Organization

                                            Lovelace Health Plan

                                  Contract Number CS 1911 - Plan Code QI

                                         Albuquerque, Ncw Mexico




                     Report No. IC-OI-00-I0-026                     Date:   9 /2 7 /1 0




                                                                    Michael R. Esser
                                                                    Assistant Inspector General
                                                                      for Audits



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

                                                    Washington, DC 20415


   Office of the
.Jllspt".t.::lor Genera!




                                              EXECUTIVE SUMMARY





                                       Federal Employees Health Benefits Program

                                    Community-Rated Health Maintcnance Organization

                                                  Loyelace Health Plan

                                        Contract Numher CS 1911 - Plan Code Ql

                                               Albuquerque, Ncw Mexico




                           Report No. lC-QI-00-1O·026                   Date: 9/27/1 0

            The OtTice of the Inspector General performed an audit of the Federal Employees Health Benelits
            Program (FEHBP) operations at Lovelace Health Plan (Plan). The audit covered contract years
            2007 through 2009 and was conducted at the Plan's otTice in Albuquerque, New Mexico.

            This report questions $3,225,779 for defective pricing in contract years 2008 and 2009. The
            questioned amount includes $2,975,728 for inappropriate health benefit charges and $250,051
            due the FEHBP for lost investment income, calculated through August 31, 2010. We found that
            the FEHBP rates were developed in accordance with the Office of PerSOlmel Management's rules
            and regulations in 2007.

            For contract years 2008 and 2009, we determined that the FEHBp's ratcs were overstated by
            $2,134,080 in 2008 and $841,648 in 2009 due to defective pricing. More specifically, the Plan
            did not select the correct similarly sized subscriber group (SSSG) for comparison to the FEHBP
            and did not apply that SSSG discount appropriately at line 5 of the FEHBp's rates in 2008.
            Additionally, the Plan did nol apply the correct step-up factor to calculate the FEHBp line one
            rates fbr 2009.




         www.opm.gov
                                                                                               www.usajobs.gov
Consistent with the FEHBP regulations and the contract, the FEHBP is due $250,051 fOl' lo"t
investment income, calculated through August 31, 20 I0, on the defective pricing findilll' .11
addition, the contracting officer should recover lost investment income on amounts due '(ir the
period beginning September 1,2010, until all defective pricing amounts have been returned to
the FEHBP.




                                                11
                                      CONTENTS



                                                                                           Page

   EXECUTIVE SUMMARY                             "            "	                             1



 I. INTRODUCTION AND BACKGROUND	                                                             1


II. OBJECTTVES, SCOPE, AND METHODOLOGY                                 "                     3


Ill. AUDIT FINDINGS AND RECOMMENDATIONS                            "                         5


   Premium Rates          "      "                                         "                 5


   1. Defective Pricing          ""          "       "             "	                        5


   2. Lost Investment Income             "               "	                    "       "   " 7


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 (Lovelace Health Plan's August 18,2010. response to the draft report)

                     I. INTRODUCTION AND BACKGROUND


Introduction

We completed an audit of the Federal Employccs lIealth Bencfits Program (FEIIBP) operations
at Lovelace Health Plan (Plan) in Albuquerque, New Mexico. The audit covercd contract years
2007 through 2009. The audit was conductcd pursuant to the provisions of Contract CS 1911; 5
U.S.c. Chapter 89; and 5 Code of Federal Regulations (CFR) Chapter I, Part 890. The audit was
performed by the Officc of Personnel Managemcnt's (OPM) Ofiicc 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 Bcne.fits Act (Public Law 86-382),
enacted on Scptember 28, 1959. The FEHsp was created to providc health insurance bencfits
for federal employees, annuitants, and dependents. The FEIIBp is administered by OpM's
Retirement and Bcnefits Office. The provisions of the Federal Employees Health Bene/i,ts Act
are implemented by OpM through regulations codified in Chapter I, Part 890 of Title 5, CFR.
Health insurance coverage is provided through contracts with health insurance carriers who
provide service benefits, indemnity benefits, or comprehcnsivc mcdical services.

Community-rated carriers participating in the FEHBP arc subject to various federal, statc and
local laws, regulations, and ordinanecs. While most carriers are subject to state jurisdiction,
many are further subject to the Hcalth 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 FEIIBP subjects thc carriers to the Fcdcral Employees Health Benefits Act
and implementing regulations promulgated by OPM.

