oversight

Audit of Optima Health Plan Virginia Beach, Virginia

Published by the Office of Personnel Management, Office of Inspector General on 2011-05-18.

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 OPTIMA HEALTH PLAN
                     VIRGINIA BEACH, VIRGINIA

                                            Report No. 1D-9R-00-11-001

                                            Date:           May 18, 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 propriety information that was redacted from the publicly distributed copy.
                      AUDIT REPORT


            Federal Employees Health Benefits Program
         Experience-Rated Health Maintenance Organization


                       Optima Health Plan
               Contract CS 2842      Plan Code 9R
                     Virginia Beach, Virginia




REPORT NO. 1D-9R-00-11-001                DATE: _May 18, 2011___




                                       __                            __
                                       Michael R. Esser
                                       Assistant Inspector General
                                          for Audits
                               EXECUTIVE SUMMARY


                         Federal Employees Health Benefits Program
                      Experience-Rated Health Maintenance Organization


                                      Optima Health Plan
                            Contract CS 2842         Plan Code 9R
                                   Virginia Beach, Virginia



            REPORT NO. 1D-9R-00-11-001                   DATE: _May 18, 2011__

This final audit report on the Federal Employees Health Benefits Program (FEHBP) operations at
Optima Health Plan (Plan), in Virginia Beach, Virginia, questions $179,778 in lost investment
income on FEHBP funds. The Plan agreed (A) with this questioned amount

Our limited scope audit was conducted in accordance with Government Auditing Standards. The
audit covered miscellaneous health benefit payments and credits from 2005 through June 30,
2010, as well as administrative expenses from 2005 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 2005 through June 30, 2010.

The audit results are summarized as follows:

    A. MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS

   Financial Adjustments – Lost Investment Income (A)                                $179,778

    The Plan returned $4,438,747 to the letter of credit account (LOCA) in an untimely manner.
    These funds consisted of health benefit refunds, uncashed check write-offs, investment
    income, and a duplicate service charge drawdown. Although these funds were deposited
    timely and held in a dedicated investment account, the Plan returned the funds untimely to
    the LOCA. Therefore, we calculated that the FEHBP would have earned additional
    investment income of $179,778 on these funds if the Plan had returned the funds timely to
    the LOCA.
                         B. ADMINISTRATIVE EXPENSES

The audit disclosed no findings pertaining to administrative expenses. Overall, we concluded
that the administrative expenses charged to the FEHBP were actual, allowable, necessary, and
reasonable expenses incurred in accordance with the terms of the contract and applicable laws
and regulations.

                               C. CASH MANAGEMENT

Overall, we concluded that the Plan handled FEHBP funds in accordance with Contract CS 2842
and applicable laws and regulations, except for the finding pertaining to cash management noted
in the “Miscellaneous Health Benefit Payments and Credits” section.




                                               ii
                                                  CONTENTS

                                                                                                                 PAGE

       EXECUTIVE SUMMARY............................................................................................... i

 I.    INTRODUCTION AND BACKGROUND ......................................................................1

II.    OBJECTIVES, SCOPE, AND METHODOLOGY ..........................................................3

III.   AUDIT FINDINGS AND RECOMMENDATIONS........................................................6

       A.     MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS.............6

              1. Financial Adjustments – Lost Investment Income………………….. ................6

       B.     ADMINISTRATIVE EXPENSES ...........................................................................7

       C.     CASH MANAGEMENT .........................................................................................7

IV.    MAJOR CONTRIBUTORS TO THIS REPORT .............................................................8

 V.    SCHEDULE A – CONTRACT CHARGES AND AMOUNTS QUESTIONED

       APPENDIX (Optima Health Plan reply, dated December 28, 2010, to the audit inquiry)
                        I. INTRODUCTION AND BACKGROUND

INTRODUCTION

This final audit report details the findings, conclusions, and recommendations resulting from our
limited scope audit of the Federal Employees Health Benefits Program (FEHBP) operations at
Optima Health Plan (Plan). The Plan is located in Virginia Beach, Virginia.

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. The Plan’s service area includes the
following areas in Virginia: Hampton Roads, Charlottesville, Fredericksburg, Lynchburg,
Richmond, and Roanoke.

The Plan’s contract (CS 2842) 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.

Our previous audit of the Plan covered corporate allocations for contract year 2001 and disclosed
no findings.

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




                                                2
               II. OBJECTIVES, SCOPE, AND METHODOLOGY

OBJECTIVES

The objectives of our audit were to determine whether the Plan charged costs to the FEHBP and
provided services to FEHBP members in accordance with the 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.

   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 2005 through 2009.
During this period, the Plan paid approximately $295 million in health benefit charges and $14
million in administrative expenses (See Figure 1 and Schedule A). The Plan also paid
approximately $2.4 million in other expenses and retentions (See Schedule A).

Specifically, we reviewed miscellaneous health benefit payments and credits (e.g., refunds,
subrogation recoveries, fraud recoveries, uncashed checks, and prescription drug rebates) and
cash management for 2005 through June 30, 2010. We also reviewed administrative expenses
for 2005 through 2009.




                                               3
In planning and conducting our audit, we                                          Optim a Health Plan
obtained an understanding of the Plan’s internal                             Sum m ary of Contract Charges
control structure to help determine the nature,
timing, and extent of our auditing procedures.                        $100
This was determined to be the most effective
approach to select areas of audit. For those                          $75




                                                         $ Millions
areas selected, we primarily relied on
substantive tests of transactions and not tests of                    $50
controls. Based on our testing, we did not
identify any significant matters involving the                        $25

Plan’s internal control structure and its
                                                                       $0
operation. However, since our audit would not                                 2005     2006    2007     2008      2009
necessarily disclose all significant matters in                                           Contract Years
the internal control structure, we do not express
                                                                        Health Benefit Payments   Administrative Expenses
an opinion on the Plan’s system
of internal controls taken as a whole.
                                                                             Figure 1– Contract Charges

We also conducted tests to 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 Virginia Beach, Virginia from November 8
though November 19, 2010 and December 6 through December 17, 2010. Audit fieldwork was
also performed at our offices in Washington, D.C. and Jacksonville, Florida.

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




                                                     4
judgmentally selected and reviewed 134 health benefit refunds, totaling $879,923 (from a universe
of 5,133 refunds, totaling $1,825,106); 20 subrogation cases, totaling $66,325 in recoveries (from
a universe of 39 cases, totaling $71,805 in recoveries); all quarterly drug rebate allocations,
totaling $2,568,359; all uncashed check write-offs, totaling $77,665; and all fraud recoveries,
totaling $11,776, to determine if refunds and recoveries were promptly returned to the FEHBP and
if miscellaneous payments were properly charged to the FEHBP. 2 The results of these samples
were not projected to the universe of miscellaneous health benefit payments and credits.

We judgmentally reviewed administrative expenses charged to the FEHBP for contract years
2005 through 2009. Specifically, we reviewed administrative expenses relating to cost centers,
expense accounts, pension, post-retirement, employee health benefits, executive compensation,
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 also reviewed the Plan’s cash management to determine whether the Plan handled FEHBP
funds in accordance with Contract CS 2842 and applicable laws and regulations.




2
 The sample of health benefit refunds consisted of all refunds greater than $2,000. For subrogation, the sample
consisted of all cases with recoveries greater than $500.




                                                         5
                III. AUDIT FINDINGS AND RECOMMENDATIONS

A. MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS

    1. Financial Adjustments – Lost Investment Income                                               $179,778

        The Plan returned $4,438,747 to the letter of credit account (LOCA) in an untimely
        manner. These funds consisted of health benefit refunds, uncashed check write-offs,
        investment income, and a duplicate service charge drawdown. Although these funds
        were deposited timely and held in a dedicated investment account, the Plan returned the
        funds untimely to the LOCA. Therefore, we calculated that the FEHBP would have
        earned additional investment income of $179,778 on these funds if the Plan had returned
        the funds timely to the LOCA.

        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 2842, 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.”

        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.”

        During our review of miscellaneous health benefit payments and credits, we verified that
        the Plan untimely returned $4,438,747 in FEHBP funds to the LOCA (i.e., $4,400,000 via
        bank wire transfer to OPM on June 25, 2010 and $38,747 via LOCA drawdown
        adjustment on November 24, 2010). These funds consisted of $3,474,820 in health benefit
        refunds received from 1999 through 2004 and April 2006 through May 2010; $77,665 in
        uncashed checks written-off in December 2006, August 2007, and March 2010; $491,583
        in investment income earned on FEHBP funds from 1999 through 2009; and $394,679 for
        a duplicate amount withdrawn from the LOCA in 2006 for the 2005 service charge. 3 The
        Plan informed us that they were unaware of the complete LOCA process, which is the
        reason for the delay in returning these funds to the FEHBP.


3
 During the audit scope, the Plan withdrew funds from the LOCA on a “checks-issued” basis. As a result, the
$4,438,747 also included uncashed checks that were issued from 2004 through 2008 and written-off on December 31,
2006, August 27, 2007, and March 31, 2010. Starting in November 2010, we noted that the Plan changed from the
“checks-issued” to the “checks-presented” basis for withdrawing funds from the LOCA.




                                                       6
     We did an analysis to determine how much investment income would have been earned on
     the $4,438,747 if these funds had been returned timely to the LOCA compared to the
     actual investment income earned on these funds in the dedicated investment account. We
     calculated that these funds would have earned an additional $179,778 in the LOCA if
     returned timely.

