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US OFFICE OF PERSONNEL MANAGEMENT 

. OFFICE OFTHE INSPECTOR GENERAL 

. . OFFICE OF AUDITS 

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lInder the Fre~do",ofInformation Act, eaution needS to' b~ exereisedbef(lre releasing thereport 10 Ihe general public. . 
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
 

The Health Plan of the Upper Ohio Valley
 

Contract Number 2616 - Plan Code U4
 

St. Clairsville, Ohio
 

Report No. 1C-U4-00-08-013 Date: JaD1l.at;y 23, 2009 

~~
 Michael R. Esser 

Assistant Inspector General 

for Audits 

www.opm.goY www.usaJobs.goY 
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
 

The Health Plan of the Upper Ohio Valley
 

Contract Number 2616 - Plan Code U4
 

St. Clairsville, Ohio
 

Report No. lC-U4-00-08-013 Dare: Janua~y 23, 2009 

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

Program (FEHBP) operations at The Health Plan oftheUpper Ohio Valley (Plan) in St. 

Clairsville, Ohio. The audit covered contract years 2003 through 2007 and was conducted at the 

Plan's office in St. Clairsville, Ohio. This report questions $516,844 for inappropriate health 

benefit charges in 2005, including $79,072 for lost investment income. We found that the 

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

of Personnel Management's rating instructions in contract years 2003, 2004, 2006, and 2007. 

In 2005, the Plan did not support the IIbenefit change factor applied to a similarly sized 

subscriber group's rates. Accordingly, we changed the factor to "hich resulted in a" 

percent discount to the group. We applied that discount to the FEHBP's rates and determined 

that the FEHBP was overcharged $437,772 in 2005. 

Consistent with the FEHBP regulations and contract, the FEHBP is due $79,072 for lost 

investment income, calculated through December 31, 2008, on the defective pricing finding in 

2005. In addition, the contracting officer should recover lost investment income on amounts due 

for the period beginning January 1, 2009, until all defective pricing amounts have been returned 

to the FEHBP. 

www.opm.goY www.usajobs.goY 
CONTENTS
 

EXECUrfIVE 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 ,	 6
 

3. Prescription Drug Rebate	 7
 

IV.	 MAJOR CONTRIBUTORS TO THIS REPORT 8. 

Exhibit A (Summary of Questioned Costs) 

Exhibit B (Defective Pricing Questioned Costs) 

Exhibit C (Lost Investment Income) 

Appendix (The Health Plan ofthe Upper Ohio Valley's December 10,2008, response 

to the draft report) 
I. INTRODUCTION AND BACKGROUND
 

Introduction 

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

at The Health Plan ofthe Upper Ohio Valley (Plan). The audit covered contract years 2003 

through 2007 and was conducted at the Plan's office in St. Clairsville,Ohio. The audit was 

conducted pursuant to the provisions of Contract CS 2616; 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 COlO), 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 aPM through regulations codified in Chapter 1, Part 890 of 

Title 5, CFR. Health insurance coverage is provided through contracts with health insurance 

carriers who 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 (Le., 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 March 31 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. 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 each contract 

year audited. 

2.500 

2.000 

1,500 

1.000 

500 

o 

2003 2004 

• Contracts 1,070 974 

DMembers 2,282 2,083 

2005 2006 

916 880 

1,963 1,872 

2007 

899 

1,941 

1
 
The Plan has participated in the FEHBP since 1991 and provides health benefits to FEHBP 

members throughout Northeast and Eastern Ohio and Northern and Central West Virginia. The 

last full-scope audit covered contract years 2001 and 2002. There were no questioned costs 

identified during that audit. 

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 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 detennine whether the Plan was in compliance with the 

provisions ofthe laws and regulations governing the FEHBP. 

We conducted this perfonnance auditin 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 performance audit covered contract years 2003
 

tluough 2007. During this period, the FEHBP paid
 

approximately $34.6 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 of the 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 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 888Gs); 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 

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

3 

FEHBP Premiums Paid to Plan 

$10 

$8 

UI 

c $6

i 

$4 

$2 

$0 
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 conducted 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 St. Clairsville, Ohio, during 

February 2008. Additional audit work was completed at our offices in Cranberry Township, 

Pennsylvania; 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. 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 ofthe 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 $437,772 

The Certificate ofAccurate Pricing the Plan signed for contract year 2005 was defective. In 

accordance with federal regulations, the FEHBP is therefore due a price adjustment for that 

year. We applied the defective pricing remedy for the year in question and determined that the 

FEHBP is entitled to a premium adjustment totaling $437,772 (see Exhibit A). We found that 

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

OPM rating instructions in contract years 2003,2004,2006, and 2007. 

