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 of
HealthAmerica of Pennsylvania, Inc.
Report No. lC-SW-OO-09-047
Date: september 23, 2010
-- 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
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before releasing the report to the general public as it may contain proprietary information that was redacted from the publicly
distributed copy.
UNITED STATES OFFICE OF PERSONNEL MANAGEMENT
Washington, DC 20415
Office of the
inspector General
AUDIT REPORT
Federal Employees Health Benefits Program
Community-Rated Health Maintenance Organization
HeaIthAmerica of Pennsylvania, Inc.
Contract Number CS 2078-A - Plan Code SW
Harrisburg, Pennsylvania
Report No. lC-SW-OO-09-047 Dat~ September 23, 2010
Wt?L-
Michael R. Esser
Assistant Inspector General
for Audits
www.opm.goy www.usaJobs.goY
UNITED STATES OFFICE OF PERSONNEL MANAGEMENT
Washington, DC 20415
Office of the
Inspector General
EXECUTIVE SUMMARY
Federal Employees Health Benefits Program
Community-Rated Health Maintenance Organization
HealthAmerica of Pennsylvania, Inc.
Contract Number CS 207S-A - Plan Code SW
Harrisburg, Pennsylvania
Report No.lC-SW-OO-09-047 Dat~September 23, 2010
The Office of the Inspector General perfonned an audit of the Federal Employees Health Benefits
Program (FEHBP) operations at HealthAmerica of Pennsylvania, Inc. (Plan). The audit covered
contract years 2005 through 2009 and was conducted at the Plan's office in Harrisburg,
Pennsylvania.
This report questions $4,860,216 for defective pricing to the FEHBP in contract year 2005. The
questioned amount includes $3,874,612 for inappropriate health benefit charges and $985,604
due the FEHBP for lost investment income, calculated through August 31, 2010. We found that
the FEHBP rates were developed in accordance with the Office of Personnel Management's rules
and regulations in contract years 2006 through 2009.
For contract year 2005, we detennined that the FEHBP's rates were overstated by $3,874,612
due to defective pricing. More specifically, the Plan did not utilize the net community weighted
experience factor for the FEHBP and did not correctly account for the FEHBP's benefit changes.
Consistent with the FEHBP regulations and the contract, the FEHBP is due $985,604 for lost
investment income, calculated through August 31, 2010, on the defective pricing findings. In
addition, the contracting officer should recover lost investment income on amounts due for the
www.opm.gov www.us8Jobs.gov
period beginning September 1, 2010, until all defective pricing amounts have been returned to
theFEHBP.
Finally, the Plan did not maintain and provide adequate source documentation to support the
rates charged to the FEHBP and the SSSGs for all years audited.
11
CONTENTS
EXECUTIVE SlTMMARY ............................................................................................... i
I. INTRODUCTION AND BACKGROUND ..................................................................... 1
II. OBJECTIVES, SCOPE, AND METHODOLOGY .......................................................... 3
III. AUDIT FINDINGS AND RECOMMENDATIONS ....................................................... 5
Premium Rates ................................................................................................................ 5
1. Defective Pricing .......................................................................................................... 5
2. Lost Investment Income ...............................................................................................7
3. Records Retention ........................................................................................................ 7
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 (HealthAmerica of Pennsylvania, Inc.'s June 21, 2010, response to the draft
report)
I. INTRODUCTION AND BACKGROUND
Introduction
We completed an audit of the Federal Employees Health Benefits Program (FEHBP) operations
at HealthAmerica of Pennsylvania, Inc. (Plan) in Harrisburg, Pennsylvania. The audit covered
contract years 2005 through 2009. The audit was conducted pursuant to the provisions of
Contract CS 2078-A; 5 U.S.C. Chapter 89; and 5 Code of Federal Regulations (CFR) Chapter 1,
Part 890. The audit was performed by the Office of Personnel Management's (OPM) Office of
the Inspector General (OIG), as established by the Inspector General Act of 1978, as amended.
