u.s. OFFICE OF PERSONNEL MANAGEMENT 

OFFICE OF THE INSPECTOR GENERAL 

OFFICE OF AUDITS 

Final Audit Report 

Subject: 

Audit ofthe Federal ElllployeesHealthBenefits
 

ProgramOperation~at PacifiCare of California
 

Report No. 1C-CY-OO-IO-024 

Date: June 3, 2010 

-- CAUTION -­

This audit repQrt has been distributed 10 Federal officials who arc responsible for the administratiQn of the ll-udited program. This 

'audit report may contain proprietary data which is protected by Federal law (18 U.S.c. 1905). Therefore, while this audil report is 

available under the Freedom Of Information Acl and made available lothe public on lhe OIG wcbpagc, caution needs 10 be exercised 

before releasing thereport'lo the general public as it may cOIl'lll-in proprietary information lhat was rNlaclcd 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 California
 

Contract Number 1937 - Plan Code CY
 

Cypress, California
 

Report No. lC-CY-OO-1O-024 Da~: June 3, 2010 

-


Michael R. Esser 

Assistant Inspector General 

for Audits 

www.opm.gov www.usajobs.gov 
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
 

PacifiCare of California
 

Contract Number 1937 - Plan Code CY
 

Cypress, California
 

Report No.lC-CY-OO-lO-024 Date: June 3, 2010 

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

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

years 2008 and 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. 

www.opm.goY www.usajobs.goY 
CONTENTS
 

Page 

EXECUTIVE SUMMARy i
 

I. INTRODUCTION AND BACKGROUND 1
 

II. OBJECTIVES, SCOPE, AND METHODOLOGy 3
 

III. RESULTS 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 California (Plan). The audit covered contract years 2008 and 2009 and was 

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

provisions of Contract CS 1937; 5 V.S.c. Chapter 89; and 5 Code of Federal Regulations (CFR) 

Chapter 1, Part 890. The audit was perfonned 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 tluough 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, 

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, aPM 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 ofthe FEHBP. 

FEHBP Contracts/Members 

March 31 

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. 

80,000 

70,000 

60,000 

50,000 

40,000 

30,000 

20,000 

10,000 

o 

• Contracts 

o Members 

2008 

28,951 

68,317 

2009 

32,462 

76,491 

1
 
The Plan participated in the FEHBP from 1983 through 2009 and provided health benefits to 

FEHBP members in California. The last full-scope audit of the Plan covered contract years 2005 

through 2007. 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 of the 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 of the 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 ofthe 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
 

concJusions based on our audit objectives.
 

. This performance audit covered contract years 

2008 and 2009. For these contract years, the 

FEHBP paid approximately $555.5 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. 

3 

• Revenue 

FEHBP Premiums Paid to Plan 

$250 

$200 

$150 

$100 

$50 

$0 
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 ofthe data generated by 

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 of the United States. 

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

2010. Additional audit work was completed at our 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. 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 determine if the 

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 ofthe FEHBP premiums and the 

reasonableness and acceptability of the Plan's rating system. 

To gain an understanding of the 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 THE AUDIT
 

Our audit showed that the Plan's rating of the FEHBP was in accordance with the applicable 

laws, regulations, and OPM's rating instructions to carriers for contract years 2008 and 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 

Staff 

Staff 

CRAG Group Chief 

Senior Team Leader 

6