The FEIIBP should pay a markct price rate,                    FEHBP Contracts/Members
which is defined as the best rate offered to                            March 31

cithcr of the two groups c10scst in size to         25,000
the FEHEI'. In contracting with
community-rated carricrs, apM rclics on             20,000
carrier compliancc with appropriate laws
and regulations and, consequently, does not         15,000

negotiate base rates. OPM ncgotiations
                                                     10.000
relate primarily to the level of coverage and
other unique fcaturcs of the FEHBP.                   5.000


Thc chart to the right shows the number of                o
                                                               2007           2008      2009
FEHBP contracts and members reported by                                                 10,135
                                                • Contracts    10.435        10.166
the Plan as of March 31 for each contract
                                                o Members      21.275        20.287     19.725
year aud ited.
The Plan has participated in the FEHBP since 1981 and provides health benefits to FEHEP
members throughoUl New Mexico. The last audit conducted by our office was a full seope audit
and covered contract years 2003, 2005, and 2006. Ail matters related to that audit have been
resolved.

The preliminary results of this audit were discussed with Plan offlcials 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 pertlmned 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 perfonnance audit in
aceordance with generally accepted government                $1115
auditing standards. Those standards require that             $1®
we plan and perform the audit to obtain               j       S9"5
sufficient, appropriate evidence to provide a         :ii     $911
reasonable basis for our findings and conclusions             $85
based on our audit objectives. We believe that                $SII
the evidence obtained provides a reasonable basis             $75
for our findings and eonclusions based on our
audit objectives.                                       • Revenue


TIlis performance audit covered contract years 2007 through 2009. For these contract years, the
FEHBP paid approximately $277.2 million in premiums to the Plan. The premiums paid lor
each contract year audited are shown on the chart above.

OIG audits of eommunity-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 illcgal 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. Howcver, 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 sizcd 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 thc 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 infonnation systems involved. However, nothing came to our attention during our
audit testing utilizing the computer-generated data to cause us to doubt its reliahility. We believe
that the available data was su11icient to achicve our audit objectives. Except as notcd above, the
audit was conducted in accordancc with generally accepted government auditing standards,
issued by the Comptroller General of the United States.

The audit fieldwork was perfonned at the Plan's oftlce in Albuquerque, New Mexico, during
February 2010. Additional audit work was completed at our field oftlces in Jacksonville,
Florida, and Cranberry To\\'tlship, Pennsylvania.

Methodologv

We examined the Plan's federal rate submissions and related documents as a basis for validating
the market price rates. Further, we examined claim payment~ to verify that the cost data used to
develop the FEHBP rates was accurate, complcte, and valid. In addition. we examined the rate
development documentation and billings to other groups, such as the SSSGs. to dctennine if the
market price was actually charged to the FEHBP. Finally, we used the contract, the Federal
Employees Health Benefits Acquisition Regulations (FEHBARl, and OPM's Rate Instructions to
Community-Rated Caniers to detennine 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 oOicials. and
perfonned other auditing procedures necessary to meet our audit objectives.




                                                 4

              1lI. AUDIT FINDINGS AND RECOMMENDAnONS

Premium Rates

1. Defective Pricing                                                                  $2,975,728

  The Certificates of Accurate Pricing the Plan signed for contract years 2008 and 2009 were
  defective. In accordance with federal rcgulations, thc FEliSP is therefore duc a price
  adjustmcnt tor these years. Application of the defective pricing remedies shows that the
  FEffilP is entitled to premium adjustments totaling $2,975,728 (see Exhibit A). We found
  that the FElIBP rates were developed in accordancc 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
  Certilkate of Accurate Pricing certifying that the proposed subscription rates, subject to
  adjustmcnts recognized by OPM, are market price rates. OP1\-1 regulations refer to a market
  price rate in conjunction with the rates offered to an SSSG. If it is found that the FEHSP 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 FElIBP premiums to the
  equivalent market price.



  The Plan selected                                 as the SSSGs in 2008. ~ with the
  selection of                  ; however, we disagree with the se.lection o f _ . We
  selected the                                  since it was closer in size to the FE1IBP and it
  did not meet any of the SSSG exclusion requirements.

