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 2013-10-10.

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 Lovelace Health Plan



                                           Report No. 1C-Q1-00-13-011

                                          Date: October 10, 2013




                                                      -- CAUTION --
This audit report has been distributed to Federal officials who are responsible for the administration of the audited program. This audit
report may contain proprietary data which is protected by Federal law (18 U.S.C. 1905). Therefore, while 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.
                                                     AUDIT REPORT



                                   Federal Employees Health Benefits Program
                                Community-Rated Health Maintenance Organization
                                              Lovelace Health Plan
                                    Contract Number CS 1911 - Plan Code Q1
                                           Albuquerque, New Mexico



                 Report No. 1C-Q1-00-13-011                                           Date:       10/10/13




                                                                                      Michael R. Esser
                                                                                      Assistant Inspector General
                                                                                        for Audits



                                                      -- CAUTION --
This audit report has been distributed to Federal officials who are responsible for the administration of the audited program. This audit
report may contain proprietary data which is protected by Federal law (18 U.S.C. 1905). Therefore, while 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.
                                EXECUTIVE SUMMARY




                       Federal Employees Health Benefits Program
                    Community-Rated Health Maintenance Organization
                                  Lovelace Health Plan
                        Contract Number CS 1911 - Plan Code Q1
                               Albuquerque, New Mexico


         Report No. 1C-Q1-00-13-011                            10/10/13
                                                         Date:_____________________


The Office of the Inspector General performed an audit of the Federal Employees Health
Benefits Program (FEHBP) operations at Lovelace Health Plan (Plan). The audit covered
contract years 2010 through 2012, and was conducted at the Plan’s office in Albuquerque, New
Mexico.

This report questions $5,056,088 for inappropriate health benefit charges to the FEHBP in
contract years 2010 and 2012, including $111,985 for lost investment income through
September 30, 2013. We found the FEHBP rates were developed in accordance with applicable
laws, regulations, and the Office of Personnel Management’s Rate Instructions to Community-
Rated Carriers for 2011.

For contract year 2010, we determined that the FEHBP rates were overstated by $560,536 due to
defective pricing. More specifically, the Plan did not apply the correct step-up factor to calculate
the FEHBP rates.

For contract year 2012, we determined that the FEHBP rates were overstated by $4,383,567 due
to defective pricing. More specifically, the Plan did not apply the correct SSSG discount to the
FEHBP rates.


                                                 i
Consistent with the FEHBP regulations and contract, the FEHBP is due $111,985 for lost
investment income, calculated through September 30, 2013, on the defective pricing finding. In
addition, the contracting officer should recover lost investment income on amounts due for the
period beginning October 1, 2013, until all defective pricing amounts have been returned to the
FEHBP.




                                               ii
                                                        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 ............................................................................................. 8

IV. MAJOR CONTRIBUTORS TO THIS REPORT.......................................................... 10

      Exhibit A (Summary of Questioned Costs)

      Exhibit B (Defective Pricing Questioned Costs)

      Exhibit C (Lost Investment Income)

      Appendix (Lovelace Health Plan’s May 21, 2013, response to the draft report)
                     I. INTRODUCTION AND BACKGROUND 


Introduction

We completed an audit of the Federal Employees Health Benefits Program (FEHBP) operations
at Lovelace Health Plan (Plan). The audit covered contract years 2010 through 2012 . The audit
was conducted pursuant to the provisions ofContmct CS 1911 ; 5 U.S.C. Chapter 89; and 5 Code
of Federal Regulations (CFR) Chapter 1, Pmi 890. The audit was perf01med 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 Healthcm·e and Insurance Office. The provisions of the Federal Employees Health
Benefits Act m·e implemented by OPM through regulations codified in Chapter 1, Prui 890 of
Title 5, CFR. Health insurance coverage is provided through contracts with health insurance
caniers who provide service benefits, indemnity benefits, or comprehensive medical services.

Community-rated caniers pa1iicipating in the FEHBP ru·e subj ect to vru·ious federal , state and
local laws, regulations, and ordinances. While most cmTiers are subj ect to state jurisdiction,
many are fmiher subject to the Health Maintenance Organization Act of 1973 (Public Law 93 ­
222), as amended (i.e., many cormmmity-rated cmTiers are federally qualified) . In addition,
pruiicipation in the FEHBP subj ects the caniers to the Federal Employees Health Benefits Act
and implementing regulations promulgated by OPM.
                                                            FEHBP Contracts/Members 

The FEHBP should pay a market price rate,                          March 31 

which is defined as the best rate offere d to
either ofthe two groups closest in size to
the FEHBP. In contracting with
commlmity-rated caniers, OPM relies on
canier compliance with appropriate laws
and regulations and, consequently, does not
negotiate base rates. OPM negotiations
relate primarily to the level of coverage and
other unique features of the FEHBP.

The chait to the right shows the number of
FEHBP contracts and members rep01ied by
the Plan as of March 31 for each contract
year audited.




                                                 1

The Plan has participated in the FEHBP since 1981 and provides health benefits to FEHBP
members in the state of New Mexico. The last audit of the Plan conducted by our office was in
2010, and covered contract years 2007 through 2009. All findings from that audit have been
resolved.

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 for review and
comment. The Plan’s comments were considered in preparation of this report and included, as
appropriate, in 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 government                      $100
auditing standards. Those standards require that                    $80




                                                      Millions
we plan and perform the audit to obtain
                                                                    $60
sufficient, appropriate evidence to provide a
reasonable basis for our findings and                               $40
conclusions based on our audit objectives. We                       $20
believe that the evidence obtained provides a                        $0
reasonable basis for our findings and                                      2010      2011         2012
                                                                 Revenue   $95.0     $98.3        $77.1
conclusions based on our audit objectives.

This performance audit covered contract years
2010 through 2012. For these contract years, the FEHBP paid approximately $270.4 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’s Rate Instructions to Community Rated
Carriers (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, enrollment,
and claims 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 during December 2012 in Albuquerque, New Mexico.
Additional audit work was completed at our offices located in Washington, D.C. 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 the rate instructions 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
             III. AUDIT FINDINGS AND RECOMMENDATIONS
Premium Rate Review

1. Defective Pricing                                                                 $4,944,103

  The Certificates of Accurate Pricing Lovelace Health Plan (Plan) signed for contract years
  2010 and 2012 were defective. In accordance with federal regulations, the FEHBP is
  therefore due a rate reduction for these years. Application of the defective pricing remedy
  shows that the FEHBP is entitled to a premium adjustment totaling $4,944,103
  (see Exhibit A).

  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 conjunction with the rates
  offered to an SSSG. SSSGs are the Plan’s two employer groups closest in subscriber size to
  the FEHBP. If it is found that the FEHBP was charged higher than the market price rate (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 rate.

  2010

  In 2010, the Plan did not apply the correct step-up factor to the FEHBP rates. The Plan could
  not support the membership used in its original FEHBP step-up factor calculation. Therefore,
  we recalculated the step-up factor based on the membership provided by the Plan. As a result,
  we applied a         step-up factor in the FEHBP audited rate development instead of the
  step-up factor that the Plan used. A comparison of our audited line 5 rates to the Plan’s
  reconciled line 5 rates shows that the FEHBP was overcharged $560,536 (see Exhibit B).

  Plan’s Comments (see Appendix):

  The Plan argues they applied the correct step-up factor to the FEHBP rates. The Plan used a
  snap-shot of aggregate census data from March 31, 2009. Due to retro-activity the detailed
  census information can no longer be pulled from their data warehouse. They believe the step-
  up factor should be viewed as correct even though some of the data cannot be reproduced.

  OIG’s Response to Plan’s Comments:

  Per the rate instructions, plans must maintain all supporting documents related to the rate
  developments for the FEHBP and SSSGs. The Plan could not provide original support for the
  membership used in the FEHBP rate development, however, a membership report from
  April 30, 2009 was provided to the auditors. Since the Plan could not support the original
  membership used in the rate development, the auditors used the membership from the support
  provided by the Plan.



                                               5
The Plan argues that th e membership report provided as support includes retro-activity.
However, the rep01i clearly states that the tiered membership is a snap shot as of April30,
2009, and that retro-activity is not included. The Plan said the membership they used was
from March 31 , 2009, w hich is in accordance with the rate instructions. However, the
variance between the unsupp01ied membership used by the Plan and th e April 30, 2009
membership rep01i is larger than om acceptable threshold. Using the m embership fi:om the
April 30, 2009 census rep01i results in a step-up factor of-      compared to the Plan's step­
up factor of-

2012




Our analysis of the rates                                              received an      II
percent discount and             received         all
                                                  percent                discounts given
to                                 are due to the Plan not consistently applying the
conect ~ll"'I..U'-'·"~           pooling charges, and credibility percentages for the
FEHBP and the SSSGs' rates. Om audited rates were developed by using the m ost recent rate
filing for all groups .

The Plan also applied a medical risk a~justment factor to the manual p01iions of the SSSG
rates. The Plan did not supply documentation for this a~just:Inent. Therefore, the medical risk
adjust:Inent factor was changed to 1.00 in om audited rates.

The Plan had originally applied- percent sel-               percent family " other" discount to
the FEHBP in the reconciliation . However, the FEHBP 1s entitled to a discmmt equivalent to
the largest discount given to an SSSG. We recalculated the FEHBP rates using ~
percent discount given to                 and removed the   II   percent self anc- p e rcent
family "other" discount.     compan son of om audited rates to the Plan 's reconciled rates
shows that the FEHBP was overcharged $4,383 ,567 in contract year 2012 (see Exhibit B) .

Plan's Comments (see Appendix):

The Plan states that groups contracting with Lovelace Insmance Company (LINC) are exempt
from the SSSG elimination process due to the following reasons :

    (a) 	                                      cannot be SSSGs because th ey are not customer
                                               ), d.b .a. Lovelace Health Plan, but are


    (b) Only groups that cont:I·act with LHS, " the Canier" are eligible for SSSG 

    consideration . 




                                              6
    (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 LINC and LHS are two distinct and separately licensed corporations.

OIG’s Response to Plan’s Comments

Groups contracting with LINC are not exempt from SSSG consideration due to the following
reasons:

    (a) LINC does not meet the OPM criteria to be a separate line of business. According to
    OPM’s definition of separate lines of business in the 2012 rate instructions, groups that
    are covered under a separate line of business which meet all of the following criteria
    should be excluded from SSSG consideration:

           • 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 information”; and

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

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

    (b) Any group that contracts with LHS and its subsidiaries (excluding separate lines of
    business as established in the 2012 rate instructions above) can be selected as an SSSG.

    According to the 2012 rate instructions, any group with which an FEHB carrier enters
    into an agreement to provide health care services may be an SSSG (including government
    entities, groups that have multi-year contracts, groups having point of service products,
    and purchasing alliances).

    (c) The interpretation that the term “Carrier”, as established in Carrier Letter 2005-11,
    excludes subsidiaries and affiliates 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, LINC must
    be a “separate business division”, must have separate financial accounting with “books
    and records that provide separate revenue and expense information,” and must have a
    “separate work force and separate management involved in the design and rating of the
    healthcare product.” LINC clearly does not have a separate workforce or management,
    since LHS completes all administrative work for LINC and LINC’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 groups from
                                              7
      SSSG eligibility. As discussed above, LINC does not meet the qualifications to be
      considered a separate line of business. Therefore, all LINC groups, if meeting the SSSG
      criteria, can be selected as SSSGs.

      The assumption that OPM 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 LINC are shown as licensed corporations, LINC is a wholly-
      owned subsidiary of LHS. As stated above, OPM 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 healthcare product) and their contracted groups
      from SSSG qualification. As discussed above, LINC does not meet the qualifications to
      be considered a separate line of business. Therefore, all LINC groups, if meeting the
      SSSG criteria, can be selected as SSSGs.

  Recommendation 1

  We recommend that the contracting officer require the Plan to return $4,944,103 to the
  FEHBP for defective pricing in contract years 2010 and 2012.

2. Lost Investment Income                                                       $111,985

  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 in
  contract years 2010 and 2012. We determined that the FEHBP is due $111,985 for lost
  investment income, calculated through September 30, 2013 (see Exhibit C). In addition, the
  FEHBP is entitled to lost investment income for the period beginning October 1, 2013, until
  all defective pricing finding amounts have been returned to the FEHBP.

  Federal Employees Health Benefits Acquisition Regulation 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 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 finding.

                                               8
Recommendation 2

We recommend that the contracting officer require the Plan to return $111,985 to the FEHBP
for lost investment income for the period January 1, 2010, through September 30, 2013. In
addition, we recommend that the contracting officer recover lost investment income on
amounts due for the period beginning October 1, 2013, until all defective pricing amounts
have been returned to the FEHBP.




                                           9
            IV. MAJOR CONTRIBUTORS TO THIS REPORT

Community-Rated Audits Group

                  , Auditor-in-Charge

                 , Auditor



               ., Chief

              , Senior Team Leader




                                        10
                                                                        Exhibit A


                                 Lovelace Health Plan
                              Summary of Questioned Costs



Defective Pricing Questioned Costs


        Contract Year 2010                                  $560,536
        Contract Year 2012                             $4,383,567


        Total Defective Pricing Questioned Costs                       $4,944,103


Lost Investment Income:                                                 $111,985


Total Questioned Costs                                                 $5,056,088
                                                                          Exhibit B

                               Lovelace Health Plan
                        Defective Pricing Questioned Costs


2010
                                               Self        Family
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate

Biweekly Overcharge

To Annualize Overcharge:
   March 31, 2010 Enrollment
   Pay Periods                                        26            26
Subtotal

Total 2010 Questioned Costs                                               $560,536

2012
                                               Self        Family
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate

Biweekly Overcharge

To Annualize Overcharge:
   March 31, 2012 Enrollment
   Pay Periods                                        26            26
Subtotal


Total 2012 Questioned Costs                                              $4,383,567

         Total Defective Pricing Questioned Costs:                       $4,944,103
                                                                                                                            Exhibit C

                                                        Lovelace Health Plan
                                                       Lost Investment Income



  Year                                                2010            2011             2012             30-Sep-2013        Total
Audit Findings:

1. Defective Pricing                                     $560,536                $0     $4,383,567                    $0    $4,944,103


                                Totals (per year):       $560,536              $0       $4,383,567                   $0     $4,944,103
                               Cumulative Totals:        $560,536        $560,536       $4,944,103           $4,944,103     $4,944,103

          Weighted Avg. Interest Rate (per year):            3.188%          2.563%           1.875%            1.500%

                  Interest on Prior Years Findings:              $0          $14,364          $10,510          $37,081         $61,955

                           Current Years Interest:           $8,934              $0           $41,096                 $0       $50,030


    Total Cumulative Interest Calculated Through
                            September 30, 2013:              $8,934          $14,364          $51,606          $37,081        $111,985
                                    APPENDIX




May 21, 2013




Chief, Community-Rated Audits Group
U. S. Office of Personnel Management
Office of the Inspector General
800 Cranberry Woods Drive
Suite 270
Cranberry Township, Pennsylvania 16066

       Re:   Lovelace Health System, Inc. d/b/a Lovelace Health Plan
             Draft Audit Report No. IC-Q1-00-13-011

Dear

       This letter is the response of Lovelace Health System, Inc. d/b/a Lovelace
Health Plan (“LHS”) to the above-referenced draft audit report (the “Draft Report”)
on the Federal Employees Health Benefits Program (“FEHBP”) operations of LHS
for contract years 2010 through 2012.

       The Draft Report contains preliminary findings of defective pricing in
contract years 2010, 2011, and 2012. Specifically, for 2010, the Draft Report claims
that LHS did not apply the correct step-up factor to calculate the FEHBP rates. For
2011, the Draft Report claims that LHS did not apply the correct medical and
pharmacy trend factors to calculate the FEHBP rates. Finally, for 2012, the Draft
Report claims that LHS did not apply the correct discount to the FEHBP that LHS
allegedly gave a similarly sized subscriber group (“SSSG”).

     As discussed below, LHS disputes the Draft Report’s findings and
recommendations with respect to contract years 2010, 2011, and 2012.

I.     Contract Year 2010

       The Draft Report alleges that LHS did not apply the correct step-up factor to
the FEHBP rates. The support for this conclusion is the fact that LHS was not able
to replicate the data used in the step-up calculation. Therefore, the auditors
recalculated the step-up factor using different membership.
                    3
Page 2


        To calculate the step-up factor, LHS used a snap-shot of aggregate censu s
data based on the date of March 31, 2009. The original number of cont r acts a n d
member s provided for this calculation was correct. The formula that was used was
also a pplied correctly. However, du e to r etro-activity the detailed censu s
infor mation can no longer be pu lled from th e LHS dat a war ehou se. vVe believe the
st ep-up factor should be viewed as correct even thou gh some of the data can not be
reproduced .


               Deleted by OIG - Not Relevant to the Final Report



III.   Contract Year 2012

                            12, LHS identified
                            as its SSSGs. The

                                              use t h ey wer e closer m size to
                                              can be a n SSSG under LHS' contract
                                               P M") since n either - was a
customer of LHS .

                                     below,                    do n ot qual~
                                  were n ot cu stomer groups of LHS . Both ­
                                    Insu rance Company ("LINC''), an insurance
compa n y su                      is a separate corpor ate legal entity fr om LHS .
Since                           wer e customer gr oups of the F EHBP carrier - LHS,
neit h er                      e a SSSG under LHS' contract with OPM.

       A 	 Only Customers of the FEHBP Contracting Carrier Can Be SSSGs;
           Customers of a Corporate Subsidiary of the Carrier Cannot Be SSSGs.

       OPM's r ating requirements for the F EHBP, including instr uction s for
identifying th e SSSGs, ar e governed by th e FEHB Act, t h e F EHB Acquisit ion
Regulation ("FEHBAR"), OP M's Stan dard Contract for Commu nity-Rated Health
Mainten a nce Or ganization Carrier s (th e "Standard Contract") and OPM's annual
rate instr uction s .

       The FEHBAR defines the SSSGs as follows:
November 26, 2013
Page 3

         (a) Similarly sized subscriber groups (SSSGs) are a comprehensive
         medical plan carrier's two employer groups that: (1) As of the date
         specified by OPM in the rate instructions, have a subscriber
         enrollment closest to the FEHBP subscriber enrollment; and, (2)
         Use any rating method other than retrospective experience rating;
         and, (3) Meet the criteria specified in the rate instructions issued by
         OPM.

         (b) Any group with which an FEHBP carrier enters into an
         agreement to provide health care services is a potential SSSG
         (including separate lines of business, government entities, groups
         that have multi-year contracts, and groups having point-of-service
         products).

48 C.F.R. § 1602.170-13 (emphasis added).

Thus, under OPM’s regulations for the FEHBP, the SSSGs must be groups of “the
carrier.”

      The term “carrier” is defined in the FEHB Act as follows:

         “[C]arrier" means a voluntary association, corporation, partnership,
         or other nongovernmental organization which is lawfully engaged
         in providing, paying for, or reimbursing the cost of, health services
         under group insurance policies or contracts, medical or hospital
         service agreements, membership or subscription contracts, or
         similar group arrangements, in consideration of premiums or other
         periodic charges payable to the carrier, including a health benefits
         plan duly sponsored or underwritten by an employee organization
         and an association of organizations or other entities described in
         this paragraph sponsoring a health benefits plan[.]

