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UNITED STATES OFFICE OF PERSONNEL MANAGEMENT
 

Washington, DC 20415
 

Office of the 

Inspector General 

AUDIT REPORT
 

Federal Employees Healtb Benefits Program
 

Comprebensive Medical Plan - Community-Rated
 

Humana Health Plan Inc. - Chicago
 

Contract Number 1570 - Plan Code 75
 

Louisville, Kentucky
 

Report No. 1C-75-00-08-029 Date: December 16. 2008 

Michael R. Esser 

Assistant Inspector General 

for Audits 

www.usaJobs.gov 

www.opm.go v 
UNITED STATES OFFICE OF PERSONNEL MANAGEMENT
 

Washington, DC 20415
 

Office of the 

Inspector General 

EXECUTIVE SUMMARY
 

Federal Employees Healtb Benefits Program
 

Comprehensive Medical Plan - Community·Rated
 

Humana Health Plan, Inc. - Chicago
 

Contract Number 1570 - Plan Code 75
 

Louisville, Kentucky
 

Report No. lC·75-00-08-029 Date: December 16, 2008 

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

Benefits Program (FEHBP) operations at Humana Health Plan, Inc. - Chicago (plan). The audit 

covered contract years 2005 through 2007 and was conducted at the Plan's office in Louisville, 

Kentucky. Additional field work was performed at our office in Washington, D.C. 

This report questions $788,247 for inappropriate health benefit charges to the FEHBP in contract 

years 2005 and 2006. The questioned amount includes $692,044 for defective pricing and 

$96,203 due the FEHBP for lost investment income, calculated through October 31,2008. We 

found that the FEHBP rates were developed in accordance with the Office ofPersonnel 

Management's rules and regulations in 2007. 

For contract years 2005 and 2006, we determined that the FEHBP's rates were overstated by 

$692,044 due to defective pricing. In 2005, the Plan did not apply the highest similarly sized 

subscriber group discount to the FEHBP's rates. In 2006, the Plan applied the incorrect office 

visit copay benefit adjustment factors in the FEHBP's rate development. 

www.opm.gov www.usojobs.gov 
Consistent with the FEHBP regulations and contract, the FEHBP is due $96,203 for lost 

investment income, calculated through October 31, 2008, on the defective pricing finding; 

The Plan agreed with the findings and remitted a check for $788,247 ($692,044 for defective 

pricing and $96,203 for additional lost investment income through October 31, 2008). 

11 
CONTENTS
 

EXECUTIVE SUMMARY ,	 .i
 

1. INTRODUCTION AND BACKGROUND	 1
 

n. OBJECTIVES, SCOPE, AND METHODOLOGY	 3
 

III. AUDIT FINDINGS AND RECOMMENDATIONS	 5
 

Premium Rates 

1. Defective Pricing , 5 

2. Lost Investment Income
 6 

IV.	 MAJOR CONTRIBUTORS TO THIS REPORT , , ? 

Exhibit A (Summary of Questioned Costs) 

Exhibit B (Defective Pricing Questioned Costs) 

Exhibit C (Lost Investment Income) 

, 5 

Appendix (Humana Health Plan, Inc. - Chicago's November 13, 2008, response 

to the draft report) 
I. INTRODUCTION AND BACKGROUND
 

Introduction 

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

at Humana Health Plan, Inc. - Chicago (Plan) in Louisville, Kentucky. The audit covered 

contract years 2005 through 2007. The audit was conducted pursuant to the provisions of 

Contract 1570; 5 U.S.C. Chapter 89; and 5 Code of Federal Regulations (CFR) Chapter I, Part 

890. The audit was performed by the Office ofPersolll1el Management's (OPM) Office of the
 

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 of the Federal Employees 

Health Benefits Act are implemented by OPM through regulations codified in Chapter I, 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 aPM. 

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, 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 

audited. 

FEHBP Contracts/Members 

March 31 

31,000 

26,000 

21,000 

16,000 

11,000 

6,000 

1,000 

• Contracts 

o Members 

11,683 

26,445 

10,818 

24,017 

9,827 

21,221 

1
 
The Plan began participating in the FEHBP as a community-rated comprehensive medical plan 

in 1975 and provides comprehensive medical services to FEHBP members throughout the 

Chicago metropolitan area. The last audit of the Plan conducted byour office was a full scope 

audit of contract years 2003 and 2004. All issues related to that audit have been resolved. 

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

draft report was also provided to the Plan for review and comment. The Plan's comments were 

considered in the preparation of this 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 

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 perfOlID 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 

2005 through 2007. During this period, the 

FEHBP paid approximately $255 million in 

premiums to the Plan. The premiums paid for 

each contract year audited are shown on the 

chart to the right. 

010 audits of community-rated carriers are 

designed to test carrier compliance with the 

FEHBP contract, applicable laws and 

regulations, and aPM 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 ofour audit procedures. However, the 

audit included such tests of the 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 (SSSO) were selected; 

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

rate offered to an SSSO); and 

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

$100 

$80 

$60 

$40 

$20 

• Revenue 

FEHBP Premiums Paid to Plan 

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 infOlmation 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 Louisville, Kentucky, during 

April 2008. Additional audit work was completed at our office in Washington, D.C. 

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 ifthe 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 syste1p. 

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 

perfonned other auditing procedures necessary to meet our audit objectives. 

4
 
III. AUDIT FINDINGS AND RECOMMENDATIONS
 

Premium Rates 

1. Defective Pricing $692,044 

The Certificates of Accurate Pricing the Plan signed in contract years 2005 and 2006 were 

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

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

FEHBP is entitled to premium adjustments totaling $692,044 (see Exhibit A). We found that 

the FEHBP rates were developed in accordance with OPM's rules and regulations for contract 

year 2007. 

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 rates higher than the market 

price rate (i.e., the best rate offered to an S88G), a condition of defective pricing exists, requiring a downward adjustment of the FEHBP premiums to the equivalent market price rate. 

2005 

The Plan selected as the 8S8Gs for contract year 2005. 

We agree with these selections. Our analysis ofthe 8SSG rates shows that 

received a.percent discount and eceived a.percent discount. In 

the 2005 reconciliation, the Plan gave the FEHBP a • percent discount. Since the FEHBP 

is entitled to a discount equivalent to the largest d~8SSG, we recalculated 

the FEHBP rates using the. discount given to_ A comparison of the 

audited rates to the reconciled rates shows that the FEHBP was overcharged $221,168 in 

contract year 2005 (see Exhibit B). 

Our review of the FEHBP rates in 2006 revealed that the Plan used an office visit copay 

benefit adjustment factor o~for the high option and_for the standard option 

when developing the FEHBP rates. Upon reviewing documentation supporting the 2006 

FEHBP rate development, we detennined that an office visit copay benefit adjustment factor 

of for the high option and _forthe standard option should have been used. 

Accordingly, we redeveloped the FEHBP rates using an office visit copay benefit adjustment 

factor of_for the high option and_ for the standard option. As a result, the 

FEHBP was overcharged $470,876 in contract year 2006 (see Exhibit B). 

5
 
Recommendation 1 

After receiving the draft audit report, the Plan returned $692,044 to the FEHBP for defective 

pricing in the contract years 2005 and 2006. Since we verified that the Plan returned 

$692,044 to the FEHBP, no further action is required. 

2. Lost Investment Income $96,203 

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 2005 and 2006. We determined that the FEHBP is due $96,203 for lost 

investment income, calculated through October 31,2008 (see Exhibit C). 

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 was not 

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

be reduced by the amount of the 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. 

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

Treasury's semiannual cost of capital rates. 

Recommendation 2 

After receiving the draft audit report, the Plan returned $96,203 to the FEHBP for lost 

investment income on the defective pricing findings in the contract.years 2005 and 2006. 