Background
The FEHBP was established by the Federal Employees Health Benefits Act (Public Law 86-382),
enacted on September 28, 1959. The FEHBP was created to provide health insurance benefits
for federal employees, annuitants, and dependents. The FEHBP is administered by OPM's
Center for Retirement and Insurance Services. The provisions of the Federal Employees Health
Benefits Act are implemented by OPM through regulations codified in Chapter 1, Part 890 of
Title 5, CFR. Health insurance coverage is provided through contracts with health insurance
carriers who provide service benefits, indemnity benefits, or comprehensive medical services.
Community-rated carriers participating in the FEHBP are subject to various federal, state and
local laws, regulations, and ordinances. While most carriers are subject to state jurisdiction,
many are further subject to the Health Maintenance Organization Act of 1973 (public Law 93
222), as amended (i.e., many community-rated carriers are federally qualified). In addition,
participation in the FEHBP subjects the carriers to the Federal Employees Health Benefits Act
and implementing regulations promulgated by OPM.
The FEHBP should pay a market price rate, FEHBP Contracts/Members
which is defined as the best rate offered to March 31
either of the two groups closest in size to
the FEHBP. In contracting with
community-rated carriers, OPM relies on
carrier 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 chart to the right shows the number of
FEHBP contracts and members reported by
the Plan as of March 31 for each contract
year audited.
1
The Plan has participated in the FEHBP since 1986 and provides health benefits to FEHBP
members in central Pennsylvania. The last audit conducted by our office was a full scope audit
and covered contract years 2000,2001,2003 and 2004. All matters related to 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 the preparation of this report and are
included, as appropriate, as the Appendix.
2
II. OBJECTIVES, SCOPE, AND METHODOLOGY
Objectives
The primary objectives of the audit were to verifY that the Plan offered market price rates to the
FEHBP and to verifY that the loadings to the FEHBP rates were reasonable and equitable.
Additional tests were performed to determine whether the Plan was in compliance with the
provisions ofthe laws and regulations governing the FEHBP.
FEHBP Premiums Paid to Plan
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 years 2005 through 2009. For these contract years, the
FEHBP paid approximately $351 million in premiums to the Plan. The premiums paid for each
contract year audited are shown on the chart above.
OIG audits of community-rated carriers are designed to test carrier compliance with the FEHBP
contract, applicable laws and regulations, and OPM rate instructions. These audits are also
designed to provide reasonable assurance of detecting errors, irregularities, and illegal acts.
We obtained an understanding of the Plan's internal control structure, but we did not use this
information to determine the nature, timing, and extent of our audit procedures. However, the
audit included such tests ofthe Plan's rating system and such other auditing procedures
considered necessary under the circumstances. Our review of internal controls was limited to the
procedures the Plan has in place to ensure that:
• The appropriate similarly sized subscriber groups (SSSG) were selected;
• the rates charged to the FEHBP were the market price rates (i.e., equivalent to the best
rate offered to the SSSGs); and
• the loadings to the FEHBP rates were reasonable and equitable.
In conducting the audit, we relied to varying degrees on computer-generated billing, enrollment,
and claims data provided by the Plan. We did not verifY the reliability of the data generated by
3
the various information systems involved. However, nothing came to our attention during our
audit testing utilizing the computer-generated data to cause us to doubt its reliability. We believe
that the available data was sufficient to achieve our audit objectives. Except as noted above, the
audit was conducted in accordance with generally accepted government auditing standards,
issued by the Comptroller General of the United States.
The audit fieldwork was performed at the Plan's office in Harrisburg, Pennsylvania during
August 2009. Additional audit work was completed at our field offices in Cranberry Township,
Pennsylvania.