Carriers proposing rates to OPM are required to submit a Certificate ofAccurate 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 that exceeded the market 

price (i.e., the best rate offered to an SSSG), a condition ofdefective pricing exists, requiring a 

downward adjustment of the FEHBP premiums to the equivalent market price. 

2005 

The Plan selected as the SSSGs for contract year 

2005. We agree with these selections. Our analysis ofthe SSSG rates shows that _ 

_ did not receive a discount and eceived a.percent discount. Our 

review of the rate development shows that the Plan applied a 

to account for reductions in the group's benefit level. However, our review 

ofthe benefits offered to hows that the group's benefits did not decrease 

from the experience period to the renewal period. Therefore, we did not include the_ 

factor in our calculation ofthe audited rates. Since the FEHBP is entitled to a discount 

equivalent to the largest disco~SSSG,we recalculated the FEHBP rates 

using the~iscount given to_ A comparison ofthe audited rates to the 

reconciled rates shows that the FEHBP was overcharged $437,772 in contract year 2005 (see 

Exhibit B). 

Plan's Comments (See Appendix): 

The Plan states that a . as applied to rates during 

the request for renewal process to account for the addition of several new ~oits rating 

area. However,_ould not allow the Plan to add the new _until. 

nitiated a new request for proposal process. Since would not 

allow the Plan to subsequently alter its proposed renewal rates to remove the 

the Plan believes that it does not owe the FEHBP any additional premium for 2005. 

5
 
OIG's Response to the Plan's Comments: 

According to correspondence provided by the Plan, both a standard bid and an alternate bid,
 

which added to the were presented to Both
 

the standard bid rates and the alternate bid rates were the same. Therefore we contend that the
 

Plan intended to bill ates that reflected an adjustment, or the standard and
 

alternate bids would have produced different rates. Accordingly, we do not accept the Plan's
 

contention that it would have adjusted the proposed renewal rates to remove the _
 

_ As a result, we continue to recommend that the FEHBP rates be adjusted by the.
 

percent discount offered t~
 

Recommendation 1 

We recommend that the contracting officer require the Plan to return $437,772 to the FEHBP 

for defective pricing in 2005. 

2. Lost Investment Income $79,072 

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

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

identified in contract year 2005. We determined that the FEHBP is due $79,072 for lost
 

investment income, calculated through December 31, 2008 (see Exhibit C). ]n addition, the
 

FEHBP is entitled to lost investment income for the period beginning January 1, 2009, until
 

all defective pricing 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 of Accurate Pricing, the rate shall
 

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

die nltes are reduced due to defective pricing, the regulations state 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.
 

We calculated the lost investment income amount based on the United States Department of
 

the Treasury's semiannual cost of capital rates.
 

Plan's Comments (See Appendix): 

The Plan believes its response results in the elimination ofthe lost investment charge. 

OIG's Response to the Plan's Comments: 

Lost investment income should be calculated on the defective pricing amounts actually due the
 

FEHBP. Therefore, our lost investment income calculation is based on the defective pricing
 

amounts discussed in this report.
 

6 

• 
Recommendation 2 

We recommend that the contracting officer require the Plan to return $79,072 to the FEHBP 

for lost investment income calculated through December 31, 2008. In addition, we 

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

period beginning January 1,2009, until all defective pricing amounts have been returned to 

the FEHBP. 

3. Prescripton Drug Rebate 

In every year of our audit, the Plan's prescription drug rating methodology correctly included 

an adjustment factor for_. The adjustment is based on a May 7, 2001, 

letter from an actuarial c~tated on a ~asis, but the Plan 

applies it on a basis. The same factor was used in the 2003 

through 2007 rate developments for the groups reviewed. 

Since the information the Plan is using to calculate the~:!~!5:5;~is~s~e~v:er~a~1years old, the Plan should update this information. Furthermore, the should be based on 

received by the Plan. Finally, since the Plan applies the 

basis, the rebate supporting calculation should also be on a_basis, nota_ 

basis. 

Plan's Comments (See Appendix): 

The Plan did not address this issue in its response. 

Recommendation 3 

We recommend that the Contracting Officer direct the Plan to update its prescription drug 

rebate amOlUlt. The amount should be based on actual prescription drug rebates received by 

the Plan and it should be applied on the basis of actual prescription drug benefit usage. 

7
 
IV. MAJOR CONTRIBUTORS TO THIS REPORT 

Community-Rated Audits Group 

Auditor 

Auditor-In-Charge 

Chief 

8
 
Exhibit A 

The Health Plan of the Upper Ohio Valley 

Summary of Questioned Costs 

Defective "fricing Questioned Costs: 

Contract Year 2005 $437,772 

Total Defective Pricing Questioned Costs 

Lost Investment Income on Defective Pricing Findings 

$437,772 

$79,072 

Total Questioned Costs $516,844 
Exhibit B 

The Health Plan of the Upper Ohio Valley 

Defective Pricing Questioned Costs 

Contract Year 2005 

Per Plan's Reconciliation 

1. Actual Community Rate· i/1l2005 

2. Special Benefit Loadings 

2a. Prescription Drugs 

3. Community Rate plus Special Benefit Loadings
 

4. Standard Loadings
 

4a. Extension of Coverage. 0.004 x 30%
 

4d. Community rate + Spec. Ben. & Standard Loadings 

4e. Enrollment Discrepancies Loading - 1% 

5. TOTAL FEHBP Rates 2005 $150.73 $346.68 

Contract Year 2005 Self Family 

Per Audit 

1. Actual Community Rate - 111/2005 

2. Special Benefit Loadings
 

2a. Prescription Drugs
 

}".'COIpmunity Rate plus Special Benefit Loadings 

4. Standard Loadings
 

4a. Extension of Coverage - 0.004 x 30%
 

4d. Community rate + Spec, Ben. & Standard Loadings 

4e. Enrollment Discrepancies Loading - 1% 

5. TOTAL FEHBP Rates 2005 $150.73 $346.68 

Sa. TOTAL FEHBP Rates 2005 (with SSSG Discount) 

Overcharge 

To Annualize Overcharge: 

x 3/31/05 Enrollment per Headcount 

x Pay Periods 26 26 

Subtotal $111,994 $325,778 $437,772 

TOlal2005 Defective Pricing Questioned Costs $437,772 
ExhibitC 

The Health Plan of the Upper Ohio Valley 

Lost Investment Income 

Year 2005 2006 2007 2008 Total 

Audit Findings: 

1. Defective Pricing $437,772 $0 $0 $0 $437,772 

Totals (per year): $437,772 $0 $0 $0 $437,772 

Cumulative Totals: $437,772 $437,772 $437,772 $437,772 $437,772 

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

Interest on Prior Years Findings: $0 $23,804 $24,077 $21,615 $69,496 

Current Years Interest: $9,576 $0 $0 $0 $9,576 

Total Cumulative Interest Calculated 

Through December 31, 2008: $9,576 $23,804 $24,077 $21,6151 $79,072 
St. Clairsville Office 

52160 National Road East 

St. Clairsville, OH 43950·9365 

PH: 1.800.624.6961 

Hearing Impaired: 1.800.622.3925 

FAX: 740.699-6163 

www.heallhplan.org 

December 10, 2008 

Chief, Community-Rated Audits Group 

V.S. Office of Personnel Management 

',. Office of the Inspector General 

.' 1900 E Street, NW 

Room 6400 

Washington, D.C. 20415-1100 

RE: Response to the FEHBP draft audit report 

The Health Plan of the Upper Ohio Valley, Inc. (U4) 

Dear_ 

I have prepared the response to the audit perforrhed by 

HomeTown Office 

100 Lillian Gish Boulevard 

P.O. Box 4816 

Massillon,OH 44648-4816 

PH: 1.877.236.2289 

OftlfJfiC9lrrrairpH ~1Illt4j6.2291 ""AX. ~~~7.6869

www.heallhplan.org 

Appendix 

Commercial HMO
 

Medicare HMO
 

'U4-oo -OB-Ol3
 

Deleted by the OIG
 

Not Relevant to the Final Report
 

In res oose to the 200S fiodi" s: 

rate development for 2005 was reduced by a factor of_due to The 

Health Plan's anticipation ofthe addition ofseveral_tothe Health Plan service area 

brought about by their prior purchase of Hometown ~nNortheast Ohio. The 

underwriter used an adjustment factor_that was applied to the 
group's incurred claim's experience. In the ACR model, the only area that can be used that affects the 

premium development for a 100% credibility group is the Benefit Plan Factor column. The underwriter 

simply applied this aggregate area adjustment factor to the paid claims in order to price the group going 

forward assuming the addition of the new Health Plan that had a significantly lower area 

adjustment factor (see attached) due to factors in those 

former HomeTown HT counties. The Health Plan operated under the false assumption that we would 

be offered to ccount in all counties that we possessed a 

Once the rates were presented to account through their Request for Renewal process 

we were not permitted to alter the renewal premiums that we proposed. The Health Plan subsequently 

learned from ccount that we could only annex our new counties whe~ida 

Request for Proposal, and not the Request for Renewal process. Thus, the new counties were not 

annexed, but the rate was considered final by ccount. 

Based on this response to the 2005 findings, The Health Plan believes there should be no financial 

penalty, which would eliminate the lost investment income. 

Please consider the above response from The Health Plan. If you find you need more information or 

have any questions, please contact me at or by email at 

cc: