oversight

Audit of Long Term Care Partners - Portsmouth, New Hampshire

Published by the Office of Personnel Management, Office of Inspector General on 2009-08-06.

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 LONG TERM CARE PARTNERS, LLC

     ... PORTSMOUTH, NEW HAMPSHIRE





                                           Report No. IG-:-LT-OO-08-047


                                          Date:                  ·August 6, 2009




                                                           --CAUTION-­
This audit-report has bccu distributed to.Federat offlcials who lire responsible for the adminish-a1iori of the audited program, This audit
report Pial contnin proprietary data which is protected by .Federallaw(l8 O.S.c. 1905). Therefore, While tilis audit report is available
under lhe Freed 01;' ofIntormation Act and made 3\'aililble to the public Oil the OIG wcbpagc, cautlon needs to be exercised before
releasing thc report tothe genel'lll public as it may contain proprietary infurmnticu that was redacted front the IJublicly distdbuted copy.
                           UNITED STATES OFFICE OF PERSONNEL MANAGEMENT

                                             Washington, DC 20415


   Office of the
Inspector General




                                       EXECUTIVE SUMMARY





                                  Federal Long Term Care Insurance Program

                                            RFi> OPM.-OI-RFP-0016



                                        Long Term Care Partners, LLC

                                         Portsmeurh, New Hampshire




                    REI)ORT NO. IG-LT-OO-08-047                 DATIc_. August. 6., ~ 2009

       This report details the results of our audit of the Federal Long Term Care Insurance Program
       (FLTCIP) operations at Long Term Care Partners, LLC (LTCP) in Portsmouth, New Hampshire.
       The audit covered claim benefit payments, administrative expenses and cash management for the
       period of October I, 2006 through July 31, 2008. In addition, we reviewed the Statement of
       Operations and Changes in Fund Balance (Experience Fund) for the period October 1, 2006
       through September 30, 2007. The report questions a total of $459,033" Of this amount,
       $30 I,416 relates to cash management activities and $157,617 to administrative expenses. Lost
       investment income on the questioned costs subject to lost investment income amounts to
       $16,918.

       The questioned items are summarized below:

                                           CLAIM PAYMENTS

       •    The C~aims Svstem Does Not Accurately Track Claim I'ayments                   Procedural

            The LTCP Claims System is not programmed to show adjustments resulting from benefit
            checks that have been voided or cancelled.




        www.oprn.goY                                                                      www.usajobs.goY
                                   CASH MANAGEMENT


•   Delay in Transfer of FLTCIP Premiums                                             Procednral

    John Hancock retained premiums collected from enrollees in a general account for several days
    before transferring the funds to its FLTCIP Separate Account, which delays the investment of
    the funds. In addition, the funds were commingled with funds from John Hancock's other lines
    of business while in this general account.

•   Overstatement of the Experiencc Fund's 2007 Financial Statements                   $301,416

    The Federal Long Term Care Program Experience Fund's Statement of Fiduciary Operations
    and Changes in Fund Balance financial statement for fiscal year 2007 is overstated by
    $301,416.

                                ADMINISTRATIVE EXPENSES

•   Unallowable Lobbying Costs                                                          $10,638

    LTCP did not deduct the lobbying costs from its AHIP membership dues for fiscal years 2002
    through April 2009. As a result, the FLTCIP was overcharged $10,638 for unallowable
    expenses.

•   Costs of Other Federal Program Charged to FLTCIP                                   $146,979

    LTCP charged $146,979 to the FLTCIP that should have been charged to BENEFEDS.

                  LOST INVESTMENT INCOME ON AUDIT FINDINGS

    The FLTCIP is due $16,918 for lost investment income on the findings presented in the

    report that are subject to the recovery oflost investment income.





                                               II
                                     CONTENTS

                                                                                   PAGE


        EXECUTIVE SUMMARy               ·	                            ,                i


 I.     INTRODUCTION AND BACKGROUND	                                                   1


II.	    OBJECTIVES, SCOPE, AND METHODOLOGy                                             2


III.	   AUDIT FINDINGS AND RECOMMENDATIONS                                             6


        A.   CLAIM PAYMENTS	                                                           6


             1. The Claims System Does Not Accurately Track Claim Payments             6


        B.   CASH MANAGEMENT	                                                          6


             1. Delay in Transfer of FLTCIP Premiums	                                  6

             2. Overstatement of the Experience Fund's 2007 Financial Statements       8


        C.   ADMlNISTRATIVE EXPENSES	                                                  9


             1. Unallowable Lobbying Costs	                                             9

             2. Costs of Other Federal Program Charged to FLTCIP	                      I0

        D.   LOST INVESTMENT INCOME ON AUDIT FINDINGS	                                 II


IV.	    MAJOR CONTRIBUTORS TO THIS REPORT                                              12.

        SCHEDULES

        A.   Statement of Fiduciary Operations and Changes in Fund Balance
        B.   Questioned Charges
        C.   Lost Investment Income

