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 Kaiser Foundation Health
 

Plan, Inc. - Southern California
 

Report No. lC-62-00-10-029 

Date: July 20, 2010 

-- CAUTION -­

This audit report has been distributed to Federal and non-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 report is available under the Freedom of Information Act 

and made available 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
 

Kaiser Foundation Health Plan, Inc. - Southern California
 

Contract Number 1044 - Plan Code 62
 

Burbank, California
 

Report No. lC-62-00-10-029 Date: July 20, 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
 

Kaiser Foundation Health Plan, Inc. - Southern California
 

Contract Number 1044 - Plan Code 62
 

Burbank, California
 

Report No. lC-62-00-10-029 Date: July 20, 2010 

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

Program (FEHBP) operations at Kaiser Foundation Health Plan, Inc, - Southern California 

(Plan). The audit covered contract years 2007 through 2009 and was conducted at the Plan's 

office in Burbank, California. We found that the FEHBP rates were developed in accordance 

with the applicable laws, regulations, and the Office ofPersonnel Management's rating 

instructions for the years audited. 

www.opm.gov www.usajoba.gov 
CONTENTS
 

Page 

EXECUTIVE SUMMARY .i
 

I. INTRODUCTION AND BACKGROUND 1
 

II. OBJECTIVES, SCOPE, AND METHODOLOGY 3
 

III. RESULTS OF THE AUDIT 5
 

IV. MAJOR CONTRIBUTORS TO THIS REPORT 6
 
FEHBP Contracts/Members 

March 31 

120,000 

100,000 

80,000 

60,000 

40,000 

20,000 

o 

• Contracts 

o Members 

I. INTRODUCTION AND BACKGROUND
 

Introduction 

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

at Kaiser Foundation Health Plan, Inc. - Southern California (Plan). The audit covered contract 

years 2007 through 2009 and was conducted at the Plan's office in Burbank, California. The 

audit was conducted pursuant to the provisions of Contract CS 1044; 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 of the 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, 

which is defined as the best rate offered to 

either of the 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 of March 31 for each contract 

year audited. 
The Plan has participated in the FEHBP since 1960 and provides health benefits to FEHBP 

members throughout Southern California. The last full-scope audit covered contract years 2004 

through 2006. 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. Since the audit showed that the Plan's rating of the FEHBP 

was in accordance with the applicable laws, regulations, and instructions, we did not issue a draft 

report. 

2
 
FEHBP Premiums Paid to Plan 

$600
 

$500
 

:!! $400
 

	 $300
 

$200
 

$100
 

$0 

• Revenue 

II. OBJECTIVES, SCOPE, AND METHODOLOGY
 

Objectives 

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

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

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

provisions ofthe laws and regulations governing the FEHBP. 

We conducted this performance audit in accordance with 

generally accepted government auditing standards. 

Those standards require that we plan and perform the 

audit to obtain sufficient, appropriate evidence to 

provide a reasonable basis for our findings and 

conclusions based on our audit objectives. We believe 

that the evidence obtained provides a reasonable basis 

for our findings and conclusions based on our audit 

objectives. 

This performance audit covered contract years 2007 

through 2009. For these contract years, the FEHBP paid
 

approximately $1.5 billion 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 of detecting errors, irregularities, and illegal acts.
 

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

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

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

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

procedures the Plan has in place to ensure that:
 

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

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

rate offered to SSSGs); and 

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

3 
Inconducting 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 government auditing standards, 

issued by the Comptroller General ofthe United States. 

The audit fieldwork was performed at the Plan's office in Burbank, California, during February 

2010. Additional audit work was completed at our offices in Jacksonville, Florida and 

Washington, D.C. 

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 if the 

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

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

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

reasonableness and acceptability of the Plan's rating system. 

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

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

performed other auditing procedures necessary to meet our audit objectives. 

4
 
III. RESULTS OF THE AUDIT
 

Our audit showed that the Plan's rating ofthe FEHBP was in accordance with the applicable 

laws, regulations, and OPM's rating instructions to carriers for contract years 2007 through 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 

Auditor-In-Charge 

Auditor 

Senior Team Leader 

Chief 

6