5 U.S.C. § 8901(7) (emphasis added). See also 48 C.F.R. § 1602.170-1.

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

      Based on the foregoing definitions, the term “carrier” as used in the definition
of SSSGs refers to the legal entity that contracts with OPM to offer a health
benefits plan under the FEHBP. The definition of carrier does not include
separately incorporated subsidiaries of the carrier that are distinct legal entities.
November 26, 2013
Page 4

       OPM’s rating instructions regarding SSSGs are consistent with the
definitions discussed above. In this regard, it is critical to distinguish between lines
of business or divisions within a single company, on the one hand, and companies
that are separate and distinct legal entities on the other. OPM itself acknowledged
this distinction when it issued guidance on circumstances when a customer served
by a separate line of business of a carrier could be excluded from SSSG
consideration. After initially proposing guidance that could have resulted in
confusion as to whether customers of a separate legal entity could be treated as
customers of the “carrier” and therefore be eligible to be SSSGs, OPM acknowledged
concerns about its initially proposed guidance, and modified it to remove any
potential ambiguity.

      Specifically, in 2005, in connection with guidance excluding customers of a
separate line of business of a carrier from SSSG eligibility, OPM proposed to define
a separate line of business as follows:

            Groups covered under a separate line of business of a parent
            company that offers an FEHBP product are excluded from
            consideration as an SSSG. To be considered a separate line of
            business all of the following criteria must be satisfied:
            • It must be a separate organizational unit, such as a division or
            subsidiary,
            • It must have separate financial accountability with “books and
            records that provide separate revenue and expense information
            that is used for internal planning and control,
            • It must have a separate work force and separate management
            involved in the design and rating of the healthcare product.

See OPM letter dated February 23, 2005. (emphasis added)

       In response to comments that OPM’s use of the 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 considered SSSGs, OPM modified the
language, changing “parent company” to “carrier” and deleted the word
“subsidiary”. 1 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


1   See e.g., Comment letter dated March 3, 2005.
November 26, 2013
Page 5

         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 language 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 SSSGs.

         We agree to change “Parent Company” to “Carrier” and strike out
         the word “subsidiary.”

See OPM Carrier Letter No. 2005-11. (emphasis added)

       OPM’s revisions in response to comments 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 within a
single carrier, could be excluded from SSSG eligibility. They do not seek to expand
the contractual and regulatory definition of SSSGs. 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.”

       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 of the FEHBP carrier are eligible for SSSG consideration.
                   therefore, cannot be SSSGs since they did not contract with LHS
for health benefits coverage in 2012.

      2. LHS and LINC Are Separate and Distinct Legal Entities.

      LHS and LINC are separate and distinct legal entities. LHS is incorporated
as a New Mexico corporation and does business using the name Lovelace Health
November 26, 2013
Page 6

Plan. LHS is licensed by the New Mexico Public Regulation Commission, Insurance
Division as a health maintenance organization.

      LINC is a separately incorporated New Mexico corporation. LINC is licensed
by the New Mexico Public Regulation Commission, Insurance Division as a life and
health insurer. LINC is not an FEHBP contractor.

       As separately licensed companies, LHS and LINC are each subject to
separate chapters of the New Mexico Insurance Code. Each submits separate sets
of audited and certified financial statements. Each company is also separately
capitalized in accordance with New Mexico law.

       As demonstrated by the foregoing, LHS and LINC are separately
incorporated and licensed legal entities with their own respective business.
Therefore, based on the FEHB Act, FEHBAR, OPM Standard Contract, and OPM
rate instructions, groups that contract with LINC, such as                   , are not
eligible to be an SSSG under LHS’ contract with OPM. As a result, the Draft
Report’s finding and recommended adjustment based on                       is
erroneous. LHS correctly identified its 2012 SSSGs as
            and the FEHBP is not due a rate adjustment for that year.

II.   Conclusion

      As discussed above, LHS disputes the Draft Report’s findings and
recommendations with respect to contract years 2010, 2011, and 2012. LHS
disputes that it engaged in defective pricing for any of those contract years and that
any adjustments are due to the FEHBP for those years.
November 26, 2013
Page 7


      If you have any questions regarding this correspondence, please contact me
at              .

Sincerely,


Ben R. Slocum
Chief Executive Officer
Lovelace Health Plan


cc:
      Chief, Health Insurance Group III


      Actuaries Group, OPM


      Audit Resolution, OPM