oversight

Audit of the Federal Employees Dental and Vision Insurance Program

Published by the Office of Personnel Management, Office of Inspector General on 2011-01-25.

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

                                                              U. S. OFFICE OF PERSONNEL MANAGEMENT
                                                                     OFFICE OF THE IN SPECTOR GENERAL
                                                                                       OFFICE OF AUDITS




Final Audit Report
Subject:




 AUDIT OF THE FEDERAL EMPLOYEES DENTAL 

     AND VISION INSURANCE PROGRAM 

     OPERATIONS AS ADMINISTERED BY 

           VISION SERVICE PLAN 

      RANCHO CORDOVA, CALIFORNIA 


                                                  Report No. IJ-OA-OO-I0-031


                                                  Date: J a n ua ry 2 5 , 20 1 1




                                                                      -C A UTlO N-
This audll rc:port lias been di$lribuled 10 Federal   official~ woo IIfC responsible for   the admimslllIlion of the audited program. This audit T<'pot1
may ronmin propriet al)' data which is protected      by Feder~llaw ( 18 U SC 19(5).       Therefore, " hil.:: this audit rcpon is available under tile
Frtel!om o flnformahon Act and made available 10 the public on the DIG I\cbp age. caution needs \0 be u~'TCised before relC35mg me reponlo
the gennlll public as it may conta in proprietary information IIial was redacted from the publicly distri oo lcd ~opy_
                            UNITED STATES OFFICE OF PERSO NN EL MANAGEME NT 

                                               Washington . DC 20415 


  Office of the
Inspector Gene ral




                                               AUDIT REPORT 





                        Audit of the Federal Employees Dental and Vision Insurance Program
                                               OPM-RFP-06-00060-6

                                       Vision Service Plan As Administrator 

                                            Rancho Cordova, California 



          REPORT NO. IJ-OA-OO-IO-031                                        DATE:     1 /25/2 0 1 1 





                                                                    Michae l R. Esser
                                                                    Assistant Inspector General
                                                                      for Audits




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                                  EXECUTIVE SUMMARY 




                Audit ofthc Federal Employees Dental and Vision Insurance Program 

                                      OPM-RFP-06-00060-6 


                               Vision Sen'ice Plan As Administrator 

                                   Rancbo Cordova, Cal ifornia 



REPORT NO. IJ-OA-OO-IO-031                                       DATE:     1/25/2011

This report detail s the results of our audit of the Federal Employees Dental and Vision Insurance
Program (FEDVIP) operations at Vision Service Plan (VSP) located in Rancho Cordova,
California. VS P provides vision insurance benefits under the FEDV IP program. The audit
covered the testing of application controls over claim benefit payments, and other tests of
administrative expenses, premiums, cash management activities, fraud and abuse program
com pl iance, compliance with the Contract's Health Insurance Portability and Accountabi lity Act
(WPAA) requirements, subcontracts, and quality assurance compliance for contrac t years 2007
and 2008. We identi fied six procedural fmdings pertaining to VSP ' s administrative expenses
and one procedural finding regarding VSp·s policies and procedures for handling outstanding
checks. Except for these findings , we detenn ined that the vision benefits were administered in
accordance with Contract OPM-06-00060-6 (the Contract) and the FEDVIP regulations (5 CF R
Part 894). Our audit issues are summarized below.

                                 CLA IM BE NE FIT PA YMENTS

The application contro ls over claim benefit payments were sufficient to ens ure that claims were
paid in accordance \"";th the Contract, as we ll as the appl icable Federal regula tions.




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                              ADMlNISTRATTVE EXPENSES

•   Unsupported Administrative Expenses                                             Procedural

    We identiiied numerous transactions in 2007 and 2008 where VSP charged the FEDVIP for
    unsupp0l1ed administrative expenses. VSP did not provide sufficient documentation to show
    that these expenses were actual, necessary, and reasonable to administer benefits wlder
    FEDVIP, pursuant to Section K.9 (b) (1) of the Contract.

•   Unallowable Travel Expenses                                                     Procedural

    We identified 12 transactions in 2007 and 2008 where VSP charged the FEDVIP for
    unallowable travel expenses.

•   Costs Associated with Lobbving Activities                                       Procedural

    We identified four transactions in 2007 where VSP charged the FEDVIP for potential 

    lobbying expenses. These expenses were not necessary or reasonable expenses under 

    Section K.9 (b) (1) of the Contract and are listed as unallowable expenses under FAR 

    31.205-22. 