        APPENDIX	 (Long Term Care Partners, LLC April 30,2009, response to the draft
                  audit report)
                     I. INTRODUCTION AND BACKGROUND


INTRODUCTION


This report details the results of our audit of the Federal Long Term Care Insurance Program
(FLTCIP or Program) operations at Long Term Care Partners, LLC (LTCP). LTCP is ajoint
venture between John Hancock Life Insurance Company (John Hancock) and MetropolitanLife
Insurance Company (MetLife) (referred to as the Carriers), located in Portsmouth, New
Hampshire. 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 Program was established by the Long Term Care Security Act (public Law 106-265), which
was signed by the President on September 19, 2000. The Act directed OPM to develop and
administer a long term care insurance program for Federal employees and annuitants, current and
retired members of the uniformed services, and qualified relatives.

In December 2001, OPM awarded a seven year contract to LTCP to offer long term care
insurance coverage to eligible participants. Operations began on March 25, 2002, and the
contract expired on April 30, 2009. (A new contract was awarded to John Hancock upon the
expiration of the original contract.) LTCP, with OPM oversight, is responsible for all
administrative functions of the Program, including marketing and enrollment, underwriting,
policy issuance, premium billing and collection, and claims administration.

Program assets are held in the "Experience Fund". Premiums received by LTCP are deposited
into the Experience Fund and invested by the Carriers, Investment income, net of Carrier
management fees, is retained in the Experience Fund. Claims paid by LTCP are deducted from
the Experience Fund, and liabilities for "incurred but not reported claims" ("IBNR") are accrued
and reported in the financial statements.

Operating expenses incurred by LTCP for the administration ofthe Program are reimbursed from
the Experience Fund to the Carriers, subject to expense guarantees stipulated in the contract and
according to defined timelines and funds availability. Interest on any outstanding balance owed
to the Carriers accrues at the rate of return earned by the Experience Fund.

Compliance with laws and regulations applicable to the Program is the responsibility of LTCP
management. Also, management ofLTCP is responsible for establishing and maintaining a
system of internal controls.

Our previous audit ofLTCP (Report No. IG-LT-00-07-055, dated August 4, 2008) questioned an
issue that is still occurring in our current audit. The issue relates to the commingling of LTCP
funds with funds from the Carriers' other lines of business. All other issues from the audit were
satisfactorily resolved.




                                                I

               II. OBJECTIVES, SCOPE, AND METHODOLOGY

OBJECTIVES


The purpose of the audit was to determine whether charges to the Program and claims services
provided to Program members were in accordance with the terms of the contract and applicable
regulations. The audit objectives are presented below.

•   Long Term Care Benefit Claim Payments

       To determine whether LTCP complied with the contract provisions relative to claim
       payments.

•   Cash Management:

      Experience Fund Revenues

      To determine whether premiums were properly deposited into the Experience

      Fund and invested by the Carriers.


      To determine whether the Carriers invested and reinvested all FLTCIP funds on hand
      until needed to discharge the obligations incurred under the contract.

      Experience Fund Expenses

      To determine whether reimbursements to the Carriers from the Experience Fund were in
      accordance with the terms of the contract, including any subsequent modification, and
      applicable regulations.

•   Administrative Expenses

      To determine if the administrative expenses charged to the FLTCIP were actual, necessary,
      and reasonable.

SCOPE

We conducted this performance audit in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our audit findings and
conclusions based on the 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 LTCP audited statements of Fiduciary Operations and Changes in Fund
Balance (Experience Fund) and the Operations and Changes in Member's Equity for the year
ended September 30, 2007. In addition, we reviewed the investment income for the period of
October 1,2006 through July 31, 2008. Finally, we reviewed internal statements of the


                                               2

Fiduciary Operations and Changes in Fund Balance and the Operations and Changes in
Member's Equity from October 1,2007 through July 31, 2008.

For fiscal year 2007, premiums and investment income to the Experience Fund totaled $341
million and expenses from the Experience Fund totaled $79 million. The expenses included such
things as on-going expenses and liabilities (profit charges, deferred acquisition cost (DAC) tax,
interest expense, OPM administrative expenses, and claim payments). The Plan paid
$14,136,832 in long term care claim payments during fiscal year2007 and $17,183,979 from
October 1,2007 through July 2008, resulting in total claim payments of $31,320,811 for the .
period reviewed. In addition, LTCP charged the FLTCIP administrative expenses of
$17,585,200 during fiscal year 2007 and $17,083,210 from October 1,2007 through July 2008,
resulting in total paid administrative expenses of $34,668,41 0 for the period reviewed.

