U.S. OFFICE OF PERSONNEL MANAGEMENT 

OFFICE OF THE INSPECTOR GENERAL 

OFFICE OF AUDITS 

Final Audit Report 

Subject: 

HORIZON BLUECROSS BLUESHIELD OF
 

NEW JERSEY
 

NEWARK, NEW JERSEY
 

Report No. lA-lO-49-09-025 

Date: Febraary 12, 2010 

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UNITED STATES OFFICE OF PERSONNEL MANAGEMENT
 

Washington, DC 20415
 

Office of the 

Inspector General 

AUDIT REPORT 

Federal Employees Health Benefits Program
 

Service Benefit Plan Contract CS 1039
 

BlueCross BlueShield Association
 

Plan Code 10
 

Horizon BlueCross BlueShield ofNew Jersey
 

Plan Codes 2801780
 

Newark, New Jersey
 

REPORT NO. IA-IO-49-09-025 DATE: February 12, 2010 

;2f?LC2.---~
 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
 

Service Benefit Plan Contract CS 1039
 

BlueCross BlueShield Association
 

Plan Code 10
 

Horizon BlueCross BlueShield of New Jersey
 

Plan Codes 2801780
 

Newark, New Jersey
 

REPORT NO. lA-1O-49-09-025 DATE: February 12, 2010 

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

Horizon BlueCross BlueShie1d ofNew Jersey (Plan) in Newark, New Jersey questions 

$2,277,467 in health benefit charges and $1,290,130 in administrative expenses. The BlueCross 

BlueShield Association (Association) agreed (A) with $1,639,848 and disagreed (D) with 

$1,927,749 of the questioned costs. Lost investment income (LII) on the questioned costs 

amounts to $231,737. 

Our audit was conducted in accordance with Government Auditing Standards. The audit covered 

claim payments from January 1, 2005 through October 31, 2008, as well as miscellaneous 

payments and credits and administrative expenses from 2003 through 2007 as reported in the 

Annual Accounting Statements. In addition, we reviewed the Plan's cash management practices 

related to FEHBP funds for contract years 2003 through 2007. 

Questioned items are summarized as follows: 

www.opm.goY www.lIsajobs.goy 
HEALTH BENEFIT CHARGES
 

Claim Payments 

• Omnibus Budget Reconciliation Act of 1990 Review $352,093 

The Plan incorrectly paid 36 claims that were priced or should have been priced under the 

Omnibus Budget Reconciliation Act of 1990 pricing guidelines, resulting in net overcharges 

of $352,093 to the FEHBP. Specifically, the Plan overpaid 29 claims by $393,826 and 

underpaid 7 claims by $41,733. The Association agreed with $50,430 (A) and disagreed with 

$301,663 (D) of the questioned charges. 

• Claim Payment Errors CA) $16,074 

The Plan incorrectly paid 39 claims, resulting in net overcharges of$16,074 to the FEHBP. 

Specifically, the Plan overpaid 38 claims by $39,534 and underpaid 1 claim by $23,460. 

Miscellaneous Payments and Credits 

• Subrogation Recoveries $1,237,935 

The Plan had not returned subrogation recoveries of $1 ,219,668 to the FEHBP as of 

December 31,2007. Subsequent to this date, the Plan returned $1,201,907 ofthese 

questioned recoveries to the FEHBP. As a result, the FEHBP is still due $30,947, consisting 

of $17,761 for the remaining questioned recoveries and $13,186 for LIl on recoveries 

deposited untimely or not deposited into the Federal Emplo:yee Program (FEP) investment 

account. The Association agreed with $36,028 (A) and disagreed with $1,201,907 (D) of the 

questioned amount. 

• Health Benefit Refunds $544,050 

The Plan had norreturned refunds of$530,864 to the FEHBP as ofDecember 31,2007. 

Subsequent to this date, the Plan returned $424,179 of these questioned refunds to the 

FEHBP. As a result, the FEHBP is still due $119,871, consisting of$106,685 for the 

remaining questioned refunds and $13,186 for LII on refunds deposited untimely or not 

deposited into the FEP investment account. The Association agreed with $119,871 (A) and 

disagreed with $424,179 (D) of the questioned amount. 

• Fraud Recoveries (A) $79,046 

The Plan did not deposit into the FEP investment account and/or return to the FEHBP letter 

of credit account 21 fraud recoveries totaling $70,320. Also, the Plan deposited 30 fraud 

recoveries untimely into the FEP investment account. As a result, the FEHBP is due 

$79,046, consisting of $70,320 for fraud recoveries not returned to the FEHBP and $8,726 

for LII on recoveries deposited untimely or not deposited into the FEP investment account. 

11 
• Special Plan Invoices fA) $48,269 

The Plan did not deposit $39,529 into the FEP investment account for six miscellaneous 

credits that were reported on special,plan invoices (SPI) in 2004 and 2005. Also, the Plan 

deposited five miscellaneous credits untimely into the FEP investment account that were 

reported on SPI's in 2006. As a result, the FEHBP is due $48,269, consisting of $39,529 for 

miscellaneous credits and $8,740 for LII on miscellaneous credits deposited untimely or not 

deposited into the FEP investment account. 

ADMINISTRATIVE EXPENSES 

• Directors Liability and Fidelity & Bond Insurance fA) $731,676 

The Plan overcharged the FEHBP for Directors Liability and Fidelity & Bond Insurance 

expenses from 2003 through 2007. 

• Post-Retirement Benefit Costs fA) $251,682 

The Plan overcharged the FEHBP for post-retirement benefit costs from 2003 through 2007. 

• Pension Costs fA) $251,241 

The Plan overcharged the FEHBP for pension costs from 2003 through 2007. 

• Administrative Expense Overcharges fA) $70,491 

The Plan overcharged the FEHBP for information technology·related expenses in 2007. 

• Unallowable and/or Unallocable Expenses fA) $52,442 

The Plan charged unallowable and/or unallocable expenses to the FEHBP from 2003 through 

2007. 

• Inter-Company Profit Adjustment fA) ($67,402) 

The Plan overstated the adjustment to remove inter-company profits from its subsidiary, 

National Account Service Company, in 2005. 

CASH MANAGEMENT 

Overall, we concluded that the Plan handled FEHBP funds in accordance with Contract CS 1039 

and applicable laws and regulations, except for the findings pertaining to cash management noted 

in the "Miscellaneous Payments and Credits" section. 

llJ 
LOST INVESTMENT INCOME ON AUDIT FINDINGS 

As a result of our audit findings presented in this audit report, the FEHBP is due LII of 

$231,737, calculated through June 30,2009. 

IV 
CONTENTS
 

PAGE
 

EXECUTIVE SUMMARY i
 

I. INTRODUCTION AND BACKGROUND 1
 

II. OBJECTIVES, SCOPE, AND METHODOLOGY 3
 

1II. AUDIT FINDINGS AND RECOMMENDATIONS 6
 

A. HEALTH BENEFIT CHARGES	 6
 

1. Claim Payments	 6
 

a. Omnibus Budget Reconciliation Act of 1990 Review	 6
 

b. Claim Payment Errors	 9
 

2. Miscellaneous Payments and Credits	 11
 

a. Subrogation Recoveries	 1I 

b. Health Benefit Refunds	 14
 

c. Fraud Recoveries	 17
 

d. Special Plan Invoices	 18
 

B. ADMINISTRATIVE EXPENSES	 20
 

1. Directors Liability and Fidelity & Bond Insurance;	 20
 

2. Post-Retirement Benefit Costs	 21
 

3. Pension Costs	 22
 

4. Administrative Expense Overcharges	 23
 

5. Unallowable and/or Unallocable Expenses	 24
 

6. Inter-Company Profit Adjustment	 26
 

C. CAStl MANAGEMENT	 26
 

D. LOST INVESTMENT INCOME ON AUDIT FINDINGS	 27
 

IV. MAJOR CONTRIBUTORS TO THIS REPORT	 28
 

V. SCHEDULES 

A. CONTRACT CHARGES 

B. QUESTIONED CHARGES 

C. LOST INVESTMENT INCOME CALCULATION 

APPENDIX A	 (BlueCross BlueShield Association reply, dated September 18,2009, 

to the draft audit report) 

APPENDIX B	 (BJueCross BlueShield Association reply, dated November 11,2009, 

to the draft audit report) 
I. INTRODUCTION AND BACKGROUND
 

INTRODUCTION
 

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

audit ofthe Federal Employees Health Benefits Program (FEHBP) operations at Horizon 

BlueCross BlueShield of New Jersey (Plan). The Plan is located in Newark, New Jersey. 

The audit was perfonned by the Office ofPersonnel 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 overalJ responsibility for administration of the FEHBP. The provisions ofthe FEHB 

Act are implemented by OPM through regulations, which are codified in Title 5, Chapter 1, Part 

890 ofthe Code of Federal Regulations (CFR). Health insurance coverage is made available 

through contracts with various health insurance carriers. 

The BlueCross BlueShield Association (Association), on behalf of participating BlueCross and 

BlueShield plans, has entered into a Government-wide Service Benefit Plan contract (CS ]039) 

with OPM to provide a health benefit plan authorized by the FEHB Act. The Association 

delegates authority to participating local BlueCross and BlueShield plans throughout the United 

States to process the health benefit claims of its federal subscribers. The Plan is one of 

approximately 63 local BlueCross and BlueShield plans participating in the FEHBP. 

The Association has established·a Federal Employee Program (FEp l

) Director's Office in 

Washington, D.C. to provide centralized management for the Service Benefit Plan. The FEP 

Director's Office coordinates the administration of the contract with the Association, member 

BlueCross and BlueShield plans, and OPM. 

The Association has also established an FEP Operations Center. The activities of the FEP 

Operations Center are perfonned by CareFirst BlueCross BlueShield, located in Washington, 

D.C. These activities include acting as fiscal intermediary between the Association and member 

plans, verifying subscriber eligibility, approving or disapproving the reimbursement of local plan 

payments ofFEHBP claims (using computerized system edits), maintaining a history file of all 

FEHBP claims, and maintaining an accounting of all program funds. 

I Throughout this report, when we refer to "FEP" we are referring to the Service Benefit Plan lines of business at the
 

Plan. When we refer to the "FEHBP" we are referring to the program that provides health benefits to federal employees.
 
Compliance with laws and regulations applicable to the FEHBP is the responsibility of the 

Association and Plan management. Also, management ofthe Plan is responsible for establishing 

and maintaining a system of internal controls. 

All findings from our previous audit ofthe Plan (Report No. IA-I 0- 49-04-072, dated October 5, 

2006) for contract years 1999 through 2002 have been satisfactorily resolved. 

The results ofthis audit were provided to the Plan in written audit inquiries; were discussed with 

Plan and/or Association officials throughout the audit and at an exit conference; and were 

presented in detail in a draft report, dated July 8,2009. The Association's comments offered in 

response to the draft report were considered in preparing our final report and are included as 

Appendices to this report. 

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 terms ofthe contract. Specifically, 

our objectives were as follows: 

Health Benefit Charges 

•	 To detennine whether the Plan complied with contract provisions relative to benefit 

payments. 

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

compliance with the terms of the contract. 

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

payments were returned promptly to the FEHBP. 

Administrative Expenses 

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

allowable, necessary, and reasonable expenses incurred in accordance with the terms 

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 performance audit in accordance with generally accepted government auditing 

standards. Those standards require that we plan and perform 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 BlueCross and BlueShield FEHBP Annual Accounting Statements as they 

pertain to Plan codes 280 and 780 for contract years 2003 through 2007. During the period, the 

Plan paid approximately $1.3 billion in health benefit charges and $104 million in administrative 

expenses (See Figure 1 and Schedule A). 