Methodology
We examined the Plan's federal rate submissions and related documents as a basis for validating
the market price rates. Further, we examined claim payments to verify that the cost data used to
develop the FEHBP rates was accurate, complete and valid. In addition, we examined the rate
development documentation and billings to other groups, such as the SSSGs, to determine if the
market price was actually charged to the FEHBP. Finally, we used the contract, the Federal
Employees Health Benefits Acquisition Regulations (FEHBAR), and OPM's Rate Instructions to
Community-Rated Carriers to determine the propriety of the FEHBP premiums and the
reasonableness and acceptability of the Plan's rating system.
To gain an understanding of the internal controls in the Plan's rating system, we reviewed the
Plan's rating system's 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 Rates
1. Defective Pricing $3,874,612
The Certificate of Accurate Pricing the Plan signed for contract year 2005 was defective. In
accordance with federal regulations, the FEHBP is therefore due a price adjustment for this
year. Application of the defective pricing remedies shows that the FEHBP is entitled to
premium adjustments totaling $3,874,612 (see Exhibit A). We found that the FEHBP rates
were developed in accordance with OPM's rules and regulations for contract years 2006
through 2009.
FEHBAR 1652.215-70 provides that carriers proposing rates to OPM are required to submit a
Certificate of Accurate Pricing certifying that the proposed subscription rates, subject to
adjustments recognized by OPM, are market price rates. OPM regulations refer to a market
price rate in conjunction with the rates offered to an SSSG. If it is found that the FEHBP was
charged higher than a market price (Le., 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.
We agree with the Plan's selection and as SSSGs for contract year 2005.
Our analysis of the rates charged to the SSSGs shows that neither nor
received a discount.
The Plan applied a community wide experience (CWE) factor to the FEHBP experience for
both the high and standard options of for medical and for pharmacy; however,
the audited factors were for medical and for pharmacy for the high option and
for medical and for the standard option.
We also found that the Plan did not appropriately account for the FEHBP high and standard
option pharmacy renewal benefit in the calculation ofthe benefit change factor. Specifically,
the Plan used a pharmacy base rate for the high option and a pharmacy base
rate for the standard option; however, based on the rate filing that was available at the time of
the rate development and was consistently used for all reviewed groups, the high option
pharmacy base rate should be and the standard option pharmacy base rate should be
We made these changes to the FEHBP pharmacy benefit calculations and determined
that the high option benefit change factor should be and the standard pharmacy benefit
change factor should be , not the and factors that the Plan applied.
We re-developed the FEHBP's rates by correcting the above noted exceptions. A comparison
of our audited line 5 rates to the Plan's reconciled line 5 rates shows that the FEHBP was
overcharged $3,874,612 in 2005 (see Exhibit B).
5
Plan's Comments (See Appendix):
The Plan states the following arguments and concludes that it is due $7,174,728 for 2005.
I. We used a different 'market methodology' to determine the group's rate in 2005.
II. An early retiree surcharge should be applied to the FEHBP since a surcharge
was applied to and a surcharge was applied to
III. The January 1,2005 state rate filing should be applied to the FEHBP and rates
to show "the most defensible, non-biased measurement of variance."
OIG's Response to the Plan's Comments:
1. We disagree with the Plan's assertion that a different market methodology was used to
develop the 2005 audited rates. The Plan provided a copy of the FEHBP reconciliation,
including rating exhibits showing the development of the FEHBP reconciled rates as well
as the development of the rates charged to and The rating exhibits
provided in the reconciliation were consistently used among the audited groups.
Therefore, we used this methodology to analyze the FEHBP and SSSG rates. A
"different market methodology" was not used in 2005.
II. We also disagree with the Plan's assertion that the FEHBP rates should increase due to an
arbitrary early retiree upward market rate adjustment given to the SSSGs. First and
foremost, an early retiree surcharge cannot be identified in either or
rate developments. Secondly, OPM's rules and regulations dictate that the FEHBP
receive a market rate, which is based on a comparison to the rates charged to the SSSGs.
In addition, the FEHBP rates should be developed based on a methodology consistent
with the one used for the SSSGs. However, arbitrary upward market rate adjustments are
not recognized as part of a consistent methodology because they are subject to the
discretion of the individual and cannot be uniformly applied to all groups.
III. The January 1, 2005, rate filing cannot be used as support for the 2005 rates since this
was not the methodology used at the time of rating and violates OPM's and the Plan's
own policies and procedures.
(a) As stated in the 2005 rate instructions, page 16, "You must go through the same
procedure you used to derive the Line 1 rates in the original 2005 rate proposal,
changing the trend factor and/or administration cost factor if appropriate. All other
parts of the reconciliation should be done the same way you did the original
proposaL"
(b) As expressed in the Plan's rating methodology write-up, "Cost levels are derived from
the most recently approved filing for the effective date of the projected rating period."
6
It is apparent from the rate instructions and the Plan's stated rating methodology that the
appropriate rate filing available at the time of the rate proposal for the FEHBP and
is the first quarter 2004 rate filing, not the January 1,2005 rate filing. It is not
appropriate for the Plan to attempt to use an updated rate filing that was not available
when the rates were developed.
Recommendation 1
We recommend that the contracting officer require the Plan to return $3,874,612 to the
FEHBP for defective pricing in contract year 2005.
2. Lost Investment Income $985,604
In accordance with the FEHBP regulations and the contract between OPM and the Plan, the
FEHBP is entitled to recover lost investment income on the defective pricing findings due the
FEHBP in contract year 2005. We determined that the FEHBP is due $985,604 for lost
investment income, calculated through August 31, 2010 (see Exhibit C). In addition, the
FEHBP is entitled to lost investment income for the period beginning September 1, 2010, until
all defective pricing finding amounts have been returned to the FEHBP.
FEHBAR 1652.215-70 provides that, if any rate established in connection with the FEHBP
contract was increased because the carrier furnished cost or pricing data that were not
complete, accurate, or current as certified in its Certificate of Accurate Pricing, the rate shall
be reduced by the amount of the overcharge caused by the defective data. In addition, when
the rates are reduced due to defective pricing, the regulation states that the government is
entitled to a refund and simple interest on the amount of the overcharge from the date the
overcharge was paid to the carrier until the overcharge is liquidated.
Our calculation of lost investment income is based on the United States Department of the
Treasury's semiannual cost of capital rates.
Recommendation 2
We recommend that the contracting officer require the Plan to return $985,604 to the FEHBP
for lost investment income for the period January 1,2005 through August 31, 2010. In
addition, we recommend that the contracting officer recover lost investment income on
amounts due for the period beginning September 1,2010, until all defective pricing amounts
have been returned to the FEHBP.
3. Records Retention
The Plan did not provide adequate documentation to support the rates charged to the FEHBP
and the SSSGs for all years audited. Federal Acquisition Regulation 1652.204-70 requires the
carrier to retain all records for five years after the end of the contract term to which the records
relate.
7
Without appropriate supporting documentation, it is difficult to determine if the FEHBP rates
were established in accordance with the Plan's contract, applicable regulations, and OPM
community-rating guidelines. Under these circumstances, we may have to depend on other
data, and at times, different rating methodologies to determine the appropriateness of the
FEHBP rates. The outcome of our analysis based on the best information available may result
in a less desirable outcome to the Plan. Therefore, it is in the best interest of a plan to retain
the information needed to verify the FEHBP and the SSSGs rates.
Plan's Comments (See Appendix):
The Plan states that its underwriting files actually contain more than one version of the
documentation. The Plan further states that documentation which matches the reconciliation
response has been identified and submitted. Therefore, the Plan respectfully requests that the
verbiage indicating non-compliance with retention of original documentation be removed
from the report. The Plan states that its service areas were expanded in the interim between
the original submission and the reconciliation for the plan year 2005, which was the primary
reason for the differences in documentation from proposal to reconciliation.
OIG's Response to the Plan's Comments:
While we acknowledge that we ultimately received, or obtained through other sources, enough
information to analyze the FEHBP and the SSSG rates, the information provided by the Plan
was not complete and it was not timely. For example, in the Plan's response to the draft
report, we received the FEHBP's experience support used at the time of rating. However, we
have yet to receive supporting documentation for the age/sex and area factors reported in the
2005 proposal and reconciliation exhibits. It appears that the age/sex and area factors were
reported consistently during both filing periods; however, the Plan has yet to provide
documentation supporting the calculation of these factors. Ultimately, we had to complete a
reasonability test based on the recreated age/sex and area factor calculations.
Secondly, the Plan stated that we did not use the market methodology (Group Subscriber
Community Rate (GSCR) methodology) in 2005 to determine the reconciled and billed rates
for all groups; however, we have yet to receive a GSCR rate model from the Plan that supports
the values reported in the reconciliation and billed to the SSSGs.
For all audit scope years, we made mUltiple requests for the source documentation for the
experience used in the FEHBP rate developments. The information was never supplied.
Ultimately, experience documentation for audit scope years 2006 through 2008 was identified
and matched in the audit of HealthAmerica of Pennsylvania, plan code 26, which was
conducted in March 2009. During that audit, when experience data was requested, we were
supplied with documentation that matched the FEHBP experience. In the supplied support
was also FEHBP experience for all HealthAmerica plan codes, including SW. It is unclear
why our multiple requests for matching documentation could not be supplied at the Harrisburg
audit site, but could ultimately be found in support received during a prior audit
(Report # 1C-26-00-09-022) of a sister plan.
8
Finally, the Plan's detennination of monies owed the Plan are not based on supported
calculations. The Plan has not provided sufficient support to prove that and
received early retiree surcharges, since both ratings do not include calculations similar to the
one applied to the FEHBP in the Plan's response. Additionally, the Plan states that there
should be a reversal ofthe discount presented in the draft report; however, the
supplied rate development in the Plan's response shows that the group received a percent
discount. Ultimately, our analysis showed that did not receive a discount. This is just
one example of the Plan's inconsistent documentation and unsupported assertions.
We have received infonnation from the Plan; however, most of it was not the original source
documentation used at the time of rating. This situation has lead us to use mUltiple
reasonability tests in all audit scope years. Most notably, the majority ofthe documentation
supplied for 2005 has not been source documentation and does not support the 2005
reconciled and billed rates. We have made multiple requests and attempts to receive the
source documentation for all years for this audit, with very little success. We believe that the
verbiage indicating non-compliance is fully accurate for this Plan.
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 breech of the records retention clause.
In addition, we recommend that the contracting officer infonn the Plan that:
• OPM expects it to fully comply with the records retention provisions of the contract
and all applicable regulations;
• 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;
• it should maintain copies of the enrollment reports and other necessary supporting
documents for the FEHBP and the groups closest in size to the FEHBP for each
unaudited year; and
• the applicable community-rated perfonnance factors described in FEHBAR
1609.7101-2 will be adversely affected ifinfonnation requested during audits is not
provided.
9
IV. MAJOR CONTRIBUTORS TO THIS REPORT
Community-Rated Audits Group
, Auditor-In-Charge
Lead Auditor
, Auditor
, Chief
Senior Team Leader
10
Exhibit A
HealthAmerica of Pennsylvania
Summary of Questioned Costs
Defective Pricing Questioned Costs:
Contract Year 2005 $3,874,612
Total Defective Pricing Questioned Costs $3,874,612
Lost Investment Income $985,604
Total Questioned Costs $4.860.216
ExhibitB
HealthAmerica of Pennsylvania
Defective Pricing Questioned Costs
2005 Contract Year - High Option
Single EmnilY
Plan's Reconciled Rates $
Audited Rates
Biweekly Overcharge
To Annualize:
x March 31, 2005 Headcount
x Pay Periods 26 26
Subtotal 5
Total 2005 High Option Defective Pricing Questioned Costs 53,806,399
2005 Contract Year - Standard Option
~ Family
Plan's Reconciled Rates
Audited Rates
Biweekly Overcharge
To Annualize:
x March 31, 2005 Headcount
x Pay Periods 26 26
Subtotal
Total 2005 Standard Option Defective Pricing Questioned Costs 568,213
Total Defective Pricing Questioned Costs ~;!.m.Cila
Exhibit C
HealthAmerica of Pennsylvania
Lost Investment Income
Year 2005 2006 2007 2008 2009 2010 Total
Audit Findings:
Defective Pricing $3,874,612 $0 $0 $0 $0 $0 $3,874,612
Totals (per year): $3,874,612 $0 $0 $0 $0 $0 $3,874,612
Cumulative Totals: $3,874,612 $3,874,612 $3,874,612 $3,874,612 $3,874,612 $3,874,612 $3,874,612
A verage Annual Interest Rate: 4.3750% 5.4375% 5.5000% 4.9375% 5.2500% 3.1875%
Interest on Prior Years Findings: $0 $210,682 $213,104 $191,309 $203,417 $82,335 $900,847
Current Years Interest: $84,757 $0 $0 $0 $0 $0 $84,757
Total Cumulative Interest $84,757 $210,682 $213,104 $191,309 $203,417 $82,335 I $985,604
Through August 31, 2010
Appendix
(C HEALTHAMERICA
Evelyn Pendleton
r•
A fovpntrq Npolth forp Pion
ZOIO JUN 25 AM 10= 0 I
Chief Financial Officer
Coventry Health Care, HealthAmerica
3721 TecPort Drive
P.O. Box 67103
Harrisburg, PA 17106-7103
June 21.2010
Chief. Community-Rated Audits Group
U.S. Office of Personnel Management
Office of the Inspector General
1900 E Street, NW Room 6400
Washington DC 20415-1100
RE: 2005 Audit Year Response
Dear :
Enclosed are our comments regarding the draft findings, using issue-by-issue bullet points to address the
carrier concerns regarding the audit's initial conclusions. For ease of reference, the 2005 findings are
quoted again here:
We agree with the Plan's selection and as SSSGs for contract year 2005.
Our ana1ysis of the rates charged to the SSSGs shows that received a percent
discount, which the Plan did not apply to the FEHBP. did not receive a discount.
The Plan did not retain the original docwnentation used at the time ofthe rating and supplied
docwnentation that supported a lower rate for the FE.Hl3P in 2005. We re-rated the FEHBP
by using the docwnentation supplied by the Plan and applied the percent
discount. A comparison ofour audited line 5 rates to the Plan's reconciled line 5 rates shows
that the FEHBP was overcharged $7,035,997 in contract year 2005 (see Exhibit B).
• Issue 1 of 3: The Plan did not retain the original documentation used at the time of the rating and
supplied documentation that supported a lower rate for the FEHBP in 2005.
Response: UW files actually contain more than one version of the documentation. For this purpose, it is
critical to respond that documentation which matches the reconciliation response has been identified and
submitted, and that Carrier respectfully requests that OPM remove the verbiage indicating non
compliance with retention of original documentation. It is of special note in this situation that our service
areas were expanded in the interim between the original submission and the reconciliation for the plan
year 2005, which was the primary reason for the differences in documentation from proposal to
reconciliation. We regret any confusion this has caused.
CONFIDENTIAL: FOR OPM USE ONLY
3721 TecPort Drive, PO Box 67103, Harrisburg, PA 17106-7103
800-788-6445 • 717-540-4260 • www.healthamerica.cvty.com
PMISOOH
Deleted by the OIG
Not Relevant to the Final Report
The Carrier and the FEHBP differ In their analyses of what the "market methodology" was in 2005, with
the allegation that the FEHBP did not receive most favored nation pricing. Because the differences in
calculations are a result of Independent determination and the opinion of OPM, not citing the particular
documentation which allowed the auditor to determine a lower rate, and because OPM's methodology is
not in agreement with HAPA's presented methodology, it is necessary to examine the differential In rate
between filed and approved methodology and that which was used in 2005 for the FEHBP and the
SSSG's In order to determine any variation.
By following this procedure, a determination may be made of any discounts or surcharges that exist. This
is an important point because the Carrier is not limited to simply using filed and approved methodology,
as in 2005, the directions are very clear on what determines the market rate.
Attachments (Community Rating Guidelines 2005).doc
Pp6:
48CFR 1602.170-13 (c) OPM shall determine the FEHBP rate by selecting the lower ofthe two
rates derived by using the two rating methods consistent with those used to derive the
SSSGrates.
Using this sutrIt:Jatt:trweagre~ with OPM that no discount was applied to , and In theJ~~amination
of a load was applied to the rates for the basic calculation. In addition, note that both
SSSG's surcharge early retirees: a surcharge on early retirees' contracts was applied for the SSSG '
and a surcharge was applied on early retirees' contracts for the SSSG Therefore, it
is the Carrier's pOSition that the rating methods of the SSSG's indicate that an early-retiree load may be
applied to early retiree contracts in addition to the final premium calculation, absent total group premium
neutrality adjustments to the active contracts, as was done for both SSSG's. This action would be clearly
supported by 48CFR 1602.170-13 ( c), because!t is defacto methodology. present in both SSSG's, and
so premium demand for the FEHBP rises by , or $7.4 million dollars for the 2005 FEHBP plan year
(using the early-retiree load, which is the lesser of the two SSSG rate methodologies).
See workbook: ,
EPA Fed GSCR Model- Calc (Filed & Approved).xls
CONFIDENTIAL: FOR OPM USE ONLY
Issue 3 of 3:
"The Plan ... supplied documentation that supported a lower rate for the FEHBP in 2005. We re-rated the
FEHBP by using the documentation supplied by the Plan ...."
Response:
As was mentioned in Issue 2, examination of the SSSG methodology. examining differentials from filed
and approved/book of business methodology, yields the most defensible, non-biased measurement of
variance. Filed and approved versions of all the FEHBP and SSSG 2005 calculations have been
documented using the filed and approved methodologies in place for 01.01.2005 (which is the effective
date of the FEHBP and the SSSG's).
A by-item treatment of the differentials between the OPM auditor's version of market methodology relative
to the reconciled methodology was demonstrated in the auditor's work papers (which is an EXCEL
workbook). This EXCEL workbook has been modified, and is tagged with "Draft Response" in order to
demonstrate the market methodology. using filed and approved I book of business SSSG methodology.
for the FEHBP GSCR models, and for
EPA Fed GSCR Model - FEHBP Calc High (Filed & Approved).xls
EPA Fed GSCR Model- FEHBP Calc Standard (Filed & Approved).xls
2005 Audited Rates (Draft Response ).xls
Because the application of identical methodology as used for the SSSG's is required for the FEHBP
rating, it is the carrier's finding that we had insufficient pricing for 2005. and as the Carrier. we are due an
additional $7,174,728 from the FEHBP for the 2005 plan year.
Original Draft Findings. 2005 Due to OPM From
Carrier ($7.035,997)
Adjustment for Issue 1. Retention of Original Documentation $0
Adjustment for Issue 2. Discount of , Reversal $425,245
Adjustment for Issue 3, 48CFR 1602.170-13 c, Market Methdology
Adjustment $13,785,480
Carrier Response to Draft Findings, 2005 Due from OPM to
Carrier $7,174,728
If you have any questions or need assistance during your review of these comments, please contact me
at , or , Consulting Underwriter. at
S:Z::,~t J\
Evelyn pJdleton
Chief Financial Officer
CC:
, Vice President of Underwriting, Coventry Health Care
. Vice President Business Development Legal, Coventry Health Care
CONFIDENTIAL: FOR OPM USE ONLY
Audit of the Federal Employees Health Benefits Program Operations of HealthAmerica of Pennsylvania, Inc.
Published by the Office of Personnel Management, Office of Inspector General on 2010-09-23.
Below is a raw (and likely hideous) rendition of the original report. (PDF)