We reviewed $2,223,594 in claim payments made from October 1,2006 through July 31, 2008,
for proper adjudication. We also reviewed $25,687,016 in Experience Fund disbursements (i.e.,
profit charges, DAC taxes, interest expenses, OPM administrative expenses, and on-going
expense reimbursements). The on-going expense reimbursements included administrative
expenses incurred by LTCP and the Carriers that were charged to the Program.

In planning and conducting our audit, we obtained an understanding of LTCP' 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 for 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 LTCP's internal control structure
and its operation. However, since our audit would not necessarily disclose all significant matters
in the internal control structure, we do not express an opinion on LTCP's systemofintemal
controls taken as a whole.

In conducting our audit, we relied to varying degrees on computer-generated data provided by
LTCP. 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 audit testing, nothing carne to our attention to cause us to doubt its reliability.
Consequently, we believe that the data was sufficient to achieve our audit objectives.

We also conducted tests to determine whether LTCP and the Carriers had complied with the
contract, the applicable procurement regulations (i.e., Federal Acquisition Regulations), and the
laws and regulations governing the Program. Exceptions noted in the areas reviewed are set
f011h 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 LTCP
and the Carriers had not complied, in all material respects, with those provisions.

METHODOLOGY

To test LTCP's compliance with the contract provisions relative to long term care claim
payments, we selected and reviewed a judgmental sample of the 150 highest dollar value claims
from a universe of 14,191 claims. Of the $31,320,811 in claim payments made from October 1,


                                                 3

2006 through July 31,2008, we reviewed a total of $2,223,594. We also reviewed LTCP's
CARE Policy Administration System for eligibility and coverage (e.g., insured's personal
information screen, coverage summary screen, and copy of signed policy application), and
supporting documents (e.g., copies of claims, explanations of benefits, approvals of claim
payments, the paid claim check numbers, and amounts in the applicable bank statements) to
determine the alJowability of these payments.

To determine if the premiums collected were properly deposited into the Experience Fund, we
judgmentally selected and reviewed the activity occurring during the month of July 2007 for
each carrier. We reviewed the bank statements and verified that the amount collected by LTCP
was transferred to the carrier's separate accounts.. To address an audit issue reported in a
previous audit, we also reviewed and verified whether the premiums collected by L TCP, from
October 1, ,2006 through July 31, 2008, were properly deposited into the John Hancock General
Account and then transferred to the John Hancock Separate Account in a timely manner.
Finally, to determine whether the funds received were properly invested, we selected and
                                                                  th
reviewed the Carriers' schedules of investment income for the 4 quarter of fiscal year 2007 and
the month of July 2008.

To determine the appropriateness of the disbursements from the Experience Fund, we
judgmentally selected and reviewed a sample of the 18 highest reimbursements from fiscal year
2007. These disbursements were related to profit charges, DAC taxes, State Street (the Carriers'
investment account) fees, asset profit, aPM expenses, and on-going expenses. Of the universe
of $55,764,645 in reimbursements to the Carriers for fiscal year 2007, we reviewed a total of
$25,687,016. We reviewed the Carriers' bank statements for the Separate Accounts and verified
that the amounts reimbursed to the Carriers agreed to the expenses incurred and the liabilities
due.

To determine if the administrative expenses were actual, necessary, and reasonable, we selected
20 of108 natural expense accounts from 11 cost centers paid during the period October 1, 2006
through September 30,2007 for potential review. The accounts were selected based on highest
dollar amount and account name. From the 20 accounts, we selected 27 monthly transactions for
detailed review based on the highest monthly transaction amounts. From 27 monthly
transactions, we selected 42 invoices. The total value of the invoice sample was $1,269,598 out
of a universe of $17,580,105.

Additionally, we selected a second sample of 10 out of 120 natural expense accounts paid during
the period October 1, 2007 through July 31, 2008. Like the first sample, these accounts were
also selected based on highest dollar amount and account name. From the 10 accounts, We
selected 10 monthly transactions for detailed review based on the highest monthly transaction
amounts. From 10 monthly transactions, we selected 26 invoices. The total value of the invoice
sample was $859,204, from a universe of $14,486,709. For both samples, we reviewed each
account description to ensure that only allowable costs were charged to the account.

Because the samples we selected and reviewed in performing the audit were not statisticalIy
based, the results could not be projected to the universe since it is unlikely that the results are
representative of the universe taken as a whole.


                                                   4
We used provisions of the contract (OPM-OI-RFP-0016), Public Law 106-265, and Federal
Acquisition Regulations to determine the allowability, allocability, and reasonableness of the
administrative expenses charged against the contract.

The results of our audit were provided to LTCP in the form of audit inquiries and discussed with
LTCP officials throughout the audit and at the exit conference. In addition, a draft report, dated
March 3, 2009, was provided to LTCP for review and comment. LTCP's comments on the draft
report were considered in preparing the final report and are included as an Appendix to this
report.




                                                5

           III. AUDIT FINDINGS AND RECOMMENDATIONS

A.   CLAIM PAYMENTS


     1. The Claims System Does Not Accurately Track Claim Payments                  Procedural

        The LTCP's. claims system is not programmed to show adjustments resulting from
        benefit checks that have been voided or cancelled. As a result, the claims paid
        amount recorded in the claim system could be potentially overstated and not in
        agreement with the paid claims amount recorded in LTCP'saccounting system.

        We noted this discrepancy during our review of the claims system when it appeared
        that two payments were made for one claim. However, upon further review we found
        that when benefit checks are voided, LTCP makes a manual entry on the "Transfer
        Report to the Bank Transactions" spreadsheet. Then, at the end of each month, LTCP
        reconciles all claim checks issued, paid, outstanding, and voided. This reconciliation
        agrees the check book balance, the general ledger account balance, and the "Transfer
        Report to the Bank Transactions" spreadsheet to the bank statement and bank
        reconciliation statement. However, the claim system is not automatically
        programmed to reconcile or adjust for voided checks or other types of adjustments.
        Consequently, its balance will not agree with the amount recorded in the accounting
        system.

        We believe the claim system should be programmed to account for voided checks, as
        well as for other claim adjustments. This would ensure that the system accurately
        reflects and accounts for claims actually paid and would tie in with the claims paid
        amount entered into the accounting system. It would also prevent the possibility of
        the voided payments not being corrected, which would result in the overstatement of
        the claims expense in the financial statements.

        LTCP Comments:

        LTCP agrees with this finding. They said that they identified this issue on a list of
        items that will be included in a future release, scheduled for later this year and
        contingent on Contract renewal.

        Recommendation 1

        We recommend that the contracting officer require LTCP to enhance its claim system
        to include adjustments for voided checks and other items, as appropriate.

B.   CASH MANAGEMENT

     1. Delay in Transfer of FLTCIP Premiums                                        Procedural

        John Hancock's cash management procedures direct LTCP to transfer premiums
        collected from enrollees into John Hancock's general account, where they are held for

                                             6

several days before John Hancock transfers the funds to its FLTCIP Separate
Account. This process delays the investment of the funds and results in the loss of
investment income. Additionally, as this was an issue in our previous audit that had
not been corrected as of July 31, 2008, we also concluded that amounts contained in
the general account continued to be commingled with funds fromJolm Hancock's
other lines of business. Contract OPM-OI-RFP-0016, Part IV, section A(a)(3)
requires the Contractor (John Hancock and Met Life) to account for FLTCIP funds
separately from its other lines of business.

LTCP premiums, collected through payroll deductions, automatic bank withdrawals,
and direct payments, are deposited into commercial bank accounts. LTCP then
transfers the funds to the general accounts of both Carriers, who subsequently transfer
the funds to their FLTCIP Separate Accounts. MetLife's account contains only
FLTCIP funds, and normally, the funds going into the account are transferred to its
FLTCIP separate account on the same day received. Once in the FLTCIP Separate
Account, the funds are available {or investment. In contrast, we found that John
Hancock held the funds in its general account from one to six days before transferring
them to its FLTCIP Separate Account. The Program earns no income on the funds
while held in the general account, and the funds are commingled with funds from
other lines of business.

The FLTCIP contract (OPM-01-RFP-0016, section 1.48 (Investment Income»
provides that the carriers are to invest and reinvest all FLTCIP funds on hand until
needed for obligations incurred under the contract. It states that when the contracting
officer concludes that 3 carrier failed to comply with this provision, the carrier is to
pay to the FLTCIP fund the investment income that would have been earned, based
on rates established by the Secretary of the Treasury. For the period October 1,2006
through July 31, 2008, LTCP transferred $277,522,860 to John Hancock's general
account. Of this amount, $36,127,500 was kept in John Hancock's general account
for one to six days before being transferred to their Separate Account. We calculated
lost investment income on the Program funds held in John Hancock's general account
in accordance with the contract. However, LTCP was able to support that it was
adjusting the Experience Fund for losses resulting from the transfer delays.
Consequently, we are not questioning an amount related to this issue in our final
report.

