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UNITED STATES OFFICE OF PERSONNEL MANAGEMENT
Washington, DC 20415
Office of the
Inspector General
AUDIT REPORT
Federal Employees Health Benefits Program
Comprehensive Medical Plan - Community-Rated
Humana Health Plan of Texas
Contract Number 1895 - Plan Code OR
Louisville, Kentucky
Report No. lC-UR-OO-08-030 Date: December 16, 2008
~~Michael R. Esser
Assistant Inspector General
for Audits
www.opm.gov www.usaJobS.gov
UNITED STATES OFFICE OF PERSONNEL MANAGEMENT
Washington, DC 20415
Office of the
Inspector General
EXECUTIVE SUMMARY
Federal Employees Health Benefits Program
Comprehensive Medical Plan - Community-Rated
Humana Health Plan of Texas
Contract Number 1895 - Plan Code UR
Louisville, Kentucky
Report No. lC-UR-OO-08-030 Date: December 16, 2008
The Office of the Inspector General perfonned an audit of the Federal Employees Health
Benefits Program (FEHBP) operations at Humana Health Plan of Texas (Plan). The audit
covered contract years 2005 through 2007 and was conducted at the Plan's office in Louisville,
Kentucky. Additional field work was performed at our office in Washington, D.C.
This report questions $328,992 for inappropriate health benefit charges to the FEHBP in contract
years 2005 and 2007. The questioned amount includes $300,577 for defective pricing and
$28,415 due the FEHBP for Jost investment income, calculated through October 31,2008. We
found that the FEHBP rates were developed in accordance with the Office of Personnel
Management's roles and regulations in 2006.
For contract years 2005 and 2007, we determined that the FEHBP's rates were overstated by
$300,577 due to defective pricing. More specifically, the Plan did not apply the correct
discounts given to a similarly sized subscriber group to the FEHBP rates.
Consistent with the FEHBP regulations and contract, the FEHBP is due $28,415 for lost
investment income, calculated through October 31, 2008, on the defective pricing findings.
The Plan agreed with the findings and remitted a check for $328,992.
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CONTENTS
EXECUTIVE 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
IV. MAJOR CONTRIBUTORS TO THIS REPORT 7
Exhibit A (Summary of Questioned Costs)
Exhibit B (Defective Pricing Questioned Costs)
Exhibit C (Lost Investment Income)
Appendix (Humana Health Plan of Texas' November 13, 2008, response
to the draft report)
I. INTRODUCTION AND BACKGROUND
Introduction
We completed an audit ofthe Federal Employees Health Benefits Program (FEHBP) operations
at Humana Health Plan of Texas (Plan) in Louisville, Kentucky. The audit covered contract
years 2005 through 2007. The audit was conducted pursuant to the provisions of Contract 1895;
5 U.S.C. Chapter 89; and 5 Code of Federal Regulations (CFR) Chapter 1, Part 890. The audit
was perfonned by the Office of Personnel Management's (OPM) Office of the Inspector
General, as established by the Inspector General Act of 1978, as amended.
Background
The FEHBP was established by the Federal EmployeesHealth 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 contraqts with various
health insurance carriers that provide service benefits, indemnity benefits, or comprehensive
medical services.
Community-rated carriers participating in the FEHBP are subject to various federal, state and
local laws, regulations, and ordinances. While most carriers are subject to state jurisdiction,
many are further subject to the Health Maintenance Organization Act of 1973 (Public Law 93
222), as amended (i.e., many community-rated carriers are federally qualified). In addition,
participation in the FEHBP subjects the carriers to the Federal Employees Health Benefits Act
and implementing regulations promulgated by 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 21,000
carriers, OPM relies on carrier compliance with
appropriate laws and regulations and, 16,000
consequently, does not negotiate base rates.
OPM negotiations relate primarily to the level 11,000
of coverage and other unique features of the
FEHBP. 6,000
1,000
The chart to the right shows the number of
FEHBP contracts and members reported by the • Contracts 8,654 7,846 6,945
Plan for March 31 of each contract year o Members 19,776 16,910 14,474
audited.
1
The Plan began participating in the FEHBP as a community-rated comprehensive medical plan
in 1987 and provides comprehensive medical services to FEHBP members throughout the San
Antonio area. The last audit of the Plan conducted by our office was a full scope audit of
contract years 2000 through 2004. All issues related to that audit have been resolved.
. 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 determine whether the Plan was in compliance with the
provisions of the laws and regulations governing the FEHBP.
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 FEHBP Premiums Paid to Plan
2005 through 2007. During this period, the
FEHBP paid approximately $209.7 million in
$90
premiums to the Plan. The premiums paid for
each contract year audited are shown on the $70
chart to the right.
$50
OIG audits of community-rated carriers are
$30
designed to test carrier compliance with the
FEHBP contract, applicable laws and $10
regulations, and OPM rate instructions. These
audits are also designed to provide reasonable • Revenue
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 detennine the nature, timing, and extent of our audit procedures. However, the
audit included such tests ofthe Plan's rating systems and such other auditing procedures as we
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 an SSSG); and
• the loadings to the FEHBP rates were reasonable and equitable.
3
In conducting the audit, we relied to varying deg'rees on computer-generated billing, enrollment,
and claims data provided by the Plan. We did not verify the reliability of the data generated by
the various information systems involved. However, nothing came to our attention during our
audit testing utilizing the computer generated data to cause us to doubt its reliability. We believe
that the available data was sufficient to achieve our audit objectives. Except as noted above, the
audit was performed in accordance with generally accepted government auditing standards,
issued by the Comptroller General of the United States.
The audit fieldwork was conducted at the Plan's office in Louisville, Kentucky, during
April 2008. Additional audit work was completed at our office in 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 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
detennine 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 $300,577
The Certificates of Accurate Pricing the Plan signed in contract years 2005 and 2007 were
defective. In accordance with federal regulations, the FEHBP is therefore due a price
reduction for these years. Application of the defective pricing remedies shows that the
FEHBP is entitled to premium adjustments totaling $300,577 (see Exhibit A). We found that
the FEHBP rates were developed in accordance with the OPM's rules and regulations for
contract year 2006.
Carriers proposing rates to aPM 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 higher than a market price rate
(i.e., the best rate offered to an SSSG), a condition of defective pricing exists, requiring a
downward adjustment of the FEHBP premiums to the equivalent market price.
The Plan selected s
the SSSGs for co~ear 2005. We agree with these selections. Our analysis of the S·SSG
rates shows that _ received a "percent discount and received a "
percent discount. In the 2005 reconciliation, the Plan gave the FEHBP a ~ercent
discount. Since the FEHBP is entitled to a discount equivalent to the largest discount given to
an SSSG, we recalculated the FEBHP rates using the _discount given . A
comparison ofthe audited rates to the reconciled rates shows that the FEHBP was
overcharged $75,006 in contract year 2005 (see Exhibit B).
The Plan selected as the SSSGs for contract year
2007. We agree WI t ese se ections. Our ana ySIS 0 t e SSSG rates shows that _
_ eceived a _ percent discount, while did not receive a
discount. In the 2007 reconciliation, the Plan gave the FEHBP a ereent discount. Since
the FEHBP is entitled to a discount equivalent to the largest discount given to an SSSG, we
recalculated the FEHBP rates using the _discount given to . A
comparison of the audited rates to the reconciled rates shows that the FEHBP was
overcharged $225,571 in contract year 2007 (see Exhibit B).
5
Recommendation 1
After receiving the draft audit report, the Plan returned $300,577 to the FEHBP for defective
pricing in the contract years 2005 and 2007. Since we verified that the Plan returned
$300,577 to the FEHBP, no further action is required.
2. Lost Investment Income $28,415
In accordance with FEHBP regulations and the contract between OPM and the Plan, the
FEHBP is entitled to recover lost investment income on the defective pricing findings in
contract years 2005 and 2007. We determined that the FEHBP is due $28,415 for lost
investment income, calculated through October 31,2008 (see Exhibit .C).
FEHBAR 1652.215-70 provides that, if any rate established in connection with the FEHBP
contract was increased because the carrier furnished cost or pricing data that was not
complete, accurate, or current as certified in its Certificate of Accurate Pricing, the rate shall
be reduced by the amount ofthe 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 ofthe 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
Treasuryts semiannual cost of capital rates.
Recommendation 2
After receiving the draft audit report, the Plan returned $28,415 to the FEHBP for lost
investment income on the defective pricing findings in contract years 2005 and 2007. Since
we verified that the Plan returned $28,415 to the FEHBP, no further action is required.
'Plan"'s Comments (See Appendix):
The Plan agrees with the defective pricing findings and the calculated lost investment income
and submitted payment in the full amount of $328,992 ($300,577 + $28,415).
6
IV. MAJOR CONTRIBUTORS TO THIS REPORT
Community-Rated Audits Group
Auditor-In-Charge
Auditor
Group Chief
Senior Team Leader
7
Exhibit A
Humana Health Plan of Texas
Summary of Questioned Costs
Defective Pricing Questioned Costs:
Contract Year 2005 $75,006
Contract Year 2007 $225,571
Total Defective Pricing Questioned Costs $300,577
Lost Investment Income on Defective Pricing Findings $28,415
Total Questioned Costs $328,992
Exhibit B
Page 1 of2
Humana Health Plan of Texas
Defective Pricing Questioned Costs
2005
High Option
FEHBP Line 5 - Reconciled Rate
FEHEP Line 5 - Audited Rate
Overcharge
To Annualize Overcharge:
x 3/31/05 enrollment
x Pay Peliods 26 26
Subtotal $11,466 $35,977 $47,443
Standard Option
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate
Overcharge
To Annualize Overcharge:
x 3/31/05 enrollment
x Pay Periods 26 26
Subtotal $3,908 $23,655 $27,563
Total 2005 Defective Pricing Questioned Costs $75,006
Exhibit B
Page 2 of2
Humana Health Plan of Texas
Defective Pricing Questioned Costs
2007
High Option
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate
Overcharge
To Annualize Overcharge:
x 3/31/07 enrollment
x Pay Periods 26 26
Subtotal $67,959 $144,367 $212,326
Standard Option
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate
Overcharge
To t\n~ualize Overcharge:
- x-3/3l!07 enrollment
x Pay Periods
Subtotal
26
$1,962
26
$11)83 $13,245
Total 2007 Defective Pricing Questioned Costs $225,571
Exhibit C
Humana Health Plan of Texas
Lost Investment Income
Year 2005 2006 2007 2008 Total
Audit Findings:
1. Defective Pricing $75,006 $0 $225,571 $0 $300,577
Totals (per year): $75,006 $0 $225,571 $0 $300,577
Cumulative Totals: $75,006 $75,006 $300,577 $300,577 $300,577
Avg. Interest Rate (per year): 4.375% 5.4375% 5.5000% 4.9375%
Interest on Prior Years Findings: $0 $4,078 $4,125 $12,368 $20,571
Current Years Interest: $1,641 $0 $6,203 $0 $7,844
Total Cumulative Interest Calculated
Through October 31, 2008: $1,641 $4,078 $10,328 $12,3681 $28,415
Page 1 of 1
From: APPENDIX
Sent: Thursday, November 13,2008 5:14 PM
To:
Subject: Humana Response to Draft Audit Report 1C:-UR-OO-08-030
this email should se""e as documentation that Humana agrees with all findings contained in the Draft
Audit Report of Humana Health Plan of Texas (plan code UR) issued August 8, 2008.
We agree with the audit findings of $300,577 in inappropriate, or defective pricing, charges plus accumulated
interest charges totalling $28,415.
The total charges of $328,992 was remitted to aPM last week.
Actuary, FEHBP & IL Region
Large Group Actuarial
Humana Inc.
The infomlation transmitted is intended only for the person or entity to which it is addre~sed and may contain
CONFIDENTIAL materiaL [fyou receive this material/information in error, please contact the sender and delete or destroy
the material/infolTllation.
Audit of the Federal Employees Health Benefits Program Operations at Humana Health Plan of Texas
Published by the Office of Personnel Management, Office of Inspector General on 2008-12-16.
Below is a raw (and likely hideous) rendition of the original report. (PDF)