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 PacifiCare of Arizona 


Report No. IC-A3-00-IO-001 

Date: May 21, 2010 

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This audit report has been distributed to Federal and non-Federal officials who arc responsible for the 

administration of the audited program. This audit report may contain proprietary data which is protected by _ 

Federal law (18 U.S.C.190S). Therefore, while this report is available under the Freedom oflnformalion Act 

and'made available to the public on the OIG webpagc, caution needs to be exercised before releasing the 

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

distributed copy. 
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 


PacifiCare of Arizona 


Contract Number 2884 - Plan Code A3 


Cypress, California 


Report No. lC-A3-00-10-001 Date: May 21, 201J 

Michael R. Esser 

Assistant Inspector General 

for Audits 

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UNITED STATES OFFICE OF PERSONNEL MANAGEMENT 


Washington. DC 20415 


Office of lhe 

Inspector General 

EXECUTIVE SUMMARY 


Federal Employees Health Benefits Program 


Community-Rated Health Maintenance Organization 


PacifiCare of Arizona 


Contract Number 2884 - Plan Code A3 


Cypress, California 


Report No. lC-A3-00-10-001 Date: May 21, 2010 

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

Program (FEHBP) operations at PacifiCare ofArizona (Plan). The audit covered contract years 

2007 through 2009 and was conducted at the Plan's office in Cypress, California. We found that 

the FEHBP rates were developed in accordance with the applicable laws, regulations, and the 

Office of Personnel Management's rating instructions for the years audited. 

During our claims review, we noted a small number ofFEHBP claims that were not adjudicated 

properly. However, these claims did not have a material impact on the scope of our audit and, 

furthermore, the Plan no longer participates in the FEHBP. As a result, no corrective action is 

necessary. 

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CONTENTS 


Page 

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


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


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


III. R.ESULTS OF AUDIT .......................................................................................... · .......... 5 


IV. MAJOR CONTRIBUTORS TO THIS REPORT ............................................................ 6 

I. INTRODUCTION AND BACKGROUND 


Introduction 

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

at PacifiCare of Arizona (Plan). The audit covered contract years 2007 through 2009 and was 

conducted at the Plan's office in Cypress, California. The audit was conducted pursuant to the 

provisions ofContract CS 2884; 5 U.S.c. Chapter 89; and 5 Code ofFederal Regulations (CFR) 

Chapter 1, Part 890. The audit was performed by the Office of Personnel Management's (OPM) 

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

amended. 

Background 

The 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 of Title 5, CFR. 

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

that 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 March 31 

either of the 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. 
The Plan participated jn the FEHBP from 1983 through 2009, and provided health benefits to 


FEHBP members throughout Maricopa and Pima Counties and a pOliion of Apache Junction. 


The last full-scope audit ofthe Plan covered contract years 2003 through 2006. All issues related 


to that audit have been resolved. 


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


through subsequent correspondence. Since the audit showed that the Plan's rating ofthe FEHBP 


was in accordance with the applicable laws, regulations, and instructions, we did not issue a draft 


report. 


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. 

This performance audit covered contract years 2007 

r---------------------~ 

FEHBP Premiums Paid to Plan 

<II 

t: 

~ 

:li 

$75 

$50 

$25 

through 2009. For these years, the FEHBP paid 


approximately $154.2 million in premiums to the Plan. 


The premiums paid for each contract year audited are shown on the chart to the right. 


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 of detecting 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 of our audit procedures. However, the 


audit included such tests ofthe 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 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 performed in accordance with generally accepted government auditing standards, 

issued by the Comptroller General of the United States. 

The audit fieldwork was performed at the Plan's office in Cypress, California, during November 

2009. Additional audit work was completed at our office in Cranberry Township, Pennsylvania. 

Methodology 

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

the market price rates. Further, we examined claim payments to verify that the cost data used to 

develop the FEHBP rates was accurate, complete and valid. In addition, we examined the rate 

development documentation and billings to other groups, such as the SSSGs, to detennine ifthe 

market price was actually charged to the FEHBP. Finally, we used the contract, the Federal 

Employees Health Benefits Acquisition Regulations, and OPM's Rate Instructions to 

Community-Rated Carriers to determine the propriety of the FEHBP premiums and the 

reasonableness and acceptability of the 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. RESULTS OF AUDIT 


During our claims review, we noted a small number ofFEHBP claims that were not adjudicated 

properly. However, these claims did not have a material impact on the scope of our audit. Since 

the Plan no longer participates in the FEHBP, no corrective action is necessary. Our audit 

showed that the Plan's rating ofthe FEHBP was in accordance with the applicable laws, 

regulations, and OPM's rating instructions to carriers for contract years 2007 through 2009. 

Consequently, the audit did not identify any questioned costs and no corrective action is 

necessary. 

5 

IV. MAJOR CONTRIBUTORS TO THIS REPORT 

Community-Rated Audits Group 

_ Auditor-In-Charge 

Auditor 

Chief 

Senior Team Leader 

6