We were informed by LTCP that John Hancock opened an FLTCIP dedicated
investment account on September 17,2008 and no longer delays transferring Program
funds from its general account to its FLTCIP Separate Account.

LTCP Comments:

In regard to commingling of Program funds with other lines of business, LTCP said
that a "separate" General Account for the FLTCIP funds was established in
September 2008, and the procedures recommended in the fiscal year 2006 audit
report were implemented.


                                     7

   OIG Response

   We verified that John Hancock established a "separate" General Account

   dedicated to the FLTCIP funds as of September 2008 and no longer delays

   transferring Program funds. The establishment and use of this account also

   addresses our concerns related to the commingling of Program funds.

   Therefore, no further action is necessary at this time.


2. Overstatement of the Experience Fund's 2007 Financial Statements $301,416

   The Experience Fund balance in the Federal Long Term Care Experience Fund,
   Statement of Fiduciary Operations and Changes in Fund Balance financial statement
   for fiscal year 2007 is overstated by $301,416.

   We reviewed and reconciled the FLTCIl?'s Experience Fund Statement, Deferred
   acquisition costs (DAC) tax to the DAC Tax Carrier's Schedule and found a
   difference of$301 ,416. LTCP inadvertently miscalculated MetLife's DAC tax
   amounts during the months of April to September of2007. Although LTCP made the
   adjustment to its accounting books for fiscal year 2007, the adjustment is not reflected
   in the 2007 Federal Long Term Care Experience Fund's Statement of Fiduciary
   Operations and Changes in Fund Balance. As a result, the Experience Fund balance
   was overstated by $30 1,416.

    We informed LTCP of this variance during our on-site visit. LTCP provided a
    revised schedule of DAC tax which supports the correction. In addition, LTCP
    provided documentation supporting the general ledger adjustment of$301,416 made
    on September 30,2007. According to LTCP,the correction was done in fiscal year
    2007 after the hooks were closed. Consequently, the adjustment impacted the
  . retained earnings and liability accounts instead of the expense and liability accounts.
    However, because the financial statements were finalized, LTCP decided not to
    reflect the adjustment in fiscal year 2007 statements.

   LTCP Comments:

    LTCP agrees with the finding. It stated that the error of $301 ,416 was identified as an
    uncorrected misstatement in the Summary of Uncorrected Misstatements in its
    September 30,2007 financial statement audit performed by its external audit firm
    RSM McCladrey. However, it was not disclosed in the Experience Fund Financial
    Statements. The variance was identified by LTCP prior to the publication of the
    financial statements but subsequent to the completion of fieldwork. Given that the
   'amount ofthe error as compared to the 2007 Experience Fund's total premium
    revenue was deemed to be immaterial, LTCP decided not to make an adjustment to
   the financial statements. However, a correcting entry was made by LTCP to the
   Fund's general ledger.




                                         8
        OIG Response

        We concur with LTCP's comments and verified that appropriate adjustments
        to the Fund's general ledger account were made. However, to date, we have
        not been provided with a copy of the subsequent year's financial statements to
        ensure that this overstatement was corrected.

        Recommendation 2

        We recommend that the contracting officer request and review a copy of the Federal
        Long Term Care Experience Fund, Statement of Fiduciary Operations and Changes in
        Fund Balance for fiscal year 2008 to verify that LTCP corrected the statements for the
        fiscal year 2007 overstatement.

c.   ADMINISTRATIVE EXPENSES

     1. Unallowable Lobbying Costs                                                    $10,638

        LTCP did not deduct the lobbying costs from their American Health Insurance Plans
        (AHIP) membership dues during fiscal years 2002 through April 2009. As a result,
        the FLTCIP is due $10,638.

        48 CFR 31.205.-22(c) states, "When a contractor seeks reimbursement for indirect
        costs, total lobbying costs shall be separately identified in the indirect cost rate
        proposal, and thereafter treated as other unallowable activity costs." OUf review of
        account 61135, Dues & Fees, from the inception of the Program through fiscal year
        2008, showed that the AHIP membership dues charged to the FLTCIP included
        lobbying costs and other unallowable costs.

