Office of Personnel Management, Office of Inspector General | U.S. Office of Personnel Management | Audit Of The Federal Employees Dental And Vision Insurance Program As Adminstered By The Office Of Personnel Management

Audit Of The Federal Employees Dental And Vision Insurance Program As Adminstered By The Office Of Personnel Management

Published by the Office of Personnel Management, Office of Inspector General on 2012-02-01.

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 THE FEDERAL EMPLOYEES

DENTAL AND VISION INSURANCE PROGRAM

AS ADMINISTERED BY

THE OFFICE OF PERSONNEL MANAGEMENT

Report No. IJ-OL-OO-\ 1-033

Date: February 1! 2 01 2

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UNITED STATES OFFICE OF PERSONNEL MANAGEMENT
Wa hin g to n, DC 20415

Offi ce of the
Inspec tor General

AUDIT REPORT

AUDIT OF THE FEDERAL EMPLOYEES

DENTAL AND VISION INSURANCE PROGRAM

AS ADMINISTERED BY

THE OFFICE OF PERSONNEL MANAGEMENT

Report No. IJ-OL-OO-ll-033 Dah:February 1. 20]2

Michael R. Esser
Assistant Inspector General
for Audits

www.opm.gov www·. usajobs .gov
UNTrED STATES OFFICE OF PERSONNE L MANAGEMEN T

Wasnin.gton. DC 204 15

Office. or th~
Gener')l
In~I1'lCI Or

EXECUTIVE SUMMARY

AUDIT OF THE FEDERAL EMPLOYEES

DENTAL AND VISION INSURANCE PROGRAM

AS ADMINISTERED BY

THE OFFICE OF PERSONNEL MANAGEMENT

Report No. LJ-OL-OO-II-033 Date: February I, 2012

The enclosed audit report details the results of our audit of the Federal Employees Dental and
Vision insurance Program (FEDVrp) as administered by the Office of Personnel Management
(OPM). OPM adm ini sters and provides oversight for the FED VIP, which provides both dental
and vision benefits to Federal employees. The audit covered a review ofOPM's administration
and oversight orthe FEDVIP, including operational acti vities, cash management, and fraud and
abuse policies and procedures fo r years 2006 through 2009. Whil e the FED VIP is operated on a
contract year basis, OPM charges expenses against the FEDVIP on a fi scal year basis.
Consequently, contract year and fiscal year are used throughollt this report as appropriate.

This report identified four procedural findings and two areas for program improvement. The
results of our audit have been summarized below.

OPM ADMTNISTRATlVE OPERATIONS

• Annual Accounting Statement Requirement Not Enforced Procedural

OPM did not enforce the requirement in the Contract for the FEDVIP Carriers to provide
annual accounting statements during contract years 2006 through 2009.

www.o pm .go" - - - - - - - - - - - - - --'-- - -
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CASH MANAGEMENT

• FEDVIP Expenses Procedural

We identified 43 expense transactions, totaling $3,282,998, in fiscal years 2006 through
2009, which we could not determine were actual, allocable, or reasonable costs for
administration of the FEDVIP. However, since it would be very difficult for OPM to
determine, due to a lack of internal controls over the expensing of FEDVIP funds, from
whom the overcharges should be recouped if the amounts proved to be unallowable FEDVIP
costs, we are not recommending that these funds be returned to the FEDVIP. Instead, we are
recommending the implementation of stronger controls to ensure that future charges against
FEDVIP funds are for actual FEDVIP costs.

• 2007 Salary Expenses Procedural

OPM did not provide adequate support for salary expenses totaling $568,699 that were
charged to the FEDVIP in 2007.

• No Reconciliation of Budgeted to Actual Expenses Procedural

OPM did not perform a yearly reconciliation of the budgeted to actual expenses for fiscal
years 2006 through 2009 as required by the Contract.

FRAUD AND ABUSE

Our review of OPM’s administration of the FEDVIP did not identify any specific problems
related to fraud and abuse in its administration of the funds received or the amounts expensed.
However, as addressed in the Lack of Internal Controls issue below, we did determine that OPM
lacked specific written policies and procedures for the detection and prevention of fraud and
abuse related to its handling of FEDVIP funds.

PROGRAM IMPROVEMENT AREAS

The areas included in this section of the report, while not violations of the FEDVIP contract,
were, in our opinion, reportable program weaknesses that are in need of corrective actions.
Consequently, we are including them in this final report in order to assist OPM in improving its
administration of the FEDVIP.

• Inadequate Support for OPM’s Administrative Fee Procedural

OPM was unable to provide documentation supporting the method of determining the
percentage of premiums used to fund its budget to administer the FEDVIP. Additionally, it
was unable to support the reasons for changes to this percentage from year to year.

• Lack of Internal Controls Procedural

OPM does not have adequate internal controls for the approval and review of its
administrative expenses. Additionally, it also does not have policies and procedures in place
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to prevent fraud and abuse in relation to the funds it receives for its administration of the
FEDVIP.

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CONTENTS
PAGE

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

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

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

III. AUDIT RESULTS AND RECOMMENDATIONS ......................................................6

A. OPM ADMINISTRATIVE OPERATIONS ..........................................................6

1. Annual Accounting Statement Requirement Not Enforced .............................6

B. CASH MANAGEMENT .......................................................................................7

1. FEDVIP Expenses ...........................................................................................7
2. 2007 Salary Expenses .....................................................................................10
3. No Reconciliation of Budgeted to Actual Expenses .......................................11

C. FRAUD AND ABUSE .........................................................................................12

D. PROGRAM IMPROVEMENT AREAS ..............................................................12

1. Inadequate Support for OPM’s Administrative Fee .......................................12
2. Lack of Internal Controls ................................................................................15

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

APPENDIX A (OPM’s response to the draft report, dated October 26, 2011)
APPENDIX B (OPM’s updated response to the draft report, dated January 13, 2012)
I. INTRODUCTION AND BACKGROUND
INTRODUCTION

This report details the results of our audit of the Federal Employees Dental and Vision Insurance
Program (FEDVIP) as administered by the Office of Personnel Management (OPM). The audit
was performed by the OPM’s Office of the Inspector General (OIG), as established by the
Inspector General Act of 1978, as amended.

BACKGROUND

The Federal Employees Dental and Vision Benefits Enhancement Act of 2004, Public Law 108-
496, 118 Statute 4001, 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 FEDVIP carriers all signed contracts with OPM to provide dental or
vision insurance services for a term of seven years:

Dental
• Aetna Life Insurance Company;
• Government Employees Hospital Association, Inc.;
• Metropolitan Life Insurance Company;
• United Concordia Companies, Inc.;
• Group Health, Inc.;
• 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:

1. To provide payments or benefits to an eligible individual if such individual is entitled
thereto under the terms of the contract;
2. With respect to disputes regarding claims for payments or benefits under the terms of the
contract –
a. to establish internal procedures designed to expeditiously resolve such disputes;
b. to establish, for disputes not resolved through procedures mentioned above,
procedures for one or more alternative means of dispute resolution involving
independent third-party review under appropriate circumstances by entities
mutually acceptable to OPM and the carrier;
3. To make available to each individual eligible to enroll in a dental benefits plan,
information on services and benefits to enable the individual to make an informed
decision about electing coverage;

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4. To maintain accounting records that contain such information and reports as OPM may
require;
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 Government Accountability Office to examine
such records of the carrier as may be necessary to carry out the purposes of the contract.

The duties and responsibilities of OPM in its administration of the FEDVIP include, but are not
limited to, the following:

1. To maintain the OPM FEDVIP website;
2. To act as a liaison with Federal agencies;
3. To facilitate the promotion of the FEDVIP through Federal agencies;
4. To be responsive on a timely basis to the Carrier’s requests for information and
assistance; and
5. To perform, as provided by The Federal Employees Dental and Vision Benefits
Enhancement Act, functions typically associated with insurance commissions such as the
review and approval of rates, forms, and education materials.

OPM’s responsibilities are outlined in Contract OPM-RFP-06-00060, with its associated
amendments, (the Contract) and its oversight duties are carried out in its Washington, D.C.
offices.

This was our first audit of OPM’s administration of the FEDVIP.

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II. OBJECTIVES, SCOPE, AND METHODOLOGY
OBJECTIVES

The objectives of our audit were to determine if OPM’s administration of the FEDVIP was in
compliance with the Contract, and the FEDVIP regulations (5 CFR Part 894). Our specific audit
objectives for this audit were as follows:

OPM Administrative Operations
• To obtain an understanding of OPM’s administrative organization as it relates to the
FEDVIP.
• To obtain an understanding of OPM’s responsibilities for administering the FEDVIP.
• To obtain an understanding of the various OPM departments and offices which are
involved in the administration of the FEDVIP.

Cash Management
• To obtain an understanding of the OPM administrative fee, including: how the fee is
determined; who calculates the fee; and how often the fee is reviewed or recalculated.
• To obtain an understanding of OPM’s responsibilities regarding FEDVIP funds
according to the Contract and applicable Federal regulations.
• To determine how the funds for the OPM administrative fee are transferred to OPM
and how much money was allocated to OPM during the scope of the audit.
• To determine the policies and procedures and/or internal controls for expensing the
FEDVIP funds; how OPM distributes or utilizes these funds; and what OPM does
with any remaining funds.
• To reconcile the OPM administrative fee to the schedule of related OPM FEDVIP
administrative expenses during the scope of the audit.

Fraud and Abuse
• To determine the policies and procedures that OPM has in place to prevent instances
of fraud and abuse in its administration of funds received and amounts expensed
related to the FEDVIP.

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 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 the audit objectives.

This performance audit covered OPM’s administration of the FEDVIP, including operational
activities, cash management activities, and fraud and abuse policies and procedures for years
2006 through 2009.

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We performed our fieldwork from February 14 to March 31, 2011, at our offices in Washington,
D.C. Additional audit work was also completed in our Washington, D.C. offices after
completion of our field work.

In planning and conducting our audit, we obtained an understanding of OPM’s internal control
structure, as it relates to its administration of the FEDVIP, 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 identified internal control
deficiencies within OPM’s administration of the FEDVIP which did not permit us to verify the
accuracy of expenses charged against FEDVIP funds. These issues are included in the “Audit
Findings and Recommendations” section of this report. Additionally, since our audit would not
necessarily disclose all significant matters in the internal control structure, we do not express an
opinion on OPM’s system of internal controls taken as a whole.

In conducting our audit, we relied to varying degrees on computer-generated data provided by
OPM. 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 came to our attention to cause us to doubt its reliability. We believe
that the data was sufficient to achieve the audit objectives.

We also conducted tests to determine whether OPM 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 forth 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 OPM had not complied, in
all material respects, with those provisions.

METHODOLOGY

To determine whether OPM’s administration of the FEDVIP was in compliance with the
Contract, and the FEDVIP regulations (5 CFR Part 894), we performed the following audit steps:

OPM Administrative Operations

• Obtained an organizational breakdown and contact information of OPM’s
management and staff directly involved in the administration of the FEDVIP; and
• Determined OPM’s responsibilities related to its administration of the FEDVIP.

Cash Management

• Obtained an understanding of OPM’s administrative fee received for the
administration of the FEDVIP, its calculation, and how often the fee was reviewed
and/or recalculated;
• Determined how the FEDVIP administrative fee monies were transferred to OPM and
the total amount of funds received by OPM to administer the FEDVIP;

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• Determined the policies and procedures and/or internal controls utilized by OPM to
ensure that the FEDVIP funds were used only for the administration of the FEDVIP;
• Judgmentally selected, based on the ratio of expense charged by each OPM
organization code to total FEDVIP expenses, a sample of 157 expense transactions
(totaling $8,124,624) from a universe of 2,305 transactions (totaling $12,080,689)
charged by OPM in its administration of the FEDVIP to determine if the expenses
charged were actual, allocable, and reasonable;
• Determined the process for the handling of FEDVIP funds retained in excess of
expenses incurred; and
• Reviewed OPM’s reconciliation of the FEDVIP administrative fees received to the
FEDVIP expenses incurred.

Fraud and Abuse
• Determined whether OPM had policies and procedures in place to prevent instances
of fraud and abuse in its administration of the FEDVIP.

The samples selected during our review were not statistically based. Consequently, the results
could not be projected to the universe since it is unlikely that the results are representative of the
universe as a whole.

We used the Contract and the FEDVIP regulations (5 CFR Part 894) to determine whether
OPM’s operations activities and cash management activities were in compliance with the terms
of the contract and the applicable regulations. We also determined whether or not OPM had
policies and procedures in place to detect and prevent instances of fraud and abuse related to its
administration of the FEDVIP.

The results of our audit were discussed with OPM throughout the audit and at the exit
conference. In addition, a draft report, dated July 14, 2011, was provided to OPM for review and
comment. OPM’s comments on the draft report were considered in the preparation of this final
report and are included as Appendices to this report.

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III. AUDIT RESULTS AND RECOMMENDATIONS
A. OPM ADMINISTRATIVE OPERATIONS

1. Annual Accounting Statement Requirement Not Enforced Procedural

OPM did not enforce the requirement in the Contract for the FEDVIP Carriers to
provide annual accounting statements during contract years 2006 through 2009.

Section K.9, Accounting and Allowable Cost (a) (1), of the Contract states that the
Carrier will prepare annually an accounting statement summarizing the financial results
of its FEDVIP contract for the previous fiscal year (for the purposes of this program a
fiscal year is the same as a calendar year). This statement will be prepared in
accordance with the requirements issued annually by OPM and will be due to OPM in
accordance with a date established by those requirements.

During our audit of the FEDVIP as administered by GEHA in November 2009, we
determined that OPM, via E-mail, had informed the FEDVIP Carriers that they did not
have to provide annual accounting statements. Although this was a Contract
requirement as cited above, this directive was communicated to the Carriers without
benefit of an amendment to the Contract. Discussion with OPM personnel could not
determine why it did not require the FEDVIP carriers to provide these statements. Of
concern to us is that without the annual accounting statements OPM could not verify
the financial viability of the Carriers participating in the FEDVIP.

As a result of our inquiries during our November 2009 audit, beginning in June 2010,
OPM has required the Carriers to provide certified annual accounting statements to
comply with Section K.9, Accounting and Allowable Cost (a) (1). OPM uses these
statements to monitor financial viability of the FEDVIP Carriers, thereby ensuring the
success of the program, and to validate the proposed premiums for the upcoming plan
year.

Recommendation 1

We recommend that in the future OPM should give formal notice to its Carriers (i.e.,
contract amendment or modification) should a requirement within the original
Solicitation be changed.

OPM Comments:

OPM requested that this recommendation be removed because the issue at hand was
corrected via an amendment to the Contract in June 2010.

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OIG Comments:

Due to the fact that during the scope of our audit the proper procedure was not
followed, we have kept the recommendation in this report. However, since the proper
procedure was followed subsequently, we consider this recommendation to be closed.

Recommendation 2

We recommend that OPM, through the collaborative efforts of its various offices,
continue to receive and review annual certified financial statements from each of the
FEDVIP Carriers in order to ensure the Carriers financial viability in relation to the
FEDVIP. In addition, the process for receipt and review of these financial statements
should be formalized in a policies and procedures document.

OPM Comments:

OPM partially concurs with this recommendation. The Federal Employee Insurance
Operations (FEIO) already coordinates with the Center for Financial Services,
specifically the Trust Fund Accounting group, to request, receive, and review the
annual financial statements from FEDVIP Carriers. This agreement will be formalized
and documented. Additionally, as part of its updated response sent on January 13,
2012, the FEIO provided its financial statement request and review process and support
for receipt of a 2007 annual financial statement from one of the participating FEDVIP
carriers. Based on the information provided, OPM asks that the OIG consider the
processes that were in place prior to the beginning of the audit and remove this
recommendation from the final report.

OIG Comments:

While OPM outlined its process for requesting and reviewing annual financial
statements submitted by the FEDVIP carriers in its updated response, we would like to
see this process summarized in more detail in a formal policies and procedures
document. Additionally, while this process may have been in place prior to the start of
our audit, we have evidence showing that it was not being consistently followed. Nor
do we know, short of a request from OPM’s actuaries inquiring about administrative
cost information from the FEDVIP carriers, whether an actual review of the statements
or any reports provided to OPM by the FEDVIP carriers was performed. Consequently,
we have kept this recommendation in our final report.

B. CASH MANAGEMENT

1. FEDVIP Expenses Procedural

We identified 43 transactions, totaling $3,282,998, in fiscal years 2006 through 2009
which we could not determine were actual, allocable, or reasonable for the
administration of the FEDVIP. However, since it would be very difficult for OPM to
determine, due to a lack of internal controls over the expensing of FEDVIP funds, from

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whom the overcharges should be recouped if the amounts proved to be unallowable
FEDVIP costs, we are not recommending that these funds be returned to the FEDVIP.

Public Law 108-496, Section 8958 (f) (2) (A) states, “There is established in the
Employees Health Benefits Fund a Dental Benefits Administrative Account, which
shall be available to the Office, without fiscal year limitation, to defray reasonable
expenses incurred by the Office in administering this chapter after the start of the first
contract year.”

Public Law 108-496, Section 8988 (f) (2) (A) states, “There is established in the
Employees Health Benefits Fund a Vision Benefits Administrative Account, which
shall be available to the Office, without fiscal year limitation, to defray reasonable
expenses incurred by the Office in administering this chapter after the start of the first
contract year.”

For our review of the 2006 though 2009 administrative expenses, we sampled 157
transactions, totaling $8,124,624, to determine if the expenses were actual, allocable, or
reasonable for the administration of the FEDVIP. Our review identified 43
transactions, totaling $3,282,998, which we could not determine were actual or
allocable costs and, therefore, have determined them to be unreasonable in relation to
the administration of the Program. Specifically, we identified the following for 2006
through 2009:

• 17 transactions, totaling $2,436,084, where no supporting documentation or
insufficient documentation was provided;
• 7 transactions, totaling $349,423, related to a 40 percent overlay cost. OPM stated
that, for the expenses related to overlay cost, the percentage was established many
years ago by OPM to cover indirect expenses. OPM is not sure how the percentage
was determined;
• 1 transaction, totaling $243,696, where the expense charged was an estimated
expense, not an actual expense;
• 5 transactions, totaling $214,477, which did not relate to the FEDVIP;
• 6 transactions, totaling $35,342, related to salary expenses. For these expenses, we
obtained supporting documentation for the employees who actually worked on the
administration of the Program, and the amount of their salary charged to the
FEDVIP. From information provided we could not determine that these employees
worked on projects related to the FEDVIP; and
• 7 transactions, totaling $3,976, related to transit benefit costs. For these expenses,
we could not determine the employees for which these costs apply and if they
performed work for the FEDVIP.

Additionally, OPM stated that they have no way of knowing what expenses were
actually charged to the FEDVIP because all expenses are paid by the Office of the
Chief Financial Officer (OCFO) office. Expenses are not approved at the Contracting
Officer level prior to or after payment.

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As a result of OPM not providing adequate supporting documentation or not providing
the basis for some of the expenses charged to the FEDVIP, we cannot properly
determine if these expenses are actual, allocable, and/or reasonable.

Furthermore, due to the lack of knowledge regarding the expenses charged to the
FEDVIP, OPM cannot provide adequate oversight of the Program. Nor can it
determine, with any accuracy, the amount of funds required to reimburse it for its true
administrative costs.

Recommendation 3

We recommend that OPM maintain documentation related to all expenses charged by it
for its administration of the FEDVIP.

OPM Comments:

OPM concurs with this recommendation and states that additional controls are needed
to more fully document and monitor the FEDVIP’s expenses and that it will work
within its various offices to identify those expenses and develop ways to effectively
document them. As part of this process an OCFO/FEIO task team has been put
together to look at the work reporting component of this audit issue from the standpoint
of accurately charging time across all of Insurance Operations, not just for the FEDVIP.
As of the date of this report, documentation included as part of its updated draft
response, provided to the OIG on January 13, 2012, OPM indicates that progress has
been made in how FEDVIP time is tracked and expense amounts are coded to the
appropriate funds.

Recommendation 4

We recommend that OPM work within its appropriate offices to institute procedures
which make certain that only those expenses related to the administration of the
FEDVIP are charged to it and that proper approvals are obtained prior to the expenses
being charged.

OPM Comments:

OPM partially concurs with this recommendation. It states that responsibility for
implementing this recommendation lies with many offices within OPM. It states that it
will implement periodic reviews of labor codes and those individuals authorized to use
them to mitigate unauthorized personnel charges to the FEDVIP. Additionally, it will
run periodic reports from its internal accounting system to help identify and reallocate
unauthorized expenses that have been charged against the FEDVIP.

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OIG Comments:

We accept OPM’s response. However, we further stress the need for OPM to schedule
the planned periodic reviews regularly (e.g., quarterly or bi-annually) to ensure that
unauthorized expenses to the FEDVIP are identified in a timely manner and reversed.

2. 2007 Salary Expenses Procedural

OPM did not provide adequate support for salary expenses totaling $568,699 that were
charged to the FEDVIP in 2007.

During our review of the expenses charged to the FEDVIP in 2007, we requested
supporting documentation for the salary expenses in our sample. The intent of our
review was to determine if the salary expense charged to the FEDVIP was related to
employees who actually worked on the Program. OPM stated that for 2007, it would
not be able to provide a breakdown of those employees who specifically performed
work for the administration of the FEDVIP because it had utilized employees from
different departments within the Retirement and Insurance Services office. OPM was
unable to provide a listing of all of the specific employees who worked on the FEDVIP
because it did not track that information and due to the amount of time that had lapsed
between the period in question and the timing of our audit.

Our review of 2007 expenses identified that 21 transactions, totaling $568,699, related
to salary and employee leave costs which were unsupported. Therefore, we could not
determine if the costs were accurate, allocable, and/or reasonable.

As a result of the inadequate support for these salary costs, the FEDVIP may have been
charged salary or leave costs for employees who did not work on the administration of
the FEDVIP.

Recommendation 5

We recommend that OPM’s various offices tasked with administering the FEDVIP
maintain a listing of all employees who have regular duties and responsibilities related

10
to the FEDVIP, and approve the salary expenses to ensure that the FEDVIP is only
charged for those employees assigned duties related to the FEDVIP.

OPM Comments:

OPM partially concurs with this recommendation. It states that it can provide a core
list of employees who have ongoing or cyclical responsibilities related to the
administration of the FEDVIP. However, creating and maintaining a comprehensive
list for those who might charge time or perform work related to the FEDVIP on an ad
hoc basis for the entire agency is not feasible. It also requested that the
recommendation be written in such a way as to reflect the collaborative nature of the
effort required.

Furthermore, it states that it is possible for employees outside those regular agency
offices in which the core of the FEDVIP staff reside to charge time to the FEDVIP for a
variety of activities such as Open Season, Policy, Retirement and others. It feels that
this necessitates the need for retroactive review of salary and leave expenses as stated
in its comments above and in its comments to recommendation number four.

OIG Comments:

We accept OPM’s response. We would like to stress that the “core list” of FEDVIP
employees need not include any employees who would only on rare occasions work on
the FEDVIP. This list should only include those employees who regularly (i.e., daily or
weekly) have duties and responsibilities related to the FEDVIP. Additionally, during
its regular review of the salary and leave expenses charged to the FEDVIP, we suggest
that OPM check all those employees charging salary expense to the FEDVIP who are
not listed as a core employee with ongoing or cyclical FEDVIP responsibilities to
ensure that time charged to the FEDVIP was accurate. The recommendation has also
been adjusted to reflect the collaborative effort required to address it.

3. No Reconciliation of Budgeted to Actual Expenses Procedural

OPM did not perform a yearly reconciliation of the budgeted to actual expenses for
fiscal years 2006 through 2009 as required by the Contract.

Section 1.31 of the Contract regarding reimbursement of government costs states that
“OPM will perform a yearly reconciliation of actual expenses to anticipated expenses
and the Carrier’s future contributions will be adjusted accordingly.”

During our review of OPM’s responsibilities regarding cash management for the
FEDVIP administrative fee, we requested supporting documentation for the yearly
reconciliation. OPM was unable to provide this information and subsequent
discussions determined that it has never performed this aspect of its responsibility
under the Contract. OPM explained that reconciliations of budgeted expenses to actual
expenses could not be performed each year because it is not provided any financial
information pertaining to the FEDVIP from OPM’s OCFO. OPM has made efforts to

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obtain financial information, such as a FEDVIP budget and a record of actual expenses
from the OCFO, but was unsuccessful. Consequently, OPM believes that most of the
budgeting functions for the FEDVIP have been performed by the OCFO and by other
offices within the agency. The Program Office itself does not have an existing budget
for the FEDVIP.

As a result of the necessary budget information being unavailable, not only was OPM
unable to perform the functions required by Section 1.31 of the Contract, but it also
could not adequately plan for future expenses or adjust its administrative fee percentage
as needed.

Additionally, OPM runs the risk of having inappropriate and/or non-program related
expenses charged to the FEDVIP which, consequently, may increase the administration
fee for the FEDVIP as well as the enrollee premiums charged by the Carriers.

Recommendation 6

We recommend that the various offices within the agency coordinate and obtain all
information necessary to perform the annual reconciliations.

OPM Comments:

OPM concurs with the recommendation and will work with the various agency offices
to obtain the necessary documentation for the annual reconciliation process.

C. FRAUD AND ABUSE

Our review of OPM’s administration of the FEDVIP did not identify any specific problems
related to fraud and abuse in its administration of the FEDVIP funds received or the
amounts expensed. Nevertheless, we did determine that OPM lacked specific written
policies and procedures for the detection and prevention of fraud and abuse related to its
handling of FEDVIP funds. However, because there are no specific fraud and abuse
requirements related to OPM’s Program administrative responsibilities in the Contract or
the FEDVIP regulations, we are addressing this area of concern in the Lack of Internal
Controls finding in Section D of the report.

D. PROGRAM IMPROVEMENT AREAS

The areas included in this section of the report, while not violations of the FEDVIP
contract, were, in our opinion, reportable program weaknesses that are in need of corrective
actions. Consequently, we are including them in this final report in order to assist OPM in
improving its administration of the FEDVIP.

1. Inadequate Support for OPM’s Administrative Fee Procedural

OPM was unable to provide documentation supporting the method of determining the
percentage of premiums used to fund its budget to administer the FEDVIP.

12
Additionally, OPM was unable to support the reasons for changes to the percentage
from year to year.

According to the Contract, Section C, Part VII, Financial, OPM estimated its overall
budget for administrative expenses for the FEDVIP to be approximately $1,000,000 per
annum.

We met with OPM to gain an understanding of how the percentage of premiums to fund
its administrative costs was determined. We found that each year, OPM receives a
portion of the FEDVIP premiums collected to use for its expenses in administering the
FEDVIP. During our discussions, we requested supporting documentation for the
calculation of this percentage (also known as the “administrative loading”) for calendar
years 2006 through 2009, as well as support for the decisions to keep the fee percentage
the same or change it each calendar year.

Additionally, in order to determine OPM’s fee for administering the FEDVIP, we
reviewed OPM’s Administration Loading Schedule. We found that at the start of the
Program, the administrative loading was an estimate. Initially it was calculated based
on a projected number of enrollees and the estimated cost of $1,000,000 stated in the
Contract.

According to OPM, for contract years 2007 and 2008 the administrative loading used
was 1.5 percent of net premiums for national dental plans, 3 percent for regional dental
plans, and 4 percent for vision plans. In 2009, the loading changed to 1 percent of net
premiums for national dental plans, 2 percent for regional dental plans, and 2 percent
for vision plans. The administrative loading remained the same for 2010 and 2011.

We were able to obtain the calculation for the 2007 and 2008 administrative loading
percentages, but not for the 2009 calculation. We were also not able to obtain any
support for the discussion or decisions by OPM to modify or maintain the
administrative loading percentages each year.

Our review has determined that, although OPM had estimated its administrative
expense budget to be approximately $1,000,000 per year, it actually received
approximately $20.5 million for contract years 2007 through 2009, and still held funds
in excess of $8.4 million following the first three years of the Program. As a result, it is
evident that the administrative loading provided Program funding over and above what
was actually needed to administer the program.

Furthermore, by not maintaining supporting documentation for the calculation of the
administrative loading percentage, OPM might not objectively and fairly charge a
reasonable amount to cover its administrative costs, resulting in overcharging or
undercharging the FEDVIP enrollees and Carriers.

13
Recommendation 7

We recommend that OPM develop a formal policies and procedures document that
addresses the documentation required to support all of the components necessary for
the calculation of and the changes to each year’s administrative loading percentage.
This policies and procedures document should also address OPM’s yearly review of the
administrative loading percentage to assess the current level of funds and to limit any
excess funds that it has for its administration of the FEDVIP.

OPM Comments:

OPM concurs with this recommendation and provided a summary of the various
decisions made in regards to the administrative loading percentage during the initial
years of the FEDVIP in its consolidated response. Additionally, in an updated response
to the draft report submitted to the OIG on January 13, 2012, OPM provided additional
documentation supporting the discussions and decisions that went into determining its
administrative loading for 2012. Its decision to lower the administrative loading
percentage for 2012 was intended to accomplish two objectives - lowering costs to the
program participants and reducing the excessive amount of unspent funds by lowering
the loading percentage below what OPM will need to fund administrative costs.
Additionally, in order to draw down approximately $10 million against the excess
reserves, which had grown to $26 million as of July 2011, the 2012 administrative
loading also includes a credit or buy-down to the total rate. Finally, OPM contends that
the documentation provided in its response confirms that a process has been in place to
annually review the FEDVIP load and make recommendations. Consequently, OPM
asks that the OIG consider the processes that were in place prior to the beginning of the
audit and remove this recommendation from the report.

OIG Comments:

While the documentation provided in OPM’s updated response adequately supports the
loading decision for 2012, OPM did not provide any support for the components of the
administrative loading percentage or the meetings and/or decisions regarding each
year’s percentage for the years under audit. The crux of our finding was that we could
not locate support for one year of the loading percentage nor could we find any
documentation of decisions to modify or maintain the loading percentage each year.

Additionally, the documentation provided only supports that a process to annually
review the FEDVIP administrative loading is currently in place. The documentation
does not support that this process existed prior to the start of our audit. Thus, OPM has
not provided documentation sufficient to adequately address our areas of concern and
warrant the closing of this recommendation.

That being said, however, we do acknowledge OPM’s current efforts in documenting
the administrative loading derivation process and reducing the amount of excess
reserves. We encourage them to formalize these processes in a policies and procedures
document to be used going forward.

14
2. Lack of Internal Controls Procedural

OPM does not have adequate internal controls for reviewing and approving its
administrative expenses, or policies and procedures in place to detect and prevent fraud
and abuse related to the funds it receives, for its administration of the FEDVIP.

During our review, we conducted separate meetings with various offices within OPM in
order to determine who approves the FEDVIP administrative costs and how invoices
are paid. We also requested the names of staff who are involved in the approval of the
FEDVIP expenses. However, we were unable to obtain this information. OPM’s
Federal Employee Insurance Operations (FEIO), the office charged with the
administration of the FEDVIP, does not approve any invoices or expenses, as they do
not receive any financial information from OPM’s OCFO. Consequently, the FEIO is
currently unable to fulfill all of its duties and responsibilities as the Administrator of the
FEDVIP because it has no knowledge of the funds expensed for the administration of
the FEDVIP each year.

Additionally, we determined that there are no written policies and procedures for the
detection and prevention of fraud and abuse related to the FEDVIP funds OPM
receives.

As a result of OPM’s Healthcare and Insurance Office not approving the FEDVIP
expenses or having a fraud and abuse policy, there is a risk that the funds received for
its administrative loading will be used to fund other OPM programs unrelated to the
FEDVIP, or for purposes completely unrelated to the intentions spelled out in Public
Law and the Contract.

Furthermore, as a result of OPM not having knowledge of its own administrative costs
for the FEDVIP each year, it will not be able to perform a reconciliation of budgeted to
actual expenses, as required in the Contract, or make proper decisions for the changes
to the administrative loading percentage.

Recommendation 8

We recommend that OPM work to develop internal controls and a fraud and abuse
policy, so that only FEDVIP expenses are charged to the FEDVIP in future contract
years.

OPM Comments:

OPM states that it partially concurs with this recommendation and that it believes that
implementation of the proposed remedies to previous recommendations in this report
will address this finding. It agrees that additional controls are needed to ensure that the
FEDVIP related expenses are charged to the FEDVIP funds prospectively.

15
OIG Comments:

We accept OPM’s response. However, OPM did not include in its comments anything
about policies and procedures regarding fraud and abuse. This is also a major area of
concern and procedures should be put in place to ensure that fraud and abuse is deterred
before it occurs. OPM’s proposed remedies to previous findings are for it to
retroactively review costs after they are charged, while policies and procedures for
fraud and abuse will hopefully prevent some errors from occurring in the first place.

16
IV. MAJOR CONTRIBUTORS TO THIS REPORT
Special Audits Group

Auditor-In-Charge

, Auditor

, Chief

, Senior Team Leader

17
Appendix A

UNITED STATES OFFICE OF PERSONNEL MANAGEMENT ,
Was hington. DC 20415
lUI/ OCT 31 Atll I: 58

MEMORANDUM FOR:
OCT 2 5 2011
GROUP
()~,,,("'i: OF INSPECTOR GENERAL

MELISSA BROWN;
DEPUTY ASSISTANT INSPECTOR GENERAL
FOR AUDITS

FROM:

JOHN O' BRJEN tf::i.~
HEALTH AND INslfR'ANeE
~IA~
CHJEF FINANCIAL OFFICER

JONATHAi~
PLANNING AND POLICY ANALYSIS

SUBJECT: OIG DRAFT AUDIT REPORT,
Federal Employees Dental and Vision lnswance Program (FEDVIP)
Audit Report Number - Jl-0L-00-II-033, dated July 14,20 II

Thank you for the opportunity to respond to your review of aPM 's Federal Employees
Dental and Vision Insurance Program CFEDVTP). The Healthcare and Insurance, the
Chief Financial Officer and the Office of the Actuary are committed to continually
improving our admini s tra~ion and oversight of FBDVI.P.

We recognize that even the best run programs can benefit from external evaluations, and,
although we concur with the majority of the findin gs in the audit report, we do have some
clari fi cations and corrections to some of the finding s and recommendations as provid ed
be low. Be assw cd tha t efforts to improve the rcv iew of key documentation , evaluate and
approve appropriate expens es and develop stronger controls and procedw-es are Wlderway
and key stakeholders are working together to address the findings in the report .

In an effort to add context to the draft audit, it should be noted that due to agency, as wel1
as the Federal Employees Insurance Operation's (FEIO) reorgani7..ation(s), references 10
the "Program O fficc" are not synonymous with the current FEIO Contract and Resource
Management Office (RMO) structures. FE:JO 's current RMO was established in 2011,
well after the audit's scope 0[2006 to 2009, when Insurance Services Program was
organizationally linked to Retirement Services under Human Resources Products and
Se rvices and received RMO support from Retirement. In the aftennath of the 20 11 re·
organization, FEIO created its 0'Wll RMO to provide work reporting, HR, budget and
other support previously provided by Retirement. Additional ly. the FEDVIP contracting
office and Contract Officer have changed as a result of the aforementioned organizational
realignments.

Due to the broad audience of this audit report, including those who may access it via a
Freedom Of Information Act (FOIA) request, we believe additional background on the
program and description of its benefits and organizational structure is warranted. This
wi ll fami liarize the reader with the program's structure, features and organizational
coordination required to administer and oversee FEDV IP.

We respectfully request tbat findings and recommendations be reviewed with an eye
towards clarifying the co llaborative efforts required to implement the reco mmendations.
Additionall y. we request yo ur consideration with regard to merging or consolidating
several similar recommendations. In that vein, we request reconunendations 4, 5, 6, 7
and lObe co mbined. Similarly, we suggest recommendations 8 and 9 be combined.
Responses to tbe individual recommendations follow.

Rcco nuD enda tion J

We recommend that the Director instruct the Program Office to give notice to its
Carriers (i.e. formal amendment or modification) should a requirement withi n the
ori ginaJ Contract be changed.

Response '"0 R ecomm cndation I

We do not concur with Recommendation 1. The FEDVIP draft audit report acknowledges
that this is be ing done. In June 20 I 0, an amendment to Section K.9 Accounting and
Allowable Cost (a) (I) of the Contract was drafted and commlmicated to the carriers.
The Program office changed from a req uirement to provide Audited Annual Accounting
Stateme nts to a requirement for Certified Annual Accounting Statements (see
attaohm ent# I). This was done via Contract modification and was in response to a prior
FEDV IP Carrier audit (GEHA Dental, I B-31-00-1 0-006, September 27, 20 I 0). The
reporting requirement applied to all FEDVIP carriers and was com municated to each
(also provided as part of attachment# 1). We request this recommendation be removed
from the fina l audit report.

Rccomm end ation 2

We recommend that the Director ensures that the Program Office continue to receive and
review annual certified financiaJ statements from each of the FEDVIP Carriers in order to
ensure the Carriers financ ial viability in relation to the FEDVIP.

Response t o Recommendation 2

We partially concur with the recommendation. The contract requirement is for "OPM" to
receive and review the annual statements. not tbe Program Office. Federal Employee
ins urance Operations (FE10) already coordinates with the Center for Fin ancial Services
(CFS), specifically the Trust Fund Accounting group to request, receive and review the
annual financ ial statements from F EDV IP Carriers (see attachrnent# 2 for email
exchanges on this topic). This agreement and the review process itself will be formalized
and documented. Note that this was an agenda item at the recent FEDVIP Carrier
Conference (where an OIG audi tor spo ke on audit issues-also prov ided in attachrnent# 2).
We request the recommendation be written in such a way as to refl ect the coll aborative
nature of the effort required.

Rccommendation 3 - We recommend that the Director ensure that tbe Program Office
maintain documentation related to aU expenses charged to the FED VIP.

Response 10 Recommcndation 3

We concur. FEIO agrees that additi onal controls and procedures are needed to more fully
document and monitor FEDV IP expenses (i.e. salary and benefits) and any other objects
such as training, travel, contracts, etc . .. ) and will work together with the C FO and other
appropriate office(s) to identify those expenses and develop ways to effecti vely docwnent
them prospectively. There is a CFO I FEIO task team that is looking at the work
reponing component of thi s issue from the standpoint of accurately charging time across
. 11 of 10, not just FEDVIP.

Recom mend a tion 4

We recommend lhat the Director ensure that the Program Office work with the OCFO to
institute. procedures to ensure that only those expenses related to the administration of the
FEDVIP are charged to it and that approval is sought from the Progranl Office prior to
ex penses being charged.

Response to Recommendation 4
We partially concur with this recommendation. Program responsibility fo r implementing
this recommendation lies with FEIO RMO) Contract officials and Program Managers
across organizations, including the CFO and others to ensure that only approved staff is
able to charge time and/o r activities to FEDV IP .

Included in this activity are ensuring that labor codes in ETAMS are onl y available to
approved staff and that approval is sought wben charging expenses against the FEDV IP.
Healthcare and insurance and RMO staff wi II work with CFO 10 implement periodic
reviews of labor codes and individuals authorized to use them to mitigate un-authorized
personnel charges to FEDVIP. This will be done via labor reports designed to identify
unauthorized charges, which wi ll be reallocated to the appropriate fund code(s).

As with ETAMS , RMO staff will run periodic reports in eBIS - the agency's financial
system - to identify unauthorized expenses that have been charged against the FEDV[P
fund. Unauthorized charges will be reallocated to the appropriate fund code(s).

Recomm enda tion 5 - We recommend tbat the Director ensure that the Program Office
maintains a list of employees and their duties for the administration of the FEDVTP, and
approve the saJary expenses which are charged to tlJe FEDVIP.

Re.s ponse t o Recommend a tion 5

We partia ll y concur. FEID can provide a core list of employees who have ongo ing or
cycl ical respons ibili ties related to the administration of FEDV IP . Generally speaki ng,
most salary expenses charged to FEDVIP are made by employees assigned to FE IO and
the Individual Benefi ts and Life (TBL) program, in particular, FEDVl P. FEIO will
maintain a list of those employees and their duties for those employees, as wel l as those
identified within the CFO, OA and Retirement. However, creating and maintaining a
comprehensive lj st for those who might charge time or perform work related to FEDVIP
on an ad hoc basis agency wide is not feasible. Therefo re, thi s action may not fully
address the finding, especially where retroactive work reporting 'corrections' are done.
We request the recommendation be written in such a way as to reflect the collaborative
nature of the effort required.

R ecom mend ation 6 -We recommend that the Program Office, witll the assistance of the
OCFO. ensure that only those employees assigned specific duties related to the FEDVlP
charge salary and leave expenses to the FEDVTP
R es ponse t o Recomm endation 6

We partially concur. See the responses to Recommendations 4 and 5. Since most
cbarges to FEDV fP are made by employees assigned to FEIO in general, and the office of
Indiv idual Benefits & Life (lBL) in particular, FEIO will work with the CFO to monitor.
document and improve work reporting for employees who are assigned FED VIP related
duties. However, it is possible that employees outside of Health and Insurance (HI) may
charge time under FEDVIP for a variety of activities such as Open Season, Policy,
Retirement and o thers. This necessitates the need for retroactive review of salary and
leave expenses charged to the FEDVIP, as previously discussed. HI believes that this
recommendation wi ll be met by implementing recommendations 4, 5 and 7.

R eco mm end ation 7

We reconunend that the Director encourage the OCFO to work with tbe Program Office
and provide the necessary docwnentation for the allnual reconciliation

R es ponse to Reco mmendation 7

We concur and FEIO will work with the CFO and others to obtain the necessary
documentation for the annual reconciliation process.

Recomm end ation 8 - We recommend the Director ensure that the Program Office
mai lltains documentation of the components needed fo r the calculation of the
administrative loading percentage, and any decision to change the percentage each year.

Response to R ecomm end atio n 8

We concur. [02008, the Office of the Actuary recommended we lower OPM's
administrative loading. The program office adopted this recommendati on and lowered
the loading for CY2009. tn 201 1, the Program Office and OA worked together once
again - this time to reduce both the OPM and BENEFEDS administrative loads, resu lt ing
in an outright decrease, or a lesser increase1 in Ole premiums FEDVlP subscribers wi ll
pay in 20 12. At FEDV IP 's outset, a $1 million estimate for OPM's adm inistrative
expense was used, based on a projected initial enrollment 0[200,000. It was decided to
lower the load for 2009 because the current actual enrollment exceeds 800,000, which
generated unexpected monies in the OPM FEDVlP fund. Due to expected procurement
initiatives (e.g. BENEFEDS contract, FEDVlP contracts ending in 20 13), it \vas decided
not to lower the fund again until solid estimated new contract figures were known. Once
we could gauge how much money would be needed for expected procurement initiatives,
the Actuary made a recommendation to lower the load, yet agai n~ for plan year 2012.
The BENEFEDS load will reduce for plan year 2012. This will furt her reduce the
enrollee's premium rate. The Program Office, CFO, OA and representatives from
BENEFEDS and LTC will meet to di scuss and agree on the mechanics of the monetary
transfers referred to above. See attachment#3 for additional infonnation regarding
OPM's loading decision.

Ileco mmendation 9 - We recommend that the Director instruct the Program Office to
work with the OCFO and Actuaries and reduce the administrative loading percentage in
an effort to lim it the excess of funds it has for its administration orthe FEDVIP, and to
fair ly reduce the premi ums fo r FED VIP enrollees

Res ponse to Recomm end ation 9
We concur. Pl ease see the response to recommendation 8. We request recommendations
8 and 9 be combined. See attaclunent#3 for additional information.

Reco mm en da tion I 0 ~ We recommend that the Director ensure that the Program Office
and the CFO work together to develop internal controls and aJraud and abuse policy, so
that only the FEDVlP expenses are charged to the FEDVlP funds for future contract
years.

R esponse to R eco mm endation 10
We partially concur. We believe that implementaUon of the proposed remedies for prior,
related recommendations will address this ftnding. We agree that additional controls are
needed to ensure that FEDVIP expenses are charged to the FEDVIP funds prospectively
and seek to leverage existing OPWCFO policy regarding documentation, expensing and
the handling of funds by the CFO. Coordination between FEIO and CFO has been

initiated and is ongoing. It is expected to improve awareness. accuracy. and compliance
in the area of Work Reporting as well as non-salary expenses, per our responses to
reconunendation 4. 5, 6 and 7.

Attachments

Appendix B

January 13.2012

FEIO's Upd aled Res ponse 10 FEDVIP Drafl Audil - Daled July 14,20 11

We are submittin g this updated response to our prio r submiss ion to th e draft FEDVlP audit
to address findings that were identified durin g the audit. We a re respondin g to
Recom mendlltions 2 and 8.

Reco mmendation 2

We recommend that the Director ensures that the Program Office conti nue to recei ve and review

annual certified financial statements from each of the FEDV IP Carriers in order to ensure the

Ca rriers financial viability in relation to the FEDVIP.

The word "continue" in the recommendation implies that 0 10 acknowledges and affinns that the

Program Office is currently receiving and reviewing annual certi tied financ ial statements from

each of the FEDVIP carriers.

FEDvrp Annual Ce rtified Financial Statement Receipt and Review Process

The purpose of receiving the statements is to monitor financial viabilit),. thereby ensuring the

success of the program. The reports all ow OPM to ensure that the plans are allocat ing cost

correctly per the contract. Financial statements are also used to validate proposed premiwns for

the upcoming plan year. This also ensures compliance wi th section K.9 Account ing and

All owable Cost, (a) Annual Accounting Statement wi thin the FEDVIP Sol ici tation (page K·7).

• T here is an agreement between the Program Office and the plans that the statements are
submitted in June, for the previous plan year.
• A reminder is sent to the plans to submit their certified statements in May.
• Once received, a copy is transmitted to the CFO and Actuary offices for their reference and
review.
• The Program Office reviews for accuracy and completeness.
• A contract amendment was drafted in 2010 to change the requirement from audited to
certified financial statements.
• The first certified statement was received in 2008 for the 2007 plan year. (2007 FEP
Statement is attac hed)
• The Program Orficc will continue to recei ve and review these reports annually.

We are requ estin g th at the IG consider the processes that were in place prior to the
begin ning of the audit and r emove this recommendation from the. report .
Updated Re.sponse 10 FEDV'" Draft Aud it - Dated July 14, 20 11
Page 2 of 2

Recommend at ion 8 - We recommend the Director ensure that the Program Office maintains
documentation of the components needed for the calculation of the administrative loading
percentage, and any decision to change the percentage each year.

FEDVIP Loading Process and Documentation
There has always been an ongoi ng process of determi nin g the FEDV IP loading. It has always
been our process to annually review and make recommendat ions. Starting last year and moving
forward, the Program Office wi ll mai ntain additional documentation from both the Actuary and the
Program Offi ce. The review process is as follows :

• Rev iew operational/budget requirements and procurement considerations.
• Hold ongoi ng discussions with the Actuary Office. Maintain meeting notes for contract
file.
• Meet with the Actuary Office prior 10 final rate se lting.
• Review memo fro m Actuary with recommcndatio n(s) discussed in the meeting.
• Program Office drafts a response back to the Actuary Office accepting. rejecting or

requesting furt her clarificati on/information.

• Hold ongoing discussion via e-mail with add iti onal documentation, if needed.
• Program Office drafts a memorandum with the final FEDV IP loading percentage.
• All documentation is maintained in the Program Office contract file.

Recom mendations 8 and 9 are closely related. The attac hed documentation confinns that a
process has been in place to annually review the FEDV IP load and make recommendations. We
are requesting that the IG consider the processes that were in place prior to the beginning of
the audit and remove these recommendations from the report.