oversight

Audit of HealthPartners in Bloomington, Minnesota

Published by the Office of Personnel Management, Office of Inspector General on 2010-04-29.

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 HEALTHPARTNERS

                                            BLOOMINGTON, MINNESOTA




                                                               Report No. ID-53-00-09-029

                                                               Date:        April 29.             2010




                                                                              --CAUTION-­
                   This audit ~epo~t has been dist~ibuted to Fede~al officials who a~c ~esponsible fo~ the administration of tht audited prog~alTl_ This audit
                   ~epo~t may contain p~optielary data which is protected by Fede~allaw (18 U.S.c. 1905). Therefo~e, while this audit npo .. t is available
                   unde~ the F~eedom of Information Act and made available to the public on the DIG webpage, caution needs to be exe~cised before
                   ~eleasing tbe ~epo~t to the general public as it may conlain p~op~ietary illfo~mation that was redacted from the publicly dist~ibuted copy.




,    ......
    ,'        ~.
                        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 Organizations


                                            HealthPartners

                                        Bloomington, Minnesota



                                      HealthPartners Classic Plan

                                  Contract CS 2875      Plan Code 53


                                   HealthPartners Primary Clinic Plan

                                  Contract CS 2874      Plan Code HQ





                       REPORT NO. ID-53-00-09-029           DATE: April 29, 2010




                                                         ~~
Michael R. Esser
                                                            Assistant Inspector General
                                                              for Audits



        www.opm·liov                                                                      www.usa)obs.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


                                             HealthPartners

                                         Bloomington, Minnesota



                                       HealthPartners Classic Plan

                                   Contract CS 2875      Plan Code 53


                                   HealthPartners Primary Clinic Plan

                                  Contract CS 2874      Plan Code HQ





                      REPORT NO. lD-S3-00-09-029 .          DATE: April 29, 2010


      This final audit report on the Federal Employees Health Benefits Program (FEHBP) operations at
      HealthPartners (Plan), which specifically included the HealthPartners Classic Plan and·
      HealthPartners Primary Clinic Plan, questions $7,279 in phannacy drug rebates and lost
      investment income. The report also includes a procedural finding for administrative expenses.
      The Plan agreed (A) with the questioned amount, but disagreed (D) with the procedural finding.

      Our 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:




        www.opm.gov                                                                       www.usajobs.gov
    A. MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS

•   Pharmacy Drug Rebates fA)                                                             $7,279

    The Plan did not allocate unidentified pharmacy drug rebates to the FEHBP. As a result, the
    FEHBP is due $7,279, consisting of $6,268 for drug rebates and $1,011 for lost investment
    income on these drug rebates.

                          B. ADMINISTRATIVE EXPENSES

•   Unallowable and/or Unallocable Expenses (D)                                      Procedural

    The Plan allocated unallowable and/or unallocable administrative expenses to. the FEHBP
    from 2004 through 2008. Also, the Plan did not correctly report the actual administrative
    expenses on the Annual Accounting Statements from 2004 through 2008. Since the Plan's
    actual administrative expenses exceeded the contractual expense limitations from 2004
    through 2008, this is a procedural finding.

                               C. CASH MANAGEMENT

    Overall; we concluded that the Plan handled FEHBP funds in accordance with Contracts CS
    2874 and 2875 and applicable laws and regulations, except for the finding pertaining to cash
    management noted in the "Miscellaneous Health Benefit Payments and Credits" section.




                                                II
                                       CONTENTS

                                                                                      PAGE

        EXECUTIVE SUMMARY	                                                                 i


 I.	    INTRODUCTION AND BACKGROUND                                                        1


II.	    OBJECTIVES, SCOPE, AND METHODOLOGY                                                 3


III.	   AUDIT FINDINGS AND RECOMMENDATIONS                                                 6


        A.   MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS                             6


             1. Phannacy Drug Rebates	                                                     6


        B.   ADMINISTRATIVE EXPENSES	                                                      7


             1. Unallowable and/or Unallocable Expenses	                                   7


        C.   CASH MANAGEMENT	                                                             10


IV.	    MAJOR CONTRIBUTORS TO THIS REPORT.                                                11


 V.	    SCHEDULE A - CONTRACT CHARGES AND AMOUNTS QUESTIONED


        APPENDIX (HealthPartners reply, dated January 19,2010, to the audit inquiries)

                        I. INTRODUCTION AND BACKGROUND

INTRODUCTION


This final audit report details the findings, conclusions, and recommendations resulting from our
limited scope audit ofthe Federal Employees Health Benefits Program (FEHBP) operations at
HealthPartners (plan), pertaining to the HealthPartners Classic Plan and HeaIthPartners Primary
Clinic Plan. The Plan is located in Bloomington, Minnesota.

The audit was performed by the Office of Personnel Management's (OPM) Office of the Inspector
General (GIG), 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 HealthPartners Classic Plan is an experience-rated health maintenance organization (HMO)
that provides health benefits to federal enrollees and their families.! Enrollment is open to all
federal employees and annuitants that live or work in the plan's service area, which includes the
entire state of Minnesota and the surrounding communities in Western Wisconsin, Northern
Iowa, and Eastern North and South Dakota.

The HealthPartners Primary Clinic Plan is also an experience-rated HMO. Enrollment is open to
all federal employees and annuitants that live or work in the plan's service area. The plan's service
area includes the Minneapolis, Saint Paul, and Saint Cloud metropolitan area; South Central and
Southeastern Minnesota and the surrounding communities; and West Central Wisconsin.

The Plan's contracts with OPM for the HealthPartners Classic Plan (CS 2875) and HealthPartners
Primary Clinic Plan (CS 2874) are 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, these contracts provide that in the event of
termination, unexpended program funds revert to the FEHBP Trust Fund. In recognition of these
provisions, the contracts require 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.


1Members ofan 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
of the charges and benefits available may be less comprehensive.




                                                        1

 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.

  This is our first audit of this Plan pertaining to the experience-rated HMO plans. The results of
  this audit were provided to the Plan in written audit inquiries (findings) during fieldwork and
. were discussed with Plan officials througholit the audit and at an exit conference. The Plan's
  comments offered in response to our audit inquiries were considered in preparing our final report
  and are included as an Appendix to this report. Since the Plan provided complete responses to
  our audit inquiries, 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 terms of the contracts. Specifically,
our objectives were as follows:

    Miscellaneous Health Benefit Payments and Credits

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

       compliance with the terms of the contracts.


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

    Administrative Expenses

    •	 To determine whether administrative expenses charged to the contracts were actual,
       allowable, necessary and reasonable expenses incurred in accordance with the terms of
       the contracts 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 performance audit in accordance with generally accepted
government auditing standards. Those standards require that we plan and perform 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
pertaining to plan codes 53 (HealthPartners Classic Plan) and HQ (HealthPartners Primary Clinic
Plan). During this period, the Plan paid approximately $433 million in health benefit charges
and $36 million in administrative expenses for the HealthPartners Classic Plan and
HealthPartners Primary Clinic Plan (See Figure 1 and Schedule A).2



2 The Plan paid approximately $407 million in health benefit charges and $34 million in administrative expenses for
the HcalthPartners Classic Plan. Also, the Plan paid approximately $26 million in health benefit charges and $2
million in administrative expenses for the HealthPartners Primary Clinic Plan.




                                                         3

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

In planning and conducting our audit, we                                           HealthPartners
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.                  $200 , . . . - - - - - - - - - - - - - - - - - - - ,
This was determined to be the most effective
approach to select areas of audit. For those              III   $150
                                                          l:
areas selected, we primarily relied on                    o
substantive tests of transactions and not tests of
controls. Based on our testing, we did not
                                                          ...i $100 +---~----==--­
                                                                 $50
identify any significant matters involving the
Plan's internal control structure and its
                                                                  $0
operation. However, 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
                                                                       I?J Health Benefit Payments     .Administrative Expenses
an opinion on the Plan's system of internal
controls taken as a whole.
                                                                             Figure 1 - Contract Charges

We also conducted tests to detennine whether the Plan had complied with the contracts, 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 ~ndicate 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 conducting 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 perfOlmed at the Plan's office in Bloomington, Minnesota from October 20,2009
through November 19,2009. Audit fieldwork was also performed at our offices in Washington,
D.C. and Jacksonville, Florida.




                                                     4

METHODOLOGY


We obtained an understanding of the 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 125 health benefit refunds, totaling $1,771,034 (from a
universe of 3,068 refunds, totaling $2,774,815); 24 subrogation recoveries, totaling $429,744
(from a universe of967 recoveries, totaling $805,100); and all quarterly pharmacy drug rebate
receipts, t o t a l i n g _ to determine if refunds and recoveries were promptly returned to
the FEHBP and if miscellaneous payments were properly charged to the FEHBP. 3 The results of
these samples were not projected to the universe of miscellaneous health benefit 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, employee health benefits, executive compensation, subcontracts, non-recurring
projects, lobbying, benefit plan brochures, and Health Insurance Portability and Accountability .
Act of 1996 compliance. We used the FEHBP contracts, 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 Plan handled FEHBP
funds in accordance with Contracts CS 2874 and 2875 and applicable laws and regulations.




3The sample of health benefit refunds consisted ofthe 25 highest dollar refunds for each year from 2004 through
2008. The sample of subrogation recoveries consisted ofthe five highest dollar recoveries from each year in 2004,
2006,2007, and 2008 and the four highest dollar recoveries from 2005.




                                                        5

            III. AUDIT FINDINGS AND RECOMMENDATIONS


A. MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS


  1. Pharmacy Drug Rebates                                                                $7,279

    The Plan did not allocate unidentified phannacy drug rebates to the FEHBP. As a result,
    the FEHBP is due $7,279, consisting of $6,268 for drug rebates and $1,011 for lost
    investment income (LII) on these drug rebates.

     48 CFR 3] .201-5 states, "The applicable portion of any income, rebate, allowance, or
     other credit relating to any allowable cost and received by or accruing to the contractor
     shall be credited to the Government either as a cost reduction or by cash refund."

    FAR 52.232-17 (a) states, "all amounts that become payable by the Contractor ... shall
    bear simple interest from the date due ... 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."

      The Plan allocates and credits phannacy drug rebates to the FEHBP when the Plan
      submits the rebate invoices to the pharmaceutical manufacturers. When the drug rebates
      are received from the manufacturers, the Plan reconciles the differences between the
      amounts invoiced and the amounts actually received, and then allocates the differences to
    . all tines of business, including the HeaIthPartners Class~c Plan and HealthPartners
      Primary Clinic Plan. We reviewed this process and verified that phannacy drug rebates,
      totaling _             were returned to the FEHBP from 2004 through 2008.

     However, during our review, we found that the Plan did not allocate unidentified drug
     rebates to the FEHBP~eriod 2004 through 2008, the Plan received unidentified
     drug rebates totaling ~which were not allocated to the lines of business. We
     calculated that the FEHBP's allocable share of these unidentified drug rebates totaled
     $6,268. In addition, the FEHBP is due LII of $1 ,0 lIon these rebates, calculated through
     June 30,2009.

     Plan's Response:

     "Health Partners, Inc. concurs with OPM's finding that it has a line item within its
     reporting of pharmaceutical rebates by Lines of Businesses that is classified as missing....
     Health Partners did a review of the phannaceutical rebates within the missing classification
     and detennined that less than $400 was attributed to the FEHBP program over the five year
     audit period. However, we understand that because we did not specifically identify the
     FEHBP pharmaceutical rebates within the missing classification we need to follow the
     same methodology for allocating these rebates to all HeathPartners applicable Lines of




                                              6

        Businesses (rather than to a missing category) as we previously used to allocate rebate
        payments that are higher or lower than the amounts invoiced to phannaceutical companies.
        To eliminate this issue in the future Health Partners will make sure that all missing
        pharmacy rebates are analyzed and recorded to the correct Lines of Businesses on our
        pharmacy rebate report."

        DIG Comments:

        After receiving the Plan's response, we were infonned by the Plan via email that the
        questioned rebate amount of $6,268 and LII of$1,011 were credited to the FEHBP letter
        of credit account in December 2009 and February 2010, respectively.

        Recommendation 1

        We recommend that the contracting officer verify that the Plan credited the FEHBP
        $6,268 for unidentified drug rebates.

        Recommendation 2

        We recommend that the contracting officer verify that the Plan credited the FEHBP
        $1,011 (plus interest accruing after June 30, 2009) for LII on the questioned drug rebates.

B. ADMINISTRATIVE EXPENSES

    1. Unallowable and/or Unallocable Expenses                                                       Procedural

        The Plan allocated unallowable and/or unallocable administrative expenses to the FEHBP
        from 2004 through 2008. Also, the Plan did not correctly report the actual administrative
        expenses on the Annual Accounting Statements (AAS) from 2004 through 2008. Since
        the Plan's actual administrative expenses exceeded the contractual expense limitations
        from 2004 through 2008, even after the unallowable and/or unallocable amounts are
        deducted, this is a procedural finding. 4

        Part III, Section 3.2 (b)(l) of Contracts CS 2874 and 2875 states, "The Carrier may charge
        a cost to the contract ... if the cost is actual, allowable, allocable, and reasonable." In
        regards to the certification of the annual accounting statement accuracy, Section 3.2 (c)(l)
        states, "The Carrier shall certify the annual and fiscal year accounting statements in the
        form set forth in paragraph (c)(3) of this clause." This clause states, "The costs included
        in the statement are actual, allowable, allocable, and reasonable in accordance with the
        tenus of the contract and with the cost principles of the Federal Employees Health
        Benefits Acquisition Regulation and the Federal Acquisition Regulation."

4 The Plan's actual administrative expenses exceeded the contractual expense limitations by $2,882,937, $1,910,525,

$1,749,401, $1,908,230, and $701,000 from 2004 through 2008, respectively, for the HealthPartners Classic Plan.
Also, the Plan's actual administrative expenses exceeded the contractual expense limitations by $134,775, $26,677,
$3,582, $31,322, and $18,572 from 2004 through 2008, respectively, for the HealthPartners Primary Clinic Plan.




                                                         7

48 CFR 31.201-4 states, "A cost is allocable ifit 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 of the business, although a direct relationship to
      any particular cost objective cannot be shown."

48 CFR 31.205-1 through 205-52 specifically address certain costs and state that
entertainment and charitable contributions are unallowable.

Regarding public relations, sales, advertising, and marketing expenses charged to the
FEHBP, 48 CFR 31.205-1 and 48 CFR 163 I .205-70 provide specific criteria on the
extent to which such expenses are chargeable. Generally, these regulations state that such
expenses are unallowable.

48 CFR 31.201-6 (a) states, "Costs that are expressly unallowable ... including ...
unallowable directly associated costs, shaH be identified and excluded from any billing ...
to a Government contract."

The Plan uses an administrative cost allocation model, which is built on a Microsoft Excel
based platform, to allocate administrative expenses to the FEHBP. The allocation model
has three administrative components: corporate, medical, and pharmacy/dental. We found
that the Plan's allocation model does not make distinctions for the FEHBP plans, and
therefore, allocates administrative expenses to the FEHBP regardless of the allowability
and/or allocability of the expenses. Furthermore, the Plan infonned us that there are no
specific procedures in place to identify and exclude unallowable and/or unallocable
expenses from the allocations to the FEHBP. As a result, the Plan allocates expenses to
the FEHBP that are unallowable and/or unallocable under the FAR and FERBAR.

Based on the Plan's accounting unit titles and descriptions and/or the Plan's responses to
our accounting unit questionnaires, we identified numerous expenses allocated to the
FEHBP that are unallowable, partially unallowable, and/or do not benefit the FEHBP.
Specifically, we identified expenses pertaining to advertising, marketing, sales,
entertainment, legal matters, sport sponsorships, charitable contributions, and other lines
of business that should be excluded from the cost allocations to the FEHBP but are not.

For example, we identified the following unallowable andlor unallocable expenses in
2008 during our accounting unit review and transaction testing:

•	   18 accounting units with expenses for sales, advertising, marketing, and/or public
     relations were allocated to the FEHBP. The Plan allocated $673,094 of these
     accounting units' expenses to the FEHBP. These types of expenses are generally
     unallowabJe.




                                          8
•	 $130,460 in project/audit expenses were specifically incurred for the Medicaid and
   Medicare lines of business in accounting unit "12811222" (Govenunent Programs).
   $20,144 of these expenses were allocated to the FEHBP. During the audit, the Plan
   subsequently removed this ae<.:ounting unit's costs from the FEHBP allocation.

•	 $7,630 of $140,948 in charitable contributions, sport sponsorships, and entertainment
   expenses were also allocated to the FEHBP.

After discussing our concerns with the Plan, the Plan removed a majority of these
questionable expense types from the FEHBP's allocation in the administrative cost
modeL

In addition, we found that the Plan did not correctly report the actual administrative
expenses on the 2004 through 2008 AAS's. For example, the Plan incurred actual
administrative expenses of $8,986,524 for the HealthPartners Classic Plan, but only
reported $7,078,294 on the 2007 AAS, which equaled the contractual expense limitation.
Similarly, the Plan incurred actual administrative expenses of$311,130 for the
HealthPartners Primary Clinic Plan, but only reported $279,808 on the 2007 AAS, which
also equaled the contractual expense limitation.

Plan's Response:

"HealthPartners, Inc. (HPJ) uses a comprehensive administrative allocation modeJ to
allocate administrative costs across all Lines of Business that HPJ sells.... HPJ feels that
this model is an accurate representation of the administrative expense of each of our line
of business which would include the Federal Employees Health Benefit Plan ...

The audit inquiry or procedural findings related to our administrative model identifies
examples of areas of expenses that are deemed unallowable or unallocable to the FEHBP
program that were allocated to the FEHBP program within our administrative model.
However, it should be clearly noted that they were never charged to the FEHBP program
because our limits were substantially lower than our administrative expenses calculated
by our model and thus they were never included in our AAS statements or were they
drawn down from our LOC account for any of the years under audit.

HPJ does have policies and procedures in place related to certain expenses that are
considered unallowable for the FEHBP program. Those expenses are either prohibited by
HPI, have significant restrictions on the reimbursement for those expenses or are not
expensed to administrative accounting units that are allocated to the FEHBP program.
HPI does acknowledge that while we do our best to identify and remove those
unallowable costs that there are instances where they are not removed from our
administrative allocation model especially in contributions, donations and entertainment
costs. However, as an organization HPJ spends very little on contributions, donations and
entertainment costs ...




                                          9
     HPI does. acknowledge that if our actual administrative costs calculated by our
     administrative allocation model were close to our ceiling limit that the way our model
     works there would be the potential of charging the FEHBP program for unallowable or
     unallocable costs. HPI did try each year to implicitly remove those costs from our
     administrative model related to the FEHBP program. While the OPM auditors were on
     site we revised each year's administrative model to explicitly remove unallowable or
     unallocable costs and compared that against the amount that we implicitly removed. The
     impact of this change to the calculated administrative costs of the FEHBP program was
     immaterial and did not impact the amount that we charged to the FEHBP each year."

     OIG Comments:

     Since the Plan's actual administrative expenses exceeded the contractual expense
     limitations from 2004 through 2008, we agree that the expense limitations implicitly
     minimized the chances that unallowable and/or unallocable expenses were charged to the
     FEHBP. However, the Plan should have specific procedures to identify and remove
     unallowable and/or unallocable expenses from the allocations to the FEHBP. With these
     procedures in place, the Plan could clearly demonstrate that certain unallowable and/or
     unallocable expenses were not allocated to the FEHBP, especially if the actual
     administrative expenses in the future are close to or less than the annual contractual
     expense limitation.

     Recommendation 3

     We recommend that the contracting officer instruct the Planto implement procedures to
     ensure that unallowable and/or unallocable expenses are excluded from the expense
     allocations to the FEHBP.

     Recommendation 4

     We recommend that the contracting officer instruct the Plan to correctly report actual
     administrative expenses on the AAS.

C. CASH MANAGEMENT

  Overall, we concluded that the Plan handled FEHBP funds in accordance with Contracts CS
  2874 and 2875 and applicable laws and regulations, except for the finding pertaining to cash
  management noted in the "Miscellaneous Health Benefit Payments and Credits" section.




                                             10

              IV. MAJOR CONTRIBUTORS TO THIS REPORT

Experience-Rated Audits Group

                Auditor-In-Charge

                 Team Leader

                 Auditor




               , Senior Team Leader




                                      11

                                                                                                                       V. SCHEDULE A



                                                                                                               HEALTH PARTNERS

                                                                                              BLOOMINGTON, MINNESOTA



                                                                          CONTRACT CHARGES AND AMOUNTS QUESTIONED


CONTRACT CHARGES (pLAN CODES 53IHQ)*                                                             2004                                               2005                                               2006                                                  2007                                            2008                                                                                   TOTAL


HEALTH BENEFIT CHARGES                                                                   $81,026,684                                       $80,936,757                                        $88,783,882                                         $92,702,495                                          $89,712,635                                                                               $433,162,453


ADMINISTRATIVE EXPENSES                                                                         6,957,679                                          6,862,173                                          7,144,481                                              7,358,102                                       7,366,801                                                                                     35,689,236


OTHER EXPENSES AND RETENTIONS                                                                         327,475                                           370,535                                            240,735                                               187,019                                         160,655                                                                                    1,286,419


            TOTAL CONTRACT CHARGES                                             I         $88,311.838                                       $88,169.465                                        $96.169098                                       $100,247.616                                            597,240091
                                                                                   ) !~ 11lmflj~, mlj./~mw'~:~m!' l~imi~ II ,lIlWillr.Hmlll~ Ilillll1 I~ IJ mmlMlllmm IIrIIIilllJEl.I);lJmIlJll:ml/,'lIImlHil3'mjrqJm~mlrtll, ,tmuwlID ~~~ ~llJ.lfl:llJll1lllll~~ulmrnmUltmmloo'~m,r !ffil\lRtl~i~mlm~lrJ~~.m1NlIlm: ~,~ jtl!m!~~llll~1 l~lf!m ~;~r.1:s.'!~ilj~ m
                                                                                                                                                                                                                                                                                                                                                                                                 5470.138,108 ~
                                                                                                                                                                                                                                                                                                                                                                                                    ~            HJM~UlMnlllml           II




AMOUNTS QUESTIONED                                                                               2004                                               2005                                               2006                                                  2007                                             2008                                     2009                                          TOTAL


       MISCELLANEOUS HEALTH BENEFIT PAYMENTS
A.      AND CREDITS
       I.   Pharmacy Drug Rebates*'"                                                                      $1,747                                                      $73                                            $745                                           $2,620                                          $1,917                                            $176                                      $7,279

B. ADMINISTRATIVE EXPENSES
       1.   Unallowable and/or Unallocable Expenses (procedural)                                                          0                                                  0                                                  0                                                      0                                             0                                                0                                             0

C. CASH MANAGEMENT                                                                                                                                                           0                                                                                                         0                                             0                                                0                                             0
                                                                                                                          °                                                                                                     0


            TOTAL AMOUNTS QUESTIONED                                           I                         $1747                                                        $73                                            $745
                                                                                   l.mm'li' ~l3' ~llll~;~i~~~~ ~IIIIUl.'O~ Il I ~r~lIl'~. ;~!~~i1illllllill. 1 j J I~i II{! lll~jmllllil 11~;J.JllIml~mIMlmrJliiir:jmfli'~~I!Il~!~~~!11   I!   1.11i~iNl~1
                                                                                                                                                                                                                                                                    $2,620
                                                                                                                                                                                                                                                             • ~"I, <l~lm;lji~illl~l~mJI'h~ffill!Jml
                                                                                                                                                                                                                                                                                                                    $1.917
                                                                                                                                                                                                                                                                                                       ~lllll!lll~mWml   •   ,   ,       I I
                                                                                                                                                                                                                                                                                                                                                                      SI76
                                                                                                                                                                                                                                                                                                                                               !l~ ~~~ij~~~~~~l~i~ll~~III:::'J~ti~m~"''')JjJ''''''I'''''
                                                                                                                                                                                                                                                                                                                                                                                                            ,    $7,279
                                                                                                                                                                                                                                                                                                                                                                                                                rfJffi!f.ffl1ili,lJl~i~ml~1
                                                                                                                                                                                                                                                                                                                                                                                                                                              '~
                                                                                                                                                                                                                                                                                                                                                                                                                                              m
                                                                                                                                                                                                                                                                                                                                                                                                                                              M


* We did not review claim payments and other expenses and retentions.
H    This audit finding also includes lost investment inl:ome of$I.Oll.
="'11'':                                                                                             APPENDIX
--
-II­
.tlu';      HealthPartners@
             Corporate OffICe:     . Mailing Address:

             8170 33'd AvenueSoulh : Mall Stop: 21109A

           . Bloomington. MN 55425. P.O. Box 1309

            .www.heallhpartners.com.MinneaPolis.MN 55440-1309





··-Jan.uary19,2010



                                         :Group Ctlief
      p               •     ..   i   •
                                         s Group·
  Office of the Inspector General·
  U.S. Office .of Personnel Man.agement:·

  1900 E Street, Room6400··:::       ..

  Washingtcm. DC 2():415-11.()O


  Dear

                                                            to.
  Attached are HealthPartliers' reSponse .the twa8udit inClOires related to the audits of
  HealthPartners Plan: Code 53 'and Plan: Code Hq FEHBP Experience rated contracts for ...
  the years 2004 through 2008.-' If YOlr have any questions regarding our response please
  feel free to contact me at '952:-.883-6535 or Kevin Brandt at 952-883-6584.             .




  Senior Vice· President and Chief Firaanaal Officer


  Attachments (2)
  'oohI_I/OPM_R_11R201DdaiI.­




            Our mission is to improve the health ofour members.   our patients and/lle community..
       :Corporate Office:       Mailing Address:
       :a170 33'd Avenue South  Mail Stop: 21109A
      . Bloomington, MN 55425   P.O. Box 1309
        www.heallhpaltners.com·Minneapolls.MN 55440-1309




      HealthPartliers, Inc::ooncurs:With OPM~s finding that it has a line item within itsreporting
      of pharmaceutical: rebates biLines:ofBusinesses thatls classified as missing.: While the
      OPM auditors were on site, HealthPartners did a review of the pharmaceutical rebates .....
: -within the missing classification and determined that less than $400 was attributed to: the·
   . FEHBFfpmgram over the five year audit period.. However, we understand :that becau·se
   . we did not speci~cally:identifythe.FEHBP pharmaceutica·' rebates wi~hin the missing ..
      classification we need to follow the same methodology for allocating these rebates to all
      HealthPartii:ers applicable Lines of Businesses trather· than to a missing category) as we.
      previously used to allocate rebate payments that are higher or lower than the amounts :
      invoiced iii pharmaceutical companies. To eliminate this issue in the future       ...     :
  ::: HealthPartners· will make sure that all missing pharmacy rebates are analyzed and. ::::
 .. recorded to the correct Lines of Businesses on our pharmacy rebate report.· .




        Our mission is to i~f.rove Ihe hefJllh ofQur "Iemhers. ourpatients and the cOltIJnullity.
                                        ...               ..
 :"".''=
 mffi    Hea1thPartners~"
          :Corporate Office:       Mailing Address:
          :817033fd Avenue Soulh . Mail Stop: 21109A
      . . Bloomington, MN 55425 . ·P.O. Box 1309
     .... www.healthpartners.com   Minneapolis, MN 5544Q-1309




... Audit Inquire #2:          Administrative Expenses .

     HealthPartners, Inc.. . (HPI)" uses a comprehensive
                                             ...           administrative allocation model to
     allocate administrative costs across all lines of Business that HPI sells.·This model is
     used to a.llocated such co~s as ; Legal, Finance, Actuary, Underwriting, Human
     Resources, 'Information services, S'aies, Marketing, Claims Pro'cessing;'Memb(:lrship
.• Accounti"ng,
           .       Member Services, Disease Management,  .     Quality and Utilization::      ...
  .. Management,
           .
                      Health Improvement.   Programs, PharrilacyAdministration
                                                                           .       and Dental
  · AdmInistration. HPI tracks these costs through approximately 225 accounting
     unit~departments witl1in our financial system;. ,Each administrative accounting unit is'
     reviewed each year to come up with the besfaiiocationmethodology to use in allocating
                                                                 of
    the accounting unit costs across each:lines business. HPI uses multiple allocation
     methodologies. in .the model. They include allocations using membership, member
     months, weighted member months, claims:counts,input from leaders of the accounting
     unit, direct allocations .and percentage effort of each accounting unit by line of business.
     HPI feels that this model is an accurate representation of the administrative expense of
     each of our line of business which wO'uld include the Federal Employees Health Benefit
     Plan (FEHBP).

      From 2003 to 2007 HPI reported on its Annual Accounting Statements (AAS)
      Supplemental·Schedule of Admiriistrative 'Expenses and the Special·PurposeStatements
   .. of Op.erations its admInistration ceiling limit each year calculated by the Office of Personal
      Management (OPM). The reason why HPI reported its ceiling limit is because our
      ini~rnal administratron allocation model calcuJ~t~ admtnistratiQn expense exceeding our
      ~nnual c~i1ing limit. Thus we were only allowed .to report and :charge tne FEHSP program
      our' ceiling: limit. In 2008 after discussions with OPM                  'and
                                                                   at the requesfcif OPMwe        ..
   · changed:howwe.:reported administration expense on our Supple~erlt Schedule of ..

      Admh,lstrative Expenses to the 'aCtual administrative experis'es calculated from our:·

 ... Internal.admiliistrationallocatio:n model. However; because our model calculated an
      admini"strative expense that exceeded our ceiling 'iimits ~Iculated by OPM we only
      charged and reported on the Special Purpose 'Statements of Operations of the AAS
      statements()ur ceiling limits and we did not charge the FEHBP for ouraclual
... :ad~inistrative costs associated with running the FEHBP pr:qgram.

   The audit inquiry or procedural findings related to our administrative model. indentifies
   examples of areas of expenses that are deemed unallowable orunallocable.to. the' ...
   FEHBP program that were aUocated:to'the FEHBP program within our administrative
   model. HoWever, it should be clearly rioted that they Were nevetcharged·to theFEHBP
   program because our limits were substantially lower than our administrative expenses
 • calculated by our model and thus they were never inch.idedjn our AAS Statements or .
   were they drawn down from ourLOe account for any of the· years: under audit.



         Our mission is to improve tile heo/th ofour IIlembers. ollr patients and the community..
 ~~. HealthPartners@

         Corporale OIfi::e:          Mailing Address:

         8170 3Yd Avenue South       MallStop: 21109A

         Bloomington, MN 55425.. _   P,O. Box 1.309'

      .. www.healthpartners.com·.    Minneapolis, MN 55440-1309



    HPI dQes have .poliaesand procedures in place related to certain expenses that are' .

  :oonsideired un'ailowable'for the:FEHBP program. Those ~xpensel;; are either prohibited

 : by H!=,I"have significant restrictions on the rejmbur~~menUorthose expenses or are not

    expensed to administrative accounting units that are al!oeated to.the FEHPB program.

    HPldoesacknowledge that while we do our best to identify and. remove those

    unallowable costs that there are instances where they are not removed from our

    administrative allocation model especially in: contributions, donations and entertainment

 :: costs. However;: as an :organization HPI'spends very little on contributions, donation's :and

    entertainment costs ofWhich only' approximately 3% to 6% of those costs would be:"" ..

    allocated the FEHBP program though our allocation model if we did not remove tho'se

    costs from our model. It shOUld also: be noted.agafn that even thQugh some unallqwable.::

    costs did get allocated the FEHBP program                     nne
                                                      of business in our administrative' .

    allocatlon_m()del if.w~s notcharged.to.the FEHBP program.


       does
   :. HPI       acknoWledge that if ouraetual'administrative costs calculated by our

      administrative allocation model: were close to our ceiling limit that the way our mod~l

. - works there woUld be the potential of charging the FEHBP program for unallowable or
      unallocable costs. HPI did trY: each year to implicitly remove those costs from o u r : : : ·
      administrative modefrelated to the FEHBP program. While the aPM auditors were on
      site we revised each year's administrative model to explicitly remove unallowable or
      unallocable co$tsand' cornpared:thataga;nst"the amount that we implicitly removed.: The
      impact of this:change to· the ~alcuiated administrative costs of the FEHBP program        was
      immaterial and did not impact the .amount that we.-charged                     to
                                                                       the FEtlBP each year.




        Our mission is to improve tile healtil ofour members, our. patien!$ ondthe community.