     Plan’s Response:

     The Plan agrees with this finding and returned the questioned amount of $179,778 to the
     FEHBP on December 21, 2010 via LOCA adjustment. The Plan has implemented
     operating procedure improvements to promptly return funds to the LOCA, and made
     other improved changes to their accounting practices.

     OIG Comments:

     We verified that the Plan returned the questioned amount of $179,778 to the FEHBP on
     December 21, 2010.

     Recommendation 1

     Since we verified that the Plan returned the questioned lost investment income of $179,778
     to the FEHBP, no further action is required for this questioned amount.

     Recommendation 2

     We recommend that the contracting officer verify that the Plan has implemented corrective
     actions to ensure that FEHBP funds, such as health benefit refunds and investment
     income, are timely returned to the LOCA. We also recommend that the contracting officer
     ensure that the Plan has a complete understanding of the LOCA process.

B. ADMINISTRATIVE EXPENSES

  The audit disclosed no findings pertaining to administrative expenses. Overall, we concluded
  that the administrative expenses charged to the FEHBP were actual, allowable, necessary, and
  reasonable expenses incurred in accordance with the terms of the contract and applicable laws
  and regulations.

C. CASH MANAGEMENT

  Overall, we concluded that the Plan handled FEHBP funds in accordance with Contract CS
  2842 and applicable laws and regulations, except for the finding pertaining to cash
  management noted in the “Miscellaneous Health Benefit Payments and Credits” section.




                                             7
              IV. MAJOR CONTRIBUTORS TO THIS REPORT


Experience-Rated Audits Group

                , Auditor-In-Charge

               , Auditor

                            , Auditor


                  , Chief

               , Senior Team Leader




                                        8
                                                                                       V. SCHEDULE A

                                                                             OPTIMA HEALTH PLAN
                                                                           VIRGINIA BEACH, VIRGINIA

                                                            CONTRACT CHARGES AND AMOUNTS QUESTIONED


CONTRACT CHARGES (PLAN CODE 9R)*                                          2005              2006            2007              2008             2009                    TOTAL


HEALTH BENEFIT CHARGES                                                $53,562,111        $57,506,078     $56,334,711      $59,227,041      $68,414,835                 $295,044,776

ADMINISTRATIVE EXPENSES                                                   2,711,412        2,623,512       2,842,584         2,769,732        3,405,422                  14,352,662

OTHER EXPENSES AND RETENTIONS                                              460,974          479,392          506,643           520,955          449,806                   2,417,770

    TOTAL CONTRACT CHARGES                                            $56,734,497        $60,608,982     $59,683,938      $62,517,728      $72,270,063                 $311,815,208


AMOUNTS QUESTIONED                                                        2005              2006            2007              2008             2009         2010       TOTAL


   MISCELLANEOUS HEALTH BENEFIT
A. PAYMENTS AND CREDITS

    1. Financial Adjustments - Lost Investment Income**                          $0                $0               $0               $0                $0   $179,778      $179,778

B. ADMINISTRATIVE EXPENSES                                                         0                0                0                 0                0          0             0

C. CASH MANAGEMENT                                                                 0                0                0                 0                0          0             0

    TOTAL AMOUNTS QUESTIONED                                                     $0                $0               $0               $0                $0   $179,778      $179,778

*   We did not review claim payments and other expenses and retentions.
** Although this questioned amount includes lost investment income from 1999 through June 2010, we included the total amount in 2010 for simplicity.
                                   •                                                                     APPENDIX 


OPtimaHea~l~th~ea~. _ - - - - - - - -­
        December 28, 20 I 0



        US Office of Personnel Management
        Office of the Inspector General
        701 Sail Marco Dlvd
        Jacksonville, FI 32207

        RE:        Optima Health Plan
                   Federal Employees Health Benefits Program (FEHBP)
                   Audit Findings as of December [6,20[0

        Deur _             :

        As requested, Optima Health Plan (OHP) management's response is provided to the aud it finding
        regarding Financial Recoveries.

                 Audit Finding Summary
                 Optima Health Plan (OHP) did not properly manage cash for health benefit refunds and
        recoveries, interest income. service charge and uncashed health benefit checks received. OHP
        depos ited these recoveries into the FEP investment account, however OHP did not adj ust the
        Letter afCredit Account (LOeA) in a timely manner. As a result. the FEHBP is due an
        additional $179,778 for the interest that wou ld have been earned ifO HP had returned the funds to
        the LOCA in a timely manner.

                OHP Response
        OHP agrees with the find ings. The: plan paid the fEHBP $ 179,77 8 on December 21, 20 I0 by a
        reduction of the same amount on the draw down of $716,006.67. Enclosed is the documentation
        to support the payment.




                                                       at _ .
        Additionally, OHP has implemented improved operating procedures 10 promptly return funds to
        the LOCA in the fu ture, and made other improved changes 10 our accounting practices.

        If you have any questions, please contact me




        Enclosures




 A. Service of Senura