oversight

Audit of the Federal Employees Health Benefits Program Operations at Dean Health Plan, Inc.

Published by the Office of Personnel Management, Office of Inspector General on 2012-03-12.

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 at Dean Health Plan, Inc.



                                            Report No. \C-WD-OO-\\-03\

                                             Date:          March 12, 2012




                                                          -- CAUTION -­
This Audit report has ~fR di stributed to Fede ra l officials \\'ho arc responsible for Ih e administra tion of Ihe a Udited program. This a udi t
nport may contain proprietary dllt. which is protec ted by Fcdtral llw (18 U.S.c. 19(5). Thurforc, " 'hil e thi s lIudi l report is • •"ai lablt
und er the Freedom of Infor ma tion Act a nd made ava ilablc 10 tht public on th e QIG ,,·cbpage. Clution needs to ~ rxt'rci ~d before
rdcasing Ih e rcpo rt 10 the gcntra l public as il rna)' conlain proprietary inform ation Ihal wu redacted fro m the publidy dist ributed copy.
                               UN ITED STATES OFFI CE OF PERSONNEL MANAGEMENT
                                                  Was hing ton. DC 204 15


  Officc of the
Inspector General



                                               AUDIT REPORT 




                                       Federal Employees Health Benefits Program 

                                    Community-Rated Health Maintenance Organization 

                                                  Dean Health Plan, Inc. 

                                       Contr act Number CS 1966 - Plan Code WD 

                                                   Madison, Wisconsin 




                           Report No. IC-WD-OO-II-031                       Date:   Ma rch 12, 2012




                                                                            Michael R. Esser
                                                                            Assistant Inspector General
                                                                              for Audits




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                           UNITED STATES OFFICE OF PERSONNEL M ANAGEMENT
                                               Washi ngton. DC 2041 5

  Office of the
Inspector General




                                      EXECUTIVE SUMMARY 





                                 Federal Employees Health Benefits Program 

                             Community~Rated Health Maintenance Organization 

                                           Dean Health Plan, inc. 

                                 Contract Number CS 1966 - Plan Code WD 

                                            Madison, Wisconsin 



                    Report No. IC-WD-OO-II-031                   Dak: March 12, 2012


      The Office of the Inspector General perfonned an audit of the Federal Employees Health
      Benefits Program (FEHBP) operations at Dean Health Plan, Inc. (Plan). The audit covered
      contract years 2007 through 2010 and was conducted at the Plan ' s office in Madison, Wisconsin.

      This report questions $57 1,189 for inappropriate health benefit charges to the FEHBP in contract
      year 201 O. The questioned amount includes $55 1,790 for defective pricing and $ 19,399 due the
      FEHBP for lost investment income, calculated through September 3D, 20 11. We found that the
      FEHBP rates were developed in accordance with the Office of Personnel Management's rules
      and regulations in contract years 2007 through 2009.

      For contract year 201 0, we determined that the FEHBP rates were overstated
      defective pricing. More specificall y, we determined that
      received a .    percent discount. The FEHBP received
      for both the FEHBP and .      were a result of an arbitrary business adjustment factor. Also, the
      Plan' s supported claims experience was higher than what was originally used in the rate
      development for .       We applied the difference between the two discounts to the FEHBP 20ID
      audited line 5 audited rates.




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Consistent with the FEHBP regulations and contract, the FEHBP is due $19,399 for lost
investment income, calculated through September 30, 2011 on the defective pricing finding.




                                              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 ............................................................... 7

       Exhibit A (Summary of Questioned Costs)

       Exhibit B (Defective Pricing Questioned Costs)

       Exhibit C (Lost Investment Income)

       Appendix (Dean Health Plan, Inc.’s December 29, 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 Dean Health Plan, Inc. (Plan). The audit covered contract years 2007 through 2010. The audit
was conducted pursuant to the provisions of Contract CS 1966; 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
                                                                       March 31
rate, which is defined as the best rate
offered to either of the two groups closest
                                                      9,000
in size to the FEHBP. In contracting with
                                                      8,000
community-rated carriers, OPM relies on
                                                      7,000
carrier compliance with appropriate laws
                                                      6,000
and regulations and, consequently, does
                                                      5,000
not negotiate base rates. OPM negotiations
                                                      4,000
relate primarily to the level of coverage
                                                      3,000
and other unique features of the FEHBP.
                                                      2,000
                                                      1,000
The chart to the right shows the number of
                                                          0
FEHBP contracts and members reported by                           2007    2008     2009    2010
the Plan as of March 31 for each contract           Contracts     4,287   4,249    4,364   4,340
year audited.                                       Members       8,979   8,771    8,989   8,871




                                                1
The Plan has participated in the FEHBP since 1985 and provides health benefits to FEHBP
members in South Central Wisconsin. The last audit of the Plan conducted by our office was a
full scope audit of contract years 2002, 2003, 2004 and 2006. The audit identified $1,549,398 in
defective pricing, including $117,670 in lost investment income. All issues identified in the
previous 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 on November 18,
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                       $50
auditing standards. Those standards require that                    $45