•   Unnecessary Expenses                                                            Procedural

    We identified 51 transactions in 2008 where VSP charged the FEDVIP for meals at its home
    duty station. The e expenses were not necessary or reasonable expenses under Section K.9
    (b) ( I) of the Contract.

•   Charges for Alcoholic Beverages                                                 Procedural

    We identified one transaction in 2008 where VSP charged the FEDVlP for alcoholic
    beverages. This expense was not a necessary or reasonable expense under Section K.9 (b)
    ( I) of the Contract and is listed as an unallowable expense under FAR 31.205-51.

•   Charges for Gift Cards                                                          Procedural

    We identified two transactions in 2008 where VSP charged the FEDVlP for gift cards. These
    expenses were not necessary or reasonable expenses under Section K.9 (b) (I) of the
    Contract and are listed as unallowable expenses under FAR 31.205-13 (b).

                                           PREM1UMS

The premium costs charged by VSP to the FEDVIP were in compliance with the terms of tbe
Contract, as well as the applicable Federal regulations.




                                               11
                              CASH MANAGEMENT ACTIVITIES 


•   Outstanding Checks Policies and Procedures                                        Procedural

    VSP ' s policy on outstanding checks inappropriately allows for an escheatment of unclaimed
    funds to the state instead of returning these funds to the FEDV1P, as required by the Contract.

                       FRAUD AND ABUSE PROGRAM COMPLIANCE

VSP ' s fraud and abuse policies and procedures were in compliance with the terms of the
Contract, as well as the applicable Federal regulations.

          COMPLIANCE WITH THE CONTRACT'S HIPAA REOUIREMENTS

VSP ' s HlPAA policies and procedures were in compliance with the terms of the Contract.

                                       SUBCONTRACTS

VSP ' s policies and procedures for administering subcontracts were in compliance with the terms
of the Contract, as well as the applicable Federal regulations.

                          OUALITY ASSURANCE COMPLIANCE

VSP' s Quality Assurance program policies and procedures were in compliance with the terms of
the Contract, as well as the applicable Federal regulations.




                                                111
                                                        CONTENTS 

                                                                                                                                       PAGE

        EXECUTIVE SUMMARy .. ...... ..... ... .. ... ............................ ............ ... ... .. .. .. ............. .. ..... i 


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


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


IlL     AUDIT FINDINGS AND RECOMMENDATIONS ........................... ........................... 8 


        A.      CLAIM BENEFIT PA YMENTS ................................. ............................. ............ 8 


        B.      ADMIN ISTRATIVE EX PENSES.............. ..... .. .... ... ...................... ................... .... 8 


                1. Unsupported Administrative Expenses .. ........ .................................................. 8 

                2. Unallowable Travel Expenses .. .. .. .. ..... ..... .. ........................................ ... ........... 8 

                3. Costs Associated with Lobbying Activi ti es ..................... ... ....... ...................... 8 

                4. Unnecessary Expenses .. ............. .. ........ .. ........... ..... .... .. ....... .. ....................... .... 9 

                5. Charges for Alcoholic Beverages ........ .. ... .. .. .... ...... .... ............ ... .. .. .............. .. .. 9 

                6. Charges for Gift Cards ....................... ................. ..... .. .... ............................ .... ..9 


        c.      PREMruMS ...... ........ .. .... ..... ........... ............. ........................... .. ............................ 10 


        D.      CASH MANAGEMENT ACnYITLES .. .... ...... ................................. .... .......... ... 10 


                1. Outstanding Checks Policies and Procedures ............... ... ............. .. .............. .. 10 


        E.      FRAUD AND ABUSE PROGRAM COMPLLANCE ...................................... ... 11 


        F.      COMPLIANCE WITH THE CONTRACT'S HIP AA REOUIREMENTS ......... 11 


        G.       SUBCONTRACTS ....... .. .............................. .. ........................................ .. ............ 11 


        H.      QUALITY ASSURANCE COMPLlANCE ......................... ......... .. ..................... 1 I 


IV. 	   MAJOR CONTRIBUTORS TO THlS REPORT ..... .. .......... .............. .... ............. .......... 12 


        SCHEDULE A - Schedule of Contract Charges 


        APPENDIX - VSP's response, dated October 21, 20 I 0, to the draft audit report. 

