oversight

Audit of the Federal Employees Health Benefits Program Operations at Independent Health

Published by the Office of Personnel Management, Office of Inspector General on 2015-08-12.

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

         AUDIT OF THE FEDERAL EMPLOYEES HEALTH
            BENEFITS PROGRAM OPERATIONS AT
                  INDEPENDENT HEALTH
                                           Report Number 1C-QA-00-14-045
                                                   August 12, 2015


                                                             -- 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 (http://www.opm.gov/our-inspector-general), 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 

              Audit of the Federal Employees Health Benefits Program Operations at
                                       Independent Health
Report No. 1C-QA-00-14-045                                                                    August 12, 2015


Why Did We Conduct the Audit?            What Did We Find?

The objectives of our audit were to      This report questions $9,496,680 for inappropriate health benefit
determine if Independent Health          charges to the FEHBP in contract year 2012. The questioned
(Plan) offered the Federal Employees     amount includes $8,969,710 for defective pricing and $526,970
Health Benefits Program (FEHBP)          due the FEHBP for lost investment income, calculated through
premium rates that were based on         July 31, 2015.
complete, accurate and current pricing
data, and that the rates were            For contract year 2012, the Plan did not apply the correct SSSG
equivalent to the Plan’s Similarly       discount to the FEHBP rates. In addition, the Plan did not fully
Sized Subscriber Groups (SSSG), as       credit the FEHBP rates for a state assessment that was included in
provided in Federal Employees            its community rates.
Health Benefits Acquisition
Regulation 1652.215-70(a).               Additionally, we found that the Plan did not maintain original
Additional tests were performed to       source documentation to support its rate development of the
determine whether the Plan was in        SSSGs as required by Section 3.4 of its FEHBP contract.
compliance with the provisions of the
laws and regulations governing the
FEHBP.

What Did We Audit?

Under contract 1933, the Office of the
Inspector General completed a
performance audit of the FEHBP’s
rates offered for contract year 2012.
Our audit fieldwork was conducted
from September 15, 2014 through
September 26, 2014 at the Plan’s
office in Buffalo, New York.




 _______________________
 Michael R. Esser
 Assistant Inspector General
 for Audits
                                                      i
                ABBREVIATIONS

FEHBAR    Federal Employees Health Benefits Acquisition Regulations
FEHBP     Federal Employees Health Benefits Program
IBNR      incurred but not reported
IHA       Independent Health Association
IHBC      Independent Health Benefits Corporation

OIG       Office of the Inspector General
OPM       U.S. Office of Personnel Management
Plan      Independent Health
PPO/POS   Preferred Provider Organization/Point of Service

SSSG      Similarly Sized Subscriber Group




                                ii
IV. MAJOR CONTRIBUTORS TO THIS REPORT
          TABLE OF CONTENTS

                                                                                                                             Page 

          EXECUTIVE SUMMARY ......................................................................................... i 


          ABBREVIATIONS ..................................................................................................... ii 


  I.	     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 ...........................................................................................9 


          3. Records Retention..................................................................................................10 


  IV.	    MAJOR CONTRIBUTORS TO THIS REPORT ..................................................12 


          Exhibit A (Summary of Questioned Costs) 


          Exhibit B (Defective Pricing Questioned Costs) 


          Exhibit C (Lost Investment Income) 


          Appendix (Independent Health’s March 9, 2015 response to the draft report) 


          REPORT FRAUD, WASTE, AND MISMANAGEMENT
IV. MAJOR CONTRIBUTORS
            I. BACKGROUND
                       TO THIS REPORT

This final report details the findings, conclusions, and recommendations resulting from our audit
of the Federal Employees Health Benefits Program (FEHBP) operations at Independent Health
(Plan).

The audit covered contract year 2012 and was conducted at the Plan’s office in Buffalo, New
York. The audit was conducted pursuant to FEHBP contract CS 1933; 5 United States Code
Chapter 89; and 5 Code of Federal Regulations Chapter 1, Part 890. The audit was performed by
the U.S. Office of Personnel Management’s (OPM) Office of the Inspector General (OIG), as
established by the Inspector General Act of 1978, as amended.

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, and is administered by OPM’s
Healthcare and Insurance Office. Health insurance coverage is provided through contracts with
health insurance carriers that 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                      FEHBP Contracts/Members
OPM.                                                                    March 31



The FEHBP should pay a premium rate that is
equivalent to the best rate given to either of the       25,000

two groups closest in size to the FEHBP. In              20,000
contracting with community-rated carriers, OPM
                                                         15,000
relies on carrier compliance with appropriate
laws and regulations and, consequently, does not         10,000
negotiate base rates. OPM negotiations relate
                                                          5,000
primarily to the level of coverage and other
unique features of the FEHBP.                                0
                                                                             2012
                                                       Contracts            13,817
The chart to the right shows the number of             Members              24,703

FEHBP contracts and members reported by the
Plan as of March 31, 2012.


                                                 1                         Report No. 1C-QA-00-14-045
The Plan has participated in the FEHBP since 1983 and provides health benefits to FEHBP
members in Western New York. The last audit conducted by our office was a rate reconciliation
audit and covered contract year 2013. There were no issues identified during that audit.

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 are included,
as appropriate, as the Appendix to the report.




                                                 2                          Report No. 1C-QA-00-14-045
IV. OBJECTIVES,
II.  MAJOR CONTRIBUTORS
                SCOPE, ANDTO THIS REPORT
                          METHODOLOGY

 Objectives
 The primary objectives of the audit were to determine if the FEHBP premium rates were
 developed using complete, accurate and current data, and were equivalent to the Plan’s Similarly
 Sized Subscriber Groups (SSSG), as provided in Federal Employees Health Benefits Acquisition
 Regulation (FEHBAR) 1652.215-70(a). Additional tests were performed to determine whether
 the Plan was in compliance with the provisions of the laws and regulations governing the
 FEHBP.