                                                      Millions
                                                                    $40
we plan and perform the audit to obtain                             $35
sufficient, appropriate evidence to provide a                       $30
                                                                    $25
reasonable basis for our findings and                               $20
conclusions based on our audit objectives. We                       $15
                                                                    $10
believe that the evidence obtained provides a                        $5
reasonable basis for our findings and                                $0
                                                                           2007    2008    2009    2010
conclusions based on our audit objectives.                       Revenue   $37.6   $36.8   $46.3   $46.6


This performance audit covered contract years
2007 through 2010. For these contract years, the FEHBP paid approximately $167.3 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 and additional audit work was completed at the Plan’s office in Madison,
Wisconsin, and our offices located in Washington, D.C., 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 policies and procedures, interviewed appropriate Plan officials, and
performed other auditing procedures necessary to meet our audit objectives.

To test the Plan’s compliance with the FEHBP health benefit provisions regarding coordination
of benefits, we selected and reviewed a judgmental sample of claims for contract years 2007
through 2010. First, we determined the birth year required for Medicare eligibility. Next, we ran
queries on the actual experience claim lines for each contract year and isolated the claims by the
members’ date of birth. Then, we selected claims from the results based upon a dollar value
equal to or greater than $1,000.00. Finally, all of the claims labeled as hospital were pulled and
any claims listed as physicians were excluded from the sample. As a result, this audit included a
2007 sample of 11 claims from 205,239 claim lines; a 2008 sample of 13 claims from 229,300
claim lines; a 2009 sample of 10 claims from 265,705 claim lines; and a 2010 sample of 9 claims
from 271,302 claim lines. The results from the various samples were not projected to the
population as a whole.




                                                 4
             III. AUDIT FINDINGS AND RECOMMENDATIONS
Premium Rate Review

1. Defective Pricing                                                             $551,790

  The Certificate of Accurate Pricing Dean Health Plan, Inc. (Plan) signed for contract year
  2010 was defective. In accordance with federal regulations, the Federal Employees Health
  Benefits Program (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 $551,790 (see Exhibit A). We found that the FEHBP rates were developed in
  accordance with OPM rules and regulations in contract years 2007 through 2009.

  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. FEHBP regulations refer to a market price rate in conjunction with the
  rates offered to a similarly sized subscriber group (SSSG). SSSGs are the Plan’s two
  employer groups closest in subscriber size to the FEHBP. If it is found that the FEHBP was
  charged higher than a 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.

  2010

  We agree with the Plan’s selection of                            (      and
          as SSSGs for contract year 2010. Our analysis of the rates charged to the SSSGs
  shows that     received a      percent discount and                      did not receive a
  discount. The Plan applied a      discount to the FEHBP.

  Included in the Plan’s rate development model is a factor entitled business adjustment.
  During our review, we determined that the business adjustment factor is an unsupported
  underwriting adjustment used by the Plan to modify a group’s rates to obtain the revenue they
  feel is necessary. There are no objective criteria supporting the factor’s development.

  In developing our audited rates for contract year 2010, we removed the business adjustment
  factors for both the FEHBP and the SSSGs in order to develop the true rates each group
  should have received. As a result,      (Active and Retirees) received a blended discount of
       percent. The discount granted to       resulted from the business adjustment factor and a
  variance in the claims experience used in the Plan’s rate development versus the claims
  experience reports provided by the Plan.

  Since OPM requires the FEHBP rates to be at least equivalent to the best rates for an SSSG,
  we recalculated the FEHBP rates by removing the       percent discount and applying the
       percent discount given to   (Active and Retirees). A comparison of our audited line 5


                                               5
  rates to the Plan’s reconciled line 5 rates shows that the FEHBP was overcharged $551,790 in
  contract year 2010 (see Exhibit B).

  Plan’s Comments (see Appendix):

  The Plan agrees with our defective pricing finding for contract year 2010 and has issued a
  check for the recommended amount.

  Recommendation 1

  Since the Plan has returned the $551,790 to the FEHBP for defective pricing in contract year
  2010, no further action is recommended.

2. Lost Investment Income                                                         $19,399

  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 year 2010. We determined that the FEHBP is due $19,399 for lost investment
  income, calculated through September 30, 2011 (see Exhibit C).

  Federal Employees Health Benefits Acquisition Regulation 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.

  Plan’s Comments (see Appendix):

  The Plan agrees with our lost investment income finding for contract year 2010 and has issued
  a check for the recommended amount.

  Recommendation 2

  Since the Plan has returned the $19,399 to the FEHBP for lost investment income for the
  period January 1, 2010 through September 30, 2011, no further action is recommended.