  Our review of the rates charged to the SSSGs shows that_eceived. percent
  discount that was not ap~: This discount was due to                             .
                          ~ did not receive a discount. As a result, we
  applied t h e . percent discount in the development of our FEHBP audited rates. A
  comparison of our audited line 5 rates to the Plan's reconciled line 5 rates shows that the
  FEHBP was overcharged $2,134,080 (see Exhibit B).

  Plan's Comments (See Appendix);

   The Plan states that groups contracting ",..ith lovelace Insurance Company (LIC) arc exempt
   from the SSSG elimination process due to the following reasons:

       (a)~annot be an SSSG because_is not a clL~tomer group of lovelace Healtb
       Solutions (lllS) d.b.a. lovelace Health Plan but is a customer of LlC.




                                                5
    (b) Only groups that contract with LHS "the Carrier" are eligible for SSSG consideration.

    (c) The Plan asserts that the definition of "Carrier" is the entity contracting with the
    FEHBP and does not include the subsidiaries and affiliates of the entity.

    (d) Both LIC and LIIS are two distinct and licensed corporations.

OI.G's Response to the Plan's Comments:

Groups contracting with LIC are not exempt from the SSSG elimination process due to the
following reasons:

    (a) LlC does not meet the criteria to be a separate line of business. According to the 2008
    rate instructions, "Groups covered under a separate line of business of a carrier that oilers
    an FEHBP product are excluded from consideration as an SSSG. To be considered a
    separate line of business all of the follov,ing criteria must be satisfied:

            • It must be a separate organizational unit, such as a division;

            • It must have separate financial accounting with' books and records that provide
              separate revenue and expense infonnation'; and

            • It must have a separate work force and separate management involved in the
              design and rating of the healthcare product."

    LIC does not meet the third criteria above; therefore, LIC cannot be considered a separate
    line of business.

    (b) Any group that contracts with LIIS and its subsidiaries (excluding separate lines of
    business as established in the 2008 Rate Reconciliation Instructions above) can be
    selected as an SSSG.

    According to the 2008 rate instructions, "Any group with which an FEIIB carrier enters
    into an agreement to provide health care services may be an SSSG (including govemment
    entities, groups that have multi-year contracts, and groups having point of service
    products)."

    (c) The interpretation that the term "Carrier", as established in Carrier Letter 2005-11,
    excludes subsidiaries and aniliates is inaccurate. The rewording of 'parent company' to
    'carrier' and the addition of 'subsidiary' to the first disqualifying point does not negate
    the second and third disqualifying points. To be a separate line of business, LlC must be
    a "separate business division", must have separate financial accounting with "books and
    records that provide separate revenue and expense infonnation," and must have a
    "separate work force and separate management involved in the design and rdting of the
    healtheare product." LIe clearly does not have a separate workforce or management,

                                               6
      since LHS completes all administrative work for LlC and LIC's management consists of
      LHS members only.

      OPM clearly establishes that all three disqualifying points must be met to exclude an
      entity (including separate and distinct legal entities) and their contracted !,JfOUpS from

      considered a separate line of business. Therefore,
      meeting the SSSG criteria, can be selected as SSSGs.
                                                           _and
      SSSG qualification. As discussed above, L1C does not meet the qualifications to be
                                                                       all other LlC groups, if


      The assumption that aPM allows the elimination of all entities simply by the use of
      incorporation as a reason is incorrect. Using this reasoning of SSSG elimination, the Plan
      could create a company where the FEHBP is the only group meeting the criteria for
      inclusion, thus rendering the SSSG process irrelevant.

      (d) Although both LHS and LIC are shown a'i licensed corporations, LIC is a wholly­
      owned subsidiary of LHS. As stated above, arM requires that all three disqualifYing
      points must be met to exclude an entity (including separate workforce and management
      involved in the design and rating of the heallhcare product) and their contracted groups
      from SSSG qualification. As discussed above, LIC does not meet the qualifications to be
      considered a separate line of business. Therefore, ~d all other LIe groups, if
      meeting the SSSG criteria, can be selected as SSSGs.



  In 2009, the Plan did not apply the correct step-up factor to the FEHBP rates. The Plan
  erroneously applied the prior year step-up factor o~instead of the current year factor of
 _        As a result. we applied the current year step-up factor o~in the development of
  our FEHBP audited rates. A comparison of our audited line 5 rates to the Plan's reconciled
  line 5 rates shows that the FEHBP was overcharged $841,648 (see Exhibit B).