                     I. INTRODUCTION AND BACKGROUND 


INTRODUCTION 


This report details the results of our audit of the Federal Employees Dental and Vision lnsurance
Program (FEDVIP) operations as administered by Vision Service Plan (VS P) in Rancho
Cordova, California. The audit was performed by the Office of Personnel Management's (OPM)
Office of the Inspector General (OIG), as established by the Inspector General Act of 1978. as
amended.

BACKGROUND

FEDERAL EMPLOYEES DENTAL and VISION PROGRAM

TIle Federal Employee Dental and Vision Bene fits Enhancement Act of2004, Public Law 108­
496, 118 Statute 400 I, was signed into law on December 23 , 2004. This law established a dental
benefits and vision benefits program for Federal employees, annuitants, and their eligible family
members. The following 10 FEDVlP carriers all signed contracts with OPM to provide dental
and vision insurance services for a term of 7 years:

   Dental
   •	   Aellla Life Insurance Company;
   •	   Government Employees Hospital Association, Inc.;
   •	   Metropolitan Life Insurance Company;
   •	   United Concordia Companies, Inc. ;
   •	   Group Health, lnc.;
   •	   CompBenefits; and
   •	   Triple-S Salud, Inc.

   Vision
   • 	 BlueCross BlueShield Association;
   • 	 United HealthCare (formerly Spectera. Inc.); and
   • 	 Vision Service Plan

The duties and responsibilities of insurance carriers participating in the FEDVIP program include
the following:

   I. 	 To provide payments or benefits to an eligible individual ifsuch individual is entitled
        thereto under the terms of the contract;
   2. 	 With respect to disputes regarding clainls for payments or benefits LInder the terms of the
        contract ­
            a. 	 to establish internal procedures designed to expeditiously resolve such disputes;
            b. 	 to establish, for disputes not resolved tlu'ough procedures mentioned above,
                 procedures for one or more alternative means of dispute resolution involving
                 independent third-party review under appropriate ci rcumstances by entities
                 mutually acceptable to OPM and the carrier;
   3. 	 To make available to each individual eligible to enroll in a vision benefits plan,
        infonnation on services and benefits to enable the individual to make an informed
        decision about electing coverage;
   4. 	 To maintain accounting records that contain such information and reports as OPM may
        requue;
   5. 	 To furnish such reasonable reports as OPM determines to be necessary to enable it to
        carry out its functions; and
   6. 	 To permit OPM and representatives of the Governrnent Accountability Office to examine
        such records of the carrier as may be necessary to carry out the purposes of the Contract.

VSP

VSP administers vision benefits under the FEDVIP. Contract number OPM-06-00060-6
between OPM and VSP was awarded on August 29, 2006. Incorporated by reference into thi s
contract are Solicitation OPM-RFP-06-00060 and Amendments 00 1, 002, and 003.

VSP provides vision insurance benefits to Federal employees, annuitants, and their eligible
family members. The Contract between OPM and VSP is for a seven year period, starting
December 31 , 2006, and ending December 31, 2013 , with tbe option to renew the Contract.

This was our first audit ofVSP's program operations as it relates to the FEDVIP program.




                                                2

               II. OBJECTIVES, SCOPE, AND METHODOLOGY 


OBJECTIVES 


The objectives of our audit ofVSP, relating to the FED VIP, were to detennine compliance with
Contract OPM-06-00060-6 (the Contract) and FEDVlP regulations (5 CFR Part 894). Our
specific audit objectives for this audit were as follows :

   Claim Benefit Payments
      • 	 To gain an understanding ofVSP ' s claims processing system.
      • 	 To determine whether VSP has appropriate controls/edits in place to prevent the
          payment of unallowable claims.
      • 	 To determine whether VSP has a program in place to protect enrollees and its claims
          system from instances of fraud and abuse.
      • 	 To determine whether VSP has proper application controls in place over its claim
          processing and check-writing systems to help ensure that FEDVIP-related
          transactions are valid, properly authorized, and completely and accurately processed.

   Administrative Expenses
     • 	 To determine if administrative expenses incurred for the FEDVIP program by VSP
         and reported to OPM as part of the premium determination were actual, necessary,
         reasonable, and allocable to the progranl.