                                               6
            IV. MAJOR CONTRIBUTORS TO THIS REPORT

Community-Rated Audits Group

                   , Auditor-in-Charge

                Lead Auditor

                   , Auditor

_______________________________________________________________________

                   Chief

                 , Senior Team Leader




                                         7
                                                                       Exhibit A


                                         Dean Health Plan, Inc.
                                      Summary of Questioned Costs



Defective Pricing Questioned Costs:


      Contract Year 2010                                    $551,790



              Total Defective Pricing Questioned Costs:                $551,790


      Lost Investment Income:                                           $19,399


                  Total Questioned Costs:                              $571,189
                                                                           Exhibit B

                                       Dean Health Plan, Inc.
                                 Defective Pricing Questioned Costs



2010

                                               Self           Family
FEHBP Line 5 - Reconciled Rate
FEHBP Line 5 - Audited Rate

Overcharge

To Annualize Overcharge:
   3/31/10 enrollment
   Pay Periods                                 26               26
Subtotal

Total Defective Pricing Questioned Costs                               $551,790
                                                                                 Exhibit C

                                     Dean Health Plan, Inc.
                                     Lost Investment Income



  Year                                         2010            2011             Total
Audit Findings:

1. Defective Pricing                              $551,790                $0       $551,790


                        Totals (per year):        $551,790              $0         $551,790
                       Cumulative Totals:         $551,790        $551,790

            Avg. Interest Rate (per year):            3.188%      2.5625%

         Interest on Prior Years Findings:                $0          $10,605           $10,605

                  Current Years Interest:             $8,794              $0             $8,794

     Total Cumulative Interest Calculated
            Through September 30, 2011:               $8,794          $10,605           $19,399
                                                                                   APPENDIX




December 29, 2011




Chief, Community-Rated Audits Group
U.S. Office of Personnel Management
Office of the Inspector General
800 Cranberry Woods Drive
Suite 270
Cranberry Township, PA 16066


RE: Dean Health Plan, Inc. and Federal Employees Health Benefits Program (FEHBP)
    Draft Report


This letter is in response to the proposed findings and recommendations set forth in the above-
referenced draft audit report (the “Draft Report”) on the Federal Employees Health Benefits
Program (“FEHBP”) operations at Dean Health Plan (“Dean”) for contract years 2007, 2008,
2009, and 2010.

The draft report confirmed that the FEHBP rates were developed in accordance with the Office
of Personnel Management’s (“OPM”) rules and regulations in contract years 2007-2009.
However, the auditors disagreed with Dean’s calculated rate for FEHBP for year 2010 and
made a preliminary finding that Dean overstated the FEHBP rates by $551,790 due to defective
pricing. FEHBP is seeking a rate reduction for the 2010 year due to a business adjustment
factor that was used to modify a SSSG group’s rate resulted a variance in the claims experience
used in Dean’s rate development versus the claims experience reports that were provided by
Dean.

According to the FEHBP Acquisition Regulation 1652.215-70, OPM is entitled to lost investment
income when rates are reduced due to defective pricing. OPM determined FEHBP is due an
amount of $19,399 calculated through September 30, 2011. The regulation entitles a continuum
of interest accrual as of October 1, 2011 until the overcharge is paid.


OPM Recommendation 1:
OPM recommends that the contracting officer require Dean to return $551,790 to the FEHBP for
defective pricing in contract year 2010.


Dean’s Comments to Recommendation 1:
Dean agrees with OPM’s defective price finding and the variance in the claims experience
reports. Dean does not wish to contest the overstated amount of $551,790. The overstated
amount will be returned as recommended.
                                                                                       APPENDIX




OPM Recommendation 2:
OPM recommends that the contracting officer require the Plan to return $19,399 to the FEHBP
for lost investment income for the period of January 1, 2010 through September 30, 2011. In
addition, we recommend that the contracting office 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.


Dean’s Comments to Recommendation 2:
Dean is in agreement with the FEHBP Acquisition Regulation 1652.215-70 and that 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.

Dean is in disagreement with the interest accrual timeframe being calculated through to
September 30, 2011. Dean received the issued draft report, November 28, 2011; 105 days past
the 90 day draft report deadline as stated by the OPM auditors in the entrance conference of
June 13, 2011. Dean is being charged interest on a matter that was unknown to the plan. Dean
is requesting the accrual interest timeframe to end as of the noted September 30, 2011 date.
Dean agrees with the variance charge from recommendation one, that if Dean would have
received the draft report in August, there would not have been any additional interest accrual
amount being added. Dean would like to request all interest accrual ends as of the month of
September since Dean is not contesting the findings and will pay the defective pricing amount of
$551,790 plus the nine months of interest accrual, $19,399 for a total of $571,189.


Conclusion:
In closing, Dean is in agreement with OPM’s Recommendation 1 and partially agrees with
Recommendation 2. Dean is requesting the interest accrual to end as of September 30 with no
additional added interest there forward. Dean is proposing an amount due to OPM of $571,189.

Enclosed please find a check in the amount of $571,189 to close this matter. We would be
happy to respond to any additional questions you may have and consider this matter closed.

Please contact me at                 for any additional information you may require.


Sincerely,




Lon Sprecher, President and CEO
Dean Health Plan