  Plan's Comments (See Appendix):

  Tlle Plan agrees that an incorrect step-up factor was used to develop the FEHBP 2009 contract
  year rates and does not dispute the finding. The Plan acknowledges that $841 ,648 should be
  returned to the FEHBP for the 2009 contact year.

  Recommendation 1

  We recommend that the contracting oflicer require the Plan to return $2,975,728 to the
  FEHBP for defective pricing in contract years 2008 and 2009.

2. Lost Investment Income                                                                $250,051

  In accordance with FEHEP regulations and the contract between aPM and the Plan, the

  FEHEP is entitled to recover lost investment income on the detective pricing findings in


                                                 7

contract years 2008 and 2009. We determined that the FEHBP is due $250,051 for lost
investment income, calcu.lated through August 31, 2010 (see Exhibit C). In addition, the
FEHBP is entitled to lost investment income lor the period beginning September 1, 20 I0, until
all defective pricing 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 prici ng 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 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 address this issue.

Recommendation 2

We recommend that the contracting officer require the Plan to return $250,051 to the FEHBP
tor lost investment income tor the period January 1, 2007 through August 31, 2010. In
addition, we recommend that the contracting officer recover lost investment income on
amounts due lor the period beginning September 1, 20 I0, lUltil all detective pricing amowlts
have been returned to the FEHBP.




                                                8

            IV. MAJOR CONTRIBUTORS TO THIS REPORT


Community-Rated Audits Group

                   Auditor-in-Charge

                    StatY Auditor

                 Staff Auditor


                    Chief

                    Senior Team Leader




                                         9

                                                Exhibit A


                     Lovelace Health Plan
                  Summary of Questioned Costs

Defective Pricing Questioned Costs:

      Contract Ycar 2008                          $2,134,080
      Contract Ycar 2009                            $841,648

Total Defective Pricing Questioned Costs          $2,975,728

Lost Investment Income                              $250,051

Total Questioned Costs                            $3,225,779
                                                                           Exhibit B



                                             Lovelace Health Plan
                                      Defective Pricing Questioned Costs


                2008 Contract Year

   Plan's Reconciled Rates
   Audited Rates
   Biweekly Overcharge
   To Annualize:

   x March 31, 2008 Headcount

   x Pay Periods
   Subtotal
Total 2008 Defective Pricing Questioned Costs                                 $2,134,080

                 2009 Contract Year

   Plan's Reconciled Rates
   Audited Rates
   Biweekly Overcharge
   To Annualize:
   x March 3 I, 2009 HeadcoWll
   x Pay Periods
   Subtotal
Total 2009 Defect;,'e Pricing Questioned Costs                                  $841,648




Total Defective Pricing Questioned Costs                                      $2·975,728
                                                                                   Exhibit C



                                         Lovelace Health Plan
                                        Lost Investment Income


  Year                                        2008         2009         2010                   Total
Audit Findings:

Defective Pricing                       $2,134,080    $841,648           SO           $2,975,728



                   Totals (per year):   $2,134,080     S841,648           SO          $2,975,728
                  Cumulative Totals:    S2,134,080   S2,975,728   S2,975,728          $2,975,728

     Average Annual Interest Rate:        4.9375%      5.2500%      3.1875%

   Interest on Prior Years Findings:            $0     $112,039      563,234             $175,273

             Current Years Interest:       $52.685      S22.093           SO              $74,778

          Total Cwnulati ve Interest      552,685     S134,132      S63,234    I        $250,051
          Through August 31, 2010
                          1001 Pennsylvania Avenue, NW, Wa5hington, DC 20004-2595. p202 624·2S0Q.   n,n   r~:'S-5116



crowellrtmoring	                                                                                    Appendix

                                                          ZOIO AUG 18 PH 5: 09




                                         August 18, 2010




   ~Melissa D. Brown
   Chief, Community-Rated Audits Group
   U. S. Ot1ice of Personnd Management
   Office of the Inspector General
   1900 E Street, NW
   Room 6400
   \Vashington, DC 204l.S·1100

           Re:	   Lovelaee Health System, Ine. d/b/a Lovelace Health Plan
                  Draft Audit Repgrt No.I<:>QLOO-lO-026

   Dear Melissa:

          This firm is legal counsel to Lovelace Health System, Inc~ (dba Lovelace
   Health Plan) ("LHS"), a community rated Carrier under the Federal Employees
   Health Benefits Program C'FEHBP")~ This letU,r and accompanYll1g exhibits
   constitute the response of LHS to the above-referenced draft audit report (the "Draft
   Report") on the FedEmd Employees Health Benefits Program ("FEHBp") operations
   of LHS for contract YE:ars 2007 through 200~1.

