oversight

Audit of Carefirst BlueChoice - Owings Mills, Maryland

Published by the Office of Personnel Management, Office of Inspector General on 2010-02-25.

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 CAREFIRST BLUECHOICE

                   OWINGS MILLS, MARYLAND




                                            Report No. ID-2G-OO-09-028

                                            Date: February 25, 2010




                                                           --CAUTION-­
This audit report has bun distributed to Feder"l officials who are responsible for the administrMion of Ihe audiled program. This audit
r~lI(Jrt rna)' contain propric'uy data which is protected by Federal law (18 U.S,c. 1<.105). The'"dore, while this audit report is ""ailable
under the Freedom ofloformation Act and made a~"ailable to the public on the OIG webpage, caution needs to be exercised before
releasing the repor'lo lite general public as it may c(lntaiD proprietary information tltal was redaCled from the publicly distribuled copy.
                                                           C:




                        UNITED STATES OFFICE OF PERSONNEL MANAGEMENT

                                            Washington, DC 20415


  Office of the
Inspector General




                                         AUDIT REPORT


                              Federal Employees Health Benefits Program

                           Experience-Rated Health Maintenance Organization



                                        CareFirst BlueChoice

                             Contract CS 2879              Plan Code 2G

                                       Owings Mills, Maryland





                      REPORT NO. ID-2G-OO-09-028           DATE: February 25, 2010




                                                         %f?RCL
                                                            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

                             Experience-Rated Health Maintenance Organization



                                           CareFirst BlueChoice

                                Contract CS 2879             Plan Code 2G

                                          Owings Mills, Maryland





                      REPORT NO. ID-2G-00-09-028               DATE:    February 25, 2010



       This final audit report on the Federal Employees Health Benefits Program (FEHBP) operations at
       CareFirst BlueChoice (Plan) in Owings Mills, Maryland questions $107,358 in administrative
       expenses and lost investment income. The Plan agreed (A) with this questioned amount.

       OUT limited scope audit was conducted in accordance with Government Auditing Standards. The
       audit covered miscellaneous health benefit payments and credits and administrative expenses for
       2004 through 2008 as reported in the Annual Accounting Statements. In addition, we reviewed
       the Plan's cash management practices related to FEHBP funds for contract years 2004 through
       2008.

       Questioned items are summarized as follows:

          A. MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS

       The audit disclosed no findings pertaining to miscellaneous health benefit payments and credits.
       Overall, we concluded that the Plan returned health benefit refunds and recoveries, including
       prescription drug rebates, to the FEHBP in a timely manner.




        www_opm.gov                                                                          www.usajobs.gov
                         B. ADMINISTRATIVE EXPENSES


•   Unallowable and/or Unallocable Cost Centers fA)                                   $107,358

    The Plan charged the FEHBP for two unallowable and/or unallocable cost centers, resulting
    in overcharges of $1 00,234 to the FEHBP. Subsequent to us identifYing these overcharges,
    the Plan returned $107,358 to the FEHBP, consisting of$100,234 for the overcharges and
    $7,124 for lost investment income.

                               c. CASH MANAGEMENT
The audit disclosed no findings pertaining to cash management. Overall, we concluded that the
Plan handled FEHBP funds in accordance with Contract CS 2879 and applicable laws and
regulations.




                                               II
                                       CONTENTS


                                                                                     PAGE

        EXECUTIVE SUM·MARY	                                                                  i


 1.     INTRODUCTION AND BACKGROUND	                                                         I


 II.    OBJECTIVES, SCOPE, AND tvfETHODOLOGY	                                                3


III.	   AUDIT FINDINGS AND RECOMMENDATIONS                                                   6


        A.   MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS                               6


        B.   ADMINISTRATIVE EXPENSES	                                                        6


             1. Unallowable and/or Unallocable Cost Centers	                                 6


        C.   CASH MANAGEMENT	                                                                8


 IV.	   MAJOR CONTRIBUTORS TO THIS REPORT.                                                   9


  V.	   SCHEDULE A - CONTRACT CHARGES AND AMOUNTS QUESTIONED


        APPENDIX (CareFirst BlueChoice reply, dated October 9,2009, to the audit inquiry)

                         I. INTRODUCTION AND BACKGROUND


INTRODUCTION

This final audit report details· the findings, conclusions, and recommendations resulting from our
limited scope audit of the Federal Employees Health Benefits Program (FEHBP) operations at
CareFirst BlueChoice (Plan). The Plan is located in Owings Mills, Maryland.

The audit was perfonned 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 (FEHB) 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. OPM's Retirement and Benefits
  Office has overall responsibility for administration of the FEHBP. The provisions of the FEHB
  Act are implemented by OPM through regulations, which are codified in Title 5, Chapter I, Part
  890 of the Code of Federal Regulations (CFR). Health insurance coverage is made available
  through contracts with various health insurance carriers.

The Plan is an experience-rated health maintenance organization (HMO) that provides health
benefits to federal enrollees and their families. l Emollment is open to all federal employees and
annuitants in the Plan's service area, which includes Maryland, Northern Virginia, and
Washington, D.C.

 The Plan's contract (CS 2879) with OPM is experience-rated. Thus, the costs of providing
 benefits in the prior year, including underwritten gains and losses which have been carried
 forward, are reflected in current and future years' premium rates. In addition, the contract
 provides that in the event of tennination, unexpended program funds revert to the FEHBP Trust
 Fund. In recognition of these provisions, the contract requires an accounting of program funds
 be submitted at the end of each contract year. The accounting is made on a statement of
 operations known as the Annual Accounting Statement.

 Compliance with laws and regulations applicable to the FEHBP is the responsibility of the Plan's
 management. Also, management of the Plan is responsible for establishing and maintaining a
 system of internal controls.




 I Members of an experience-rated HMO have the option of using a designated network of providers or using non­
 network providers. A member's choice in selecting one healthcare provider over another has monetary and medical
 implications. For example, if a member chooses a non-network provider, the member will pay a substantial portion
 ofthe charges and benefits available may be less comprehensive.




                                                         1

This is our first audit ofthis Plan as an experience-rated HMO, The results of this audit were
provided to the Plan in a written audit inquiry (finding) during fieldwork, and were discussed
with Plan officials throughout the audit and at an exit conference. The Plan's comments offered
in response to our audit inquiry were considered in preparing our final report and are included as
an Appendix to this report. Since the- Plan agreed with our audit inquiry, we bypassed the draft
report and only issued a final report. The Plan agreed with this decision.




                                                2

                II. OBJECTIVES, SCOPE, AND METHODOLOGY


OBJECTIVES


The objectives of our audit were to determine whether the Plan charged costs to the FEHBP and
provided services to FEHBP members in accordance with the tenus of the contract. Specifically,
our objectives were as follows:

   Miscellaneous Health Benefit Payments and Credits

   •	 To detennine whether miscellaneous payments charged to the FEHBP were in

      compliance with the terms of the contract.


   •	 To detennine whether credits and miscellaneous income relating to FEHBP benefit
      payments were returned promptly to the FEHBP.

   Administrative Expenses

   •	 To detennine whether administrative expenses charged to the contract were actual,
      allowable, necessary and reasonable expenses incurred in accordance with the tenns of
      the contract and applicable regulations.

   Cash Management

   •	 To determine whether the Plan handled FEHBP funds in accordance with applicable laws
      and regulations concerning cash management in the FEHBP.

SCOPE

We conducted our limited scope perfonnance audit in accordance with generally accepted
government auditing standards. Those standards require that we plan and perfonn the audit to
obtain sufficient and 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.

We reviewed the Plan's Annual Accounting Statements for contract years 2004 through 2008.
During this period, the Plan paid approximately $235 million in health benefit charges and $15
million in administrative expenses (See Figure 1 and Schedule A). The Plan also paid
approximately $1 million in other expenses and retentions (See Schedule A).

Specifically, we reviewed miscellaneous health benefit payments and credits (e.g., refunds,
subrogation recoveries, provider audit recoveries, fraud recoveries and prescription drug rebates),
administrative expenses, and cash management for 2004 through 2008.




                                                 3

In planning and conducting our audit, we                                     CareFirst BlueChoice
obtained an understanding of the Plan's internal                          Summary of Contract Charges
control structure to help determine the nature,
timing, and extent of our auditing procedures.                  $100
This was detennined to be the most effective
approach to sele~t areas of audit. For those              III
                                                                 $75
                                                          c
areas selected, we primarily relied on                    0

substantive tests of transactions and not tests of        :i $50
                                                          ~

controls. Based on our testing, we did not
identify any significant matters involving the                   $25
Plan's internal control structure and its
                                                                  $0
operation. Howevei,~since our audit would not
                                                                          2004      2005       2006       2007    2008
necessarily disclose all significant matters in                                            Contract Years
the internal control structure, we do not express
                                                                r.iI Health Benefit Payments    .Administrative Expenses
an opinion on the Plan's system of internal
controls taken as a whole.
                                                                       Figure I - Contract Charges

