oversight

Audit of KPS Health Plans Seattle, Washington

Published by the Office of Personnel Management, Office of Inspector General on 2016-02-02.

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

                                              AUDIT OF
                                          KPS HEALTH PLANS
                                        SEATTLE, WASHINGTON
                                           Report Number 1D-VT-00-15-026
                                                  February 02, 2016




                                                             -- 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 that 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 (http://www.opm.gov/our-inspector-general), caution needs to be exercised
before releasing the report to the general public as it may contain proprietary information that was redacted from the publicly distributed copy.
             EXECUTIVE SUMMARY 

                                         Audit of KPS Health Plans

Report No. 1D-VT-00-15-026                                                                      February 02, 2016



Why did we conduct the audit?             What did we find?

We conducted this limited scope audit     We questioned $2,028,790 in health benefit refunds and
to obtain reasonable assurance that       recoveries, pharmacy drug rebates, cash management activities,
KPS Health Plans (Plan) is complying      and lost investment income (LII). We also identified a procedural
with the provisions of the Federal        finding regarding the Plan’s F&A Program. The Plan agreed with
Employees Health Benefits Act and         all of the questioned amounts as well as the procedural finding
regulations that are included, by         regarding the Plan’s F&A program.
reference, in the Federal Employees
Health Benefits Program (FEHBP)           Our audit results are summarized as follows:
contract. Specifically, the objectives
of our audit were to determine if the     	 Miscellaneous Health Benefit Payments and Credits – We
Plan charged costs to the FEHBP and          questioned $741,856 for health benefit refunds and recoveries
provided services to FEHBP members           and pharmacy drug rebates that had not been returned to the
in accordance with the terms of the          FEHBP as of December 31, 2014, and $122,060 for LII on
contract.                                    health benefit refunds and recoveries and pharmacy drug
                                             rebates that were returned untimely to the FEHBP. We
What did we audit?                           verified that the Plan has returned these questioned amounts to
                                             the FEHBP.
Our audit covered miscellaneous
health benefit payments and credits,      	 Cash Management – We determined that the Plan held an
such as refunds and pharmacy drug            excess working capital deposit of $1,149,634 in the dedicated
rebates, from 2010 through 2014. We          FEHBP investment account as of March 31, 2015. We also
also reviewed the Plan’s cash                questioned $15,240 for investment income earned on funds
management activities and practices          held in the dedicated investment account from January 2010
related to FEHBP funds from 2010             through December 2014 that had not been returned to the
through March 31, 2015, and the              FEHBP. We verified that the Plan has returned these
Plan’s Fraud and Abuse (F&A)                 questioned amounts to the FEHBP.
Program for 2014.
                                          	 Fraud and Abuse Program – The Plan is not in compliance with
                                             the communication and reporting requirements for fraud and
                                             abuse cases that are set forth in FEHBP Carrier Letter 2011-13.


 _______________________
 Michael R. Esser
 Assistant Inspector General
 for Audits
                                                       i
                   ABBREVIATIONS

CL           Carrier Letter
EFTs         Electronic Fund Transfers
FAR          Federal Acquisition Regulations
FEHB         Federal Employees Health Benefits
FEHBP        Federal Employees Health Benefits Program
F&A          Fraud and Abuse
HMO          Health Maintenance Organization
LOCA         Letter of Credit Account
Guidelines   Letter of Credit System Guidelines
LII          Lost Investment Income
OIG          Office of the Inspector General
OPM          Office of Personnel Management
Plan         KPS Health Plans
SIU          Special Investigations Unit
WC           Working Capital




                                    ii
IV. MAJOR CONTRIBUTORS TO THIS REPORT
          TABLE OF CONTENTS

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


          ABBREVIATIONS ...................................................................................................... ii 


  I.      BACKGROUND ...........................................................................................................1 


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


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


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


               1. Health Benefit Refunds and Recoveries ............................................................6 

               2. Pharmacy Drug Rebates .....................................................................................9 


          B. CASH MANAGEMENT .......................................................................................11 


               1. Excess Working Capital Deposit .....................................................................11 

               2. Investment Income...........................................................................................13 


          C. FRAUD AND ABUSE PROGRAM ......................................................................14 


               1. Special Investigations Unit ..............................................................................14


  IV.	    MAJOR CONTRIBUTORS TO THIS REPORT........................................................17 


  V.	     SCHEDULE A - QUESTIONED CHARGES

          APPENDIX (KPS Health Plans’ Draft Report Response, dated September 18, 2015)

          REPORT FRAUD, WASTE, AND MISMANAGEMENT
IV. MAJOR CONTRIBUTORS
            I. BACKGROUND
                       TO THIS REPORT

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
KPS Health Plans (Plan). The Plan’s offices are located in Bremerton and Seattle, Washington.

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.

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 Since 2005, the Plan has operated as a wholly
owned subsidiary of Group Health Cooperative, which is headquartered in Seattle, Washington.
The Plan enrollment is open to federal employees and their families residing in the state of
Washington.

The Plan’s contract (CS 1767) 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.




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                              Report No. 1D-VT-00-15-026
All findings from our prior audit of the Plan (Report No. 1D-VT-00-02-004, dated November 25,
2002) for contract years 1998 through 2000 have been satisfactorily resolved.

The results of this audit were provided to the Plan in written audit inquiries; were discussed with
Plan officials throughout the audit and at an exit conference on July 27, 2015; and were
presented in a draft report, dated July 30, 2015. 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                          Report No. 1D-VT-00-15-026
IV. OBJECTIVES,
II.  MAJOR CONTRIBUTORS
                SCOPE, ANDTO THIS REPORT
                          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 timely to the FEHBP.

        Cash Management

        	 To determine whether the Plan handled FEHBP funds in accordance with applicable
           laws and regulations concerning cash management in the FEHBP.

        Fraud and Abuse Program

        	 To determine whether the Plan's communication and reporting of fraud and abuse
           cases were in compliance with the terms of Contract CS 1767 and the applicable
           FEHBP Carrier Letters.

 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 KPS Health Plans’ Annual Accounting Statements pertaining to Plan codes
 “VT” and “L1” for contract years 2010 through 2014. During this period, the Plan processed
 approximately $371 million in FEHBP health benefit payments and charged $34 million for
 administrative expenses for these Plan codes. Specifically, we reviewed miscellaneous health
 benefit payments and credits (e.g., refunds, subrogation recoveries, and pharmacy drug rebates)


                                                3	                         Report No. 1D-VT-00-15-026
from 2010 through 2014 and cash management activities from 2010 through March 31, 2015.
We also reviewed the Plan’s Fraud and Abuse (F&A) Program for 2014.



                                               KPS Health Plans
                                            Contract Charges by Year

                              $100
                 $ Millions




                               $80
                               $60
                               $40
                               $20
                                $0
                                         2010      2011           2012     2013     2014

                                                     Contract Years


                                     Health Benefit Charges         Administrative Expenses


In planning and conducting our audit, we obtained an understanding of the Plan’s internal control
structure to help determine the nature, timing, and extent of our auditing procedures. This was
determined to be the most effective approach to select areas of audit. For those areas selected,
we primarily relied on substantive tests of transactions and not tests of controls. Based on our
testing, we did not identify any significant matters involving the Plan’s internal control structure
and its operations. However, since our audit would not necessarily disclose all significant
matters in the internal control structure, we do not express an opinion on the Plan’s system of
internal controls taken as a whole.

We also conducted tests to determine whether the Plan had complied with the contract, the
applicable procurement regulations (i.e., Federal Acquisition Regulations (FAR) and Federal
Employees Health Benefits Acquisition Regulations, 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


                                                              4                               Report No. 1D-VT-00-15-026
various information systems involved. However, while utilizing the computer-generated data
during our audit, 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 Seattle, Washington from April 27, 2015 through
May 8, 2015. Audit fieldwork was also performed at our office in Jacksonville, Florida through
July 2015.

METHODOLOGY

We obtained an understanding of the internal controls over the Plan’s financial 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. For the period
2010 through 2014, we also judgmentally selected and reviewed all health benefit refunds and
subrogation recoveries, totaling $3,871,545; all 54 pharmacy drug rebate allocation amounts,
totaling $2,076,267; and 12 fraud recoveries, totaling $18,595 (from a universe of 15 fraud
recoveries, totaling $18,958), to determine if health benefit refunds and recoveries and pharmacy
drug rebates were timely returned to the FEHBP and if miscellaneous payments were properly
charged to the FEHBP.2

We reviewed the Plan’s cash management activities and practices to determine whether the Plan
handled FEHBP funds in accordance with Contract CS 1767 and applicable laws and regulations.
Specifically, we reviewed the Plan’s letter of credit account (LOCA) drawdowns and interest
income transactions from 2010 through 2014, the Plan’s working capital calculations,
adjustments and/or balances from 2010 through March 31, 2015, and the Plan’s dedicated
FEHBP investment account balance as of December 31, 2014.

