U.S. OFFICE OF PERSONNEL MANAGEMENT 

OFFICE OF THE INSPECTOR GENERAL 

OFFICE OF AUDITS 

Final Audit Report 

SUbject: 

Audit of the Federal Employees Health Benefits 

Program Operations at PacifiCare of Colorado 

Report No. lC-D6-00-10-003 

. ,',: ,::-. Date: May 21, 2010

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.': ........ Thisauditreport has becn distributed to Federal and non-Federal officials who are responsiblc for the 

a'4m'inistration of the audited program. This audit report may contain proprictary data \vhich is protected by 

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'.;.: ".-;.:::~~~ J..iIade ~vailableto thc public on the OIG wcbpage,caution rt'cedsto be exercised before releasing the. 

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UNITED STATES OFFICE OF PERSONNEL MANAGEMENT 


Washington, DC 20415 


Office of the 

Inspector General 

AUDIT REPORT 


Federa1 Employees Health Benefits Program 


Community-Rated Health Maintenance Organization 


PacifiCare ofCo1orado 


Contract Number 1761 - Plan Code D6 


Cypress, CaUfornia 


Report No. lC-D6-00-10-003 Date: May 21, 2010 

Michae1 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 


Community-Rated Health Maintenance Organization 


PacifiCare of Colorado 


Contract Number 1761 - Plan Code D6 


Cypress, California 


Report No. lC-D6-00-10-003 Dak: May 21, 2010 

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

Program (FEHBP) operations at PacifiCare of Colorado (Plan). The audit covered contract year 

2009 and was conducted at the Plan's office in Cypress, California. We found that the FEHBP 

rates were developed in accordance with applicable laws, regulations, and the Office of 

Personnel Management's rating instructions for the year audited. 

During our claims review, we noted a small number of FEHBP claims that were not adjudicated 

properly. However, these claims did not have a material impact on the scope of our audit, and 

furthermore, the Plan no longer participates in the FEHBP. As a result, no corrective action is 

necessary. 

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CONTENTS 


Page 

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


L INTRODUCTION AND BACKGROUND ..................................................................... 1 


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


III. RESULTS OF AUDIT .................................................................................................... 5 


IV. MAJOR CONTRIBUTORS TO THIS REPORT ............................................................ 6 

I. INTRODUCTION AND BACKGROUND 


Introduction 

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

at PacifiCare of Colorado (Plan). The audit covered contract year 2009 and was conducted at the 

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

Contract CS 1761; 5 U.S.c. Chapter 89; and 5 Code ofFederal Regulations (CFR) Chapter 1, 

Part 890. The audit was performed by the Office of Personnel Management's (OPM) Office of 

the Inspector General (OIG), as established by the Inspector General Act of 1978, as amended. 

Background 

The FEHBP was established by the Federal Employees Health Benefits Act (Public Law 86-382), 

enacted on September 28, 1959. The FEHBP was created to provide health insurance benefits 

for federal employees, annuitants, and dependents. The FEHBP is administered by OPM's 

Retirement and Benefits Office. The provisions ofthe Federal Employees Health Benefits Act 

are implemented by OPM through regulations codified in Chapter I, Part 890 ofTitle 5, CFR. 

Health insurance coverage is provided through contracts with various health insurance carriers 

that provide service benefits, indemnity benefits, or comprehensive medical services. 

Community-rated carriers participating in the FEHBP are subject to various federal, state and 

local laws, regulations, and ordinances. While most carriers are subject to state jurisdiction, 

many are further subject to the Health Maintenance Organization Act of 1973 (Public Law 93­

222), as amended (i.e., many community-rated carriers are federally qualified). In addition, 

participation in the FEHBP subjects the carriers to the Federal Employees Health Benefits Act 

and implementing regulations promulgated by OPM. 

The FEHBP should pay a market price rate, FEHBP Contracts/Members 

which is defined as the best rate offered to 

either ofthe two groups closest in size to 

the FEHBP. In contracting with 

community-rated carriers, OPM relies on 

carrier compliance with appropriate laws 

and regulations and, consequently, does not 

negotiate base rates. OPM negotiations 

relate primarily to the level of coverage and 

other unique features of the FEHBP. 

The chart to the right shows the number of 

FEHBP contracts and members reported by 

the Plan as of March 31 for the contract 

year audited. 

March 31 

1 

The Plan participated in the FEHBP from 1978 through 2009, and provided health benefits to 

FEHBP members throughout the Metropolitan Denver, Boulder, and Colorado Springs areas. 

The last full-scope audit of the Plan covered contract years 2005 through 2008. There were no 

issues identified in the prior audit. 

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

through subsequent correspondence. Since the audit showed that the Plan's rating ofthe FEHBP 

was in accordance with the applicable laws, regulations, and instructions, we did notissue a draft 

report. 

2 

II. OBJECTIVES, SCOPE, AND METHODOLOGY 


Objectives 

The primary objectives of the audit were to verify that the Plan offered market price rates to the 

FEHBP and to verify that the loadings to the FEHBP rates were reasonable and equitable. 

Additional tests were perfonned to detennine whether the Plan was in compliance with the 

provisions of the laws and regulations governing the FEHBP. 

We conducted this perfonnance audit in accordance with generally accepted government auditing 

standards. Those standards require that we plan and 

perfonn the audit to obtain sufficient, appropriate 

evidence to provide a reasonable basis for our findings 

and conclusions based on our audit objectives. We 

believe that the evidence obtained provides a reasonable 

basis for our findings and conclusions based on our 

audit objectives. 

This perfonnance audit covered contract year 2009. 

During this period, the FEHBP paid approximately 

$77.2 million in premiums to the Plan. The premiums 

paid for the contract year audited are shown on the chart 

to the right. 

FEHBP Premiums Paid to Plan 

DIG audits of community-rated carriers are designed to test carrier compliance with the FEHBP 

contract, applicable laws and regulations, and OPM rate instructions. These audits are also 

designed to provide reasonable assurance of detecting errors, irregularities, and illegal acts. 

We obtained an understanding of the Plan's internal control structure, but we did not use this 

information to detennine the nature, timing, and extent of our audit procedures. However, the 

audit included such tests of the Plan's rating system and such other auditing procedures 

considered necessary under the circumstances. Our review of internal controls was limited to the 

procedures the Plan has in place to ensure that: 

• The appropriate similarly sized subscriber groups (SSSG) were selected; 

• 	 the rates charged to the FEHBP were the market price rates (i.e., equivalent to the best 

rate offered to SSSGs); and 

• 	 the loadings to the FEHBP rates were reasonable and equitable. 

In conducting the audit, we relied to varying degrees on computer-generated billing, enrollment, 

and claims data provided by the Plan. We did not verify the reliability of the data generated by 

3 
the various information systems involved. However, nothing came to our attention during our 

audit testing utilizing the computer-generated data to cause us to doubt its reliability. We believe 

that the available data was sufficient to achieve our audit objectives. Except as noted above, the 

audit was performed in accordance with generally accepted government auditing standards, 

issued by the Comptroller General of the United States. 

The audit fieldwork was performed at the Plan's office in Cypress, California, during November 

2009. Additional audit work was completed at our office in Cranberry Township, Pennsylvania. 

Methodology 

We examined the Plan's federal rate submissions and related documents as a basis for validating 

the market price rates. Further, we examined claim payments to verify that the cost data used to 

develop the FEHBP rates was accurate, complete and valid. In addition, we examined the rate 

development documentation and billings to other groups, such as the SSSGs, to determine ifthe 

market price was actually charged to the FEHBP. Final1y, we used the contract, the Federal 

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

Community-Rated Carriers to determine the propriety ofthe FEHBP premiums and the 

reasonableness and acceptability ofthe Plan's rating system. 

To gain an understanding of the internal controls in the Plan's rating system, we reviewed the 

Plan's rating system's policies and procedures, interviewed appropriate Plan officials, and 

performed other auditing procedures necessary to meet our audit objectives. 

4 

III. RESULTS OF AUDIT 


During our claims review, we noted a small number ofFEHBP claims that were not adjudicated 

properly. However, these claims did not have a material impact on the scope of our audit. Since 

the Plan no longer participates in the FEHBP, no corrective action is necessary. Our audit 

showed that the Plan's rating of the FEHBP was in accordance with the applicable laws, 

regulations, and OPM's rating instructions to carriers for contract year 2009. Consequently, the 

audit did not identify any questioned costs and no corrective action is necessary. 

5 

IV. MAJOR CONTRIBUTORS TO THIS REPORT 

Community-Rated Audits Group 

Audi tor-In-Charge 


Staff Auditor 


Chief 

Senior Team Leader 

6