We also conducted tests to detennine whether the Plan had complied with the contract, the
applicable procurement regulations (i.e., Federal Acquisition Regulations (FAR) and Federal
Employees Health Benefits Acquisition Regulations (FEHBAR), as appropriate), and the laws
and regulations governing the FEHBP. The results of our tests indicate that, with respect to the
items tested, the Plan did not comply with all provisions of the contract and federal procurement
regulations. Exceptions noted in the areas reviewed are set forth in detail in the "Audit Findings
and Recommendations" section of this audit report. With respect to the items not tested, nothing
came to our attention that caused us to believe that the Plan had not complied, in all material
respects, with those provisions.

In c~hducting our audit, we relied to varying degrees on computer-generated data provided by the
Plan. Due to time constraints, we did not verify the reliability of the data generated by the
various systems involved. However, while utilizing the computer-generated data during our
audit testing, nothing came to our attention to cause us to doubt its reliability. We believe that
the data available was sufficient to achieve our audit objectives.

The audit was performed at the Plan's office in Owings Mills, Maryland on various dates from
May 4, 2009 though August 7, 2009. Audit fieldwork was also performed at our offices in
Washington, D.C.; Cranberry Township, Pennsylvania; and Jacksonville, Florida.




                                                     4

METHODOLOGY


We obtained an understanding ofthe internal controls over the Plan's financial, cost accounting,
and cash management systems by inquiry of Plan officials.

We interviewed Plan personnel and reviewed the Plan's policies, procedures, and accounting
records during our audit of miscellaneous health benefit payments and credits. We also
judgmentally selected and reviewed 10 health benefit refund adjustments, totaling $120,194
(from a universe of23 health benefit refund adjustments, totaling $138,978); 10 provider audit
recoveries, totaling $68,783 (from a universe of86 provider audit recoveries for selected months,
totaling $123,223); 15 subrogation recoveries, totaling $145,608 (from a universe of93
subrogation recoveries, totaling $187,000); 10 fraud recoveries, totaling $28,992 (from a
universe of 26 fraud recoveries, totaling $33,433); and 15 prescription drug rebate adjustments,
totaling $2,045,868 (from a universe of 61 prescription drug rebate adjustments, totaling
$3,981,297), to determine if refunds and recoveries were promptly returned to the FEHBP and if
miscellaneous payments were properly charged to the FEHBP. 2 The results of these samples
were not projected to the universe of miscellaneous payments and credits.

We judgmentally reviewed administrative expenses charged to the FEHBP for contract years
2004 through 2008. Specifically, we reviewed administrative expenses relating to cost centers,
expense accounts, out-of-system adjustments, prior period adjustments, pension, post-retirement,
employee health benefits, executive compensation, subcontracts, lobbying, benefit plan
brochures, and Health Insurance Portability and Accountability Act of 1996 Compliance. We
used the FEHBP contract, the FAR, and the FEHBAR to determine the allowability, allocability,
and reasonableness of charges. The results of the testing were not projected to the universe of
administrative expenses.

We also reviewed the Plan's cash management to determine whether the Planhandled FEHBP
funds in accordance with Contract CS 2879 and applicable laws and regulations.




2 The sample of health benefit refund adjustments consisted of the two highest adjustments for each year from 2004
through 2008. The sample of provider audit recoveries consisted of all recoveries greater than $2,000 for selected
months in 2004 through 2008. The sample of subrogation recoveries consisted of all recoveries greater than $2,500
from 2004 through 2008. The sample of fraud recoveries consisted of all recoveries greater than $1,000 from 2004
through 2008. The sample of prescription drug rebate adjustments consisted of the three highest adjustments for
each year from 2004 through 2008.




                                                         5

             III. AUDIT FINDINGS AND RECOMMENDATIONS


A. MISCELLANEOUS HEALTH BENEFIT FAYMENTS AND CREDITS

  The audit disclosed no findings pertaining to miscellaneous health benefit payments and
  credits. Overall, we concluded that the Plan returned health benefit refunds and recoveries,
  including prescription drug rebates, to the FEHBP in a timely manner.

B. ADMINISTRATIVE EXPENSES

  1. Unallowable and/or Unallocable Cost Centers                                        $107,358

     The Plan charged the FEHBP for two unallowable and/or unallocable cost centers,
     resulting in overcharges of $1 00,234 to the FEHBP. Subsequent to us identifying these
     overcharges, the Plan returned $107,358 to the FEHBP, consisting of $100,234 for the
     overcharges and $7,124 for lost investment income (LII).

     Contract CS 2879, Part III, Section 3.2(b)(l) states, "The Carrier may charge a cost to the
     contract for a contract tenn if the cost is actual, allowable, allocable, and reasonable."

     48 CFR 31.201-4 states, "A cost is allocable if it is assignable or chargeable to one or more
     cost objectives on the basis of relative benefits received or other equitable relationship.
     Subject to the foregoing, a cost is allocable to a Government contract if it­
     a)    Is'incurred specifically for the contract;
     b) Benefits both the contract and other work, and can be distributed to them in
           reasonable proportion to the benefits received; or
     c)    Is necessary to the overall operation ofthe business, although a direct relationship to
           any particular cost objective cannot be shown."

     48 CFR 52.232-17(a) states, "all amounts that become payable by the Contractor ... shall
     bear simple interest from the date dOe ... The interest rate shall be the interest rate
     established by the Secretary of the Treasury as provided in Section 611 of the Contract
     Disputes Act of 1978 (Public Law 95-563), which is applicable to the period in which the
     amount becomes due, as provided in paragraph (e) of this clause, and then at the rate
     applicable for each six-month period as fixed by the Secretary until the amount is paid."

     For the period 2004 through 2008, the Plan allocated administrative expenses of
     $11,540,003 to the FEHBP from] ,838 cost centers. From this universe, we selected a
     judgmental sample of38 cost centers to review, which totaled $3,597,285 in expenses
     allocated to the FEHBP. We selected the cost centers based on high dollar amounts, our
     nomenclature review, and significant dollar amount fluctuations from year to year. We
     reviewed the expenses from these cost centers for allowability, allocability, and
     reasonableness.




                                               6
Based on our review, we identified two cost centers that were unallowable and/or did not
benefit the FEHBP.

•	 For cost center "00757" (Individual Telesales), the Plan allocated corporate advertising
   expenses, totaling" $97,503, to the FEHBP from 2006 through 2008. Specifically, these
   advertising expenses were for telesales to "Market all product lines to increase
   enrollment" and internet sales to "Educate internet prospects". Regarding advertising
   expenses charged to the FEHBP, 48 CFR 31.205-1 and 48 CFR 1631.205-70 provide
   specific criteria on the extent to which such expenses are chargeable. Generally, these
   regulations state that such expenses are unallowable.

•	 For cost center "00106" (Broker Compensation System Replacement), the Plan
   allocated broker expenses of $2,731 to the FEHBP in 2008. The Plan stated that these
   expenses were inadvertently allocated to the FEHBP.

In total, the Plan charged the FEHBP $100,234 for these unallowable and/or unallocable
cost center expenses. After receiving our audit inquiry, the Plan returned the questioned
cost center charges of $1 00,234 and applicable LII of $7,124 to the FEHBP. As part of
our review, we verified that the Plan returned these funds to the FEHBP letter of credit
account on October 1, 2009.

Plan's Response:

The Plan agrees with this finding. The Plan returned the questioned cost center charges
and applicable LII to the FEHBP on October 1, 2009.

In reference to cost center "00757" (Individual Telesales), the Plan states, "In September
2006, the Account Product Specialist Manager tenninated employment with CareFirst,
and the FEHBP HMO Field Service activities were transitioned to another Account
Manager residing in a different cost center. However, the Plan identified that a mapping
of the FEHBP HMO contracts to the Account Product Specialist Manager's marketing
representative number continued through the present and resulted in the incorrect
allocation of $97,503 from September 2006 through December 2008. Since the incorrect
mapping has been identified, the Plan has correctly mapped the FEHBP HMO contracts
to the current Account Manager marketing representative."

In reference to cost center "001D6" (Broker Compensation System Replacement), the
Plan agrees that the expenses related to this cost center were inadvertently allocated to the
FEHBP.

Recommendation 1

We verified that the Plan returned $100,234 to the FEHBP for the questioned cost center
charges. Therefore, no further action is required for these questioned charges.




                                          7
     Recommendation 2

     We verified that the Plan returned $7,124 to the FEHBP for LLI on the questioned cost
     center charges. Therefore, no further action is required for this LII amount.

C. CASH MANAGEMENT

  The audit disclosed no findings pertaining to cash management. OveraIJ, we concluded that
  the Plan handled FEHBP funds in accordance with Contract CS 2879 and applicable laws and
  regulations.




