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US OFFICE OF PERsoNNEL MANAGEMENT' 

OFFICE OF THE INSPECTOR GENE:RAL 

OFFICE OFAUDITS 

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UNITED STATES OFFICE OF PERSONNEL MANAGEMENT
 

Washington, DC 20415
 

Office of the 

Inspector General 

AUDIT REPORT
 

Federal Employees Health Benefits Program
 

Comprehensive Medical Plan - Community-Rated
 

Humana Health Plan of Texas
 

Contract Number 1895 - Plan Code OR
 

Louisville, Kentucky
 

Report No. lC-UR-OO-08-030 Date: December 16, 2008 

~~Michael R. Esser 

Assistant Inspector General 

for Audits 

www.usaJobS.gov www.opm.gov 
UNITED STATES OFFICE OF PERSONNEL MANAGEMENT
 

Washington, DC 20415
 

Office of the 

Inspector General 

EXECUTIVE SUMMARY
 

Federal Employees Health Benefits Program
 

Comprehensive Medical Plan - Community-Rated
 

Humana Health Plan of Texas
 

Contract Number 1895 - Plan Code UR
 

Louisville, Kentucky
 

Report No. lC-UR-OO-08-030 Date: December 16, 2008 

The Office of the Inspector General perfonned an audit of the Federal Employees Health 

Benefits Program (FEHBP) operations at Humana Health Plan ofTexas (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 $328,992 for inappropriate health benefit charges to the FEHBP in contract 

years 2005 and 2007. The questioned amount includes $300,577 for defective pricing and 

$28,415 due the FEHBP for Jost investment income, calculated through October 31,2008. We 

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

Management's roles and regulations in 2006. 

For contract years 2005 and 2007, we determined that the FEHBP's rates were overstated by 

$300,577 due to defective pricing. More specifically, the Plan did not apply the correct 

discounts given to a similarly sized subscriber group to the FEHBP rates. 

Consistent with the FEHBP regulations and contract, the FEHBP is due $28,415 for lost 

investment income, calculated through October 31, 2008, on the defective pricing findings. 

The Plan agreed with the findings and remitted a check for $328,992. 

www.opm.goY www.usajobs.goY 
CONTENTS
 

EXECUTIVE 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
 

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 (Humana Health Plan of Texas' November 13, 2008, response
 

to the draft report)
 
I. INTRODUCTION AND BACKGROUND
 

Introduction 

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

at Humana Health Plan of Texas (Plan) in Louisville, Kentucky. The audit covered contract 

years 2005 through 2007. The audit was conducted pursuant to the provisions of Contract 1895; 

5 U.S.C. Chapter 89; and 5 Code ofFederal Regulations (CFR) Chapter 1, Part 890. The audit 

was perfonned by the Office of Personnel 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 EmployeesHealth 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 contraqts 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 OPM. 

The FEHBP should pay a market price rate, 

FEHBP Contracts/Members which is defined as the best rate offered to 

either ofthe 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 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. 

1 

March 31 

21,000 

16,000 

11,000 

6,000 

1,000 

• Contracts 8,654 7,846 6,945

o Members 19,776 16,910 14,474
The Plan began participating in the FEHBP as a community-rated comprehensive medical plan 

in 1987 and provides comprehensive medical services to FEHBP members throughout the San 

Antonio area. The last audit of the Plan conducted by our office was a full scope audit of 

contract years 2000 through 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 ofthis 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 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 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 $209.7 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 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 

information to detennine the nature, timing, and extent of our audit procedures. However, the 

audit included such tests ofthe 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 (SSSG) were selected; 

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

rate offered to an SSSG); and 

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

$90 

$70 

$50 

$30 

$10 

• Revenue 

FEHBP Premiums Paid to Plan 

3
 
In conducting the audit, we relied to varying deg'rees on computer-generated billing, enrollment, 

and claims data provided by the Plan. We did not verify the reliability ofthe 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 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 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 

detennine 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 $300,577 

The Certificates of Accurate Pricing the Plan signed in contract years 2005 and 2007 were 

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

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

FEHBP is entitled to premium adjustments totaling $300,577 (see Exhibit A). We found that 

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

contract year 2006. 

Carriers proposing rates to aPM 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 higher than a market price rate 

(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. 

The Plan selected s 

the SSSGs for co~ear 2005. We agree with these selections. Our analysis of the S·SSG 

rates shows that _ received a "percent discount and received a" 

percent discount. In the 2005 reconciliation, the Plan gave the FEHBP a ~ercent

discount. Since the FEHBP is entitled to a discount equivalent to the largest discount given to 

an SSSG, we recalculated the FEBHP rates using the _discount given . A 

comparison ofthe audited rates to the reconciled rates shows that the FEHBP was 

overcharged $75,006 in contract year 2005 (see Exhibit B). 

The Plan selected as the SSSGs for contract year 

2007. We agree WI t ese se ections. Our ana ySIS 0 t e SSSG rates shows that _ 

_ eceived a_percent discount, while did not receive a 

discount. In the 2007 reconciliation, the Plan gave the FEHBP a ereent discount. Since 

the FEHBP is entitled to a discount equivalent to the largest discount given to an SSSG, we 

recalculated the FEHBP rates using the _discount given to . A 

comparison ofthe audited rates to the reconciled rates shows that the FEHBP was 

overcharged $225,571 in contract year 2007 (see Exhibit B). 

5
 
Recommendation 1 

After receiving the draft audit report, the Plan returned $300,577 to the FEHBP for defective 

pricing in the contract years 2005 and 2007. Since we verified that the Plan returned 

$300,577 to the FEHBP, no further action is required. 

2. Lost Investment Income $28,415 

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 2007. We determined that the FEHBP is due $28,415 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 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 carrier until the overcharge is liquidated. 

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

Treasuryts semiannual cost of capital rates. 

Recommendation 2 

After receiving the draft audit report, the Plan returned $28,415 to the FEHBP for lost 

investment income on the defective pricing findings in contract years 2005 and 2007. Since 

we verified that the Plan returned $28,415 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 $328,992 ($300,577 + $28,415). 

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 of Texas 

Summary of Questioned Costs 

Defective Pricing Questioned Costs: 

Contract Year 2005 $75,006 

Contract Year 2007 $225,571 

Total Defective Pricing Questioned Costs 

Lost Investment Income on Defective Pricing Findings 

Total Questioned Costs 

$300,577 

$28,415 

$328,992 
Exhibit B
 

Page 1 of2
 

Humana Health Plan of Texas 

Defective Pricing Questioned Costs 

2005 

High Option 

FEHBP Line 5 - Reconciled Rate 

FEHEP Line 5 - Audited Rate 

Overcharge 

To Annualize Overcharge: 

x 3/31/05 enrollment 

x Pay Peliods 26 26 

Subtotal $11,466 $35,977 $47,443 

Standard Option 

FEHBP Line 5 - Reconciled Rate 

FEHBP Line 5 - Audited Rate 

Overcharge 

To Annualize Overcharge: 

x 3/31/05 enrollment 

x Pay Periods 

Subtotal 

26 

$3,908 

26 

$23,655 $27,563 

Total 2005 Defective Pricing Questioned Costs $75,006 
2007 

Exhibit B
 

Page 2 of2
 

Humana Health Plan of Texas 

Defective Pricing Questioned Costs 

High Option 

FEHBP Line 5 - Reconciled Rate 

FEHBP Line 5 - Audited Rate 

Overcharge 

To Annualize Overcharge: 

x 3/31/07 enrollment 

x Pay Periods 

Subtotal 

26 

$67,959 

26 

$144,367 $212,326 

Standard Option 

FEHBP Line 5 - Reconciled Rate 

FEHBP Line 5 - Audited Rate 

Overcharge 

To t\n~ualize Overcharge: 

-­ x-3/3l!07 enrollment 

x Pay Periods 

Subtotal 

26 

$1,962 

­

26 

$11)83 $13,245 

Total 2007 Defective Pricing Questioned Costs $225,571 
Exhibit C 

Humana Health Plan of Texas
 

Lost Investment Income
 

Year 2005 2006 2007 2008 Total 

Audit Findings: 

1. Defective Pricing $75,006 $0 $225,571 $0 $300,577 

Totals (per year): $75,006 $0 $225,571 $0 $300,577 

Cumulative Totals: $75,006 $75,006 $300,577 $300,577 $300,577 

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

Interest on Prior Years Findings: $0 $4,078 $4,125 $12,368 $20,571 

Current Years Interest: $1,641 $0 $6,203 $0 $7,844 

Total Cumulative Interest Calculated 

Through October 31, 2008: $1,641 $4,078 $10,328 $12,3681 $28,415 
Page 1 of 1 

APPENDIX From: 

Sent: Thursday, November 13,2008 5:14 PM 

To: 

Subject: Humana Response to Draft Audit Report 1C:-UR-OO-08-030 

this email should se""e as documentation that Humana agrees with all findings contained in the Draft 

Audit Report of Humana Health Plan of Texas (plan code UR) issued August 8, 2008.
 

We agree with the audit findings of $300,577 in inappropriate, or defective pricing, charges plus accumulated
 

interest charges totalling $28,415.
 

The total charges of $328,992 was remitted to aPM last week.
 

Actuary, FEHBP & IL Region 

Large Group Actuarial 

Humana Inc. 

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