oversight

Audit of BlueShield of California Access+HMO, San Francisco, California

Published by the Office of Personnel Management, Office of Inspector General on 2009-06-09.

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

                                                        US OFFICE OF PERSONNEL MANAGEMENT
                                                            OFFICE
                                                              .    OF"THE INSPECtOR GENERAL
                                                                        '   .   -   -    ...


                                                                             OFFICE OF AUDITS




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                                           . Reporf No~ li>:"SJ"700-09"021





                                              .
                                                          ..-CAUTION"""
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. report may contain ProprJetarydatawlilcbis protected:by Federal law (18 U.KC. 1905);lherefore, whiletbipudit report is Bvailable .
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                       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



                                 Blue Shield of California Access+ HMO

                           Contract CS 2639                       Plan Code SJ

                                        San Francisco, California





                      REPORT NO. ID':'SJ-00-09-021          DATE:    June 9. 2009




                                                           Wa-
                                                             Michael R. Esser
                                                             Assistant Inspector General
                                                               for Audits




        www.opm.gov                                                                        www.usa]obs.gov
                        UNITED STATES OFFICE OF PERSONNEL MANAGEMENT

                                             Washington, DC 20415



   Office of the
Inspector General




                                    EXECUTIVE SUMMARY




                              Federal Employees Health Benefits Program

                           Experience-Rated Health Maintenance Organization



                                Blue Shield of California Access+ HMO

                           Contract CS 2639·                      Plan Code S1

                                        San Francisco, California





                      REPORT NO. 10-81-00-09-021            DATE: June 9, 2009



      This final audit report on the Federal Employees Health Benefits Program (FEHBP) operations at
      Blue Shield of California Access+ HMO (Plan) questions $178,930 inadministrative expenses
      and $402,805 in lost investment income (LII) on excess letter of credit drawdowns. The Plan
      agreed (A) with all questioned charges.

      Our limited scope audit was conducted. in accordance with Government Auditing Standards. The
      audit covered miscellaneous health benefit payments and credits and administrative expenses
      from 2003 through 2007 as reported in the Annual Accounting Statements. In addition, we
      reviewed the Plan's cash management practices related to FEHBP funds for contract years 2003
      through 2007.

      Questioned items are summarized as follows:




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

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

                            B. ADMINISTRATIVE EXPENSES

•   Incorrect Reporting of Administrative Expenses fA)                                   $121,822

    The Plan overstated the administrative expenses reported in the 2007 Annual Accounting
    Statement by $121,822. Since administrative expenses are considered when developing the
    premium rates, overstating administrative expenses may increase future rates.

•   Unallocable Cost Center Expenses fA)                                                  $57,108

    The Plan charged the FEHBP $50,484 in expenses from two unallocable cost centers. As a .
    result, the FEHBP is due $57,108, consisting of$50,484 for unallocable cost center expenses
    and $6,624 for LII on these expenses.

                                  c. CASH MANAGEMENT
•   Lost Investment Income on Excess Letter of Credit Drawdowns fA)                      $402,805

    For the period 2003 through 2007, the Plan included inflow and outflow adjustments, totaling
    $5,430,761 (net), when calculating and requesting letter of credit (LaC) drawdowns. The
    inclusion of these adjustments in the LaC drawdown calculations caused the Plan to withdraw
    funds in excess of actual expenses. The Plan subsequently returned these excess drawdowns
    to the FEHBP in 2008, but did not return LII of $402,805 on these excess funds.




                                                11
                                       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


       B.   ADMINISTRATIVE EXPENSES	                                                       6


            1.   Incorrect Reporting of Administrative Expenses	                           6

            2.   Unallocable Cost Center Expenses	                                         7


       C.   CASH MANAGEMENT	                                                               8


            1.   Lost Investment Income on Excess Letter of Credit Drawdowns               8


IV.    MAJOR CONTRIBUTORS TO THIS REPORT	                                                 10


 V.    SCHEDULES

       A.   CONTRACTCHARGESANDAMOUNTSQUESTIONED
       B.   QUESTIONED CHARGES

       APPENDIX	 (Blue Shield of California's reply, dated April 27, 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
Blue Shield of California Access+ HMO (Plan). The Plan is located in San Francisco,
California.