   Premiums
      • 	 To determine whether the FEDVlP premiwn cost and its relative components are
          derived from amounts that are allowable, allocable, and reasonable to the program.
      • 	 To reconcile the premiums transferred from Benefeds to the premiums collected by
          VSP.
      • 	 To detemune ifFEDVlP premiums were appropriately collected and used to pay for
          FEDVIP claims.

   Cash Management Activities
      • 	 To detennine if the FED VIP funds are held and invested in all interest-bearing bank
          account separate from VSP 's other lines of business; if these funds are held until they
          are used to pay claims: and if the amolmt claimed for investment income is accurate.
      • 	 To detennine ifVSP/FEDVIP has adequate outstanding check procedures in place,
          and to determine if it currently has any checks that have been outstanding for more
          than two years.

   Fraud and Abuse Program Compliance
      • 	 To detemline how VSP prevents instances of and protects its FEDVIP vision
          subscribers from fraud and abuse.
      • 	 To detennine if the fraud and abuse policies and procedures implemented and
          followed by VSP were sufficient to meet the Contract requirements.




                                                3

   Compliance with the Contntct's Health Insurance Purtability and Accountabilit)' Act
   (HIPAA) Requirements
      • 	 To determine ifVSP's H1PAA policies and procedures are sufficient to meet tbe
          Contract requirements.

   Subcontracts
      • 	 To determi ne ifVSP adheres to the subcontracti ng provisions stipulated within the
          Contract.
      • 	 To deternline if there are any subcontracts where FEDV IP costs exceeded the Federa l
          regulation threshold ($550,000) and did not receive OPM approval.
      • 	 To determine ifOPM's contracting office approved any significant changes to the
          original subcontract

   Quality Assurance
       • 	 To determine if VSP has a quality assurance program in place that meets the
           requirements of the Contract

SCOPE

We conducted this performance audit in accordance with gene rally accepted government
auditing standards. Those standards require that we plan and perform the audi t to obtain
suffic ient, appropriate evidence to provide a reasonable basis [or our finding s and conclusions
based on the audit objectives. We believe that the evidence obtained provides a reasonable basis
for our findings and conclusions based on the audit objectives.

The audit covered the testing of application controls over claim benefi t payments, and other tests
of administrative expenses. prem iums. cash management activities , fraud and abuse program
compliance. compliance with the Contract's HillAA requirements. subcontracts, and quality
assurance compliance for contract years 2007 and 2008. We performed our field\.vork from
March 8 to March 25, 201 0, at VSP's offices in Rancho Cordova, Californ ia. Additi onal audit
work was completed in our Washington, D. C. and C ranberry, Pennsylvania officcs after the on­
site visit.

We reviewed the VSP/ FEDVIP premium reports for the years under review and found that VSP
co llected premium payments or approximatel y $13.8 mi llion and $26.5 mi llion in 2007 and 2008
respectivel y. Vision claim payments during the same period a.mowlted to approx imate ly    l1li
million and ~i llion.

In planning and conduct ing our audit, we obtained an understanding ofVSPIFEDVIP ' 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 sign ificant matters in volving VSPIFEDV rp·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
VSP/FEDVIP's system of internal controls tak.en as a whole.




                                                 4

In conducting our audit, we relied to varying degrees on computer-generated data provided by
VSPlFEDV IP . Due to time constraints. we did no! verify the reliab ility of the data generated by
the various information systems involved. However, while utilizing the computer-generated data
during audit testing, nothing came to our attention to cause us to doubt its reliability. We believe
that the data was suffic ient to achjeve the audit objectives.

We also conducted tests to determine whether VSP/FEDVIP had complied with the Contract, the
appl icabl e procurement regulations (i.e. , Federa l Acqui sition Regulations), and the laws and
regulations governing the Program. The results of our tests indicate that. with respect to the
items tested, VSPfFEDVIP complied with all provisions of the Contract and the federal
procurement regulatio ns, except ror the seven procedural findings explained in detai l in the
"Audit Findings and Recom.mcndations" section of this report.

METHODOLOGY

To achieve our objectives related to claim benefit payments. we:
   • 	 Interviewed personnel to obtain an wlderstanding of VS P's cl aims processing system.
   • 	 Perfonned application testing and reviewed the results to detennine ir claims were
       processed properl y. Specifically. we created 21 test claims which were submitted into
       the VSP test claim processing system. The test claims were manually entered by VSP
       clai ms processors and each edit was reviewed by our auditors.

