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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. www.opm.goY www.usajobs.goY 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)