3
 
Specifically, we reviewed approximately $16 million in claim payments made from January I, 

2005 through Octoher 31, 2008 for proper adjudication. In addition, we reviewed miscellaneous 

payments and credits, such as refunds and subrogation recoveries, administrative expenses, and 

cash management for 2003 through 2007. 

In planning and conducting our audit,
 

we obtained an understanding of the
 

Horizon BlueCross BlueShield of New Jersey Plan's internal control structure to help Contract Charges 

determine the nature, timing, and extent $400 

of our auditing procedures. This was
 

determined to be the most effective
 $300 I/) approach to select areas of audit. For c 

,g those areas selected, we primarily relied 

:; $200 on substantive tests oftransactions and 

not tests of controls. Based on our 

$100 testing, we did not identify any
 

significant matters involving the Plan's
 

internal control structure and its
 $0
 

operation. However, since our audit
 2003
 

would not necessarily disclose all
 

significant matters in the internal
 I?';) Health Benefit Payrrents • Administrative Expenses 

control structure, we do not express an
 

opinion on the Plan's system of internal
 

controls taken as a whole. Figure 1 -- Contract Charges
 

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· re·gulations governing the FEHBP. The results of our tests indicate that, with respect to the 

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

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

and Recommendations" section of this 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 conducting our audit, we relied to varying degrees on computer-generated data provided by the 

FEP Director's Office, the FEP Operations Center, the Plan, and the Centers for Medicare and 

Medicaid Services. Due to time constraints, we did not verify the reliability of the data generated 

by the various information 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 was sufficient to achieve our audit objectives. 

The audit was perfonned at the Plan's office in Newark, New Jersey from March 16 through
 

April 10, 2009 and April 27 through May 8, 2009. Audit fieldwork was also performed at our
 

offices in Washington, D.C. and Jacksonville, Florida.
 

2004 2005 2006 2007 

Contract Years 

4
 
METHODOLOGY 

We obtained an understanding of the internal controls over the Plan's claims processing, 

financial, and cost accounting systems by inquiry of Plan- officials. 

To test the Plan's compliance with the FEHBP health benefit provisions, we selected and 

reviewed samples of766 claims? We used the FEHBP contract, the Service Benefit Plan 

brochure, the Plan's provider agreements, and the Association's FEP administrative manual to 

determine the allowability of benefit payments. The results ofthese samples were not projected 

to the universe of claims. 

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

records during our audit of miscellaneous payments and credits. We also judgmentally selected 

and reviewed 209 high dollar health benefit refunds and subrogation recoveries, totaling 

$2,889,198 (from a universe of 10,161 refunds and recoveries, totaling $5,789,816); 42 high 

dollar hospital and provider audit recoveries, totaling $846,219 (from a universe of 1,527 

recoveries, totaling $2,493,950); 28 high dollar special plan invoices, totaling $1,456,] 94 in net 

credits (from a universe of250 special plan invoices, totaling $4,232,586 in net payments); and 

23 fraud cases, totaling $228,496 in recoveries (from a universe of 36 fraud cases, totaling 

$234,118 in recoveries), to detennine ifrefunds and recoveries were promptly returned to the 

FEHBP and if miscellaneous payments were properly charged to the FEHBP. 3 The results of 

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

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

2003 through 2007. Specifically, we reviewed administrative expenses relating to cost centers, 

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

employee health benefits, executive compensation, subcontracts, non-recurring projects, return 

on investment, inter-company profits, and Health Insurance Portability and Accountability Act of 

1996 compliance. We used the FEHBP contract, the FAR, and the FEHBAR to detennine the 

allowability, allocability, and reasonableness of charges. 

We also reviewed the Plan's cash management to detennine whether the Plan handled FEHBP 

funds in accordance with Contract CS 1039 and applicable laws and regulations. 

2 See the audit findings for "Omnibus Budget Reconciliation Act of 1990 Review" (AI.a) and "Claim Payment 

Errors" (A I.b) on pages 6 through 10 for specific details of our sample selection methodologies.
 

3 See the audit findings for "Subrogation Recoveries" (A2.a), "Health Benefit Refunds" (A2.b), "Fraud Recoveries"
 

(A2.c), and "Special Plan Invoices" (A2.d) on pages 11 through 19 for specific details of our sample selection
 

methodologies.
 

5
 
III. AUDIT FINDINGS AND RECOMMENDATIONS
 

A. HEALTH BENEFIT CHARGES 

1. Claim Payments 

a. Omnibus Budget Reconciliation Act of 1990 Review $352,093 

The Plan incorrectly paid 36 claims that were priced or should have been priced under 

the Omnibus Budget Reconciliation Act of 1990 (OBRA 90) pricing guidelines, 

resulting in net overcharges of $352,093 to the FEHBP. Specifically, the Plan 

overpaid 29 claims by $393,826 and underpaid 7 claims by $4],733. 

Contract CS 1039, Part III, section 3.2 (b)(l) states, "The Carrier may charge a cost to 

the contract for a contract term if the cost is actual, allowable, allocable, and 

reasonable." Part II, section 2.6 states, "(a) The Carrier shall coordinate the payment 

of benefits under this contract with the payment of benefits under Medicare ... (b) 

The Carrier shall not pay benefits under this contract until it has determined whether 

it is the primary carrier ...." Part II, section 2.3(g) states, "If the Carrier or OPM 

determines that a Membees claim has been paid in error for any reason, the Carrier 

shall make a diligent effort to recover an overpayment ...." 

OBRA 90 limits the benefit payments for certain inpatient hospital services provided 

to annuitants age 65 or older who are not covered under Medicare Part A. The 

FEHBP fee-far-service plans are required to limit the claim payment to the amount 

equivalent to the Medicare Part A payment. 

-Using a program developed by the Centers for Medicare and Medicaid Services (CMS) 

to price OBRA 90 claims, we recalculated the claim payment amounts for the claims in 

our samples that were subject to and/or processed as OBRA 90. 

The following summarizes the claim payment errors. 

OBRA 90 Claim Pricing Errors 

For the period January 1, 2005 through October 31, 2008, we identified 1,823 claims, 

totaling $17,105,505 in payments, that were subject to OBRA 90 pricing guidelines. 

Frpm this universe, we selected and reviewed a judgmental sample of208 claims, 

totaling $6,241,077 in payments, to determine if these claims were correctly priced by 

the FEP Operations Center and paid by the Plan. OUf sample included all OBRA 90 

claims with amounts paid of$15,000 or more. 

Based on our review, we determined that 14 claims were paid incorrectly, resulting in 

net overcharges of $205,243 to the FEHBP. Specifically, the Plan overpaid I] claims 

by $218,04] and underpaid 3 claims by $]2,798. 

6
 
These claim payment errors resulted from the following: 

•	 In 12 instances, the claims were not priced in accordance with OBRA 90 pricing,
 

resulting in net overcharges of $180,772 to the FEHBP. Specifically, the Plan
 

overpaid nine Claims by $193,570 and underpaid three claims by $12,798.
 

•	 The FEP Operations Center priced two claims using incorrect Medicare
 

Diagnostic Related Group (DRG) codes, resulting in overcharges of $24,471 to
 

the FEHBP.
 

Claims Not Priced Under OBRA 90 (Possible OBRA 90 Claims) 

For the period January 1, 2005 through October 31,2008, we identified 370 claims, 

totaling $5,420,031 in payments, that were potentially subject to OBRA 90 pricing 

guidelines but appeared to be paid under the Plan's standard pricing procedures. 

From this universe, we selected and reviewed a judgmental sample of 137 claims, 

totaling $4,338,974 in payments, to detennine ifthe Plan paid these claims properly. 

Our sample included all possible OBRA 90 claims with amounts paid of$10,000 or 

more. 

Based on our review, we determined that 22 claims were paid incorrectly, resulting in 

net overcharges of$146,850 to the FEHBP. Specifically, the Plan overpaid 18 claims 

by $175,785 and underpaid 4 claims by $28,935. 

These claim payment errors resulted from the following: 

•	 The FEP Operations Center priced six claims using incorrect Medicare DRG
 

codes, resulting in overcharges of $98,747 to the FEHBP.
 

•	 In 12 instances, the claims were not priced in accordance with OBRA 90 pricing,
 

resulting in net overcharges of$37,271 to the FEHBP. Specifically, the Plan
 

overpaid eight claims by $66,206 and underpaid four claims by $28,935.
 

•	 The Plan did not properly coordinate four claims with Medicare, resulting in
 

overcharges of $1 0,832 to the FEHBP.
 

Association's Response: 

The Association agrees with $50,430 and disagrees with $301,663 of the questioned 

charges. The Association states that the Plan has initiated refund requests to recover the 

uncontested overpayments. To the extent that errors did occur, the Association states 

. that these payments were good faith erroneous benefit payments and fall within the 

context of CS 1039, Part II, section 2.3(g). Any payments the Plan is unable to recover 

are allowable charges to the FEHBP. As good faith erroneous payments, lost 

investment income does not apply to the claim payment errors identified in this finding. 

7
 
For the contested amount, the Association states that when the claims were re-priced 

using the most current version of the FEP Operations Center's OBRA 90 Pricer, the 

re-priced amounts differed from the CMS Pricer amounts. The Association also 

states that the FEP Operations Center's OBRA 90 Pricer is the official OPM approved 

source for FEP OBRA 90 pricing. 

In addition, the Association states, "To reduce these types of pricing errors in the 

future, the Plan has implemented and updated its Policy & Procedure for OBRA '90 

claim processing.... Also, the FEP Director's Office includes potential OBRA '90 

priced claims in its periodic System-Wide Claims Review to facilitate early 

identification and recovery ofOBRA '90 claim payment errors." 

OIG Comments: 

Based on our review of the Association's response and additional documentation 

provided by the Plan, we revised the questioned costs from the draft report to $352,093. 

For $123,218 of the contested amount, the overpayments are being questioned because 

incorrect DRG codes were used to price these claims. The Plan did not provide 

documentation to support that these claims were priced using the correct DRG's. 

Based on the diagnosis and procedure codes on each ofthese claims, the CMS DRG 

grouper is calculating a different DRG code than what was originally used by the FEP 

Operations Center to price the claim. Our re-pricing of these claims recognizes the 

correct DRG codes that should have been used to price them. 

For the remaining contested amount of $178,445, the FEP Operations Center's OBRA 

90 pricing amounts differed from the CMS Pricer amounts. Based on our experience 

with auditing BlueCross and BlueShield plans, we have found that these pricing 

-differences occur because the mainframe pricing software used by the FEP Operations 

Center is not always up-to-date. Therefore, we will continue to use the latest version 

of the CMS Pricer program, which includes up-to-date pricing, to determine if claims 

paid under OBRA 90 were correctly priced by the FEP Operations Center and paid by 

the Plan. 

Recommendation 1 

We recommend that the contracting officer disallow $393,826 for claim overcharges, 

and verify that the Plan returns all amounts recovered to the FEHBP. 

Recommendation 2 

We recommend that the contracting officer allow the Plan to charge the FEHBP 

$41,733 if additional payments are made to the providers to correct the underpayment 

errors. 

8
 
Recommendation 3 

Although the Plan has developed a corrective action plan to reduce OBRA 90 

findings, we recommend that the contracting officer instruct the Association to ensure 

that the Plan is following the corrective action plan. 

b.	 Claim Payment Errors $16,074 

The Plan incorrectly paid 39 claims, resulting in net overcharges of$16,074 to the 

FEHBP. Specifically, the Plan overpaid 38 claims by $39,534 and underpaid 1 claim 

by $23,460. 

As previously cited from CS 1039, costs charged to the FEHBP must be actual, 

allowable, allocable, and reasonable. If errors are identified, the Plan is required to 

make a prompt and diligent effort to recover the overpayments. 

The following summarizes the claim payment errors: 

Assistant Surgeon Claims 

For claims reimbursed from January 1,2005 through October 31,2008, we identified 

1,171 assistant surgeon claim groups, totaling $190,308 in potential overpayments 

that may not have been paid in accordance with the Plan's assistant surgeon pricing 

procedures. From this universe, we selected and reviewed a judgmental sample of 

163 assistant surgeon claim groups, totaling $83,379 in potential overpayments, to 

determine ifthe Plan paid these claims properly. Our sample included all assistant 

surgeon claim groups with potential overpayments of $250 or more. 

Based on our review, we determined that 33 claims were paid incorrectly, resulting in 

overcharges of $29,479 to the FEHBP. The claim payment errors resulted from the 

following: 

•	 The Plan incorrectly paid nine assistant surgeon claims, resulting in overcharges 

of$14,259 to the FEHBP. These overcharges were due to errors in the calculation 

of the assistant surgeon fee, which should have been priced at 20 percent of the 

procedure allowance. 

•	 The Plan incorrectly paid 24 assistant surgeon claims that were subject to Omnibus 

Budget Reconciliation Act of 1993 (OBRA 93) pricing guidelines. These errors 

were due to Palmetto (an OBRA 93 pricing vendor) not recognizing the assistant 

surgeon pricing modifier and erroneously calculating the assistant surgeon fee. As a 

result, the Plan overpaid these claims by $15,220. 

9
 
System Review 

For claims reimbursed from January 1 through October 31,2008, we identified 

2,649,818 claim lines, totaling $252,570,234 in payments, using a standard criteria 

based on our experience. From this universe, we selected and reviewed a judgmental 

sample of 126 claims (representing 1,406 claim lines), totaling $3,488,898 in 

payments, to determine if the Plan adjudicated these claims properly.4 

Our review identified two claim payment errors, resulting in overcharges of $1 00 to 

the FEHBP. In each instance, the Plan did not apply the correct subscriber liability 

amount when paying the claim. 

Amounts Paid Greater than Covered Charges 

For the period January 1, 2005 through October 31,2008, we identified 6,507 claims 

where the amounts paid were greater than the covered charges by a total of 

$2,247,808. From this universe, we selected and reviewed a judgmental sample of 

132 claims with a total variance of$I,514,671, and determined if the Plan paid these 

claims properly. Our sample included all claims where the amounts paid exceeded 

covered charges by $1,000 or more. 

Based on our review, we determined that four claims were paid incorrectly, resulting 

in nel undercharges of $13,505 to the FEHBP. Specifically, the Plan overpaid three 

claims by $9,955 and underpaid one claim by $23,460. These four claim payment 

errors resulted from processor errors. 

Association's Response: 

.The Association agrees with this finding. The Association states that the Plan has 

initiated recovery of the overpayments. The Association also states that these 

payments were good faith erroneous benefit payments and fall within the context of 

CS 1039, Part II, section 2.3(g). Any payments the Plan is unable to recover are 

allowable charges to the FEHBP. As good faith erroneous payments, lost investment 

income (LII) does not apply to the claim payment errors identified in this finding. 

In addition, the Association states, "The Plan has several methods in place to identify 

overpayments. These methods include, but are not limited to, the System Wide 

Claims Reports (which includes a listing ofAssistant Surgeon Claims, Amounts Paid 

Greater than Charges Claims, OBRA '90, OHRA '93, High Dollar and Termination 

Claims), ... provided by the FEP Director's Office along with routine claims quality 

assurance audits performed by the Plan's Internal Auditors. These are all tools that 

are used to promote claims accuracy. While these measures are not absolute, they 

4 We selected our sample from an OIG-generated "Place ofService Report" (SAS application) that stratified the Claims by 

place of service (POS), such as provider's office, and payment category, such as $50 to $99.99. We judgmentally 

determined the number of sample items to select from each POS stratum based on the stratum's total claim dollars paid. 

10
 
provide reasonable assurances that such items will be identified. Efforts will be made 

to periodically examine existing procedures and add additional controls where 

necessary." 

Recommendation 4 

We recommend that the contracting officer disallow $39,534 for claim overcharges 

and verify that the Plan returns all amounts recovered to the FEHBP. 

Recommendation 5 

We recommend that the contracting officer allow the Plan to charge the FEHBP 

$23,460 if an additional payment is made to the provider to correct the underpayment 

error. 

2. Miscellaneous Payments and Credits 

a. Subrogation Recoveries $1,237,935 

The Plan had not returned subrogation recoveries of $1 ,219,668 to the FEHBP as of 

December 31, 2007. Subsequent to this date, the Plan returned $1,201,907 ofthese 

questioned recoveries to the FEHBP. As a result, the FEHBP is still due $30,947, 

consisting of$17,761 for the remaining questioned recoveries and $13,186 for LII on 

recoveries deposited untimely or not deposited into the FEP investment account. 

48 CFR 31.201-5 states, "The applicable portion of any income, rebate, allowance, or 

other credit relating to any allowable cost and received by or accruing to the 

contractor shall be credited to the Government either as a cost reduction or by cash 

refund." 

Contract CS 1039, Part II, Section 2.3 (i) states, "All health benefit refunds and 

recoveries, including erroneous payment recoveries, must be deposited into the working 

capital or investment account within 30 days and returned to or accounted for in the 

FEHBP letter of credit account within 60 days after receipt by the Carrier." Also, based 

on an agreement between OPM and the Association, dated March 26, 1999, BlueCross 

and BlueShield plans have 30 days to return health benefit refunds and recoveries to the 

FEHBP before LII will commence to be assessed. 

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

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

rate established by the Secretary of the 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) of this clause, and 

then at the rate applicable for each six-month period as fixed by the Secretary until the 

amount is paid." 

11
 
For the period 2003 through 2007, there were 800 subrogation recoveries totaling 

$2,833,541. From this universe, we selected and reviewed a sample of 100 

subrogation recoveries, totaling $1,843,283, for the purpose of detennining ifthe Plan 

promptly returned these recoveries to the FEHBP. Our sample included high dollar 

subrogation recoveries and at least 50 percent of each year's recovery dollars. 

The following summarizes the exceptions noted: 

•	 The Plan did not return 14 subrogation recoveries, totaling $11,239, to the FEHBP 

letter of credit (LOC) account. 

•	 The Plan did not deposit eight subrogation recoveries, totaling $6,522, into the
 

FEP investment account. Since these recoveries were not deposited into the FEP
 

investment account, the FEHBPis also due $1,045 for LIl (calculated through
 

June 30, 2009) on these funds.
 

•	 The Plan deposited numerous subrogation recoveries, totaling $674,704, into the
 

FEP investment account in an untimely manner. Specifically, the Plan deposited
 

these funds into the FEP investment account between 31 and 1,086 days after
 

being received. As a result, the FEHBP is due $2,544 for LII on these funds.
 

Our sample also included numerous subrogation recoveries that were previously 

reviewed during a "Control and Perfonnance Review" (CPR) ofthis Plan conducted 

by the Association in 2007. During the CPR, the Association identified 556 

subrogation recoveries, totaling $1,201,907, that were deposited into the FEP 

investment account but not returned to the LOC account. These subrogation recoveries 

were received by the Plan during 2003 through 2007". Since these recoveries were 

_deposited into the FEP investment account, the Association did not assess LIl on these 

funds. As part of our review, we verified that the Plan returned these subrogation 

recoveries to the FEHBP by reducing the LOC drawdown by $1,201,907 on June 13, 

2008. Although these recoveries were returned to the FEHBP before the start of our 

audit, we are continuing to question this amount as a monetary finding since the Plan 

returned these recoveries to the LOC account more than 60 days after receipt (Le., from 

169 to 1,032 days after receipt) and after receiving our audit notification letter and 

standard audit request (dated August 27, 2007). In addition, we reviewed the 

processing dates of these recoveries and noted the following additional exceptions: 

•	 Numerous recoveries were deposited untimely or not deposited into the FEP 

- investment account.	 Specifically, 67 recoveries, totaling $] 5] ,377, were not 

deposited into the FEP investment account. Since these recoveries were not 

deposited into the FEP investment account, the FEHBP is due $13,524 for 111 

(calculated through May 11) 2009) on these funds. (Note: As part of our review, 

we verified that the Plan deposited $] 51 ,377 into the FEP investment account on 

May 11,2009. This amount is already included as part ofthe questioned amount 

of$1,201,907.) 

12
 
•	 90 recoveries, totaling $460,727, were deposited untimely into the FEP 

investment account. As a result, the FEHBP is due $1,154 for LII on these funds. 

In total, we are questioning $1,237,935, consisting of$1,219)668 ($11,239 + $6,522 + 

$1)201,907) for subrogation recoveries and $18,267 ($1,045 + $2,544 + $13,524 + 

$1,154) for LII on recoveries deposited untimely or not deposited into the FEP 

investment account. 

Association's Response: 

The Association agrees with $36,028 ofthe questioned amount, consisting of$17,761 

for recoveries and $18,267 for LII. The Association states, "Special Plan Invoices to 

credit the Program for the $31,245 ($11,239 principle and $20,006 LII) were 

submitted to FEP on August 18,2009. These funds were wired to BCBSA FEP on 

August 19,2009. An additional $4,783 was deposited into the FEP Investment 

Account on August 19,2009. This amount will be included in the final wire of funds 

to close out this audit." 

The Association disagrees with $1,201,907 of the questioned amount. The 

Association states, "This amount was identified as a result of the 2007 BCBSA 

Control Performance Review (CPR) Plan Audit. The Plan received the final CPR 

Audit report on May 23,2008. The amount ofthe finding was agreed upon by the 

CPR Audit Team and the Plan and funds were returned to the Program on June 13, 

2008, which was prior to the 2009 aPM Audit." 

In addition, the Association states that the Plan has enhanced procedures and 

developed additional monitoring tools to ensure that funds are deposited into the 

investment account within 30 days of receipt. 

DIG Comments: 

Since the Plan returned the contested recoveries of $1 ,201,907 to the FEHBP more 

than 60 days after receipt and after receiving our audit notification letter and standard 

audit request, we wjJl continue to question this amount as a monetary finding. 

Recommendation 6 

Since we verified that the contested subrogation recoveries of $1 ,201 ,907 were 

returned to the FEHBP on June 13,2008 and May 11,2009, no further action is 

required for this questioned amount. 

Recommendation 7 

We recommend that the contracting officer verify that the Plan credits the FEHBP 

$17,761 for subrogation recoveries. 

13
 
Recommendation 8 

We recommend that the contracting officer verify that the Plan credits the FEHBP 

$18,267 (plus interest accruing after June 30, 2009) for LII on subrogation recoveries 

that were deposited untimely or not deposited into the FEP investment account. 

Recommendation 9 

We recommend that the contracting officer have the Association verify that the Plan 

implemented procedures and developed additional monitoring tools to ensure that 

subrogation recoveries are returned to the FEHBP in a timely manner. 

b.	 Health Benefit Refunds $544,050 

The Plan had not returned health benefit refunds of $530,864 to the FEHBP as of 

December 31, 2007. Subsequent to this date, the Plan returned $424,179 of these 

questioned refunds to the FEHBP. As a result, the FEHBP is still due $119,871, 

consisting of $106,685 for the remaining questioned refunds and $13,186 for LII on 

refunds deposited untimely or not deposited into the FEP investment account. 