To test and detennine ir administrative expenses incurred by VSP for the FEDVIP program and
reported to OPM as part of the premium determination were actual. necessary. reasonable, and
allocable to the program , wejudgmeOla!Jy selected a sample of administrati ve expenses under
the cost centers titled: Marketing, Enterprise Info Services, Client Services, Customer Services.
Claim Services, CPS. and Sales. The sample was based on one or more of the following:
    • 	 hjghest monthly expense of the year,
    • 	 nomenclature,
    • 	 unusual charges, and
    • consistently high charges for the year.



       -- ..
Specifically, the sample included:
    • 	 266 transactions (from contract year 2007) totaling $653.053 out ofa universe o r

   • 	 140 transact ions (rrom contract year 2008) totaling $690,847 out of a universe o r

The universal transaction totals ror both samples was too voluminous to record.

To detennine if FEDVlP premiums were appropriately collected and paid, we:
   • 	 Reviewed the " Request for Proposal" agreements bet\veen OPM and VSPfFE DV[P to
       determine the components of the premiums.
   • 	 Obtained an overview of the premium process and how the premium rates are calculated.
   • 	 Compared the FEDVIP premiums reported on the VSP bank: statements to VSP's report
       of actual monthly premiums received for 2007 and 2008.
   • 	 Judgmentally selected the first four deposits posted to the VSP system in January 2008.
       These were chosen because we felt they were dated far back enough that we would be



                                                 5

       able to trace all the premiums earned to these amowJts [through earlier discussions with
       VSP. we realized due to retroactivity that these amounts could be for premiums earned in
       2007 and/or 2008]. This sample amounted to $1,246,863 out ofa lmiverse of
       $40,272,984.

To achieve our objectives related to cash management activities, we:
   • 	 Reviewed the VSPIFEDVlP bank statements and procedures related to accounting for
       FED VIP premiums to detemli ne whether the FEDVTP funds were mainta ined separately
       from VSP 's other lines of business.
   • 	 Reviewed the VSP high and standard option utilization reports to determine ifinteresl
       was earned and used to pay claims.
   • 	 Reviewed the VSP/FEDVIP outstanding checks policies and procedures and outstanding
       checks reports to determine if the policies were reasonable and if there were any checks
       outstanding for more than two years.
   • 	 Obtained an overview ofVSP's investment policy and process to determine if the policy
       was reasonable.

To achieve our fraud and abuse objectives, we interviewed VSP personnel and reviewed VSP's
intemal fraud policies and procedures and other information to gain an understanding of their
fraud and abuse program and to determine compliance with the Contract requirements.

To determine ifVSP's HIPAA policies and procedures were sufficient to meet the Contract
requirements, we reviewed VSP ' s responses to our HIP AA questionnaire and it's intemal
HIPAA policies and procedures.

To achieve our objectives related to subcontracts, we:
   • 	 Obtained a listing of subcontracts requested for approval from OPM and VSP.
   • 	 Determined whether any subcontract's costs exceeding $550.000 received appropriate
       approval.
   • 	 Reviewed the costs charged to the FED VIP program, for all qualifying subcontracts, to
       determine if they were allowable, allocable and reasonable.

To achieve our objective related to quality assurance, we obtained and reviewed the policies and
procedures fo r VSP's Quality Assurance Program.

Because the samples we selected and reviewed in perform ing the audit were not statistically
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.

We used the FEDVIP contract, the Federal Acquisition Regulations, and the laws and regulations
governing VSPIFEDVIP to determine whether VSp·s application controls over claim benefit
payments, and procedures covering administrative expenses, premiums, cash management
activities. fraud and abuse progranl compliance, compliance with the Contract's HJPAA
requirements. subcontracts, and quality assurance compliance for contract years 2007 and 2008
were in compliance with the terms of the Contract and applicable regulations.




                                                   6

The initial results of our audit were discussed with VSP during an exit conference at the end of
our on-site work. In addition, a draft report dated September 22. 2010 was provided to VSP for
review and comment. VSP's comments to the draft repOli were considered in preparing the final
report and are included as an Appendix to tlUs report.




                                               7

               In. AUDIT FIN DINGS AND RECOMMENDATIONS

A. CLAIM BENEFIT PAYMENTS 


The a pplication controls over claim benefit payments were sufficient to ensure that claims were
paid in accordance with the Contract, as well as the applicable Federal regulations.

