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 of OSF HealthPlans, Inc. 

Report No. lC-9F-OO-09-064 

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 

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

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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 


Comprehensive Medical Plan - Community-Rated 


OSF HealthPlans, Inc. 


Contract Number 2829-A - Plan Code 9F 


Peoria, Illinois 


Report No. lC-9F-OO-09-064 Date: July 22, 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 


Comprehensive Medical Plan - Community-Rated 


OSF HealthPlans, Inc. 


Contract Number 2829-A - Plan Code 9F 


Peoria, Illinois 


Report No. lC-9F-OO-09-064 Da~: July 22, 2010 

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

Program (FEHBP) operations at OSF HealthPlans, Inc. (Plan). The audit covered contract years 

2005,2006,2008, and 2009 and was conducted as a desk audit in our Washington, D.C. office. 

We found that the FEHBP rates were developed in accordance with the Office ofPersonnel 

Management's rules and regulations in 2005 and 2006. 

In contract years 2008 and 2009, we found that the FEHBP did not receive a discount equivalent 

to the adjustment the Plan gave to a similarly sized subscriber group (SSSG). Application ofthe 

SSSG's discount to the FEHBP's audited rates shows that the FEHBP was overcharged $79,992 

for 2008 and $228,417 for 2009. This report also details a procedural finding related to the 

Plan's claims data submission. 

Consistent with the FEHBP regulations and contract, the FEHBP is due $17,183 for lost 

investment income, calculated through June 30, 2010, on the defective pricing finding. 

The Plan agreed with these findings and remitted a check for $325,592 ($79,992 + $228,417 + 

$17,183). 

www.opm.gov www.usajobs.gov 
CONTENTS 


Page 

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


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


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


III. 	 AUDIT FINDINGS AND RECOMMENDATIONS ...................................................... 5 


A. Premium Rates ............................................................................................................ 5 


1. Defective Pricing ..................................................................................................... 5 


2. Lost Investment Income .......................................................................................... 6 


B. Claims Review .............................................................................................................6 


Medical COB Review ................................................................................................. 7 


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 (Humana's June 28, 2010, response to the draft report) 

I. INTRODUCTION AND BACKGROUND 


Introduction 

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

at OSF HealthPlans, Inc. (Plan) in Peoria, Illinois. The audit covered contract years 2005, 2006, 

2008, and 2009. The audit was conducted pursuant to the provisions ofContract CS 2829-A; 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 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 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, 

which is defined as the best rate offered to 

FEHBP Contracts/Members 

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 ofthe 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. 

1 

The Plan has participated in the FEHBP since 1998 and provides health benefits to FEHBP 

members in Central Illinois and Central-Northwestern Illinois. The last audit conducted by our 

office was a rate reconciliation audit for contract year 2007. We agreed with the Plan's 2007 

proposed reconciled rates. 

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

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

comment. 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 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. 

FEHBP Premiums Paid to Plan 

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 2005, 

2006,2008, and 2009. For these contract years, the 

FEHBP paid approximately $36.2 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 ofdetecting errors, irregularities, and illegal acts. 

We obtained an understanding ofthe 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 
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 

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 was conducted as a desk audit in our Washington, D.C. offices during October 2009. 

Methodolo2V 

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 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 


A. Premium Rates 

1. Defective Pricing $308,409 

The Certificates ofAccurate Pricing the Plan signed for contract years 2008 and 2009 were 

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

reduction for those years. Application of the defective pricing remedies shows that the 

FEHBP is entitled to premium adjustments totaling $308,409 (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 years 2005 and 2006. 

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. Ifit 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 of the FEHBP premiums to the equivalent market price. 

The Plan selected as the 

SSSGs in 2008. We 

that and 

with these selections. 

"percent and _ percent, ude either discount in the 

FEHBP's rate development. In developing the audited rates for the FEHBP, we applied 

the.percent discount granted to A comparison ofour 

audited rates to the proposed rates showed that the FEHBP was overcharged $79,992 in 

2008 (see Exhibit B). 

The Plan selected 

SSSGs in 2009. We 

as the 

with these selections. Our an~is ofthe SSSG rates showed 

received a discount of"percent. 

not receIve a The Plan included a discount m 

FEHBP rate development. In developing the audited rates for the FEHBP, we applied the 

"percent discount granted to . A comparison ofour 

audited rates to the proposed rates showed that the FEHBP was overcharged $228,417 in 

2009 (see Exhibit B). 

5 

Recommendation 1 

After receiving the draft report, the Plan returned $308,409 to the FEHBP for defective 

pricing in contract years 2008 and 2009. Since we verified that the Plan returned $308,409 

to the FEHBP, no further action is required. 

2. Lost Investment Income $17,183 

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 2008 and 2009. We determined that the FEHBP is due 

$17,183 for lost investment income, calculated through June 30, 2010 (see Exhibit C). 

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 of the overcharge caused by the defective data. In 

addition, when 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 ofthe 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 ofthe 

Treasury's semiannual cost of capital rates. 

Recommendation 2 

After receiving the draft report, the Plan returned $17,183 to the FEHBP for lost 

investment income on the defective pricing findings in contract years 2008 and 2009. 

Since we verified that the Plan returned $17,183 to the FEHBP, no further action is 

required. 

Plan's Comments (See Appendix): 

The Plan agrees with the defective pricing finding and the calculated lost investment 

income and submitted payment in full in the amount of $325,592 ($79,992 + $288,417 + 

$17,183). 

B. Claims Review 

In FEHBP Program Carrier Letter 2008-09, the Office of Personnel Management requires all 

carriers to keep on file all data necessary to justify its Adjusted Community Rating (ACR) 

rate and save back-up copies of their claims databases for audit purposes. We reviewed the 

FEHBP claims data for contract year 2009. We ran queries on the claims data that relate to 

hospital, physician, out-of-area, prescription drugs and injectible drugs, large claims, 

6 
coordination of benefits (COB), bundling of claims, and non-covered benefits according to 


the FEHBP benefit brochures. 


Medical COB Review 

The Plan did not provide all the necessary documentation to support all ofthe claims selected 

for the medical COB review. In order to complete the COB review, we need documentation 

to support 8 medical claims, totaling $61,117.42 in payments, ofthe 15 we selected for 

review. This support is needed to verify that the Plan coordinated payment of the claims with 

other insurance providers (i.e., Medicare). These eight claims were included in the total 

claims cost used to develop the FEHBP rates. Since the Plan did not support the claims, we 

removed $61,117.42 in claims from the 2009 rate development to determine the effect on the 

2009 premium rates. The comparison showed that removing the claims would produce an 

immaterial change. Therefore, we are reporting this issue as a procedural finding. 

Recommendation 3 

We recommend that the contracting officer require the Plan to submit the eight medical 

claims, totaling $61,117.42 in payments, to verify that coordination was done correctly. 

Plan's Comments (See Appendix): 

The Plan did not comment on this finding. 

7 

IV. MAJOR CONTRIBUTORS TO THIS REPORT 

Community-Rated Audits Group 

Lead Auditor 

Auditor-In-Charge 

Senior Team Leader 

Chief 

8 

Exhibit A 

OSF HealthPlans, Inc. 

Summary of Questioned Costs 

Defective Pricing Questioned Costs: 

Contract Year 2008 $79,992 

Contract Year 2009 $228,417 

Total Defective Pricing Questioned Costs $308,409 

Lost Investment Income $17,183 

Total Questioned Costs $325.592 
Exhibit B 

OSF HealthPlans, Inc. 


Defective Pricing Questioned Costs 


2008 Contract Year 

Higb Option 

Plan's Proposed Rates 

Audited Rates 

Biweekly Overcharge 

To Annualize: 

x March 31, 2008 Headcount 

x Pay Periods 

Subtotal 

Amount Due FEHBP in 2008 $76,518 

High Deductible Health Plan 

Plan's Proposed Rates 

Audited Rates 

Biweekly Overcharge 

To Annualize: 

x March 31, 2008 Headcount 

x Pay Periods 

Subtotal 

Amount Due FEHBP in 2008 $3,474 


Total 2008 Defective Pricing Questioned Costs 

2009 Contract Year 

$79.992 


High Option 

Plan's Proposed Rates 

Audited Rates 

Biweekly Overcharge 

To Annualize: 

x March 31, 2009 Headcount 

x Pay Periods 

Subtotal 

Amount Due Plan in 2009 $228,417

Total 2009 Defective Pricing Questioned Costs $228417

Total Defective Pricing Questioned Costs $308.409 
Exhibit C 

OSF HealthPlans, Inc. 

Lost Investment Income 

Year 

Audit Findings: 

Defective Pricing 

2008 

$79,992 

2009 

$228,417 

2010 

0 

Total 

$308,409 

Totals (per year): 

Cumulative Totals: 

Average Annual Interest Rate: 

Interest on Prior Years Findings: 

Current Years Interest: 

Total Cumulative Interest 

June 30, 2010 

$79,992 

$79,992 

4.9375% 

$0 

$1,975 

$1,975 

$228,417 

$308,409 

5.2500% 

$4,200 

$5,996 

$10,196 

$0 

$308,409 

3.2500% 

$5,012 

$0 

$5,012 r 

$308,409 

$308,409 

$9,212 

$7,971 

$17,183 
Appendix 

HUMANA RESPONSE TO DRAFT AUDIT REPORT NO. lC-9F-OO-09-064 

June 28, 2010 

This document is submitted by Humana Inc. ("Humana"), the acquirer of OSF HealthPlans, 

Inc. ("OSF") in May 2008, and responds to the Draft Audit Report dated March 19,2010 (the 

"Audit Report") issued by the Office ofInspector General of the Office of PerSOlmel 

Management ("OPM") regarding the OSF HealthPlans, Inc. FEHBP Contract Number 2829­

A - Rate Code 9F for contract years 2005-2006 and 2008-2009. 

REMOVED BY OIG 

NOT RELEVANT TO FINAL REPORT 

Humana concurs with the defective pricing charges in entirety for contract years 2008 and 

2009 totaling $308,409 and has enclosed a check for this amount plus $17,183 in lost 

investment income through 6/30/2010 for a total repayment of $325,592 (see Exhibit 1). 

REMOVED BY OIG 


NOT RELEVANT TO FINAL REPORT 

Exhibit 1 

RESPONSE TO FINAL AUDIT REPORT ­

CHARGES CONCESSION INCLUDING LOST INVESTMENT INCOME THROUGH 6/3012010 

OSF HealthPlans , Inc. 

Year 2006 2007 2008 2009 2010 Total 

Audit Findings 

Defective pricing 0 0 79,992 228,417 0 308,409 

Totals (per year): 0 0 79,992 228,417 0 308.409 

Cumulative total: 0 0 79,992 308,409 308,409 308,409 

Avg Interest Rate (per year): 5.4375% 5.50% 4.938% 5.25% 3.25% 

Interest PY findings: 0 0 0 4,200 5.012 9,212 

thru 6-30-10 

Current Year findings: 0 0 1,975 5,996 0 7,971 

Total Cumulative Interest: 0 0 1.975 10.196 5,012 17,183 

Total Audit Charges Concession & Interest 325,592