U.S. OFFICE OF PERSONNEL MANAGEMENT 

OFFICE OF THE INSPECTOR GENERAL 

OFFICE OF AUDITS 

final Audit Report 

Subjec(: ~~. 

..,' . '. ", " .. 

,Audit ()ftbeFedet.alE9!Plotee,sH'ealthBenefits 

.·pr9gr~~~f;:-;l~ijiji:~~i;~t~t~~s;t~=,.[~~Ith 

'" ,lt~portN(). , ... . .. ,lC~ " .E3~OO~09~OlO ..... '. .. 

Date: 'August ,6, ,.2009 

. -- CAUTION-­

This a,udit report has been distributed to Federal ofr.4;ials wbo areresponslbJe for tbe administ.-ation of t~e ;ludited program. This 

auditrepo.-r may contain proprietary data which is protf.ctedby Federal law (IS U,S.C.190S). Therefore, while this audit report is 

lIya,ilable under the Freedom:ofJDformation Ad and made available 10 tiie public on the Ole webpag,e,.cillllioil' needs to be exercised 

befo.-ereleasirig tlJereportHi the ge~eral public as it may contain proprietary information that was redacted from the publicly 

distributed CQPY; , , 
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 of the Mid-Atlantic States, Inc. 


Contract Number 1763 - Plan Code E3 


Rockville, Maryland 


Report No. lC-E3-00-09-010 Dak: August 6, 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 

Inspector General 

EXECUTIVE SUMMARY 


Federal Employees Health Benefits Program 


Community-Rated Health Maintenance Organization 


Kaiser Foundation Health Plan of the Mid-Atlantic States, Inc. 


Contract Number 1763 - Plan Code E3 


Rockville, Maryland 


Report No. 1C-E3-00-09-010 Dak: August 6, 2009 

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

Program (FEHBP) operations at Kaiser Foundation Health Plan of the Mid-Atlantic States, Inc. 

(Plan). The audit covered contract years 2006 through 2008 and was conducted at the Plan's 

office in Rockville, Maryland. This report questions $7,545,775 for defective pricing in 2006 

through 2008, including $919,280 for related lost investment income. 

For contract years 2006 through 2008, the Plan initially supplied the incorrect membership data 

for the FEHBP. We developed our audited rates using the correct membership data provided by 

the Plan. As a result, we determined that the FEHBP's rates were overcharged by $2,593,923 in 

2006 and $4,810,121 in 2007. However, we determined that the Plan should be credited 

$777,549 in 2008. The amount credited to the Plan in 2008 will be deducted from the total 

amounts due the FEHBP in 2006 and 2007. 

Consistent with the FEHBP regulations and the contract, the FEHBP is due $919,280 for lost 

investment income, calculated through June 30,2009, on the defective pricing findings. In 

addition, the contracting officer should recover lost investment income on amounts due for the 

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

FEHBP. 

www.opm.goy www,usajobs.gov 
CONTENTS 


EXECUTIVE SUMMARy............................................................................................... i 


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


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


111. 	 AUDIT FINDINGS AND RECOMMENDA nONS ....................................................... 5 


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


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


2. Lost Investment Income ..................................................................................5 


IV. MAJOR CONTRIBUTORS TO THIS REPORT ............................................................ 7 


Exhibit A (Summary of Questioned Costs) 


Exhibit B (Defective Pricing Questioned Costs) 


Exhibit C (Lost Investment Income) 


Appendix (Kaiser Foundation Health Plan of the Mid-Atlantic States, Inc.'s June 8, 2009, 


response to the draft report) 

I. INTRODUCTION AND BACKGROUND 

Introduction 

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

at Kaiser Foundation Health Plan of the Mid-Atlantic States, Inc. (Plan) in Rockville, Maryland. 

The audit covered contract years 2006 through 2008. The audit was conducted pursuant to the 

provisions of Contract CS 1763; 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 

Center for Retirement and Insurance Services. 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 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 Jaws, 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 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 1975 and provides health benefits to FEHBP 

members in Metropolitan Washington, D.C. and Metropolitan Baltimore, Maryland. The last 

audit conducted by our office covered contract years 2000 and 2002 through 2005. All noted 

exceptions were resolved and amounts questioned were returned to OPM. 

The preliminary results ofthis audit were discussed with Plan officials at an exit conference and . 

in subsequent correspondence. A draft report was also provided to the Plan for review and 

comment. The Plan agrees with our findings. 

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 determine whether the Plan was in compliance with the 

provisions of the 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 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 2006 through 2008. 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 above. 

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 

infonnation 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 ofinternal 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 the SSSGs); 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 

3 

the various infonnation 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 performed at the Plan's office in Rockville, Maryland during October 

and November 2009. 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 docwnentation and 

billings to other groups, such as the SSSGs, to detennine 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 

detennine the propriety of the 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 our audit objectives. 

4 

III. AUDIT FINDINGS AND RECOMMENDATIONS 


Premium Rates 

1. Defective Pricing $6,626,495 

The Certificates ofAccurate Pricing the Plan signed for contract years 2006, 2007, and 2008 

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

adjustment for 2006 and 2007 and owes the Plan a rate increase for 2008. Application ofthe 

defective pricing remedies shows that the FEHBP is entitled to premium adjustments totaling 

$6,626,495 (see Exhibit A). 

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

offered to an SSSG. If it is found that the FEHBP was charged higher than a market price 

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

downward adjustment ofthe FEHBP premiums to the equivalent market price. 

2006 through 2008 

We agreed with the Plan's SSSG selections for all years under review. We verified that the 

largest SSSG discount was applied to the FEHBP rates in each year. 

Our analysis ofthe rates charged to the FEHBP shows that the Plan used incorrect enrollment 

data in its original rate development. Prior to the release of our draft report, the Plan disclosed 

these errors and provided the corrected FEHBP enrollment data. As a result, we found that the 

FEHBP rates were overstated by $2,593,923 for contract year 2006, $4,810,121 for contract 

year 2007, and understated $777,549 for contract year 2008 (see Exhibit B). 

Recommendation 1 

We recommend that the contracting officer require the Plan to return $6,626,495 to the 


FEHBP for defective pricing in contract years 2006 through 2008. 


2. Lost Investment Income $919,280 

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 findings due the 

FEHBP in contract years 2006 and 2007. We detennined that the FEHBP is due $919,280 for 

lost investment income, calculated through June 30, 2009 (see Exhibit C). In addition, the 

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

defective pricing finding amounts have been returned to the FEHBP. 

5 
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 thatwere not 

comp1ete, 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 ofthe overcharge from the date the 

overcharge was paid to the 9arrier until the overcharge is liquidated. 

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

Treasury's semiannual cost of capital rates. 

Recommendation 2 

We recommend that the contracting officer require the Plan to return $919,2&0 to the FEHBP 

for lost investment income for the period January 1,2006 through June 30,2009. In addition, 

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

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

the FEHBP. 

Plan's Comments 

The Plan agrees with the findings. 

6 

IV. MAJOR CONTRIBUTORS TO THIS REPORT 

Community-Rated Audits Group 

Auditor 

Senior Team Leader 

Acting Group Chief 

7 

Exhibit A 

Kaiser Foundation Health Plan of the Mid-Atlantic States, Inc. 


Summary of Questioned Costs 


Defective Pricing Questioned Costs: 

Contract Year 2006 $2,593,923 

Contract Year 2007 $4,810,121 

Contract Year 2008 ($777,549) 

Total Defective Pricing Questioned Costs $6,626,495 

Lost Investment Income $919,280 

Total Questioned Costs $7,545,775 
Kaiser Foundation Health Plan of the Mid-Atlantic States, Inc. 

Defective Pricing Questioned Costs 

2006 Contract Year 

High Option 

Plan's Reconciled Rates 

Audited Rates 

Biweekly Overcharge 

To Annualize: 

x March 31, 2006 Headcount 

x Pay Periods 

Subtotal 

Amount Due FEHBP in 2006 

Standard Option 

Plan's Reconciled Rates 

Audited Rates 

Biweekly Undercharge 

To Annualize: 

x March 31, 2006 Headcount 

x Pay Periods 

Subtotal 

Amount Due Plan in 2006 

Total 2006 Defective Pricing Questioned Costs 

Exhibit B 

pg. 1 of3 

$2,840,333 

($246,410) 

$.2..193923 
Kaiser Foundation Health Plan of the Mid-Atlantic States, Inc. 

Defective Pricing Questioned Costs 

2007 Contract Year 

Hig~ Option 

Plan's Reconciled Rates 


Audited Rates 


Biweekly Overcharge 


To Annualize: 


x March 3 I, 2007 Headcount 


x Pay Periods 


Subtotal 


Amount Due FEHBP in 2007 


Standard Option 

Plan's Reconciled Rates 


Audited Rates 


Biweekly Overcharge 


To Annualize: 


x March 31, 2007 Headcount 


x Pay Peri ods 


Subtotal 


Amount Due FEHBP in 2007 


Total 2007 Defective Pricing Questioned Costs 

Exhibit B 

pg. 2 on 

$4,616,805 

$193,3]6 

$4.810,12] 
Exhibit B 

pg.30f3 

Kaiser Foundation Health Plan of the Mid-Atlantic Statest Inc. 

Defective Pricing Questioned Costs 

2008 Contract Year 

High Option 

Plan's Reconciled Rates 

Audited Rates 

Biweekly Undercharge 

To Annualize: 

xMarch 31, 2008 Headcount 

x Pay Periods 

Subtotal 

Amount Due Plan in 2008 ($732,326) 

Standard Option 

Plan's Reconciled Rates 

Audited Rates 

Biweekly Undercharge 

To Annualize: 

x March 31,2008 Headcount 

x Pay Periods 

Subtotal 

Amount Due Plan in 2008 ($45,223) 

Total 2008 Defective Pricing Questioned Costs ($777,549) 

Total Defective Pricing Questioned Costs £6..626,495 
Exhibit C 

Kaiser Foundation Health Plan of the Mid-Atlantic States, Inc. 

Lost Investment Income 

Year 2006 2007 2008 2009 Total 

Audit Findings: 

Defective Pricing $2,593,923 $4,810,]21 $0 0 $7,404,044 

Totals (per year): $2,593,923 $4,810,121 $0 $0 $7,404,044 

Cumulative Totals: $2,593,923 $7,404,044 $7,404,044 $7,404,044 $7,404,044 

A verage Annual Interest Rate: 5.4375% 5.5000% 4.9375% 5.6250% 

Interest on Prior Years Findings: $0 $142,666 $365,575 $208,239 $716,480 

Current Years Interest: $70,522 $132,278 $0 $0 $202,800 

Total Cumulative Interest $70,522 $274,944 $365,575 $208,239 , $919,280 

Through June 30, 2009 
••• 

Appendix 

~""~ KAISER PERMANENT£,~ 

Sent yiaE-mail and First Class Maif .. '.• ..'J,.~~~';·~.i.-: ,~·t.~... ·.· ... _~._,'. i.".u- ,. __ .:;':;~_.:.t... _,.,r., .............. t(·_ -- .-' ," . 


InlT'''_'''''!:II~.:.rt Audits Group 

Office of Inspector General, Room 6400 

US Office of Personnel Management 

1900 E Street~ NW 

Washington, DC 20415-1100 

Re: Kaiser Foundation Health Plan of the Mid-Atlantic States, Inc. 

Draft Audit Report No. 1 C-E3-00-09-01 0 (May 7, 2009) 

Dear_ 

We are in receipt of the above-referenced draft audit report on the Federal Employees 

HI~alth Benefits Program ("FEHBP") operations at Kaiser Foundation Health Plan of the 

Mid-Atlaritic States, Jnc. (the "Carrier") for contract years 2006 through 2008. 

The Carrier acknowledges that it informed OIG that it inadvertently used incorrect 

membershIp data in the FEHBP rate development for all the years under audit. It 

agrees to OIG's calculations of the amounts due FEHBP: $6,627,382 for defective 

pricihg in years 2006 through 2008, plus $847,196 in lost investment income. 

Thank you again for your attention to this matter. 

Vice President, FEHBP Line of Business 

cc: 

#451296