oversight

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)

                                                            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