oversight

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)

                                                   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
available under the Freedom of Information Act and made available to the public on the OIG webpage, caution needs to be exercised
before releasing the report to the general public as it may contain proprietary information that was redacted from the publicly
distributed copy.
                       UNITED STATES OFFICE OF 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