B. ADMINISTRATIVE EXPENSES 	                                                            Procedural

The Contract between VSP and aPM limits the total amoun t of premium dollars th<lt can be
allocated to pay program administrati ve expenses t~ percent of gross prem iums received .
However, in contract years 2007 and 2008, VS P actually incurred administr ative expenses
related to the FEDVIP iotaJing _ percent and . percent of gross premiums received,
                             because of the Contract tenns, VSP paid ~percent .
                      of the 2007 incurred adm inistrative expenses and ~rcent •
                     of the 2008 incurred admini strati ve expenses out of corporate fun ds.

As part of our audit, we sampled and tested 266 and 140 adm ini strative expense transact ions in
2007 and 2008. respectively. to determine whether the expenses charged to lhe FEDVIP were
actual, necessary, reasonable, and allocable program costs, in accordance with the Contract and
program regulations. The results of these revi ews showed VSP did include unsupportab le, as
well as unallowable. expenses in its administrative costs charged to the FEDVIP.

We identified the following unsupported and unallowable expenses during our review o f
adm ini strative costs :

    I. 	 Unsupported Administrative Expenses                                           Procedural
         We identi fied numerous transactions in 2007 and 2008, totaling $534.292, where VS P
         could not provide sufficicnt documentati on to show that the related expenses were actual ,
         necessary, allocable, and reasonable to adminjster bencfits under the FEDVIP. pursuant
        to Section K.9 (b) ( I) of the Contract.

   2. 	 Unallowable Travel Expenses                                                   Procedural
        We identified 12 transactions in 2007 and 2008. totaling $6,60 I ,where VSP charged the
        FEDVlP for unallowable travel ex penses. including hotel fees in excess of the Federal
        per diem rate and the applicable tax on the unallowable lodging costs.

   3. 	 Cos ts Associated with Lobb)'ing Activities                                   Procedural
        We identified four transactions in 2007 where VSP chargcd the FEDVIP for lobbying
        expenses. T hese expenses, totaling $18,463 , were not necessary or reasonable expenses
        under Section K.9 (b) (1) of the Contract and are listed as unallowable expenses under
        FAR 31.205-22.




                                                 8

   4. 	 Unn ecessary Expenses                                                            Procedural
       We ident ified 51 transactions in 2008 where VS P charged the FED VIP for meals at its
       home duty stati on. These expenses, totaling $1 ,677, were not necessary or reasonable
       expenses under Section K.9 (b) (1) of the Contract.

   5. 	 C ha rges for Alcoholic Bcvcrages                                               P roced u ral
        We identified one transaction in 2008 where VSP charged the FEDVIP for alcoholic
        beverages. This expense, totaling S157, was not a necessary or reasonable expense under
        Section K.9 (b) (1 ) of the Contract and is listed as an unallowable expense under FAR
        31.205-51.

   6. 	 Charges for Gift Cards                                                       P ro ccdural
        We identified two transactions in 2008 where VSP charged the FEDVIP for gift cards.
        These expenses, totaling $150. were not necessary or reasonable expenses under Section
        K.9 (b) (1) of the Contract and are listed as unallowable expenses under FAR 31.205-13
        (b).

Section K.9 (b) (1) of the Contract (Accounting and Allowable Costs) states, "The aJ10wabJe
costs chargeable to the contract for a fiscal year will be the aClual, necessary, reasonable. and
allocable amounts incurred with proper justifi cation and accounting support , determined in
accordance with Subpan 31.2 of the Federal Acquisition Regulation . ... "

Additionally, Contract section 1.20, regarding Contracto r Records Retention, states that the
Carrier will retain and make available aU records that support the annual statement of operations
for a period of six years after the end of the year to which the records relate .

FurthemlOre, FAR 31.205A6 limits the amolLnt of travel costs that can be charged by contractor
personnel on official company business. It stales that these costs are allowab le only to the ex tent
that they do not exceed, on a daily basis, tllC maximum per diem rates in effect at the time of
travel as set forth in the Federal T ravel Regulatiolls prescribed by the General Services
Administration .

VSP 's identification of these unsupported and unallowable administrative expenses as
chargeable costs against the FEDVIP results in an inappropriate use o f subscriber premium
dollars that could have been used to fund more needed program services.

vsp Co mm ents :

As stated above, VSP incurred more in administrative expense in each year than the .      percent
it was allowed to charge against the Program. Consequently, it contends that even i f the
identified unsupported or unallowable expenses were excluded from the chargeable costs to the
Program, it would still have sufficient allowable costs exceeding the . percent cap that could
replace the unallowable expenses. Therefore. VSP argues that no amounts are due back to the
FEDVlP for these unallowable costs.