Since we verified that the Plan returned $96,203 to the FEHBP, no further action is required. 

·Plan's Comments (See Appendix): 

The Plan agrees with the defective pricing findings and the calculated lost investment income 

and submitted payment in the full amount of$788,247 ($692,044 + $96,203). 

6
 
IV. MAJOR CONTRIBUTORS TO THIS REPORT 

Community-Rated Audits Group 

Auditor-In-Charge 

Auditor 

Group Chief 

Senior Team Leader 

7
 
Exhibit A 

Humana Health Plan, Inc. - Chicago 

Summary of Questioned Costs 

Defective Pricing Questioned Costs: .. 

Contract Year 2005 $221,168 

Contract Year 2006 $470,876 

Total Defective Pricing Questioned Costs $692,044 

Lost Investment Income on Defective Pricing Findings $96,203 

Total Questioned Costs $788.247 
2005 

Exhibit B 

Page 1 of2 

Humana Health Plan, Inc. - Chicago 

Defective Pricing Questioned Costs 

High Option 

FEHBP Line 5 - Reconciled Rate 

FEHBP Line 5 - Audited Rate 

Overcharge 

To Annualize Overcharge: 

x 3/31/05 enrollment 

x Pay Periods 

Subtotal 

Standard Option 

FEHBP Line 5 - Reconciled Rate 

FEHBP Line 5 - Audited Rate 

Overcharge 

To Annualize Overcharge: 

x 3/31105 enrollment 

x Pay Periods 

.jubtotal 

Total 2005 Defective Pricing Questioned Costs 

26 26 

$49,673 $161,441 $211,114 

26 26 

$2,137 $7,917 

$221.168 
2006 

Exhibit B 

Page 2 of2 

Humana Health Plan, Inc. - Chicago 

Defective Pricing Questioned Costs 

High Option
 

FEHBP Line 5 - Reconciled Rate
 

FEHBP Line 5 - Audited Rate
 

Overcharge 

To Annualize Overcharge:
 

x 3/31/06 enrollment
 

x Pay Periods
 

Subtotal 

Standard Option
 

FEHBP Line 5 - Reconciled Rate
 

FEHBP Line 5 - Audited Rate
 

Overcharge 

. To Annualize Overcharge: 

x 3/31/06 enrollment 

x Pay Periods 

Subtotal 

Total "2006 Defective Pricing Questioned Costs 

26 26 

$109,951 $348,638 $458,589 

26 26 

$2,874 $9,413 

$470,876 
Exhibit C 

Humana Health Plan of Chicago 

Lost Investment Income 

Year 2005 2006 2007 2008 Total 

Audit Findings: 

1. Defective Pricing $221,168 $470,876 $0 $0 $692,044 

Totals (per year): $221,168 $470,876 $0 $0 $692,044 

Cumulative Totals: $221,168 $692,044 $692,044 $692,044 $692,044 

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

Interest on Prior Years Findings: $0 $12,026 $38,062 $28,475 $78,563 

Current Years Interest: $4,838 $12,802 $0 $0 $17,640 

Total Cumulative Interest Calculated 

Through October 31,2008: $4,838 . $24,828 $38,062 $28,4751 $96,203 
Page 1 of 1 

From:
 

Sent: Thursday, Novem APPENDIX
 

To:
 

Subject: Humana Response to Draft Audit Report 1C-75-00-08-029
 

_this email should serve as documentation that Humana agrees with all findings contained in the Draft 

Audit Report of Humana Health Plan, Inc. -Chicago (plan code 75) issued August 12, 2008. 

We agree with the audit findings of $692,044 in inappropriate, or defective pricing, charges plus accumulated 

interest charges totalling $96,203. 

The total charges of $788,247 was remitted to OPM last week. 

Actuary, FEHBP & IL Region 

large Group Actuarial 

Humana Inc. 

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