We also interviewed the Plan’s Special Investigations Unit regarding the effectiveness of the
F&A Program, as well as reviewed the Plan’s communication and reporting of fraud and abuse
cases to test compliance with Contract CS 1767 and the applicable FEHBP Carrier Letters.




2
 For the sample of fraud recoveries, we selected and reviewed all of the cash recovery amounts. The results of this
sample were not projected to the universe of fraud recoveries.


                                                         5                               Report No. 1D-VT-00-15-026
  IV. AUDIT
III.   MAJORFINDINGS
             CONTRIBUTORS  TO THIS REPORT
                     AND RECOMMENDATIONS
  A. MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS

    1. Health Benefit Refunds and Recoveries                                               $583,500

       Our audit determined that the Plan had not returned health benefit refunds and recoveries,
       totaling $505,739, to the FEHBP as of December 31, 2014. The Plan subsequently
       returned these refunds and recoveries to the FEHBP in March and May 2015, more than
       60 days after receipt (i.e., from 382 to 1,158 days late) and after receiving our audit
       notification letter. Additionally, the Plan untimely returned health benefit refunds and
       recoveries, totaling $2,421,617, to the FEHBP during the audit scope and prior to
       receiving our audit notification letter. As a result, we are questioning $583,500 for this
       audit finding, consisting of $505,739 for health benefit refunds and recoveries returned to
       the FEHBP after our audit notification and $77,761 for lost investment income (LII) on
       refunds and recoveries returned untimely 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 refunds.”

       Contract CS 1767, Part II, Section 2.3 (i) states, “All health benefit refunds and
       recoveries . . . must be deposited into the working capital or investment account within 30
       days and returned to or accounted for in the FEHBP letter of credit account within 60
       days after receipt by the Carrier.”

       Regarding reportable monetary findings, Contract CS 1767, Part III, Section 3.16 (a)
       states, “Audit findings . . . in the scope of an OIG audit are reportable as questioned
       charges unless the Carrier provides documentation supporting that the findings were
       already identified and corrected (i.e., . . . untimely health benefit refunds were already
       processed and returned to the FEHBP) prior to audit notification.”

       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 41 U.S.C 7109, 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.”




                                              6                              Report No. 1D-VT-00-15-026
The following summarizes our reviews for health benefit refunds and recoveries:

Health Benefit Refunds and Subrogation Recoveries

For the period 2010 through December 31, 2014, health benefit refunds and subrogation
recoveries totaled $3,871,545. Based on our review, we determined that the Plan
untimely returned most of these health benefit refunds and subrogation recoveries to the
FEHBP. The following exceptions were noted:

	 As a result of our audit, the Plan identified and returned health benefit refunds and
   subrogation recoveries, totaling $487,144, to the FEHBP on various dates in March
   and May 2015. These return dates were more than 60 days after receipt (i.e., from
   382 to 1,158 days late) and after receiving our audit notification letter (dated
   January 5, 2015). Therefore, we are questioning $512,130 as a monetary finding,
   consisting of $487,144 for health benefit refunds and subrogation recoveries returned
   to the FEHBP after our audit notification date and $24,986 for LII on these refunds
   and recoveries returned untimely to the FEHBP. As a result of this finding, the Plan
   returned the questioned LII of $24,986 to the FEHBP on July 10, 2015.

	 The Plan also returned health benefit refunds and subrogation recoveries, totaling
   $2,421,617, untimely to the FEHBP during the audit scope. Specifically, we noted
   that the Plan deposited these refunds and recoveries into the FEHBP investment
   account from 4 to 1,185 days late. Since the Plan returned these funds to the FEHBP
   during the audit scope and prior to receiving our audit notification letter, we did not
   question this principal amount as a monetary finding. However, the FEHBP is due
   LII of $51,790 on these refunds and recoveries since the funds were deposited
   untimely into the FEHBP investment account. As a result of this finding, the Plan
   returned the questioned LII of $51,790 to the FEHBP on July 10, 2015.

Fraud Recoveries

For the period 2010 through December 31, 2014, there were 15 fraud recoveries totaling
$18,958. We selected and reviewed a judgmental sample of 12 fraud recoveries, totaling
$18,595, for the purpose of determining if the Plan timely returned these recoveries to the
FEHBP. Our sample included all of the cash recovery amounts in the universe.

We determined that the Plan had not returned 12 fraud recoveries, totaling $18,595, to the
FEHBP as of December 2014. The Plan subsequently returned these fraud recoveries to
the FEHBP in May 2015, more than 60 days after receipt (i.e., from 942 to 1,044 days
late) and after receiving our audit notification letter (dated January 5, 2015). Therefore,



                                         7	                         Report No. 1D-VT-00-15-026
we are questioning $19,580 as a monetary finding, consisting of $18,595 for fraud
recoveries returned to the FEHBP after our audit notification date and $985 for LII on
these recoveries returned untimely to the FEHBP. As a result of this finding, the Plan
returned the questioned LII of $985 to the FEHBP on July 10, 2015.

Summary of Questioned Amounts

                                     In total, we are questioning $505,739 ($487,144 plus
  The Plan returned refunds          $18,595) for health benefit refunds and recoveries
  and recoveries of $505,739         returned to the FEHBP more than 60 days after receipt
  to the FEHBP from 382 to           and after our audit notification date. We are also
   1,158 days late and after         questioning $77,761 ($24,986 plus $51,790 plus $985)
  the audit notification date.       for applicable LII on health benefit refunds and
                                     recoveries that were returned untimely to the FEHBP.

Plan’s Response:

The Plan agrees with this finding.

OIG Comment:

We verified that the Plan returned $583,500 to the FEHBP for this finding, consisting of
$505,739 for the questioned health benefit refunds and recoveries and $77,761 for
applicable LII on refunds and recoveries that were returned untimely to the FEHBP.

Recommendation 1

We recommend that the contracting officer require the Plan to return $505,739 to the
FEHBP for the questioned health benefit refunds and recoveries. However, since we
verified that the Plan returned $505,739 to the FEHBP for the questioned health benefit
refunds and recoveries, no further action is required for this amount.

Recommendation 2

We recommend that the contracting officer require the Plan to return $77,761 to the
FEHBP for LII on health benefit refunds and recoveries that were returned untimely to
the FEHBP. However, since we verified that the Plan returned $77,761 to the FEHBP for
the questioned LII, no further action is required for this LII amount.




                                           8                        Report No. 1D-VT-00-15-026
2. Pharmacy Drug Rebates                                                               $280,416

   Our audit determined that the Plan had not returned four pharmacy drug rebate amounts,
   totaling $236,117, to the FEHBP as of December 31, 2014. The Plan subsequently
   returned these pharmacy drug rebates to the FEHBP in March 2015, more than 2 ½ years
   late and after receiving our audit notification letter. Additionally, the Plan untimely
   returned pharmacy drug rebate amounts, totaling $1,257,669, to the FEHBP during the
   audit scope and prior to receiving our audit notification letter. As a result, we are
   questioning $280,416 for this audit finding, consisting of $236,117 for pharmacy drug
   rebates returned to the FEHBP after our audit notification and $44,299 for LII on
   pharmacy drug rebates returned untimely to the FEHBP.

   As previously cited from Contract CS 1767, all health benefit refunds and recoveries
   must be deposited into the FEHBP investment account within 30 days and returned to the
   FEHBP within 60 days after receipt by the Carrier.

   As previously cited from FAR 52.232-17(a), all amounts that become payable by the
   Carrier should include simple interest from the date due.

   Regarding reportable monetary findings, Contract CS 1767, Part III, Section 3.16 (a)
   states, “Audit findings … in the scope of an OIG audit are reportable as questioned
   charges unless the Carrier provides documentation supporting that the findings were
   already identified and corrected (i.e., . . . untimely health benefit refunds were already
   processed and returned to the FEHBP) prior to audit notification.”

   The Plan’s pharmacy drug claims are processed by MedImpact, which is the Plan’s
   Pharmacy Benefit Manager. Pharmacy drug rebates are received multiple times a year
   (usually monthly) by the Plan and then allocated and credited to the participating groups
   quarterly, including the FEHBP. From January 2010 through December 2014, the Plan
   received pharmacy drug rebate amounts, totaling $               , for all participating
   groups. Of these, the Plan allocated   pharmacy drug rebate amounts, totaling
   $           , to the FEHBP. We selected and reviewed all of these amounts that were
   allocated to the FEHBP for the purpose of determining if the Plan properly allocated and
   timely returned pharmacy drug rebates to the FEHBP.




                                             9                           Report No. 1D-VT-00-15-026
The following summarizes the exceptions noted:

	 The Plan had not deposited four pharmacy drug rebate amounts, totaling $236,117,
   into the dedicated FEHBP investment account as of December 31, 2014. The Plan
   subsequently returned these pharmacy drug rebates to the FEHBP in March 2015,
   more than 2 ½ years late and after receiving our audit notification letter (dated
   January 5, 2015). The Plan identified this exception while preparing for our audit.
   Therefore, we are questioning this amount as a monetary finding as well as LII for
   returning these pharmacy drug rebates untimely to the FEHBP. As a result of this
   finding, the Plan also returned LII of $9,246 to the FEHBP on July 10, 2015.

	 The Plan also returned 30 pharmacy drug rebate amounts, totaling $1,257,669,
   untimely to the FEHBP during the audit scope. Specifically, we noted that the Plan
   deposited these funds into the dedicated FEHBP investment account from 7 to 832
   days late. Since the Plan returned these pharmacy drug rebates to the FEHBP during
   the audit scope and prior to receiving our audit notification letter, we did not question
   this principal amount as a monetary finding. However, the FEHBP is due LII on
   these rebates since the funds were deposited untimely into the FEP investment
   account. As a result of this finding, the Plan returned LII of $35,053 to the FEHBP
   on July 10, 2015.


   The Plan returned         In total, we are questioning $236,117 for pharmacy drug
pharmacy drug rebates        rebates returned to the FEHBP more than 2 ½ years late and
   of $236,117 to the        after receiving our audit notification letter. We are also
FEHBP over 2 ½ years         questioning $44,299 ($9,246 plus $35,053) for applicable
late and after the audit     LII on pharmacy drug rebates returned untimely to the
    notification date.       FEHBP.


Plan’s Response:

The Plan agrees with this finding.

OIG Comment:

We verified that the Plan returned $280,416 to the FEHBP for this finding, consisting of
$236,117 for the questioned pharmacy drug rebates and $44,299 for LII on pharmacy
drug rebates that were returned untimely to the FEHBP.




                                         10 	                        Report No. 1D-VT-00-15-026
     Recommendation 3

     We recommend that the contracting officer require the Plan to return $236,117 to the
     FEHBP for the questioned pharmacy drug rebates. However, since we verified the Plan
     returned $236,117 to the FEHBP for the questioned pharmacy drug rebates, no further
     action is required for this amount.

     Recommendation 4

     We recommend that the contracting officer require the Plan to return $44,299 to the
     FEHBP for LII on pharmacy drug rebates returned untimely to the FEHBP. However,
     since we verified the Plan returned $44,299 to the FEHBP for the questioned LII, no
     further action is required for this LII amount.

B. CASH MANAGEMENT

  1. Excess Working Capital Deposit                                                 $1,149,634

     As of March 31, 2015, the Plan held a working capital (WC) deposit of $1,149,634 over
     the amount needed to meet the Plan’s daily cash needs for FEHBP claim payments. As a
     result of our audit, the Plan returned $1,149,634 to the FEHBP for the excess WC
     deposit.

     OPM’s “Letter of Credit System Guidelines” (Guidelines), dated May 2009, states:
     “Carriers should maintain a working capital balance equivalent to an average of 2 days of
     paid claims. The working capital fund should be established using federal funds.
     Carriers are required to monitor their working capital fund on a monthly basis and adjust
     if necessary on a quarterly basis. The interest earned on the working capital funds must
     be credited to the FEHBP at least on a monthly basis. The working capital is not required
     but strongly recommended.” Also, based on the Guidelines, the Carrier’s WC calculation
     must exclude electronic fund transfers (EFTs).

     In addition, based on the regulations governing the financing of Federal programs by the
     letter of credit method as established in 31 CFR 205 (Treasury Department Circular No.
     10750), electronic fund transfers should not be included in the WC calculation. These
     instructions are established under the provisions of Treasury Department Circular No.
     1083 (Regulations Governing the Utilization of the U.S. TFCS), 5 CFR Part 890, and 48
     CFR Chapter 16.

     Based on industry practice (e.g., other FEHBP experience-rated Carriers), the WC
     deposit should be recalculated on a regular basis to determine if the amount currently


                                             11                         Report No. 1D-VT-00-15-026
        maintained is adequate to meet the Plan's daily cash needs for FEHBP claim payments.
        If the deposit is not adequate, the Plan should make an appropriate adjustment.

        We noted that the Plan made no adjustments to the WC deposit during the audit scope.3
        When reviewing the Plan’s WC calculation, we determined that the Plan inappropriately
        included EFTs in the calculation. As of March 31, 2015, the Plan held a WC deposit
        amount of $1,723,397 in the dedicated FEHBP investment account.

        In response to our request, the Plan provided a revised WC calculation, excluding EFTs.
        The Plan recalculated the WC deposit on a monthly basis and determined that, as of
        March 31, 2015, the WC deposit should only be $521,078. Based on the Plan’s revised
        calculation, excess WC funds of $1,202,319 ($1,723,397 minus $521,078) were held in
        the dedicated FEHBP investment account.

                                  However, we recalculated the Plan’s WC deposit on a
           The Plan held an       quarterly basis (excluding EFTs) and determined that, as of
         excess WC deposit of March 31, 2015, the Plan should have only maintained a WC
           $1,149,634 in the      deposit of $573,763. Therefore, we determined that, as of
           dedicated FEHBP        March 31, 2015, the Plan held a WC deposit with an excess
          investment account      amount of $1,149,634 ($1,723,397 minus $573,763) over the
         as of March 31, 2015. amount actually needed to meet the Plan’s daily cash needs
                                  for FEHBP claim payments. Since the Plan maintained these
        excess WC funds in an interest-bearing account and returned the interest earned on these
        funds to the FEHBP, no LII is due the FEHBP.

        Plan’s Response:

        The Plan agrees with this finding.

        OIG Comment:

        We verified that the Plan returned the excess WC deposit of $1,149,634 to the FEHBP on
        June 29, 2015.




3
 Although the audit scope for cash management activities and practices initially only included 2010 through 2014,
we expanded the scope for the WC deposit to also include January 2015 through March 2015.


                                                        12                              Report No. 1D-VT-00-15-026
   Recommendation 5

   We recommend that the contracting officer require the Plan to return $1,149,634 to the
   FEHBP for the excess WC deposit. However, since we verified that the Plan returned the
   excess WC funds of $1,149,634 to the FEHBP, no further action is required for this
   questioned amount.

   Recommendation 6

   We recommend that the contracting officer update the Annual Accounting Statement for
   the experience-rated HMO’s and Employee Organization plans to include a specific
   worksheet for the WC deposit and adjustments.

2. Investment Income                                                                  $15,240

   Our audit determined that the Plan had not returned investment income of $15,240 to the
   FEHBP as of December 31, 2014. This investment income was earned on funds held in
   the dedicated FEHBP investment account from January 2010 through December 2014.
   As a result of our audit, the Plan returned this investment income of $15,240 to the
   FEHBP.

   48 CFR 1652.215-71 (a) states, "The Carrier shall invest and reinvest all funds on hand
   that are in excess of the funds needed to promptly discharge the obligations incurred
   under this contract." 48 CFR 1652.215-71 (b) states, "All investment income earned on
   FEHB funds shall be credited to the Special Reserve on behalf of the FEHBP."

   Regarding reportable monetary findings, Contract CS 1767, Part III, section 3.16 (a)
   states, “Audit findings . . . in the scope of an OIG audit are reportable as questioned
   charges unless the Carrier provides documentation supporting that the findings were
   already identified and corrected . . . prior to audit notification.”

   During the period January 2010 through December 2014, WC and excess funds in the
   Plan’s dedicated FEHBP investment account earned a total of $15,240 in investment
   income. After receiving our audit notification letter and audit information request (dated
   January 5, 2015) and while preparing for our audit, the Plan self-disclosed that this
   investment income amount inadvertently had not been returned to the FEHBP. As a
   result, the Plan returned this investment income amount to the FEHBP on February 23,
   2015. Since the Plan held the investment income in the dedicated FEHBP investment
   account, LII is not applicable for this audit finding.




                                            13                          Report No. 1D-VT-00-15-026
     Plan’s Response:

     The Plan agrees with this finding.

     OIG Comment:

     We verified that the Plan returned $15,240 to the FEHBP for the questioned investment
     income.

     Recommendation 7

     We recommend that the contracting officer require the Plan to return $15,240 to the
     FEHBP for the questioned investment income. However, since we verified that the Plan
     returned $15,240 to the FEHBP for questioned investment income, no further action is
     required for this amount.

C. FRAUD AND ABUSE PROGRAM

  1. Special Investigations Unit                                                     Procedural

     The Plan is not in compliance with the communication and reporting requirements for
     fraud and abuse cases that are set forth in FEHBP Carrier Letter (CL) 2011-13.
     Specifically, the Plan did not report, or did not timely report, all fraud and abuse cases to
     the OIG. Without awareness of these existing potential fraud and abuse issues, the OIG
     cannot investigate the broader impact of these potential issues on the FEHBP as a whole.

     CL 2011-13 (Mandatory Information Sharing via Written Case Notifications to OPM’s
     Office of the Inspector General), dated June 17, 2011, states that all Carriers “are
     required to submit a written notification to the OPM OIG within 30 working days of
     becoming aware of a fraud, waste or abuse issue where there is a reasonable suspicion
     that a fraud has occurred or is occurring against the Federal Employees Health Benefits
     (FEHB) Program.” There is no dollar threshold for this requirement.

     During the period January 1, 2014 through December 31, 2014, the Plan opened 134
     fraud and abuse cases. Of these, only two cases were identified with FEHBP exposure.
     We reviewed these two cases with FEHBP exposure to determine if the cases were
     reported to the OIG as required by CL 2011-13. Based on our review, we determined
     that notification for only one of these cases with FEHBP exposure was sent to the OIG.
     Because both of these cases have FEHBP exposure, and there is no financial threshold for
     reporting suspected fraud against the FEHBP, these cases should have been reported to
     the OIG as required by CL 2011-13.


                                              14                           Report No. 1D-VT-00-15-026
The Plan’s non-compliance with the communication and reporting requirements may be
due, in part, to the Plan downsizing the Special Investigations Unit (SIU) and only having
one investigator during the audit scope. Section 1.9(a) of Contract CS 1767 requires that
the Plan implement a program to assess its vulnerability to fraud and abuse and operate a
system designed to detect and eliminate fraud and abuse internally by Plan employees
and subcontractors, by providers providing goods or services to FEHBP members, and by
individual FEHBP members. In our opinion, by having only one investigator for the
entire company, the Plan’s F&A Program is not as effective as this program should be.

                         The CL 2011-13 requires the Plan to submit written notification
  The Plan is not in
                         to the OIG within 30 days of any relevant FEHBP fraud
   compliance with
                         activity. However, of the two cases with FEHBP exposure in
 the communication
                         2014, we determined that one case was referred untimely to the
    and reporting
                         OIG (i.e., four days late) and the other case was not referred at
  requirements for
                         all. Without submitting timely referrals to the OIG, the Plan’s
   fraud and abuse
                         SIU cannot meet the FEHBP’s contractual communication and
        cases.
                         reporting requirements.

Ultimately, the Plan’s untimely communicating or not reporting of potential FEHBP
cases to the OIG has resulted in a failure to meet the communication and reporting
requirements that are set forth in CL 2011-13. The lack of notifications and/or untimely
case notifications did not allow the OIG to investigate whether other FEHBP Carriers are
exposed to the identified provider committing fraud against the FEHBP. This also does
not allow the OIG’s Administrative Sanctions Group to be notified timely. As a result,
this non-compliance by the Plan may result in additional improper payments being made
by other FEHBP Carriers.

Plan’s Response:

The Plan agrees with this finding.

OIG Comment:

In the Plan’s response to the audit inquiry (dated July 1, 2015), the Plan stated that the
SIU is in the process of updating the policies and procedures to ensure timely reporting of
all fraud, waste and abuse cases to the OIG. Subsequent to the draft report, the Plan also
informed us in an email (dated September 11, 2015) that the Plan’s SIU was already in
the process of hiring an additional investigator prior to the OIG audit. According to the
Plan, this additional investigator was hired and started in August 2015.




                                        15                          Report No. 1D-VT-00-15-026
        Recommendation 8

        We recommend that the contracting officer require the Plan to provide evidence or
        supporting documentation ensuring that the Plan has implemented the necessary
        procedural changes to meet the communication and reporting requirements of fraud and
        abuse cases that are contained in CL 2011-13 and CL 2014-29 (Federal Employees
        Health Benefits Fraud, Waste and Abuse).4 We also recommend that the Plan have more
        than one investigator on staff to investigate fraud and abuse cases.




4
 CL 2014-29 (dated December 19, 2014) consolidates and updates the information from CL’s 2003-23, 2003-25,
2007-12, 2011-13, which are superseded by this guidance. CL 2014-29 also supplements guidance from the FEHBP
contract (Section 1.9 – Plan Performance).


                                                    16                             Report No. 1D-VT-00-15-026
IV. MAJOR CONTRIBUTORS TO THIS REPORT

    Experience-Rated Audits Group

                   , Auditor-In-Charge

                 , Auditor

              , Auditor




                      , Chief

                   , Senior Team Leader
 

 

 
 
 
 
                                                
 




                                          17       Report No. 1D-VT-00-15-026
                                                                                   V. SCHEDULE A



                                                                                KPS HEALTH PLANS

                                                                              SEATTLE, WASHINGTON


                                                                              QUESTIONED CHARGES



AUDIT FINDINGS	                                                       2010             2011             2012             2013             2014             2015        TOTAL


A.	 MISCELLANEOUS HEALTH BENEFIT PAYMENTS
    AND CREDITS

    1. Health Benefit Refunds and Recoveries*	                                                                                                                           $583,500
    2. Pharmacy Drug Rebates*	                                                                                                                                            280,416

   TOTAL MISCELLANEOUS HEALTH BENEFIT

   PAYMENTS AND CREDITS
                                                                                                                                                 $863,916

B.	 CASH MANAGEMENT

    1. Excess Working Capital Deposit	                                       $0               $0                $0               $0               $0      $1,149,634    $1,149,634
    2. Investment Income                                                 11,285            1,606               845              952              552               0        15,240

    TOTAL CASH MANAGEMENT                                               $11,285           $1,606             $845             $952             $552       $1,149,634    $1,164,874

C.	 FRAUD AND ABUSE PROGRAM

    1. Special Investigation Unit (Procedural)                                $0              $0               $0                $0              $0               $0           $0

    TOTAL FRAUD AND ABUSE PROGRAM                                             $0              $0               $0                $0              $0               $0           $0

TOTAL QUESTIONED CHARGES                                                $59,665          $27,150         $644,914         $136,165          $11,262       $1,149,634    $2,028,790

* We included lost investment income (LII) within audit findings A1 ($77,761) and A2 ($44,299). Therefore, no additional LII is applicable for these findings.
                                                                                                                                                                                      
    KPS                                                                              APPENDIX

he a lth plans




September 18, 2015



Office of Personnel Management
Office of the Inspector General
701 San Marco Blvd, Suite 1207
Jacksonville, FL 32207

RE: Office of Personnel Management, Office of Inspector General limited Financial Audit of KPS
Health Plans, Bremerton, Washington

Dear            :

Thanlk you for the opportunity to work with the OPM OIG on the KPS Health Plan audit. In
regards to the final draft report issued on July 30, 2015, KPS Health Plan agrees with the audit
findings and recommendations in the draft report.

Since,rely,




£.t~~
KPS Health Plans




                       KPS Health Plans SSS Pacific Ave, Bremerton, WA 98337
                                   360-377-5576 I 800-552-7114

                                                                               Report No. 1D-VT-00-15-026
                                                                                                                         



                                       Report Fraud, Waste, and 

                                           Mismanagement 

                                                  Fraud, waste, and mismanagement in
                                               Government concerns everyone: Office of
                                                   the Inspector General staff, agency
                                                employees, and the general public. We
                                              actively solicit allegations of any inefficient
                                                    and wasteful practices, fraud, and
                                               mismanagement related to OPM programs
                                              and operations. You can report allegations
                                                          to us in several ways:


                        By Internet:               http://www.opm.gov/our-inspector-general/hotline-to­
                                                   report-fraud-waste-or-abuse


                         By Phone:                 Toll Free Number:                              (877) 499-7295
                                                   Washington Metro Area:                         (202) 606-2423


                           By Mail:                Office of the Inspector General
                                                   U.S. Office of Personnel Management
                                                   1900 E Street, NW
                                                   Room 6400
                                                   Washington, DC 20415-1100
                     
                                                                                                                         
                                                                                                                         




                                                             -- 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 that 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 (http://www.opm.gov/our-inspector-general), caution needs to be exercised
before releasing the report to the general public as it may contain proprietary information that was redacted from the publicly distributed copy.

                                                                                                               Report No. 1D-VT-00-15-026