         The Draft Report contams preliminary findings of defective pricing in
   contract years 2008 and 2009. Specifically, for 2008, the Draft Report claims that
   LHS did not apply a di.8count to the FEHBP that LHS alleged gave a similarly SiZE,,1
   subscriber group ("SSSG") and recommends that LHS return $2.134,080 to the
   FEHBp. For 2009, the Draft Report claims that LHS did not apply the correct step·
   up factor to the FEHSp's rates and, as a result. overcharged the FEHBP by
   $841,648

         As dIscussed below, LHS disJlutes the Draft Report's findings and
   recommendations with re"pect to contract year 2008~ LHS does not dispute the
   Draft Report's finding and recommendation regarding 2009~ PCI' your request, we
   are providing this response on a compact disk in \\'ord format and also via hard
   copy~
        1I1elissa D. Brown
        August 18, 2010
        Page 2

         L         Contract Year 2008

                For contract year 2008, LHS identified \\'estern Teamsters and Comcast as
         its SSSCi-s, The Draft Report agrees with LHS' selection of \Vestern Teamsters but
         disagrees with the selection of Comcast and the other SSSG, According to the Draft
         Heport, the auditors selected the University of New Mexico ("UNM") "since it was
         closer in size to the FEllSI' and it did not meet any SSSG exclusion requircments-"
         (emphasis added) However, U)Jl\1 simply cannot be an SSSG under LHS' contract
         with the Office of Personnel1\fanagement CO PM") since UNM was not a customer
         of LllS. To be ineligible for SSSG status lJNM need not fit within one of the
         exceptions from SSSG eligibility appl i.cable to particular types of Carrier customers,
         since it was not a customer ofLHS in the first place. OP1I,JlI,ls ..,xplicitlv rg~(jgniz('d
         this, and did so specifically in connecti()n\yith the excepJion from SSSG status
         instructions. As a result, it is irrelevant whether UNM met an "SSSG exclusion
         requirement".

                As we explalll in more detail helow, U1\I'vI does not quali(y fllr SSSG status
         hecause UNM was not a customer group of LIlS. UNM was a customer of Lovelace
         Insurance Company ("LIC"), an insurance company subsidiary of LHS that is a
         separate corporate .Iegal entity from LHS See Organizational Chart attached
         hereto as Exhibit A $ee aJsQ Group Contrncts between LIC and UNM attached
         hereto as Exhibit B and the applicable enrollee Evidence of Coverage issued by LIe
         j<lr U1\M plan participants attached as Exhibit C. Since UNM was not a customer
         group of the FEHBI' carrier - LHS, U1\1\1 cannot be an SSSG under LHS' contract
         with 01'1\-1.

                   A Only Customers orthe FEHEP Contracting Carrier Can Ee S88Gs:
                     Customers of a Corporate Subsidiary of the Carrier Cannot Be
                     888Gs.

               OPM's rating requirements for the F~;HBP, including instructions for
        identifying the SSSGs, are governed by the FEHB Act, the FEHB Acquisition
        Regulation ("FEHBAH"), OPM's Standard Contract for Community-Raled Health
        Maintenance Organization Carriers (the "Standard Contract") and OPM's annual
        rate instructions.

                   The FEHBAR defines the SSSGs as £)lIows:

                        (a) Similarly sized suhscriber groups (SSSGs) are a comprehensive
                        medical plan carri(~r's two emp19.YtJ~g1'9UPSthat: (1) As of tbe date
                        specified by OPM in the rate instructions, have a subscriber
                        enrollment closest to the FEHEP subscriber enrollment; and, (2)
                        Use any rating method other than retrospective experience rating:


Crowell & MOrlli!j.lLP • WW\<l.uowdl,corn • Wol\o.hingtoll, DC • New York •   S~n Fr.an(i~co   III   Lo, Angeles   III   Orange (OUflty   iIj   Ar;cho(a~e   • london _ fl-rus,els
        Melissa D. Brown
        August 18, 2010
        Page 3

                       and, (:3) :Vleet the criteria specified in the rate instructions issued by
                       01'1\1.

