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 Presbyterian Health Plan, Inc. 

Report No. lC-P2-00-10-008 

Date:October 15, 2010 

-- CAUTION -­

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

audit report may contain proprietar)' data which is protected by Federal law (18 U.S.c. ]905). Therefore, wbile this audit report is 

available under the Freedom of Information Act and made available to the public on the OIG webpage, 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 PERSON EL MANAGEMENT 

Wa hington, DC 20415 

Office of the 

Tn pector General 

AUDIT REPORT 

Federal Employees Health Benefits Program
 

Community-Rated Health Maintenance Organization
 

Presbyterian Health Plan, Inc.
 

Contract Number CS 2627 - Plan Code P2
 

Albuquerque, New Mexico
 

Report o. lC-P2-00-10-008 Da~: October 15, 2010 

~~Assistant Inspector General 

for Audits 

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

Washingt n. DC 10415
 

Office of the 

In pector General 

EXECUTfVESU~ARY
 

Federal Employees Health Benefits Program
 

Community-Rated Health Maintenance Organization
 

Presbyterian Health Plan, IDe.
 

Contract Number CS 2627 - Plan Code P2
 

Albuquerque, New Mexico
 

Report No. lC-P2-00-10-008 Date: October 15, 2010 

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

Program (FEHBP) operations at Presbyterian Health Plan, Inc. (Plan). The audit covered contract 

years 2007 through 2009 and was conducted at the Plan's office in Albuquerque, New Mexico. 

This report questions $1 154,630 for defective pricing in contract years 2008 and 2009. The 

questioned amount includes $1,075,400 for inappropriate health benefit charges and $79,230 due 

the FEHBP for lost investment income, calculated through September 30, 2010. We found that 

the FEHBP rates were developed in accordance with the Office of Personnel Management's rules 

and regulations in 2007. 

For contract year 2008, we determined that the FEHBP's rates were overstated by $496,521 due 

to defective pricing. More specifically, the Plan used an inconsistent application of the incurred 

but not reported (IBNR) factors for the FEHBP when compared to the IBNR methodology used 

for both similarly sized subscriber groups (SSSG). The Plan also did not apply an SSSG 

discount to the FEHBP's rates. 

For contract year 2009 we determined that the FEHBP's rates were overstated by $578,879 due 

to defective pricing. More specifically the Plan incorrectly charged the FEHBP al percent state 

www.opm.goY www.usaJobs.goY 
assessment to cover the ew Mexico Health Insurer Alliance and the ew Mexico Medical 

Insurance Pool mandate. 

Consistent with the FEHBP regulations and the contract, the FEHBP is due $79,230 for lost 

investment income, calculated through September 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 October 1,2010, until all defective pricing amounts have been returned to the 

FEHBP. 

II 
CONTENTS 

EXECUTIVE SUMMARY	 i
 

I. INTRODUCTIO AND BACKGROUND	 1
 

II.	 OBJECTIVES, SCOPE, A 0 METHODOLOGY 3
 

III.	 AUDIT FINDINGS AND RECOMMENDAnONS 5
 

Premium Rates 5
 

1. Defective Pricing	 5
 

2. Lost Investment Income	 8
 

IV.	 MAJOR CONTRIBUTORS TO THIS REPORT 9
 

Exhibit A (Summary of Questioned Costs)
 

Exhibit B (Defective Pricing Questioned Costs)
 

Exhibit C (Lost Investment Income)
 

Appendix (presbyterian Health Plan, Inc. 's September 8,2010, response to the
 

draft report)
 
I. INTRODUCTION AND BACKGROUND
 

Introduction 

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

at Presbyterian Health Plan, Inc. (Plan) in Albuquerque, New Mexico. The audit covered 

contract years 2007 through 2009. The audit was conducted pursuant to the provisions of 

Contract CS 2627; 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 ofthe 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, FEHBP Contracts/Members 

which is defined as the best rate offered to 

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. aPM negotiations 

relate primarily to the level of coverage and 

otber 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. 

o-i'-'===-T'-===-T'--===-or 

March 31 

12,000 

10,000 

8,000 

6,000 

4,000 

2,000 

2007 

• Contracts 5,438 

o Members 11,864 

2008 

5.438 

11,864 

2009 

4,728 

10.051 
The Plan has participated in the FEHBP since 1991 and provides health benefits to FEHBP 

members in all counties ofNew Mexico. The last audit conducted by our office was a full scope 

audit and covered contract years 2003, 2004, and 2006. All matters related to that audit have 

been resolved. 

The preliminary results ofthis 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's comments were considered in the preparation of this report and are 

included, as appropriate, as the Appendix. 

2
 
FEHBP Premiums Paid to Plan 

$56 

III $54 t:: 

,g 

$52 

$50 

$48 2007 2008 2009 

• Revenue $50.7 $55.5 $55.4

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 

ac~ordance 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 through 2009. For these contract years, the 

FEHBP paid approximately $161.6 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 aPM 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 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 of the United States. 

The audit fieldwork was performed at the Plan's office in Albuquerque, ew Mexico, during 

March 20 IO. Additional audit work wa 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. Further we examined claim payments to verify that the cost data us d to 

develop the FEHEP 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 ifthe 

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

Employees Haith Benefits Acquisition Regulations (FEHBAR), and OPM's Rate Instructions to 

Commtmity-Rated Carriers to determine the propriety ofthe FEHBP premiLUns 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
 
Premium Rates 

1. Defective Pricing $1,075,400 

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

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

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

FEHBP is entitled to premium adjustments totaling $1,075,400 (see Exhibit A). We found 

that the FEHBP rates were developed in accordance with OPM's rules and regulations for 

contract year 2007. 

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 conj unction 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 of 

defective pricing exists, requiring a downward adjustment of the FEHBP premiums to the 

equivalent market price. 

2008 

We agree with the Plan's selection 0 as the SSSGs for 

contract year 2008. Our analysis of the rat~the SSSGs shows that 

did not receive a discount and__received ~iscount. The 

Plan did not apply the~ercent discount that eceived to the FEHBP's rates in 

contract year 2008. 

In addition, we reviewed the FEHBP's rates and found that the Plan was using an inconsistent 

rating methodology in its application of the incurred but not reported (IBNR) factors. The 

Plan originally rated the FEHEP using an annual IBNR factor but rated both SSSGs using 

monthly IBNR factors. 

We applied the monthly IBNR factors to the FEHBP's monthly medical claims data, based on 

the 2008 Community Rating Instructions, which state that the carrier should use the same 

rating method for the Federal group as it uses for the SSSGs. We accept different rating 

methods in some situations. If, however, the carrier rates an SSSG using a method 

inconsistent with the carrier-established policies, the Federal group is entitled to a discount 

based on the SSSG rating method applied to the Federal group. When we applied the monthly 

IBNR factors to the FEHBP's medical claims data, the Incurred Completion Factor was 

reduced from _ to_ 

5 
We re-developed the FEHBP s rates by applying the monthly IBNR factors to the medical
 

claims data and by applying th. percent discount, granted to to the line 5
 

rates. A comparison of the reconciled line 5 rates to our audited line 5 rates shows that the
 

FEHBP was overcharged $496,521 in 2008 (see Exhibit B).
 

Plan's Comments (See Appendix): 

The Plan does not dispute the lB R finding for 2008. 

However, the Plan disagrees with the finding regarding thellll percent discount that _ 

_ received. The Plan states that had.pre-65 retirees that were billed a 

higher premium than the rest of the active employees group in the first quarter of 

2007, when the 2008 renewal was being calculated. The calculation ofthe"percent 

discount did not consider the higher rates billed to the.pre-65 retirees in 2007. 

In addition the"pre-65 retirees terminated coverage before January 1,2008 (March 31 

2007 and May 31, 2006 respectively) and were not covered in any month of 2008. Detailed 

bills were included for each month of2008 to show that neither subscriber was covered in 

2008. 

Based on this information the Plan disputes the finding that _was given a discount 

o~percent; therefore, they state that the defective pricing amount for 2008 should be 

reduced by approximately $120,000, plus any interest on that amount. 

DIG's Response to the Plan's Comments: 

We acknowledge the Plan s agreement with the IB R finding and the subsequent application 

of the monthly IBNR factors to the FEHBP's rates in contract year 2008. 

We disagree with the Plan's assertion that the.pre-65 retirees received a higher billed rate 

in the first quarter of 2007. While on-site, we obtained copies of the March 2007 bills, which 

show th~re-65 retirees receiving the same rate as the active enrollees (_single 

and_employee and spouse). The 2007 billed rates affect the calculation of the current 

per me~h (PMPM) rates, which we calculated at a lower amount than the Plan 

used in rate development. The variance in the current PMPM leads to an 

increased rate change and ultimately an increased rate for 2008. 

We also disagree with the Plan's assertion that removing the"pre-65 retirees and the _
 

_ from the quoted rate model, due to termination, would negate the discount that
 

received. When we removed from the single tierl,•••
 

_romthe employee and spouse tier and from the total members,
 

the discount for slightly increased to .percent.
 

Another issue that we have with the Plan's argument is the fact that the Plan states that one of 

the pre-65 retirees terminated as of May 31, 2006. The enrollment system report that was 

6 
provided in the Plan's response to the draft report supports the date of tennination, but the 

bills that were provided on-site continue to show the pre-65 enrollee being billed by the Plan 

until at least March 2007. 

The information provided by the Plan does not change our original conclusion that _ 

_ received a discount due to the fact that the bills show the pre-65 retirees being charged 

the same amount as the active members. We continue to contend that_received a 

"percent discount and this discount was not applied to the FEHBP rates. 

We agree with the Plan's selection 0 as the SSSGs for 

contract year 2009. Our analysis of the rates charged to the SSSGs shows that neither group 

received a discount. 

We reviewed the FEHBP's rates and found that the Plan charged alpercent loading for an 

insurance pool assessment. The insurance pool assessment loading is a state mandated charge 

for the New Mexico Medical Insurance Pool (NMMIP) and the New Mexico Health Insurer 

Alliance (NMHIA). The NMMIP is a state assessment that allows for coverage of uninsured 

ew Mexico state residents. The MHIA is an alliance ofthe New Mexico Insurers that
 

allows underwriting of indi iduals and small businesses. This allows the risk to be spread
 

across all insurers.
 

State assessments are an unallowable cost identified by the 2009 Community Rating 

Instructions which prohibits the imposition of taxes, fees, or other monetary payment, directly 

or indirectly, on FEHBP premiums by any State, the Dish-jet of Columbia, or the 

Commonwealth of Puerto Rico or by any political subdivision or other govemmental authority 

of those entities. 

We re-developed the FEHBP's rates by removing the insurance pool assessments. A 

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

overcharged $578,879 in 2009 (see Exhibit B). 

Plan's Comments (See Appendix): 

The Plan does not dispute this finding for 2009. 

Recommendation 1 

We recommend that the contracting officer require the Plan to return $1,075,400 to the
 

FEHBP for defective pricing in contract years 2008 and 2009.
 

7
 
2. Lost Investment Income $79,230 

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 $79,230 for 

lost investment income, calculated through September 30, 2010 (see Exhibit C). In addition, 

the FEHBP is entitled to lost investment income for the period beginning October 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 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 of the overcharge from the date the 

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

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

Treasury's semiannual cost of capital rates. 

Plan's Comments (See Appendix): 

The Plan does not dispute lost investment income being calculated for the lBNR finding in 

2008 or the state assessment finding in 2009. The Plan does not agree with the SSSG discount 

finding in 2008 and feels that lost investment income should not be calculated for the amount 

related to that finding. 

OIG's Response to the Plan's Comments: 

We disagree with the Plan's assertion that lost investment income should not be calculated for 

the SSSG discount finding in 2008. We feel that the finding is correct and will continue to 

assess lost investment income for the full amount of findings in contract years 2008 and 2009. 

Recommendation 2 

We recommend that the contracting officer require the Plan to return $79,230 to the FEHBP 

for lost investment income for the period January 1,2008 through September 30, 2010. In 

addition, we recommend that the contracting officer recover lost investment income on 

amounts due for the period beginning October 1, 2010, until all defective pricing amounts 

have been returned to the FEHBP. 

8
 
IV. MAJOR CONTRIBUTORS TO THIS REPORT 

Community-Rated Audits Group 

Auditor 

Auditor 

Auditor-In-Charge 

Senior Team Leader 

Chief 

9
 
Exhibit A 

Presbyterian Health Plan, Inc. 

Summary of Questioned Costs 

Defective Pricing Questioned Costs: 

Contract Year 2008 

Contract Year 2009 

$496,521 

$578,879 

Total Defective Pricing Questioned Costs: $1 075,400 

Lost Investment Income: $79,230 

Total Questioned Costs: $1,151.630 
• • 

Exhibit B 

Page 1 of2 

Presbyterian Health Plan, Inc.
 