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 Center for Retirement and
Insurance Services has overall responsibility for administration ofthe FEHBP. The provisions of
theFEHB Act are implemented by OPM tlrrough 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 heath
benefits to federal enrollees and their families, I Enrollment is open to all federal employees and
annuitants in the Plan's service area. The Plan's service area includes most of California.

The Plan's contract (CS 2639) 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 theseprovisions, 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
management. Also, management of the Plan is responsible for establishing and maintaining a
system of internal controls.




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
ofthe charges and benefits available may be less comprehensive..




                                                        1

This is our first audit of the Plan. The results of our audit were provided to the Plan in written
audit inquiries; were discussed with Plan officials throughout the audit and at an exit conference;
and were presented in detail in a draft report, dated March 27,2009. 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.




                                                 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 tenus
          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 FEHBP Annual Accounting Statements for contract years 2003 through
2007. During this period, the Plan paid approximately $419 million in health benefit charges and
$19 million in administrative expenses (See Figure 1 and Schedule A). The Plan also paid
approximately $3 million in other expenses and retentions (See Schedule A).

Specifically, we reviewed miscellaneous health benefit payments and credits (i.e., refunds,
subrogation recoveries, provider audit recoveries, fraud recoveries, uncashed provider and
subscriber checks, and pharmacy drug rebates), administrative expenses, and cash management
for 2003 through 2007.




                                               3

In planning and conducting our audit, we
                                                                 Blue Shield of California Access"" HMO

obtained an understanding of the Plan's                              Summary of Contract Charges

internal control structure to help determine the
nature, timing, and extent of our auditing                    $150 , - - - - - - , - - - - - - - - - - - - ,
procedures. This was determined to be the
most effective approach to select areas of audit.
For those areas selected, we primarily relied on          .~ $100 ~---------­
substantive tests of transactions and not tests of        i
                                                          ~
controls. Based on our testing, we did not                    $50
identify any significant matters involving the
Plan's internal control structure and its
operation. However, since our audit would not                   $0
                                                                       2003      2004   2005     2006      2007
necessarily disclose all significant matters in                                     Contract Years
the internal control structure, we do not
express an opinion on the Plan's system of                1'21 Health Benefit Payments   .Administrative Expenses
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 information 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 was sufficient to achieve our audit objectives.

The audit was performed at the Plan's office in San Francisco, California from February 3, 2009
through February 26,2009. Audit fieldwork was also performed at                 our
                                                                        offices in Cranberry
Township, Pennsylvania and Jacksonville, Florida through March 27,2009:

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.




                                                     4

We interviewed Plan personnel and reviewed the Plan's policies, procedures, and accounting
records during our audit of miscellaneous health benefit payments and credits. Using various
sampling methodologies, we selected and reviewed 186 health benefit refunds and recoveries,
totaling $4,644,328 (from a universe of 4,050 refunds and recoveries, totaling $12,544,799), to
determine ifrefunds and recoveries were promptly returned to the FEHBP. Specifically, our
sample included 168 refunds, subrogation recoveries, and provider audit recoveries totaling
$2,489,490; 13 uncashed checks totaling $54,583; and 5 pharmacy drug rebates totaling
$2,100,255. In addition, prior to the start of our audit, the Plan identified and returned $181,522
in refunds, uncashed checks, provider interest charges, and lost investment income to the FEHBP
as part of a corrective action plan. Of this amount, we judgmentally selected and reviewed
$57,522 to determine if these funds were properly returned to the FEHBP. The results of these
samples were not projected to the universe of miscellaneous health benefit payments and credits.

We judgmentally reviewed administrative expenses charged to the FEHBP for contract years
2003 through 2007. Specifically, we reviewed administrative expenses relating to cost centers,
natural accounts, out-of-system adjustments, employee health benefits, executive compensation,
BlueCross BlueShield Association dues, gains and losses, return on investment, benefit plan
brochures, and Health Insurance Portability and Accountability Act of 1996 compliance. We
used the FEHBP contract, the FAR, and the FEHBAR to determine the allowability, allocability,
and reasonableness of charges.

We also reviewed the Plan's cash management to determine whether the Plan handled FEHBP
funds in accordance with Contract CS 2639 and applicable laws and regulations.




                                                 5

             III. AUDIT FINDINGS AND RECOMMENDATIONS


A. MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS

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

B. ADMINISTRATIVE EXPENSES

  1.	 Incorrect Reporting of Administrative Expenses                                    $121,822

     The Plan overstated the administrative expenses reported in the 2007 Annual Accounting
     Statement (AAS) by $121,822. Since administrative expenses are considered when
     developing the premium rates, overstating administrative expenses may increase future
     rates.

     Contract CS 2639, Part III, Section 3.2 (a)(3) states, "Based on the results of either the
     independent audit prescribed by the Guide or a Government audit, OPM may require the
     carrier to adjust its annual accounting statements (i) by amounts found not to constitute
     actual, allowable, allocable and reasonable costs; or (ii) to reflect prior overpayments or
     underpayments."

     We reconciled the Plan's cost accounting reports to the administrative expenses reported
     on the AAS's for contract years 2003 through 2007. Based on our reconciliation, we
     determined that the Plan overstated the amount of administrative expenses reported on
     the 2007 AAS. This overstatement was caused by the following items:

     •	 The Plan misclassified the December 2007 service charge accrual of $69,31 0 as an
        administrative expense accrual.

     •	 The Plan incorrectly recorded $2,012 in lost investment income (LII) as an increase in
        administrative expenses, instead of recording this amount as a decrease.

     •	 The Plan incorrectly calculated the amount of disallowed charges to be excluded from
        the administrative expense amount reported on the AAS, resulting in an
        overstatement of $50,500.

     As a result of these inadvertent errors, the Plan overstated the administrative expenses by
     $121,822 in the 2007 AAS.

     Plan's Response:

     The Plan agrees with this finding and has adjusted the 2008 AAS accordingly.




                                              6

   Recommendation 1

   We recommend that the contracting officer verify that the Plan made the appropriate prior
   period adjustment in the 2008 AAS to correct the 2007 administrative expense
   overstatement of $121,822.

2. Unallocable Cost Center Expenses	                                                    $57,108

   The Plan charged the FEHBP $50,484 in expenses from two unallocable cost centers. As
   a result, the FEHBP is due $57,108, consisting of $50,484 for unallocable expenses and
   $6,624 for LII on these expenses.

   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 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."

   From 2003 through 2007, the Plan charged the following expenses to the FEHBP from
   two cost centers that did not benefit the FEHBP:

          Cost Centers
          2503H - Hospital and Provider Liaison                  $39,821
          6035H - Producer Internet Sales	                        10,663
                                                                 $50.484

   Specifically, cost center 2503H (Hospital and Provider Liaison) benefits the preferred
   provider organization Federal Employee Program product but not the experience-rated
   HMO product, and cost center 6035H (Producer Internet Sales) does not provide support to
   the FEHBP. As a result, the FEHBP is due $50,484 for unallocable cost center expenses
   charged to the FEHBP.




                                             7

        Subsequent to us identifying this audit finding, the Plan returned $50,484 to the FEHBP on
        March 16,2009 for these unallocable cost center expenses. Accordingly, we verified the
        return of these funds to the FEHBP and calculated LII of $6,624 through March 16,2009
        on these questioned expenses.

        Plan's Response:

        The Plan agrees with this finding. The Plan will return LII of $6,624 to the FEHBP in the
        next drawdown during the first week of May 2009.

        Recommendation 2

        We verified that the Plan returned the questioned cost center expenses of $50,484 to the
        FEHBP on March 16,2009. Therefore, no further action is required for these questioned
        expenses.

