Consistent with the FEHBP regulations and contract, the FEHBP is due $53,876 for lost
investment income, calculated through September 30, 2011, on the defective pricing findings. In
addition, we recommend that the contracting officer recover lost investment income starting
October 1, 2011, until all defective pricing amounts have been returned to the FEHBP.
ii
CONTENTS
Page
EXECUTIVE SUMMARY............................................................................................... i
I. INTRODUCTION AND BACKGROUND ..................................................................... 1
II. OBJECTIVES, SCOPE, AND METHODOLOGY ......................................................... 3
III. AUDIT FINDINGS AND RECOMMENDATIONS ....................................................... 5
Premium Rate Review ....................................................................................................... 5
1. Defective Pricing............................................................................................................ 5
2. Lost Investment Income ................................................................................................. 6
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 (Humana Health Plan of Texas, Inc.’s September 12, 2011, response
to the draft report)
I. INTRODUCTION AND BACKGROUND
Introduction
We completed an audit of the Federal Employees Health Benefits Program (FEHBP) operations
at Humana Health Plan of Texas, Inc. (Plan). The audit covered contract years 2008 through
2010 and was conducted at the Plan’s office in Louisville, Kentucky. The audit was conducted
pursuant to the provisions of Contract CS 1895; 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
Healthcare and Insurance Office. 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 FEHBP Contracts/Members
rate, which is defined as the best rate March 31
offered to either of the two groups closest 14,000
in size to the FEHBP. In contracting with
12,000
community-rated carriers, OPM relies on
10,000
carrier compliance with appropriate laws
and regulations and, consequently, does 8,000
not negotiate base rates. OPM 6,000
negotiations relate primarily to the level
4,000
of coverage and other unique features of
2,000
the FEHBP.
0
2008 2009 2010
The chart to the right shows the number 6,486 6,294 6,057
Contracts
of FEHBP contracts and members Members 13,182 12,733 12,061
reported by the Plan as of March 31 for
each contract year audited.
1
The Plan has participated in the FEHBP since 1987 and provides health benefits to FEHBP
members in the San Antonio, Austin, and Corpus Christi areas. The Plan has been audited before
with the most recent final report issued on December 16, 2008. The report questioned $328,992,
including $28,415 for lost investment income, and covered contract years 2005 through 2007.
The findings related to the Plan not giving the full SSSG discount to the FEHBP. The Plan
agreed with the findings and returned the appropriate amounts to the FEHBP.
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 on June 14, 2011 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 of the laws and regulations governing the FEHBP.
Scope
FEHBP Premiums Paid to Plan
We conducted this performance audit in
accordance with generally accepted government $63
auditing standards. Those standards require that $62
Millions
we plan and perform the audit to obtain $61
sufficient, appropriate evidence to provide a $60
reasonable basis for our findings and conclusions $59
based on our audit objectives. We believe that $58
the evidence obtained provides a reasonable basis $57
for our findings and conclusions based on our 2008 2009 2010
audit objectives. Revenue $58.2 $60.6 $62.5
This performance audit covered contract years 2008 through 2010. For these years, the FEHBP
paid approximately $181.3 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 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 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 Louisville, Kentucky, during February
2011. Additional audit work was completed at our offices in Cranberry Township, Pennsylvania
and Jacksonville, Florida.
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, 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 Rate Review
1. Defective Pricing $541,470
The Certificates of Accurate Pricing Humana Health Plan of Texas, Inc. (Plan) signed for
contract years 2008 and 2010 were defective. In accordance with federal regulations, the
FEHBP is therefore due a rate reduction for these years. Application of the defective
pricing remedies shows that the FEHBP is entitled to premium adjustments totaling
$541,470 (see Exhibit A). We found that the FEHBP rates were developed in accordance
with the Office of Personnel Management’s (OPM) rules and regulations for contract year
2009.
Federal Employee Health Benefits Acquisition Regulation (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 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.
2008
The Plan selected as the SSSGs for contract
year 2008. We agree with the selection of however, we disagree with the
selection of . Instead, we selected because
terminated its contract with the Plan on June 30, 2008, which makes it
ineligible as an SSSG.
Our analysis of the rates charged to the SSSGs shows that received a
percent discount and received a percent discount. In the 2008
reconciliation, the Plan gave the FEHBP a percent discount. Since the FEHBP is
entitled to a discount equivalent to the largest discount given to an SSSG, the FEHBP
should have received the percent discount given to
Our analysis of the rate development shows that the pooled claims used for
the San Antonio region were incorrect. For the pooled claims, the Plan used four large
claims totaling $1,879,393; however, the documentation provided by the Plan only supports
three large claims totaling $1,252,410. When the correction is made,
received a percent discount.
Accordingly, we re-developed the FEHBP’s rates by applying the percent discount
granted to to our audited line 5 rates. A comparison of our audited line 5
5
rates to the Plan’s reconciled line 5 rates shows that the FEHBP was overcharged $373,222
in contract year 2008 (see Exhibit B).
2010
The Plan selected and
as the SSSGs for contract year 2010. We agree
with these selections. Our analysis of the rates charged to the SSSGs shows that
received a percent discount and received a percent discount.
In the 2010 reconciliation, the Plan applied an “Anticipated SSSG Discount Factor” to the
FEHBP rates of percent. When reviewing both SSSG rate developments, we found
received the highest discount amount of percent. The Plan however applied
the lesser discount of percent. Since the FEHBP is entitled to a discount equivalent to
the largest discount given to an SSSG, the FEHBP should have received the percent
discount given to
Accordingly, we redeveloped the FEHBP rates by applying the percent discount given
to to our audited line 5 rates. A comparison of our audited line 5 rates to the
Plan’s reconciled line 5 rates shows that the FEHBP was overcharged $168,248 in contract
year 2010 (see Exhibit B).
Plan’s Comments (See Appendix):
The Plan agrees with our defective pricing findings for contract years 2008 and 2010.
Recommendation 1
We recommend that the contracting officer require the Plan to return $541,470 to the
FEHBP for defective pricing in contract years 2008 and 2010.
2. Lost Investment Income $53,876
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 in
contract years 2008 and 2010. We determined that the FEHBP is due $53,876 for lost
investment income, calculated through September 30, 2011 (see Exhibit C). In addition,
the FEHBP is entitled to lost investment income for the period beginning October 1, 2011,
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
6
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.
Plan’s Comments (See Appendix):
The Plan agrees and will include lost investment income calculated through the current date
when it remits payment to OPM for defective pricing charges.
Recommendation 2
We recommend that the contracting officer require the Plan to return $53,876 to the
FEHBP for lost investment income for the period January 1, 2008, through September 30,
2011. In addition, we recommend that the contracting officer recover lost investment
income on amounts due for the period beginning October 1, 2011, until all defective pricing
amounts have been returned to the FEHBP.
7
IV. MAJOR CONTRIBUTORS TO THIS REPORT
Community-Rated Audits Group
, Auditor-in-Charge
, Lead Auditor
, Auditor
_______________________________________________________________________
Chief
, Senior Team Leader
8
Exhibit A
Humana Health Plan of Texas, Inc.
Summary of Questioned Costs
Defective Pricing Questioned Costs:
Contract Year 2008 $373,222
Contract Year 2010 $168,248
Total Defective Pricing Questioned Costs: $541,470
Lost Investment Income: $53,876
Total Questioned Costs: $595,346
Exhibit B
Humana Health Plan of Texas, Inc.
Defective Pricing Questioned Costs
2008
High Option Self Family
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate
Overcharge
To Annualize Overcharge:
March 31, 2008 Enrollment
Pay Periods 26 26
Subtotal $194,590
Standard Option
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate
Overcharge
To Annualize Overcharge:
March 31, 2008 Enrollment
Pay Periods 26 26
Subtotal $178,632
Total 2008 Defective Pricing Questioned Costs $373,222
2010
High Option Self Family
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate
Overcharge
To Annualize Overcharge:
March 31, 2010 Enrollment
Pay Periods 26 26
Subtotal $64,562
Standard Option
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate
Overcharge
To Annualize Overcharge:
March 31, 2010 Enrollment
Pay Periods 26 26
Subtotal $103,686
Total 2010 Defective Pricing Questioned Costs $168,248
EXHIBIT C
Humana Health Plan of Texas, Inc.
Lost Investment Income
Year 2008 2009 2010 2011 Total
Audit Findings:
1. Defective Pricing $373,222 $0 $168,248 $0 $541,470
Totals (per year): $373,222 $0 $168,248 $0 $541,470
Cumulative Totals: $373,222 $373,222 $541,470 $541,470 $541,470
Avg. Interest Rate (per year): 4.9375% 5.2500% 3.1875% 2.5625%
Interest on Prior Years Findings: $0 $19,594 $11,896 $10,491 $41,981
Current Years Interest: $9,214 $0 $2,681 $0 $11,895
Total Cumulative Interest Calculated
Through September 30, 2011: $9,214 $19,594 $14,577 $10,491 $53,876
HUMANA RESPONSE TO DRAFT AUDIT REPORT NO. 1C-UR-00-11-013
This document is submitted by Humana Health Plan of Texas, Inc. (“Humana”) and responds
to the Draft Audit Report dated June 14, 2011 issued by the Office of Inspector General of
the Office of Personnel Management ("OPM") regarding the Humana FEHBP Contract
Number 1895 – Plan Code UR for contract years 2008-2010.
The Audit Report questions inappropriate charges for contract years 2008 and 2010 totaling
$590,741 consisting of defective pricing charges of $541,470 and $49,271 due the FEHBP
for lost investment income through 5/31/2011.
Humana concurs with all of the defective pricing charges and, upon release of the Final Audit
report will remit payment including lost investment income calculation through current.
The following are simply clarifications or wording corrections contained in the Draft Audit
Report.
2008
was one of the two SSSGs in contract year. The name comes from the fact
that
was the other SSSG and its selection was appropriate because although
had closer enrollment as of 3/31/2008, its contract with Humana
terminated at 6/30/2008.
Audit of the Federal Employees Health Benefits Program Operations at Humana Health Plan of Texas, Inc.
Published by the Office of Personnel Management, Office of Inspector General on 2011-11-09.
Below is a raw (and likely hideous) rendition of the original report. (PDF)