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US OFFICE OF PERSONNEL MANAGEMENT. 

. OFFICE OP·TBEINSPECIQj{(jENERAt 

OFFICE OF AUDITS 

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UNITED STATES OFFICE OF PERSONNEL MANAGEMENT
 

Washington, DC 20415
 

Office of the 

Inspecto! General 

AUDIT REPORT 

Federal Employees Health Benefits Program
 

Community-Rated Health Maintenance Organization
 

Health Plan of Nevada
 

Contract Number CS 1942 - Plan Code NM
 

Las Vegas, Nevada
 

Report No. lC-NM~OO-08-049 Date: February 5, 2009 

Michael R. Esser 

Assistant Inspector General 

for Audits 

-_ .. _--------------- -----_._-------------------------------­ www.opm.gav www.usaJobs.goy 
UNITED STATES OFFICE OF PERSONNEL MANAGEMENT
 

Washinglon, DC 20415
 

Office of the 

Inspector General 

EXECUTIVE SUMMARY
 

Federal Employees Health Benefits Program
 

Community-Rated Health Maintenance Organization
 

Health Plan of Nevada
 

Contract Number CS 1942 - Plan Code NM
 

Las Vegas, Nevada
 

Report No.1C-NM-OO-08-049 Date: February 5, 2009 

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

Benefits Program (FEHBP) operations at Health Plan ofNevada (Plan). The audit covered 

contract years 2003 through 2008 and was conducted at the Plan's office in Las Vegas, Nevada. 

.This report questions $2,158,941 for inappropriate charges to the FEHBP in 2004, 2007, and 

2008, including $94,261 for lost investment income. We found that the FEHBP rates were 

developed in accordance with the applicable Jaws, regulations, and OPM's rating instructions in 

contract years 2003, 2005, and 2006. 

The questioned costs are a result of the Plan applying an incorrect discount to the FEHBP rates 

in 2004 because of an error in its calculation of a discount for the 

Plan giving a 2 year contract startin in 2006, which resulted in a 

discount 0 percen ; an e an glvmg a 2 year contract 

starting in 2007, which resulted in a"percent discount. We applied these discounts to the 

FEHBP's rates and determined that the FEHBP was overcharged $2,064,680. 

Consistent with the FEHBP regulations and contract, the FEHBP is due $94,261 for lost 

investment income, calculated through January 31, 2009, on the defective pricing findings in 

2004,2007, and 2008. In addition, the contracting officer should recover lost investment income 

on amounts due for the period beginning February], 2009, until all defective pricing amounts 

have been returned to the FEHBP. 

www.opm.gov www.usaJobs.gov 
CONTENTS
 

Page 

EXECUTIVE SUMMARY	 i
 

I. INTRODUCTION AND BACKGROUND	 1
 

II.	 OBJECTIVES, SCOPE, AND METHODOLOGy 3
 

III.	 AUDIT FINDINGS AND RECOMMENDAnONS 5
 

Premium Rates 5
 

1. Defective Pricing	 5
 

2. Lost Investment Income	 , _ 8
 

IV.	 MAJOR CONTRIBUTORS TO TI-IIS REPORT 9
 

Exhibit A (Summary of Questioned Costs)
 

Exhibit B (Defective Pricing Questioned Costs)
 

Exhibit C (Lost Investment Income)
 

Appendix (Health Plan ofNevada's December 17,2008, response to the draft report)
 
I. INTRODUCTION AND BACKGROUND
 

Introduction 

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

at Health Plan ofNevada (Plan) in Las Vegas, Nevada. The audit covered contract years 2003 

through 2008. The audit was conducted pursuant to the provisions of Contract CS 1942; 5 

U.S.C. Chapter 89; and 5 Cod~ of Federal Regulations (CFR) Chapter 1, Part 890. The audit was 

perfonned by the Officeof Personnel Management's (OPM) Office ofthe Inspector General, 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 Center for Retirement and Insurance Services. The provisions ofthe Federal Employees 

Health Benefits Act are implemented by OPM through regulations codified in Chapter l> 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 

March 31 

either ofthe two groups closest in size to the
 

FEHBP. In contracting with community-rated
 

carriers, aPM relies on carrier compliance with
 

. appropriate laws and regulations and, 

consequently, does not negotiate base rates. 

aPM negotiations relate primarily to the level 

of coverage and other unique features of the 

FEHBP. 

The chart to the right shows the number of
 

FEHBP contracts and members reported by the
 

Plan for March 31 of each contract year
 

5,000 ... 4,500 :-: 1-: 

4,000 I:: ::: 

3,500 :-: 

3,000 I:: 

2,500 ;:: :-:

f- r­ 2,000 

r­ [:: f­ 1,500 I:: 

i;,ill .. .. rI 1,000 

2003 2004 2005 2006 2007

•

2008

I_ Contracts 2,037 2,252 2,398 2,340 2,367 2,360

10 Members 4,142 4,567 4,804 4,637 4,552 4,539

audited. 
The Plan began participating in the FEHBP in 1984 and provides health benefits to FEHBP 

members throughout Las Vegas, Nevada. The last audit of the Plan conducted by our office was 

a full scope audit of contract years 2000 through 2002. As a result of that audit, we found that 

the Plan's rating ofthe FEHBP was in accordance with the applicable laws, regulations, and 

aPM rating instructions for the years audited. 

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

FEllBP 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 generaJly 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 

2003 through 2008 1

• For contract years 2003 

through 2007, the FEHBP paid approximately $51 million in premiums to the Plan. The 

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

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

contract, applicable laws and regulations, and DPM 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 of our audit procedures. However, the 

audit included such tests ofthe Plan's rating systems and such other auditing procedures as we 

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 an SSSG); and 

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

I The Subscription Income Report for 2008 was not available at the time this report was completed. 

3 

FEHBP Premiums Paid to Plan 

$2 

$7 

$12 

$17 

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

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

The audit fieldwork was conducted at the Plan's office in Las Vegas, Nevada, during June and 

July 2008. Additional audit work was completed at our office in Jacksonville, Florida. 

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 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 of the 

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 $2,064,680 

The Certificates of Accurate Pricing the Plan signed for contract years 2004, 2007, and 2008 

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

adjustment for each year. We applied the defective pricing remedies for the years in question 

and determined that the FEHBP is entitled to premium adjustments totaling $2,064,680 (see 

Exhibit A). We found that the FEHBP rates were developed in accordance with the 

applicable laws, regulations, and aPM rating instructions in contract years 2003, 2005, and 

2006. 

Carriers proposing rates to aPM are required to submit a Certificate of Accurate Pricing 

certifying that the proposed subscription rates, subject to adjustments recognized by aPM, are 

market price rates. aPM regulations refer to a market price rate in conjunction with the rates 

offered to an SSSG. Ifit is found that the FEHBP was charged rates that exceeded the market 

price (i.e., 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. 

2004 

The Plan selected 

for contract year 2004. We agree with these selections. 

the contract year with three subgroups ­

and 

rates. Starting in July, the group decided to include both into the_ 

Ian. However, the billed rates for all enro ees remame a e _ 

_ rates. The Plan calculated ~ercent discount as a result of the combination of 

the three groups and applied this discount to the FEHBP rates. However, we calculated a 

_percent discount. Accordingly, we redeveloped the FEHBP rates by applying the_ 

percent SSSG discount. A comparison ofthe audited rates to the reconciled rates shows that 

the FEHBP was overcharged $52,414 in 2004 (see Exhibit B). 

Plan's. Comments (See Appendix): 

The Plan states that the was not included in the calculation of 

the average premium ra110 m e or s eet or t e 

group. The original ratio of should b~ This correction reduces the discount to 

_percent and results in $52,090 due the 

OIGJs Response to the Plan's Comments: 

We reviewed th~worksheet submitted by the Plan and· agree that the 

_category was not included in the calculation ofthe average premium ratio. 

5
 
We also agree with the revised discount of.percent given to the 

_group and that this discount should be applied to the FEHBP rates. However, our 

:=onshows that the FEHBP is due $52,414 for 2004, not $52,090. 

The Plan selected 

for contract year 

that had a two year contract starting in 2006. However, in 

calculating any potential discount as a result of the two year contract, the Plan used the same 

enrollment data from the calculation ofthe 2006 -'djustment factor instead of using 

emollment data that would be available at the time the 2007 rates were developed. 

Accordingly, we recalculated rates using current enrollment 

data for the calculation ofthe adjustment factor. As a result, 

_received a_percent discount, instead ofth~ercent discount calculated 

by the Plan and applied to the FEHBP rates. Therefore, we redeveloped the FEHBP rates by 

applying th~percent SSSG discount. A comparison ofthe audited rates to the 

reconciled rates shows that the FEHBP was overcharged $444,115 in contract year 2007 (see 

Exhibit B). 

Plan's Response (See Appendix): 

The Plan disagrees with updating the enrollment data in the middle of a two year contract. 

The Plan states that using updated enrollment to evaluate the rates charged to an SSSG 

introduces "hindsight" into the process which the Plan says is contrary to the principles of 

community rating. The Plan further states that there is no basis in OPM's regulations or rating 

instructions for this approach. The Plan states that the only instruction relating to rates that 

extend beyond 12 months requires that premium adjustments be made or the rate extensions 

will be considered as a discount. The Plan states that it complied with this requirement at the 

-_~ime_ofthe 2007 rate reconciliation when it gave the FEHBP a~ercent discount in 

connection with the rates charged to 

OIG's Response to theptan's Comments: 

OPM's 2007 Rate Reconciliation Instructions state that, "If an SSSG's rate is extended 

beyond twelve months...a premium adjustment that reflects the entire value ofthe extension 

must be made for the SSSG in the following year, or the rate extension will be considered a 

discount." In determining the discount, the Plan used the same enrollment data from the 

calculation of the 2006_adjustment factor. To be consistent with the methodology 

used to develop the FEHBP's and the other SSSG's rates, enrollment data that was available 

at the time the 2007 rates were developed should have been used for the calculation ofthe 

~djustment factor. Therefore, we recalculated rates 

using current enrollment data for the calculation of the adjustment factor. As a result, 

received a _ percent discount, which we applied to the 

FEHBP rates. 

6 
The Plan selected 

for contract ear 2 

that had a two year contract starting in 2007. However, in 

calculating any potential discount as a result of the two year contract, the Plan used the same 

enrollment data from the calculation ofthe 2007 adjustment factor instead of using 

enrollment data that was available at the time the 2008 rates were developed. Accordingly, 

we recalculated rates using the current enrollment data for the 

calculation ofthe_adjustment factor. As a result, we determined that alii percent 

discount was given to Therefore, we applied this discount to 

the FEHBP rates. A comparison 0 the audited rates to the reconciled rates shows that the 

FEHBP was overcharged $1,568,151 in contract year 2008 (see Exhibit B). 

Plan's Comments (See Appendix): 

The Plan states that OPM's instructions regarding multi-year rate agreements require a plan to 

use the current year's rating methodology when determining any discount in the second and 

subsequent years of the rate agreement. The Plan states that its evaluation of 

•••••• rates was consistent with OPM's instructions. Further, the Plan states that 

according to OPM's rate reconciliation instructions, a plan may not update the FEHBP 

enrollment data to reflect the impact ofopen season. Therefore, to be consistent with the 

established ratin methodolo , the Plan used the enrollment data it used in developing 

2007 _ factor. 

OIG's Response to the Plan's Comments: 

The Plan states that it followed OPM's instructions by using the current year's methodology 

to determine any discount in the second year 0 two year 

contract. We disagree. The methodology used to eve op 

current rates (i.e., the 2007 rates) was based on rating factors, including enrollment, that were 

available at the time the rates were developed. Therefore, to evaluate the 2008 rates, the Plan 

should use the rating factors, including enrollment, that were available at the time the 2008 

rates were develo ed. This is the methodolo we used in calculating the. percent 

discount given to 

Further, the Plan states that aPM does not allow plans to update the FEHBP's enrollment to 

reflect open season changes; therefore, the Plan applied the same approach when developing 

rates. We agree that OPM does not allow plans to update the 

FEHBP's enrollment between the proposal and reconciliation to reflect the impact of open 

season changes. However, that limitation applies within the same year. For example, the Plan 

cannot use one set of enrollment statistics to develop the proposed 2008 rates and then use a 

different set of enrollment statistics to develop the reconciled 2008 rates. The issue with 

is not the same. The Plan used the same set of enrollment 

statistics to develop both the 2007 and potential 2008 rates. Using the enrollment data that 

7
 
was available at the time 2008 rates were developed is not inconsistent with OPM's 

instructions. 

In conclusion, we developed 2008 rates as the Plan would 

done had the group not had a two year contract and determined that the group received a 

percent discount in 2008 that was not applied to the FEHBP rates. • 

Recommendation 1 

We recommend that the contracting officer require the Plan to return $2,064,680 to the 

FEHBP for defective pricing in 2004,2007, and 2008. 

2. Lost Investment Income $94,261 

In accordance with 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 2004, 2007, and 2008. We determined that the FEHBP is due $94,261 for lost 

investment income, calculated through January 31,2009. In addition, the FEHBP is entitled 

to lost investment income for the period beginning February 1,2009, until all defective 

pricing amounts have been returned to the FEHBP. 

FEHBAR 1652.215-70 provides that, ifany rate established in connection with the FEHBP 

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

complete, accurate, or current as certified in its Certificate of Accurate 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 of the overcharge from the date the 

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

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

Treasury's semiannual cost of capital rates. 

Plan~s Response (See Appendix): 

The Plan did not provide any comments regarding the lost investment income finding. 

Recommendation 2 

We recommend that the contracting officer require the Plan to return $94,261 to the FEHBP 

forlost investment income, calculated through January 31,2009. In addition, we recommend 

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

beginning February 1,2009, until all defective pricing amounts have been returned to the 

FEHBP. 

8
 
IV. MAJOR CONTRIBUTORS TO THIS REPORT 

Community-Rated Audits Group 

Auditor-in-Charge 

Staff Auditor 

Staff Auditor 

Chief 

Senior Team Leader 

9
 
Exhibit A 

Health Plan of Nevada
 

Summary of Questioned Costs
 

Defective Pricing Questioned Costs: 

Contract Year 2004 $52,414
 

Contract Year 2007 $444,115
 

Contract Year 2008 $1,568,151
 

Total Defective Pricing Questioned Costs $2,064,680 

Lost Investment Income $94,261 

Total Questioned Costs $2,158,941 
Self Family 

FEHEP Line 5 - Reconciled Rate 

FEHBP Line 5 - Audited Rate 

Overcharge 

i 

To Annualize Overcharge: 

3/31/04 enrollment 

Pay Periods 

Subtotal 

•• 

•

26 •26

$12,243 $40,171 

Total 2004 Defective Pricing Questioned Costs

Exhibit B 

Health Plan of Nevada
 

Defective Pricing Questioned Costs
 

FEHBP Line 5 - Reconciled Rate 

FEHBP Line 5 • Audited Rate 

Overcharge 

To Annualize Overcharge: 

3/31101 enrollment 

Pay Periods 

Subtotal 

26 

$117,066 

26 

$327,049 

Total 2007 Defective Pricing Questioned Costs $444,]]5 

FEHBP Line 5 - Reconciled Rate 

FEHEP Line 5 - Audited Rate 

Overcharge 

To Annualize Overcharge: 

3/31/08 enrollment 

Pay Periods 

Subtotal 

26 

$414,800 

26 

$1,153,351 

Total 2008 Defective Pricing Questioned Costs $1.568,151 

Total Defective Pricing Questioned Costs $2,064,680 
Health Plan of Nevada 

Lost Investment Income 

EXHIBITC 

Year 

Audit Findings: 

2004 2005 2006 2007 200B 2009 Total 

I. Defective Pricing $52,414 $0 $0 $444,115 $1,568,151 $0 $2,064,680 

Totals (per year): $52,414 $0 $0 $444,1 [5 $1,568,151 $0 $2,064,680 

Cumulative Totals: $52,414 $52,414 $52,414 $496,529 $2,064,680 $2,064,680 $2,064,680 

Avg. Interest Rate (per year). 4.250% 4.375% 5.4375% 5.5000% 4.9375% 5.6250% 

Interest on Prior Years Fi ndings: SO $2,293 $2,850 $2,883 $24,516 $9,678 $42,220 

Current Years Interest: $1,114 SO SO SI2,2[3 $38,714 SO $52,041 

Total Cumulative Interest Calculated 

Through January 31, 2009: $1,114 $2,293 $2,850 $15,096 $63,230 $9,6781 $94,261 
Appendix

20DBOEC 23 AM 7: ItIEALTH PLAN OF NEVADA 

AUnltedHealthcare Company 

December 17, 2008 

VIA UPS OVERNIGHT
 

Chief; Community-Rated Audits Group 

U.8. Office of Personnel Management 

. Office of the Inspector General 

1900 E Street, NW 

Room 6400 

Washington, DC 20415 

Re:	 Health Plan of Nevada, Inc. 

Draft Audit Report No. lC-NM·00-08-049 

Dear 

This letter and accompanying exhibit respond to the above-referenced draft 

audit report (the "Draft Report") on the Federal Employees Health Benefits 

Program ("FEHBP") operations at Health Plan of Nevada, Inc. (the "Plan") for 

contract years 2003 through 2008. A CD containing this response is enclosed. 

The Draft Report contains preliminary findings that the Plan engaged in 

defective pricing in contract years 2004, 2007 and 2008, and questions $2,444,266 

for inappropriate health benefit charges to the FEHBP excluding lost investment 

income. The Draft Report found that the Plan's rates to the FEHBP for contract 

years 2003, 2005 and 2006 were developed in accordance with Office of Personnel 

Management ("OPM") rules and regulations. 

As discussed below, the Plan disagrees that it engaged in defective pricing in 

2004, 2007 and 2008. Moreover, the only adjustment due the FEHBP in connection 

with these three years is a slight additional discount for 2004. 

I.	 Contract Year 2004 

For contract year 2004, the Draft Report agrees with the Plan's similarly 

sized subscriber group ("SSSG") selections of 

The 

each with separate billed rates. In 

mid 2004, the ~erecombined into the . The 

billed rates for~ainedat the 

reconciliation, the Plan determined that the 

ates. In the 2004 

Good health takes a good plan"~

P.O. Box 15645. Las Vegas, Nevada 89114-5645. (702) 242-7200 
OPMOIG 

December 17, 2008 

Page 2 

received a_discount as a result of combining the three subgroups, and 

therefore gave the FEHBP the same discount. However, the Draft Report 

calculated a discount for the SSSG. Based on that calculation, the Draft 

Report recommends that the Plan overcharged the FEHBP by $385,674. 

The Plan disa rees with the Draft Report's calculation of the additional 

discount for the group and the resulting overcharge 

amount for the FEHBP. Upon further review ofthe group's rating, the Plan 

identified an error in the calculation of the average Premium Ratio_in the 

worksheet originally prepared by the Plan and in the 

audited_worksheets for the period 611/04-12/31/04. Specifically, the 

ategory was excluded from the calculation. (See Excel file 

A, xIs, tab '). The 

premium ratio is also used in the derivation 0 e s ep up actor, w ich is used to 

convert the adjusted per member per month premium rate into an employee only 

premium rate. The original step up factor was_and the corrected factor is 

_ (See Excel file B, 4-25-04)7-04Corrected.xls, tab 

" ") This correction in step up factor generates a final 

o and an additional adjustment to the FEHBP of $52,090. (See 

2004 Rev.xls.) 

II. Contract Year 2007 

. _For contract year 2007, the Draft Report agrees with the Plan's SSSG 

-selections of In 

2007, as m t e second year 0 a two year contract. 

For purposes of determining whether the SSSG received a discount in 2007 as a 

result of the two year contract, the Plan, consistent with its established rating 

practice, compared the pricing factors used in the original rating of the group to 

updated trend and other pricing factors. Based on that analysis, the Plan 

determined that the SSSG received a~1o discount and reported this discount in 

the 2007 rate reconciliation. 

The Draft Report contains preliminary findings that 

_received a _discount in 2007 as a result oft e two year contract 

and recommends that the Plan return an additional $444,115 to the FEHBP. The 

difference between the Plan's discount calculation and the Draft Report's discount 

calculation is solely attributable to the Draft Report using updated enrollment data 

(i.e., the enrollment data that the Plan would have used if the group had a 12 

month contract for 2007) to develop the adjustment factor. In evaluating 
OPMOIG 

December 17, 2008 

Page 3 

the group's 2007 rates for purposes of the 2007 reconciliation, the Plan used the 

enrollment data that was available at the time of the original rating for the two 

year contract to develop the _adjustment factor. The Plan disagrees with the 

Draft Report's use of updated enrollment data in analyzing the second year of a two 

year contract. Such an approach is not appropriate and is not provided for in OPM's 

rating instructions. 

Specifically, there is no reason to review the enrollment data from the middle 

ofthe two year contract period to assess the Plan's rates for the group. That data is 

relevant for the limited purpose of determining whether the group is in fact an 

SSSG based on its size. The only enrollment data that is relevant to an evaluation 

of the rates charged the S8SG is the enrollment data used in the original rating of 

the group. Were OPM to take the position that updated enrollment data must be 

used for rate evaluation purposes, such a position would inappropriately shift the 

focus to whether health plans had, in retrospect, guessed right, rather than 

focusing, as the OIG always has, on whether the plans rated the 888Gs properly 

based on information available at the time their rates were set. 

Finally, there is no basis in OPM's regulations or rating instructions for the 

approach taken in the Draft Report. Neither the 2007 Community Rate 

Instructions nor the Reconciliation Guidelines for 2007 Rates provide for the 

approach used in the Draft Report. The Instructions and Guidelines do refer to 

enrollment data as of March 31st of the coverage year, but that is in reference" to the 

identification of the 888Gs, not the evaluation of the rates charged the 888Gs.l 

Using updated enrollment data to evaluate the rates charged a group introduces 

"hindsight" into the rating process, which is contrary to principles of community 

rating. The only instruction relating to rates that extend beyond 12 months 

requires that premium adjustment be made or the rate extension will be considered 

as a discount. The Plan complied with this requirement at the time ofthe 2007 rate 

reconciliation when it gave the FEHBP a % discount in connection with the

rates charged 

1 The 2007 Community Rating Guidelines provide at page 8 that: "All group enrollments including 

new groups (the Federal group and the SSSG enrollments) should be the latest 2007 enrollment 

available to the carrier (but no later than March 31,2007)." 
OPMOIG 

December 17, 2008 

Page 4 

III.	 Contract Year 2008 

The findings and recommendation for contract year 2008 are similar to those 

for 2007. The Draft Report agrees with the Plan's SSSG selections of 

For 2008, 

was in the second year of a two year rate contract. The Draft Report 

contains preliminary findings that the SSSG received a _ discount by using 

updated enrollment data to calculate the _adjustment factor for contract year 

2008. Consistent with 2007 and the Plan's established rating practice, the Plan 

used the original enrollment data for purposes of the 2008 rate reconciliation. For 

the reasons discussed in Section II above, the Plan disagrees with the Draft 

Report's use of updated enrollment data to calculate the_adjustment factor 

in evaluating 2008 rates.2 

Also, the 2008 Rate Instructions include the following discussion at page 13 

regarding multi-year rate agreements: 

If a group has negotiated a multi year contract and is determined to 

be an SSSG, the following rules will apply: 

. Ifthe SSSG is in the first year ofthe'multi year contract, the 

current methodology for determining reasonableness ofrate will 

be applied. For the second and all subsequent years of a multi 

year contract, SSSG discounts or overcharges will be determined 

by applying the current year methodology to the current year 

rate. If a discount is determined to have been applied to the 

SSSG, the previous years in the multi year contract will be used 

to determine ifthe carrier included additional costs due to the 

multi year rate contract. Ifthis is the case, the discount applied 

to the SSSG may be offset by these costs. 

2 The Plan has identified an error in the billed premium rate used by the auditors for members 

enrolled in the HMO D20 benefit plan. Specifically, the ~orksheetprepared by the auditor 

(Revised SSSG ~uditedRate Development.xls) contains the correct rate of 

However, the 2008 Lead Schedule also prepared by the auditors uses an incorrect rate of $••• 

(see tab labeled "Lead Schedule" in workbook named "2008 FEHBP Audited Rate Development 

Rev.xls"). Using the correct billed rate results in a discount calculation of~lo. See tab "Lead 

Schedule Rev" in same spreadsheet. Copies of the April 2008 Facets invoice and April 2008 premium 

remittance memo are enclosed. The documents show the billed rate and paid rate of$_ 
OPMOIG 

December 17,2008 

Page 5 

In addition the Reconciliation Instructions for 2008 Rates provide at page 6 as 

follows: 

Multi-Year Rate Agreements 

If a group has negotiated a multi-year contract and is determined to 

be an 8SSG, the following rules will apply: 

First year of a multi-year agreement - The process of determining 

discounts as defined above applies. 

Second and all subsequent years of a multi-year agreement - The 

process of determining discounts as defined above applies. Any 

additional costs incurred in previous years ofthe multi-year rate 

agreement will be considered when determining the discount. 

2008 rates and of 

ra es or purposes 0 he FEHBP rate 

reconciliation in each of the two years was consistent with the OPM instructions 

quoted above. 

Finally, the 2008 instructions do not provide for the approach used in the 

Draft Report. Consistent with its current methodology, the Plan recalculated the 

888Gs' rates using the enrollment data used in the original rating ofthe groups but 

updated trend and other pricing factors. This is the same approach that the Plan 

follows and is required by OPM for the FEHBP. That is, in performing the FEHBP 

rate reconciliation, a plan may use updated rates and pricing factors but may not 

update the FEHBP enrollment data to reflect the impact of open season. To do so, 

could artificially increase or decrease the group's rates. Thus, consistent with its 

established rating methodology and the methodology used for the FEHBP, the Plan 

used the original enrollment data in its anal sis of 

2008 rates and of 

IV. Conclusion 

Based on the foregoing, no adjustment is due the FEHBP for contract years 

2007 or 2008 as the Plan properly accounted for the 888Gs' two year rate contracts. 

For contract year 2004, the FEHBP is entitled to an additional discount of $52,090. 
OPMOIG 

December 17, 2008 

Page 6 

Please don't hesitate to contact me if you have any questions or require 

additional information. I can be reached at 

Sincerely, 

Chief Operating Officer 

Enclosures