U.S. OFFICE OF PERSONNEL MANAGEMENT 

OFFICE OF THE INSPECTOR GENERAL 

OFFICE OF AUDITS 

Final Audit Report 

Subject: 

Audit of the Federal Employees Health Benefits 

Program Operations at Blue Choice 

Report No. lC-MK-OO-lO-005 

Date: July 22, 2010 

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This audit report has been distributed to Federal officials who are responsible for the administration of the audited program. This 

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before releasing the report to the general public as it may contain proprietary information that was redacted from the publicly 

distributed copy. 
UNITED STATES OFFICE OF PERSONNEL MANAGEMENT
 

Washington, DC 20415
 

Office of the 

Inspector General 

AUDIT REPORT
 

Federal Employees Health Benefits Program
 

Community-Rated Health Maintenance Organization
 

Blue Choice
 

Contract Number CS 2506 - Plan Code MK
 

Rochester, New York
 

Report No. lC-MK-00-10-005 Date: July 22, 2010 

Michael R. Esser 

Assistant Inspector General 

for Audits 

www.opm.goY www.usajobs.goY 
UNITED STATES OFFICE OF PERSONNEL MANAGEMENT 

Washington, DC 20415 

Office of the 

Inspector General 

EXECUTIVE SUMMARY
 

Federal Employees Health Benefits Program
 

Community-Rated Health Maintenance Organization
 

Blue Choice
 

Contract Number CS 2506 - Plan Code MK
 

Rochester, New York
 

Report No. lC-MK-00-10-005 Da~:July 22. 2010 

The Office ofthe Inspector General performed an audit of the Federal Employees Health Benefits 

Program (FEHBP) operations at Blue Choice (Plan). The audit covered contract years 2006 

through 2009 and was conducted at the Plan's office in Rochester, New York. 

This report questions $2,486,049 for inappropriate health benefit charges to the FEHBP in 

contract years 2007,2008, and 2009. The questioned amount includes $2,301,947 for defective 

pricing and $184,102 due the FEHBP for lost investment income, calculated through June 30, 

2010. We found that the FEHBP rates were developed in accordance with the Office of 

Personnel Management's rules and regulations in 2006. 

For contract years 2007 through 2009, we determined that the FEHBP's rates were overstated by 

$607,957 in 2007, $462,788 in 2008, and $1,231,202 in 2009 due to defective pricing. More 

specifically, the Plan did not apply a similarly sized subscriber group discount to the FEHBP's 

rates in each year in question. 

Consistent with the FEHBP regulations and the contract, the FEHBP is due $184,102 for lost 

investment income, calculated through June 30, 20 I0, on the defective pricing findings. In 

addition, the contracting officer should recover lost investment income on amounts due for the 

period beginning July 1,2010, until all defective pricing amounts have been returned to the 

FEHBP. 

www.opm.goY www,usajobs.goY 
CONTENTS
 

Page 

EXECUTIVE SUMMARY	 i
 

I. INTRODUCTION AND BACKGROUND	 1
 

II.	 OBJECTIVES, SCOPE, AND METHODOLOGY 3
 

III.	 AUDIT FINDINGS AND RECOMMENDATIONS 5
 

Premium Rates : 5
 

1. Defective Pricing	 5
 

2. Lost Investment Income	 6
 

IV.	 MAJOR CONTRIBUTORS TO THIS REPORT 8
 

Exhibit A (Summary of Questioned Costs)
 

Exhibit B (Defective Pricing Questioned Costs)
 

Exhibit C (Lost Investment Income)
 

Appendix (Blue Choice's June 2010, response to the draft report)
 
I. INTRODUCTION AND BACKGROUND
 

Introduction 

We completed an audit of the Federal Employees Health Benefits Program (FEHBP) operations 

at Blue Choice (Plan) in Rochester, New York. The audit covered contract years 2006 through 

2009. The audit was conducted pursuant to the provisions of Contract CS 2506; 5 U.S.C. 

Chapter 89; and 5 Code of Federal Regulations (CFR) Chapter 1, Part 890. The audit was 

performed by the Office of Personnel Management's (OPM) Office ofthe Inspector General 

(OIG), as established by the Inspector General Act of 1978, as amended. 

Background 

The FEHBP was established by the Federal Employees Health Benefits Act (Public Law 86-382), 

enacted on September 28, 1959. The FEHBP was created to provide health insurance benefits 

for federal employees, annuitants, and dependents. The FEHBP is administered by OPM's 

Retirement and Benefits Office. The provisions of the Federal Employees Health Benefits Act 

are implemented by OPM through regulations codified in Chapter 1, Part 890 ofTitle 5, CFR. 

Health insurance coverage is provided through contracts with health insurance carriers who 

provide service benefits, indemnity benefits, or comprehensive medical services. 

Community-rated carriers participating in the FEHBP are subject to various federal, state and 

local laws, regulations, and ordinances. While most carriers are subject to state jurisdiction, 

many are further subject to the Health Maintenance Organization Act of 1973 (Public Law 93­

222), as amended (i.e., many community-rated carriers are federally qualified). In addition, 

participation in the FEHBP subjects the carriers to the Federal Employees Health Benefits Act 

and implementing regulations promulgated by OPM. 

The FEHBP should pay a market price rate, FEHBP Contracts/Members 

which is defined as the best rate offered to 

either ofthe two groups closest in size to 

the FEHBP. In contracting with 

community-rated carriers, OPM relies on 

carrier compliance with appropriate laws 

and regulations and, consequently, does not 

negotiate base rates. OPM negotiations 

relate primarily to the level of coverage and 

other unique features of the FEHBP. 

The chart to the right shows the number of 

FEHBP contracts and members reported by 

the Plan as of March 31 for each contract 

year audited. 

March 31 

8,000 

7,000 

6,000 

5,000 

4,000 

3,000 

2,000 

1,000 

o 

2006 

• Contracts 3,331 

o Members 7,176 

2007 

3,465 

7,487 

2008 

3,634 

7,851 

2009 

2,881 

5,504 

1
 
The Plan has participated in the FEHBP since 1989 and provides health benefits to FEHBP 

members in the New York Counties of Monroe, Livingston, Wayne, Ontario, Seneca, and Yates. 

The last audit conducted by our office was a rate reconciliation audit and covered contract year 

2005. All matters related to that audit have been resolved. 

The preliminary results of this audit were discussed with Plan officials at an exit conference and 

in subsequent correspondence. A draft report was also provided to the Plan for review and 

comment. The Plan agrees with our findings. The Plan's comments were considered in the 

preparation ofthis final report and are included, as appropriate, as the Appendix. 

2
 
II. OBJECTIVES, SCOPE, AND METHODOLOGY
 

Objectives 

The primary objectives ofthe audit were to verify that the Plan offered market price rates to the 

FEHBP and to verify that the loadings to the FEHBP rates were reasonable and equitable. 

Additional tests were performed to determine whether the Plan was in compliance with the 

provisions of the laws and regulations governing the FEHBP. 

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 our audit objectives. We believe that 

the evidence obtained provides a reasonable basis 

for our findings and conclusions based on our 

audit objectives. 

FEHBP Premiums Paid to Plan 

$30 

$25 

$20 

$15 

$10 

$5 

$0 

• Revenue 

This performance audit covered contract years 2006 through 2009. For these contract years, the 

FEHBP paid approximately $99.3 million in premiums to the Plan. The premiums paid for each 

contract year audited are shown on the chart above. 

OIG audits of community-rated carriers are designed to test carrier compliance with the FEHBP 

contract, applicable laws and regulations, and OPM rate instructions. These audits are also 

designed to provide reasonable assurance ofdetecting errors, irregularities, and illegal acts. 

We obtained an understanding of the Plan's internal control structure, but we did not use this 

information to determine the nature, timing, and extent ofour audit procedures. However, the 

audit included such tests of the Plan's rating system and such other auditing procedures 

considered necessary under the circumstances. Our review of internal controls was limited to the 

procedures the Plan has in place to ensure that: 

•	 The appropriate similarly sized subscriber groups (SSSG) were selected; 

•	 the rates charged to the FEHBP were the market price rates (i.e., equivalent to the best 

rate offered to the SSSGs); and 

•	 the loadings to the FEHBP rates were reasonable and equitable. 

In conducting the audit, we relied to varying degrees on computer-generated billing, enrollment, 

and claims data provided by the Plan. We did not verify the reliability of the data generated by 

3
 
the various information systems involved. However, nothing came to our attention during our 

audit testing utilizing the computer-generated data to cause us to doubt its reliability. We believe 

that the available data was sufficient to achieve our audit objectives. Except as noted above, the 

audit was conducted in accordance with generally accepted government auditing standards, 

issued by the Comptroller General ofthe United States. 

The audit fieldwork was performed at the Plan's office in Rochester, New York, during October 

and November 2009. Additional audit work was completed at our field offices in Cranberry 

Township, Pennsylvania and Jacksonville, Florida. 

Methodology 

We examined the Plan's federal rate submissions and related documents as a basis for validating 

the market price rates. In addition, we examined the rate development documentation and 

billings to other groups, such as the SSSGs, to determine if the market price was actually charged 

to the FEHBP. Finally,we used the contract, the Federal Employees Health Benefits Acquisition 

Regulations (FEHBAR), and OPM's Rate Instructions to Community-Rated Carriers to 

determine the propriety ofthe FEHBP premiums and the reasonableness and acceptability ofthe 

Plan's rating system. 

To gain an understanding ofthe internal controls in the Plan's rating system, we reviewed the 

Plan's rating system's policies and procedures, interviewed appropriate Plan officials, and 

performed other auditing procedures necessary to meet our audit objectives. 

4
 
III. AUDIT FINDINGS AND RECOMMENDATIONS
 

Premium Rates 

1. Defective Pricing $2,301,947 

The Certificates of Accurate Pricing the Plan signed for contract years 2007, 2008, and 2009 

were defective. In accordance with federal regulations, the FEHBP is therefore due a price 

adjustment for these years. Application of the defective pricing remedies shows that the 

FEHBP is entitled to premium adjustments totaling $2,301,947 (see Exhibit A). We found 

that the FEHBP rates were developed in accordance with the Office of Personnel 

Management's (OPM) rules and regulations for contract year 2006. 

Federal Employee Health Benefits Acquisition Regulation (FEHBAR) 1652.215-70 provides 

that carriers proposing rates to OPM are required to submit a Certificate of Accurate Pricing 

certifying that the proposed subscription rates, subject to adjustments recognized by OPM, 

are market price rates. OPM regulations refer to a market price rate in conjunction with the 

rates offered to an SSSG. If it is found that the FEHBP was charged higher than a market 

price (i.e., the best rate offered to an SSSG), a condition ofdefective pricing exists, requiring 

a downward adjustment ofthe FEHBP premiums to the equivalent market price. 

2007 

We disagree with the Plan's selection of 

_asthe SSSGs for contract year 2007. The Plan did not originally include 

experience rated preferred provider option (PPO) or point-of-service (POS) groups in its 

support for the 2007 SSSG selections. We obtained the enrollment data that included PPO 

and POS rou s and determined that the 2007 SSSGs were •••••••••• 

Our analysis ofthe rates charged to the SSSGs shows that -,eceived a.percent 

discount and _received ~ercentdiscount. The Plan did not apply the"percent 

discount that _received to the FEHBP's rates in contract year 2007. Therefore, we redeveloped the FEHBP's rates by applying the_ercent discount to the line 5 rates. A 

comparison ofthe reconciled line 5 rates to our audited line 5 rates shows that the FEHBP 

was overcharged $607,957 in 2007 (see Exhibit B). 

We disagree with the Plan's selection of 

~sthe SSSGs for contract year 2008. Again, the Plan did not originally include 

experience rated PPO or POS groups in its support for the 2008 SSSG selections. We 

obtained the enrollment data that included PPO and POS groups and determined that the 

2008 SSSGs were 

5
 
Our analysis ofthe rates charged to the SSSGs shows that_did not receive a 

discount and"received a • percent discount. The Plan did not apply the.percent 

discount that RIT received to the FEHBP's rates in contract year 2008. Accordingly, we redeveloped the FEHBP's rates by applying the.percent discount to the line 5 rates. A 

comparison ofthe reconciled line 5 rates to our auoited line 5 rates shows that the FEHBP 

was overcharged $462,788 in 2008 (see Exhibit B). 

We disagree with the Plan's selection 0 

_asthe SSSGs for contract year 2009. As in previous years, the Plan did not 

originally include experience rated PPO or POS groups in its support for the 2009 SSSG 

selections. We obtained the enrollment data that included PPO and POS oups and 

determined that the 2009 SSSGs were 

Recommendation 1 

We recommend that the contracting officer require the Plan to return $2,301,947 to the 

FEHBP for defective pricing in contract years 2007, 2008, and 2009. 

Plan's Comments: 

The Plan concurs with the findings presented above, which reflect adjustments, based on the 

Plan's comments, to the 2008 calculated discount and amount overcharged. 

2. Lost Investment Income $184,102 

In accordance with the FEHBP regulations and the contract between OPM and the Plan, the 

FEHBP is entitled to recover lost investment income on the defective pricing findings due the 

FEHBP in contract years 2007, 2008, and 2009. We determined that the FEHBP is due 

$184,102 for lost investment income, calculated through June 30, 2010 (see Exhibit C). In 

addition, the FEHBP is entitled to lost investment income for the period beginning July 1, 

2010, until all defective pricing finding amounts have been returned to the FEHBP. 

FEHBAR 1652.215-70 provides that, if any rate established in connection with the FEHBP 

contract was increased because the carrier furnished cost or pricing data that were not 

complete, accurate, or current as certified in its Certificate of Accurate Pricing, the rate shall 

be reduced by the amount ofthe overcharge caused by the defective data. In addition, when 

6
 
the rates are reduced due to defective pricing, the regulation states that the government is 

entitled to a refund and simple interest on the amount of the overcharge from the date the 

overcharge was paid to the carrier until the overcharge is liquidated. 

Our calculation of lost investment income is based on the United States Department of the 

Treasury's semiannual cost of capital rates. 

Recommendation 2 

We recommend that the contracting officer require the Plan to return $184,102 to the FEHBP 

for lost investment income for the period January 1, 2007 through June 30, 2010. In addition, 

we recommend that the contracting officer recover lost investment income on amounts due 

for the period beginning July 1,2010, until all defective pricing amounts have been returned 

to the FEHBP. 

Plan's Comments: 

The Plan concurs. 

7
 
IV. MAJOR CONTRIBUTORS TO THIS REPORT ; 

Community-Rated Audits Group 

Auditor-In-Charge 

~uditor
 

Auditor 

Chief 

Senior Team Leader 

8
 
Blue Choice 

Summary of Questioned Costs 

Defective Pricing Questioned Costs: 

Contract Year 2007
 

Contract Year 2008
 

Contract Year 2009
 

Total Defective Pricing Questioned Costs 

Lost Investment Income 

Total Questioned Costs 

Exhibit A 

$607,957 

$462,788 

$1,231.202 

$2,301,947 

$184,102 

$2.486.049 
Blue Choice 

DefeetlvePricmg Questioned Costs 

2007 Contract Year 

Plan's Reconciled Rates
 

Audited Rates
 

Biweekly Overcharge
 

To Annualize:
 

x March 31, 2007 Headcount
 

x Pay Periods
 

Subtotal
 

Total 2007 Defective Pricing Questioned Costs 

2008 Contract Year 

Plan's Reconciled Rates
 

Audited Rates
 

Biweekly Overcharge
 

To Annualize:
 

x March 31, 2008 Headcount
 

x Pay Periods
 

Subtotal
 

Total 2008 Defective Pricing Questioned Costs 

2009 Contract Year - High Option 

Plan's Reconciled Rates
 

Audited Rates
 

Biweekly Overcharge
 

To Annualize:
 

x March 3 L 2009 Headcount
 

x Pay Periods
 

Subtotal
 

Total 2009 - High Option Defective Pricing Questioned Costs 

2009 Contract Year - Standard Option 

Plan's Reconciled Rates
 

Audited Rales
 

Biweekly Overcharge
 

To Annualize:
 

x March 31. 2009 Ileadcount
 

x Pay Periods
 

Subtotal
 

Total 2009 - Standard Option Detective Pricing Questioned Costs 

Total 2009 Defective I)ricing Questioned Costs 

Total Defective Pricing Questioned Costs 

Exhibit n 

$607,957 

$462,788 

$1,043,365 

$187,837 

$1,231.202 

$2.3111.947 
Year
 

Audit Findings:
 

Defective Pricing 

Totals (per year):
 

Cumulative Totals:
 

Average Annual Interest Rate:
 

Interest on Prior Years Findings:
 

Current Years Interest:
 

Total Cumulative Interest
 

Through June 30, 2010
 

Blue Choice
 

Lost Investment Income
 

2007 2008 2009 

$607,957 $462,788 $1,231,202 

$607,957 

$607,957 

5.5000% 

$0 

$16,719 

$16,719 

$462,788 

$1,070,745 

4.9375% 

$30,018 

$11,425 

$41,443 

$1,231,202 

$2,301,947 

5.2500% 

$56,214 

$32,319 

$88,533 

June 30, 2010 

$0 

$0 

$2,301,947 

3.2500% 

$37,407 

$0 

$37,407 I 

Exhibit C 

Total 

$2,301,947 

$2,301,947 

$2,301,947 

$123,639 

$60,463 

$184,102 
APPENDIX
 

June 23, 2010 

U.S. Office of Personnel Management 

Offic~eneral

Attn:__ 

1900 E Street, NW 

Room 6400 

Washington, D.C. 20415-1 ]00 

Dear_ 

Enclosed is the response to the draft audit report issues May 11,2010. For the covered years of2006, 

2007, and 2009 we have no objections to the findings detailed therein. For the 2008 plan year we have the 

following comments: 

1) Benefit changes to the plan labeled "PPO C", worth.were not accounted for in the •. 

2) Benefit changes to the plan labeled "POS B" which len ecame "Custom POS 1", worth 

were not accounted for in the analysis 

3) Benefit changes to the plan labeled "POS D" which then became "Custom POS 2", worth_ 

were not accounted for in the analysis 

4) Starting 2007 Med D Rx rates are incorrect in the development. 

Details supporting the changes listed above are attached for your consideration. Inclusion ofthese changes 

should place the final discount Upon adjustments ofthe calculated discount for 2008, we 

expect that there will also be a 

a_downward adjustment ofthe lost investment income calculation. 

Please forward any questions to me at•••••• 

Manager ofUnderwriting 

Cc: 

Director Rating and Underwriting 

Chief Underwriter 

lnternal Auditor 

Edward DeHerde 

Chief, Health Insurance Group III 

Insurance Services Program