As previously stated under audit finding A2.a, the Plan is required to promptly return 

health benefit refunds to the FEHBP with applicable LII. 

For the period 2003 through 2007, there were 9,361 health benefit refunds totaling 

$2,956,275. From this universe, we selected and reviewed a judgmental sample of 

109 refunds, totaling $1,045,915, for the purpose of determining if the Plan promptly 

returned these funds to the FEHBP. Our sample included all provider refunds of 

$3,000 or more and all member refunds of $1 ,500 or more. 

The following summarizes the exceptions noted: 

•	 In seven instances, the Plan deposited refunds of $79,268 into the FEP investment 

account, but did not return these funds to the LOC account. The Plan also 

deposited $71,490 ofthese refunds untimely into the FEP investment account. As 

a result, the FEHBP is due $79,375, consisting of$79,268 for refunds not returned 

to the LOC account and $107 for LII on refunds deposited untimely into the FEP 

investment account. 

•	 . In three instances, the Plan did not deposit refunds of $22,804 into the FEP 

investment account. Since these refunds were not deposited into the FEP 

investment account, the FEHBP is due $26,442, consisting of $22,804 for refunds 

and $3,63& for LII (calculated through June 30, 2009) on these funds. 

14
 
•	 In one instance, the Plan did not deposit a refund of $4,613 into the FEP 

investment account, nor did the Plan return these funds to the LOC account. 

Since these funds were not deposited into the FEP investment account and 

returned to the LOC account, the FEHBP is due $4,954, consisting of $4,613 for 

this refund and $341 for LII (calculated through June 30, 2009). 

•	 In 22 instances, the Plan returned refunds of $94,109 to the LOC account, but 

deposited these funds untimely into the FEP investment account. Specifically, we 

found that the Plan deposited these funds into the FEP investment account from 

33 to 100 days after being received. As a result, the FEHBP is due $230 for LII 

on these funds. 

Our sample also included numerous health benefit refunds that were previously 

reviewed during a CPR of this Plan conducted by the Association in 2007. During the 

CPR, the Association identified 1,378 refunds, totaling $424,179, that were deposited 

into the FEP investment but not returned to the LOC account. These refunds were 

received by the Plan from 2003 through 2007. Since these refunds were deposited into 

the FEP investment account, the Association did not assess LII on these funds. As part . 

ofour review, we verified that these refunds were returned to the FEHBP on August 8, 

2008. Although these refunds were returned to the FEHBP before the start of our 

audit, we are continuing to question this amount as a monetary finding since the Plan 

returned these refunds to the LOC account more than 60 days after receipt (i.e., from 

225 to 2,004 days after receipt) and after receiving our audit notification letter and 

standard audit request (dated August 27, 2007). In addition, we reviewed the 

processing dates of these refunds and noted the following additional exceptions: 

•	 Numerous refunds were deposited untimely or not deposited into the FEP 

investment account. Specifically, 73 refunds, totaling $80,447, were not deposited 

into the FEP investment account. Since these refunds were not deposited into the 

FEP investment account, the FEHBP is due $5,958 for LIl (calculated through 

August 8, 2008) on these funds. 

•	 16 refunds, totaling $134,358, were deposited untimely into the FEP investment 

account. As a result, the FEHBP is due $2,912 for LII on these funds. 

In total, we are questioning $544,050, consisting of$530,864 ($79,268 + $22,804 + 

$4,613 + $424,179) for refunds and $13,186 ($107 + $3,638 + $341 + $230 + $5,958 + 

$2,912) for LII on refunds deposited untimely or not deposited into the FEP investment 

account. 

15
 
Association's Response: 

The Association agrees with $119,871 of the questioned amount, consisting of 

$106,685 for refunds and $13,186 for LII. The Association states, "Special Plan 

Invoices to credit the Program for $97,550 ($83,881 principle and $13,669 LII) were 

submitted and wired to BCBSA FEP on August 19,2009. An additional $22,321 was 

deposited into the FEP Investment Account on August 19,2009. This amount will be 

included in the final wire of funds to close out this audit." 

The Association disagrees with $424,179 ofthe questioned amount. The Association 

states that "this amount was identified as a result of the 2007 BCBSA CPR Plan 

Audit prior to the start ofthe 2009 aPM Audit. Funds were returned to the Program 

on July 15,2008, prior to the start ofthe 2009 aPM Audit." 

In addition, the Association states that the Plan has enhanced procedures and 

developed additional monitoring tools to ensure that refunds are deposited into the 

investment account within 30 days of receipt. 

DIG Comments: 

Since the Plan returned the contested refunds of $424,179 to the FEHBP more than 60 

days after receipt and after receiving our audit notification letter and standard audit 

request, we will continue to question this amount as a monetary finding. 

Recommendation 10 

Since we verified that the contested refunds of $424;179 were returned to the FEHBP 

. on August 8, 2008, no further action is required for this questioned amount. 

Recommendation 11 

We recommend that the contracting officer verify that the Plan credits the FEHBP 

$106,685 for refunds. 

Recommendation 12 

We recommend that the contracting officer verifY that the Plan credits the FEHBP 

$13,186 (plus interest accruing after June 30, 2009) for LII on refunds that were 

deposited untimely or not deposited into the FEP investment account. 

Recommendation 13 

We recommend that the contracting officer have the Association verifY that the Plan 

implemented procedures and developed additional monitoring tools to ensure that 

health benefit refunds are returned to the FEHBP in a timely manner. 

16
 
c.	 Fraud Recoveries $79,046 

The Plan did not deposit into the FEP investment account and/or return to the LOC 

account 21 fraud recoveries t.otaling $70,320. Also, the Plan deposited 30 fraud 

recoveries untimely into the FEP investment account. As a result, the FEHBP is due 

$79,046, consisting of $70,320 for fraud recoveries not returned to the FEHBP and 

$8,726 for LII on recoveries deposited untimely or not deposited into the FEP 

investment account. 

As previously stated under audit finding A2.a, the Plan is required to promptly return 

fraud recoveries to the FEHBP with applicable LIt 

For the period 2003 through 2007, there were 36 FEP fraud cases with recoveries 

totaling $234,118. From this universe, we selected and reviewed a judgmental 

sample of23 fraud cases (representing 63 recoveries), totaling $228,496 in recoveries, 

for the purpose of determining if the Plan promptly returned these recoveries to the 

FEHBP. Our sample included all fraud cases with cumulative recoveries of$I,OOO or 

more. Most ofthe fraud cases included multiple recoveries that were received on 

various dates. 

The following summarizes the exceptions noted for the 63 recoveries in our sample: 

•	 In 11 instances, the Plan did not deposit fraud recoveries of $30,620 into the FEP 

investment account. Since these funds were not deposited into the FEP 

investment account, the FEHBP is also due $6,056 for LII on these funds. 

•	 In 10 instances, the Plan did not return fraud recoveries of $39,700 to the LOe 

account. Since $1,595 ofthese funds were not deposited into the FEP investment 

account, the FEHBP is also due $312 for LII. 

•	 In 30 instances, the Plan deposited fraud recoveries of $82,856 into the FEP 

investment account in an untimely manner. Specifically, we found that the Plan 

deposited these funds into the FEP investment account from 42 to 1,785 days after 

being received. As a result, the FEHBP is due $2,358 for LII on these funds. 

In total, the Plan owes the FEHBP $79,046, consisting of$70,320 ($30,620 + $39,700) 

for fraud recoveries not returned to the FEHBP and $8,726 ($6,056 + $312 + $2,358) for 

LII on recoveries deposited untimely or not deposited into the FEP investment account. 

Association's Response: 

The Association agrees with this finding. The Association states, "Special Plan 

Invoices to credit the Program for the $48,498 ($39,700 principle and $8,798 LII) were 

submitted to FEP on August 19,2009. An additional $30,548 was deposited into the 

FEP Investment Account on August 19,2009. This amount will be included in the final 

17
 
wire of funds to close out this audit. In addition, procedures have been enhanced and 

additional monitoring tools developed to promote the deposit ofrefunds into the FEP 

investment account funds within 30 days of receipt." 

Recommendation 14 

We recommend that the contracting officer verify that the Plan credits the FEHBP 

$70,320 for fraud recoveries. 

Recommendation 15 

We recommend that the contracting officer verify that the Plan credits the FEHBP 

$8,726 for LIl on fraud recoveries that were deposited untimely or not deposited into 

the FEP investment account. 

d.	 Special Plan Invoices $48,269 

The Plan did not deposit $39,529 into the FEP investment account for six 

miscellaneous credits that were reported on special plan invoices (SPI) in 2004 and 

2005. Also, the Plan deposited five miscellaneous credits untimely into the FEP 

investment account that were reported on SPI's in 2006. As a result, the FEHBP is 

due $48,269, consisting of$39,529 for miscellaneous credits and $8,740 for LII on 

miscellaneous credits deposited untimely or not deposited into the FEP investment 

account. 

As previously stated under audit finding A2.a, the Plan is required to promptly return 

health benefit refunds and recoveries to the FEHBPwith applicable LII. 

. For the period 2003 through 2007, there were 250 SPI's with miscellaneous payments 

and credits totaling $4,232,586 in net payments. From this universe, we selected and 

reviewed a judgmental sample of28 high dollar SPI's, totaling $1,456,194 in net 

credits, for the purpose ofdetermining ifthe Plan properly credited or charged the 

FEHBP for these invoices. 

The following summarizes the exceptions noted: 

•	 The Plan did not deposit $39,529 into the FEP investment account for six 

miscellaneous credits reported on SPI's in 2004 and 2005. These SPI's were for 

claim overpayment refunds and fraud recoveries. Since the funds were not 

deposited into the FEP investment account, the FEHBP is also due $7,905 for LIl 

on these funds. 

18
 
•	 The Plan deposited five miscellaneous credits, totaling $74,355, into the FEP 

investment account in an untimely manner. These credits were for claim 

overpayment refunds and fraud recoveries that were reported on SPI's in 2006. 

Specifically, we found that the Plan deposited these funds into the FEP investment 

account from 71 to 172 days after being received. As a result, the FEHBP is due 

$835 for LII on these funds. 

In total, the Plan owes the FEHBP $48,269, consisting of$39,529 for miscellaneous 

credits and $8,740 ($7,905 + $835) for LII on miscellaneous credits deposited 

untimely or not deposited into the FE~ investment account. 

Association's Response: 

The Association agrees with this finding. The Association states that the Plan wire 

transferred $31,787 and $7,742 ($31,787 + $7,742 = $39,529) into the FEP 

investment account on April 2, 2009 and May 12,2009, respectively. The Plan also 

transferred an additional $8,740 into the FEP investment account on August 19,2009 

for LII. In addition, the Association states that the Plan's internal procedures have 

been revised to ensure that this type of exception does not occur in the future. 

Recommendation 16 

We recommend that the contracting officer verify that the Plan credited the FEHBP 

$39,529 for miscellaneous credits. 

Recommendation 17 

We recommend that the contracting officer verify that the Plan credited the FEHBP 

$8,740 for LII on miscellaneous credits that were deposited untimely or not deposited 

into the FEP investment account. 

19
 
B. ADMINISTRATIVE EXPENSES
 

1. Directors Liability and Fidelity & Bond Insurance $731,676 

The Plan overcharged the FEHBP $731,676 for Directors Liability and Fidelity & Bond 

Insurance expenses from 2003 through 2007. 

Contract CS 1039, Part III, section 3.2 (b)(l) states, "The Carrier may charge a cost to the 

contract for a contract term ifthe cost is actual, allowable, allocable, and reasonable." 

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

more cost objectives on the basis ofrelative benefits received or other equitable 

relationship. Subject to the foregoing, a cost is allocable to a Government contract if it -­

(a) Is incurred specifically for the contract; 

(b) Benefits both the contract and other work and can be distributed . in reasonable 

proportion to the benefits received; or 

..

(c) Is necessary to the overall operation ofthe business ...." 

From 2003 through 2007, the Plan allocated Directors Liability and Fidelity & Bond 

Insurance expenses to the FEHBP using a revenue ratio methodology. The Directors 

Liability Insurance includes professional liability coverage for the Plan's senior 

management and board ofdirectors. This insurance also includes employment practice 

liability, which covers employee lawsuits for wrongful termination and/or discrimination, 

and employee errors and/or omissions occurring during normal work activities. The 

Fidelity & Bond Insurance covers an employer against losses due to fraudulent or 

dishonest employees, electronic crime, and travel accidents. 

On average, the Plan allocated 10.46 percent ofthese expenses to FEP from 2003 through 

-. 2007 using a revenue ratio methodology. In the draft audit report, we questioned the 

reasonableness ofthe FEP allocation percentage. Since these insurance policies benefit the 

company as a whole, our position is that the Plan should allocate these expenses to FEP 

based on a company expense ratio. Company cost centers, which benefit all lines of 

business, were allocated to FEP by the Plan using the company expense ratio methodology. 

As a result, the Plan re-evaluated how the revenue was allocated and determined that 

insured revenue was inadvertently used instead of gross revenue in the allocation 

methodology. The Plan then recalculated the 2003 through 2007 allocations using the 

gross revenue ratio methodology and determined that the FEHBP was overcharged 

$731,676 for these years. We accepted the Plan's revised allocations since the Plan's 

allocation percentages using the gross revenue ratio methodology are now comparable to 

the percentages using the company expense ratio methodology. 

Association's Response: 

The Association agrees with the questioned overcharges. 

20
 
Recommendation 18 

We recommend that the contracting officer disallow $731,676 for insurance overcharges 

from 2003 through 2007. 

2. Post-Retirement Benefit Costs $251,682 

The Plan overcharged the FEHBP $251,682 (net) for post-retirement benefit costs (PRE) 

from 2003 through 2007. 

As previously cited from CS 1039, costs charged to the FEHBP must be actual,
 

allowable, allocable, and reasonable.
 

48 CPR 31.205-6(0)(2) states: "To be allowable, PRE costs must be reasonable and 

incurred pursuant to law, employer-employee agreement, or an established policy ofthe 

contractor. In addition, to be allowable, PRB costs must also be calculated in accordance 

with paragraphs (0)(2)(i), (ii), or (iii) of this section." 

For 2003 through 2007, we reviewed the Plan's calculations ofPRB costs chargeable to 

the FEHBP. We found that for the FEP dedicated cost centers the Plan properly limited 

FEP's PRB costs to the actual payments for the current year benefits. However, the 

Plan transposed a number in the 2006 year-end PRE adjustment calculation. As a 

result, the FEHBP was undercharged $4,705 for PRB costs from the FEP dedicated cost 

centers in 2006. 

For the indirect cost centers, we found that the Plan did not limit FEP's PRB costs to the 

actual payments for the current year benefits. Therefore, we requested that the Plan 

provide the amounts charged to FEP for PRB costs from the indirect cost centers. We 

then limited those charges to the actual payments for the current year benefits. As a 

result, we detennined that the FEHBP was overcharged $256,387 ($108,691 in 2003, 

$82,949 in 2004, $33,656 in 2005, $29,937 in 2006, and $1,]54 in 2007) forPRB costs 

from the indirect cost centers in 2003 through 2007. 

In total, the FEHBP was overcharged $25] ,682 (net) for PRB costs from 2003 through 

2007. 

Association's Response~

The Association agrees with this finding. The Association states that the Plan submitted 

prior period adjustments for the overcharges on June 15,2009, and transferred applicable 

LII assessed on these funds to the Association's FEP account on August 19,2009. 

21
 
OIG Comments: 

Since the Association did not provide support for the Plan's LII assessed on these 

questioned charges, we did not include LII as part ofthis finding. Instead, we calculated 

LII on these questioned charges in Schedule C of this report. 

Recommendation 19 

We recommend that the contracting officer disallow $251,682 (net) for PRE cost 

overcharges from 2003 through 2007, and verify that these overcharges were returned to 

the FEHBP. 

3. Pension Costs $251,241 

The Plan overcharged the FEHBP $251,241 for pension costs from 2003 through 2007. 

As previously cited from CS 1039, costs charged to the FEHBP must be actual,
 

allowable, allocable, and reasonable.
 

48 CFR 31.205-60)(2) states, "The cost of all defined-benefit pension plans shall be 

measured, allocated, and accounted for in compliance with the provisions of 48 CFR 

9904.412, Cost accounting standard for composition and measurement of pension cost, 

and 48 CFR 9904.413, Adjustment and allocation ofpension cost. The costs of all 

defined-contribution pension plans shall be measured, allocated, and accounted for in 

accordance with the provisions of 48 CFR 9904.412 and 48 CFR 9904.413. Pension 

costs are allowable subject to the referenced standards and the cost limitations and 

exclusions set forth in paragraph (j)(2)(i) and in paragraphs 0)(3) through (8) of this 

subsection." 

The Federal Acquisition Regulations (FAR) limit the amount of pension costs that may 

be charged to a govenunent contract to the amount of any cash contribution to the 

pension fund trustee, or the amount of expense calculated in accordance with Cost 

Accounting Standard (CAS) 412 and 413, whichever is lower. 

For 2003 through 2007, we reviewed the Plan's calculations of pension costs chargeable 

to the FEHBP. We found that for FEP dedicated employees the Plan properly limited 

FEHBP's pension costs to the lower of CAS or funded amounts, except in 2004 where 

the Plan did not limit FEHBP's pension costs to the lower amount. This resulted in an 

overcharge of $43,350 to the FEHBP. However, since we verified that the Plan returned 

this overcharge to the FEHBP on February 27,2007 (during the audit scope), we did not 

question this amount in the finding. In addition, we noted that in 2004 and 2006, the Plan 

elected to apply a portion of its prepaid credit to make the funded amount equal to the 

CAS amount. 

22
 
In deteffilining FEHBP's portion ofpension costs for indirect employees, we found that 

the Plan did not limit FEHBP's pension costs to the lower of CAS or funded amounts. 

Therefore, we requested that the Plan provide the FEP pension charges from the indirect 

cost centers. We then limited those charges to the lower of CAS or funded. As a result, 

we detennined that the FEHBP was overcharged $251,241 ($52,111 in 2003, $100,004 in 

2004, $13,857 in 2005, $30,723 in 2006, and $54,546 in 2007) for pension costs from 

2003 through 2007. 

Association's Response: 

The Association agrees with this finding. The Association states that the Plan submitted 

prior period adjustments for the overcharges on June 1,2009, and transferred applicable 

LII assessed on these funds to the Association's FEP account on August 19, 2009. 

OIG Comments: 

Since the Association did not provide support for the Plan's LII assessed on these 

questioned charges, we did not include LII as part ofthis finding. Instead, we calculated 

LII on these questioned charges in Schedule C of this report. 

Recommendation 20 

We recommend that the contracting officer disallow $251,241 for pension cost 

overcharges from 2003 through 2007, and verify that these overcharges were returned to 

the FEHBP. 

4. Administrative Expense Overcharges $70.491 

The Plan overcharged the FEHBP $70,491 for infonnation technology-related expenses 

in 2007. 

As previously cited from CS 1039, costs charged to the FEHBP must be actual,
 

allowable, allocable, and reasonable.
 

During our review ofFEP's system chargeback expenses and electronic media claim 

expenses, we identified overcharges of $27,435 to the FEHBP in 2007. Also, although 

the Plan's support for the system chargeback expenses only totaled $936,315, the Plan 

charged the FEHBP $979,371 for these expenses, resulting in an additional overcharge of 

$43,056. In total, the FEHBP was overcharged $70,491 for these infoffilation 

technology~related expenses in 2007. 

Association's Response: 

The Association agrees with this finding. The Association states that the Plan wire 

transferred the questioned amount into the FEP investment account. 

23
 
DIG Comments: 

We reviewed additional documentation provided by the Plan and revised our questioned 

costs from the draft report to $70,491. 

Recommendation 21 

We recommend that the contracting officer disallow $70,491 for administrative expense 

overcharges in 2007 and verifY that these overcharges are returned to the FEHBP. 

5. Unallowable and/or Unallocable Expenses $52,442 

The Plan charged unallowable and/or unallocable expenses of$52,442 to the FEHBP 

from 2003 through 2007. 

As previously cited from CS 1039, costs charged to the FEHBP must be actual, 

allowable, allocable, and reasonable. 

48 CFR 31.201-4 states, "A cost is allocable if it 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 it ­

(a) 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 of the business, although a direct relationship 

to any particular cost objective cannot be shown." 

For the period 2003 through 2007, the Plan allocated administrative expenses of 

-. $105,065,829 to the FEHBP from 173 natural accounts and 140 cost centers. From this 

.- universe, we selected ajudgmental sample of 30 natural accounts to review, which totaled 

$23,271,725 in expenses allocated to the FEHBP. We also selected a judgmental sample 

of23 cost centers to review, which totaled $10,569,924 in expenses allocated to the 

FEHBP. We selected the natural accounts and 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 natural accounts and cost centers for allowability, 

allocability, and reasonableness. 

24
 
Based on our review, we determined that the Plan charged the following expenses to the 

FEHBP that were expressly unallowable and/or did not benefit the FEHBP or only 

minimally benefited the FEHBP: 

Natural 

Account 

Number 

Natural Account Name Reason for 

Questioning 

Amount 

Questioned 

66596 Consignment Expenses Unallowable $2,818 

66420 Outside Agency Fees Umillocable 12,870 

65010 Legal Charges Unallocable 10,920 

64110 Advertisilll? - Other Unallowable 5,928 

60190 Settlements/Separation Payments Unallocable 5,882 

66840 AT&T NASCa Fees Unallocable 5,193 

66423 Outside Agency Fee AAI-Insured Unallocable 3,306 

66598 Administrative Penalties Unallowable 1,864 

64210 Promotional Expenses Unallowable 1,382 

60040 Personal Car Allowance Unallowable 1,359 

60130 Commissions Unallowable 920 

Total $52,442 

For advertising, marketing and promotional 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 

costs are chargeable. Generally, these regulations state that such costs are unallowable. 

Regarding consignment and commission expenses charged to the FEHBP, 48 CFR 

31.205-1 through 205-52 specifically addresses certain costs and state that entertairunent 

and commissions are unallowable. 

Regarding fines and penalties charged to the FEHBP, 48 CFR 31.205-15 provides 

specific criteria on the extent to which such costs are chargeable. Generally, this 

regulation states that such costs are unallowable. 

Association's Response: 

In the draft report response (dated September 18, 2009), the Association agreed with 

$47,760 of the questioned costs. 

DIG Comments: 

We reviewed additional documentation provided by the Plan and revised our questioned 

costs from the draft report to $52,442. Subsequent to the draft report response, the 

Association agreed with the revised questioned costs of $52,442. 

Recommendation 22 

We recommend that the contracting officer disallow $52,442 for unallowable and/or 

unallocable costs from 2003 through 2007. 

25
 
6. Inter-Company Profit Adjustment ($67,402) 

The Plan overstated the adjustment to remove inter-company profits from its subsidiary, 

National Account Service Company (NASCO), by $67,402 in 2005. 

As previously cited from CS 1039, costs charged to the FEHBP must be actual, 

allowable, allocable, and reasonable. 

48 CFR 31.205-26(e) states, "Allowance for all materials, supplies, and services that are 

sold or transferred between any divisions, subdivisions, subsidiaries, or affiliates of the 

contractor under a common control shall be on the basis of cost incurred ...." 

From 2003 through 2007, the Plan made out-of-system adjustments to remove intercompany profits from the NASCa subsidiary expenses. In 2005, the Plan miscalculated 

the adjustment to remove NASCa profits by using the net income for the month of 

November instead ofthe December year-to-date net income. Therefore, we recalculated 

the inter-company profit adjustment by using the December 2005 year-to-date net income. 

We determined that the Plan overstated the adjustment, resulting in an undercharge of 

$67,402 to the FEHBP in 2005. 

Association's Response: 

The Association agrees with this finding. The Association states that the Plan submitted 

a prior period adjustment on August 5,2009 to credit the Plan for the undercharge. 

Recommendation 23 

We recommend that the contracting officer allow the Plan to charge the FEHBP $67,402 

for an undercharge in 2005. 

C. CASH MANAGEMENT 

Overall, we concluded that the Plan handled FEHBP funds in accordance with Contract CS 

1039 and applicable laws and regulations, except for the audit findings pertaining to cash 

management noted in the "Miscellaneous Payments and Credits" section. 

26
 
D. LOST INVESTMENT INCOME ON AUDIT FINDINGS $231,737 

As a result of the audit findings presented in this report, the FEHBP is due LII of $231,737 

from January 1,2004 through June ~O, 2009. 

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

simple interest from the date due ... The interest rate shall be the interest rate established by 

the Secretary of the Treasury as provided in Section 611 ofthe 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." 

We computed investment income that would have been earned using the semiannual rates 

specified by the Secretary of the Treasury. Our computations show that the FEHBP is due 

LII of$231,737 from January 1,2004 through June 30, 2009 on questioned costs for contract 

years 2003 through 2007 (see Schedule C). 

Association's Response: 

The draft audit report did not include an audit finding for LII. Therefore, the Association did 

not address this item in its reply. 

OIG Comments: 

According to the Association's draft report response (Appendix A), the Plan submitted prior 

period adjustments to the Association and/or wire transferred funds into the FEP investment 

account during June and August 2009 for the administrative expense audit findings that are 

subject to LII. The Plan also calculated LII on the audit findings for "Post-Retirement 

Benefit Costs" (B2) and "Pension Costs" (B3) and wire transferred these LII funds to the 

Association's FEP account on August 19,2009. 

Recommendation 24 

We recommend that the contracting officer direct the Plan to credit $231,737 (plus interest 

accruing after June 30,2009) to the Special Reserve for LII on audit findings. 

27
 
IV. MAJOR CONTRIBUTORS TO THIS REPORT 

Experience-Rated Audits Group 

Lead Auditor 

Auditor 

Auditor 

Auditor 

Chief 

Senior Team Leader 

28
 
CONTRACT CHARGES 

A. HEALTH BENEFIT CHARGES 

PLAN CODE 280 

MISCELLANEOUS PAYMENTS AND CREDITS 

PLAN CODE 780 

MISCELLANEOUS PAYMENTS AND CREDITS 

SCHEDULE A 

V. SCHEDULES 

HORIZON BLUECROSS BLUESHIELD OF NEW JERSEY
 

NEWARK, NEW JERSEY
 

CONTRACT CHARGES
 

2003 2004 2005 2006 2007 TOTAL 

$101,122,882 $115,299,117 $123,513,995 $144,141,400 $154,009,873 . $638,087,267 

1,514,547 765,390 (102,115) 350,750 481,715 3,010,287 

107,031,349 118,358,418 128,942,209 148,695,449 171,592,572 674,619,996 

0 0 0 0 0 0 

TOTAL I 

~Jm~,;,2,~~~,?~Z3~~IUlW~;';~~::i;'2!~llilh"i,,~m!71:::,:~~":"~"~!,".",~,~~~;,~~:.~~?~m~~:~~;."~!":Jim~'~;i::~1~~r~~"~~ ~~rn'll: ! :,~a~I~~,~m;:;~! ?;"~"~i~~mll ~i

B. ADMINISTRATIVE EXPENSES 

PLAN CODE 280 $20,036,346 $20,345,524 $22,007,772 $22,157,899 $20,518,288 $105,065,829 

PRIOR PERIOD ADJUSTMENTS (304,288) (211,528) (193,049) (4,542) (41,540) (754,947) 

TOTAL I $19,732,058 $20,133,996 $21,814,723 $22,153,357 $20,476,748 $104,310,882 1m 

l1l~l~nil~ l,HljllJ~I~Ym~~I,lmm~m~I~llilm!l!miJlir,:I;l:i~mllp.1H:W1!~~~11t ,m:F:~~I;ilm.'! ,~U! lfil Imr~Hlli!m,l,mL'!l~immjij!i ,gmlmilllHW~ rnmiJj!~lm~i!iwg!,liilm~WHllmiNm!~~~!mmmlm~ rn ll~m!!J J\~lllj !r.J ![WI" !:m:t:~m:mm.;J l~jmm~iL l:r'!n,t~~;iMI1 I.il ill!l .. '~m~.l:~~i m~~1 i ~~f~!illl~!lm~~ .•,G,~t, 11:~m'~~B'~i

TOTAL CONTRACT CHARGES I $229,400,836 $254,556,921 $274,168,811 $315,340,957 $346,560,908 $1,420,028,433 'IHi' Imm:mmnimmmm",~mm:~~i~~mimm, le,Him Iimml:il'''ii;i'illii~mmllll,ffimrn~liil~mmmmlll:! ,1"lmlllm~~lI1I~:lIlll1ll1ll1ll1lmml~!iiI~mrnmlmlllllwmlmlll~'IIIWJm~mw11I1~~IU:III~II!lirn@mUmlmwrnlllm~rnm~III®1lm",m~1iIi , WI'lllilllmml~IWw.m~~ ~mmmffil~~'I~1I1 ;~, II illlwlf~~lmHimH!llml
HORIZON BLUECROSS BLUESHIELD OF NEW JERSEY 

NEWARK, NEW JERSEY 

QUESTIONED CHARGES 

AUDIT FINDINGS 2003 2004 2005 2006 

A. HEALTH BENEFIT CHARGES 

1. Claim Payments~

a. Omnibus Budget Reconciliation Act of 1990 Review SO SO $94,535 56,382 

b. Claim Payment Errors 0 0 6,414 (5,004) 

Total Claim Payments I $0 $0 $100,949 $1,378 

2. Miscellaneous Payments and Credils** 

a. Subrogation Recoveries $174 $1.764 $12,835 $71,382 

b. Health Benefit Refunds 9,163 49,483 88,717 220,975 

c. Fraud Recoveries 22 4,845 65,737 3,576 

d. Special Plan Invoices 0 7,801 32,781 2,659 

Total Miscellaneous Payments and Credits I $9,359 $63,893 5200,070 $298,592 

TOTAL HEALTH BENEFIT CHARGES I $9.359 $63893 $301019 $299970 &;)':,..{,~ :"-"'7~f:':;;'~~~W~:«;W""":=-ff"''':~~/~~"O";-''':':' .'l(~~:':.'l"..;I:-". •.•,.:<;.-"g,-'«:.-~;''::~',:<::;:.-.«-",i/h:*'~

B. ADMINISTRAnVE EXPENSES*** 

1. Directors Liability and Fidelity & Bond Insurance 5107,179 5123,268 5168,382 5159,892 

2. Post-Retirement Benefit Costs 108,691 , 82,949 33,656 25,232 

3. Pension Costs 52,111 100,004 13,857 30,723 

4. Administrative Expense Overcharges 0 0 0 0 

5. Unallowable andlor Unallocable Expenses 1,807 11,038 20,845 

6. Inter-Company Profit Adjustment 0 0 (67,402) 0 

TOTAL ADMINISTRATIVE EXPENSES I 5269788 $317,259 $169,338 $215,847 ~:-: :6:l'.«o1":';t'ffi~~~Ii"·~C',.<""""'~ X'::-"":QGI;9~""",:-:>:

C. CASH MANAGEMENT 1 so 50 50 $0 '::-«':iJox~:--;s:;.:; "-;s:;'",.6;'::oJo,,,,,,~A>;«r;«~.Qm; .;';::-"k~~~y'-:i}:l':#I"~~"'~~~;<: •• ~. ,~ ., • . , , . 

D. LOST TNVESTMENT INCOME ON AUDIT FINDINGS I 0 11.466 25684 41128 ...:~:....tft.~.'&~');~~~'$?;~~~~»::W:~,~¢"Q':-;::''::::;:'~rW:~';:.X:»»:-".-m::-.',.«.-;o::-.:v.:.wQ,m.~#;-WhW~~~.mz,'~

TOTAL QUESTIONED CHARGES I 5279 147 $392618 5496041 $556945 ::~~»,..-..:;:.m.....w..~..y:Mc;;arH..w-if,~-.;.;:(b,::;~*~-«»,,,,;,~~.wv~M,;,mu$,,;r;.;*,:,,~!q#,;,<~&;,1'7~.¥/."" • ;.< "'. . We did nol review ..aim paymems for cont....c! years Z003 and 2004. 

•* The audit find~ngs for miscelianeQus payments and credits include lost investment income. 

..... The audil find~ngs for admin~strative expenses an. subjed 10 l-os[ in-ye.stment income. 

2007 

S82,542 

12,110 

594,652 

$1,140,005 

171,286 

2,365 

2,480 

SI,316,136 

$1 410 788 

$112,955 

1,154 

54,546 

70,491 

18,752 

0 

$317,898 

" 

$0 

53,473 

$1 782 159 

SCHEDULE B 

2008 2009 TOTAL 

$168,634 

2,554 

$171,188 

S7,807 

3,665 

1,811 

1,946 

S15,229 

S186417 

:;<;'''':'.'':~.(ifJ';:;r;:X,*M»:··

SO 

0 

0 

0 

0 

0 

$0 

=-­ '"'" 

50 .. .. .. ,. .' 

63,701 

$0 

0 

5352,093 

16,074 

SO $368,167 

53,968 

761 

690 

602 

$1,237,935 

544,050 

79,046 

48,269 

$6,021 $1,909,300 

$6,021 52277.467 .' , ~}X~A'-"';;

$0 $731,676 

0 251,682 

0 251,241 

0 70,491 

0 52,442 

0 (67,402) 

$0 SI,290 130 

@ 

'-': 

<­

». 

$0 50 j ,. .. ,. 

36285 $231 737 '7.o;·d~m.:t.N..:.q";;,,,;,~~~w/41:--,",m..."'. -'.$';"$~ ::.:o.,.'m"~~o(W~~~:x:->.:='y~~;.o;-~~

5250 118 $42306 $3,799,334 • ~~~M.<r:r.-:;r.(~~~WM';:« ="," • - YA',.-~·
LOST INVESTMENT INCOME 

A. QUESTIONED CHARGES (Subject to Lost Investment Income) 

ADMINISTRATIVE EXPENSES I 

B. LOST INVESTMENT INCOME CALCULATION 

a. Prior Years Total Questioned (Principal) 

b. Cumulative Total 

c. Total 

d. Treasury Rate: January 1 w June 30 

e, Interest (d * c) 

f. Treasury Rate: July 1 - December 31 

g. Interest (f * c) 

Total Interest By Year (e + g) I 

SCHEDULEC 

HORIZON BLUECROSS BLUESHIELD OF NEW JERSEY 

NEWARK, NEW JERSEY 

LOST INVESTMENT INCOME CALCULATION 

2003 2004 2005 2006 2007 2008 2009 TOTAL 

$269,788 $317,259 $169,338 $215,847 $317,898 $0 $0 $1290,130 

$0 $269,788 $317,259 $169,338 $215,847 $317,898 $0 

269,788 587,047 756,385 972,232 1,290,130 

SO $269,788 S587,047 $756,385 S972,232 SI,290,130 $1,290,130 

4.250% 4.000% 4.250% 5.125% 5.250% 4.750% 5.625% 

$0 $5,396 $12,475 $19,382 $25,521 $30,641 $36,285 $129,700 

3.125% 4.500% 4.500% 5.750% 5.750% 5.125% 

$0 $6,070 $13,209 $21,746 $27,952 $33,060 $102,037 

$0 $11,466 S25,684 $41,128 $53,473 $63,701 $36,285 $231,737 

!! Q 
••

APPENDIX A 

BlueCross BlueShield 

Association 

An Association of Independent 

Blue Cross and Blue Shield Plans 

September 18, 2009 

Federal Employee Program 

1310 G Street, N.W. Group Chief 

Washington, D.C. 20005 Experience-Rated Audits Group 202.942.1000 . 

Office of the Inspector General 

U.S. Office of Personnel Management 

1900 E Street, Room 6400 

Washington, DC 20415-1100 

Reference:	 OPM DRAFT AUDIT REPORT 

Horizon Blue Cross Blue Shield of New Jersey 

Audit Report Number 1A-10-49-09-025 

(Dated July 8, 2009 and Received July 8, 2009) 

Dear 

This is our response to the above referenced U.s. Office of Personnel 

Management (OPM) Draft Audit Report covering the Federal Employees' Health 

Benefits Program (FEHBP) concerning the Horizon BlueCross BlueShield Plan of 

New Jersey. Our comments concerning the findings in the report are as follows: 

A. HEALTH BENEFIT CHARGES 

1. Claim Payments 

a. Omnibus Budget Reconciliation Act 1990 Review $787,068 

The Plan disagrees with $736,638 of this finding. The amount includes a 

$434,975 claim where the payment was issued via an off-system check 

because of a local system issue. The claim was processed accurately on 

FEP Direct, but not posted to history on the Plan's local system (NASCO). 

Supporting documentation regarding the off-system check was sent to 

aPM on July 23,2009 reflecting that the claim posted on the local system. 

Based on the documentation provided by the Plan, aPM agreed to 

remove the $434,975 from the audit finding. In addition, the Plan 

disagrees that $301,663 was paid incorrectly due to the OBRA '90 Pricer 

and eMS Pricer pricing differences. When the claims were re-priced with 

the most current version of the FE? Operations Center OBRA '90 Pricer, 

the priced obtained was different from the price obtained using the eMS 

Pricer. Documentation was provided to support the $301,663 payment 

based on the FEP Operations Center OBRA '90 Pricer which is the official 

aPM approved source for FE? aBRA '90 pricing. 
September 18, 2009 

Page 2 

Ofthe remaining amount, the Plan agrees that $50,430 represents OBRA 

'90 claim overpayments. To reduce these types of pricing errors in the 

future, the Plan has implemented and updated its Policy & Procedure for 

OBRA '90 claim processing. Request for refunds have been initiated to 

recover payment errors and any amounts recovered will be returned to the 

Program. Also, the FEP Director's Office includes potential OBRA '90 

priced claims in its periodic System-Wide Claims Review to facilitate early 

identification and recovery of OBRA '90 claim payment errors. 

Completion of these periodic reports assists in timely the timely 

identification and recovery of OBRA '90 claim payment errors. 

Accordingly, to the extent that errors did occur, the payments are good 

faith erroneous benefits payments and fall within the context of CS 1039, 

Section 2.3(g). Any benefit payments the Plan is unable to recover are 

allowable charges to the Program. In addition, as good faith payments, 

the Plan continues to initiate recovery in a timely manner for confirmed 

overpayments. Because these are good faith erroneous payments, they 

are not SUbject to lost investment income. 

b. Claims Payment Errors	 $16,074 

Assistant Surgeon Review $29,479 

The Plan does not contest this finding. Recovery activities have been 

initiated for these overpayments..The Plan has reviewed the identified 

errors and determined that they were the result of examiner manual . 

interventions. Additional training has been provided to the examiners reemphasizing the proper procedures for handling these claims. Also, the 

FEP Director's Office generates periodic listings of Assistant Surgeon 

Claims as a part of its System-wide Claims Review Process to ensure that 

these claim payment errors are identified and recovered in a timely 

manner. 

For the Assistant Surgeon claim errors noted that related to the OBRA '93 

pricing of claims with the "AS Modifier, the FEPDO implemented the 

following: 

•	 Modified its contract with Palmetto to include the pricing of AS 

modifier claims. 

•	 Issued a final comprehensive listing of unadjusted OBRA '93 

Assistant Surgeon claims with the AS Modifier to all Plans in the 

Phase IV af the System-wide Claims Review Process that was sent 

during January 2009 so that claims can be adjusted as necessary. 

Accordingly, to the extent that errors did occur, the payments are good 

faith erroneous benefits payments ~lid fall within the context of CS 1039, 
September 18,2009 

Page 3 

Section 2.3(g). Any benefit payments the Plan is unable to recover are 

allowable charges to the Program. In addition, as good faith payments, 

the Plan continues to initiate recovery in a timely manner for confirmed 

overpayments. Because these are good faith erroneous payments, they 

are not subject to lost investment income. 

System Review $100 

The Plan does not contest this audit finding. Recovery activities have 

been initiated for the two overpayments identified. Claims were manually 

priced with the incorrect provider allowance, which resulted in incorrect 

payments. The Plan will review processing procedures and documentation 

to ensure training materials are up to date as well as provide refresher 

training to claim processors to reduce these types of payment errors in the 

future. 

The Plan has several methods in place to identify overpayments. These 

methods include, but are not timited to, the System Wide Claims Reports 

(which includes a listing of Assistant Surgeon Claims, Amount Paid 

Greater than Charges Claims, OBRA '90, OBRA '93, High Dollar and 

Termination Claims), COB claims reports and Duplicate claims reports 

provided by the FEP Director's Office along with routine claims quality 

assurance audits performed by the Plan's Internal Auditors. These are all 

tools that are used to promote claims accuracy. While these measures 

are not absolute, they provide reasonable assurances that such items will 

be identified. Efforts will be made to periodically examine existing 

procedures and add additional controls where necessary. 

Accordingly, to the extent that errors did occur, the payments are good 

faith erroneous benefits payments and fall within the context of CS 1039, 

Section 2.3(g). Any benefit payments the Plan is unable to recover are 

allowable charges to the Program. In addition, as good faith efforts, the 

Plan continues to initiate recovery in a timely manner for confirmed 

overpayments. Because these are good faith erroneous payments, they 

are not subject to lost investment income. 

Amounts Paid Greater than Covered Charge $(13,505) 

The Plan does not contest this audit finding. Recovery efforts have been 

initiated the identified overpayments totaling $9,955. The one claim that 

Was underpaid by $23,460 has been processed to issue an additional 

payment to the provider. The four errors (three overpayments and one 

underpayment) that occurred in this area were the result of manual 

intervention. To ensure these types of errors do not occur in the future, 

the Plan has reviewed its processing procedures and its training materials 

to ensure they are current. In addition, the FEP Director's Office System 

Wide Claims Review process includes Amounts Paid Greater than 

Covered Charges Claims for Plan review and identification of potential 
September 18, 2009 

Page 4 

overpayments. This review process should continue to reduce these 

types of findings in the future. 

Accordingly, to the extent that errors did occur, the payments are good 

faith erroneous benefits payments and fall within the context of CS 1039, 

Section 2.3{g). Any benefit payments the Plan is unable to recover are 

allowable charges to the Program. In addition, as good faith efforts, the 

Plan continues to initiate recovery in a timely manner for confirmed 

overpayments. Because these are good faith erroneous payments, they 

are not subject to lost investment income. 

2. Miscellaneous Payment and Credits 

Response for "Subrogation Recoveries" (A2.a), "Health Benefit 

Refunds" (A2.b), and "Fraud Recoveries" (A2.c) - Superseded by 

the November 11. 2009 Response (Appendix B) . 
September 18, 2009 

PageS 

d. Special Plan Invoices $48,269 

The Plan agrees that the funds were not deposited in the Investment 

Account but when the Special Plan Invoice was approved by FEP, the 

funds were reduced from the amount payable to the Plan in the daily 

draws for 2004 and 2005 transactions. Therefore, only L11 is due the 

Program starting 31 days after the funds were received until the Special 

Plan Invoices were processed_ 

The Plan has calculated the values for the two Specia' Plan Invoices at 

$39,529. On April 2, 2009 and May 12,2009 the Plan wired $31,787.36 

and $7,741.73 respectively to the FE? Investment Account. An additional 

$8,740 of LIt was wired on August 19,2009. Internal procedures have 

been revised to ensure that this type of exception does not occur in the 

future. 

8. ADMINISTRATIVE EXPENSES 

1. Directors and LiabiJity and Fidelity & Bond Insurance $922,118 

The Plan does not agree with aPM that using Revenue as the methodology 

was inappropriate. However, the Plan has re-evaluated how the Revenue was 

allocated and determined that Insured Revenue was used instead of Gross 

Revenue. The Plan has subsequently recalculated the overcharge as follows: 
September·18,2009 

Page 6 

Horizon Healthcare Services, Inc. (HHSI) (Horizon Blue Cross Blue Shield of 

New Jersey) incurs significant expenses for Directors' Liability Insurance 

coverage and Fidelity & Bond Insurance coverage. These policies are written 

on a consolidated basis, and cover HHSI as well as all of its subsidiaries and 

affiliates. The total expense is first allocated to each legal entity, based upon 

gross revenues (which include premium equivalents for self·funded groups). 

The costs allocated to HHSI are coded to the Executive department, which is 

then allocated to Market Segments as part of the Plan expense allocations. 

Since HHSI has made the decision not to charge the FEP Program with any 

Executive department salary or benefit costs, the original Plan expense . 

allocations to the FEP Market Segment for Executive costs, including the 

liability Insurance expenses, were backed out, in total, from the FEP cost 

submissions. However, since these insurance costs are valid charges to FEP, 

an alternative allocation methodology was then utilized to calculate the 

amount of insurance expenses properly allocable to FEP. For the years 

under audit, the insurance expenses in HHSI were allocated to FEP using 

Insured Revenues. FEP revenues were divided by total Insured revenues to 

get the FEP percentage, and this was applied against the total Directors' 

Liability and Fidelity &Bond insurance costs charged to HHSI. The aPM 

auditors have questioned the use of revenues as a basis for allocating these 

insurance costs, and have proposed that total expenses should be used as 

the basis for allocating these insurance costs, not revenues. (See Audit 

Inquiry #11) 

The Plan's initial response was that there was nothing in the CAS regulations 

that would prohibit the use of revenues as an allocation basis, and since the 

insurance expenses in question were originally allocated to the legal entities 

using revenues, the use of revenues to allocate to Market Segments would be 

appropriate. 

Upon further review, the Plan now believes that the use of Insured premiums, 

as opposed to gross revenues, was inconsistent with the original allocation of 

the insurance expenses to the legal entities. and that the expenses allocated 

to the FEP Market Segment should have been calculated under that 

methodology. By using Insured premiums, the Plan was not allocating any of 

the Liability insurance costs to self-funded business, which would be 

incorrect. We still disagree with the aPM proposal to use total expenses, but 

we do agree that the original expense allocations have been overstated. 

Attachment 1 shows the Plan's revised allocations, by year, of the costs of the 

Directors' Liability and Fidelity & Bond insurance costs to the FEP Program, 

based upon gross revenues by Market Segment. This results in overcharges 

to the FEP Program of $731,676, as opposed to the $922,118 calculated by 

aPM. We hereby submit that this revised amount should be returned to the 

FEP Program. 
September 18, 2009 

Page 7 

Although the Plan does not agree with the full amount questioned, on August 

19,2009, $922,118 was wired into the FEP Investment Account pending a 

final resolution to this issue. The applicable Lost Investment Income will be 

assessed. 

Supporting Documentation 

Attachments 2a and 2b show the total insurance expense allocated by legal 

entity, to prove that the HHSI amount has already been reduced for amounts 

applicable to other legal entities under the Horizon corporate structure. 

See Attachment 3 (pages 1-5) that shows the total consolidated insurance 

expenses to support the previous two attachments. 

In summary since the charges were consistently allocated based on a 

percentage of revenue to all reporting entities and internal market segments, 

the allocation to FEP should also be based on gross revenues. 

2. Post-Retirement Benefit Costs $251.682 

The Plan does not contest this audit finding. On June 15,2009 the Plan 

submitted Prior Period Adjustment (PPAs) forms for the overcharges from 

2003-2007. ' 

To prevent this error from occurring in the future, the Plan has revised its 

accounting for Post Retirements Benefits. The accounting for Post 

Retirement Benefits for non FEP cost centers'will be calculated in the same 

format as is used for Direct FEP cost centers. 

Applicable Lost Investment Income was assessed on these funds and wired 

to SCSSA FEP on August 19, 2009. 

3. Pension Costs $251,241 

The Plan does not contest this audit finding. On June 1, 2009, the Plan 

submitted Prior Period Adjustment forms for the overcharges from 2003-2007. 

To prevent this error from occurring in the future, the Plan has revised the 

accounting for Pension Costs. The accounting for Pension costs for non FEP 

cost centers will be calculated using the CAS pension expense instead of the 

GAAP pension expense. 

Applicable Lost Investment Income was assessed on these funds and wired 

to BCBSA FEP on August 19, 2009. 
September 18. 2009 

Page 8 

4. Administrative Expense Overcharges $185.077 

. The Plan agrees with only $70,491 of the audit finding. The FEP Program 

appears to have been overcharged for $43,056 related to systems chargebacks. In addition, the Plan agrees that $27,435 of the $142.021 related to 

EMC Charges were improperly charged to the Program. 

However, the Plan disagrees with $114,586 of the finding. The OPM auditors 

did not take into consideration the realignment of our IT department in 2007 

when determining the allowable charges to the Program. In completing our 

review of this Audit Inquiry, Plan staff has identified additional charges that 

were part of the cost center that handled electronic media claims (EMC) (cost 

center 9677) in 2006 but were transferred to various cost centers in 2007 and 

are allowable/allocable to FEP. See Attachment 4 for further analysis of the 

charges to FEP. 

Although the Plan does not agree with the full amount questioned, on August 

19,2009 $185,077 was wired into the FEP Investment Account, pending a 

final resolution of this issue. As applicable, Lost Investment Income will be 

assessed once the audit finding is resolved. 

5. Unallowable and/or Unallocable Expenses $136.159 

The Plan agrees with $47,760 ofthis finding. However, it disagrees with 

$88,399 of this finding. Specifically, the Plan disagrees with the disallowance 

of the Managed Medicare and Sales and Reporting cost centers, and natural 

accounts 61040 (Print Promotional), 66596 (Consignment Expense) and 

66598 (Admin Penalties) and feel that these are allowable expenses, totaling 

$88,399. The follOWing are the Plan's responses for those items where there 

is disagreement with the amount questioned by OPM. 

Managed Medicare cc 9452 - During the on-site portion of the audit, 

additional information was provided for this cost center. A document was 

provided that stated that the correct name of this cost center in 2003 was 

"HCM Compliance/Gov't Programs". There were seven FTEs in the cost 

center of which 3 FTEs "cover all products for compliance/mandates". Since 

FEP is one of Horizon's products, an allocation to FEP is warranted and 

justifiable. An Excel file was also produced that showed the monthly 

allocation of $2,034 to FEP which on an annual basis is $24,408 or only $269 

less than the actual allocation of $24,677. Of the total expense in the cost 

center, 2.35% was allocated and charged to FEP. Disallowing expenses 

because of the cost center name is inappropriate. 

Sales & Reporting cc 4083 - During the on-site portion of the audit, 

additional information was provided for this cost center. An e-mail from the 

manager of the cost center dated JUly 2,2004, stated that the cost center 

performed a number of functions including "prepared monthly enrollment and 
September 18, 2009 

Page 9 

financial reports that include the entire enterprise". Since FEP enrollment is 

included in Horizon produced enrollment reports and would be included in 

many financial reports that include the entire enterprise, the allocation of 

these costs to FEP are both warranted and justified. For the three years in 

question, the percentage allocation of this cost center to FEP was never more 

than 1.0%. 

Print Promotional - Account 61040 The expenses in the Print Promotional 

.account for 2005 represents payments made to a vendor who pUblished our 

"Focus" member magazine in 2005 as well as our Health and Wellness. 

calendar. Since this publication was distributed to our members, this would 

include our members and FEP staff, the allocation of this expense to FEP 

would be both warranted and justified. This print information was intended to 

educate, inform and advise our members so while this expense was charged 

to a print promotional account the Plan believes that this should not be 

treated as either a disallowed or non-chargeable account. 

Consignment Expenses - Account 66596. This expense represents the 

costs of entertainment tickets, monthly bus and train passes, and water that 

are sold out of Horizon's fitness center. These expenses are fully offset by 

revenues that are coded to account 75140 - Credits Other in that same cost 

center. FEP is allocated a portion of the Fitness Center cost center, since it 

serves all employees, including the FEP staff. As part of that allocation, these 

credits were allocated back to FEP for each year of the audit. Since the credit 

was allocated back to FEP the expense should also be chargeable. The 

credits were included in the amount reported in Information Request #25 on 

line 262 (Credits Other). 

Admin Penalties - Account 66598. If the expense from this account in 

2004 of $1 ,864 is to be classified as a disallowed .account, then the credit of 

$2,924 from 2005 should also be disallowed. This credit was not included by 

the auditors as a disallowed account in 2005; only the amount from 2004 was 

included in the draft report. 

Of the remaining Natural Accounts the Plan agrees that these should not 

have been charged to FEP. The agreed upon amount is $29,008 

Transaction Expenses - The Plan agrees that these two transactions should 

not have been charged to FEP. The agreed upon amount is $18,752. 

Procedures have been enhanced to ensure that errors of this nature do not 

occur in the future. 

Although the Plan does not agree with the total amount of this finding, on 

August 19, 2009 $136,159 was wired into the FEP Investment Account, 
pending final resolution of this issue. Applicable Lost Investment Income will 

be assessed after final resolufion. 

6. Inter-Company Profit Adjustment ($67,402) 

The Plan does not contest this finding. A Prior Period Adjustment form was 

submitted on August 5, 2009 to credit the Plan for this overpayment. 

We appreciate the opportunity to provide our response to each of the findings 

and request that our comments be included in their entirety as part of the Final 

Audit Report. 

Executive Director
 

Program Integrity
 

-

cc: 
APPENDIXB . 

BlueCross BJueShield 

Association 

An A.'I9ocialion oflndependent 

Blue Cross IUld Blue Shield Plans 

November 11, 2009 

federal Employee PrOgram 

1310 G Street, N.W. 

Group Chief . Washington, D.C. 20005 

Experience-Rated Audits Group 202.942.1000 

Fax 202.942.1125 Office of the Inspector General 

U.S. Office of Personnel Management 

1900 E Street, Room 6400 

Washington, DC 20415-1100 

Reference:	 OPM DRAFT AUDIT REPORT 

Horizon Blue Cross Blue Shield of New Jersey 

Audit Report Number 1A-10-49-o9-025 

(Dated JUly 8, 2009 and Received JUly 8, 2009) 

Dea~

This is our revised response findings 2a, 2b and 2c to the above referenced U.S. 

Office of Personnel Management (OPM) Draft Audit Report covering the Federal 

Employees' Health Benefits Program (FEHBP) concerning the Horizon 

BlueCrass BlueShield Plan of New Jersey. 

2. Miscellaneous Payment and Credits 

a. SUbrogation Recoveries	 $1,237,935 

The Plan disagrees with $1,201.907 of this audit finding. This amount was
 

identified as a result of the 2007 SCSSA Control Performance Review
 

(CPR) Plan Audit. The Plan received the final CPR Audit report on May
 

23,2008. The amount of the finding was agreed upon by the CPR Audit
 

Team and the Plan and funds were returned to the Program on June 13,
 

2008. which was prior to the 2009 aPM Audit. Documentation to support
 

the position that the Plan was selected for the 2007 CPR audit prior to
 

aPM Audit notification was forwarded by the FEP Director's Office to the
 

aPM audit team on June 9, 2009.
 

The Plan does agree that $36,028, which is comprised of $18,265 in L11
 

and $17,761 in refunds, was not credited to the Program. Special Plan
 

Invoices to credit the Program for the $31.245 ($11,239 principle and
 

$20,006 L11) were submitted to FEP on August 18, 2009. These funds
 

were wired to SeSSA FEP on August 19, 2009. An additional $4,783 was
 

deposited into the FEP Investment Account on August 19, 2009. This
 

amount will be included in the final wire of funds to close out this audit.
 
• •••••• • 

November 11, 2009 

Page 2 

In addition, procedures have been enhanced and additional monitoring 

tools developed to ensure the deposits in the investment account within 30 

days of receipt. 

b. Health Benefit Refunds $544,050 

The Plan disagrees with $424,179 of the audit finding because this 

amount was identified as a result of the 2007 SeBSA CPR Plan Audit 

prior to the start of the 2009 OPM Audit. Funds were returned to the 

Program on JUly 15, 2008, prior to the start of the 2009 OPM Audit. 

Documentation to support the position that the Plan was selected for the 

2007 CPR audit prior to OPM Audit notification was forwarded by the FEP 

Dtrector's Office to the OPM audit team on June 9,2009. 

The Plan agrees that $119,871, which is comprised of $13,186 in LII and 

$106,685 in refunds, was not credited to the Program. Special Plan 

Invoices to credit the Program for $97,550 ($83,881 principle and $13,669 

L11) were submitted and wired to SCSSA FEP on August 19, 2009. An 

additional $22,321 was deposited into the FEP Investment Account on 

August 19, 2009. This amount will be included in the final wire of funds to 

. close out this audit. In addition, procedures have been enhanced and 

additional monitoring tools developed to ensure the deposits in the 

investment account within 30 days of receipt. 

c. Fraud Recoveries $79,046 

The Plan agrees with this finding. Special Plsn Invoices to credit the 

Program for the $48,498 ($39,700 principle and $8,798 L11) were 

submitted to FEP on August 19, 2009. An additional $30,548 was 

deposited into the FEP Investment Account on August 19, 2009. This 

amount wiJI be included in the final wire of funds to close out this audit. In 

addition, procedures have been enhanced and additional monito~ing tools 

developed to promote the deposit of refunds into the FEP investment 

account funds within 30 days of receipt. 

~uestions or concerns, please feel free to call either. 

____or myself at 

Sincerely,