oversight

Audit of Altius Health Plans South Jordan, Utah

Published by the Office of Personnel Management, Office of Inspector General on 2010-06-28.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                          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



                                           Altius Health Plans

                                Contract CS 2839       Plan Codes 9K/DK

                                           South Jordan, Utah





                        REPORT NO. lD-9K-OO-09-026           DATE: June 28, 2010




                                                            ~~Michael R. Esser
                                                              Assistant Inspector General
                                                                for Audits




        www.o prn.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



                                                Altius Health Plans

                                     Contract CS 2839       Plan Codes 9KJDK

                                                South Jordan, Utah





                        REPORT NO. 1D-9K-00-09-026                      DATE: ,June 28, 2010


       This final audit report on the Federal Employees Health Benefits Program (FEHBP) operations at
       Altius Health Plans (Plan), in South Jordan, Utah, questions $57,831 in health benefit charges,
       $88,521 in administrative expenses, and $99,260 in cash management practices. The Plan agreed
       (Aj with all questioned charges. Lost investment income CLII) on the questioned charges
       amounts to $9,313.

       Our limited scope audit was conducted in accordance with Government Auditing Standards. The
       audit covered claim payments, miscellaneous health benefit payments and credits, and
       administrative expenses from 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:




       I For claim payments, we only reviewed a sample of debarred providers to determine if any claims were
       inappropriately paid to these providers from January 1,2004 through December 31,2008.



        www.opm.gov                                                                                            www.us ajobs.gov
                           HEALTH BENEFIT CHARGES


Claim Payments

•	 Debarred Provider Payments (A)                                                          $2,991

   The Plan made 11 claim payments, totaling $2,991, to a debarred provider in 2004 and 2005.

Miscellaneous Payments and Credits

•	 Health Benefit Refunds, Subrogation Recoveries, and Drug Rebates (A)                   $54,840

   As of the start date of our review, the Plan had not returned 13 health benefit refunds and 2
   subrogation recoveries, totaling $36,381, to the FEHBP. Also, the Plan did not timely return
   $2,519,723 in drug rebates, $746,176 in health benefit refunds, and $214,427 in subrogation
   recoveries to the FEHBP. As a result of this finding, the Plan returned $54,840 to the
   FEHBP, consisting of $36,381 for the funds not returned to the FEHBP and $18,459 for LIl
   on the funds returned untimely or not returned to the FEHBP.

                             ADMINISTRATIVE EXPENSES

•	 Executive Compensation (A)                                                             $96,404

   The Plan overcharged the FEHBP for executive compensation from 2006 through 2008.

•	 Unallowable Lobbying Expenses (A)                                                      $14,527

   The Plan charged unallowable lobbying expenses to the FEHBP from 2006 through 2008.

•	 Cost of Health Care Allocation Percentage (A)                                        $(22,410)

   The Plan undercharged the FEHBP for administrative expenses in 2007 and 2008.


                                 CASH MANAGEMENT

•	 Excess Letter of Credit Drawdowns for Service Charges (A)                              $95,823

   The Plan withdrew $84,960 from the letter of credit (LaC) account in excess of the
   contractual annual service charges. As a result of this finding, the Plan returned $95,823 to
   the FEHBP, consisting of$84,960 for the excess LaC drawdowns and $10,863 for LII on
   these funds.




                                                11
                                                                 -   ---------------     -- - - - - - - - - - - - - - - - -




•   Cash Management of Program Funds fA)                                                     $3,437

    The Plan incorrectly adjusted an LOC drawdown error. As a result of this finding, the Plan
    returned $3,437 to the FEHBP, consisting of $3,000 for the drawdown adjustment error and
    $437 for LII.


               LOST INVESTMENT INCOME ON AUDIT FINDINGS

    As a result of our audit findings presented in this audit report, the FEHBP is due LII of
    $9,313, calculated through August 28,2009. The questioned charges subject to the LII
    calculation were returned to the FEHBP on August 28,2009.




                                                 ...

                                                 ni
                                      CONTENTS

                                                                                     PAGE

       EXECUTIVE SUMMARy                                                                   i


 I.    INTRODUCTION AND BACKGROUND                                                         1


II.    OBJECTIVES, SCOPE, AND METHODOLOGY                                                  3


III.   AUDIT FINDINGS AND RECOMMENDATIONS                                                  6


       A.   HEALTH BENEFIT CHARGES                                                         6


            1. Claim Payments                                                              6

               a. Debarred Provider Payments                                               6


            2. Miscellaneous Payments and Credits                                          7

               a. Health Benefit Refunds, Subrogation Recoveries, and Drug Rebates         7


       B.   ADMINISTRATIVE EXPENSES                                                        9


            1. Executive Compensation                                                      9

            2. Unallowable Lobbying Expenses                                              10

            3. Cost of Health Care Allocation Percentage                                  11


       C.   CASH MANAGEMENT                                                               13


            1. Excess Letter of Credit Drawdowns for Service Charges                       13

            2. Cash Management of Program Funds                                          ; 14

       D.   LOST INVESTMENT INCOME ON AUDIT FINDINGS                                      16


 IV.   MAJOR CONTRIBUTORS TO THIS REPORT                                                  17


 V.    SCHEDULES

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


       APPENDIX (Altius Health Plans reply, dated November 30,2009, 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
Altius Health Plans (Plan). The Plan is located in South Jordan, Utah.

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 Retirement and Benefits
Office has overall responsibility for administration of the FEHBP. The provisions of the FE?B
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? Enrollment is open to all federal employees and
annuitants that live or work in the plan's service area, which includes Utah and select counties in
Idaho and Wyoming.

The Plan's contract with OPM (CS 2839) 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, 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.

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 as an experience-rated HMO. 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,

2 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.




                                                        I
dated October 16, 2009. 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 December 22, 2009 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:

   Health Benefit Charges

   •	 To determine whether the Plan complied with the FEHBP health benefit provisions
      relative to debarred providers.

   •	 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.

   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.
During this period, the Plan paid approximately $441 million in health benefit charges and $26
million in administrative expenses (See Figure 1 and Schedule A). The Plan also paid
approximately $3 million in service charges (See Schedule A).

Specifically, we reviewed a sample of debarred providers in Utah to determine if any claims were
inappropriately paid to these providers from January 1, 2004 through December 31, 2008. In



                                               3

                                                                                                        ~---~----------




addition, 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                                         Altius Health Plans

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              l/)   $150
                                                          s::
areas selected, we primarily relied on                    .2
substantive tests of transactions and not tests of        :E    $100
                                                          ~

controls. Based on our testing, we did not
identify any significant matters involving the                   $50

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
an opinion on the Plan's system of internal                            r.a Health Benefit Payments     11II Administrative Expenses

controls taken as a whole.
                                                                             Figure I - Contract Charges

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 ofthis 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 South Jordan, Utah from August 3 through
August 28,2009. 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.

To test the Plan's compliance with the FEHBP health benefit provisions, we selected and
reviewed a judgmental sample of25 debarred providers in Utah (from a universe of 123 debarred
providers) for the purpose of determining if any claims were inappropriately paid to these
providers from 2004 through 2008. We used the FEHBP contract and benefit plan brochure to
determine the allowability of the benefit payments. The results of this sample were not projected
to the universe of debarred providers.

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 82 health benefit refunds, totaling $1,399,551 (from a
universe of 11,420 refunds, totaling $3,709,442); 62 subrogation recoveries, totaling $365,565
(from a universe of 97 recoveries, totaling $403,613); and all quarterly pharmacy drug rebate
receipts, totaling $4,895,489, from 2004 through 2008 for the purpose of determining if refunds,
recoveries, and rebates 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 expense
accounts, pension, employee health benefits, executive compensation, subcontracts, non­
recurring projects, lobbying, and Health Insurance Portability and Accountability Act of 1996
compliance. We used the FEHBP contract, the FAR, and the FEHBAR to determine the
allowability, allocability, and reasonableness of charges. The results of the testing were not
projected to the universe of administrative expenses.

We reviewed the Plan's cash management to determine whether the Plan handled FEHBP funds
in accordance with Contract CS 2839 and applicable laws and regulations. For the period 2004
through 2008, we also selected and reviewed a judgmental sample of 82 letter of credit (LOC)
drawdowns, totaling $40,603,351 (from a universe totaling $469,204,617), for the purpose of
determining if these drawdowns were properly supported." The results of this sample were not
projected to the universe ofLOC drawdowns.




3 See the audit finding for "Health Benefit Refunds, Subrogation Recoveries, and Drug Rebates" (A2.a) on pages 7

through 9 for the specific details of our sample selection methodologies.

4 For each year, we judgmentally selected one week from each quarter and reviewed the Plan's daily drawdowns

during those weeks.





                                                        5
           III. AUDIT FINDINGS AND RECOMMENDATIONS


A. HEALTH BENEFIT CHARGES

  1. Claim Payments

     a. Debarred Provider Payments                                                      $2,991

        The Plan made 11 claim payments, totaling $2,991, to a debarred provider in 2004
        and 2005.

        Contract CS 2839, Part II, Section 2.7 states that that if a provider has been barred
        from participating in the FEHBP under Title 5 of the U.S. Code, or the provider's
        services under the Code are excluded, the carrier agrees to withhold payments to that
        provider.

        For the period 2004 through 2008, we identified 123 providers in Utah that were
        debarred. From this universe, we selected and reviewed a judgmental sample of 25
        debarred providers for the purpose of determining if the Plan inappropriately paid any
        claims to these providers after the debarment dates. Based on our review, we
        determined that the Plan made 11 claim payments in 2004 and 2005, totaling $2,991,
        to a debarred provider after the debarment date. According to the Plan, the Altius'
        Special Investigations Unit opened a case on this provider on July 7, 2004 after
        receiving a debarment notification from the state of Utah. The Plan also received an
        official debarment date of July 28,2004 from the OIG's Administrative Sanctions
        Branch. On December 21,2004, the Plan mailed debarment notification letters to the
        applicable FEHBP members and the debarred provider.

        Plan's Response:

        The Plan agrees with this finding. The Plan returned the questioned charges of $2,991
        to the FEHBP on August 28,2009.

        Recommendation 1

        We verified that the Plan returned $2,991 to the FEHBP for the claims that were
        inappropriately paid to a debarred provider. Therefore, no further action is required
        for this questioned amount.




                                             6

    2. Miscellaneous Payments and Credits

        a. Health Benefit Refunds, Subrogation Recoveries, and Drug Rebates                              $54,840

             The Plan had not returned 13 health benefit refunds and 2 subrogation recoveries,
             totaling $36,381, to the FEHBP as of July 8, 2009. 5 Also, the Plan did not timely
             return $2,519,723 in drug rebates, $746,176 in health benefit refunds, and $214,427 in
             subrogation recoveries to the FEHBP. As a result of this finding, the Plan returned
             $54,840 to the FEHBP, consisting of $36,381 for the funds not returned to the FEHBP
             and $18,459 for lost investment income (LII) on the funds returned untimely or not
             returned to the FEHBP.

             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 2839, Part II, Section 2.3(i) states, "All health benefit refunds and
             recoveries, including erroneous payment 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."
             Based on insurance industry practice, the Plan has 30 days to return health benefit
             refunds and recoveries to the FEHBP before LII will commence to be assessed.

             48 CFR 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."

             For the period 2004 through 2008, there were 11,420 health benefit refunds totaling
             $3,709,442. This universe included 9,709 medical refunds, totaling $3,070,649; 17
             miscellaneous refunds, totaling $567,456; and 1,694 drug refunds, totaling $71,337.
             From this universe, we selected and reviewed a judgmental sample of 82 refunds,
             totaling $1,399,551, for the purpose of determining if the Plan promptly returned these
             refunds to the FEHBP. Our sample included 57 medical refunds, totaling $828,479
             (all refunds of $10,000 or more and/or the 10 highest dollar refunds from each year);
             14 miscellaneous refunds, totaling $564,093 (all refunds of$4,000 or more); and 11
             drug refunds, totaling $6,979 (all refunds of $500 or more).



5 We submitted our samples of health benefit refunds and subrogation recoveries to the Plan on July 8, 2009. As of
this date, the Plan had not returned these refunds and recoveries to the FEHBP.




                                                         7

Also, there were 97 subrogation recoveries totaling $403,613. From this universe, we
selected and reviewed a judgmental sample of 62 subrogation recoveries, totaling
$365,565, for the purpose of determining if the Plan promptly returned these
recoveries to the FEHBP.

In addition, there were 23 quarterly pharmacy drug rebates totaling $4,895,489. We
selected for review all of these quarterly rebates and determined ifthe Plan promptly
returned these rebates to the FEHBP.

The following summarizes the exceptions noted from our review of these samples:

•	 The Plan had not returned 13 health benefit refunds, totaling $35,487, to the
   FEHBP as of July 8, 2009. Also, the Plan did not timely return health benefit
   refunds of$746,176 to the FEHBP. As a result, we calculated LII of $11,179 on
   the refunds returned untimely or not returned to the FEHBP.

•	 The Plan had not returned portions of two subrogation recoveries, totaling $894, to
   the FEHBP as of July 8, 2009. Also, the Plan did not timely return subrogation
   recoveries of $214,427 to the FEHBP. As a result, we calculated LII of $549 on
   the recoveries returned untimely or not returned to the FEHBP.

•	 The Plan did not timely return drug rebates of $2,519,723 to the FEHBP. As a
   result, we calculated LII of $6,731 on these rebates returned untimely to the
   FEHBP.

In total, we are questioning $54,840, consisting of $36,381 ($35,487 + $894) for health
benefit refunds and subrogation recoveries and $18,459 ($11,179 + $549 + $6,731) for
LII on health benefit refunds, subrogation recoveries, and drug rebates returned
untimely or not returned to the FEHBP.


Plan's Response:

The Plan agrees with this finding. The Plan returned the questioned amount of
$54,840 to the FEHBP on November 23,2009. The Plan is implementing a process
to ensure that refunds are returned to the FEHBP in a timelier manner.


OIG Comments:

After reviewing additional documentation provided by the Plan, we revised our
questioned amount from the draft report to $54,840.




                                     8

        Recommendation 2

        Since we verified that the Plan returned $36,381 to the FEHBP for the questioned
        health benefit refunds and subrogation recoveries, no further action is required for this
        questioned amount.

        Recommendation 3

        Since we verified that the Plan returned $18,459 to the FEHBP for LII on health
        benefit refunds, subrogation recoveries, and drug rebates returned untimely or not
        returned to the FEHBP, no further action is required for this questioned amount.

B. ADMINISTRATIVE EXPENSES


  1. Executive Compensation                                                              $96,404

     The Plan overcharged the FEHBP $96,404 for executive compensation from 2006
     through 2008.

     48 CFR 31.205-6(p) limits the allowable compensation costs for senior executives to a
     benchmark amount established each year by the Office of Federal Procurement Policy.
     This limit is applicable to the five most highly compensated employees in management
     positions at each home office and each segment of the Plan, whether or not the home
     office or segment reports directly to the Plan's headquarters. The benchmark
     compensation amounts were $546,689 in 2006, $597,912 in 2007, and $612,196 in 2008.

     48 CFR 31.205-6(p)(2)(i) states, '" Compensation' means the total amount of wages,
     salary, bonuses, deferred compensation ... and employer contributions to defined
     contribution pension plans ... for the fiscal year, whether paid, earned, or otherwise
     accruing, as recorded in the contractor's cost accounting records for the fiscal year."

     To determine the allowability of the amounts charged to the FEHBP for executive
     compensation, we reviewed the Plan's allocations for 2004 through 2008 to determine if
     the executive compensation amounts were limited to the benchmark amounts set forth in
     48 CFR 31.205-6(p). We determined that the Plan limited the executive compensation
     amounts in 2004 and 2005 as required by the regulation. However, for 2006 through
     2008, the Plan did not factor in the amount of restricted stock and mid-term compensation
     when comparing the total compensation for one executive to the benchmark amounts. As
     a result, the FEHBP was overcharged $96,404 for executive compensation from 2006
     through 2008 ($3,334, $85,735 and $7,335, respectively) .




                                               9

   Plan's Response:

   The Plan agrees with this finding. The Plan returned the executive compensation

   overcharges of $96,404 to FEHBP on August 28, 2009.


   Recommendation 4

   Since we verified that the Plan returned $96,404 to the FEHBP for the executive
   compensation overcharges, no further action is required for this questioned amount.

2. Unallowable Lobbying Expenses                                                       $14,527

   The Plan charged unallowable lobbying expenses of$14,527 to the FEHBP from 2006 to
   2008.

   48 CFR 31.205-22(a) states, "Costs associated with the following activities are
   unallowable: ... (3) Any attempt to influence- (i) The introduction of Federal, state, or
   local legislation ...."

   48 CFR 31.205-22(c) states, "When a contractor seeks reimbursement for indirect costs,
   total lobbying costs shall be separately identifiedin the indirect cost rate proposal, and
   thereafter treated as other unallowable activity costs."

   During our review of expenses charged to the FEHBP from 2004 through 2008, we found
   that natural account "654000" (consultant fees) included expenses for lobbying activities
   performed by a consultant. The Plan allocated $14,527 of these lobbying expenses to the
   FEHBP from 2006 through 2008 ($4,941, $4,506 and $5,080, respectively). Based on
   discussions with the Plan, we determined that these expenses were related to local and
   state lobbying activities for the Plan's commercial lines of business, which are not
   chargeable to the FEHBP.

   Plan's Response:

   The Plan agrees with this finding. The Plan returned the questioned lobbying charges of
   $14,527 to FEHBP on August 28,2009.

   Recommendation 5

   Since we verified that the Plan returned $14,527 to the FEHBP for the unallowable
   lobbying charges, no further action is required for this questioned amount.




                                            10
      3. Cost of Health Care Allocation Percentage                                             $(22,410)

           The Plan undercharged the FEHBP $22,410 for administrative expenses from 2007
           through 2008.

           Contract 2839, 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."

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

           48 CFR 31.201-1(a) states, "The total cost ofa contract is the sum of the direct and
           indirect costs allocable to the contract, incurred or to be incurred, less any allocable
           credits, plus any allocable cost of money pursuant to 31.205-10. In ascertaining what
           constitutes a cost, any generally accepted method of determining or estimating costs that
           is equitable and is consistently applied may be used, including standard costs properly
           adjusted for applicable variances."

           For the period 2004 through 2006, the Plan allocated administrative expenses to the
           FEHBP based on a "Cost of Health Care Percentage" (COHC %). The Plan calculated
           the COHC% by dividing the FEHBP's claims paid by the total corporate claims paid.
           The Plan calculated the cost of health care (COHC) as follows: claims paid +/- change in
           IBNR6 reserve - pharmacy drug rebates. We agree with the Plan's calculation for 2004
           through 2006.

           In 2007, the Plan changed the calculation of the COHC as follows: claims paid +/- change
           in IBNR reserve - pharmacy drug rebates + pharmacy drug rebates. The Plan informed us
           that Coventry Health Care (Coventry) started performing the pharmacy drug rebate
           function in 2007. Although Coventry acquired Altius in 2003, Coventry did not centralize
           the rebate function until 2007. Starting in 2007, all rebates received are processed at the
           corporate level and only the portion related to the FEHBP is separately transferred and
           recorded as a credit to FEHBP's claims paid by Altius.

           For 2007 and 2008, we verified that the Plan returned the pharmacy drug rebates to the
           FEHBP. However, when calculating the COHC, the Plan added the rebates back to the
           formula, which resulted in negating the credit that the Plan recorded when the rebates


6   IBNR are claims incurred but not reported.




                                                     11
were initially received. The Plan stated that the pharmacy drug rebates received from
Coventry were added back to FEHBP's COHC in order to be consistent with the health
care costs for other lines of business, since Coventry did not break out the rebates for the
Plan's other lines of business.

Since the COHC is affected by rebates, we recalculated the FEHBP's COHC and
COHC% as follows:


      OIG Calculations ofCOHC and COHC%              2007            2008
      FEHBP Claims Paid                             $95,070,489    $103,986,694
      Yearly Change in IBNR Reserve                     562,000        (324,000)
      Less: Pharmacy Dug Rebates                      1,020,919        1,744,751
      Total FEHBP COHC (AJ                          $94,611,570    $101,917,943
      Total Corporate COHC (B)                     $526,741,561    $544,335,220
      FEHBP COHC% (A/B)                             17.96%          18.72%


We applied our calculated COHC% for FEHBP to the total corporate allocable
administrative expenses and determined that the FEHBP was undercharged $20,000 in
2007 and $2,410 in 2008. The following summarizes our calculations of these
undercharges to the FEHBP:


          OIG Calculation of Undercharges            2007            2008
      Total Corporate Allocable Administrative
      Expenses (C)                                  $25,000,174      $24,098,749

      FEHBP COHC% (per OIG) (D)                    , 17.96%         18.72%
      Total FEHBP Allocable Administrative
      Expenses (per OIG) (C*D)                       $4490031        $4511 286
      Total Amount Charged to the FEHBP              $4,470,031      $4,508,876
      Difference (Dndercharges)                       ($20,000)         ($2,410)

In total, the Plan undercharged the FEHBP $22,410 in 2007 and 2008 for administrative
expenses.

Plan's Response:

The Plan agrees with this finding, The Plan has not taken any action to charge this
additional amount to the FEHBP. The Plan is waiting for approval from the contracting
officer before taking corrective action,




                                             12

     Recommendation 6

     We recommend that the contracting officer allow the Plan to charge the FEHBP $22,410
     for administrative expense undercharges in 2007 and 2008.


C. CASH MANAGEMENT


  1. Excess Letter of Credit Drawdowns for Service Charges                           $95,823

     The Plan withdrew $84,960 from the LOC account in excess of the contractual annual
     service charges. As a result of this finding, the Plan returned $95,823 to the FEHBP,
     consisting of $84,960 for the excess LOC drawdowns and $10,863 for LII on these funds.

     As previously cited from CS 2839, costs charged to the FEHBP must be actual,
     allowable, allocable, and reasonable.

     Appendix B (Subscription Rates, Charges, Allowances and Limitations) of Contract CS
     2839 includes the Plan's annual service charge amount.

     48 CFR 52.232-l7(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."

     For each year, we performed a reconciliation of the Plan's LOC drawdowns for the
     annual service charge to the Plan's contractual service charge amount. We found that the
     Plan withdrew $32,757 and $52,962 from the LOC account in excess of the contractual
     annual service charges for contract years 2005 and 2007, respectively. We also found
     that the Plan withdrew $759 less than they should have from the LOC account for the
     contract year 2004 service charge. In total, we determined that the Plan overdrew
     $84,960 (net) from the LOC account for the annual service charges. We also calculated
     LII of $10,863 on these excess funds.

     Plan's Response:

     The Plan agrees with this finding. The Plan returned the questioned amount of $95,823
     to the FEHBP on August 28,2009.

     Recommendation 7

     Since we verified that the Plan returned $84,960 to the FEHBP for the excess LOC
     service charge drawdowns, no further action is required for this questioned amount.



                                             13
  'Recommendation 8

   Since we verified that the Plan returned $10,863 to the FEHBP for LII on the excess Lac
   service charge drawdowns, no further action is required for this questioned amount.


2. Cash Management of Program Funds                                                     $3,437

   The Plan incorrectly adjusted an Lac drawdown error. As a result of this finding, the
   Plan returned $3,437 to the FEHBP, consisting of$3,000 for the drawdown adjustment
   error and $437 for LII.

   As previously cited from CS 2839, costs charged to the FEHBP must be actual,
   allowable, allocable, and reasonable.

   Contract CS 2839, Part III, Section 3.4(a) states, "The Carrier shall invest and reinvest all
   FEHB funds on hand that are in excess of the funds needed to promptly discharge the
   obligations incurred under this contract. The Carrier shall seek to maximize investment
   income with prudent consideration to the safety and liquidity of investments." In addition,
   Section 3.4(e) states, "Investment income lost as a result of failure to credit income due
   the contract or failure to place excess funds in income producing investments and accounts
   shall be paid from the date the funds should have been invested ...."

   48 CFR 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."

   As part of our cash management review, we obtained an understanding of the Plan's
   policies and procedures relating to FEHBP funds. The Plan did not have a working
   capital (WC) deposit for the Federal account during the period 2004 through 2009.
   Although a WC deposit is not a contractual requirement, OPM strongly recommends that
   each Carrier have a dedicated WC account to manage FEHBP funds. We noted that when
   claim payment checks were presented to the bank, the Plan covered the check amounts
   with corporate funds and then withdrew the reimbursement funds from the LOC account
   and deposited these funds into a dedicated FEHBP zero-balance account. After the
   reimbursement funds were deposited into the zero-balance account, the Plan transferred
   these funds on the same day to a corporate account.

   For the period 2004 through 2008, we selected and reviewed a judgmental sample of 82
   LaC drawdowns, totaling $40,603,351 (from 'a universe totaling $469,204,617), for the
   purpose of determining if these drawdowns were properly supported. During our review,
   we identified numerous LaC drawdown errors, such as double, over, and under draws.




                                            14
The Plan had already identified most ofthese errors when performing month-end
reconciliations. However, we noted that the errors made during the month were not
corrected until the 15th of the following month. Since the Plan did not have a dedicated
WC capital deposit, the Plan also did not have an FEHBP investment account. Therefore,
when over-draw errors occurred, the excess FEHBP funds did not earn the required
investment income before the corrections were made. For example, we identified two
drawdown errors, totaling $448,529, which the Plan took 43 and 45 days, respectively, to
correct. Since the Plan made as many over-draw errors as under-draw errors, we did not
calculate LII on the individual errors that were identified in our sample.

Except for one exception, the Plan had already corrected the LaC drawdown errors noted
in our review. For this one exception, the Plan had not properly adjusted a drawdown
error. Specifically, the Plan inadvertently withdrew $229,112 twice from the LaC
account. However, when correcting this error, the Plan only returned $226,112 to the
LaC account, resulting in a drawdown adjustment error of$3,000. We also calculated
LII of $437 on this adjustment error.

Plan's Response:

The Plan agrees with this finding. The Plan returned the questioned amount of$3,437 to
the FEHBP on August 28, 2009. The Plan states, "Altius has revised its processes to
perform a daily reconciliation of the drawdown, from monthly, to minimize drawdown
errors and insure a more timely correction of any drawdown errors that do occur. ...
Altius has also added an additional level of management review to further validate LaC
draws versus the allowed costs. Finally, Altius is in the process of establishing a working
capital deposit to manage FEHBP funds."

Recommendation 9

Since we verified that the Plan returned $3,000 to the FEHBP for the LaC drawdown
adjustment error, no further action is required for this questioned amount.

Recommendation 10

Since we verified that the Plan returned $437 to the FEHBP for LII on the LaC
drawdown adjustment error, no further action is required for this questioned amount.


Recommendation 11

We recommend that the contracting office verify if the Plan has implemented procedures
to improve its controls over FEHBP funds and the LaC drawdown process.




                                         15

D. LOST INVESTMENT INCOME ON AUDIT FINDINGS                                                               $9,313

    As a result of the audit findings presented in this report, the FEHBP is due LII of $9,313 from
    January 1,2007 through August 28,2009. 7

    48 CFR 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
    LIl of $9,313 from January 1,2007 through August 28,2009 on questioned costs for contract
    years 2006 and 2008 (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.

    Recommendation 12

    We recommend that the contracting officer direct the Plan to credit $9,313 to the Special
    Reserve for LIl on audit findings




7 The audit findings for "Executive Compensation" (Bl) and "Unallowable lobbying Expenses" (B2) are subject to
the lost investment income calculation. The Plan returned the questioned charges for these findings to the FEHBP
on August 28,2009.




                                                       16
              IV. MAJOR CONTRIBUTORS TO THIS REPORT

Experience-Rated Audits Group

                 Auditor-In-Charge

                 Team Leader

               Auditor



                   Chief

                Senior Team Leader




                                     17

                                                                                                                                                                                                                                SCHEDULE A
                                                    V. SCHEDULES


                                            ALTIUS HEALTH PLANS

                                            SOUTH JORDAN, UTAH


                                                CONTRACT CHARGES


CONTRACT CHARGES                         2004                        2005                                   2006                                      2007                                        2008                                TOTAL


A. HEALTH BENEFIT CHARGES

   CLAIM PAYMENTS                     $68,938,528           $85,406,073                             $91,717,546                                 $95,070,489                             $103,986,694                                $445,119,330
   OTHER ADJUSTMENTS                     (663,443)             (840,377)                               (830,598)                                   (489,092)                              (1,744,751)                                 (4,568,261)

   TOTAL HEALTH BENEFIT CHARGES   I   $68,275,085           $84,565,696                             $90,886,948                                $94,581,397                              $102,241,943                                $440,551,069 ilil
                                                 JI j ~lll!li@lJWW;!mlJ!!j,i!imm!!mlm!liil@mMjmfmmmmmJiilmjj)mmMlm@g!li!liJijWiiHIjm!!mmmwmmmmmmllllwmlliimmm@!mllMmmmml!ml1!mmmmmmmmummmmummmmW#lmllll Jmiimlmllmmllmllmmj@mmmjmMWm~mmmmmmmmiiimilnl!M1!mdgmlih\JmiimHH! ilW




B. ADMINISTRATIVE EXPENSES        I    $5,450,016              $5,764,764                              $5,630,419                                 $4,829,197                                  $4,688,010                                $26,362,406                      lil!11




C. SERVICE CHARGES                I     $393,098                    $529,514                                $635,551                                   $722,540                                    $718,984                               $2,999,687
                                                                                                                                                                                                                                                                          11111




   TOTAL CONTRACT CHARGES         I   $74,118,199           $90,859,974                             $97,152,918                             $100,133,134                                $107,648,937                                $469,913,162                         Illili
                                                                                                                                                                                                                                                                                                                                                SCHEDULEB
                                                                                        ALTIUS HEALTH PLANS
                                                                                        SOUTH JORDAN, UTAH

                                                                                        QUESTIONED CHARGES

AUDIT FINDINGS                                                                                             2004                                    2005                                    2006                                    2007                                    2008                                     2009                              TOTAL

A. HEALTH BENEFIT CHARGES

    1. Claim Payments
       a. Debarred Provider Payments                                                                            $2,931                                          $60                                        $0                                      $0                                       $0                                      $0                                $2,991

        Total Claim Payments                                                              I                     $2,931                                          $60                                        $0                                      $0                                       $0                                      $0                                $2,991

    2. Miscellaneous Payments and Credits*
       a. Health Benefit Refunds, Subrogation Recoveries, and Drug Rebates                                   $16,460                                    $3,320                               $24,738                                    $6,289                                  $2,678                                   $1,355                                   $54,840

        Total Miscellaneous Payments and Credits                                          I                  $16,460                                    $3,320                               $24,738                                    $6,289                                  $2,678                                   $1,355                                   $54,840

                                                                                          I
                                                                                              !i:iliiiillll'!'Il~i~~i;!;~I~Ii!l:'illi"III!!i!l!!mi!i!!iIi~i~';!;I~~ilIiii:!iiliiiilmllililill ~;i~r:I~;!~'iH'!11liilllillillii!'I@!!II~I~I:;I~~iiillililllllllUliilllil!i>1'iI!~~!:~i:i~! 1ii1'!!illllilllllllfilimlil~i~':~'~i~iiJl, @!liiiii1l"lIII!JhI!JI~~ZI:~I;I~I@ !~
    TOTAL HEALTH BENEFIT CHARGES
                                                                                                                                                                                                                                                                                                                                              iii


B. ADMINISTRATIVE EXPENSES**

    1. Executive Compensation                                                                                              $0                                      $0                           $3,334                              $85,735                                     $7,335                                              $0                           $96,404
    2. Unallowable Lobbying Expenses                                                                                        0                                       0                            4,941                                4,506                                      5,080                                               0                           $14,527
    3. Cost of Health Care Allocation Percentage                                                                            0                                       0                                 0                             (20,000)                                    (2,410)                                              0                          ($22,410)

    TOTAL ADMINISTRATIVE EXPENSES                                                         I                                $0                                      $0                           $8,275                              $70,241                                 $10,005                                                $0                             $88,521
                                                                                                                                                                                                                                                                                                                                                                   ,),.i,jjjfiJ\)!j!Jii;i;;immm
                                                                                                                                                                                                                                                                                                                                                                                                  1O
                                                                                                                                                                                                                                                                                                                                                                                                  j~

C. CASH MANAGEMENT*

    1. Excess Letter of Credit Drawdowns for Service Charges                                                       ($759)                            $32,757                                    $1,772                              $54,754                                     $4,223                                   $3,076                                   $95,823
    2. Cash Management of Program Funds                                                                                0                                  $0                                     3,006                                  164                                        148                                      119                                    $3,437

    TOTAL CASH MANAGEMENT                                                                I                         ($759)                            $32,757                                    $4,778                              $54,918                                     $4,371
                                                                                                         :iHll!i~;mHiii!iiiifjIIHiimmmjlim!mlwmilllliimliimiiiliimli;iilWl!mij;iimiimmuliWiIWiiiililigiiilililHWmmniiilllliiwmmimwumli@liiiiii@lilllllllllllimiHWHHWmiimii@mmll!i~llmiiiiimiimHl@;
                                                                                                                                                                                                                                                                                                                         $3,195                                   $99,260m
                                                                                                                                                                                                                                                                                                            liiiill@iiHmm@Wi@@l/HiiJh@lilimilil iiiiiHillmllHliHnWiiiliiilUlliiiiiH@ilL: ·IIJ
                                                                                              Hi!iliHt


D. LOST INVESTMENT INCOME ON AUDIT FINDINGS                                              I                                 $0                                      $0                                      $0                               $455                                $4,864                                   $3,994                                      $9,313
                                                                                                                                                                                                                                                                                                                                                                                                  III


TOTAL QUESTIONED CHARGES                                                                 I    WWlh6iiHHmi
                                                                                                             $18,632
                                                                                                                wimmmmmmHmmwm mi'
                                                                                                                                                     $36,137                                 $37,791                             $131,903
                                                                                                                                               ;~iHiin!!nHHimM;il!!mi!Ih!H!i!mj iW;mm!:mJjM.immWmmiilmiill!jjWiinmHll;ljjimi!imlmmmW~llllllIWlh;m iliHw,;m:;lli1!j!l!
                                                                                                                                                                                                                                                                            $21,918
                                                                                                                                                                                                                                                                              ,;'WidWl!l!illhjiim,!
                                                                                                                                                                                                                                                                                                                         $8,544.. . . . . ....$254,925 Ii'
                                                                                                                                                                                                                                                                                                      ~mWimmnhJh)linhdiiH'Wi'iiil,mWif:i!1i!WiiiiiWlhm!1WWiiWllll!mWhiWii!iiW1WkWi; ill

* Theaudit findings for miscellaneous payments and creditsand cash management include lost investment income.
** Theadministrative expense overcharges are subject to lostinvestment income.
                                                                                                                                                                                                                                  SCHEDULEC

                                                                                       ALTIUS HEALTH PLANS
                                                                                       SOUTH JORDAN, UTAH

                                                                   LOST INVESTMENT INCOME CALCULATION

LOST INVESTMENT INCOME                                                                     2004                                        2005                                         2006         2007      2008      2009*           TOTAL

A. QUESTIONED CHARGES (Subject to Lost Investment Income)

     Executive Compensation                                                                                     $0                                         $0                           $3,334   $85,735    $7,335           $0       $96,404
     Unallowable Lobbying Expenses                                                                               0                                          0                            4,941     4,506     5,080            0        14,527

   . ADMINISTRATIVE EXPENSES                                                I                                $0                                          $0                             $8,275
                                                                                JiWi@llMill;iJ0!illmmmWl,lliiilil@ll! d;mUllillhfM lidA!,;l! lilil!JlJjli;dMi@ IJll ,lill lllh%lhllliillU
                                                                                                                                                                                                 $90,241   $12,415           $0      $110,931   1111,




B. LOST INVESTMENT INCOME CALCULATION

    a. Prior Years Total Questioned (Principal)                                                              $0                                          $0                                 $0    $8,275   $90,241    $12,415
    b. Cumulative Total                                                                                       Q                                           Q                                  Q         Q     8,275     98,516
    c. Total                                                                                                 $0                                          $0                                 $0    $8,275   $98,516   $110,931

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

    e. Interest (d * c)                                                                                      $0                                          $0                                 $0     $217     $2,340     $3,120          $5,677

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

    g. Interest (f * c)                                                                                      $0                                          $0                                 $0     $238     $2,524      $874           $3,636

    Total Interest By Year (e + g)                                          I                                $0                                         $0                                  $0     $455     $4,864     $3,994         $9,313 Iii"I
                                                                                                                                                                                                                                             ¥


* Lost investment income is calculated through August 28,2009, which is the date when these questioned charges were returned to the letter of credit account.
                                                                                      -----~-------           -------




                                                                                                          APPENDIX




               November 30, 2009



Snuth [ordan

               Auditor-In-Charge
               Experience-Rated Audit Groups
               US Office of Personnel Management
               Office of the Inspector General
               701 San Marco Blvd.
               Jacksonville, FL 32207



               Dear_

               Thank you for the opportunity to comment on the findings, conclusions, and
               recommendations outlined in the draft report (Report NO.1 D-9K-00-09-026) issued by the
               Office of Inspector General (OIG) from the limited scope audit your team conducted of the
               Federal Employees Health Benefits Program (FEHBP) operations at Altius Health Plans
               (Altius).

               We want to express our gratitude again for the very professional manner in which you and
               your team conducted the audit and the insight and gUidance you provided that will help
               Altius to improve our internal processes and operations of the FEHBP.

               We have noted a few corrections on the enclosed draft report, most notably the
               clarification of the plan's name as Altius Health Plans. In addition for Recommendation
               12, Altius' Compliance Officer would prefer that shortcomings identified in Altius' internal
               controls over the draw down process of FEHBP funds be referred to as "not sufficient"
               versus "inadequate" if this is acceptable to you.

               For each of the OIG's audit findings and recommendations, Altius will respond below with
               our comments and actions.

               l.      Health Benefit Charges

                       a.   Debarred Provider Payments

                       Altius agreed with this audit finding and the OIG's recommendation to return the
                       $2.991 in claim overcharges to the FEHBP, which was done by 8/28/09. In
                       addition, Altius has re-reviewed the policy & procedures for debarred providers
                       with the appropriate functions and staff to insure claim payments are stopped in a
                       timely manner and that the debarment notification is sent to the debarred provider
                       and FEHBP members utilizing that provider in a timely manner.

                       b.   Health Benefit Refunds, Recoveries, and Rebates

                       Altius agreed with $54,840 of this $99,507 finding and disagreed with $44,667.
                       Altius is still awaiting a response from the OIG on the additional documentation
                       provided to support the disputed amount. Altius has returned the $54,840 non­
                       disputed amount per the OIG's recommendations (#2 and #3), which was done
                       by 11/23/09. In addition, Altius is implementing a process to credit the FEHBP for
       the average run rate of refunds in the current month since the actual refund
       amounts for each month are not available to Altius personnel until the monthend
       accounting and reconciliation process to insure refund credits to the FEHBP are
       given in a more timely manner.

II.    Administrative Expenses

       a.   Executive Compensation

       Altius agreed with this audit finding and the OIG's recommendation to return the
       £96,404 in executive compensation overcharges to the FEHBP. which was done
       by 8/28/09. In addition, Altius has worked with the Controller over the corporate
       overhead allocation model to insure that in the future more detail is provided on
       executive compensation that is retained at the corporate level (i.e. restricted
       stock) to insure that excess amounts over the benchmark are disallowed in the
       allocation model.

       b.   Unallowable Lobbying Expenses

       Altius agreed with this audit finding and the OIG's recommendation to return
       S 14,527 in unallowable lobbying expenses to the FEHBP. which was done by
       8/28/09. In addition, Altius has implemented an additional review of expenses
       charged to Altius' purchased services and consultant fee natural accounts to
       insure that they do not contain any miscoded or unallowable expenses.

       c.   Allocation Percentage

       Altius agreed with this audit finding in that the inclusion of pharmacy rebates as
       part of the cost of health care will change the cost of health care allocation
       percentage. The recalculation resulted in a higher allocation percentage to the
       FEHBP and an undercharge for administrative expenses of $22,410. Altius has
       not taken any action to charge this additional amount to the FEHBP. What is
       required tor Altius to take this credit? 00 we wait for approval from the
       contracting officer and are we required to amend and resubmit the annual
       accounting statements from this time period?



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




III.   Cash Management

       a.   Excess Letter of Credit Drawdowns for Service Charges

       Altius agreed with this audit finding and the OIG's recommendation to disallow
       $84,960 for letter of credit drawdowns in excess of its contractual annual service
       charge and to credit the FEHBP for $10,863 in lost investment income for the
       excess drawdown. Altius returned $95,823 to the FEHBP, which was done by
       8/28109.

       b.   Cash Management of FEHBP Funds
        Altius agreed with this audit finding and the O/G's recommendation to credit the
        FEHBP for the $3,000 LaC drawdown error and $437 forLiI on that error. Altius
        returned $3,437 to the FEHBP, which was done by 8/28/09. In addition, the OIF
        recommended that the plan strengthen its internal controls over FEHBP funds
        and specifically the drawdown process. Altius has revised its processes to
        perform a daily reconciliation of the drawdown, from monthly, to minimize
        drawdown errors and insure a more timely correction of any drawdown errors that
        do occur. As part of this change in process, Altius had added supplemental
        schedules for each of the major cost centers to accurately capture expense by
        distinct category instead of netting together as previously presented. Altius has
        also added an additionallevei of management review to further validate LaC
        draws versus the allowed costs. Finally, Altlus is in the process of establishing a
        working capital deposit to manage FEHBP funds.

In summary, Altius would like to again thank the OIG for the additional insights you
offered into the FEHBP and the recommendations that were provided for areas where
Altius can improve our operations. This represented the first of audit of the FEHBP for .
Altius since its inception in 1999 and was a great learning experience for us. While we
are disappointed in the shortcomings in Altius operations that were identified in the audit
we are pleased that they are all easily correctable and that the total questioned charges
from the audit represent only 0.06% of the total contract charges over the audited time
period. Please let me know if you have any questions or concerns with the comments or
responses provided.


Sincerely,



154          t{     ~
Brett R. Clay
Chief Financial Officer
Altius Health Plans