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 Pacificare of Oklahoma, Inc. 

Report No. lC-2N-OO-IO-20 

Date: May 7, 2010 

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

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distributed copy_ 
UNITED STATES OFFICE OF PERSONNEL MANAGEMENT
 

Washington, DC 20415
 

Office of the 

nspector General 

AUDIT REPORT 

Federal Employees Health Benefits Program
 

Community-Rated Health Maintenance Organization
 

PacifiCare of Oklahoma, Inc.
 

Contract Number CS 2885 - Plan Code 2N
 

Cypress, California
 

Report No. lC-2N-OO-lO-020 Date: May 7, 2010 

Michael R. Esser 

Assistant Inspector General 

for Audits 

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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 Oklahoma, Inc.
 

Contract Number CS 2885 - Plan Code 2N
 

Cypress, California
 

Report No. lC-2N-OO-10-020 Date: May 7, 2010 

Tht' Office ofthe Inspector General perfonned an audit ofthe Federal Employees Health Benefits 

Prograrn (FEHBP) operations at PacifiCare of Oklahoma, Inc. (Plan). The audit covered contract 

years 2006 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 Office of Personnel 

Mmldgement's rules and regulations in contract years 2006 through 2009. 

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CONTENTS
 

Page 

EXECUTIVE SUMMARy i
 

L INTRODUCTION AND BACKGROUND I
 

II. OBJECTIVES, SCOPE, AND METHODOLOGy 3
 

III. RESULTS OF THE AUDIT : 5
 

IV. MAJOR CONTRIBUTORS TO THIS REPORT 6
 
4,000 

3,000 

2,000 

1,000 

o 

• Contracts 

o Members 

2,505 

2006 

5,172 

2,109 

2007 

4,177 3,300 

2009 

2,813 

1,527 

2008 

1,738 

FEHBP Contracts/Members
 

March 31
 

6,000 

5,000 

.. _-....__-------1 

I. INTRODUCTION AND BACKGROUND
 

Introduction 

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

at PacifiCare of Oklahoma, Inc. (Plan). The audit covered contract years 2006 through 2009 and 

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

the provisions of Contract CS 2885; 5 U.S.C. Chapter 89; and 5 Code ofFederal Regulations 

(CFR) Chapter 1, Part 890. The audit was performed by the Office ofPersonnel Management's 

(OPM) Office ofthe 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), 

cnacted 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 OPMthrough 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 commWlity-rated carriers are federally qualified). In addition, 

The chart to the right shows the number ofFEHBP contracts and members reported by the Plan 

as of March 31 for each contract year audited. 

pmticipation 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 commWlityrated 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 other 

unique features of the FEHBP. 

1
 
The Plan has participated in the FEHBP since 1983 and provides health benefits to FEHBP 

members throughout central and northeastern Oklahoma. The last full-scope audit covered 

contract years 2003 through 2005. The audit did not identify any questioned costs and no 

corrective action was necessary. 

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 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 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 conclusions based on our audit 

objectives. 

This performance audit covered contract years 2006 

through 2009. For years 2006 tluough 2008, the FEHBP 

paid approximately $56.8 million in premiums to the 

Plan. 1 The premiums paid for each contract year audited are shown on the chart to the right. 

DIG 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 ofthe Plan's internal control structure, but we did not use this 

information to determine the nature, timing, and extent ofour 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. 

J The Subscription Income Report for contract year 2009 was not available at the time the report was completed. 

FEHBP Premiums Paid to Plan 

$25 

$20 

III 

I: $15 

:i $10 

$5 

$0 

.Revenue 

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 ofthe data generated by 

the various infonnation 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 govermnent 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 Jacksonville, Florida and Cranbeuy 

Township, Pennsylvania. 

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

Community-Rated Carriers to detennine 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 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 2006 through 

2009. Consequently, the audit did not identify any questioned costs. 

5
 
IV. MAJOR CONTRIBUTORS TO THIS REPORT 

Community-Rated Audits Group 

Auditor-In-Charge 

Auditor 

Auditor 

Senior Team Leader 

Chief 

6