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UNITED STATES OFFICE OF PERSONNEL MANAGEMENT
 

Washington, DC 204]5
 

Office of the 

Inspector General 

AUDIT REPORT 

Federal Employees Health Benefits Program
 

Community-Rated Health Maintenance Organization
 

Health Net of Arizona, Inc.
 

Contract Number 2121 - Plan Code A7
 

Woodland Hills, California
 

Report No~ lC-A7-00-09-030 Da~: November 4, 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 

I nspector GeneraI 

EXECUTIVE SUMMARY
 

Federal Employees Health Benefits Program
 

Community-Rated Health Maintenance Organization
 

Health Net of Arizona, Inc.
 

Contract Number 2121 - Plan Code A7
 

Woodland Hills, California
 

Report No. 1C-A7-00-09-030 Date:November 4, 2009 

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

Program (FEHBP) operations at Health Net of Arizona, Inc. (Plan). The audit covered contract 

years 2006 through 2008 and was conducted at the Plan's office in Woodland Hills, California. 

Additional field work was performed at our office in Jacksonville, Florida. This report questions 

$80,747 for defective pricing in 2006, including $11,530 for related lost investment income. We 

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

Management's (OPM) rules and regulations in contract years 2007 and 2008. 

We determined that the FEHBP rates were overstated by $69,217 for contract year 2006 because 

the Plan incorrectly calculated the vision rider by applying a service industry factor larger than 

what was applied to a similarly sized subscriber group. 

Consistent with the FEHBP regulations and the contract, the FEHBP is due $11,530 for lost 

investment income, calculated through August 31, 2009, on the defective pricing findings. In 

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

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

the FEHBP. 

www.opm.gov www.usajobs.gov 
CONTENTS
 

Page 

EXECUTIVE SUMMARY	 i
 

1. INTRODUCTION AND BACKGROUND	 1
 

n. OBJECTIVES, SCOPE, AND METHODOLOGy 3
 

Ill. ADDlT FINDINGS AND RECOMMENDATIONS 5
 

Premium Rates 5
 

1. Defective Pricing	 5
 

2. Lost Investment Income 6
 

Claims Review 6
 

1. Payment for Non-Covered Services	 7
 

2. Coordination ofBenefits with Medicare	 7
 

IV.	 MAJOR CONTRIBUTORS TO THIS REPORT 9
 

Exhibit A (Summary of Questioned Costs)
 

Exhibit B (Defective Pricing Questioned Costs)
 

Exhibit C (Lost Investment Income)
 

Appendix (Health Net of Arizona, Inc.'s August 11,2009, response to the draft report)
 
I. INTRODUCTION AND BACKGROUND
 

Introduction 

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

at Health Net of Arizona, Inc. (Plan) in Woodland Hills, California. The audit covered contract 

years 2006 through 2008. The audit was conducted pursuant to the provisions of Contract CS 

2121; 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 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 

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. 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 as of March 31 for each contract 

year audited. 

18,000 

16,000 

14,000 

12,000 

10,000 

8,000 

6,000 

4,000 

2,000 

o 

• Contracts 

o Members 

March 31 

2006 2007 

5,953 8,175 

10,464 17,208 

2008 

6,234 

13,478 
The Plan has participated in the FEHBP since 1987 and provides health benefits to FEHBP 

members throughout the state of Arizona. The last audit conducted by our office covered 

contract years 2002 through 2005. As a result of that audit, we found that the Plan's rating of the 

FEHBP in contract years 2002 through 2005 was in accordance with the applicable laws, 

regulations, and aPM rating instructions. 

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 

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. 

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 toprovide 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 $151.7 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 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 ofintemal 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 S5SGs); and 

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

FEHBP Premiums Paid to Plan 

$60 

$50 

$40 

• Revenue 

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 governrnent auditing standards issued 

by the Comptroller General ofthe United States. 

The audit fieldwork was performed at the Plan's office in Woodland Hills, California, during 

February 2009. 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 the SSSGs, to determine ifthe 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 determine the 

propriety of the FEHBP premiums and the reasonableness and acceptability ofthe 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 $69,217 

The Certificate of Accurate Pricing the Plan signed for contract year 2006 was defective. In 

accordance with federal regulations, the Federal Employees Health Benefits Program 

(FEHBP) is therefore due a rate reduction for this year. Application ofthe defective pricing 

remedies shows that the FEHBP is entitled to premium adjustments totaling $69,217 (see 

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

Personnel Management's (OPM) rules and regulations in contract years 2007 and 2008. 

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 a similarly sized subscriber group (SSSG). Ifit is found that the FEHBP was 

charged higher than a market price (i.e., the best rate offered to an SSSG), a condition of 

defective pricing exists, requiring a downward adjustment of the FEHBP premiums to the 

equivalent market price. 

2006 

In reviewing the FEHBP rates, we noted that the Plan incorrectly calculated the vision rider 

by applying a service industry factor (SIC) larger than what was applied to an SSSG. Based 

on OPM's rate instructions, the FEHBP should receive the lowest industry factor given to an 

SSSG. The Plan applied ,-SICto both SSSGs' vision rider calculations. Therefore, 

we re-developed the FEHBP rates by applying the _ SIC factor to the vision rider. A 

comparison of our audited line 5 rates to the Plan's reconciled line 5 rates shows that 

the FEHBP was overcharged $69,217 in 2006 (see Exhibit B). 

Plan's Comments (See Appendix): 

The Plan acknowledged OPM's re-calculation and agrees to return the overcharge of$69,217 

for 2006. 

Recommendation 1 

We recommend that the contracting officer require the Plan to return $69,217 to the FEHBP 

for defective pricing in contract year 2006. 

5
 
· 2. Lost Investment Income $11.530 

In accordance with the 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 year 2006. We determined that the FEHBP is due $11,530 for lost investment 

income, calculated through August 31,2009 (see Exhibit C). In addition, the FEHBP is 

entitled to lost investment income for the period beginning September 1,2009, until all 

defective pricing finding amounts have been returned to the FEHBP. 

Federal Employees Health Benefits Acquisition Regulation 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 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 ofthe overcharge from the date the overcharge was paid to the carrier until the 

overcharge is liquidated. 

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

Treasury's semiannual cost of capital rates. 

Recommendation 2 

We recommend that the contracting officer require the Plan to return $1 ],530 to the FEHBP 

for lost investment income for the period January 1,2006, through August 3], 2009. In 

addition, we recommend that the contracting officer recover lost investment income on 

amounts due for the period beginning September 1, 2009 until all defective pricing amounts 

have been returned to the FEHBP. 

Plan's Comments (See Appendix): 

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

Claims Review 

According to FEHBP Program Carrier Letters 2006-14 and 2007-09, the Office ofPersonnel 

Management requires all carriers to keep on file all data necessary to justify its Adjusted 

Community Rating (ACR) rate and save back-up copies of their claims databases for audit 

purposes. We reviewed FEHBP claims data for contract years 2007 and 2008. We ran queries 

on the claims data that relate to hospital, physician, prescription drugs, coordination of benefits, 

bundling of claims, and non-covered benefits according to the FEHBP benefit brochures. 

6
 
1. Payment for Non-Covered Services 

Our review of the 2007 and 2008 FEHBP claims data shows that the Plan paid for claims that 

related to elective abortion, which is a non-covered benefit according to the FEHBP benefit 

brochure. We queried claims data during the experience period of2007 (January 1,2004 

through December 31, 2005) and 2008 (January 1,2005 through December 31,2006). We 

found that there were six instances of the Plan inappropriately paying for this benefit. The 

total paid amount was $302 for 2007 and $1,563 for 2008. We notified the Plan of our results 

and requested an explanation for payment ofthese claims. The Plan agreed that the abortion 

claims were paid erroneously. The Plan also noted that the plans (benefits) were configured 

incorrectly. We agree with the Plan that these claims were paid incorrectly. Additionally, the 

amount in question does not have a significant impact on the premium rates for 2008. We 

addressed this issue as a procedural issue because the Plan should not have covered the 

elective abortions. 

Recommendation 3 

We recommend that the contracting officer require the Plan to monitor its claims system that 

tracks elective abortions so that these claims are being reviewed and rejected as a non-covered 

benefit. 

2. Coordination of Benefits with Medicare 

To test the Plan's compliance with the FEHBP health benefit provisions related to 

coordination of benefits with Medicare, we selected a judgmental sample of potential 

uncoordinated claim lines that were identified in a computer search using SAS Enterprise 

Guide. We selected and reviewed 74 claims, totaling $1,849,148 in payments, for 

coordination of benefits with Medicare in contract years 2007 and 2008. We notified the Plan 

ofthese potential uncoordinated claims and submitted the claim samples to the Plan for their 

review and response. 

Generally, Medicare Part A covers 100 percent of inpatient care in hospitals, skilled nursing 

facilities, and hospice care. For each Medicare Benefit Period, there is a one-time deductible, 

followed by a daily copayment beginning with the 61st day. Beginning with the 9151 day of the 

Medicare Benefit Period, Medicare Part A benefits may be exhausted, depending on whether 

the patient elects to use their Lifetime Reserve Days. For the uncoordinated Medicare Part A 

claims, we estimate that the FEHBP was overcharged for the total claim payment amounts. 

When applicable, we reduced the questioned amount by the Medicare deductible and/or 

Medicare copayment. 

2007 

The results of our tests indicate that, with respect to the items tested, the Plan did not fully 

comply with the provisions ofthe contract relative to coordination of benefits with Medicare. 

The auditors reviewed and summarized the Plan's responses. The Plan did not properly 

7
 
coordinate a claim in 2004, totaling $28,849, with Medicare as required by the FEHBP 

contract. As a result, the FEHBP paid as the primary insurer for this claim when Medicare 

was the primary insurer. Therefore, we estimate that the FEHBP was overcharged by $28,849 

for this claim. We removed the overpayment from the 2007 premium. The comparison 

showed that the overpayment did not have an effect on the premium rates for 2007. 

Therefore, this is a procedural issue because the Plan should have coordinated this claim with 

Medicare. 

Recommendation 4 

We recommend that the contracting officer require the Plan to ensure that they have 

procedures in place to review all claims incurred back to the Medicare effective dates when 

updated, other party liability information is added to their claims system. When Medicare 

eligibility is subsequently reported, the plans are expected to immediately determine if already 

paid claims are affected and, if so, to initiate the recovery process within 30 days. 

8
 
IV. MAJOR CONTRIBUTORS TO THIS REPORT 

~oIT!.munity_-RatedAudits Group 

Auditor 

Auditor-In-Charge 

Auditor 

Chief 

Senior Team Leader 

9
 
Exhibit A 

Health Net of Arizona, Inc.
 

Summary of Questioned Costs
 

Defective Pricing Questioned Costs: 

Contract Year 2006 $69,217 

Lost Investment Income: $11,530 

Total Questioned Costs $80,747 
Exhibit B 

Health Net of Arizona, Inc. 

Defective Pricing Questioned Costs 

FEHBP Line 5 - Reconciled Rate 

FEHBP Line 5 - Audited Rate 

Overcharge 

To Annualize Overcharge: 

x March 31, 2006 enrollment 

x Pay Periods 26 26 

Subtotal 

Total 2006 Defective Pricing Questioned Costs 
EXHIBITC 

Health Net of Arizona, Inc. 

Lost Investment Income 

Year 

Audit Findings: 

2006 2007 2008 2009 Total 

I. Defective Pricing $69,217 $0 $0 $0 $69,217 

Totals (per year); 

Cumulative Totals: 

$69,217 

$69,217 

$0 

$69,217 

$0 

$69,217 

$0 

$69,217 

$69,217 

$69,217 

Avg. Interest Rate (per year): 5.4375% 5,5000% 4.9375% 5.2500% 

Interest on Prior Years Findings: 

Current Years Interest: 

$0 

$1,882 

$3,807 

$0 

$3,418 

$0 

$2,423 

$0 

$9,648 

$1,882 

Total Cumulative Interest Calculated 

Through August 31,2009: $1,882 $3,807 $3,418 $2,4231 $11,530 
Appendix 

d1' Health Net, Inc­ 2U09 AUG 11 AM 10: It6 

21650 Oxnard Strer.: Health Net'	 Woodland Hills. CA 913&7 

August 11, 2009 

Chief Community-Rated Audits Group 

Office of the Inspector General 

Office of Personnel Management 

1900E Street, N.W. 

Washington, D.C. 20415 

Re:	 Draft of Audit Report No.1C-A7-00-090-030
 

Health Net of Arizona, Inc.
 

Dear_ 

This letter and accompanying chart and exhibits are in response to the above-referenced 

Draft Audit Report on the Federal Employees Health Benefits Program CFEHBP") operations at 

Health Net of Arizona, Inc. (the "Plan") for contract years 2006 through 2008. As discussed 

below, the Draft Audit Report contains a finding and recommendation that is incorrect and 

unsupported. As a result, the Draft Audit Report conveys an inaccurate description ofthe Plan's 

compliance with FEHBP rating requirements. Thus, Health Net believes that the Draft Audit 

Report requires revision before it is issued in final form. 

I.	 PLAN RESPONSE 

In this section, we summarize the findings and recommendations contained in the Draft 

Audit Report and any findings that we dispute. The discussion under this section is not intended 

to be exhaustive 

A.	 Service Industry Factor Applied to FEHBP 

For contract year 2006, the Draft Audit Report contains preliminary findings that the Plan 

incorrectly calculated the vision rider by applying a service industry factor (SIC) larger that what 

was applied to an SSSG. Specifically, the Draft Audit Report contains preliminary findings that 

the Plan applied a_SIC to both SSSGs' vision rider calculations. Therefore aPM redeveloped the FEHBP rates by applying the_SIC factor to the vision rider. 

Health Net acknowledges OPMs' re-calculation and agrees to return the overcharge of
 

$69,217 for 2006.
 

-1­

 Health Net, Inc. 

216S0 Oxnard Street Health Net' Woodland Hifls. CA91;': 

Deleted by OIG - Not relevant to the Final Report 

II. CONCLUSION 

As discussed above and accompanying exhibits, the Draft Audit Report contains an error 

and unwarranted finding and recommended adjustment. We respectfully request that the DIG 

-2­
o Health Net, Inc. 

21650 Oxnard Stre(;", Health Net Woodland Hills, (A 91 ~i,·

reevaluate the Draft Audit Report's findings and recommendations in light of this submission 

and issue a final audit report that accurately reflects the Plan's rating ofthe FEHBP and SSSGs. 

Please contact the undersigned if you have any questions regarding this submission. 

Sincerely, 

CC:Chuck Sowers, CEO, Health Net of Arizona., Inc.
 

Exhibits (2)
 

-3­