 Scope
 We conducted this performance audit in accordance with generally accepted government
 auditing standards. Those standards require that we plan and perform the audit to obtain
 sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions
 based on our audit objectives. We believe that the evidence obtained provides a reasonable basis
 for our findings and conclusions based on our audit objectives.

 This performance audit covered contract year 2012. For this year, the FEHBP paid
 approximately $115 million in premiums to the Plan.

 OIG audits of community-rated carriers are designed to test carrier compliance with the FEHBP
 contract, applicable laws and regulations, and OPM 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 SSSGs were selected;

         the rates charged to the FEHBP were developed using complete, accurate and current
          data, and were equivalent to the best rate given 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                          Report No. 1C-QA-00-14-045
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 Buffalo, New York in September
2014. Additional audit work was completed at our office in Jacksonville, Florida.

Methodology
We examined the Plan’s Federal rate submission and related documents as a basis for validating
its Certificate of Accurate Pricing. In addition, we examined the rate development
documentation and billings to other groups, such as the SSSGs, to determine if the FEHBP rates
were reasonable and equitable. Finally, we used the contract, the FEHBAR, 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                    Report No. 1C-QA-00-14-045
III. AUDIT FINDINGS AND RECOMMENDATIONS
 Premium Rate Review

 1. Defective Pricing                                                                  $8,969,710

   The Certificate of Accurate Pricing Independent Health (Plan) signed for contract year 2012
   was defective. In accordance with Federal regulations, the FEHBP is therefore due a rate
   reduction for this year. Application of the defective pricing remedy shows that the FEHBP is
   due a premium adjustment of $8,969,710 (see Exhibit A).

   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 are complete, accurate, and current.                   The FEHBP is due a
   Furthermore, FEHBAR 1652.216-70 states that the subscription                rate reduction of
   rates agreed to in the contract shall be equivalent to the subscription       $8,969,710 for
   rates given to the community-rated carrier’s SSSGs as defined in           defective pricing in
   FEHBAR 1602.170-13. SSSGs are the Plan’s two employer                      contract year 2012.
   groups closest in subscriber size to the FEHBP. If it is found that
   the FEHBP rates were increased because of defective pricing or
   defective cost or pricing data, then the rates shall be reduced in the amount by which the price
   was increased because of the defective data or information.

   2012

   The Plan selected             and                                         (         ) as SSSGs
   for contract year 2012. We disagree with the Plan’s selection of             as an SSSG. We
   selected                               (      ) because it was closest in subscriber size to the
   FEHBP. Our analysis shows that neither              nor the FEHBP received a discount, but
            received a      percent discount. Since the FEHBP is entitled to a discount equivalent
   to the largest discount given to an SSSG, we applied         ’s     percent discount to the
   FEHBP’s rates.

          ’s     percent discount is due to the following:

    Contrary to its filed Article 43 Large Group Rate Manual (rating methodology), the Plan
     used 16 months of claims experience to develop          ’s rates. The Plan’s filed rating
     methodology calls for the use of one or two years of claims experience in rating large
     groups, as determined by the number of enrolled subscribers. Thus, 16 months of claims
     experience is inconsistent with the Plan’s rating methodology.




                                              5                             Report No. 1C-QA-00-14-045
 The Plan used a step up factor of     in            ’s rate development. However, based on
  enrollment data provided by the Plan,           ’s step up factor should have been    .

 The Plan did not use the correct retention or pooling factors as prescribed in its rating
  methodology. The retention factor should have been          percent, instead of        percent.
  The pooling factor should have been       percent, instead of     percent.

 The Plan did not provide sufficient documentation to support           ’s benefit adjustment
  differences for the Encompass, preferred provider organization and preferred provider
  select benefit plans. As a result, all factors less than 1.00 were moved to 1.00 in our
  audited rate development.

 The Plan reduced            ’s rates by applying an arbitrary underwriting adjustment of
  percent.

In reviewing the FEHBP’s reconciled rates, we also found that the Plan did not appropriately
credit the FEHBP rates for a state assessment that was included in its community rates.

We calculated our audited FEHBP rates by applying           ’s     percent discount and
correcting the state assessment credit calculation. A comparison of our audited line 5 rates to
the Plan’s reconciled line 5 rates shows that the FEHBP was overcharged $8,969,710 (see
Exhibit B).

Plan’s Comments (see Appendix):

The Plan disagrees with the selection of          as an SSSG for 2012 and contends that:

	 Federal regulations apply by carrier. The Plan asserts that         is covered under a
   separate carrier than that of the FEHBP.          is covered under Independent Health
   Benefits Corporation (IHBC) while the FEHBP is covered by Independent Health
   Association (IHA). The Plan argues that Federal regulations do not permit OPM to use an
   SSSG of a different carrier as a basis for imposing a rate reduction.

	 OPM’s proposed 2015 legislation would change the definition of SSSGs, but the
   regulation has not yet been adopted and it may not be imposed retroactively. The Plan
   asserts that OPM currently does not have existing authority to require a carrier to include
   subscriber groups of a subsidiary carrier in determining SSSGs.

	           is new business subject to the new business exclusion. While          employees
     were enrolled with IHBC as of January 1, 2010,          joined with two other entities to
     secure group coverage effective January 1, 2012. The rating for the larger group was
     developed based on an aggregation of the number of eligible employees for the three
     groups.

