oversight

Audit of the Health Plan of the Upper Ohio Valley

Published by the Office of Personnel Management, Office of Inspector General on 2009-01-23.

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

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                                                                          US OFFICE OF PERSONNEL MANAGEMENT
                                                                             . OFFICE OFTHE INSPECTOR GENERAL
                                                                                    .       . OFFICE OF AUDITS




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           This all~it repGrthasbeen distributedto Federal officials who are responsibleJor the administraU(llIQf the audited program;. this 1I11dit
          .rePort may contain proprietary datil which is protected by Fedenill,lIw (18US.G190S); therefore, while this auditrtportis available
           lInder the Fre~do",ofInformation Act, eaution needS to' b~ exereisedbef(lre releasing thereport 10 Ihe general public.            .
                        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

                                 The Health Plan of the Upper Ohio Valley

                                  Contract Number 2616 - Plan Code U4

                                           St. Clairsville, Ohio




                    Report No. 1C-U4-00-08-013                 Date: JaD1l.at;y    23,   2009




                                                                   ~~

                                                                   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

                                 The Health Plan of the Upper Ohio Valley

                                  Contract Number 2616 - Plan Code U4

                                           St. Clairsville, Ohio




                    Report No. lC-U4-00-08-013                    Dare:   Janua~y   23, 2009

        The Office of the Inspector General performed an audit of the Federal Employees Health Benefits
        Program (FEHBP) operations at The Health Plan oftheUpper Ohio Valley (Plan) in St.
        Clairsville, Ohio. The audit covered contract years 2003 through 2007 and was conducted at the
        Plan's office in St. Clairsville, Ohio. This report questions $516,844 for inappropriate health
        benefit charges in 2005, including $79,072 for lost investment income. We found that the
        FEHBP rates were developed in accordance with the applicable laws, regulations, and the Office
        of Personnel Management's rating instructions in contract years 2003, 2004, 2006, and 2007.

                                            II
        In 2005, the Plan did not support the    benefit change factor applied to a similarly sized
        subscriber group's rates. Accordingly, we changed the factor to "hich resulted in a "
        percent discount to the group. We applied that discount to the FEHBP's rates and determined
        that the FEHBP was overcharged $437,772 in 2005.

        Consistent with the FEHBP regulations and contract, the FEHBP is due $79,072 for lost
        investment income, calculated through December 31, 2008, on the defective pricing finding in
        2005. In addition, the contracting officer should recover lost investment income on amounts due
        for the period beginning January 1, 2009, until all defective pricing amounts have been returned
        to the FEHBP.




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                                      CONTENTS





   EXECUrfIVE SUMMARY	                                                               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                   ,	                                    6


   3. Prescription Drug Rebate	                                                      7


IV.	 MAJOR CONTRIBUTORS TO THIS REPORT                                               8.

   Exhibit A (Summary of Questioned Costs)

   Exhibit B (Defective Pricing Questioned Costs)

   Exhibit C (Lost Investment Income)

   Appendix (The Health Plan of the Upper Ohio Valley's December 10,2008, response
             to the draft report)
                     I. INTRODUCTION AND BACKGROUND


Introduction

We completed an audit of the Federal Employees Health Benefits Program (FEHBP) operations
at The Health Plan of the Upper Ohio Valley (Plan). The audit covered contract years 2003
through 2007 and was conducted at the Plan's office in St. Clairsville,Ohio. The audit was
conducted pursuant to the provisions of Contract CS 2616; 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 COlO), 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 aPM 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 (Le., 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          2.500
the FEHBP. In contracting with
community-rated carriers, aPM relies on               2.000

carrier compliance with appropriate laws
                                                      1,500
and regulations and, consequently, does not
negotiate base rates. OPM negotiations                1.000
relate primarily to the level of coverage and
other unique features of the FEHBP.                    500


The chart to the right shows the number of                o
                                                              2003    2004    2005    2006    2007
FEHBP contracts and members reported by                                       916     880     899
                                                • Contracts   1,070   974
the Plan as of March 31 for each contract       DMembers      2,282   2,083   1,963   1,872   1,941
year audited.


                                                1

The Plan has participated in the FEHBP since 1991 and provides health benefits to FEHBP
members throughout Northeast and Eastern Ohio and Northern and Central West Virginia. The
last full-scope audit covered contract years 2001 and 2002. There were no questioned costs
identified during that audit.

The preliminary results of this audit were discussed with Plan officials at an exit conference. A
draft report was also provided to the Plan for review and comment. The Plan's comments were
considered in the preparation of this final 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 detennine whether the Plan was in compliance with the
provisions of the laws and regulations governing the FEHBP.


                                                                         FEHBP Premiums Paid to Plan

We conducted this perfonnance auditin accordance with

generally accepted government auditing standards.
                 $10

Those standards require that we plan and perfonn the
               $8
audit to obtain sufficient, appropriate evidence to

                                                              UI
provide a reasonable basis for our findings and
              c
                                                              ~    $6
conclusions based on our audit objectives. We believe
        i
that the evidence obtained provides a reasonable basis
            $4

for our findings and conclusions based on our audit

                                                                   $2
objectives.

                                                                   $0
This performance audit covered contract years 2003

tluough 2007. During this period, the FEHBP paid

approximately $34.6 million in premiums to the Plan.

The premiums paid for each contract year audited are shown on the chart to the right.


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 of the Plan's rating system and such other auditing procedures

considered necessary under the circumstances. Our review of internal controls was limited to the

procedures the Plan has in place to ensure that:


       •	 The appropriate similarly sized subscriber groups (SSSG) were selected;

       •	 the rates charged to the FEHBP were the market price rates (i.e., equivalent to the best
          rate offered to 888Gs); 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
the various infonnation systems involved. However, nothing came to our attention during our
                                                 3
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 St. Clairsville, Ohio, during
February 2008. Additional audit work was completed at our offices in Cranberry Township,
Pennsylvania; Jacksonville, Florida; and Washington, D.C.

Methodology

We examined· the Plan's federal rate submissions and related documents as a basis for validating
the market price rates. In addition, we examined the rate development documentation and
billings to other groups, such as the SSSGs, to determine if the market price was actually charged
to the FEHBP. Finally, we used the contract, the Federal Employees Health Benefits Acquisition
Regulations (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                                                                      $437,772

  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 that
  year. We applied the defective pricing remedy for the year in question and determined that the
  FEHBP is entitled to a premium adjustment totaling $437,772 (see Exhibit A). We found that
  the FEHBP rates were developed in accordance with the applicable laws, regulations, and
  OPM rating instructions in contract years 2003,2004,2006, and 2007.

  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. Ifit is found that the FEHBP was charged rates that exceeded the market
  price (i.e., the best rate offered to an SSSG), a condition of defective pricing exists, requiring a
  downward adjustment of the FEHBP premiums to the equivalent market price.

  2005

  The Plan selected                                             as the SSSGs for contract year
  2005. We agree with these selections. Our analysis ofthe SSSG rates shows that _
  _         did not receive a discount and                     eceived a . percent discount. Our
  review of the                  rate development shows that the Plan applied a
                     to account for reductions in the group's benefit level. However, our review
  ofthe benefits offered to                      hows that the group's benefits did not decrease
  from the experience period to the renewal period. Therefore, we did not include t h e _
  factor in our calculation of the audited rates. Since the FEHBP is entitled to a discount
  equivalent to the largest disco~SSSG, we recalculated the FEHBP rates
  using the~iscount given t o _ A comparison of the audited rates to the
  reconciled rates shows that the FEHBP was overcharged $437,772 in contract year 2005 (see
  Exhibit B).

  Plan's Comments (See Appendix):

  The Plan states that a                             . as applied to              rates during
  the request for renewal process to account for the addition of several new ~o its rating
  area. H o w e v e r , _ o u l d not allow the Plan to add the new _ u n t i l .
                  nitiated a new request for proposal process. Since               would not
  allow the Plan to subsequently alter its proposed renewal rates to remove the
  the Plan believes that it does not owe the FEHBP any additional premium for 2005.



                                                  5

  OIG's Response to the Plan's Comments:

  According to correspondence provided by the Plan, both a standard bid and an alternate bid,

  which added            to the                        were presented to                     Both

  the standard bid rates and the alternate bid rates were the same. Therefore we contend that the

  Plan intended to bill                    ates that reflected an adjustment, or the standard and

  alternate bids would have produced different rates. Accordingly, we do not accept the Plan's

  contention that it would have adjusted the proposed renewal rates to remove the _

  _       As a result, we continue to recommend that the FEHBP rates be adjusted by the.

  percent discount offered t~


  Recommendation 1

  We recommend that the contracting officer require the Plan to return $437,772 to the FEHBP
  for defective pricing in 2005.

2. Lost Investment Income                                                                    $79,072

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

  FEHBP is entitled to recover lost investment income on the defective pricing finding

  identified in contract year 2005. We determined that the FEHBP is due $79,072 for lost

  investment income, calculated through December 31, 2008 (see Exhibit C). ]n addition, the

  FEHBP is entitled to lost investment income for the period beginning January 1, 2009, until

  all defective pricing amounts have been returned to the FEHBP.


  FEHBAR 1652.215-70 provides that, if any rate established in connection with the FEHBP

  contract was increased because the carrier furnished cost or 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 ofthe overcharge caused by the defective data. In addition, when

  die nltes are reduced due to defective pricing, the regulations state 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.


  We calculated the lost investment income amount based on the United States Department of

  the Treasury's semiannual cost of capital rates.


  Plan's Comments (See Appendix):

  The Plan believes its response results in the elimination of the lost investment charge.

  OIG's Response to the Plan's Comments:

  Lost investment income should be calculated on the defective pricing amounts actually due the

  FEHBP. Therefore, our lost investment income calculation is based on the defective pricing

  amounts discussed in this report.


                                                  6



                                                                                                        •
  Recommendation 2

  We recommend that the contracting officer require the Plan to return $79,072 to the FEHBP
  for lost investment income calculated through December 31, 2008. In addition, we
  recommend that the contracting officer recover lost investment income on amounts due for the
  period beginning January 1,2009, until all defective pricing amounts have been returned to
  the FEHBP.

3. Prescripton Drug Rebate

  In every year of our audit, the Plan's prescription drug rating methodology correctly included
  an adjustment factor f o r _ . The adjustment is based on a May 7, 2001,
  letter from an actuarial c~tated on a ~asis, but the Plan
  applies it on a                                   basis. The same factor was used in the 2003
  through 2007 rate developments for the groups reviewed.

  Since the information the Plan is using to calculate the~:!~!5:5;~is~s~e~v:er~a~1years
  old, the Plan should update this information. Furthermore, the           should be based on
                 received by the Plan. Finally, since the Plan applies the
  basis, the rebate supporting calculation should also be on a_basis, not a _
  basis.

  Plan's Comments (See Appendix):

  The Plan did not address this issue in its response.

  Recommendation 3

  We recommend that the Contracting Officer direct the Plan to update its prescription drug
  rebate amOlUlt. The amount should be based on actual prescription drug rebates received by
  the Plan and it should be applied on the basis of actual prescription drug benefit usage.




                                                 7

             IV. MAJOR CONTRIBUTORS TO THIS REPORT


Community-Rated Audits Group

                 Auditor-In-Charge

                Auditor




                   Chief




                                     8

                                                                         Exhibit A


                           The Health Plan of the Upper Ohio Valley
                                Summary of Questioned Costs



Defective "fricing Questioned Costs:


      Contract Year 2005                                      $437,772


                Total Defective Pricing Questioned Costs                 $437,772


Lost Investment Income on Defective Pricing Findings                      $79,072


                    Total Questioned Costs                               $516,844
                                                                                          Exhibit B



                                  The Health Plan of the Upper Ohio Valley
                                     Defective Pricing Questioned Costs

 Contract Year 2005
 Per Plan's Reconciliation
 1. Actual Community Rate· i/1l2005

2. Special Benefit Loadings
2a. Prescription Drugs

3. Community Rate plus Special Benefit Loadings


4. Standard Loadings

4a. Extension of Coverage. 0.004 x 30%


 4d. Community rate + Spec. Ben. & Standard Loadings

4e. Enrollment Discrepancies Loading - 1%

 5. TOTAL FEHBP Rates 2005                                      $150.73      $346.68

 Contract Year 2005                                               Self        Family
 Per Audit
 1. Actual Community Rate - 111/2005

