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US OFFICE OF PERSONNEL MANAGEMENT 

OFFICE OF THE INSPECTOR GENERAL 

OFFICE OF AUDITS 

FinaiAudltR.eport 

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Rep()rt~o.lC~57~OO-08~028 . " ,- -, '-',' ': 

Date:.Fel:>rpary 3,?()09 

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--CAUTlONThis audit report has been distributed to Federal and non-Federal officials who are responsiblefortlle 

administration ofthe audited·contract. This report may contain proprietary data whicbisprotected.by 

Federal law{18 U.S.C. 1905); therefor,,, while this report isavailai>le under the FreedomofInformation Act, 

ca.. tion needs to be exercised before releasing the'reportto the general public. . 
Office of the'. 

Inspr£tor General 

UNITED STATES OFFICE OF PERSONNEL MANAGEMENT 


Washington, DC 20415 


AUDIT REPORT 

Federal Employees Health Benefits Program 


Community-Rated Health Maintenance Organization 


Kaiser Foundation Health Plan of the Northwest 


Contract Number 1047 - Plan Code 57 


Portland, Oregon 


Report No. 1C-S7-00-08-028 Date: February 3, 2009 

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 

InspecLor General 

EXECUTIVE SUMMARY 


Federal Employees Health Benefits Program 


Community-Rated Health Maintenance Organization 


Kaiser Foundation Health Plan of the Northwest 


Contract Number 1047 - Plan Code 57 


Portland, Oregon 


Report No. lC-57-00-08-028 Date: February 3, 2009 

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

Program (FEHBP) operations at Kaiser Foundation Health Plan of the Northwest in Portland, 

Oregon. The audit covered contract years 2005 thr~lUgh 2008 and was conducted at the Plan's 

office in Portland, Oregon. This report discusses the Plan's incorrect application of the medical 

rate adjustment factors in the development of the FEHBP's 2008 high and standard option rates. 

We found that the FEHBP rates were developed in accordance with the Office of Personnel 

Management's rules and regulations in 2005,2006, and 2007. 

We detennined that the FEHBP's rates were overstated by $259,816 in contract year 2008 

because the Plan applied incorrect medical rate adjustment factors in the development of the 

FEHBP's 2008 high and standard option rates. However, because the Plan applied additional 

credit adjustments to the FEHBP's high and standard option rates, no additional costs are due the 

FEHBP. 

www.opm.gov www_usaJobs_gov 
CONTENTS 


EXE(~UTIVE SUMMARY......... , ................................................................................. ; ... i 


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


II. 	 OBJECTIVES, SCOPE, AND METHODOLOGy .......................................................... 3 


III. 	 AUDIT FINDING AND RECOMMENDATION ........................................................... 5 


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


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


Exhibit A (Summary of Questioned Costs) 


Exhibit B (Defective Pricing Questioned Costs) 


Appendix (Kaiser Foundation Health Plan of the Northwest's January 9,2009, 


response to the draft report) 


·IV. MAJOR CONTRIBUTORS TO THIS REPORT ............................................................ 6 

I. INTRODUCTION AND BACKGROUND 


Introduction 

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

at Kaiser Foundation Health Plan ofthe Northwest (Plan). The audit covered contract years 2005 

through 2008 and was conducted at the Plan's office in Portland, Oregon. The audit was 

conducted pursuant to the provisions of Contract CS 1047; 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 ofthe 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 

Center for Retirement and Insurance Services. 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 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 earners 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 of the two groups closest in size to 

the FEHBP. In contracting with 

conununity-rated carriers, OPM relies on 

carrier compliance with appropriate laws 

and reguhitions and, consequently, does not 

negotiate base rates. aPM 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. 

1 

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

members throughout Portland and Salem, Oregon, and throughout Vancouver and Longview, 

Washington. The last full-scope audit covered contract years 2000 through 2004. All noted 

exceptions were resolved and amounts questioned were returned to OPM. 

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 response to the 

draft report contained sufficient documentation to resolve the draft report's findings. 

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. 

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 2005 

through 2008. For contract years 2005 tlrrough 2007, the 


FEHBP paid approximately $385 million in premiums to the Planl

. 


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 aPM 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 of the 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. 

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

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 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 conducted in accordance with generally accepted government auditing standards issued 

by the Comptroller General of the United States. 

The audit fieldwork was perfonned at the Plan's office in Portland, Oregon, during August 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 the SSSGs, to detennine 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 detennine the 

propriety ofthe FEHBP premiums and the reasonableness and acceptability ofthe 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 

perfonned other auditing procedures necessary to meet OUf audit objectives. 

