U.S. OFF ICE OF PERSONNEL MANAGEMENT OFFICE OF THE INSPECTOR GENERAL OFFICE OF AUDITS Final Audit Report Su bj ect : Audit of the Feder al Employees Health Benefits Program Ope r ations at Humana Health Plans of Puerto Rico, Inc. Report No. I C-ZJ-OO-I 0-056 Date: April 13 , 2011 -- CAUTION - This a udi t report has been distribu ted In Fede ra l officia l"! whu a rc rt·!'.pllu\ihle for the adminlstrution of the a udited prog ra m. Th is a ud it report IIlHy cun tal n proprietary d at a wh tr h is p ro tected b)' Fcd cra t tuw (I ~ tl.S.c. 1905). Th erefore, wh ile th is a udit repo rt is a vail abl e und er the Freedom of Information Act a nd made available to t he pub lic 0 11 t he O IG webpage, ca u tion needs til be exercised before n 'l easing the repo r t te the general public li S it may co nta in p l'(jprietHQ in for mation Chat was reda ct ed from tilt" publicly dist ribu ted COP)'. UNITED STATES OFFIC E OF PERSONNEL MA NAGEMENT Washi ngton. DC 204 L5 Office of the lnspector General AUDIT REPORT Federal Employees Health Benefits Program Comm unity-Rated Health Maintenance Organization Humana Health Plans of Puerto Rico, Inc. Co nt r act Nu mber 2872 -I'lan Code ZJ Sa n Jua n, Puerto Rico Repo rt No. IC-Z,J-OO-I O-056 Date: April 1 3, 2 0 11 Michael R. Esser Assistant In sp ector Ge ne r al fo r Audits ww w.o pm.gov w ww. usaj o bs. g ov UNITED STAT ES OFFICE OF PE RSONNEL MANAGEMENT Was hingto n, DC 20415 Office of the Inspector General EXECUTIVE SUMMARY Federal Employees Health Benefits Program Comm unity-Ra ted Health Maintena nce Organization H umana Hea lth Pla ns of Puerto Rico, Inc. Contract Num ber 2872 - Plan Code Z.J Sa n .Juan , Puerto Rico Re port No. tC-Z-J-OO-1O-056 Dat e: April 13, 2011 The Office of the Inspect or General performed an aud it of the Federal Employees Health Benefits Program (FEIIBP) operations at Humana Healt h Plans of Puerto Rico. Inc. (Plan) . The audit covered contract years 2005 through 2010 and was cond ucted at the PIan' s office in San Juan. Puerto Ric o. Additional audit work was performe d at our offic es in Jackso nville. Florida. and Washington, D.C. This report questions $208 ,502 for inappropriate hea lth bene fit charges to the FEH BP in contract years 2005 and 2009 . The questi oned amo unt incl udes $177.7 10 for defective pricing and $30,792 d ue the FEHBP for lost investment income, calculated through December 31, 20 10. We fo und that the FEHB P rates were develope d in acco rdance with the Office of Personnel Management' s rules and regulations in cont ract years 2006. 2007. 2008, and 20 10. In contract year 2005. we determined that the FE] IBP's rates were o verstated by $98.906 because the Plan overstated the med ical claims used in the rate developm ent. The medical claims included a dental fee for service cla ims. whic h were disallowed, becau se dcntal was a non FE HBP benefit to r contract year 2005. There fore, the dental claims should not be inclu ded in the total medical claim s. Additionally, we found that the Plan failed to apply a 1.49 percent discount to the FEllBP that was given to American Airlines, a sim ilarly sized subscriber group. www .op m.go v www.usajo bs.gov In 2009, we determined that the FEHBP’s rates were overstated by $78,804 because the Plan incorrectly calculated the FEHBP's special benefit loading adjustments. Consistent with the FEHBP regulations and contract, the FEHBP is due $30,792 for lost investment income, calculated through December 31, 2010, on the defective pricing findings. In addition, we recommend that the contracting officer recover lost investment income starting January 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 Rates ................................................................................................................ 5 1. Defective Pricing.......................................................................................................... 5 2. Lost Investment Income ............................................................................................... 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 (Humana, Inc.’s March 10, 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 Plans of Puerto Rico, Inc. (Plan). The audit covered contract years 2005 through 2010 and was conducted at the Plan’s office in San Juan, Puerto Rico. The audit was conducted pursuant to the provisions of Contract CS 2872; 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 6,000 in size to the FEHBP. In contracting with 5,000 community-rated carriers, OPM relies on carrier compliance with appropriate laws 4,000 and regulations and, consequently, does 3,000 not negotiate base rates. OPM negotiations relate primarily to the level 2,000 of coverage and other unique features of 1,000 the FEHBP. 0 2005 2006 2007 2008 2009 2010 The chart to the right shows the number 1,631 1,602 2,191 2,240 2,151 2,130 Contracts of FEHBP contracts and members Members 3,960 4,425 5,825 5,892 5,756 5,657 reported by the Plan as of March 31 for each contract year audited. 1 The Plan has participated in the FEHBP since 2003 and provides health benefits to FEHBP members throughout Puerto Rico. This is the first audit of the Plan conducted by our office since the start of its participation in 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 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 $20 accordance with generally accepted government auditing standards. Those standards require that $15 Millions we plan and perform the audit to obtain sufficient, appropriate evidence to provide a $10 reasonable basis for our findings and conclusions $5 based on our audit objectives. We believe that the evidence obtained provides a reasonable basis $0 for our findings and conclusions based on our 2005 2006 2007 2008 2009 audit objectives. Revenue $5.7 $9.1 $12.3 $12.4 $12.9 This performance audit covered contract years 2005 through 2010. For contract years 2005 through 2009, the FEHBP paid approximately $52.4 million in premiums to the Plan. 1 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. 1 The Subscription Income Report for 2010 was not available at the time this report was completed. 3 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 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 San Juan, Puerto Rico, during August 2010. Additional audit work was completed at our offices in Washington, D.C., and Jacksonville, Florida. Methodology We examined the Plan’s federal rate submissions and related documents as a basis for validating the market price rates. Further, we examined claim payments to verify that the cost data used to develop the FEHBP rates was accurate, complete, and valid. 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 $177,710 The Certificates of Accurate Pricing the Plan signed for contract years 2005 and 2009 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 $177,710 (see Exhibit A). We found that the FEHBP rates were developed in accordance with OPM’s rules and regulations for contract years 2006, 2007, 2008, and 2010. 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. 2005 The Plan selected as the SSSGs for contract year 2005. We agree with these selections. Our analysis of the SSSG rates shows that received a percent discount, while did not receive any discount. Since the FEHBP is entitled to a discount equivalent to the largest discount given to an SSSG, we applied the percent discount given to when we computed the FEHBP rates. Additionally in 2005, the medical claims used in the FEHBP rate development included claims for a dental fee for service benefit. During contract year 2005, dental was not a covered FEHBP benefit; therefore, dental claims should not have been used when developing the FEHBP rate. We recalculated the FEHBP rates using the percent discount given to and removing the dental claims from the FEHBP rate development. A comparison of our audited rates to the reconciled rates shows that the FEHBP was overcharged $98,906 in 2005 (see Exhibit B). 5 Plan’s Comments (See Appendix): The Plan concurs with the defective pricing charges in their entirety for contract year 2005. 2009 The Plan incorrectly calculated the FEHBP's special benefit loading adjustments in contract year 2009. In calculating the FEHBP's special benefit loading adjustments, the Plan failed to apply the self per member per month ratio to the bi-weekly change per cost per member to determine the self rate. We re-developed the FEHBP rates by applying the self per member per month ratio. A comparison of the audited rates to the reconciled rates shows that the FEHBP was overcharged $78,804 in 2009 (see Exhibit B). Plan’s Comments (See Appendix): The Plan concurs with the defective pricing charges in their entirety for contract year 2009. Recommendation 1 We recommend that the contracting officer require the Plan to return $177,710 to the FEHBP for defective pricing in contract years 2005 and 2009. 2. Lost Investment Income $30,792 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 2005 and 2009. We determined that the FEHBP is due $30,792 for lost investment income, calculated through December 31, 2010 (see Exhibit C). In addition, the FEHBP is entitled to lost investment income for the period beginning January 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 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. 6 Plan’s Comments (See Appendix): The Plan concurs with the lost investment income finding on the defective pricing charges in contract years 2005 and 2009. Recommendation 2 We recommend that the contracting officer require the Plan to return $30,792 to the FEHBP for lost investment income, calculated through December 31, 2010. We also recommend that the contracting officer recover lost investment income on amounts due for the period beginning January 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 Auditor , Auditor , Auditor _______________________________________________________________________ , Chief , Senior Team Leader 8 Exhibit A Humana Health Plans of Puerto Rico, Inc. Summary of Questioned Costs Defective Pricing Questioned Costs: Contract Year 2005 $98,906 Contract Year 2009 $78,804 Total Defective Pricing Questioned Costs: $177,710 Lost Investment Income: $30,792 Total Questioned Costs: $208,502 Exhibit B Humana Health Plans of Puerto Rico, Inc. Defective Pricing Questioned Costs 2005 Self Family FEHBP Line 5 - Reconciled Rate FEHBP Line 5 - Audited Rate Overcharge To Annualize Overcharge: 3/31/05 enrollment Pay Periods 26 26 Subtotal Total 2005 Questioned Costs $98,906 2009 Self Family FEHBP Line 5 - Reconciled Rate FEHBP Line 5 - Audited Rate Overcharge To Annualize Overcharge: 3/31/09 enrollment Pay Periods 26 26 Subtotal Total 2009 Questioned Costs $78,804 Total Defective Pricing Questioned Costs $177,710 EXHIBIT C Humana Health Plans of Puerto Rico, Inc. Lost Investment Income Year 2005 2006 2007 2008 2009 2010 Total Audit Findings: 1. Defective Pricing $98,906 $0 $0 $0 $78,804 $0 $177,710 Totals (per year): $98,906 $0 $0 $0 $78,804 $0 $177,710 Cumulative Totals: $98,906 $98,906 $98,906 $98,906 $177,710 $177,710 $751,044 Avg. Interest Rate (per year): 4.375% 5.438% 5.500% 4.938% 5.250% 3.188% Interest on Prior Years Findings: $0 $5,378 $5,440 $4,883 $5,193 $5,665 $26,559 Current Years Interest: $2,164 $0 $0 $0 $2,069 $0 $4,233 Total Cumulative Interest Calculated Through Dec. 31, 2010: $2,164 $5,378 $5,440 $4,883 $7,262 $5,665 $30,792
Audit of the Federal Employees Health Benefits Program Operations at Humana Health Plans of Puerto Rico, Inc.
Published by the Office of Personnel Management, Office of Inspector General on 2011-04-13.
Below is a raw (and likely hideous) rendition of the original report. (PDF)