2. Special Benefit Loadings

2a. Prescription Drugs


}".'COIpmunity Rate plus Special Benefit Loadings

4. Standard Loadings

4a. Extension of Coverage - 0.004 x 30%


4d. Community rate + Spec, Ben. & Standard Loadings

4e. Enrollment Discrepancies Loading - 1%

5. TOTAL FEHBP Rates 2005                                       $150.73      $346.68
Sa. TOTAL FEHBP Rates 2005 (with SSSG Discount)

Overcharge

To Annualize Overcharge:
   x 3/31/05 Enrollment per Headcount
   x Pay Periods                                                   26           26
Subtotal                                                        $111,994     $325,778   $437,772

TOlal2005 Defective Pricing Questioned Costs                                            $437,772
                                                                                                             ExhibitC

                                             The Health Plan of the Upper Ohio Valley
                                                     Lost Investment Income



  Year                                       2005             2006             2007          2008          Total
Audit Findings:

1. Defective Pricing                            $437,772                 $0             $0           $0       $437,772



                        Totals (per year):      $437,772               $0               $0           $0       $437,772
                       Cumulative Totals:       $437,772         $437,772         $437,772     $437,772       $437,772

            Avg. Interest Rate (per year):          4.375%       5.4375%          5.5000%       4.9375%

         Interest on Prior Years Findings:              $0           $23,804       $24,077      $21,615        $69,496

                  Current Years Interest:           $9,576               $0             $0           $0            $9,576

     Total Cumulative Interest Calculated
            Through December 31, 2008:              $9,576           $23,804       $24,077      $21,6151       $79,072
                                           St. Clairsville Office                     HomeTown Office
                                                                                                                   Appendix
                                     52160 National Road East                 100 Lillian Gish Boulevard
                                St. Clairsville, OH 43950·9365                            P.O. Box 4816
                                           PH: 1.800.624.6961                Massillon,OH 44648-4816
                             Hearing Impaired: 1.800.622.3925                      PH: 1.877.236.2289
                                            FAX: 740.699-6163
                                             www.heallhplan.org
                                                                    OftlfJfiC9lrrrairpH  ~1Illt4j6.2291
                                                                                     ""AX. ~~~7.6869
                                                                                    www.heallhplan.org
                                                                                                           Commercial HMO

                                                                                                            Medicare HMO




  December 10, 2008                                                              'U4-oo -OB-Ol3

    Chief, Community-Rated Audits Group
    V.S. Office of Personnel Management
',. Office of the Inspector General
.' 1900 E Street, NW
    Room 6400
    Washington, D.C. 20415-1100
    RE: Response to the FEHBP draft audit report
    The Health Plan of the Upper Ohio Valley, Inc. (U4)

  Dear_

  I have prepared the response to the audit perforrhed by




                                                 Deleted by the OIG


                                      Not Relevant to the Final Report





  In res oose to the 200S fiodi" s:
                            rate development for 2005 was reduced by a factor o f _ due to The
  Health Plan's anticipation of the addition of s e v e r a l _ t o the Health Plan service area
  brought about by their prior purchase of Hometown ~n Northeast Ohio. The
  underwriter used an                             adjustment factor_that was applied to the
group's incurred claim's experience. In the ACR model, the only area that can be used that affects the
premium development for a 100% credibility group is the Benefit Plan Factor column. The underwriter
simply applied this aggregate area adjustment factor to the paid claims in order to price the group going
forward assuming the addition of the new Health Plan             that had a significantly lower area
adjustment factor (see attached) due to                                                  factors in those
former HomeTown HT counties. The Health Plan operated under the false assumption that we would
be offered to                    ccount in all counties that we possessed a


Once the rates were presented to                   account through their Request for Renewal process
we were not permitted to alter the renewal premiums that we proposed. The Health Plan subsequently
learned from                     ccount that we could only annex our new counties whe~id a
Request for Proposal, and not the Request for Renewal process. Thus, the new counties were not
annexed, but the rate was considered final by                  ccount.

Based on this response to the 2005 findings, The Health Plan believes there should be no financial
penalty, which would eliminate the lost investment income.

Please consider the above response from The Health Plan. If you find you need more information or
have any questions, please contact me at               or by email at




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