        Recommendation 3

        We recommend that the contracting officer verify that the Plan returned $6,624 to the
        FEHBP for LII on the unallocable cost center expenses that were charged to the FEHBP.

c.   CASH MANAGEMENT

     1. Lost Investment Income on Excess Letter of Credit Drawdowns                       $402.805

        For the period 2003 through 2007, the Plan included inflow and outflow adjustments,
        totaling $5,430,76] (net), when calculating and requesting letter of credit (LOC)
      ~·drawdowns. The inclusion of these adjustments in the LOC drawdown calculations
        caused the Plan to withdraw funds in excess of actual expenses. The Plan subsequently
        returned these excess drawdowns to the FEHBP in 2008, but did not return LII of
        $402,805 on these excess funds.

        Contract CS 2639, Part III, Section 3.2 (b)(I) states, "The Carrier may charge a cost to the
        contract for a contract term if the cost is actual, allowable, allocable, and reasonable. In
        addition, the Carrier must: ... (ii) determine the cost in accordance with: (A) the terms
        of this contract ...."

        48 CFR 1652.215-71 requires the carrier to invest and reinvest all excess FEHBP funds
        on hand, and to credit all investment income earned on those funds to the Special Reserve
        on behalf of the FEHBP.

        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 ofthe Contract




                                                 8
        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."

        From 2003 through 2007, the Plan requested $432,760,945 in reimbursements via LOC
        drawdowns. When requesting these funds, the Plan included inflow and outflow
        adjustments totaling $5,430,761 (net) in their LOC drawdown calculations. According to
        the Plan,these adjustments were included primarily to cover estimated capitation
        expenses incurred a month prior to reimbursement from the FEHBP. For example, the
        Plan wire transferred the January 2005 provider capitation payments in the beginning of
        January; however, the Plan was not reimbursed for these expenses until the month-end
        drawdown was requested in mid-February. In order to have sufficient funds for the
        January 2005 provider capitation payments, the Plan added an inflow and outflow
        adjustment to the December 2004 month-end drawdown.

        Although these adjustments were added to the LOC drawdowns to cover estimated
        allowable expenses, the LOC drawdowns were not properly reconciled or adjusted for
        variances between month-end actual expenses versus funds received for the
        corresponding month. As a result, as of December 31, 2007, the Plan maintained a
        balance of$6,555,018 in excess funds.'

        In 2008, the Plan discontinued the use of inflow and outflow adjustments and adjusted
        various LOC drawdowns to return the excess funds of$6,555,018 to the FEHBP.
        Although the Plan returned the principal amount to the FEHBP, the Plan did not return
        1.,11 on the overdrawn funds. As a result, the FEHBP is due LIl of $402,805 on these
        excess funds.

        Plan's Response:

        The Plan agrees with this finding and returned 1.,11 of $402,805 to the FEHBP on April 16,
        2009.

        Recommendation 4

        We recommend that the contracting officer verify that the Plan returned $402,805 to the
        FEHBP for LII on the excess LOC drawdowns.




2 The funds returned to the FEHBP in 2008 were greater than the inflow and outflow adjustments disclosed in our
review for the period 2003 though 2007 because the balance of $6,555,018 also included inflow and outflow
adjustments accumulated prior to 2003.




                                                        9

                IV. MAJOR CONTRIBUTORS TO THIS REPORT

Experience-Rated Audits Group

               Auditor-In-Charge (AIC)

              Co-AIC

             Auditor

               Auditor


                   Chief

               enior Team Leader




                                         10

                                                                                                                                                                             SCHEDULE A
                                                                                             V. SCHEDULES


                                                                           BLUE SHIELD OF CALIFORNIA ACCESS+ HMO

                                                                                 SAN FRANCISCO, CALIFORNIA


                                                                         CONTRACT CHARGES AND AMOUNTS QUESTIONED



CONTRACT CHARGES"                                                                2003            2004          2005           2006           2007        2008       2009       TOTAL


A. HEALTH BENEFIT CHARGES                                                      $47,702,247     $64,806,091   576,965,557   $108,482,649   $121,352,159                        $419,308,703

B. ADMINISTRATIVE EXPENSES                                                       2,487,298       3,431,558     3,462,416      4,275,300      5,477,599                          19,134,171

C. OTHER EXPENSES AND RETENTIONS                                                  301,107         417,280         594896       669,267        818,742                            2,801,292

TOTAL CONTRACT CHARGES                                                     I   $50490652       $68.654.929   S81 022 869   SIB 427 216    S127 648 500                        $441244166


AMOUNTS QUESTIONED
                                                                                 2003            2004          2005           2006           2007        2008       2009       TOTAL
(PER SCHEDULE B)

A. MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS                                    SO              $0           SO             SO              SO         $0       SO             SO
B. ADMINISTRA.TIVE EXPENSES                                                          6,508           6,990        7,412         10,029         144,907      2,492      592        178,930
C. CASH MANAGEMENT                                                                  24,635          83,435      ·35,818         80,898          98,652     79,367        0        402,805

   TOTAL QUESTIONED CHARGES                                               I       $31143          $90425        $43230         $90.927       $243.559     $81859      $592       S581735

.. We did not review claim payments and other expenses and retentions.
                                                                                                                                                                SCHEDULEB
                                                                    BLUE SHIELD OF CALIFORNlA ACCESS+ HMO
                                                                          SAN FRANCISCO, CALIFORNlA

                                                                                QUESTIONED CHARGES


AUDIT FINDINGS                                                          2<103         2004        2005         2006        2007        2008        2009           TOTAL


A. MISCELLANEOUS HEALTH BENEFIT PA YMENTS AND CREDITS               I           SO           SO          SO           so          SO          50           50             $0

B. ADMINISTRATIVE EXPENSES

   1. Incorrect Reporting of Administrative Expenses                           50           SO            50         50    5121,822           SO           SO       5121,822
   2. Unallocable Cost Center Expenses"                                     6,508        6,990         7,412     10,029      23,085       2,492           592         57,108

   TOTAL ADMINISTRATIVE EXPENSES                                    I      56508        56.990        $7.412    $10029     $144907       52492       5592           $178930

C. CASH MANAGEMENT

   1. Lost Investment Income on Excess Letter of Credit Drawdowns        524,635       583,435       535,818    $80,898     $98,652     579,367            SO       5402,805

   TOTAL CASH MANAGEMENT                                            I     S24.635      583.435       $35818     S80898      598.652     $79.367            SO       5402805

TOTAL QUESTIONED CHARGES                                            I     531.143      590.425       S43.230    590927     S243.559     581859        5592          5581735

,. This audit finding inchldes lost investment lecome of $6,624.
                                                                                                                        APPENDIX
                                        blue, of california


         April 27, 2009

                        Senior Team Lead

         Experienced-Rated Audit Group

         Office oflnspector General


         RE: Report No. 1O-SJ-00-09-021

         Dear • • • • • •

         In response to the April 21, 2009 email from OIG stating that OIG has decided to not change the LII calculation
         methodology and also agreed to revise the Audit Inquiry #2 overcharge to be $50,484, Blue Shield of California has
         the following responses to the Draft Audit Report dated March 27, 2009 and revised Audit Inquiry #2:

         Audit Inquiry #1 - Incorrect Reporting of 2007 Administrative Expenses ($121,822)
              o	   Blue Shield of California agrees with the finding and has adjusted the 2008 AAS accordingly.

         Audit Inquiry #2 - Unallocable Cost Centers ($57,108)
              o	   Blue Shield of California agrees with this finding that cost centers 2503H - Hospital and Provider Liaison
                   and 6035H - Producer Internet Sales were charged in error to the program.

                            Cost Centers:
                            2503H - Hospital and Provider Liaison                           $39,821
                            6035H - Producer Internet Sales                                  10,663
                                                                                            $50.484

             o	    Blue Shield of California agrees with the revised LII calculation of$6,624 related to the overcharge to the
                   program and will return the LII to OPM on the next drawdown during the first week of May 2009.

         Audit Inquiry #3 • Lost Investment Income on Excess Letter of Credit Drawdowns (402,805)
              o	   Blue Shield of California agrees with the finding. Even though the LII amount wasn't completely
                   finalized, Blue Shield returned the $402,805 to OPM on April 16, 2009 with the assumption that any LII
                   calculation changes would be adjusted during a future drawdown. Since OIG did not revise the LII
                   calculation methodology, no future draw adjustments will be needed.



         Sincerely,



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