        The FLTCIP's AHIP membership dues for the 2006 Benefit Year state, "An estimated
        20% of your AHIP dues are attributable to lobbying activities & grassroots efforts on
        behalf of members and is not deductible." Of the $10,638 in unallowable charges,
        $2,910 was identified based on our analysis of the charges incurred in fiscal year
        2007. The remaining $7,728 was found by LTCP as a result of a review of the Dues
        & Fees account that it conducted in response to our draft audit report. Based on our
        review of the supporting documentation provided by LTCP, we agree with the
        overcharges it identified.

        LTCP Comments

        LTCP agrees that lobbying costs are non-reimbursable expenses. LTCP has reviewed
        all expenses charged to the Dues & Fees account from the Contract's inception
        through April 4, 2009, and determined that AHIP membership dues of$53,188 were
        charged to the FLTCIP contract during this time. Consequently, LTCP adjusted the
        account for $10,638 (20% of$53,188) on April 30, 2009, to reclassify the expense
        and charge it to its corporatecost center.


                                             9

   Recommendation 3

   We recommend that LTCP ensure that the FLTCIP is not charged for unallowable
   lobbying costs in future years.

2. Costs of Other Federal Program Charged to FLTCIP	                            $146,979

   LTCP charged $146,979 to the FLTCIP that should have been charged to the

   BENEFEDS Contract.


   Contract RFP OPM-OI-RFP-0016, Part IV, section K9 Accounting and Allowable
   Cost (b) (ii) Administrative Expenses states, "Administrative Expenses consist of all
   actual, allocable, allowable, and reasonable expenses incurred in the adjudication of
   claims or incurred in the Carrier's overall operation of the business. Unless otherwise
   provided in the contract or FAR, administrative expenses include, but are not limited
   to, taxes, insurance and reinsurance premiums, the cost of investigation and
   settlement of claims, the cost of maintaining files regarding payment of claims, and
   legal expenses incurred in the litigation of benefit payments."

   We reviewed the invoice transactions for fiscal year 2007, and found the following:

      •	 One invoice from Carousel Industries of North America for the amount of
         $131,986, for Telecom equipment to prepare the BENEFEDS Call Center for
         Open Season.
      •	 Two invoices from Web Performance, Inc., for $14,993, for a software
         maintenance contract for software to load test the BENEFEDS website.

   We informed LTCP of the error through an e-mail on May 19, 2009. LTCP agrees

   that the costs in question were incorrectly classified as FLTCIP expenses.

   Subsequent to the completion ofthe audit, LTCP provided us documentation showing

   that it corrected the error in fiscal year 2009.


   OUf previous audit also showed that other federal program expenses were incorrectly

   charged to the FLTCIP. As this is still a concern in our current audit, we believe that

   LTCP should revise or evaluate its internal controls to prevent the costs of other

   federal programs from being charged to the FLTCIP going forward.


   LTCP Comments

   LTCP agrees with this finding and corrected for these errors during May of2009.

   Recommendation 4

   As this was an audit finding in the previous audit, we recommend that LTCP improve
   oversight of its cost segregation practices amongst its various programs to ensure that
   the FLTCIP is only charged for its program-related costs.


                                        10

D.   LOST INVESTMENT INCOME ON AUDIT FINDINGS                                           $16,918

     The FLTCIP is due $16,918 for lost investment income on the findings subject to the
     recovery of lost investment income

     The FLTCIP contract (OPM-OI-RFP-00I6, section 1.48 (Investment Income» requires,
     among other things, that the carriers pay the Program lost investment income on charges
     made against the contract which are not allowable, allocable, or reasonable. It provides
     that all amounts payable will bear simple interest compounded semiannually at the rates
     established by the Secretary of the Treasury.

     We computed investment income that would have been earned using the semiannual rates
     specified by the Secretary of the Treasury on a fiscal year basis. The computations show
     that the FLTCIP is due $16,918 for lost investment income, calculated for the period
     from October 1,2005 through June 30, 2009, on questioned costs for fiscal years 2006
     through 2009.

     L TCP Comments:

     The draft report did not include a section covering lost investment income on the audit
     findings. Therefore, the Plan did not address lost investment income in commenting on
     the draft report. However, it should be noted that LTCP did return to the program
     amounts questioned related to unallowable lobbying costs ($10,638) and costs of other
     federal programs charged to the FLTCIP ($146,979) in April and May of2009.
     Consequently, future years' interest calculations should be adjusted to reflect the return
     of these funds to the Program.

     Recommendation 6

     We recommend that the contracting officer direct the Plan to credit the FLTCIP $16,918,
     plus interest accruing after June 30,2009, on the remaining audit findings to the
     Experience Fund for lost investment income.




