,u.s. OFFICEOF PERSONNEL MANAGEMENT 

, "OFFICE OFTIIEINSPECTOR GENERAL' 

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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
 

Community-Rated Health Maintenance Organization
 

PacifiCare of Nevada
 

Contract Number 2899 - Plan Code K9
 

Cypress, California
 

Report No. 1C-K9-00-09-007 Da~: September 8, 2009 

Michael R. Esser 

Assistant Inspector General 

for Audits 

www.opm.goll www.usajobs.gOIl 
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
 

PacifiCare of Nevada
 

Contract Number 2899 - Plan Code K9
 

Cypress, California
 

Report No. lC-K9-00-09-007 Da~: september 8, 2009 

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

Program (FEHBP) operations at PacifiCare ofNevada (Plan). The audit covered contract years 

2004 through 2008 and was conducted at the Plan's office in Cypress, California. The audit 

showed that the Plan's rating ofthe FEHBP was in accordance with applicable laws, regulations, 

and the Office of PerSOlmel Management's rating instructions for the years audited. 

www.optn.gov www.usajobs.gov 
CONTENTS
 

Page 

EXECUTIVE SUMMARy i
 

I. INTRODUCTION AND BACKGROUND 1
 

n. OBJECTIVES, SCOPE, AND METHODOLOGy 3
 

m. RESULTS OF AUDIT 5
 

IV. MAJOR CONTRIBUTORS TO THIS REPORT 6
 
FEHBP ContractsJMembers
 

March 31
 

5,000 

4,500 

4,000 

3,500 

3,000 

2,500 

2,000 

1,500 

1,000 

500 

o 

2004 2005 2006 2007 2008 

• Contracts 2,045 1,690 1,526 1,5281,374 

o Members 4,672 3,514 3,171 3,125 2,785 

I. INTRODUCTION AND BACKGROUND
 

Introduction 

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

at PacifiCare ofNevada (plan). The audit covered contract years 2004 through 2008 and was 

conducted at the Plan's office in Cypress, California. The audit was conducted pursuant to the 

provisions ofContract CS 2899; 5 U.S.c. Chapter 89; and 5 Code ofFederal Regulations (CPR) 

Chapter 1, Part 890. The audit was performed by the Office ofPersonnel 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, amlUitants, 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 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 earners 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 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 ofMarch 31 for each contract 

year audited. 

1 
The Plan has participated in the FEHBP since 1983 and provides health benefits to FEHBP 

members throughout the Las Vegas and Clark County areas. The last audit conducted by our 

office covered contract years 1998 through 2000,2002, and 2003~ All questioned costs 

associated with that audit have been resolved. 

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 response to the audit report contained sufficient documentation to resolve 

the draft report's findings. 

2
 
$0 

$5 

$10 

$15

.Revenue 

FEHBP Premiums Paid to Plan 

II. OBJECTIVES, SCOPE, AND METHODOLOGY
 

Objectives 

The primary objectives ofthe audit were to verify that the Plan offered market price rate~ to the 

FEHBP and to verify that the loadings to the FEHBP rates were reas~nable and equitable. 

Additional tests were performed to determine whether the Plan was in compliance with the 

provisions ofthe 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 2004 

through 2008. For these years, the FEHBP paid 

approximately $54 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 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. 

3 
In conducting the audit, we relied to varying degrees on computer-generated billing, ~n:follment,

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

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 ofthe United States. 

The audit fieldwork was performed at the Plan's office in Cypress, California, during January 

2009. 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 the 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, and OPM's Rate Instructions to Community-Rated Caniers to deteffi1ine 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 

perfoffi1ed other auditing procedures necessary to meet our audit objectives. 

4
 
III. RESULTS OF AUDIT
 

Our audit showed that the Plan's rating ofthe FEHBP was in accordance with the applicable 

laws, regUlations, and OPM's rating instructions to carriers for contract years 2004 through 2008. 

Consequently, the audit did not identify any questioned costs and no corrective action is 

necessary. 

5
 
IV,; MAJOR CONTRIBUTORS TO THIS REPORT 

Community-Rated Audits Group 

Auditor-In-Charge 

Lead Auditor 

Chief 

, Senior Team Leader 

6