4 

III. AUDIT FINDING AND RECOMMENDATlON 

Premium Rates 

1. Defective Pricing $259.816 

The Certificate of Accurate Pricing the Plan signed in 2008 was defective. In accordance with 

federal regulations; the FEHBP is therefore due a price adjustment for that year. Application 

of the defective pricing remedy shows that the FEHBP is entitled to a premium adjustment 

totaling $259,816 (see Exhibit B). We found that the FEHBP rates were developed in 

accordance with OPM's rules and regulations for contruct years 2005, 2006, and 2007. 

Our audit shows that the Plan applied incorrect medical rate adjustment factors (RAFs) in the 

FEHBP's 2008 rate development. . our claims review, we detennined that the Plan 

included As a result, the medical RAFs were 

overstated. In the 2008 applied medical RAFs for the high 

option an~for the standard option. After removing the revised 

medical RAFs are _for the high option and_ for the As a result, 

the FEHBP rates were overstated by $259,816. However, because the Plan applied additional 

credit adjustments to FEHBP's high and standard option rates, no additional costs· are due the 

FEHBP. 

Plan'.s Comments (See Appendix): 

The Plan states that the amount questioned by the auditors (Plus lost investment income) is 

offset by an additional discount given to the FEHBP in 2008. The Plan agrees no money is 

due the FEHBP because of credit adjustments the Plan gave the FEHBP which exceeded the 

amount questioned in 2008. 

Recommendation 

Since we verified that the additional credits the Plan included in the FEHBP's 2008 rates 

offset the $259,816 overcharge, no further action is required. 

5 

IV. MAJOR CONTRIBUTORS TO THIS REPORT 

Community-Rated Audits Group 

Auditor 

Auditor-In-Charge 

Senior Team Leader 

Chief 

6 

Exhibit A 

Kaiser Foundation Health Plan of the Northwest 


Summary of Questioned Costs 


Defective Pricing Questioned Costs: 

Contract Year 2008 $259,816 

Total Defective Pricing Questioned Costs 
2008 

Kaiser Foundation Health Plan of the Northwest 

Defective Pricing Questioned Costs 

High Option 

FEHBP Line 5 - Reconciled Rate 

FEHBP Line 5 - Audited Rate 

Overcharge 

To Annualize Overcharge: . 

x 3/31/08 enrollment 

x Pay Periods 

Subtotal 

Standard Option 

FEHBP Line 5 - Reconciled Rate 

FEHBP Line 5 - Audited Rate 

Overcharge 

To Annualize Overcharge: 

x·3J31/08 enrollment 

x Pay Periods 

Subtotal 

Total 2008 Defective Pricing Questioned Costs 

ExhibitB 

$121,429 

$138,387 

$259,816 
KAISER Appendix PERMANENTE. 

January 9, 2009 

V;u E-muil 

~dAudits Grotlp 

U.S. Office of Personnel Management 

Otlicc of In5pcclor General 

1900 E Street, N,W" Room 6400 

Washington. D.C 20415-1100 

Rc: 	 Kuiser Foundation Health Plan of the Northwest 

Response to DruH ot'a Proposed Repon lC-57-00-08-028 (December 8. 2(08) 

This leiter responds to your correspondence of December 8. 2008. which enclosed a DraH 

Report on the operations of Kaiser Foundation Health 1)lan of the Northwest ("Carrier") 

for contract years 2005 through ("Drutl Report"). As we have 

discussed with Auditor-In Charge . response resolves the concerns 

outlined in the Oral) Report. 

The Draft Report requested reimbursement 01'$259,816 (plus losl investment inCl)me) 

because the Carrier's medical mle adjustment ,1u::lors (RAFs) lor 2008 incorrectly 

included the"expericnce. As the Carrier subsequently pointed 

out to the . amount is more than offset by the discount that the Carrier gave 

FEHOP lor 2008. See attat;hed dot;ument entitled "Discount Calculation Using Rcvi.sed 

RJ\Fs"("DiscoullI Calculation" tab .ofthe Excel spreadsheet and "Summary without 

Discounr" tab. footnote I b). In aggregate. the Carrier's FEHBP discounl for 2008 lolals: 

morelhan~ 

be,:au,,. the fEHBP discount completely onsets the 

concerns Report. the linal report will be denn. 

This rt:sponse contains commercial and financial information that is propricUlry tmd 

cnnlidentialto the Carrier. Disclosure of this information would cause substantial harm 

10 the Carrier"s competitive position. OPM is requested to treat this document as 

confidential. This material is exempt from disclosure under Section S52(b)(4) ol"Titlc 5 

of the United States Code. 
Page 2 

Please do not hesitate to contact m . •• '. I questions or need any additional 

information. You can reach me at Thank you. 

Attachment 

cc: 

up III 


OPM Insurance Program Services 


ommUl~ity Rated Audits Group 

Kaiser Foundation Health Plan of the Northwest 

429441 

119/2009 

LegalEdge 1106·23461