                                              II

                    IV. MAJOR CONTRIBUTORS TO THIS REPORT


. Special Audits Group

              Auditor-In-Charge

             , Auditor



                 , Group Chief (202) 606-4745

                   Senior Team Leader




                                            12

                                                                                     SCHEDULE A

                                      Long Term Care Partners, LLC

                                       Portsmouth, New Hampshire


                    Statement of Fiduciary Operations and Changes in Fund Balance

                            (Recreated from the IPA Financial Statements)


                                                                         Fiscal Year 2007

Revenue
  Premiums revenue                                                                     $295,625,215
  Invesunentincorne                                                                      45,359,002
                          Total revenue                                                $340~984,217


Expenses
  Claims expenses, including changes in disabled life reserves                          $30,727,625
  Deferred acquisition costs tax                                                          7,681,142
  Profit char~e                                                                          22,221,599
  Interest expense                                                                          214,345
  OPM administrative expenses                                                               633,914
  LTCP administrative expenses                                                           17,585,200
                          Total expenses                                                $79~063,825


Change in fund balance                                                                 $261,920,392
Fund balance at beginning of year                                                       782,005,782
Fund balance at end of year                                                          $1,043~926,174
                                                                                 SCHEDULEB
                                        LONG TERM CARE PARTNERS, LLC
I,                                      PORTSMOUTH, NEW HAMPSHIRE
                                            ,




                                            QUESTIONED CHARGES


                                                                                 FISCAL YEAR
 QUESTIONED CHARGES                                                                 2007


A. CLAIM PAYMENTS
     1.   The Claims System Does Not Accurately Track Claim Payments                 Procedural.


 B. CASH MANAGEMENT

     1.   Delay in Transfer of FLTCIP Premiums                                       Procedural
     2. Overstatement of the Experience Fund's 2007 Financial Statements
             $301,416
     TOTAL CASH MANAGEMENT                                                  I
        $301,416    I

C. ADMINISTRATIVE EXPENSES
     l.   Unallowable Lobbying Costs
                                                  $10,638
     2.· Cost of Other Federal Program Charged to FLTCIP
                              146,979
     TOTAL ADMINISTRATIVE EXPENSES                                          I
        $157,617


               TOTAL QUESTIONED CHARGES                                     I         $459,033    I
                                                                                                                                                                        SCHEDULEC
                                                           LONG TERM CARE PARTNERS, LLC
                                                                                                                                                     ~


                                                            PORTSMOUTH, NEW HAMPSHIRE
                                                              LOST INVESTMENT INCOME


                                                                FY 2005                 FY 2006            FY 2007             FY 2008                 FY 2009
                                                           (10/1104-9130/05)       (10/1105-9130/06)   (10/1106-9/30/07)   (10/1107-9/30/08)       (10/1108-9130/09)      Total

QUESTIONED CI!i\RGES (Subject to Lost Investment Income)

   ADMINISTRATIVE EXPENSE CHARGES
   I. Unallowable Lobbying Costs                                      $1,132                  $2,910              52,182              $2,668                   51,746       510,638
   2. Costsof OtherFederalProgramCharged to FLTCIP                         50                     $0            $146,979                  $0                       $0      $146,979

   CUMULATIVE TOTALS                                                  $1132                   $4042             5153203             $155871                 $157617        $157,617

       LOST INVESTMENT INCOME CALCULATION

       a. Prior Year's Total Questioned (Principal)                        $0                 51,132              54,042            5153,203                $155,871
       b. Prior Year's Interest                                                Q                   Q                  a                  284                    8,112
       c. Cumulative Total                                                IQ                  $1.132              $4,100            5153,487                $163,983

       Treasury Rates
       d. Average Interest Rate (per fiscal year)                                                                                              .
       e. Interest   OD   Prior Years findings                            $0                     $58                $226              $7,828                   $8,806       516,918

          Total Interest by Year                                          $0                     $58                $226              $7,828                   $8,806      $16,918
                                                                                                              Appendix

c;*.lo~TermCare
 -, Partners,          LLC
                                                                                         Long Term Care Partn~rs. llC
                                                                                         100 Arboretum Drive
                                                                   2889 MAY 6 PH 31      8ismouth. NH 0380l·7833




   April 30, 2009


                         Chief
   Special Audits Group
   Office of the Inspector General
   U. S. Office of Personnel Management

   Theodore Roosevelt Building

   1900 E St. NW, Room 6400

   Washington, DC 204 I 5-1100


   Re: Audit Report Number       IG~LT~OO~08~047


   Dear_,

   We have received and reviewed Audit Report Number 1G-L T-OO-08-047, which reported on Federal
   Long Term Care Insurance Program (FLTCIP) operations at Long Term Care Partners, LLC during
   FY2007 and FY2008 through July 31, 2008. Thank you for providing us with an opportunity to
   respond to the issues identified in the report.

   Audit Finding AI: Claims System Does Not Accurately Tralk Claim Payments
   This procedural issue addresses the fact that our claims system is not programmed to correctly reflect
   the processing of void checks and related adjustments. We,agree with this finding, and have identified
   this issue ona list of items to be included in a future release, scheduled for later this year and
   contingent on Contract renewal. In the meantime, we will continue to account for these by means of
   our current process.


   Audit Finding BI: Delav in Transfer of FLTCIP Premiums
   With respect to Audit Finding B1, Delay in Transfer of FLTCIP Premiums, we agree that during the
   period in question, October I, 2006 through July 3], 2008, the cash management procedures of
  _FLTCIP premiums as performed by John Hancock were as described in the draft audit report.
   However, we don't agree that the procedures in place resulted in lost investment income to the Plan.
   As shown in the "Interest and Balances Jll.xls'' file which we provided. toyou on January 29,2008,
   and again in August, 2008, the FY2007 ,FLTCIP Experience Fund liability to John Hancock was
   reduced by an interest credit of$105,388 to offset the impact of the delay in-transferring the funds to
   the Separate Account. Additionally, for the period October), 2007 through September 30, 2008,
   $12,590 was credited. The total interest credit applied during the periodinquestion df$117,978
   exceeded the amount of lost investment income of $4] ,309 identified in the.aadlrreportby $76,669.
   An equi valent amount ($Il 7,978) of interest income was recorded in .the Expdnente(Fundfinancial
   statements for the same period. Moreover, during the timeframe ill which the cash management
   procedures as described in the report were in place (from August 28, 2003 through September 17,
   2008), a total credit of $1,317,667 has been applied to the liability balance owed to John Hancock.
   This amount of interest income is significantly higher than the combined total of lost investment
 income ($276,869) identified in the FY2005 final audit report ($41,907), the FY2006 audit report

 ($193,653), and the draft FY2007/2008 audit report ($41,309).


  With regard to the commingling ofFLTCIP premiums with fundsfrom other lines of John Hancock's
  Business, which was described in the draft report, a "separate" General Account for the FLTCIP funds
  was established in September 2008, as was noted in the draft report, and the procedures recommended
. in the FY2006 audit report have been implemented. The Bank of America account name is "John
  Hancock Life Insurance Company Federal Long Term Care Clearing Account," and the account
  number is 004622423553. A copy of the October 2008 bank statement is included with this letter.


 Audit Finding B2: Overstatement of 2007 Financial Statements
 With respect to Audit Finding B2, we agree that the FY2007 Experience Fund Financial Statements
 were overstated by $301,416 due to an error in the calculation of MetLife's DAC tax for the period of
 April to September 2007. This error wasidentified as an uncorrected misstatement in the Summary of
 Uncorrected Misstatements, September 30,2007 provided by our external audit finn, RSM
 McGladrey. However, it was not disclosed in the Experience Fund Financial Statements themselves.
 The variance was identified by us prior to the publication of the financial statements, but subsequent to
 the completion of fieldwork. It was decided that given the amount of the error as compared to the total
 Premium Revenue of the Experience Fund for 2007, the impact of the known variance was immaterial
 and an adjustment was not made to the Financial Statements. However, a correcting entry was made by
 LTCP to the Fund's general ledger. A copy of the Summary of Uncorrected Misstatements is included
 with this letter.


 Audit Finding Cl: Unallowable Lobbying Costs
 With respect to this finding, we have reviewed 48 CFR 31.205.22(c), and agree that lobbying costs are
 a non-reimbursable expense, A review of account 61135, Dues and Fees, from Contract inception
 through 4/30/09 indicates that AHIP membership dues of$53,188.14 have been charged to the
 FLTCIP contract during this period. Consequently, an adjustment of$10,637.63 (20% of the total) has
 been made to reclassify this expense and charge it to our corporate cost center. A copy ofthe
 adjustment is attached.




                                          Deleted by the OIG

                                    Not Relevant to the Final Report





                                                     2

We appreciate the opportunity to respond to the draft report, and hope that our responses have

provided the information and clarification needed to resolve these issues.



                          or require further information, please don't hesitate to contact me a t .



Sincerely,

~J·~/cro
Linda S. Roth, CFO

Long Term Care Partners, LLC



Enclosures

cc:

       FSA, Life and Long Term Care Insurances Group

       Insurance Services Programs


                      Chief

       Program Planning and Evaluation Group



       Deputy Chief Financial Officer




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