                                                  9

OIG Comments:

We agree that no amounts are due to the FEDVIP for these unsupported and unallowable
expenses for the reasons stated above. However, we strongly encourage VSP to implement the
needed controls over program admi nistration costs to ensure that unallowable program costs are
properly identified and excluded as potential allowable FED VIP costs for all open and future
year's contracts.

Recommendation 1

We recommend that VSP develop better internal controls which require the review of all
administrati ve expenses charged to a cost center under its FEDvIP aecOlUlt. These charges
should be properly documented and the records supporting these expenses must be maintained
for a period of six years after the end of the year to which the records rel ate.

Recommendation 2

We recommend that the program office review the estimated administrative expenses at the time
of each year's rate proposal to ensure that unallowable costs are not included as part of the
allowable costs charged to the FED VIP.

C.PREMIUMS

The premium costs charged by vSP to the FEDVIP were in compliance with the terms of the
Contract, as well as the applicable Federal regulations.

D. CASH MANAGEMENT ACTIVITIES

   1. Outstanding Checks Policies and Procedures                                     Procedural

   Our review of vSP's cash management activities identified a vSP policy that was not in
   compliance with the terms of the Contract and the applicable federal regulations.
   Specifically, vSP 's policy on outstanding checks inappropriately allows for an escheatment
   of unclaimed funds to the state instead ofretuming these funds to the FEDvIP.

   Following the guidance OPM issued to the carriers on November 3. 2006. all payment checks
   outstanding after two years of issuance shall be voided. The amounts ofthese checks shall
   be credited to a designated account no later than the 25th month after issuance. In addition.
   the Contract (Section C.l .C Enabling Legislation) states that OPM has the authority to
   preempt individual State dental and vision benefit and procedural mandates, and contractors
   must be aware of and be prepared to comply with its requirements and OPM's implementing
   regulations and administrative guidance.

   VSP stated that they do not track FEDvlP check payments separately and all outstanding
   checks fall under the applicable states' unclaimed property regulations. If a check remains
   outstanding for one year, then the amount will be transferred to an unclaimed property




                                               10 

   account and all information regarding the payment, including the client information, will be
   recorded in this file. VSP' s policy follows each state' s requirement for outstanding check
   monies to be esc heated to the state.

   We recommend that VSP modiry its policy on how to handle outstanding checks so that it
   credi ts the funds back to the FEDVIP instead of transferring the funds to each state's
   unclaimed property account. For contract years 2007 and 2008. oW' review showed that no
   FED VIP monies had been escheated to the states.

   VSP Comments :

   VSP agrees with this fmding.

   Recommendation 3

   We recommend that VSP modiry its policy on outstanding checks so that it agrees "vith the
   guidance provided by OPM's ProgIanl Office and provide a copy of the revised policy to
   OPM ' s Program Office.

E. FRAUD AND ABUSE PROGRAM COMPLLANCE

VSP's fraud and abuse policies and procedures were in compl iance with the temlS of the
Contract, as well as the applicable Federal regulations .

.11'. COMPLIANCE WITH THE CONTRACT'S mPAA REQUIREMENTS

VSP's H1PAA policies and procedW'es were in compliance with the telms of the Contract.

G. SUBCONTRACTS

VSP ' s policies and procedures for administering subcontracts were in compliance with the terms
of the Contract, as well as the applicable Federal regulations.

H. QUALITY ASSURANCE COMPLIANCE

VSP ' s Quality Assurance program policies and procedures were in compliance with the terms of
the Contract, as well as the applicable Federal regulations.




