u.s. OFFICE OF PERSONNEL MANAGEMENT 

OFFICE OF THE INSPECTOR GENERAL 

OFFICE OF AUDITS 

Final Audit Report 

Subject: 

AUDIT OF CAREFIRST BLUECHOICE
 

OWINGS MILLS, MARYLAND
 

Report No. ID-2G-OO-09-028 

Date: February 25, 2010 

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C: 

UNITED STATES OFFICE OF PERSONNEL MANAGEMENT
 

Washington, DC 20415
 

Office of the 

Inspector General 

AUDIT REPORT 

Federal Employees Health Benefits Program
 

Experience-Rated Health Maintenance Organization
 

CareFirst BlueChoice
 

Contract CS 2879 Plan Code 2G
 

Owings Mills, Maryland
 

REPORT NO. ID-2G-OO-09-028 DATE: February 25, 2010 

%f?RCL 

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
 

Experience-Rated Health Maintenance Organization
 

CareFirst BlueChoice
 

Contract CS 2879 Plan Code 2G
 

Owings Mills, Maryland
 

REPORT NO. DATE: February 25, 2010 ID-2G-00-09-028 

This final audit report on the Federal Employees Health Benefits Program (FEHBP) operations at 

CareFirst BlueChoice (Plan) in Owings Mills, Maryland questions $107,358 in administrative 

expenses and lost investment income. The Plan agreed (A) with this questioned amount. 

OUT limited scope audit was conducted in accordance with Government Auditing Standards. The 

audit covered miscellaneous health benefit payments and credits and administrative expenses for 

2004 through 2008 as reported in the Annual Accounting Statements. In addition, we reviewed 

the Plan's cash management practices related to FEHBP funds for contract years 2004 through 

2008. 

Questioned items are summarized as follows: 

A. MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS 

The audit disclosed no findings pertaining to miscellaneous health benefit payments and credits. 

Overall, we concluded that the Plan returned health benefit refunds and recoveries, including 

prescription drug rebates, to the FEHBP in a timely manner. 

www_opm.gov www.usajobs.gov 
B. ADMINISTRATIVE EXPENSES
 

• Unallowable and/or Unallocable Cost Centers fA) $107,358 

The Plan charged the FEHBP for two unallowable and/or unallocable cost centers, resulting 

in overcharges of $1 00,234 to the FEHBP. Subsequent to us identifYing these overcharges, 

the Plan returned $107,358 to the FEHBP, consisting of$100,234 for the overcharges and 

$7,124 for lost investment income. 

c. CASH MANAGEMENT 

The audit disclosed no findings pertaining to cash management. Overall, we concluded that the 

Plan handled FEHBP funds in accordance with Contract CS 2879 and applicable laws and 

regulations. 

II 
CONTENTS
 

PAGE 

EXECUTIVE SUM·MARY	 i
 

1. INTRODUCTION AND BACKGROUND	 I
 

II. OBJECTIVES, SCOPE, AND tvfETHODOLOGY	 3
 

III.	 AUDIT FINDINGS AND RECOMMENDATIONS 6
 

A. MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS 6
 

B. ADMINISTRATIVE EXPENSES	 6
 

1. Unallowable and/or Unallocable Cost Centers	 6
 

C. CASH MANAGEMENT	 8
 

IV.	 MAJOR CONTRIBUTORS TO THIS REPORT. 9
 

V.	 SCHEDULE A - CONTRACT CHARGES AND AMOUNTS QUESTIONED
 

APPENDIX (CareFirst BlueChoice reply, dated October 9,2009, to the audit inquiry)
 
I. INTRODUCTION AND BACKGROUND
 

INTRODUCTION 

This final audit report details· the findings, conclusions, and recommendations resulting from our 

limited scope audit of the Federal Employees Health Benefits Program (FEHBP) operations at 

CareFirst BlueChoice (Plan). The Plan is located in Owings Mills, Maryland. 

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 (FEHB) 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. OPM's Retirement and Benefits 

Office has overall responsibility for administration of the FEHBP. The provisions ofthe FEHB 

Act are implemented by OPM through regulations, which are codified in Title 5, Chapter I, Part 

890 of the Code ofFederal Regulations (CFR). Health insurance coverage is made available 

through contracts with various health insurance carriers. 

The Plan is an experience-rated health maintenance organization (HMO) that provides health 

benefits to federal enrollees and their families. l Emollment is open to all federal employees and 

annuitants in the Plan's service area, which includes Maryland, Northern Virginia, and 

Washington, D.C. 

The Plan's contract (CS 2879) with OPM is experience-rated. Thus, the costs of providing 

benefits in the prior year, including underwritten gains and losses which have been carried 

forward, are reflected in current and future years' premium rates. In addition, the contract 

provides that in the event of tennination, unexpended program funds revert to the FEHBP Trust 

Fund. In recognition of these provisions, the contract requires an accounting of program funds 

be submitted at the end of each contract year. The accounting is made on a statement of 

operations known as the Annual Accounting Statement. 

Compliance with laws and regulations applicable to the FEHBP is the responsibility of the Plan's 

management. Also, management of the Plan is responsible for establishing and maintaining a 

system of internal controls. 

I Members of an experience-rated HMO have the option of using a designated network of providers or using nonnetwork providers. A member's choice in selecting one healthcare provider over another has monetary and medical 

implications. For example, if a member chooses a non-network provider, the member will pay a substantial portion 

ofthe charges and benefits available may be less comprehensive. 

1
 
This is our first audit ofthis Plan as an experience-rated HMO, The results of this audit were 

provided to the Plan in a written audit inquiry (finding) during fieldwork, and were discussed 

with Plan officials throughout the audit and at an exit conference. The Plan's comments offered 

in response to our audit inquiry were considered in preparing our final report and are included as 

an Appendix to this report. Since the- Plan agreed with our audit inquiry, we bypassed the draft 

report and only issued a final report. The Plan agreed with this decision. 

2
 
II. OBJECTIVES, SCOPE, AND METHODOLOGY
 

OBJECTIVES
 

The objectives of our audit were to determine whether the Plan charged costs to the FEHBP and 

provided services to FEHBP members in accordance with the tenus of the contract. Specifically, 

our objectives were as follows: 

Miscellaneous Health Benefit Payments and Credits 

•	 To detennine whether miscellaneous payments charged to the FEHBP were in
 

compliance with the terms ofthe contract.
 

•	 To detennine whether credits and miscellaneous income relating to FEHBP benefit 

payments were returned promptly to the FEHBP. 

Administrative Expenses 

•	 To detennine whether administrative expenses charged to the contract were actual, 

allowable, necessary and reasonable expenses incurred in accordance with the tenns of 

the contract and applicable regulations. 

Cash Management 

•	 To determine whether the Plan handled FEHBP funds in accordance with applicable laws 

and regulations concerning cash management in the FEHBP. 

SCOPE 

We conducted our limited scope perfonnance audit in accordance with generally accepted 

government auditing standards. Those standards require that we plan and perfonn the audit to 

obtain sufficient and 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. 

We reviewed the Plan's Annual Accounting Statements for contract years 2004 through 2008. 

During this period, the Plan paid approximately $235 million in health benefit charges and $15 

million in administrative expenses (See Figure 1 and Schedule A). The Plan also paid 

approximately $1 million in other expenses and retentions (See Schedule A). 

Specifically, we reviewed miscellaneous health benefit payments and credits (e.g., refunds, 

subrogation recoveries, provider audit recoveries, fraud recoveries and prescription drug rebates), 

administrative expenses, and cash management for 2004 through 2008. 

3
 
CareFirst BlueChoice 

Summary of Contract Charges 

$100 

III $75 c 

0

:i $50

$25

$0

2004 2005 2006 2007 2008

Contract Years 

r.iI Health Benefit Payments .Administrative Expenses 

Figure I - Contract Charges 

In planning and conducting our audit, we 

obtained an understanding of the Plan's internal 

control structure to help determine the nature, 

timing, and extent of our auditing procedures. 

This was detennined to be the most effective 

approach to sele~t areas of audit. For those 

areas selected, we primarily relied on 

substantive tests of transactions and not tests of 

controls. Based on our testing, we did not 

identify any significant matters involving the 

Plan's internal control structure and its 

operation. Howevei,~since our audit would not 

necessarily disclose all significant matters in 

the internal control structure, we do not express 

an opinion on the Plan's system of internal 

controls taken as a whole. 

We also conducted tests to detennine whether the Plan had complied with the contract, the 

applicable procurement regulations (i.e., Federal Acquisition Regulations (FAR) and Federal 

Employees Health Benefits Acquisition Regulations (FEHBAR), as appropriate), and the laws 

and regulations governing the FEHBP. The results of our tests indicate that, with respect to the 

items tested, the Plan did not comply with all provisions of the contract and federal procurement 

regulations. Exceptions noted in the areas reviewed are set forth in detail in the "Audit Findings 

and Recommendations" section ofthis audit report. With respect to the items not tested, nothing 

came to our attention that caused us to believe that the Plan had not complied, in all material 

respects, with those provisions. 

In c~hducting our audit, we relied to varying degrees on computer-generated data provided by the 

Plan. Due to time constraints, we did not verify the reliability of the data generated by the 

various systems involved. However, while utilizing the computer-generated data during our 

audit testing, nothing came to our attention to cause us to doubt its reliability. We believe that 

the data available was sufficient to achieve our audit objectives. 

The audit was performed at the Plan's office in Owings Mills, Maryland on various dates from 

May 4, 2009 though August 7, 2009. Audit fieldwork was also performed at our offices in 

Washington, D.C.; Cranberry Township, Pennsylvania; and Jacksonville, Florida. 

4
 
METHODOLOGY
 

We obtained an understanding ofthe internal controls over the Plan's financial, cost accounting, 

and cash management systems by inquiry of Plan officials. 

We interviewed Plan personnel and reviewed the Plan's policies, procedures, and accounting 

records during our audit of miscellaneous health benefit payments and credits. We also 

judgmentally selected and reviewed 10 health benefit refund adjustments, totaling $120,194 

(from a universe of23 health benefit refund adjustments, totaling $138,978); 10 provider audit 

recoveries, totaling $68,783 (from a universe of86 provider audit recoveries for selected months, 

totaling $123,223); 15 subrogation recoveries, totaling $145,608 (from a universe of93 

subrogation recoveries, totaling $187,000); 10 fraud recoveries, totaling $28,992 (from a 

universe of26 fraud recoveries, totaling $33,433); and 15 prescription drug rebate adjustments, 

totaling $2,045,868 (from a universe of 61 prescription drug rebate adjustments, totaling 

$3,981,297), to determine ifrefunds and recoveries were promptly returned to the FEHBP and if 

miscellaneous payments were properly charged to the FEHBP.2 The results ofthese samples 

were not projected to the universe of miscellaneous payments and credits. 

We judgmentally reviewed administrative expenses charged to the FEHBP for contract years 

2004 through 2008. Specifically, we reviewed administrative expenses relating to cost centers, 

expense accounts, out-of-system adjustments, prior period adjustments, pension, post-retirement, 

employee health benefits, executive compensation, subcontracts, lobbying, benefit plan 

brochures, and Health Insurance Portability and Accountability Act of 1996 Compliance. We 

used the FEHBP contract, the FAR, and the FEHBAR to determine the allowability, allocability, 

and reasonableness of charges. The results of the testing were not projected to the universe of 

administrative expenses. 

We also reviewed the Plan's cash management to determine whether the Planhandled FEHBP 

funds in accordance with Contract CS 2879 and applicable laws and regulations. 

2 The sample of health benefit refund adjustments consisted ofthe two highest adjustments for each year from 2004 

through 2008. The sample of provider audit recoveries consisted of all recoveries greater than $2,000 for selected 

months in 2004 through 2008. The sample of subrogation recoveries consisted of all recoveries greater than $2,500 

from 2004 through 2008. The sample of fraud recoveries consisted of all recoveries greater than $1,000 from 2004 

through 2008. The sample of prescription drug rebate adjustments consisted of the three highest adjustments for 

each year from 2004 through 2008. 

5
 
III. AUDIT FINDINGS AND RECOMMENDATIONS
 

A. MISCELLANEOUS HEALTH BENEFIT FAYMENTS AND CREDITS 

The audit disclosed no findings pertaining to miscellaneous health benefit payments and 

credits. Overall, we concluded that the Plan returned health benefit refunds and recoveries, 

including prescription drug rebates, to the FEHBP in a timely manner. 

B. ADMINISTRATIVE EXPENSES 

1. Unallowable and/or Unallocable Cost Centers $107,358 

The Plan charged the FEHBP for two unallowable and/or unallocable cost centers, 

resulting in overcharges of $1 00,234 to the FEHBP. Subsequent to us identifying these 

overcharges, the Plan returned $107,358 to the FEHBP, consisting of $100,234 for the 

overcharges and $7,124 for lost investment income (LII). 

Contract CS 2879, Part III, Section 3.2(b)(l) states, "The Carrier may charge a cost to the 

contract for a contract tenn if the cost is actual, allowable, allocable, and reasonable." 

48 CFR 31.201-4 states, "A cost is allocable ifit is assignable or chargeable to one or more 

cost objectives on the basis of relative benefits received or other equitable relationship. 

Subject to the foregoing, a cost is allocable to a Government contract if ita) Is'incurred specifically for the contract; 

b) Benefits both the contract and other work, and can be distributed to them in 

reasonable proportion to the benefits received; or 

c) Is necessary to the overall operation ofthe business, although a direct relationship to 

any particular cost objective cannot be shown." 

48 CFR 52.232-17(a) states, "all amounts that become payable by the Contractor ... shall 

bear simple interest from the date dOe ... The interest rate shall be the interest rate 

established by the Secretary ofthe Treasury as provided in Section 611 of the Contract 

Disputes Act of 1978 (Public Law 95-563), which is applicable to the period in which the 

amount becomes due, as provided in paragraph (e) ofthis clause, and then at the rate 

applicable for each six-month period as fixed by the Secretary until the amount is paid." 

For the period 2004 through 2008, the Plan allocated administrative expenses of 

$11,540,003 to the FEHBP from] ,838 cost centers. From this universe, we selected a 

judgmental sample of38 cost centers to review, which totaled $3,597,285 in expenses 

allocated to the FEHBP. We selected the cost centers based on high dollar amounts, our 

nomenclature review, and significant dollar amount fluctuations from year to year. We 

reviewed the expenses from these cost centers for allowability, allocability, and 

reasonableness. 

6 
Based on our review, we identified two cost centers that were unallowable and/or did not 

benefit the FEHBP. 

•	 For cost center "00757" (Individual Telesales), the Plan allocated corporate advertising 

expenses, totaling" $97,503, to the FEHBP from 2006 through 2008. Specifically, these 

advertising expenses were for telesales to "Market all product lines to increase 

enrollment" and internet sales to "Educate internet prospects". Regarding advertising 

expenses charged to the FEHBP, 48 CFR 31.205-1 and 48 CFR 1631.205-70 provide 

specific criteria on the extent to which such expenses are chargeable. Generally, these 

regulations state that such expenses are unallowable. 

•	 For cost center "00106" (Broker Compensation System Replacement), the Plan 

allocated broker expenses of $2,731 to the FEHBP in 2008. The Plan stated that these 

expenses were inadvertently allocated to the FEHBP. 

In total, the Plan charged the FEHBP $100,234 for these unallowable and/or unallocable 

cost center expenses. After receiving our audit inquiry, the Plan returned the questioned 

cost center charges of $1 00,234 and applicable LII of $7,124 to the FEHBP. As part of 

our review, we verified that the Plan returned these funds to the FEHBP letter of credit 

account on October 1, 2009. 

Plan's Response: 

The Plan agrees with this finding. The Plan returned the questioned cost center charges 

and applicable LII to the FEHBP on October 1, 2009. 

In reference to cost center "00757" (Individual Telesales), the Plan states, "In September 

2006, the Account Product Specialist Manager tenninated employment with CareFirst, 

and the FEHBP HMO Field Service activities were transitioned to another Account 

Manager residing in a different cost center. However, the Plan identified that a mapping 

of the FEHBP HMO contracts to the Account Product Specialist Manager's marketing 

representative number continued through the present and resulted in the incorrect 

allocation of $97,503 from September 2006 through December 2008. Since the incorrect 

mapping has been identified, the Plan has correctly mapped the FEHBP HMO contracts 

to the current Account Manager marketing representative." 

In reference to cost center "001D6" (Broker Compensation System Replacement), the 

Plan agrees that the expenses related to this cost center were inadvertently allocated to the 

FEHBP. 

Recommendation 1 

We verified that the Plan returned $100,234 to the FEHBP for the questioned cost center 

charges. Therefore, no further action is required for these questioned charges. 

7 
Recommendation 2 

We verified that the Plan returned $7,124 to the FEHBP for LLI on the questioned cost 

center charges. Therefore, no further action is required for this LII amount. 

C. CASH MANAGEMENT 

The audit disclosed no findings pertaining to cash management. OveraIJ, we concluded that 

the Plan handled FEHBP funds in accordance with Contract CS 2879 and applicable laws and 

regulations. 

8
 
IV. MAJOR CONTRIBUTORS TO THIS REPORT 

Experience-Rated Audits Group 

Auditor-In-Charge 

, Auditor 

Auditor 

Auditor 

Auditor 

Chief 

Senior Tearn Leader 

9
 
CONTRACT CHARGES* 2004 2005 2006 2007 2008 TOTAL 

HEALTH BENEFIT CHARGES $31,119,521 $35,068,755 $41,131,980 $53,197,740 $74,208,829 $234,726,825 

ADMINISTRATIVE EXPENSES 2,496,340 2,170,846 2,607,078 3,256,008 4,166,604 14,696,876 

OTHER EXPENSES AND RETENTIONS 268,954 68,353 92,083 224,062 324,621 978,073 

TOTAL CONTRACT CHARGES I $33,884,815 $37,307,954 $43,831,141 $56,677,810 $78.700,054 $250,401,774 

AMOUNTS QUESTIONED 2004 2005 2006 2007 2008 TOTAL 

MISCELLANEOUS HEALTH BENEFIT PAYMENTS 

A. ' AND CREDITS SO SO SO SO SO $0 

B. ADMINISTRATIVE EXPENSES .

1. Unallowable and/or Unallocable Cost Centers** 0 0 13,581 43,412 50,365 107,358 

. C CASH MANAGEMENT 0 0 0 0 0 0 

TOTAL AMOUNTS QUESTIONED I $0 SO S13,581 $43,412 S50,365 S107,358 

* We did not review claim payments and other expenses and retentions. 

"* This audit finding also includes lost investment income of$7,124. 

, V. SCHEDULE A 

,CAREFIRST BLUECHOICE
 

OWINGS MILLS, MARYLAND
 

CONTRACT CHARGES AND AMOUNTS QUESTIONED


I 

I 
APPENDIX
 

CureFJrst BlueCross BlueShJeld 

10455 Milt Run Circle 

Owings Mills, MD 21117-5559 

CareRrst.•' October 9, 2009 BlueCross BlueShield 

ce 0 Personnel Management .
 

Office of Inspector General
 

Auditor - Experience Rated Audits Group
 

800 Ctanberrry Woods Drive
 

Suite .130
 

Cranberry Township; PA 16066
 

Dear_ 

This is in response to the OPM OIG revised Audit Inquiry #1, which was issued on 

October 6, 2009. In the inquiry, the OIa indicated that CareFirst charged the FEHBP for 

two unallowable and lor unallocable cost centers, resulting in overcharge:;; ofSlOO,234 to 

the FEHBP. CareFirst is providing the following response to each cost center issue: 

Cost Center 00757 - Individual Telesales - $97~503

The Plan agrees with this section related to expenses charged from September 2006 to 

December 2008. 

In September 2006, the Account Product Specialist Manager tenninated employment 

with CareFirst, and the FEHBP HMO Field Service activities were transitioned to another 

Account Manager residing in a different cost center.· However, the Plan identified that a 

mapping of the FEHBP HMO contracts to the Account Product Specialist Manager's 

marketing representative number continued through the present and resulted in the 

incorrect allocation of $97,503 from September 2006 through December 2008. Since the 

incorrect mapping has been identified, the Plan" has correctly mapped the FEHBP HMO 

contracts to the current Account Manager marketing representative. The Plan has 

returned the principal amount of $97,503 and lost investment income of $7,017.49 to the 

Program on OctOber 1, 2009. Supportitig docUmentation is attached ,for your review. In 

addition, the misallocation for the Year 2009 was corrected during~e August 2009 

financial close process. 

Cost Center 001D 6 - Broker .Compensation System Replacement - $2,731 

The· Plan agrees that the project expenses related to this cost center were inadvertently 

misallocated to the FEHBP HMO in the amount of $2,731. The Plan has returned the 

principal amount of $2~731 and lost investn::lent income of $106.44Jto the Program·on . 

October I, 2009.· Supporting documentation is attached for your review. 

. • Ca/efir>ll llluoCross BlueShield is en Independent lioonsse of the Blue Cross and Blue ShlQld Asooci.lion. 

Ill) Re9i~red 1l1ldemD/~ of 1M Blue Cross and Blu9 Shield AssoclRtlon. W Ile'gisrered Iredemario of CareFirst 01 Ma/yland. II'IG. .... . ..: -. . ." ...,." . 
October 9. 2009 

Page2of2 

We request that CareFirst's comments be included in their entirety in the OPM Final 

Audit Report. 

Sincerely, 

.6.. o ..

cc: