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. U.S. OFFICE OF PERSONNEL MANAGEMENT 

OFFICE OF THE INSPECTOR GENERAL 

OFFICE OF AUDITS 

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. Date: June 24," 2009 

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this &uditrepor't h;Js been dis'ri.buiid toFederal and Doo-Federaioffidals who are respcnsibleIor.the administration or the audited
 

. cuntract, This report may contain proprietary da'aw~ich is protected by Federal law (18.U$.C.1905); therefore, while thlsreport is ..
 

avallableunderthe Freedom oflnformatiQn Act, cautionneeds to be exercised before releasing thereport to the 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
 

Advantage Health Solutions, Inc.
 

Contract Number CS 2862 - Plan Code 6Y
 

Indianapolis, Indiana
 

Report No. lC-6Y-OO-09-004 Date: June 24, 2009 

Michael R. Esser 

Assistant Inspector General 

for Audits 

www.opm.gov www.lIsajobs.gc>v 
UNITED STATES OFFICE OF PERSONNEL MANAGEMENT
 

Washington. DC 204]5
 

Office of the 

Inspector General 

EXECUTIVE SUMMARY
 

Federal Employees Health Benefits Program
 

Community-Rated Health Maintenance Organization
 

Advantage Health Solutions, Inc.
 

Contract Number CS 2862 - Plan Code 6Y
 

Indianapolis, Indiana
 

Report No. lC-6Y-OO-09~004 Date: June 24, 2009 

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

Benefits Program (FEHBP) operations at Advantage Health Solutions, Inc. (Plan). The audit 

covered contract years 2003 through 2008 and was conducted at the Plan's office in Indianapolis, 

Indiana. This report questions $439,823 for defective pricing in 2005 and 2007, including 

$57,035 for related lost investment income. We found that the FEHBP rates were developed in 

accordance with the Office of Personnel Management's rules and regulations in contract years 

2003,2004,2006, and 2008. 

We determined that the FEHBP rates were overstated by $196,932 for contract year 2005 

because the Plan overstated its capitation increase, charged the FEHBP unsupported benefit 

loadings, and applied retention to the dental benefit twice. 

We determined that the FEHBP rates were overstated by $185,856 for contract year 2007 

because the Plan overstated its capitation increase, charged the FEHBP unsupported benefit 

loadings, applied retention to the dental benefit twice, and did not completely apply a Similarly 

Sized Subscriber Group discount to the FEHBP's rates. 

Consistent with the FEHBP regulations and the contract, the FEHBP is due $57,035 for lost 

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

www.opm.gov www.usajobs.gov 
CONTENTS
 

EXECUTIVE SUMMARY	 i
 

1.	 INTRODUCTION AND BACKGROUND 1
 

. . 

II.	 OBJECTIVES, SCOPE, AND METHODOLOGY 3
 

III.	 AUDIT FINDINGS AND RECOMMENDATIONS 5
 

Premium Rates r 5
 

1. Defective Pricing	 5
 

2. Lost Investment Income	 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 (Advantage Health Solutions, Inc. April 2, 2009, response to the draft report)
 
FEHBP Contracts/Members 

March 31 

3,000 

I"" 

2,500
 

2,000
 

1,500
 "l' 

I"" - "­ 1,000 

,.... 500 :1. ,. "­

0 III I.J. III

2003 2004 2005 2006 2007 2008

I_ Contracts 604 1,085 1,236 614 518 788

IEJMembers 1,459 1,481 2,688 1,292 1,015 1,552

I. INTRODUCTION AND BACKGROUND
 

Introduction 

We completed an a'udit ofthe Federal Employees Health Benefits Program (FEHBP) operations 

at Advantage Health Solutions, Inc. (Plan) in Indianapolis, Indiana. The audit covered contract 

years 2003 through 2008. The audit was conducted pursuant to the provisions of Contract CS 

2862; 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 various 

health insurance carriers that provide service benefits, indemnity benefits, or comprehensive 

medica! 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 carriets 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, 

which is defined as the best rate offered to 

either ofthe two groups cJosest 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 ofthe 

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
 
The Plan has participated in the FEHBP since 200 I and provides health benefits to FEHBP 

members throughout most of Indiana. The last audit conducted by our office covered contract 

years 2001 through 2005. As a result of that audit, we found that the Plan's rating of the FEHBP 

in contract year 2001 was in accordance with the applicable laws, regulations, and aPM rating 

instructions. In contract year 2002, we found that there were inappropriate health benefit charges 

to the FEHBP, which were then fully reimbursed by the Plan. However, we found that the Plan 

could not fully support their rating methodologies in 2003 through 2005; therefore, we did not 

issue an opinion for these years with the intent to re-audit those years as part of the current audit. 

The preliminary results ofthis 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 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 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 

FEHBP Premiums Paid to Plan 

$8 

$6 

$4 

$2 

$0 

$10 

• Revenue 

2003 through 2008. For these contract years,
 

the FEHBP paid approximately $35.3 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 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 of the Plan's rating systems 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 an SSSG); 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 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 ofthe United States. 

The audit fieldwork was performed at the Plan's office in Indianapolis, Indiana, during 

November 2008. Additional audit work was completed at our office in Cranberry Township, 

Pennsylvania. 

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 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 

determine 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 

performed other auditing procedures necessary to meet our audit objectives. 

4
 
III. AUDIT FINDINGS AND RECOMMENDATIONS
 

Premium Rates 

1. Defective Pricihg $382,788 . 

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

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

adjustment for each year. We applied the defective pricing remedies for the years in question 

and determined that the FEHBP is entitled to premium adjustments totaling $382,788 (see 

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

applicable laws, regulations, and aPM rating instructions in contract years 2003, 2004, 2006, 

and 2008. 

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. aPM 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 rates that exceeded the market 

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

a downward adjustment ofthe FEHBP premiums to the equivalent market price. 

During the scope of our audit, the Plan contracted with physician hospital organization (PHD) 

providers to deliver covered services to its members. Many of these PHO contracts were 

capitated, meaning the Plan paid the PHO a fixed per-member-per-month (PMPM) amount for 

each member selecting a PHD physician. The PHO assumes the risk of incurring medical 

expenses above the capitation level. The Plan retains a certain percentage of group premiums 

to cover administrative expenses. 

In developing group premium rates, the Plan uses a capitation-based Adjusted Community 

Rating (ACR) methodology. This methodology compares group-specific capitation expense 

with actual PHD medical claims expense to determine the required change in the PHD 

capitation at a group's renewal. However, this reguired capitation increase/decrease was only 

used as a negotiating tool with its PHD. A group's actual renewal rate is based on the end 

results ofthe Plan's negotiated capitation increase/decrease. This method of setting a group's 

renewal rate is subjective and arbitrary. In order to determine whether the FEHBP received a 

market price rate, we used the required capitation increase/decrease as our basis for evaluating 

each groups' rates in each year of our audit. Further, pharmacy benefits are rated using actual 

claims expense. Lastly, special benefits, such as family planning, vision, mental health and 

substance abuse, Healthy Allies, and dental are rated using a flat-fee PMPM capitation. 

We agree with the Plan's selection of_and as the 

SSSGs for contract ear 2005. Our anal sis ofthe rates charged to the SSSGs shows that 

~or eceived a discount. 

5 
The Plan originally applied a negotiated capitation increase ofllpercent to the FEHBP's 

current capitation rate. However, we found that the required capitation increase was. 

percent. We also found that the PMPM mental health and substance abuse (MHSA) 

capitation rate used by the Plan should actually have been PMPM. Additionally, the 

family planning capitation rate of PMPM was not fully supported. We reduced it to the 

filed rate of SIIIIPMPM. Finally, we determined that the Plan overcharged the retention 

portion ofthe FEHBP dental rate. 

$.

We re-developed the FEHBP's rates by correcting the above noted exceptions. A comparison 

ofour audited line 5 rates to the Plan's proposed rates shows that the FEHBP was overcharged 

$196,932 in 2005 (see Exhibit B). 

We agree with the Plan's selection of and_as the SSSGs for 

contract year 2007. Our analysis of the rates charged to the SSSGs shows that _ 

_ received a"percent discount, which was not applied to the FEHBP._

did not receive a discount. 

For the Plan originally applied a negotiated capitation increase of. 

percent to the current capitation rate. However, we found that the required capitation increase 

was.percent. We also found that the $_PMPM MHSA capitation rate used by the 

Plan should actually have been $_ PMPM. Additionally, the ~PMPM family planning 

capitation rate used by the Plan was unsupported. We reduced it to the actual filed rate of 

$.PMPM. These exceptions resulted in receiving a II percent 

discount. . 

For the FEHBP, the Plan originally applied a negotiated capitation increase of.percent to
 

. the current capitation rate. However, we found that the required capitation increase was.
 

·percent. We also found that the ~PMPM MHSA capitation rate used by the Plan should
 

actually have been $.PMPM. Additionally, the ~MPM family planning capitation
 

rate used by the Plan was unsupported. We reduced it to the actual filed rate of ~PMPM.

Finally, we determined that the Plan overcharged the retention portion of the FEHBP dental 

rate. 

We re-developed the FEHBP's rates by correcting the above noted exceptions and applying 

the. percent discount. A comparison of our audited line 5 rates to 

the Plan's proposed rates shows that the FEHBP was overcharged $185,856 in 2007 (see 

Exhibit B). . 

Recommendation 1 

After receiving the draft report, the.Plan returned $382,788 to the FEHBP for defective 

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

questioned costs to the FEHBP, no further action is required. 

6 
2. Lost Investment Income $57,035 

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 $57,035 for lost 

investment income, calculated through April 30, 2009. 

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

Treasury's semiannual cost of capital rates. 

Recommendation 2 

After receiving the draft report, the Plan returned $57,035 to the FEHBP for lost investment 

income, calculated through April 30,2009. Since we verified that the Plan returned the total 

lost investment income amount to the FEHBP, no further action is required. 

7
 
IV. MAJOR CONTRIBUTORS TO THIS REPORT 

Community-Rated Audits Group

• 

Staff Auditor 

Staff Auditor 

Auditor-in-Charge 

Senior Team Leader 

Chief 

8
 
Advantage Health Solutions 

Summary of Questioned Costs 

Defective Pricing Questioned Costs: 

Contract Year 2005 

Contract Year 2007 

Total Defective Pricing Questioned Costs 

Lost Investment Income 

Total Questioned Costs 

Exhibit A 

$196,932 

$185,856 

$382,788· 

$57,035 

$439,823 
• • 

• • 

Exhibit B 

Advantage Health Solutions
 

Defective Pricing Questioned Costs
 

200S Contract Year 

Single Family 

Plan's Proposed Rates 

Audited Rates 

Biweekly Overcharge 

To Annualize: 

x March 31, 2005 Headcount 

x Pay Periods 

-

26 

•

26 

Subtotal· $51,145 $145,787 

Amount Due FEHBP in 2005 $196,932 

2007 Contract Year 

Single Family 

Plan's Proposed Rates 

Audited Rates 

Biweekly Overcharge 

To Annualize: 

x March 31, 2007 Headcount 

. --x Pay Periods 

-

26 

•

26 

Subtotal $62,704 $123,152 

Amount Due FEHBP in 2007 $185,856 

Total Defective Pricing Questioned Costs $382.788 
Year
 2005 2006 2007 ··2008 4/30/2009 Total 

Audit Findings:
 

Defective Pricing $196,932 $0 $185,856 $0 $0 $382,788 

Totals (per year):
 $196,932 $0 $185,856 $0 $0 $382,788 

Cumulative Totals:
 $196,932 $196,932 $382,788 $382,788 $382,788 $382,788 

Average Annual Interest Rate:
 4.375% 5.4375% 5.5000% 4.9375% 5.6250% 

Interest on Prior Years Findings:
 $0 $10,708 $10,831 $18,900 $7,177 $47,616 

Current Years Interest:
 $4,308 $0 $5,11 1 $0 $0 $9,419 

Total Cumulative Interest
 

Through April 30, 2009
 

$4,308 $10,708 $15,942 $18,900 $7,177 I $57,035 

Advantage Health Solutions
 

Lost Investment Income
 

ExbibitC 
Appendix
 

2009 APR 2I PI~ 2: 28
 

ADVANTAGE
 ...risingabove the serviceyou expect,.. , 

April 2, 2009 

Chief, Community-Rated Audits Group
 

U.S.Office of Personnel Management
 

Office of the Inspector General
 

1900 EStreets, NW
 

Room 6400
 

Washington, D.C. 20415-1100
 

Dear_: 

ADVANTAGE Health Solutions has received the draft report dated March 3, 2009, detailing the results of 

FEHBP, audit forcontract ye~rs20o.3tlar:cugh 2008. After reviewing the draft report and the details of 

the .a~dit findings;'A.,DVANTAGE:_ilgrees with the aPM and its findings for contract year 2005 of $196,132 

and for contract year 2007 of $185,856. ADVANTAGE is prepared to submit payment to the aPM in the 

amount of the audit findings for defective pricing in years 2005 and 2007 plus the lost investment 

income of $49,858. 

AOVANTAG~ wishes to submit payment promptly, please provide instructions as to where payment 

s~i?'::i1~'be sent, ,;...; 

Sincerely, 

?~u+).~·

Jennifer Ponski
 

ChieffinancialOfficer
 

ADVANTA~~Health' Solutions . i _...j , •I, ' _. ;. ''>~' : ,-~-,,:) :' i _ . 

ADVANTAGE Health Solutions, Inc. SM 

9045 River Road, Suite 200 I l 

C· .. Indianapolis, Indiana 46240 , .',c I· 

·1·877-901-2237 I www.advantageplan.com