oversight

Audit of Group Health Incorporated New York, New York

Published by the Office of Personnel Management, Office of Inspector General on 2011-07-27.

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 GROUP HEALTH INCORPORATED
              NEW YORK, NEW YORK



                                             Report No. 1D-80-00-10-046

                                             Date:          July 27, 2011




                                                           --CAUTION--
This audit report has been distributed to Federal officials who are responsible for the administration of the audited program. This audit
report may contain proprietary data which is protected by Federal law (18 U.S.C. 1905). Therefore, while this audit report is available
under the Freedom of Information Act and made available to the public on the OIG webpage, caution needs to be exercised before
releasing the report to the general public as it may contain proprietary information that was redacted from the publicly distributed 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 Organization


                                         Group Health Incorporated
                                     Contract CS 1056     Plan Code 80
                                            New York, New York




                         REPORT NO. 1D-80-00-10-046          DATE: 7 / 27/1 1




                                                              Michael R. Esser
                                                              Assistant Inspector General
                                                                for Audits




       w ww. op m .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


                                        Group Health Incorporated
                                  Contract CS 1056       Plan Codes 80
                                          New York, New York




                     REPORT NO. 1D-80-00-10-046              DATE: 7/ 2 7/ 1 1


      This final audit report on the Federal Employees Health Benefits Program (FEHBP) operations at
      Group Health Incorporated (Plan) questions $3,610,055 in health benefit charges and $16,244 in
      administrative expenses. The Plan agreed (A) with these questioned charges. Lost investment
      income (LII) on the questioned charges amounts to $63,893.

      Our limited scope audit was conducted in accordance with Government Auditing Standards. The
      audit covered miscellaneous health benefit payments and credits, administrative expenses, and
      statutory reserve payments from 2004 through 2009 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 2009.

     The audit results are summarized as follows:




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

•   Pharmacy Drug Rebates (A)                                                        $2,864,447

    The Plan had not returned pharmacy drug rebates of $2,788,625 to the FEHBP as of
    December 31, 2009. Subsequent to this date, the Plan returned these questioned drug rebates
    to the FEHBP, more than 30 days after receipt, through various letter of credit account
    (LOCA) adjustments from January 2010 through January 2011. As a result of this finding,
    the Plan also returned LII of $75,822 to the FEHBP calculated on the drug rebates that were
    returned untimely.

•   Unsupported Settlement Charges (A)                                                 $598,622

    The Plan could not provide documentation to support settlement charges of $457,073 to the
    FEHBP. These charges were reported on the 2004 Annual Accounting Statement. As a
    result of this finding, the Plan returned $598,622 to the FEHBP, consisting of $457,073 for
    the unsupported settlement charges and $141,549 for LII on these charges.

•   Uncashed Health Benefit Checks (A)                                                 $146,986

    The Plan had not returned uncashed health benefit checks of $122,892 to the FEHBP as of
    December 31, 2009. These uncashed checks were issued by the Plan from 2002 through
    2007. While preparing for our audit, the Plan returned these questioned uncashed checks to
    the FEHBP via LOCA adjustment on June 14, 2010. As a result of this finding, the Plan also
    returned LII of $24,094 to the FEHBP calculated on the uncashed checks that were returned
    untimely to the FEHBP.

                           ADMINISTRATIVE EXPENSES

•   Pension Costs (A)                                                                    $16,244

    The Plan overcharged the FEHBP $16,244 (net) for pension costs. Specifically, the Plan
    overcharged the FEHBP $566,301 in 2006, 2008 and 2009, and undercharged the FEHBP
    $550,057 in 2004, 2005 and 2007.

                        STATUTORY RESERVE PAYMENTS

The audit disclosed no findings pertaining to statutory reserve payments. The Plan calculated
and charged statutory reserve payments to the FEHBP in accordance with Contract CS 1056 and
applicable laws and regulations.




                                                ii
                                  CASH MANAGEMENT
Overall, we concluded that the Plan handled FEHBP funds in accordance with Contract CS 1056
and applicable laws and regulations, except for the findings pertaining to cash management noted
in the “Miscellaneous Health Benefit Payments and Credits” section.

             LOST INVESTMENT INCOME ON AUDIT FINDINGS

As a result of the audit findings presented in this audit report, the FEHBP is due LII of
$63,893, calculated through June 30, 2011.




                                                 iii
                                                     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. Pharmacy Drug Rebates .....................................................................................6

              2. Unsupported Settlement Charges .......................................................................8

              3. Uncashed Health Benefit Checks .......................................................................9

       B.     ADMINISTRATIVE EXPENSES .........................................................................10

              1. Pension Costs ...................................................................................................10

       C.     STATUTORY RESERVE PAYMENTS ..............................................................12

       D.     CASH MANAGEMENT .......................................................................................12

       E.     LOST INVESTMENT INCOME ON AUDIT FINDINGS ...................................12

IV.    MAJOR CONTRIBUTORS TO THIS REPORT ...........................................................14

 V.    SCHEDULES

       A.     CONTRACT CHARGES
       B.     QUESTIONED CHARGES
       C.     LOST INVESTMENT INCOME CALCULATION

       APPENDIX (Group Health Incorporated reply, dated January 21, 2011, to the draft
                audit report)
                        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
Group Health Incorporated (Plan). The Plan is located in New York, New York.

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 (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 Healthcare and Insurance
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 1, 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. 1 Enrollment is open to all federal employees and
annuitants that live or work in the Plan’s service area, which includes New York and the
surrounding counties in northern New Jersey.

The Plan’s contract (CS 1056) 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 termination, 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.

All findings from our previous audit of the Plan (Report No. 1D-80-00-04-058, dated June 20,
2005) for contract years 1999 through 2003 were satisfactorily resolved.


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




                                                        1
The results of this audit were provided to the Plan in written audit inquiries (findings); were
discussed with Plan officials throughout the audit and at an exit conference; and were presented in
detail in a draft report, dated November 22, 2010. The Plan's comments offered in response to the
draft report were considered in preparing our final report and are included as an Appendix to this
report. Also, additional documentation provided by the Plan on various dates through June 29,
2011 was considered in preparing our final report.




                                                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 contract. 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 contract.

   •   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 contract were actual,
       allowable, necessary, and reasonable expenses incurred in accordance with the terms of
       the contract and applicable regulations.

   Statutory Reserve Payments

   •   To determine whether the Plan charged statutory reserve payments to the FEHBP in
       accordance with the contract and federal 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 2009.
During this period, the Plan paid approximately $1.1 billion in health benefit charges and $82
million in administrative expenses (See Figure 1 and Schedule A). The Plan also made
approximately $12 million in statutory reserve payments (See Schedule A).




                                                3
Specifically, we reviewed miscellaneous health benefit payments and credits (e.g., refunds,
subrogation recoveries, program integrity recoveries, uncashed checks, and pharmacy drug
rebates), administrative expenses, statutory reserve payments, and cash management for contract
years 2004 through 2009.

In planning and conducting our audit, we                                         Group Health Incorporated
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.                        $400
This was determined to be the most effective
approach to select areas of audit. For those                          $300




                                                         $ Millions
areas selected, we primarily relied on
substantive tests of transactions and not tests of                    $200
controls. Based on our testing, we did not
identify any significant matters involving the                        $100

Plan’s internal control structure and its
                                                                       $0
operation, except for the processing of
                                                                             2004     2005    2006    2007    2008    2009
pharmacy drug rebates (see the audit finding                                                 Contract Years
for “Pharmacy Drug Rebates” (A1) on pages 6
through 8).                                                              Health Benefit Payments     Administrative Expenses



                                                                             Figure 1 – Contract Charges

However, since our audit would not necessarily disclose all significant matters in the internal
control structure, we do not express an opinion on the Plan’s system of internal controls taken as
a whole.

We also conducted tests to determine 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 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 performed at the Plan’s office in New York, New York from July 12 through
July 23, 2010 and August 16 through August 27, 2010. Audit fieldwork was also performed at




                                                     4
our offices in Washington, D.C. and Jacksonville, Florida. Throughout the audit process, we
encountered numerous instances where the Plan responded untimely, or initially provided
incomplete responses, to various requests for supporting documentation. As a result, completion
of our audit work and issuance of our draft and final reports were delayed.

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 health benefit refunds, subrogation recoveries, and program
integrity recoveries of $2,260,459 (from a universe of $5,318,346); all uncashed check write-offs,
totaling $2,730,809; all quarterly pharmacy drug rebates, totaling $11,878,553; and all settlement
charges, totaling $457,073, to determine if refunds and recoveries were promptly returned to the
FEHBP and if miscellaneous payments were properly charged to the FEHBP. 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 2009. Specifically, we reviewed administrative expenses relating to pension, post-
retirement, executive compensation, behavioral and disease management, and lobbying. 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 reviewed the statutory reserve payments charged to the FEHBP for contract years 2004
through 2009. We also reviewed the Plan’s cash management to determine whether the Plan
handled FEHBP funds in accordance with Contract CS 1056 and applicable laws and regulations.




                                                5
            III. AUDIT FINDINGS AND RECOMMENDATIONS

A. MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS

  1. Pharmacy Drug Rebates                                                           $2,864,447

     The Plan had not returned pharmacy drug rebates of $2,788,625 to the FEHBP as of
     December 31, 2009. Subsequent to this date, the Plan returned these questioned drug
     rebates to the FEHBP, more than 30 days after receipt, through various letter of credit
     account (LOCA) adjustments from January 2010 through January 2011. As a result of
     this finding, the Plan also returned lost investment income (LII) of $75,822 to the FEHBP
     calculated on the drug rebates that were returned untimely.

     48 CFR 31.201-5 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.”

     Contract CS 1056, Part II, Section 2.3 (i) states, “All health benefit refunds and
     recoveries . . . must be deposited into the working capital or investment account within 30
     days and returned to or accounted for in the FEHBP letter of credit account within 60
     days after receipt by the Carrier.” Since the Plan did not have a dedicated working capital
     or investment account, the Plan had 30 days to return the pharmacy drug rebates to the
     LOCA before the funds were subject to LII.

     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.”

     Prior to 2009, the Plan’s pharmacy drug claims were processed by Express Scripts (ESI).
     The Plan received quarterly pharmacy drug rebates from ESI. During the period 2004
     through 2009, the quarterly ESI drug rebate receipts totaled $14,119,987 for the FEHBP.
     We selected and reviewed all of these ESI drug rebates for the purpose of determining if
     the Plan promptly returned these funds to the FEHBP. We noted the following exception:

     •   Although the ESI drug rebate receipts totaled $1,324,594 for the FEHBP in 2009, the
         Plan had only returned $563,829 of this amount to the FEHBP as of December 31,
         2009. As a result of our finding, the Plan returned the remaining 2009 ESI drug
         rebates, totaling $760,765, to the LOCA on January 24, 2011, more than one year
         after receipt.




                                              6
Starting in 2009, the pharmacy drug claims and rebates were processed internally by
Emblem Health, which is the parent company of GHI. The Plan refers to these drug
rebates as “Online Claims Adjudication Program” (OCAP) rebates. In 2009, the OCAP
drug rebate receipts totaled $2,027,860 for the FEHBP. We selected and reviewed all of
these OCAP drug rebates for the purpose of determining if the Plan promptly returned
these funds to the FEHBP. We noted the following exception:

•   As of December 31, 2009, the Plan had not returned these OCAP drug rebates to the
    FEHBP. Subsequent to this date, the Plan returned $1,571,282 of these questioned
    drug rebates to the FEHBP via LOCA adjustment on January 5, 2010. However,
    since the Plan returned these questioned drug rebates of $1,571,282 to the LOCA
    more than 30 days after receipt (i.e., from 36 to 279 days after receipt) and after
    receiving our notification letter and standard audit request (dated November 13,
    2009), we are continuing to question this amount as a monetary finding. Also, the
    Plan returned the remaining 2009 OCAP drug rebates, totaling $456,578, to the
    LOCA on June 30, 2010, more than six months after receipt.

As a result of this finding, the Plan calculated and returned LII of $75,822 to the FEHBP
since these questioned drug rebates were returned untimely to the LOCA. We reviewed
and accepted the Plan’s LII calculation and verified the return of the LII to the LOCA
(i.e., $3,176 on January 24, 2011 and $72,646 on May 9, 2011).

In total, we are questioning $2,864,447, consisting of $2,788,625 for pharmacy drug
rebates (i.e., $760,765 for ESI drug rebates and $2,027,860 for OCAP drug rebates) and
$75,822 for LII on these questioned drug rebates.

Plan’s Response:

The Plan agrees with the finding that pharmacy drug rebates of $2,788,625 were not
returned to the FEHBP as of December 31, 2009.

OIG Comments:

After reviewing the Plan’s response and additional documentation, we revised the
questioned amount from the draft report to $2,864,447. Based on the Plan’s response and
additional documentation, we determined that the Plan agrees with our revised questioned
amount. As part of our review, we verified that the Plan returned this questioned amount of
$2,864,447 to the FEHBP, consisting of $2,788,625 for pharmacy drug rebates ($760,765
for ESI drug rebates plus $2,027,860 for OCAP drug rebates) and $75,822 for LII.

Recommendation 1

Since we verified that the Plan returned the questioned pharmacy drug rebates of
$2,788,625 to the FEHBP, no further action is required for this questioned amount.



                                        7
   Recommendation 2

   Since we verified that the Plan returned $75,822 to the FEHBP for LII on the questioned
   pharmacy drug rebates, no further action is required for this LII amount.

   Recommendation 3

   We recommend that the contracting officer instruct the Plan to implement corrective
   actions to ensure that pharmacy drug rebates are timely returned to the LOCA.

2. Unsupported Settlement Charges                                                       $598,622

   The Plan could not provide documentation to support settlement charges of $457,073 to
   the FEHBP. These charges were reported on the 2004 Annual Accounting Statement. As
   a result of this finding, the Plan returned $598,622 to the FEHBP, consisting of $457,073
   for the unsupported settlement charges and $141,549 for LII on these charges.

   Contract CS 1056, Part III, Section 3.2(b) (1) states, “The Carrier may charge a cost to the
   contract for a contract term if the cost is actual, allowable, allocable, and reasonable. In
   addition, the Carrier must: (i) on request, document and make available accounting
   support for the cost to justify that the cost is actual, reasonable and necessary . . . .” In
   addition, Part III, section 3.8 states, “the Carrier will retain and make available all records
   applicable to a contract term . . . .”

   FAR 52.232-17(a) states, “all amounts that become payable by the Contractor . . . shall
   bear simple interest from the date due . . . until the amount is paid.”

   The Plan reported settlement charges of $457,073 on the 2004 Annual Accounting
   Statement. The Plan could not provide documentation or an explanation to support these
   charges. Therefore, we could not determine if these costs were actual, allowable,
   reasonable, and necessary charges to the FEHBP.

   As a result, we are questioning $598,622, consisting of $457,073 for the unsupported
   settlement charges and $141,549 for LII on these charges. After responding to our draft
   report, the Plan returned these unsupported settlement charges of $457,073 to the LOCA
   on January 24, 2011. The Plan also returned the questioned LII of $141,549 to the LOCA
   (i.e., $76,811 on January 24, 2011 and $64,738 on May 9, 2011).

   Plan’s Response:

   The Plan agrees with the questioned unsupported settlement charges.




                                             8
   OIG Comments:

   After reviewing the Plan’s response and additional documentation, we revised the
   questioned amount from the draft report to $598,622. Based on the Plan’s response and
   additional documentation, we determined that the Plan agrees with our revised questioned
   amount. As part of our review, we verified that the Plan returned this questioned amount
   of $598,622 to the FEHBP, consisting of $457,073 for unsupported settlement charges
   and $141,549 for LII on these charges.

   Recommendation 4

   Since we verified that the Plan returned $457,073 to the FEHBP for the unsupported
   settlement charges, no further action is required for this questioned amount.

   Recommendation 5

   Since we verified that the Plan returned $141,549 to the FEHBP for LII on the
   unsupported settlement charges, no further action is required for this LII amount.

3. Uncashed Health Benefit Checks                                                   $146,986

   The Plan had not returned uncashed health benefit checks of $122,892 to the FEHBP as
   of December 31, 2009. These uncashed checks were issued by the Plan from 2002
   through 2007. While preparing for our audit, the Plan returned these questioned
   uncashed checks to the FEHBP via LOCA adjustment on June 14, 2010. As a result of
   this finding, the Plan also returned LII of $24,094 to the FEHBP calculated on the
   uncashed checks that were returned untimely to the FEHBP.

   Contract CS 1056, Part III, Section 3.6 states: “Payment of checks issued pursuant to this
   contract shall be voided if the checks have been outstanding for two (2) years. The
   amounts represented by these checks shall be credited to the Special Reserve of this
   contract no later than the 25th month after issuance. . . .”

   FAR 52.232-17(a) states, “all amounts that become payable by the Contractor . . . shall
   bear simple interest from the date due . . . until the amount is paid.”

   During the audit scope, the Plan withdrew funds from the LOCA on a “checks-issued”
   basis. Starting in July 2010, we noted that the Plan changed from the “checks-issued” to
   the “checks-presented” basis for withdrawing funds from the LOCA.

   We reviewed the uncashed health benefit checks that were written-off during the period
   2004 through 2009 for the purpose of determining whether the Plan promptly returned
   these funds to the FEHBP. These uncashed checks were issued by the Plan from 2002



                                            9
     through 2007 and totaled $2,730,809. We reviewed the Plan’s LOCA adjustments and
     verified that the Plan only returned $2,607,917 of these uncashed checks to the FEHBP as
     of December 31, 2009. While preparing for our audit, the Plan returned the remaining
     balance of $122,892 to the LOCA on June 14, 2010. However, since the Plan returned
     these remaining uncashed checks of $122,892 to the FEHBP in an untimely manner (i.e.,
     more than 25 months after issuance) and as a result of our audit, we are continuing to
     question this amount as a monetary finding. We also calculated LII of $24,094 on these
     uncashed checks since the funds were returned untimely to the LOCA. The Plan returned
     this LII amount to the LOCA on January 24, 2011.

     In total, we are questioning $146,986, consisting of $122,892 for uncashed health benefit
     checks and $24,094 for LII on the uncashed checks that were returned untimely to the
     FEHBP.

     Plan’s Response:

     The Plan agrees with this finding and returned the questioned amounts for uncashed
     checks and LII to the LOCA.

     OIG Comments:

     As part of our review, we verified that the Plan returned $146,986 to the FEHBP,
     consisting of $122,892 for uncashed checks and $24,094 for LII.

     Recommendation 6

     Since we verified that the Plan returned $122,892 to the FEHBP for the uncashed health
     benefit checks, no further action is required for this questioned amount.

     Recommendation 7

     Since we verified that the Plan returned $24,094 to the FEHBP for LII on the uncashed
     health benefit checks returned untimely to the FEHBP, no further action is required for
     this LII amount.

B. ADMINISTRATIVE EXPENSES

  1. Pension Costs                                                                      $16,244

     The Plan did not calculate pension costs in accordance with the Federal regulations. The
     regulations limit the amount of pension costs that may be charged to a government
     contract to the lower of any cash contribution to the pension fund trustee, or the amount
     of expense calculated in accordance with Cost Accounting Standards (CAS) 412 and 413,
     whichever is lower. The Plan did not calculate pension costs based on the lesser of the




                                             10
cash contributions (funded) or CAS amounts. As a result, the Plan overcharged the
FEHBP $16,244 (net) for pension costs. Specifically, the Plan overcharged the FEHBP
$566,301 in 2006, 2008 and 2009, and undercharged the FEHBP $550,057 in 2004, 2005
and 2007.

48 CFR 31.205-6(j)(2) states, “The cost of all defined-benefit pension plans shall be
measured, allocated and accounted for in compliance with the provisions of 48 CFR
9904.412, Cost accounting standard for composition and measurement of pension cost,
and 48 CFR 9904.413, Adjustment and allocation of pension cost. The costs of all
defined-contribution pension plans shall be measured, allocated, and accounted for in
accordance with the provisions of 48 CFR 9904.412 and 48 CFR 9904.413. Pension
costs are allowable subject to the referenced standards . . . .”

The Federal Acquisition Regulations (FAR) limit the amount of pension costs that may
be charged to a government contract to the amount of any cash contribution to the
pension fund trustee, or the amount of expense calculated in accordance with Cost
Accounting Standard (CAS) 412 and 413, whichever is lower.

The Plan’s pension expenses were calculated on a statutory basis (as required by the state
of New York) for 2004 through 2006 and in accordance with generally accepted
accounting principles for 2007 through 2009. For 2004 through 2009, the Plan allocated
$3,488,522 in pension costs to the FEHBP. However, the Plan’s pension cost allocations
were not based on the lower of the funded or CAS amounts.

Since the Plan’s pension cost allocations were not based on the lower of the funded or
CAS amounts, we requested the Plan to recalculate the 2004 – 2009 allocations based on
the lower of these amounts. Based on the Plan’s recalculations, the FEHBP was
overcharged $566,301 in 2006, 2008 and 2009, and undercharged $550,057 in 2004,
2005 and 2007, resulting in a net overcharge of $16,244 to the FEHBP for pension costs
from 2004 through 2009. We reviewed and accepted the Plan’s calculations.

OIG Comments:

On June 29, 2011, the Plan provided revised pension cost allocations for 2004 through
2009, which are based on the lower of the funded or CAS amounts. The Plan’s revised
calculations resulted in a net overcharge of $16,244 to the FEHBP for pension costs from
2004 through 2009.

Recommendation 8

We recommend that the contracting officer disallow $566,301 for pension costs that were
overcharged to the FEHBP in 2006, 2008, and 2009 ($173,836, $212,165, and $180,300,
respectively.




                                        11
     Recommendation 9

     We recommend that the contracting officer allow the Plan to charge the FEHBP $550,057
     for pension costs that were undercharged to the FEHBP in 2004, 2005, and 2007 ($405,972,
     $133,415, and $10,670, respectively).

C. STATUTORY RESERVE PAYMENTS

  The audit disclosed no findings pertaining to statutory reserve payments. The Plan calculated
  and charged statutory reserve payments to the FEHBP in accordance with Contract CS 1056
  and applicable laws and regulations.

D. CASH MANAGEMENT

  Overall, we concluded that the Plan handled FEHBP funds in accordance with Contract CS
  1056 and applicable laws and regulations, except for the findings pertaining to cash
  management noted in the “Miscellaneous Health Benefit Payments and Credits” section.

E. LOST INVESTMENT INCOME ON AUDIT FINDINGS                                                 $63,893

  As a result of the audit findings presented in this report, the FEHBP is due LII of $63,893
  from January 1, 2007 through June 30, 2011.

  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.”

  We computed investment income that would have been earned using the semiannual rates
  specified by the Secretary of the Treasury. Our computations show that the FEHBP is due
  LII of $63,893 from January 1, 2007 through June 30, 2011 on questioned costs for contract
  years 2006 through 2009 (see Schedule C).

  Plan’s Response:

  The draft audit report did not include an audit finding for LII. Therefore, the Plan did not
  address this item in its reply.




                                                12
OIG Comments:

Only the audit finding for “Pension Costs” (B1) is subject to our LII calculation in Schedule C.

The audit findings for “Pharmacy Drug Rebates” (A1), “Unsupported Settlement Charges (A2),
and “Uncashed Health Benefit Checks” (A3) already include LII calculations. Therefore, these
audit findings are not subject to our LII calculation in Schedule C.

Recommendation 10

We recommend that the contracting officer direct the Plan to credit $63,893 (plus interest
accruing after June 30, 2011) to the Special Reserve for LII on audit findings.




                                            13
                IV. MAJOR CONTRIBUTORS TO THIS REPORT


Experience-Rated Audits Group

                , Auditor-In-Charge

                            , Auditor



                  , Chief

               , Senior Team Leader




                                        14
                                                                                                                                                    SCHEDULE A
                                                                         V. SCHEDULES


                                                                GROUP HEALTH INCORPORATED
                                                                    NEW YORK, NEW YORK


                                                                     CONTRACT CHARGES


CONTRACT CHARGES                                      2004            2005             2006            2007            2008            2009          TOTAL


 A. HEALTH BENEFIT CHARGES


    CLAIM PAYMENTS*                                 $195,517,870    $182,925,261    $185,308,314    $183,742,398    $185,027,576    $192,135,472    $1,124,656,891
    OTHER ADJUSTMENTS                                 (2,912,496)     (3,585,003)     (3,489,322)     (4,231,935)     (4,314,260)     (4,708,816)      (23,241,833)


    TOTAL HEALTH BENEFIT CHARGES                    $192,605,374    $179,340,258    $181,818,992    $179,510,463    $180,713,316    $187,426,656    $1,101,415,058


 B. ADMINISTRATIVE EXPENSES


    PLAN CODE 80                                     $14,397,308     $13,827,849     $14,074,349     $13,988,471     $13,359,772     $13,120,989      $82,768,738
    PRIOR PERIOD ADJUSTMENTS                            (296,167)              0               0               0               0               0          (296,167)


    TOTAL ADMINISTRATIVE EXPENSES                    $14,101,141     $13,827,849     $14,074,349     $13,988,471     $13,359,772     $13,120,989      $82,472,571


 C. STATUTORY RESERVE PAYMENTS                        $2,117,228      $1,974,186      $2,006,726      $1,992,942      $1,982,927      $2,066,696      $12,140,705



TOTAL CONTRACT CHARGES                              $208,823,743    $195,142,292    $197,900,067    $195,491,876    $196,056,015    $202,614,341    $1,196,028,334


* We did not review claim payments on this audit.
                                                                                                                                                                                          SCHEDULE B
                                                                                      GROUP HEALTH INCORPORATED
                                                                                            NEW YORK, NEW YORK


                                                                                           QUESTIONED CHARGES


AUDIT FINDINGS                                                                              2004         2005          2006          2007          2008          2009        2010        2011        TOTAL


A. MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS*


    1. Pharmacy Drug Rebates                                                                       $0           $0            $0            $0            $0   $2,788,625     $75,822           $0   $2,864,447
    2. Unsupported Settlement Charges                                                       457,073              0             0             0             0            0     141,549            0     598,622
    3. Uncashed Health Benefit Checks                                                               0       69,999      (54,686)      (91,534)      121,327       77,786       24,094            0     146,986


    TOTAL MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS                                $457,073       $69,999      ($54,686)     ($91,534)    $121,327     $2,866,411    $241,465           $0   $3,610,055


B. ADMINISTRATIVE EXPENSES


    1. Pension Costs                                                                      ($405,972)    ($133,415)    $173,836       ($10,670)    $212,165      $180,300            $0          $0     $16,244


    TOTAL ADMINISTRATIVE EXPENSES                                                         ($405,972)    ($133,415)    $173,836       ($10,670)    $212,165      $180,300            $0          $0     $16,244


C. STATUTORY RESERVE PAYMENTS                                                                      $0           $0            $0            $0            $0            $0          $0          $0           $0


D. CASH MANAGEMENT                                                                                 $0           $0            $0            $0            $0            $0          $0          $0           $0


E. LOST INVESTMENT INCOME ON AUDIT FINDINGS                                                        $0           $0            $0       $9,561       $8,584       $20,265      $18,050     $7,433       $63,893


TOTAL QUESTIONED CHARGES                                                                    $51,101      ($63,416)    $119,150       ($92,643)    $342,076     $3,066,976    $259,515     $7,433     $3,690,192


* The audit findings for miscellaneous health benefit payments and credits include lost investment income (LII). No additional LII is applicable for these audit findings.
                                                                                                                                                                       SCHEDULE C
                                                                             GROUP HEALTH INCORPORATED
                                                                                  NEW YORK, NEW YORK

                                                                      LOST INVESTMENT INCOME CALCULATION


LOST INVESTMENT INCOME                                               2004         2005           2006        2007        2008        2009       2010        2011**        TOTAL


A. QUESTIONED CHARGES (Subject to Lost Investment Income)


    Pension Costs*                                                          $0           $0      $173,836           $0   $212,165    $180,300          $0        $0        $566,301


    TOTAL                                                                   $0           $0      $173,836           $0   $212,165    $180,300          $0        $0        $566,301


B. LOST INVESTMENT INCOME CALCULATION


    a. Prior Years Total Questioned (Principal)                             $0           $0             $0   $173,836           $0   $212,165   $180,300         $0
    b. Cumulative Total                                                      0            0              0           0    173,836     173,836    386,001     566,301
    c. Total                                                                $0           $0             $0   $173,836    $173,836    $386,001   $566,301    $566,301


    d. Treasury Rate: January 1 - June 30                             4.000%       4.250%         5.125%      5.250%      4.750%      5.625%     3.250%      2.625%


    e. Interest (d * c)                                                     $0           $0             $0     $4,563      $4,129     $10,856     $9,202      $7,433        $36,183


    f. Treasury Rate: July 1 - December 31                            4.500%       4.500%         5.750%      5.750%      5.125%      4.875%     3.125%


    g. Interest (f * c)                                                     $0           $0             $0     $4,998      $4,455      $9,409     $8,848                    $27,710


   Total Interest By Year (e + g)                                           $0           $0             $0     $9,561      $8,584     $20,265    $18,050      $7,433        $63,893


* Only the pension cost overcharges on Schedule B are subject to this lost investment income calculation.
** We calculated lost investment income through June 30, 2011 on the pension cost overcharges.
                                                                                                                                                      APPENDIX
  Senior Vice President, Sales and Account Management
  Tel              Fax
                                                                                                          EmblemHeab -
  55 Water Street, New York, NY 10041-8190
                                                                                                          www.en- iblernneaith.corn




             January 21, 2011


             Auditor
             US Office of Personnel Management
             Office of the Inspector General
             701 San Marco Blvd.
             Jacksonville, FL 32207


                        RE: Response to Report No. ID-80-00-10-046
             Dear

             Enclosed is EmblemHealth's ("Plan") response to the Draft Audit Report that was released on
             November 22, 2010. The report questions $7,299,415 in health benefit charges and
             administrative expenses from 2004 through 2009. Additionally, the report requests the Plan to
             provide documentation on unsolicited/unidentified refunds and provide a response to your
             request to have a pension allocation based on Cost Accounting Standards (CAS) 412 or 413 -
             whichever is lower.

             With respect to the health benefit charges of $7,299,415 as identified in the audit report, the
             following is a summary of the Plan's findings:

                  t     Deleted by the Office of the Inspector General — Not Relevant to the
                        Final Report


                  2. The Plan agrees with the finding that pharmacy rebates totaling $2,788,625 were not
                     returned to FEHB as of December 31, 2009. The report recognizes subsequent to this
                     date that $1,571,282 in pharmacy rebates have been returned to the LOCA. Of the
                     remaining rebates - i.e., $1,217,343, GHL credited FEHB on June 30, 2010, July 21, 2010
                     and, August 31, 2010 with $456,578 in rebates (documentation is provided in the
                     enclosed report). On January 21, 2011 FEHB was also credited with the remaining
                     rebates - i.e., $760,765. Additionally, the Plan credited the LOCA with $3,176.44 in lost
                     investment income.
                 3. The Plan agrees with the finding that $457,073 representing an unsupported
                    settlement charge is due FEHB. On January 20, 2011, the LOCA was credited with this
                    amount. Additionally, the Plan credited the LOCA with $76,811 in lost investment
                    income.

Group Health Imorporated (GHI). HIP Health Plan of New York (HIP), HIP Insurance Company of New York and Erriblewl-lealth Services Company. LLC are
EmblemHealth companies. EmblemHealth Services Company, LLC provides administrative services to
                                                                                                 EmblemHealth companies.
                                                                                                                                                          'or
      4. The Plan agrees with the finding that a credit for uncashed checks was not returned to
         FEHB as of December 31, 2009. Subsequent to this date, on June 15, 2010, a credit in the
         amount of $122,892 was made to the LOCA and, on January 20, 2011, an additional
         $24,094 representing lost investment income was credited to the LOCA.

      5. Deleted by the Office of the Inspector General — Not Relevant to the
         Final Report

As requested, the plan's policies and procedures for unsolicited refunds and, a quotation to
provide the pension allocation on a CAS basis are included in the attached report.

Should you have any questions regarding this response to your audit report, please feel free to
contact me or                   .




Cc:
                       Response to The Draft Audit Report
                    Federal Employees Health Benefit Program
Report No. ID 80 00 10 046
            -   -   -   -
                                                         Date: January 21, 2011




                             Group Health Incorporated
                                   Plan Code 80
                               New York, New York
                                      Contents
•   Financial Recoveries/Health Benefit Refunds - Audit Inquiry #4          1
•   Pharmacy Rebates - Audit Inquiry #7                                     2
•   Unsupported Settlement Charges - Audit Inquiry # 2                      .2
•   Uncashed Health Benefit Checks - Audit Inquiry #6                       3
•   Unsolicited and Unidentified Refunds - Audit Inquiry # 3                3
•   Unsupported Behavioral Management Program Charges - Audit Inquiry # 5   4
•   Pension Cost Audit Inquiry # 1                                          4
                   Health Benefit Refunds and Recoveries
                             Audit Inquiry # 4


Deleted by the Office of the Inspector General — Not Relevant to the Final Report




                                        1
                                     Pharmacy Rebates
                                     Audit Inquiry # 7

OIG
The Plan had not returned pharmacy drug rebates of $2,788,625 to the LOCA as of December
31, 2009. Subsequent to this date, the Plan returned $1,571,282 of these questioned drug
rebates to the FEHBP. As a result, the FEHBP is still due $1,217,343 for the remaining
questioned drug rebates plus applicable LII on the drug rebates that were returned untimely or
not returned to the FEHBP.

Plan Response:
The plan agrees with this finding. The Plan has credited the LOCA on January 21, 2011 with
$760,765 for ESI rebates. OCAP rebates in the amount of $456,578 were credited to the
LOCA on June 30, 2010, July 21, 2010 and August 31, 2010. A total of 1,217,343 in ESI and
OCAP rebates plus LII in the amount of 3,176.44 have been credited to the LOCA. Attached
to this report is documentation of these credits.



                           Unsupported Settlement Charges
                                 Audit Inquiry #2

OIG Finding:
The Plan did not provide documentation to support settlement charges of $457,073 to the
FEHBP, which were reported in the 2004 Annual Accounting Statement (AAS). As a result,
the FEHBP is due $457,073 for these unsupported charges.


Plan Response:
The Plan agrees with this finding and has returned the $457,073 plus $76,811 in LII to the
LOCA on January 20, 2011.




                                              2
                           Uncashed Health Benefit Checks
                                  Audit Inquiry #6
OIG Finding:
The Plan had not returned uncashed health benefit checks of $122,892 to the LOCA as of
December 31, 2009. These uncashed checks were issued by the Plan from 2002 through 2007.
Spbsequent to this date, the Plan returned these questioned uncashed checks to the FEHBP. As
a result, the FEHBP is still due $24,094 for LII on these uncashed checks since the funds were
returned untimely to the FEHBP.

Plan Response:
The Plan agrees with this finding. The Plan returned $122,892 to the LOCA on June 15, 2010.
The Plan also credited the LOCA on January 20, 2011 for the additional $24,094 in LII.



                       Unsolicited and Unidentified Refunds
                                    Audit Inquiry #3


Deleted by the Office of the Inspector General — Not Relevant to the Final Report




                                             3
             Unsupported Behavior Management Program Charges
                             Audit Inquiry # 5



Deleted by the Office of the Inspector General        -   Not Relevant to the Final Report




                                     Pension Cost
                                    Audit Inquiry #1
OIG Findings:
The Plan did not calculate pension costs in accordance with the Federal regulations. The
regulations limit the amount of pension costs that may be charged to a government contract to
the lower of any cash contribution to the pension fund trustee, or the amount of expense
calculated in accordance with Cost Accounting Standards (CAS) 412 and 413, whichever is
lower. The Plan did not calculate pension costs based on the lesser of cash contributions
(funded) or CAS amounts. Therefore, we could not determine if the Plan charged the correct
pension cost amounts to the FEHBP.

Plan Response:
In July 2010, the Plan was asked by the (AG audit team to provide OPM with a quote to have
the Plan's pension cost allocation changed from Generally Accepted Accounting Principles to
CAS Accounting Standards. This change means an additional cost would be borne by FEHB
program. Accordingly, the Plan has provided a quote to OPM and is awaiting a decision.