	 New York’s regulatory requirements restrict the application of a subscriber group covered
   by a non-health maintenance organization (HMO) as an SSSG for community rated

                                             6	                   Report No. 1C-QA-00-14-045
   FEHBP coverage issued by an HMO. Even if affiliated, HMO and non-HMO carriers in
   New York are required to calculate rates based upon distinct rating pools, which are
   subject to distinct regulations that have a significant impact on premium rates and risk
   selection. The Plan also argues that it may not legally apply discounts to its community
   rated products.

	 48 CFR 1602.170-13 (d) states that “OPM shall determine the FEHBP rate by selecting
   the lower of the two rates derived by using rating methods consistent with those used to
   derive the SSSG rates.” The Plan believes this regulation does not permit the FEHBP
   community rates to benefit from an experience rated SSSG discount. OPM would be
   required to recalculate the FEHBP rates according to the experience rating methodology
   used for

	 The auditors did not use the correct retention and pooling factors. Per       ’s request
   for proposal, there were more than 3,000 eligible employees potentially enrolling with the
   Plan. The Plan believes this is the appropriate enrollment figure to use when determining
   the retention and pooling costs and factors.

	 The auditors should not have changed the benefit factors under 1.00 to a factor of 1.00.
   The Plan feels that this is inappropriate and provided additional documentation to support
   its benefit adjustment calculation.

	 An underwriting adjustment is not akin to a discount and its rate manual permits
   underwriting adjustments. Underwriting adjustments allow a carrier to determine a proper
   rate for each experience rated account based on the specific attributes of that group. The
   application of an underwriting adjustment to a community rated product is prohibited by
   New York State law.

	 It has fully credited the FEHBP for state assessments including the New York Graduate
   Medical Education Assessment and Bad Debt and Charity Care surcharges and
   assessments.

The Plan acknowledges that:

	 16 months of claims data was used in its rating of        and the audited calculation used
   12 months.

	 The auditor calculated the conversion factor correctly.

OIG’s Response to the Plan’s Comments:

OIG’s selection of         as an SSSG

	 The Plan did not provide sufficient documentation to support its position that the FEHBP
   and the SSSGs are covered by two separate carriers. IHA is the parent company which
   contracts with OPM and is licensed for HMO products. IHBC is a wholly-owned

                                           7	                   Report No. 1C-QA-00-14-045
     subsidiary of the Plan and is used to sell its Article 43 business or Preferred Provider
     Organization/Point of Service (PPO/POS) products. The OIG agrees that the state of New
     York has legislation and licensing requirements governing HMOs and PPO/POS products.
     Hence the reason the Plan formed IHBC to sell insurance products. However, in order for
     IHBC employer groups to be excluded for SSSG purposes, IHBC would need to meet the
     separate lines of business definition and all of the following criteria would need to be met:

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

b.	 It must have a separate financial accounting with “books and records that provide separate
    revenue and expense information; and

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

The Plan did not provide evidence that these three requirements were all met.

	 OPM is not retroactively imposing a 2015 regulation. The OIG’s criteria for selecting
           as an SSSG are the 2012 rate instructions. It provides that all groups meeting
   specific criteria can be an SSSG with certain exceptions. The 2012 rate instructions do
   not specifically exclude subscriber groups covered by a separate carrier that is an affiliate
   or subsidiary of the carrier issuing the FEHBP plan. Therefore,           is an acceptable
   SSSG.

	           is not a new group for contract year 2012. The 2012 rate instructions exclude a
     new group (starting its first contract year between July 2, 2011 and July 1, 2012) and a
     second year group (a group starting its second contract year between July 2, 2011, and
     July 1, 2012) that normally would be rated by adjusted community rating.            ’s first
     contract with the Plan began January 1, 2010. The addition of new enrollees does not
     meet the criteria for a new group.

	 Also, the plan did not provide sufficient documentation supporting the 2012 policy for
           and the new enrollees. Each new entity associated with          was rated
   separately. The enrollment used in the Plan’s         rate development did not reflect the
   statements in the request for proposal.

	 OPM expects a carrier to use the same rating method for the FEHBP as it uses for SSSGs.
   However, different rating methods are acceptable if the carrier rates an SSSG using a
   method consistent with the carrier established policies. The Plan has distinct and well-
   documented rating methodologies for HMO and non-HMO employer groups, as regulated
   by the state of New York. These different rating methodologies are valid and accepted by
   OPM. The Plan rated           and the FEHBP appropriately and in accordance with its
   internal rating policies.

	 The Plan did not provide sufficient evidence to support its statement that it may not legally
   apply discounts to its community-rated products.

                                              8	                     Report No. 1C-QA-00-14-045
         ’s discount calculation

  	 The Request for the Proposal the Plan referenced states that         had 3,500 to 3,600
     employees. Of the estimated 3,500 employees,            covered 2,328 employees at the
     time the group was rated. This figure was used in the auditor’s rate calculation for
              We found no support in any other rating documents provided during our site visit
     to show that total group membership was greater than 3,000.

  	 After reviewing the documentation submitted by the Plan, the auditors concluded that the
     Plan did not provide sufficient documentation to support its experience period and renewal
     period benefit adjustment factors. As a result, all factors less than 1.00 were moved to
     1.00 in our audited rate development.

  	 OPM requires the Federal group net-to-carrier rates to be a least equivalent to the rates for
     the SSSGs. Therefore, we expect the Federal group to receive at least the largest rate
     discount and any other advantage given to either SSSG. The underwriting adjustments
     stated in the Plan’s underwriting manual are subjective. The Plan did not provide any
     verifiable basis for acceptance. Therefore, the underwriting adjustments are considered to
     be discretionary discounts to be applied to the FEHBP’s rates.

  	 The Plan did not appropriately credit the FEHBP for the New York state assessment. The
     Plan used 2012 FEHBP enrollment and premium data and the 2013 tax assessment to
     develop the FEHBP’s tax credit. These time periods of enrollment, premium and tax
     assessment data do not reflect the same time period used to develop the community rates.
     The audited FEHBP tax credit was recalculated using data which reflects the same time
     period as the community rates.

  Recommendation 1

  We recommend that the contracting officer require the Plan to return $8,969,710 to the
  FEHBP for defective pricing in contract year 2012.

2. Lost Investment Income 	                                                               $526,970

  In accordance with FEHBP regulations and the contract between OPM and the Plan, the 

  FEHBP is entitled to recover lost investment income on the defective 

  pricing finding in contract year 2012. We determined the FEHBP is 
    The FEHBP is due
  due $526,970 for lost investment income, calculated through July 31,     lost investment
  2015 (see Exhibit C). In addition, the FEHBP is entitled to lost          income on the
  investment income for the period beginning August 1, 2015, until all    defective pricing
  defective pricing amounts have been returned to the FEHBP.                finding in the
                                                                              amount of $526,970
  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 was not complete, accurate, or current as certified in its Certificate of 


                                               9	                   Report No. 1C-QA-00-14-045
  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 disagrees with the defective pricing finding and therefore believes that the FEHBP
  did not experience a loss of investment income.

  Recommendation 2

  We recommend that the contracting officer require the Plan to return $526,970 to the FEHBP
  for lost investment income, calculated through July 31, 2015. We also recommend that the
  contracting officer recover lost investment income on amounts due for the period beginning
  August 1, 2015, until all defective pricing amounts have been returned to the FEHBP.

3. Records Retention

  The Plan did not comply with the records retention clause of its FEHBP contract. After
  several requests, the Plan failed to provide sufficient and appropriate documentation to
  support        ’s 2012 rate development. Specifically, incurred but not reported (IBNR)
  factors to support the IBNR total added to paid claims and benefit adjustment factors were not
  supported. Although we ultimately developed audited rates using alternative methods, the
  FEHBP contract requires the Plan to retain and make available all records supporting its rate
  submissions for a period of six years after the end of the contract term to which records relate.

  Plan’s Comments (see Appendix):

  The Plan contends the draft report did not include enough information to provide an
  appropriate response.

  Recommendation 3

  We recommend that the contracting officer assess the maximum penalty allowed in the
  contract between OPM and the Plan for the Plan’s non-compliance of the records retention
  clause.

  In addition, we recommend that the contracting officer inform the Plan that:

   	 OPM expects it to fully comply with the records retention provision of the contract and
      all applicable regulations;

                                             10 	                   Report No. 1C-QA-00-14-045
	 it should maintain copies of all pertinent rating documents that show the factors and
   calculations the Plan uses in developing the actual rates for the FEHBP and the groups
   closest in size to the FEHBP for each unaudited year; and

	 the applicable community-rated performance factors described in FEHBAR 1609.7101-2
   will be enforced if information requested during an audit is not provided.




                                        11 	                  Report No. 1C-QA-00-14-045
IV. MAJOR CONTRIBUTORS TO THIS REPORT

COMMUNITY-RATED AUDITS GROUP

        , Auditor-in-Charge




          , Senior Team Leader

           , Chief




                                 12   Report No. 1C-QA-00-14-045
                                   EXHIBIT A




                              Independent Health
                           Summary of Questioned Costs



Defective Pricing Questioned
Costs


         Contract Year 2012                         $8,969,710


         Total Defective Pricing Questioned Costs                      $8,969,710


Lost Investment Income                                                   $526,970


Total Questioned Costs                                                 $9,496,680




                                                         Report No. 1C-QA-00-14-045
                                    EXHIBIT B




                                 Independent Health
                          Defective Pricing Questioned Costs


Contract Year 2012
                                                Self     Family
FEHBP Line 5 - Reconciled Rate              $            $
FEHBP Line 5 - Audited Rate                 $            $

Bi-weekly Overcharge                        $            $

To Annualize Overcharge:
   March 31, 2012 enrollment
   Pay Periods                                 26           26
Subtotal                                   $2,742,789   $6,226,921     $8,969,710

Total Defective Pricing Questioned Costs                               $8,969,710




                                                               Report No. 1C-QA-00-14-045
                                                           EXHIBIT C


                                                       Independent Health 

                                                      Lost Investment Income



                                                                  2012       2013       2014       2015
Year
Audit Findings:
                                                                                                            Total
1. Defective Pricing                                         $8,969,710        $0         $0          $0       $8,969,710


                                     Totals (per year):      $8,969,710         $0         $0         $0       $8,969,710
                                    Cumulative Totals:       $8,969,710 $8,969,710 $8,969,710 $8,969,710       $8,969,710

                          Avg. Interest Rate (per year):        1.875%     1.563%     2.063%     2.250%

                       Interest on Prior Years Findings:            $0    $140,152   $185,000   $117,727        $442,879

                                Current Years Interest:        $84,091         $0         $0          $0          $84,091

Total Cumulative Interest Calculated Through July 31,
                                               2015:           $84,091     140,152   $185,000   $117,727
         526,970

                                      APPENDIX

March 9, 2015


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:     Draft Audit of Independent Health Association Report No. IC-QA-000140045

Dear          ,

       I am writing in response to the draft audit report issued to Independent Health
Association (“IHA”) dated January 28, 2015. The draft report questions IHA’s health benefit
charges to the Federal Employee Health Benefit Program (“FEHBP”) for calendar year 2012.
IHA believes that its FEHBP premium rates for 2012 were appropriately calculated. The audit
findings are inconsistent with federal law and the calculations include errors.

      A. Federal Law requires OPM to Use an SSSG Covered by the Same Carrier

        The 2012 FEHBP policy was issued by IHA. The draft audit report suggests that IHA
should have considered                               (“               ”) to be a similarly sized
subscriber group (“SSSG”) and further suggests that FEHBP was entitled to a price reduction as
a result of a perceived discount in the                  pricing.                    is a group
covered by a separate and distinct carrier, Independent Health Benefits Corporation (“IHBC”).
Federal law does not permit OPM to use an SSSG of a different carrier as a basis for imposing a
rate reduction. This issue was raised in a letter from Mark Johnson to                     dated
October 1, 2014, copy attached, but subsequent regulatory developments make this even more
clear. See Exhibit A.

      1.	 The SSSG must be Covered by the Same Carrier and IHA and IHBC are Separate
          Carriers

        FEHBP premium rates must include any discounts that a carrier has applied to its SSSGs
as defined in FEHBAR 1602.170-13. See 48 CFR 1652.216-70(b)(2)(ii). SSSGs are a carrier’s
two employer groups that have subscriber enrollment closest to the FEHBP enrollment. See 48
CFR 1602.170-13(a). “Any group with which an FEHB 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
contracts).” See 48 CFR 1602.170-13(b).

                                                                  Report No. 1C-QA-00-14-045
        The draft audit asserted that IHA should have selected an SSSG from IHBC’s book of
business and that premium refunds are due to OPM as a result. However, federal regulations
require SSSGs to be selected from groups which obtain coverage through the same carrier. See
48 CFR 1602.170-13. For purposes of the FEHBP, “carrier” is defined in 48 CFR 1602.170-1 as
follows:

           “Carrier means a voluntary association, corporation, partnership, or other
           nongovernmental organization which is lawfully engaged in providing,
           delivering, paying for, or reimbursing the cost of health care services under
           group insurance policies or contracts, medical or hospital service agreements,
           membership or subscription contracts, including a health maintenance
           organization, a nonprofit hospital and health service corporation, or any other
           entity providing a plan of health insurance, health benefits or health services,
           in consideration of premiums or other periodic charges payable to the carrier.”

        IHA and IHBC are separate carriers which are licensed by separate New York State
regulatory agencies and subject to distinct regulatory requirements. IHA is a separate corporate
entity from IHBC. IHA is a health maintenance organization. IHBC is a nonprofit hospital and
health service corporation. IHA operates pursuant to a certificate of authority issued by the New
York State Department of Health pursuant to Article 44 of the New York Public Health Law. In
contrast, IHBC operates pursuant to a license issued by the New York State Department of
Financial Services pursuant to Article 43 of the New York Insurance Law. Importantly, IHA, as
an HMO, and IHBC, as a nonprofit hospital and health services corporation, are subject to
distinct regulatory requirements that have a significant impact on premium rates and risk
selection.

       Federal regulations clearly apply SSSG by carrier, although SSSGs may be selected from
a separate line of business. Federal regulations do not require carriers to consider the rates of a
group policy issued by a separate carrier even if they are in an apparent affiliate relationship.
Because IHA and IHBC are separate carriers,                      may not be used as a basis for
determining if IHA issued a defective rate for 2012.

   2.	 OPM has proposed a regulation which would change the definition of SSSGs, but
       the regulation has not yet been adopted and it may not be imposed retroactively

        On January 7, 2015, OPM issued a notice of proposed rulemaking which proposes to
change the definition of SSSGs to include subscriber groups covered by a separate carrier that is
an affiliated subsidiary of the carrier issuing the FEHBP plan, subject to certain limitations. We
have attached a copy of the full current definition of SSSG and a copy of the proposed revised
definition. See Exhibit B. Comments on the proposed regulation are due back to OPM by
March 9, 2015.

        As discussed above, OPM does not have existing authority to require a carrier to include
the subscriber groups of a subsidiary carrier in determining SSSGs. OPM’s proposed regulation
is further proof that a regulatory change is needed to require a carrier to consider subscriber



                                                                    Report No. 1C-QA-00-14-045
groups of a separate carrier which is a subsidiary in selecting a SSSG. The regulation has not yet
been adopted, and the proposed approach certainly may not be applied retroactively to an audit
of rates established for 2012.

        Notably, the proposed regulation would not allow                        to be considered a
SSSG. This is true because the proposed regulation includes other changes to the definition of
SSSG which, in conjunction with certain ACA requirements effective as of 2014, would make it
more appropriate to consider the subscriber groups of an affiliated carrier in determining SSSGs.
For example, the proposed regulation includes a requirement that any SSSG must be rated based
on traditional community rating (“TCR”) “in order to maintain alignment between the TCR-rated
FEHB group and the subscriber group used for comparison.” See “Provisions of This Proposed
Regulation,” 80 FR 926-01. This provision is designed to avoid a comparison of apples and
oranges, such as the comparison of the TCR-rated FEHBP group to the prospectively experience-
rated                   group made in the draft audit report. Additionally, the proposed regulation
requires plans to select the single subscriber group which is closest in size to the FEHBP plan,
which would have been the                group that IHA submitted as the SSSG for 2012. Thus,
OIG’s attempt to retroactively apply only a portion of this proposed regulation prior to its
effective date is arbitrary and capricious.

   3.	                   was a New Business, Subject to the New Business Exclusion

        Our determination that                   does not meet the definition of an SSSG is further
supported by the 2012 community rating guidelines for FEHBP plans. The guidelines exclude
new groups (starting the first contract year between July 2, 2011 and July 1, 2012) and second
year groups (starting the second contract year or first between July 2, 2011 and July 1, 2012)
from consideration as SSSGs. See Exhibit C. While some
employees were enrolled with IHBC as of January 1, 2010,                                     joined
with other          entities to secure group coverage effective January 1, 2012. The policy and
the rates at issue were developed in response to an RFP for coverage of eligible enrollees from
                             ,                               and                              . As
discussed below, rating for this larger group was developed based on an aggregation of the
number of eligible employees in all three            entities. See Exhibit D. Therefore,
          should be excluded from SSSG consideration pursuant to 2012 rating guidelines as a
new group starting their first contract year between July 2, 2011 and July 1, 2012.

   4.	 New York’s regulatory requirements make inappropriate to use a subscriber group
       covered by a non-HMO as an SSSG for community rated FEHBP coverage issued
       by an HMO

        There are strong policy reasons why                , as a non-HMO group, should not be
used as an SSSG for the purpose of FEHBP rates. Even if affiliated, HMO and non-HMO
carriers in New York are required by law to calculate rates based upon distinct rating pools
which are subject to distinct regulations which have a significant impact on premium rates and
risk selection. For example, in 2012, New York HMOs were required by law to issue large
group coverage on a guaranteed issue basis, while non-HMOs were not. HMOs were required to
write only highly comprehensive benefit plans with minimal cost sharing, while non-HMOs had



                                                                    Report No. 1C-QA-00-14-045
the flexibility to issue a range of coverage options subject to range of cost sharing options.
Additionally, HMOs were required to issue large group coverage on a community rated basis,
while non-HMOs were permitted to extend experience rated pricing. These distinct rating
requirements shape the rating pools that serve as the foundation for pricing. For this reason,
FEHBP rates for a product issued by IHA as an HMO may not be fairly compared with the rates
of a similarly sized non-FEHBP group that purchased a non-HMO experience rated product
through IHBC. While a comparison of HMO and non-HMO rates may reasonable in states with
that apply consistent rating methodology, in New York, such a comparison is a comparison of
apples and oranges.

   5.	 New York law does not permit pricing consistent with the draft audit results

        Pricing consistent with the draft audit results could not be legally achieved in New York.
The draft audit results attempt to apply perceived discounts applicable to an experience rated
product to the FEHBP community rate by selecting an SSSG of a non-HMO. This approach
essentially seeks to blend the benefits of community rating with some, but not all, of the features
of experience rating. As an HMO, IHA may not legally apply discounts to its community rated
products. To access such discounts, OPM would need to purchase an experience rated product
through IHBC. However, full application of the experience rating methodology would apply to
rating of such a product, so the FEHBP program would lose the benefit of community rating. The
FEHBP rates for 2012 would have been higher if FEHBP purchased an experience rated plan and
audit report’s hybrid rating methodology is inconsistent with State law.

   6.	 Federal regulations require FEHBP pricing to be determined based on methods
       which are consistent with the rating method applied to the SSSG

        As discussed above, the audit finding applies perceived discounts applied to
          rates to the community rated FEHBP rates without applying the experience rating
methodology used for                    . This hybrid rating methodology is inconsistent with
federal regulations and guidance. The federal regulation which defines SSSGs states: “OPM
shall determine the FEHBP rate based upon the lower of the two rates derived based upon rating
methods consistent with those used to derive the SSSG rates [emphasis added.]” (See 48 CFR
1602.170-13(d)). This language requires that the FEHBP rates be determined by using rating
methods consistent with those used to derive the SSSG rates. The language does not provide
OPM with the flexibility to use only components of the rating method used to derive the SSSG
rate. If                   was an appropriately selected SSSG, OPM would be required to
recalculate the FEHBP rate according to the full experience rating methodology used for
        . Federal regulations do not permit the FEHBP rates to benefit from community rating
while securing the perceived discounts applied to an experience rated SSSG.

        The 2012 Community Rating Guidelines expressly address the circumstance where a
different rate method is used for the FEHBP product and the SSSG. Specifically, the guidelines
state:

       “the carrier is expected to use the same rating method for the Federal group as it
       uses for the SSSG though different rating methods are acceptable in some



                                                                    Report No. 1C-QA-00-14-045
       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 [emphasis added].”
       See Exhibit C, page 11.

Although IHA disagrees, the draft audit results indicate that the auditors disagree with IHA’s
choice of             and           as the SSSGs. The auditors selected                       as the
SSSG. Further, citing 48 CFR 1652.70, the report then determines that a discount was applied to
                 because                  “received a rate lower than that determined according to
the carrier’s established policy.” See 48 CFR 1652-70(b)(ii). The audit then concludes that a
rebate is due based on a perceived inconsistency between IHBC’s rating of the
policy and IHBC’s established rating practices. Although the audit findings conclude that IHBC
rated                   in a manner that was inconsistent with its policy, the audit findings do not
recalculate the federal rate “based on the SSSG rating method applied to the federal group.”
This attempt to apply discounts without applying the full experience rating method applied to
        is inconsistent with the 2012 Community Rating Guidelines. When this issue was raised
with auditors on August 28, 2014, IHA received a written e-mail response that the discount
needed to be applied to FEHBP rates, but the FEHBP rate did not need to be recalculated
according to the SSSG rating method because IHA and IHBC applied an acceptable rating
method to the HMO and non-HMO products. We see no basis in guidance or regulations for a
conclusion that a discount is due based on an inconsistency with a IHA’s established policy
without also triggering an obligation to apply the SSSG rating method.

        Lastly, the federal regulation addressing accounting and price adjustment states: “The
subscription rates agreed to in this contract shall be equivalent to the subscription rates given to
the carriers similarly sized subscriber groups as defined in FEHBAR 1602.170-13…The
subscription rates shall be determined according to the carrier’s established policy, which must
be applied consistently to the FEHBP and the carrier’s SSSGs. [emphasis added]. If an SSSG
receives a rate lower than that determined according to the carrier’s established policy, it is
considered a discount. The FEHBP must receive a discount equal to or greater than the carrier’s
largest SSSG discount.” See 48 CFR 1652.216-70(b)(ii). This regulation provides that discounts
should be applied if a carrier deviates from its established policy. However, the regulation also
provides that the established policy “must be applied consistently to the FEHBP and the carrier’s
SSSG.” The regulation does not permit application of the discount without use of the SSSG
rating method.

       As discussed above, IHA does not believe                       meets the definition of an
SSSG. Additionally, as discussed in section B of this letter, IHA does not believe IHBC applied
discounts to the                      product. However, even if such interpretations were
enforceable, to determine if FEHBP rates were defective in comparison to                    , the
2012 FEHBP rates would need to be recalculated on an experience rated basis. As noted in item
5 above, FEHBP rates for 2012 benefitted from community rating. The rates would be higher if
recalculated on an experience rated basis and no rebate would be due.

   B. The Calculations are Not Correct




                                                                    Report No. 1C-QA-00-14-045
        As discussed above, IHA does not believe that OPM may legally force premium
adjustments for defective pricing based upon a determination that                      should have
been used as the SSSG because                        does not meet the definition of an SSSG as a
group covered by a separate and distinct carrier. However, we think it is important to convey
that there are also inaccuracies in the calculations OPM has used to determine that approximately
$13.7M would be due to OPM for “defective pricing” even if such an interpretation was
enforceable.

                  OIG DELETED – NOT RELEVANT TO THE FINAL REPORT


   2. Discounts Applied to                       ($10.6M)
        There are also inaccuracies in the calculations used to determine that discounts were
applied to                    which should also be applied to the FEHBP rates. The federal
regulation that is relevant to determining if a discount has been applied to an SSSG and if a
discount should be applied to FEHBP rates as a result states:

           “…The subscription rates shall be determined according to the carrier’s
       established policy, which must be applied consistently to the FEHBP and the
       carrier’s SSSGs. If an SSSG receives a rate lower than that determined
       according to the carrier’s established policy, it is considered a discount. The
       FEHBP must receive a discount equal to or greater than the carrier’s largest
       SSSG discount.” See 48 CFR 1652.216-70(b)(ii)

                              As required by New York law, IHBC established premium rates
for the                  group according to its established rating methodology set forth in its rate
manual which was filed with the New York Department of Financial Services (“DFS”).
         did not receive “a lower rate than that determined according to the carrier’s established
policy” and could not be considered to have received a discount pursuant to 48 CFR 1652.216-
70. Therefore, the 2012 FEHBP rates would not be entitled to a discount even if
met the definition of an SSSG.

        Rating manuals necessarily include significant complexities to ensure accuracy in pricing
and meet regulatory requirements. Therefore, this letter separately addresses each point raised in
the draft audit report and provides supplemental Exhibits:

                  OIG DELETED – NOT RELEVANT TO THE FINAL REPORT


       (b) Benefit Adjustment Factor ($1.8M)

        A benefit adjustment was included in                  ’s rates as a standard step in the
rating process which is supported by IHBC’s rate manual. Many large groups, like
        , offer employees a choice of benefit packages. For example, a large group may want to
offer a highly comprehensive plan with low member cost sharing alongside of a high deductible
health plan and a product with moderate levels of cost sharing. As a first step in rating such


                                                                    Report No. 1C-QA-00-14-045
groups, a single aggregate rate is developed. This aggregate rate represents an average premium
that does not account for selection and variations in benefit design. Next, adjustments are
applied to account for anticipated differences in utilization and experience associated with the
benefit design of each product. These adjustments are applied based on pre-determined rating
relativities which are set forth in IHBC’s rate manual. For                      , when the rating
relativities set forth in the rate manual were applied to the initial aggregate rate, the aggregate
rate decreased for one benefit design and increased for two benefit designs.

        While the draft audit report does not include much explanation, the report indicates that
“the Plan did not include sufficient documentation to support             ’s benefit adjustment
differences for the Encompass, PPO and PPS benefit plans. As a result, all factors less than 1.00
were moved to 1.00 in our audited rate development.” We note that the auditors did accept the
calculation and did not similarly move factors in excess of 1.00 to 1.00.

         We have attached a copy of the benefit adjustment factor and its supporting
documentation. See Exhibit G. Similar documentation was sent to the auditor in charge on
September 25, 2014 and October 24, 2014. The auditors did not request any additional
information.                     ’s benefit adjustments were calculated consistent with the rating
relativities set forth in the manual. As such, no discount was applied and no adjustment could be
considered due pursuant to 48 CFR 1652.216-70(b)(ii) if                      was an appropriately
selected SSSG.

        While IHA does not believe                     is an appropriately selected SSSG, even if
                 ’s selection was consistent with federal law, changing the benefit adjustment
factor on the Passport Select Plan from        to 1.0 is not appropriate. This represents a $1.8M
reduction in the audit findings.

       (c) Retention and Pooling Factor ($2.8M)

        The draft audit findings indicate that IHBC did not use the correct retention and pooling
factors in establishing rates for                 . However, the retention and pooling factors
applied by IHBC were consistent with IHBC’s rating manual.

        As per the attached                              ’s Request for Proposal, there were more
than        eligible employees potentially enrolling with IHBC. See Exhibit D, pages 2-3. IHBC
rated this group based on the number of eligible employees described in the RFP. A copy of the
RFP was provided to the auditor in charge on October 2, 2014. No additional information was
requested.

       The retention factor for groups entering an Encompass Plus or Passport plan without
insured pharmacy coverage with          + eligible enrollees is      %. The retention factor for
groups entering a Passport Plan Select without insured pharmacy coverage with         + eligible
enrollees is    %. We have attached a copy of “The Variable Retention Rating Structure” from
IHBC’s 2012 Large Group Rating Manual. See Exhibit H. You will see that the retention factor
used depends on the size of the group and type of product to be rated.




                                                                    Report No. 1C-QA-00-14-045
       Similarly, given                    was a new group, IHBC rated the group with the
expectation that more than 3,000 subscribers would enroll. As a result, the group qualified for a
pooling level of $        . As per the attached “Pooling Charges Worksheet” from the IHBC
2012 Rating Manual, the charge for a $                 pooling level is     %. See Exhibit I.
Accordingly, the pooling credits were also calculated using the $        level.

        The retention and pooling factors used for             were correct and consistent
with IHBC’s rate manual. Therefore, no discount was applied and a rebate would not be due
even if                  was an appropriately selected SSSG. This further reduces the audit
findings by $ 2.8M.

   (d) Underwriting Adjustment ($3.8M)
       IHBC applied an underwriting adjustment of         % to                ’s rates consistent
with IHBC’s rate manual. An underwriting adjustment is not akin to a discount. Rather,
underwriting adjustments are an integral component of the experience rated formula approved by
the New York DFS. Underwriting adjustments allow carriers to determine a proper rate for each
experience rated account based on the specific attributes of that group.

       As discussed above, application of an underwriting adjustment to community rated
products is prohibited by New York State law. During the audit period in question, FEHBP
subscribed to a community rated product. Therefore, it would not have been legal for IHA to
apply such an adjustment to the FEHBP rates.

        Attached is a copy of IHBC’s 2012 rate manual where underwriting adjustments are
addressed. The rate manual permits underwriting adjustments of plus or minus % for new
business and plus or minus % for existing business. See Exhibit J. IHBC applied a           %
underwriting adjustment to                   consistent with IHBC’s rating policy which permits
adjustments of up to % for new business. Given the adjustment was consistent with IHBC’s
rating policy, the adjustment does not equate to a discount.

        Given that the      % underwriting adjustment falls within the bounds allowed for
underwriting adjustments in IHBC’s rate manual, no rebate would be due to FEHBP for
application of discount if                 was an appropriately chosen SSSG. Therefore, the
audit findings should be reduced by $3.8M.

       (f) Step-Up Factor

       We agree with the conversion factor calculated by the auditor. IHBC should have used
      rather than      . However, this adjustment was included in the calculation of a XX
underwriting adjustment noted in (d) above. This adjustment did not cause the underwriting
adjustment to exceed the limits allowed in the rate manual. Therefore, no discount was applied
and no rebate would be due on this basis if               was an appropriately selected SSSG.

       (g) Number of Months Used in Claims Experience




                                                                  Report No. 1C-QA-00-14-045
       We acknowledge the use of 16 months of claims data instead of the 12 months cited in
the audit report. However, this adjustment was included in the calculation of a XX underwriting
adjustment noted in (d) above. This adjustment did not cause the underwriting adjustment to
exceed the limits allowed in the rate manual. Therefore, no discount was applied and no rebate
would be due on this basis if                was an appropriately selected SSSG.

   C. Records Retention and Lost Investment Income ($0.6M)
        The draft audit report does not include enough information for us to determine the basis
for the record’s retention finding or provide an appropriate response.
        With respect to loss of investment income, IHA does not agree that premium rebates are
due to the FEHBP. Since the underlying rebates are not due, the FEHBP program did not
experience lost investment income. Therefore, the finding that IHA owes $0.6M to FEHBP for
lost income is inaccurate.

        Conclusion
        In summary, we strongly believe that                   is not an SSSG under federal law.
Therefore, IHA should not owe rebates to OPM based on perceived discounts applied to
          rates. Secondarily, even arguing in the alternative, no rebates are due to FEHBP for
2012 because                  ’s premium rates did not include discounts.                ’s rates
were calculated in full compliance with IHBC’s rating manual consistent with federal
requirements. Therefore, the following adjustments would need to be made to the audit findings
even if                was determined to be an SSSG:




                                           Audit  Actual
               1. GME and BDDC             $3.1M  $0
               2. Discounts Applied               $0
               OIG DELETED – NOT RELEVANT TO THE FINAL
               REPORT
                  b. Benefit Adjustment    $1.8M  $0
                  c. Retention and Pooling $2.8M  $0
                  d. Underwriting          $3.8M  $0
               Total                       $13.7M $0


                              We think it is important to resolve these issues as quickly as
possible. We request a meeting including OPM attorneys to address the legal issues, particularly
in view of OPM’s recently proposed regulation which creates a very clear legal impediment to
using the subscriber groups of separate subsidiary carriers as SSSG prior to its adoption.




                                                                  Report No. 1C-QA-00-14-045
                 Very truly yours,




                               , VP, Actuarial 



                 Underwriting and Informatics 



cc: 	            Mark Johnson, EVP, CFO
                 John Mineo, Esq. GC
                             , Esq.
                             , Esq.

ALB 1844324v12
                                                           November 25, 2014




                                                   Report No. 1C-QA-00-14-045
                                                                              



               Report Fraud, Waste, and 

                   Mismanagement 

                        Fraud, waste, and mismanagement in
                     Government concerns everyone: Office of
                         the Inspector General staff, agency
                      employees, and the general public. We
                    actively solicit allegations of any inefficient
                          and wasteful practices, fraud, and
                     mismanagement related to OPM programs
                    and operations. You can report allegations
                                to us in several ways:


     By Internet:        http://www.opm.gov/our-inspector-general/hotline-to-
                         report-fraud-waste-or-abuse


      By Phone:          Toll Free Number:                  (877) 499-7295
                         Washington Metro Area:             (202) 606-2423


        By Mail:         Office of the Inspector General
                         U.S. Office of Personnel Management
                         1900 E Street, NW
                         Room 6400
                         Washington, DC 20415-1100
  
                                                                              
                                                                              




                                                                 Report No. 1C-QA-00-14-045