                       (b) Any group with ""hich an FEHBP carrier enters into an
                       agreement to provide health one "ervice" is a potential SSSG
                       (ineluding separate lines of business, government entities, groups
                       that have multi-year contracts, and groups having point-of-sen'ice
                       products).

                       (c) Exceptions to the general rule stated in paragraph (b) of this
                       section are (and the foHowmg groups must be excluded from SSSG
                       consideration): (1) Groups the carrier rates hy the method of
                       retrospective experience rating; (2) Groups consisting of the
                       carrier's own employees; (3) Medicaid groups, Medicare groups, and
                       groups that have only a stand alone benefit (such as dental only);
                       and (4) A purchasing alliance whose rate-setting is mandated by
                       the State or local government..

                       (d) OPM shall determine the FEHHP rate by selecting the lower of
                       the two raU,,, derived by using rating methods consistent with those
                       used to derive the SSSG rates.

        48 CYR § liJ02.170-l:,l (emphH sis Hdded).

        Thus, under OP]\1's regulations for the FEIlEP, the SSSGs must be groups of "the
        carner,

                  The term "carrier' is defined in the FEHB Act as follows:

                       "IC]arrier" mean" a voluntary association, corporation, partner"lllp,
                       01' other nongovernmental organization which is lawfully engaged
                       in providing, paving for, or reimbursing the cost of, health services
                       under b'TOUP insurance policie" or contracts, medical or hospital
                       service agreement", member"hip or subscription contracts, or
                       similar group arrangement", in consideration of premiums or other
                       periodic charges payahle to the carrier, including a health benefits
                       plan duly sponsored or underwritten by an employee organization
                       and an association of organizations or other entitles deSCrIbed in
                       this paragraph sponsoring a health benefits plan[.]

        ::; USC. § 8901(7) (emphasis added).                           Se~   also 48 c.F.R § 1602.170,L




(oweH 6: Mo6r1% lLP • wW'W,crow(·tl.com •   Wa~hillgton,   DC .. New York. San   F(an:::i~:::o   • Los Angpleos •   O(3,I1~e   Count)' _ Anchof",:ge • LQndon • Brussels
       Melissa D. Brown
       August IB, 2010
       Page, 4

       The definition of carrier III the Standard Contract incorporates the statutory
       defmition and further provides that the term "may be used interchangeably with
       the term Contractor." See Standard Contract at § 1.1.

              Finally, the term "health benefIts plan," which .is used in the definit.ion of
       carrier, is de.fIned as follows:

                     Health benefit.s plan means a group insurance policy, cont.ract,
                     medical or hospital service agreement, membership or suhscription
                     contract, or similar groUjJ arrangement.s prqvided by a carrier If)r
                     the purpose of providing, arranging for. delivering, paying for, or
                     reimbursing any of the costs of health care services.

       48 C,FK § 1602.170,9 (emphasis added).

              Based on the foregoing definit.ions, the term "carrior" as used in the definition
       of SSSGs refers to the legal entity t.hat cont.ract.s wit.h OPM to offer a health
       benefits plan under the FEIIBP. The definition of carrier does not. ltlclude
       sl,parately incorporated subsidiaries of the carrier that are distmct. legal entities.

               OPl\fs rating instructions regarding SSSGs are consist.ent wit.h t.he
       defInit.ions discussod above. In this regard, it. is critical to distinguish bet.welm lines
       of business or divisions within a single company, on the one hand, and companies
       that al'(! separate and distinct legal entities on the other. Ol'l'vl it.self acknowledged
       this distinction whenlt issued guidance on circumstances when a customer served
       by a separate line of busliless of a carrier could be excluded from SSSG
       consideration. After initially proposing guidance that could have resulted in
       confusion as to whether cm;(mners of a separate legal ent.ity could be tn,ated as
       cust.omors of the "carrier" and therefore be eligible to be SSSGs, OPJ'vl acknowledged
       concerllS about its initially proposed guidance, and modified it to rmnove any
       pot'mt.ial ambiguit.y.

             Specifically, in 2005, in connection with guidance excluding customers of a
       separate line of business of a carrier from SSSG eligibilit.y, OPl\l proposed to define
       a separate line of business as follows:

                     Groups covered under a separat.e line of business of a parent
                     ~Q!l1pan.Y that offers an FEHBP product arB excluded from
                     consideration as an SSSG. To he considered a separate line of
                     business all of t.he following criteria must be satisfied:
                     • It IllUSt be a separate organizational unit, such as a division or
                     subsidiary.



Crowell & Moring lLP .. www.crowel1.com.Washington.DC.NewYork ..   $anFrarKi5(o.LosAng8h~...   Orange(ouroty.Anchcrage.London.Brusst.ls
Melissa D. Brown
August 18, 2010
Page f)

            • It: must: have separate fina ncial accountability with "books and
            records that provide separate revenue and expense information
            that is used for mternal planning and control,
            • It must have a separate work force and separate management
            involved in the design and rating of the healthcare product.

Sec OPM letter dated February 23, 2005 attached hereto as Exhibit D. (emphasis
added)

       In response to comments that Ol'J\'1's use ofthe terms "parent company" and
"subsidiary" would cause confusion regarding whether groups that are not
customers of the carrier, but are customers of a separate legal entity subsidiary or
sister corporation of the carrier, could be considfm~d SSSGs, OPM modified the
language, changing "parent company" to "carrier" and deleted the word
"subsidiary'" Specifically, OPM noted

            Some of the carriers had problems with the term "parent company"
            since they thought this implied groups could be SSSGs even though
            a legal entity other than the FEHBP carrier provides the coverage.
            They said the use of the words "parent company" and "subsidiary"
            creates confusion about intent of the proposed policy.

            One respondent said the word "subsidiary" presented a problem
            because it typically refers to a separate and distinct legal entity.
            They said the wording would create uncertainty about whether
            groups who are not customers of the carrier could in some instances
            be considered SSSGs. They propose amending the languag'j by
            changing "parent company" to "carrier" and striking out the word
            "subsidiary,"

            One carrier said that our description appears to encompass a
            carrier's sister corporations which are separate legal entities and.
            potentially. not contracted with OPM as approved carriers. They do
            not believe it is the intent to cross into separate legal entities even
            between commonly owned corporations to select potential SS8Gs.

            We agree tochallge "Parent Companv" to "Carrier" and st.rike oill
            the word "subsidiary~



1   Sec f:j£. Comment letter dated March :i, 2005 attached hereto as Exhibit E.
           Melissa D. Brown
           August] 8, 2010
           Page 6

           See OPM Carrier Letter No. 2006·] 1 attached hereto as Exhibit F. (emphasis

           added)


                  OP1\1's revisions in response to eClmmcnts demonstrate the agency's clear
           intent, consistent with and as required by its regulations, to exclude from
           consideration as an SSSG those groups that are not customers of the Carrier that
           contracts with OPM. The clarified instructions remain to address situations where
           a group customer of a separate line of business, operated as a division withiull
           single carrier, could be excluded from SSSG eligibility. They do not seek to expand
           the CDntractual and regulatory definition of 88SGs. The instructions make clear
           that a determination as to whether a program is a separate line of business is made
           as with respect to the operations "of a carrier."

                  Therefore, the "separate line ofhusiness" instruction - which inquires into
           whether separate staffs are used {elr certain activities within the supposedly
           separate line of business .. cannot he applied to a subsidiary of the carrier that
           contracts with OPM. The fact that the carrier that contracts with OPM also
           performs administrative services for the subsidiary, or vice versa, does not create a
           different result. The provision of administrative services by a corporate parent to
           an affiliate is very common in the health plan and other industries. Such
           arrangements do not affect the legal separateness of the related parties. That the
           same staff may perform certain functions for both LIC and LHS is irrelevant to
           whether UNM can be an SSSG of LHS. Thus, UNM's ineligibilitv tg.l!e!l}!SSSG
           does not depend on satisfaction of the criteria OPM has established for determining
           if a progralll\Yltniflllslllgle companv can be deemed a "separate line oLbllS1t1eSS,"
           A different conclu,~ion would not only violate the FEHBP regulations and the
           Standard Contract, but would radically alter the premises of health plans'
           participation in the FEHBP. This is true, not only for regional plans like LHS, but
           also for major national insurance companies that have many different subsidiaries
           that are licensed as insurers and as health maintenance organizations, often
           operating within the same states.

                 As evidenced by the foregoing, OPM recognizes that the carrier with which it
           contracts under the FEHBP and the carrier's affiliate(s) are separate legal entities
           and only group customers oIthe FEHBP carrier are eligible for SSSG consideration.
           UNM, therefore, cannot be an SSSG since it did not contract with LHS for llOalth
           benefits coverage in 2008.

                         2. I.fI$:m<lJ,ICi\re                            S~p:l.r:lte and        Distinct Legal Entities

                 LHS and LIC are separate and distinct legal entities LHS is incorporated as
           a New Mexico COJ1lOration and does business using the name Lovelace Health Plan.
           See LHS Articles of Incorporation attached as Exhibit G. LHS IS lIcensed by till!


(ro...... ('{1 & Moring LLfl ....... ww.C(QweIL(.1r,1 •   Wa~llington,   DC • New York. San Frandscc ,..   lo~   Angeles .,   Ofdr~e   County •   An~:hQfi~ge   • Lon(j,);)   il:   8rus"e-h

       l'vlehssa D. Brown
       August 18, 2010
       Page 7

       New Mexico Public Regulation Commission, Insurance Division as a health
       maintenance organization. See LHS Certificate of Authority attached hereto as
       Exhibit H. LHS has contract<~d with OI'M as an FEHSI' contractor since 1981. A
       copy of pertinent pages of LHS' community rated contract with OI'M contract are
       attached as Exhibit 1. A copy of pertinent pages from the 2008 LllS FEHBI'
       brochure is attached as Exhibit ,r.

               LIC is a separately incorporated New Mexico corporation. See LIC Articles of
       Incorporation attached as Exhibit K. LIC is licensed by the New Mexico Public
       Hegulation Commission, Insurance Division as a life and health insurer, See L1C
       Certifi.cate of Authority attached hereto as Exhibit L. LIC is not an FEllBI'
       contractor.

              As separately licensed companies, LHS and LIC are each subject to separate
       chapters of the New Mexico Insurance Code. As a health maintenance organization,
       LHS is primarily governed by N.M. Stat. Ann. § 5~JA-46-1 et. seq. As a life and
       health insurer, LIC is governed by separate licensure requirements under a range
       of provisions, including N.t'v!. Stat. Ann. § 59A-20-1 (regulating life insurance
       contracts) and N.M. Stat. Ann. § 59A-22-1 et seq. (regulating health insurance
       contraets). Each submits separate sets of audited and certified financial
       st8toments, attached hereto as Exhibits M (LHS) and N (LIC), Each company is
       also appropriately capitalized i.n accordance with New l\1exico law.

              As demonstrated by the foregoing, LHS and LIC are separately incorporated
       and licensed legal entlties with their own respective business. Therefore, based on
       the FEHB Act, FEHBAR, O1'M Standard Contract, and 01'1'1'1 rate instructions, a
       group that contracts with LlC, such as UNJ\l, is not eligible to be an SSSG under
       LHS' contract with O1'M, As a result, the Draft Report's finding and recommended
       adjustment for based on UNJ\1 are erroneous. LHS correctly identified its 2008
       SSSGs as Western Teamsters and Corncast, and the FEIlBPis not due a rate
       adjustment for that year.




CroweH &   Mor;n~   LlP • WIVW.'ft.lwe-U,c.am •   Washingto~',   DC • Ne.... Yo(k • San Fr,3m::isCo • Lo, Allg{'-1es _ Orange Count)' _ AndlQPI!V' _ Lot1dQI1 • Brussels
        Melissa D. Brown
        August 18. 2010
        Page 8


        Il.        Conclusion

              LHS acknowledges that $841,648 sh<)uld be returned to the FEHBP for
        contract year 200~l. LHS disputes that it engaged in defective pricing in contract
        year 2008 and that any adjustment is due the FEHEP for that year.

              If you have any questions regarding this correspondence, please contact me
        at 202 (j24-2820.

                                                            Sincerely,

                                                            (J)~~
                                                            Arthur N. Lerner

        enclosures

        cc: Angela Martinez
            Christine Rinn




(rQwell &. /;i,oring lLP • W"WW,CfQw",lL(om _ Washington, DC • New York _ San   F"ranc~sco   _ Los AngellO'> _ Orange- County _ Anchorage. london. BnJ....ds