Defective Pricing Questioned Costs
 

2008 - High Option 

Family 

FEHBP Line 5 - Reconciled Rate 

FEHBP Line 5 - Audited Rate 

Overcharge 

To Annualize Overcharge: 

3/31/08 enrollment 

Pay Periods 26 26 

Subtotal $115,489 $365,922 

Total 2008 - High Option Defective Pricing Questioned Costs $48],411 

2008 - Standard Option 

Self Familv 

FEHBP Line 5 - Reconciled Rate 

FEHBP Line 5 - Audited Rate 

Overcharge 

To Annualize Overcharge: 

3/31/08 enrollment 

Pay Periods 26 26 

Subtotal $4,593 $10,517 

Total 2008 • Standard Option Defective Pricing Questioned Costs $15,110 

Total 2008 Defective Pricing Questioned Costs $496,521 
Presbyterian Health Plan, Inc.
 

Defective Pricing Questioned Costs
 

2009 - High Option 

FEHBP Line 5 - Reconciled Rate 

FEHBP Line 5 - Audited Rate 

Overcharge 

To Annualize Overcharge: 

3131/09 enrollment 

Pay Periods 

Subtotal 

26 

$130,266 

Total 2009 - High Option Defective Pricing Questioned Costs 

2009 - Standard Option 

F HBP Line 5 - Reconciled Rate 

FEHBP Line 5 - Audited Rate 

Self 

Overcharge 

To Annualize Overcharge: 

3/31109 enrollment 

Pay Periods 

Subtotal 

26 

11.794 

Total 2009 ­ tandard Option Defective Pricing Questioned Costs 

Total 2009 Defective Pricing Questioned Costs 

Toal Defective Pricing Questioned Costs 

Exhibit B
 

Page 2 of2
 

26 

$385,382 

Family 

$515,648 

26 

$51 437 

$578,879 

$1,075.400 
EXHIBITC 

Presbyterian Health Plan, Inc. 

Lost Investment Income 

Year 2007 2008 2009 2010 Total 

Audit Findings: 

I. Defective Pricing $0 $496521 $578,879 $0 $[,075,400 

Totals (per year): $0 $496,521 $578879 $0 $1,075,400 

Cumulative Totals: $0 $496,521 $1,075,400 $1,075,400 

Avg. Interest Rate (per year): 5.5000% 4.9375% 5.2500% 3.1875% 

Interest on Prior Years Findings: $0 $0 $26,067 $25,709 $51,776 

Current Years Jnterest: $0 $12,258 $15,196 $0 $27,454 

Total Cumulative Interest Calculated 

Through eptember 30, 20 I0: $0 $12,258 $41,263 $25,7091 $79,230 
Appendix
 

!.PRESBY ERIAN	 2010 SEP 14 PM 3: 08 

eplember 8, 2010 

Chief Community-Rated udits Group
 

U.. Office of Personnel Management
 

Office ofIn peclor Gen ral
 

1900 Stre t, NW
 

Room 6400
 

Washington D. .20415-110
 

Re:	 Presb terian Respon e to Draft [Proposed Report - OPM
 

Report umber: 1C-P2-00-1 0-008
 

Oat : June J7 20 10
 

Dear_ 

Thank you for the oPPOltunity to respond to the Draft Report for PHP FEHBP plan. Following
 

are responses 10 the arious finding.
 

2008­

The OIG audit team calculated a discount I_forthe Januar 1 2008 renewal. 

had.pre 65 r tiree lhat were billed a higher premium than the rest ofthelc••• 

active employees in the first qua11er 0[2007 when the January 1,2008 renewai 'vvas being 

calculated. The.pre 65 retit'ees were: 

he pre umption of the OIG audit team in arriving at th~discount was that the e_ individuals were billed at the lower activ rates in 2008. 

lowe er, we have sine b en able to do additional research back to the relevant points in tim 

I am attaching the April 2007 demographic report which shows the 

_ in the retiree class. 

term inated co erag with us effecti e 3/31/2007.
 

retroactively terminated cov rage back to 5/3112006.
 
terminated coverage before January 1, 2008 and \ ere not covered 

in any month of 2008. I am including the detailed bills for ach month of2008 to show that 

•••••••"\las cover din 2008. 

Based on this information we dispute the finding that was given a discount of 

_therefore the defective pricing amount for 2008 F HBP should be reduced by 

approximately $120,000 plus any interest 011 that amount. 

OTHER FINOr GS
 

Pr sbyt rian does not disput the I NR finding for 2008 or th tat Assessment finding for
 

2009.
 

Thanks for your consideration related to tlus finding. 

nior Actuarial Assistant
 

Presbyterian Haith Plan