                                               II 

              IV. MAJOR CONTRffiUTORS TO THIS REPORT

Special Audits Group

              Auditor-In-Charge

               Auditor

                  Auditor



              . Senior Team Leader




                                     12 

Vision Sen-icc Plan, us Administrator of the Fcdera l Employees Dental ano Vision Insurance Program 

                                    Rancho Cordova, California 


                                       Schcdu le of Contract Charges 

                                         Contract Years 2007-2008 




                                                   2007                  2008               Total

          Revenue
            Premi ums Rceeived:~(C~:als~.hl;;)cl~h:e7~9~7'ti7TI~
                                                               2
                          Tota l H                                                           540.272,984

          F:xpcnscs
            Claim l3enefi ts Paid 

                       Total E' xp<,ns<:s L_ 

                                                                                            -
                                                                                      APPENDIX 





October21,2010



Office of Personnel Management
Office of the         General
Attentio[]:
I900 E M"">l,   

Washington, DC 20415-1 IDO 



RE: Report No. lJ-OA-OO- IO-031


Dear Ms . •     "

Thank you for providing VSP Vision Care with the draft audit report, lJ-OA-OO-1 0-031 dated September
22,2010, detailing the Office ofPcrsonnei Management (OPM) findings. We highly vaJue the FEDVlP
contract and believe the audit results continue to demonstrate our commitment to service excellence. We
were very pleased to see that our compliance, policies and controls all received favorable ralings. This is
very consistent with comments from the FEDVIP Audit team during their visit, as well as other very large
clients who perform s uch reviews of our backroom operations.

We appreciate the opportunity to address the administrative expenses and cash management activities
exceptions noted in the report. We are committed to full transparency and believe the administrat ive
expense concern noted in the report may be a misunderstanding of how the FEDVIP contract is rated or a
mistake in understanding ollr cost center structure. It is important to note that we have 110t charged the
expenses identified in the report to the government, nor at anytime did we co·mingle funds to pay claims.

Below we have outlined information [hat wc hope will bring clarity to this concern. We would welcome
the opportunity to provide additional background or insight, if needed. If we need to modi fy aspects of
our accounting structure for the FEDvlP contract to better align with the aPM expectations. we would bc
happy to discuss your recommendations.

The FEDVJP contrnct is a fully insured contract and all payments to VSP arc produced by the set per
member/per month fcc including a fixed _ administrative fee. The FED VIP rates are based solely on
utilization and a tlat . administrative fee und not the expenses contained in the 2007 and 2008 budget to
actual reports.




                     Deleted by OIG - Not Relevant to Final Report 

                                                                                    AI'PENDIX 


Office of Personnel Management
Office


Page 2


Below is a summary regarding our expenses rdalcd to adm inistration of FEDV IP in 2007 and 2008.
Please note: Our acluui allowable expenses far exceed the . administrative expense ch arged to FEDVIP.


Incurred
Non·chargcable                                                           I
Allowed

Projected . Administrative Expense·
Allowed
Allowed Expense as % of Gross Premium

·Prior /0 underwriting alld enroJling FEDV/J> members, VSP notified OPM thai Ollr underwritten rilles
included .   ofpremiums projected as administrative expense. Premiums paid by FED VIP members
ineluded only lhe _ adminiSfrative €.\pense projected by VSP.


                                                 _10
Prt:mlUms charged to FEDVIP members included . rorprojected admini strati ve expense in both 2007
and 2008. In 2007, VSP' s allowed expenses were             of prem iums, and in 2008 they were "
premiUlns. In both 2007 and 2008, FEDVTP members actually bencfitted from those di fferences. Their
                                                                                                   ;" of

premi ums reflected the lower . projected admini strative expenses. Even ifnon-chargeable ex penses arc
subtracted fi'om incurred expenses, allowed expenses sti ll exceeded the . projected administrative
expenses that were a . component of gross premIUms charged to FEDVll' members.
                                                                                      APPENDIX 


Otlicc of Personnel Management
Office of the Insp.'oto, G;wemi
Attention:
October 21,
Page 3




B. Cash Management


1. OulStanding Check Pmccdu."cs


VSP agrees that payments for the btmcfit of FED VIP enrollees will not be escheated to the statcs. There
was no unclaimed property cscheated related to the FEDVIP contract, so there is no amount that VSP IS
required to repay.




                    Deleted by OIG - Not Relevant to Final Report
    Officc orPcrsonncl Management
    Oflicc


    Page 4



    Thank you again ror providing VSP, Vision Care the opportunity 10 address the results of the March 2010
    audit. We hope the infonnation provided in this letter, as well as the supponing expense information
    provided under separate cover, fully addresses your concerns. We would appreciate the opportunity to
    provide additional information or discussion should there be any concern regarding administrative
    expenses prior to the tinal report. If there you have any questions, please let me know.




    VSP, Vision Care




                         Deleted by OIG - Not Relevant to Final Report
,