                                            8

              IV. MAJOR CONTRIBUTORS TO THIS REPORT

Experience-Rated Audits Group

               Auditor-In-Charge

              , Auditor

                  Auditor

                 Auditor

                 Auditor


                   Chief

              Senior Tearn Leader




                                    9

                                                                        ,       V. SCHEDULE A

                                                                        , CAREFIRST BLUECHOICE

                                                                        OWINGS MILLS, MARYLAND


                                                        CONTRACT CHARGES AND AMOUNTS QUESTIONED



CONTRACT CHARGES*                                                             2004          2005          2006          2007          2008        TOTAL


HEALTH BENEFIT CHARGES                                                      $31,119,521   $35,068,755   $41,131,980   $53,197,740   $74,208,829   $234,726,825

ADMINISTRATIVE EXPENSES                                                       2,496,340     2,170,846     2,607,078     3,256,008     4,166,604     14,696,876

OTHER EXPENSES AND RETENTIONS                                                  268,954        68,353        92,083       224,062       324,621         978,073

      TOTAL CONTRACT CHARGES                                            I   $33,884,815   $37,307,954   $43,831,141   $56,677,810   $78.700,054   $250,401,774 I



AMOUNTS QUESTIONED                                                            2004          2005          2006          2007          2008        TOTAL


     MISCELLANEOUS HEALTH BENEFIT PAYMENTS
A. ' AND CREDITS                                                                     SO            SO            SO            SO            SO            $0


.B.   ADMINISTRATIVE EXPENSES

      1. Unallowable and/or Unallocable Cost Centers**                                0             0       13,581        43,412        50,365         107,358

C. CASH MANAGEMENT                                                                    0             0             0             0             0              0

      TOTAL AMOUNTS QUESTIONED                                          I            $0            SO      S13,581       $43,412       S50,365       S107,358 I

* We did not review claim payments and other expenses and retentions.
"* This audit finding also includes lost investment income of$7,124.
                                                                                                                                                APPENDIX

 CureFJrst BlueCross BlueShJeld
 10455 Milt Run Circle
 Owings Mills, MD 21117-5559




October 9, 2009                                                                                      CareRrst.•'
                                                                                                     BlueCross BlueShield

          ce 0 Personnel Management .

Office of Inspector General

Auditor - Experience Rated Audits Group

800 Ctanberrry Woods Drive

Suite .130

Cranberry Township; PA 16066


Dear_

This is in response to the OPM OIG revised Audit Inquiry #1, which was issued on
October 6, 2009. In the inquiry, the OIa indicated that CareFirst charged the FEHBP for
two unallowable and lor unallocable cost centers, resulting in overcharge:;; ofSlOO,234 to
the FEHBP. CareFirst is providing the following response to each cost center issue:

Cost Center 00757 - Individual Telesales -                             $97~503


The Plan agrees with this section related to expenses charged from September 2006 to
December 2008.

In September 2006, the Account Product Specialist Manager tenninated employment
with CareFirst, and the FEHBP HMO Field Service activities were transitioned to another
Account Manager residing in a different cost center.· However, the Plan identified that a
mapping of the FEHBP HMO contracts to the Account Product Specialist Manager's
marketing representative number continued through the present and resulted in the
incorrect allocation of $97,503 from September 2006 through December 2008. Since the
incorrect mapping has been identified, the Plan" has correctly mapped the FEHBP HMO
contracts to the current Account Manager marketing representative. The Plan has
returned the principal amount of $97,503 and lost investment income of $7,017.49 to the
Program on OctOber 1, 2009. Supportitig docUmentation is attached ,for your review. In
addition, the misallocation for the Year 2009 was corrected during~e August 2009
financial close process.

Cost Center 001D 6 - Broker .Compensation System Replacement - $2,731

The· Plan agrees that the project expenses related to this cost center were inadvertently
misallocated to the FEHBP HMO in the amount of $2,731. The Plan has returned the
principal amount of $2~731 and lost investn::lent income of $106.44Jto the Program·on .
October I, 2009.· Supporting documentation is attached for your review.



                                          .     • Ca/efir>ll llluoCross BlueShield is en Independent lioonsse of the Blue Cross and Blue ShlQld Asooci.lion.
                           Ill)   Re9i~red 1l1ldemD/~ of 1M Blue Cross and Blu9 Shield AssoclRtlon. W Ile'gisrered Iredemario of CareFirst 01 Ma/yland. II'IG.
                                    ....                . ..:    -.                .            ."       . . ., . "                                  .
October 9. 2009
Page2of2


We request that CareFirst's comments be included in their entirety in the OPM Final
Audit Report.

Sincerely,




         .6..     o   ..




cc: