U.S. OFFICE OF PERSONNEL MANAGENIENT 

OFFICE OF THE INSPECTOR GENERAL 

OFFICE OF AUDITS 

Final Audit Report 

Subject: 

Audit of the Federal Employees Health Benefits 


Program Operations at Preferred Care 


Report No. lC-GV-OO-lO-004 

Date: July 27, 2010 

-- CAUTION -­

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

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

available under the f"reedom of Information Act and made availa ble to the public on the OIG webpage, caution needs to be exercised 

before releasing the report to the general public as it may contain proprietary information that was redacted from the publicly 

distributed copy. 
UNITED STATES OFFICE OF PERSONNEL MANAGEMENT 


Washington, DC 20415 


Office of the 

Inspector General 

AUDIT REPORT 


Federal Employees Health Benefits Program 


Community-Rated Health Maintenance Organization 


Preferred Care 


Contract Number CS 2371 - Plan Code GV 


Rochester, New York 


Report No. lC-GV-OO-lO-004 Dak: July 27, 2010 

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 


Community-Rated Health Maintenance Organization 


Preferred Care 


Contract Number CS 2371 - Plan Code GV 


Rochester, New York 


Report No. lC-GV-OO-lO-004 Date: July 27, 2010 

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

Program (FEHBP) operations at Preferred Care (Plan). The audit covered contract years 2006 

through 2009 and was conducted at the Plan's office in Rochester, New York. 

This report questions $746,845 for inappropriate health benefit charges to the FEHBP in contract 

years 2006 through 2009. The questioned amount includes $685,407 for defective pricing and 

$61,438 due the FEHBP for lost investment income, calculated through July 31, 2010. 

For contract year 2006, we determined that the FEHBP's rates were overstated by $30,306 

because the Plan charged broker commissions to the FEHBP. Broker commissions have been 

identified as an unallowable cost under 48 Code of Federal Regulations (CFR) 1631.205-75 

Selling Costs part (a). 

For contract year 2007, we determined that the FEHBP's rates were overstated by $64,093 

because the Plan charged the FEHBP both broker commissions and a state assessed market 

stabilization fee. Broker commissions have been identified as an unallowable cost under 48 CFR 

1631.205-75. New York's market stabilization fee is an unallowable cost under Carrier Letter 

www.opm.gov www.usajobs.gov 
2003-16, the Federal Employees Health Benefits Act, and the Omnibus Budget Reconciliation 

Act of 1990 at United States Code (U.S.C.) sub code 8909(1). 

For contract year 2008, we determined that the FEHBP's rates were overstated by $374,167 

because the Plan charged broker commissions to the FEHBP. Broker commissions have been 

identified as an unallowable cost under 48 CFR 1631.205-75 Selling Costs part (a). 

For contract year 2009, we determined that the FEHBP's rates were overstated by $216,841 

because the Plan charged the FEHBP a state assessed market stabilization fee. New York's 

market stabilization fee is an unallowable cost under Carrier Letter 2003-16, the Federal 

Employees Health Benefits Act, and the Omnibus Budget Reconciliation Act of 1990 at U.S.C. 

sub code 8909(1). 

Consistent with the FEHBP regulations and contract, the FEHBP is due $61,438 for lost 

investment income, calculated through July 31, 2010, on the defective pricing findings. In 

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

August 1,2010, until all defective pricing amounts have been returned to the FEHBP. 

11 
CONTENTS 


Page 

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


I. INTRODUCTION AND BACKGROUND ..................................................................... 1 


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


III. 	 AUDIT FINDINGS AND RECOMMENDATIONS ...................................................... 5 


Premium Rates ................................................................................................................ 5 


1. Defective Pricing ......................................................................................................... 5 


2. Lost Investment Income .............................................................................................. 7 


IV. 	 MAJOR CONTRIBUTORS TO THIS REPORT ............................................................. 9 


Exhibit A (Summary ofQuestioned Costs) 


Exhibit B (Defective Pricing Questioned Costs) 


Exhibit C (Lost Investment Income) 


Appendix (MVP Health Care's May 20, 2010, response to the draft report) 

I. INTRODUCTION AND BACKGROUND 


Introduction 

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

at Preferred Care (Plan). The audit covered contract years 2006 through 2009 and was conducted 

at the Plan's office in Rochester, New York. The audit was conducted pursuant to the provisions 

of Contract CS 2371; 5 U.S.C. Chapter 89; and 5 Code of Federal Regulations (CFR) Chapter 1, 

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

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

Background 

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

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

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

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

are implemented by OPM through regulations codified in Chapter 1, Part 890 of Title 5, CFR. 

Health insurance coverage is provided through contracts with 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 ofthe FEHBP. 

The chart to the right shows the number of 

FEHBP contracts and members reported by 

the Plan as ofMarch 31 for each contract 

year audited. 

March 31 

1 

The Plan has participated in the FEHBP since 1988 and provides health benefits to FEHBP 

members throughout the Rochester area. The last full-scope audit ofthe Plan covered contract 

years 2001 through 2005. All issues related to that audit have been resolved. 

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

through subsequent correspondence. A draft report was also provided to the Plan for review and 

comment. The Plan's comments were considered in the preparation ofthis final report and are 

included, as appropriate, as the Appendix. 

2 

II. OBJECTIVES, SCOPE, AND METHODOLOGY 


Objectives 

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

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

Additional tests were performed to determine whether the Plan was in compliance with the 

provisions of the laws and regulations governing the FEHBP. 

FEHBP Premiums Paid to Plan We conducted this performance audit in accordance with 

generally accepted government auditing standards. 

Those standards require that we plan and perform the 

audit to obtain sufficient, appropriate evidence to 

provide a reasonable basis for our findings and 

conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis 

for our findings and conclusions based on our audit 

objectives. 

This performance audit covered contract years 2006 

through 2009. For these years, the FEHBP paid 

approximately $84.7 million in premiums to the Plan. 

The premiums paid for each contract year audited are 

shown on the chart to the right. 

OIG 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 ofdetecting errors, irregularities, and illegal acts. 

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

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

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

considered necessary under the circumstances. Our review ofinternal 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 (Le., equivalent to the best 

rate offered to SSSGs); and 

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

3 
In conducting the audit, we relied to varying degrees on computer-generated billing, enrollment, 

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

the various 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 governrnent auditing standards, 

issued by the Comptroller General ofthe United States. 

The audit fieldwork was performed at the Plan's office in Rochester, New York during October 

2009. Additional audit work was completed at our offices in Jacksonville, Florida, and 

Cranberry Township, Pennsylvania. 

Methodology 

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

the market price rates. In addition, we examined the rate development documentation and 

billings to other groups, such as the SSSGs, to determine if the market price was actually charged 

to the FEHBP. Finally, we used the contract, the Federal Employees Health Benefits Acquisition 

Regulations (FEHBAR), and OPM's Rate Instructions to Community-Rated Carriers to 

determine the propriety of the 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. AUDIT FINDINGS AND RECOMMENDATIONS 


Premium Rates 

1. Defective Pricing $685,407 

The Certificates ofAccurate Pricing the Plan signed for contract years 2006 through 

2009 were defective. In accordance with federal regulations, the FEHBP is therefore due a 

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

FEHBP is entitled to premium adjustments totaling $685,407 (see Exhibit A). 

FEHBAR 1652.215-70 provides that carriers proposing rates to OPM are required to submit a 

Certificate of Accurate Pricing certifYing that the proposed subscription rates, subject to 

adjustments recognized by OPM, are market price rates. OPM regulations refer to a market 

price rate in conjunction with the rates offered to an SSSG. Ifit is found that the FEHBP was 

charged higher than a market price (Le., the best rate offered to an SSSG), a condition of 

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

equivalent market price. 

We reviewed the FEHBP's rates and found that the Plan charged broker commissions to the 

FEHBP. The broker commission was built into the community rate. Broker commissions are 

unallowable costs identified by United States Code of Federal Regulation Title 48 - Federal 

Acquisition Regulations System Chapter 16 - Office of Personnel Management Federal 

Employees Health Benefits Acquisition Regulation Part 1631 Contract Cost Principles and 

Procedures 1631.205-75 Selling Costs part (a). 

We re-developed the FEHBP's rates by applying a credit to offset the broker commission. A 

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

was overcharged $30,306 in 2006 (see Exhibit B). 

We reviewed the FEHBP's rates and found that the Plan charged both broker commissions 

and a market stabilization fee to the FEHBP. The broker commission and market 

stabilization fee were built into the community rate. The market stabilization fee is an 

assessment imposed by the state ofNew York to fund a pool used to pay high cost claims for 

individual and small group insurance policies. 

Broker commissions are unallowable costs identified by United States Code ofFederal 

Regulation Title 48 - Federal Acquisition Regulations System Chapter 16 - Office of 

Personnel Management Federal Employees Health Benefits Acquisition Regulation Part 1631 

- Contract Cost Principles and Procedures 1631.205-75 Selling Costs part (a). 

5 
The market stabilization fee is an unallowable cost associated with Carrier Letter 2003-16, 

the Federal Employees Health Benefits Act, and the Omnibus Budget Reconciliation Act of 

1990 at U.S.C. sub code 8909(f). The regulation states, "No tax, fee, or other monetary 

payment may be imposed, directly or indirectly, on a carrier or an underwriting or plan 

administration subcontractor of an approved health benefits plan by any State ... with respect 

to any payment made from the Employees Health Benefits Fund." This regulation excludes 

the FEHBP from surcharges that subsidize indigent care and other health care initiatives 

through pooled funds. 

We re-developed the FEHBP's rates by applying a credit to offset both the broker 

commission and the market stabilization fee. A comparison ofthe reconciled line 5 rates to 

our audited line 5 rates shows that the FEHBP was overcharged $64,093 in 2007 (see Exhibit 

B). 

We reviewed the FEHBP's rates and found that the Plan charged broker commissions to the 

FEHBP. The broker commission was built into the community rate. Broker commissions are 

unallowable costs identified by United States Code of Federal Regulation Title 48 Federal 

Acquisition Regulations System Chapter 16 Office ofPersonnel Management Federal 

Employees Health Benefits Acquisition Regulation Part 1631 - Contract Cost Principles and 

Procedures 1631.205-75 Selling Costs part (a). 

We re-developed the FEHBP's rates by applying a credit to offset the broker commission. A 

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

was overcharged $374,167 in 2008 (see Exhibit B). 

We reviewed the FEHBP's rates and found that the Plan charged a market stabilization fee to 

the FEHBP. This market stabilization fee was built into the community rates for 2009. The 

market stabilization fee is an assessment imposed by the state ofNew York to fund a pool 

used to pay high cost claims for individual and small group insurance policies. 

The market stabilization fee is an unallowable cost associated with Carrier Letter 2003-16, 

the Federal Employees Health Benefits Act, and the Omnibus Budget Reconciliation Act of 

1990 at U.S.C. sub code 8909(f). The regulation states, "No tax, fee, or other monetary 

payment may be imposed, directly or indirectly, on a carrier or an underwriting or plan 

administration subcontractor of an approved health benefits plan by any State ... with respect 

to any payment made from the Employees Health Benefits Fund." This regulation excludes 

the FEHBP from surcharges that subsidize indigent care and other health care initiatives 

through pooled funds. 

6 
We re-developed the FEHBP's rates by applying a credit to offset the market stabilization 

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

FEHBP was overcharged $216,841 in 2009 (see Exhibit B). 

Plan's Comments (See Appendix): 

The Plan concurs that brokers commissions and market stabilization fees were improperly 

charged to the FEHBP. 

Recommendation 1 

We recommend that the contracting officer require the Plan to return $685,407 to the FEHBP 

for defective pricing in contract years 2006 through 2009. 

2. Lost Investment Income $61,438 

In accordance with the FEHBP regulations and the contract between OPM and the Plan, the 

FEHBP is entitled to recover lost investment income on the defective pricing findings in 

contract years 2006 through 2009. We determined that the FEHBP is due $61,438 for lost 

investment income, calculated through July 31,2010 (see Exhibit C). In addition, the FEHBP 

is entitled to lost investment income for the period beginning August 1, 2010, until all 

defective pricing finding amounts have been returned to the FEHBP. 

FEHBAR 1652.215-70 provides that if any rate established in connection with the FEHBP 

contract was increased because the carrier furnished cost or pricing data that were not 

complete, accurate, or current as certified in its Certificate ofAccurate Pricing, the rate shall 

be reduced by the amount ofthe overcharge caused by the defective data. In addition, when 

the rates are reduced due to defective pricing, the regulation states that the government is 

entitled to a refund and simple interest on the amount ofthe overcharge from the date the 

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

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

Treasury's semiannual cost of capital rates. 

Plan's Comments (See Appendix): 

The Plan concurs. 

Recommendation 2 

We recommend that the contracting officer require the Plan to return $61,438 to the FEHBP 

for lost investment income for the period January 1, 2006, through July 31,2010. In addition, 

we recommend that the contracting officer recover lost investment income on amounts due for 

7 

IV. MAJOR CONTRIBUTORS TO THIS REPORT 

Community-Rated Audits Group 

Auditor-In-Charge 

Staff Auditor 

Staff Auditor 

Senior Team Leader 

9 

Exhibit A 

Preferred Care - Rochester, NY 


Summary of Questioned Costs 


Defective Pricing Questioned Costs: 

Contract Year 2006 $30,306 

Contract Year 2007 $64,093 

Contract Year 2008 $374,167 

Contract Year 2009 $216,841 

Total Defective Pricing Questioned Costs: $685,407 

Lost Investment Income: $61,438 

Total Questioned Costs: $746,845 
2006 

Exhibit B 

Page 1 of2 

Preferred Care - Rochester, NY 


Defective Pricing Questioned Costs 


FEHBP Line 5 Reconciled Rate 

FEHBP Line 5 - Audited Rate (Revised 6/4/2010) 

Overcharge 

To Annualize Overcharge: 

3/31/06 enrollment 

Pay Periods 

Subtotal 

Total 2006 Defective Pricing Questioned Costs $30.306 

2007 

FEHBP Line 5 - Reconciled Rate 

FEHBP Line 5 - Audited Rate 

Overcharge 

To Annualize Overcharge: 

3/31/07 enrollment 


Pay Periods 


Subtotal 

Total 2007 Defective Pricing Questioned Costs $64.093 

2008 

FEHBP Line 5 - Reconciled Rate 

FEHBP Line 5 - Audited Rate 

Overcharge 

To Annualize Overcharge: 

3/31108 enrollment 

Pay Periods 

Subtotal 

Tota12008 Defective Pricing Questioned Costs $374,167 
2009 

Exhibit B 

Page 2 of2 

Preferred Care - Rochester, NY 

Defective Pricing Questioned Costs 

High Option 

FEHBP Line 5 - Reconciled Rate 

FEHBP Line 5 - Audited Rate 

Overcharge 

To Annualize Overcharge: 

3/31/09 enrollment 

Pay Periods 

Subtotal 

Total 2009 High Option Defective Pricing Questioned Costs $208,340 

Standard Option 

2009 

FEHBP Line 5 - Reconciled Rate 

FEHBP Line 5 - Audited Rate 

Overcharge 

To Annualize Overcharge: 

3/31/09 enrollment 

Pay Periods 

Subtotal 

Total 2009 Standard Option Defective Pricing Questioned Costs 

Total 2009 Defective Pricing Questioned Costs $216,841 
EXHIBITC 

Preferred Care - Rochester, NY 

Lost Investment Income 

Year: 2006 2007 2008 2009 2010 Total 

Defective Pricing: $30,306 $64,093 $374,167 $216,841 $0 $685,407 

Totals (per year): $30,306 $64,093 $374,167 $216,841 $0 $685,407 

Cumulative Totals: $30,306 $94,399 $468,566 $685,407

A vg. Interest Rate (per year): 5.4375% 5.5000% 4.9375% 5.2500% 3.2500% 

Interest on Prior Years Findings: $0 $1,667 $4,661 $24,600 $12,994 $43,922 

Current Years Interest: $824 $1,763 $9,237 $5,692 $0 $17,516 

Total Cumulative Interest Calculated 

Through July 31, 2010: $824 $3,430 $13,898 $30,292 $12,994 I $61,438 
APPENDIX 


(1 ~ r~ :"t Jt", ~I:r~'"·· r '-., B 

"'-:I-';l"IJ.:J :'Jl1:·>iJi 

mvphealthcare.com 

May 20. 2010 

Audits Group 

U.S. Office of the Inspector General 

1900 E Street. NW 

Room 6400 

Washington, D.C. 20415-1100 

RE: Report No. 1C-GV-00-1 0-004 

Dear_: 

Enclosed please find a CD in Microsoft word tormat as well as hard copies of the response to your letter 

of March 24, 2010 addressed to Mr. David OUker. Chief Executive Officer. MVP Health Care (MVP) 

regarding Report No. 1C-GV-00-10-004, audit of Preferred Care tor the time period 2006-2009. 

The Office of Personnel Management/Office of Inspector General (OIG) has calculated a balance due of 

$914,049 for contract audit years 2006 through 2009 ($847,099 for defective priCing and $66.950 for lost 

investment income). After a thorough review. MVP has concluded that the figure should be amended to 

$734,765 ($686,285 for defective pricing and $48,480 for lost investment income). MVP accepts 

responsibility for the inclusion of broker commissions in the FEHB rate and concurs with the removal and 

credit back to FEHB of those funds plus interest. However in 2006 and 2007 we believe there is a 

computation error where a monlhly amount is multiplied by 26 (pay period application) resulting in an 

overage of amount due as calculated by OIG. In 2008 the removal of broker commission is calculated 

correctly. Also in 2008, MVP disagrees with the SSSG discount as it pertains to the broker commission. 

Please see attached broker commission schedules outlining the revised payment schedule, thus 

removing the discount cited in the comparison to . The priCing for ____

was rated in compliance with the formula and this amount should be excluded from 

MVP agrees with the findings for 2009 regarding the removal of the market stabilization fee. The attached 

documentation provides further detail for the year by year differences. 

Thank you for your consideration of these items to aid in the preparation of the final audit report. 

Please direct any questions you may have relative to this application to my attention. 

Sincerely, 

Vice President, Underwriting & Analysis