U.S. OFFICE OF PERSONNEL MANAGEMENT 

OFFICE OF THE INSPECTOR GENERAL 

OFFICE OF AUDITS 

Final Audit Report 

Subject: 

AUDIT OF LONG TERM CARE PARTNERS, LLC
 

... PORTSMOUTH, NEW HAMPSHIRE
 

Report No. IG-:-LT-OO-08-047 

Date: ·August 6, 2009 

--CAUTION-­

This audit-report has bccu distributed to.Federat offlcials who lire responsible for the adminish-a1iori of the audited program, This audit 

report Pial contnin proprietary data which is protected by .Federallaw(l8 O.S.c. 1905). Therefore, While tilis audit report is available 

under lhe Freed 01;' ofIntormation Act and made 3\'aililble to the public Oil the OIG wcbpagc, cautlon needs to be exercised before 

releasing thc report tothe genel'lll public as it may contain proprietary infurmnticu that was redacted front the IJublicly distdbuted copy. 
UNITED STATES OFFICE OF PERSONNEL MANAGEMENT
 

Washington, DC 20415
 

Office of the 

Inspector General 

EXECUTIVE SUMMARY
 

Federal Long Term Care Insurance Program
 

RFi> OPM.-OI-RFP-0016
 

Long Term Care Partners, LLC
 

Portsmeurh, New Hampshire
 

REI)ORT NO. IG-LT-OO-08-047 DATIc_. August. 6., 2009 

This report details the results of our audit of the Federal Long Term Care Insurance Program 

(FLTCIP) operations at Long Term Care Partners, LLC (LTCP) in Portsmouth, New Hampshire. 

The audit covered claim benefit payments, administrative expenses and cash management for the 

period of October I, 2006 through July 31, 2008. In addition, we reviewed the Statement of 

Operations and Changes in Fund Balance (Experience Fund) for the period October 1, 2006 

through September 30, 2007. The report questions a total of $459,033" Of this amount, 

$30 I,416 relates to cash management activities and $157,617 to administrative expenses. Lost 

investment income on the questioned costs subject to lost investment income amounts to 

$16,918. 

The questioned items are summarized below: 

CLAIM PAYMENTS 

• The C~aims Svstem Does Not Accurately Track Claim I'ayments Procedural 

The LTCP Claims System is not programmed to show adjustments resulting from benefit 

checks that have been voided or cancelled. 

www.oprn.goY www.usajobs.goY 
CASH MANAGEMENT
 

• Delay in Transfer of FLTCIP Premiums Procednral 

John Hancock retained premiums collected from enrollees in a general account for several days 

before transferring the funds to its FLTCIP Separate Account, which delays the investment of 

the funds. In addition, the funds were commingled with funds from John Hancock's other lines 

of business while in this general account. 

• Overstatement of the Experiencc Fund's 2007 Financial Statements $301,416 

The Federal Long Term Care Program Experience Fund's Statement of Fiduciary Operations 

and Changes in Fund Balance financial statement for fiscal year 2007 is overstated by 

$301,416. 

ADMINISTRATIVE EXPENSES 

• Unallowable Lobbying Costs $10,638 

LTCP did not deduct the lobbying costs from its AHIP membership dues for fiscal years 2002 

through April 2009. As a result, the FLTCIP was overcharged $10,638 for unallowable 

expenses. 

• Costs of Other Federal Program Charged to FLTCIP $146,979 

LTCP charged $146,979 to the FLTCIP that should have been charged to BENEFEDS. 

LOST INVESTMENT INCOME ON AUDIT FINDINGS 

The FLTCIP is due $16,918 for lost investment income on the findings presented in the
 

report that are subject to the recovery oflost investment income.
 

II 
CONTENTS
 

PAGE
 

EXECUTIVE SUMMARy ·	 , i
 

I. INTRODUCTION AND BACKGROUND	 1
 

II.	 OBJECTIVES, SCOPE, AND METHODOLOGy 2
 

III.	 AUDIT FINDINGS AND RECOMMENDATIONS 6
 

A. CLAIM PAYMENTS	 6
 

1. The Claims System Does Not Accurately Track Claim Payments 6
 

B. CASH MANAGEMENT	 6
 

1. Delay in Transfer of FLTCIP Premiums	 6
 

2. Overstatement ofthe Experience Fund's 2007 Financial Statements 8
 

C. ADMlNISTRATIVE EXPENSES	 9
 

1. Unallowable Lobbying Costs	 9
 

2. Costs of Other Federal Program Charged to FLTCIP	 I0 

D. LOST INVESTMENT INCOME ON AUDIT FINDINGS	 II
 

IV.	 MAJOR CONTRIBUTORS TO THIS REPORT 12. 

SCHEDULES 

A. Statement ofFiduciary Operations and Changes in Fund Balance 

B. Questioned Charges 

C. Lost Investment Income 

APPENDIX	 (Long Term Care Partners, LLC April 30,2009, response to the draft 

audit report) 
I. INTRODUCTION AND BACKGROUND
 

INTRODUCTION
 

This report details the results of our audit ofthe Federal Long Term Care Insurance Program 

(FLTCIP or Program) operations at Long Term Care Partners, LLC (LTCP). LTCP is ajoint 

venture between John Hancock Life Insurance Company (John Hancock) and MetropolitanLife 

Insurance Company (MetLife) (referred to as the Carriers), located in Portsmouth, New 

Hampshire. 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 Program was established by the Long Term Care Security Act (public Law 106-265), which 

was signed by the President on September 19, 2000. The Act directed OPM to develop and 

administer a long term care insurance program for Federal employees and annuitants, current and 

retired members ofthe uniformed services, and qualified relatives. 

In December 2001, OPM awarded a seven year contract to LTCP to offer long term care 

insurance coverage to eligible participants. Operations began on March 25, 2002, and the 

contract expired on April 30, 2009. (A new contract was awarded to John Hancock upon the 

expiration of the original contract.) LTCP, with OPM oversight, is responsible for all 

administrative functions of the Program, including marketing and enrollment, underwriting, 

policy issuance, premium billing and collection, and claims administration. 

Program assets are held in the "Experience Fund". Premiums received by LTCP are deposited 

into the Experience Fund and invested by the Carriers, Investment income, net of Carrier 

management fees, is retained in the Experience Fund. Claims paid by LTCP are deducted from 

the Experience Fund, and liabilities for "incurred but not reported claims" ("IBNR") are accrued 

and reported in the financial statements. 

Operating expenses incurred by LTCP for the administration ofthe Program are reimbursed from 

the Experience Fund to the Carriers, subject to expense guarantees stipulated in the contract and 

according to defined timelines and funds availability. Interest on any outstanding balance owed 

to the Carriers accrues at the rate of return earned by the Experience Fund. 

Compliance with laws and regulations applicable to the Program is the responsibility of LTCP 

management. Also, management ofLTCP is responsible for establishing and maintaining a 

system of internal controls. 

Our previous audit ofLTCP (Report No. IG-LT-00-07-055, dated August 4, 2008) questioned an 

issue that is still occurring in our current audit. The issue relates to the commingling ofLTCP 

funds with funds from the Carriers' other lines of business. All other issues from the audit were 

satisfactorily resolved. 

I
 
II. OBJECTIVES, SCOPE, AND METHODOLOGY
 

OBJECTIVES
 

The purpose of the audit was to determine whether charges to the Program and claims services 

provided to Program members were in accordance with the terms ofthe contract and applicable 

regulations. The audit objectives are presented below. 

• Long Term Care Benefit Claim Payments 

To determine whether LTCP complied with the contract provisions relative to claim 

payments. 

• Cash Management: 

Experience Fund Revenues 

To determine whether premiums were properly deposited into the Experience
 

Fund and invested by the Carriers.
 

To determine whether the Carriers invested and reinvested all FLTCIP funds on hand 

until needed to discharge the obligations incurred under the contract. 

Experience Fund Expenses 

To determine whether reimbursements to the Carriers from the Experience Fund were in 

accordance with the terms of the contract, including any subsequent modification, and 

applicable regulations. 

• Administrative Expenses 

To determine if the administrative expenses charged to the FLTCIP were actual, necessary, 

and reasonable. 

SCOPE 

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 audit findings and 

conclusions based on the audit objectives. We believe that the evidence obtained provides a 

reasonable basis for our findings and conclusions based on our audit objectives. 

We reviewed the LTCP audited statements ofFiduciary Operations and Changes in Fund 

Balance (Experience Fund) and the Operations and Changes in Member's Equity for the year 

ended September 30, 2007. In addition, we reviewed the investment income for the period of 

October 1,2006 through July 31, 2008. Finally, we reviewed internal statements ofthe 

2
 
Fiduciary Operations and Changes in Fund Balance and the Operations and Changes in 

Member's Equity from October 1,2007 through July 31, 2008. 

For fiscal year 2007, premiums and investment income to the Experience Fund totaled $341 

million and expenses from the Experience Fund totaled $79 million. The expenses included such 

things as on-going expenses and liabilities (profit charges, deferred acquisition cost (DAC) tax, 

interest expense, OPM administrative expenses, and claim payments). The Plan paid 

$14,136,832 in long term care claim payments during fiscal year2007 and $17,183,979 from 

October 1,2007 through July 2008, resulting in total claim payments of $31,320,811 for the . 

period reviewed. In addition, LTCP charged the FLTCIP administrative expenses of 

$17,585,200 during fiscal year 2007 and $17,083,210 from October 1,2007 through July 2008, 

resulting in total paid administrative expenses of $34,668,41 0 for the period reviewed. 

We reviewed $2,223,594 in claim payments made from October 1,2006 through July 31, 2008, 

for proper adjudication. We also reviewed $25,687,016 in Experience Fund disbursements (i.e., 

profit charges, DAC taxes, interest expenses, OPM administrative expenses, and on-going 

expense reimbursements). The on-going expense reimbursements included administrative 

expenses incurred by LTCP and the Carriers that were charged to the Program. 

In planning and conducting our audit, we obtained an understanding of LTCP's internal control 

structure to help determine the nature, timing, and extent ofour auditing procedures. This was 

determined to be the most effective approach to select areas for audit. For those areas selected, 

we primarily relied on substantive tests oftransactions and not tests of controls. Based on our 

testing, we did not identify any significant matters involving LTCP's internal control structure 

and its operation. However, since our audit would not necessarily disclose all significant matters 

in the internal control structure, we do not express an opinion on LTCP's systemofintemal 

controls taken as a whole. 

In conducting our audit, we relied to varying degrees on computer-generated data provided by 

LTCP. Due to time constraints, we did not verify the reliability ofthe data generated by the 

various information systems involved. However, while utilizing the computer-generated data 

during audit testing, nothing carne to our attention to cause us to doubt its reliability. 

Consequently, we believe that the data was sufficient to achieve our audit objectives. 

We also conducted tests to determine whether LTCP and the Carriers had complied with the 

contract, the applicable procurement regulations (i.e., Federal Acquisition Regulations), and the 

laws and regulations governing the Program. Exceptions noted in the areas reviewed are set 

f011h in detail in the "Audit Findings and Recommendations" section of this audit report. With 

respect to the items not tested, nothing came to our attention that caused us to believe that LTCP 

and the Carriers had not complied, in all material respects, with those provisions. 

METHODOLOGY 

To test LTCP's compliance with the contract provisions relative to long term care claim 

payments, we selected and reviewed a judgmental sample ofthe 150 highest dollar value claims 

from a universe of 14,191 claims. Of the $31,320,811 in claim payments made from October 1, 

3
 
2006 through July 31,2008, we reviewed a total of $2,223,594. We also reviewed LTCP's 

CARE Policy Administration System for eligibility and coverage (e.g., insured's personal 

information screen, coverage summary screen, and copy of signed policy application), and 

supporting documents (e.g., copies of claims, explanations of benefits, approvals of claim 

payments, the paid claim check numbers, and amounts in the applicable bank statements) to 

determine the alJowability ofthese payments. 

To determine if the premiums collected were properly deposited into the Experience Fund, we 

judgmentally selected and reviewed the activity occurring during the month of July 2007 for 

each carrier. We reviewed the bank statements and verified that the amount collected by LTCP 

was transferred to the carrier's separate accounts.. To address an audit issue reported in a 

previous audit, we also reviewed and verified whether the premiums collected by LTCP, from 

October 1, ,2006 through July 31, 2008, were properly deposited into the John Hancock General 

Account and then transferred to the John Hancock Separate Account in a timely manner. 

Finally, to determine whether the funds received were properly invested, we selected and 

reviewed the Carriers' schedules of investment income for the 4th quarter offiscal year 2007 and 

the month of July 2008. 

To determine the appropriateness ofthe disbursements from the Experience Fund, we 

judgmentally selected and reviewed a sample ofthe 18 highest reimbursements from fiscal year 

2007. These disbursements were related to profit charges, DAC taxes, State Street (the Carriers' 

investment account) fees, asset profit, aPM expenses, and on-going expenses. Ofthe universe 

of $55,764,645 in reimbursements to the Carriers for fiscal year 2007, we reviewed a total of 

$25,687,016. We reviewed the Carriers' bank statements for the Separate Accounts and verified 

that the amounts reimbursed to the Carriers agreed to the expenses incurred and the liabilities 

due. 

To determine if the administrative expenses were actual, necessary, and reasonable, we selected 

20 of108 natural expense accounts from 11 cost centers paid during the period October 1, 2006 

through September 30,2007 for potential review. The accounts were selected based on highest 

dollar amount and account name. From the 20 accounts, we selected 27 monthly transactions for 

detailed review based on the highest monthly transaction amounts. From 27 monthly 

transactions, we selected 42 invoices. The total value ofthe invoice sample was $1,269,598 out 

of a universe of $17,580,105. 

Additionally, we selected a second sample of 10 out of 120 natural expense accounts paid during 

the period October 1, 2007 through July 31, 2008. Like the first sample, these accounts were 

also selected based on highest dollar amount and account name. From the 10 accounts, We 

selected 10 monthly transactions for detailed review based on the highest monthly transaction 

amounts. From 10 monthly transactions, we selected 26 invoices. The total value ofthe invoice 

sample was $859,204, from a universe of $14,486,709. For both samples, we reviewed each 

account description to ensure that only allowable costs were charged to the account. 

Because the samples we selected and reviewed in performing the audit were not statisticalIy 

based, the results could not be projected to the universe since it is unlikely that the results are 

representative of the universe taken as a whole. 

4 
We used provisions of the contract (OPM-OI-RFP-0016), Public Law 106-265, and Federal 

Acquisition Regulations to determine the allowability, allocability, and reasonableness of the 

administrative expenses charged against the contract. 

The results of our audit were provided to LTCP in the form of audit inquiries and discussed with 

LTCP officials throughout the audit and at the exit conference. In addition, a draft report, dated 

March 3, 2009, was provided to LTCP for review and comment. LTCP's comments on the draft 

report were considered in preparing the final report and are included as an Appendix to this 

report. 

5
 
III. AUDIT FINDINGS AND RECOMMENDATIONS
 

A. CLAIM PAYMENTS
 

1. The Claims System Does Not Accurately Track Claim Payments Procedural 

The LTCP's. claims system is not programmed to show adjustments resulting from 

benefit checks that have been voided or cancelled. As a result, the claims paid 

amount recorded in the claim system could be potentially overstated and not in 

agreement with the paid claims amount recorded in LTCP'saccounting system. 

We noted this discrepancy during our review ofthe claims system when it appeared 

that two payments were made for one claim. However, upon further review we found 

that when benefit checks are voided, LTCP makes a manual entry on the "Transfer 

Report to the Bank Transactions" spreadsheet. Then, at the end of each month, LTCP 

reconciles all claim checks issued, paid, outstanding, and voided. This reconciliation 

agrees the check book balance, the general ledger account balance, and the "Transfer 

Report to the Bank Transactions" spreadsheet to the bank statement and bank 

reconciliation statement. However, the claim system is not automatically 

programmed to reconcile or adjust for voided checks or other types of adjustments. 

Consequently, its balance will not agree with the amount recorded in the accounting 

system. 

We believe the claim system should be programmed to account for voided checks, as 

well as for other claim adjustments. This would ensure that the system accurately 

reflects and accounts for claims actually paid and would tie in with the claims paid 

amount entered into the accounting system. It would also prevent the possibility of 

the voided payments not being corrected, which would result in the overstatement of 

the claims expense in the financial statements. 

LTCP Comments: 

LTCP agrees with this finding. They said that they identified this issue on a list of 

items that will be included in a future release, scheduled for later this year and 

contingent on Contract renewal. 

Recommendation 1 

We recommend that the contracting officer require LTCP to enhance its claim system 

to include adjustments for voided checks and other items, as appropriate. 

B. CASH MANAGEMENT 

1. Delay in Transfer of FLTCIP Premiums Procedural 

John Hancock's cash management procedures direct LTCP to transfer premiums 

collected from enrollees into John Hancock's general account, where they are held for 

6
 
several days before John Hancock transfers the funds to its FLTCIP Separate 

Account. This process delays the investment of the funds and results in the loss of 

investment income. Additionally, as this was an issue in our previous audit that had 

not been corrected as ofJuly 31, 2008, we also concluded that amounts contained in 

the general account continued to be commingled with funds fromJolm Hancock's 

other lines of business. Contract OPM-OI-RFP-0016, Part IV, section A(a)(3) 

requires the Contractor (John Hancock and Met Life) to account for FLTCIP funds 

separately from its other lines ofbusiness. 

LTCP premiums, collected through payroll deductions, automatic bank withdrawals, 

and direct payments, are deposited into commercial bank accounts. LTCP then 

transfers the funds to the general accounts of both Carriers, who subsequently transfer 

the funds to their FLTCIP Separate Accounts. MetLife's account contains only 

FLTCIP funds, and normally, the funds going into the account are transferred to its 

FLTCIP separate account on the same day received. Once in the FLTCIP Separate 

Account, the funds are available {or investment. In contrast, we found that John 

Hancock held the funds in its general account from one to six days before transferring 

them to its FLTCIP Separate Account. The Program earns no income on the funds 

while held in the general account, and the funds are commingled with funds from 

other lines of business. 

The FLTCIP contract (OPM-01-RFP-0016, section 1.48 (Investment Income» 

provides that the carriers are to invest and reinvest all FLTCIP funds on hand until 

needed for obligations incurred under the contract. It states that when the contracting 

officer concludes that 3 carrier failed to comply with this provision, the carrier is to 

pay to the FLTCIP fund the investment income that would have been earned, based 

on rates established by the Secretary of the Treasury. For the period October 1,2006 

through July 31, 2008, LTCP transferred $277,522,860 to John Hancock's general 

account. Ofthis amount, $36,127,500 was kept in John Hancock's general account 

for one to six days before being transferred to their Separate Account. We calculated 

lost investment income on the Program funds held in John Hancock's general account 

in accordance with the contract. However, LTCP was able to support that it was 

adjusting the Experience Fund for losses resulting from the transfer delays. 

Consequently, we are not questioning an amount related to this issue in our final 

report. 

We were informed by LTCP that John Hancock opened an FLTCIP dedicated 

investment account on September 17,2008 and no longer delays transferring Program 

funds from its general account to its FLTCIP Separate Account. 

LTCP Comments: 

In regard to commingling ofProgram funds with other lines of business, LTCP said 

that a "separate" General Account for the FLTCIP funds was established in 

September 2008, and the procedures recommended in the fiscal year 2006 audit 

report were implemented. 

7
 
OIG Response 

We verified that John Hancock established a "separate" General Account
 

dedicated to the FLTCIP funds as of September 2008 and no longer delays
 

transferring Program funds. The establishment and use of this account also
 

addresses our concerns related to the commingling ofProgram funds.
 

Therefore, no further action is necessary at this time.
 

2. Overstatement of the Experience Fund's 2007 Financial Statements $301,416 

The Experience Fund balance in the Federal Long Term Care Experience Fund, 

Statement ofFiduciary Operations and Changes in Fund Balance financial statement 

for fiscal year 2007 is overstated by $301,416. 

We reviewed and reconciled the FLTCIl?'s Experience Fund Statement, Deferred 

acquisition costs (DAC) tax to the DAC Tax Carrier's Schedule and found a 

difference of$301 ,416. LTCP inadvertently miscalculated MetLife's DAC tax 

amounts during the months of April to September of2007. Although LTCP made the 

adjustment to its accounting books for fiscal year 2007, the adjustment is not reflected 

in the 2007 Federal Long Term Care Experience Fund's Statement of Fiduciary 

Operations and Changes in Fund Balance. As a result, the Experience Fund balance 

was overstated by $30 1,416. 

We informed LTCP ofthis variance during our on-site visit. LTCP provided a 

revised schedule of DAC tax which supports the correction. In addition, LTCP 

provided documentation supporting the general ledger adjustment of$301,416 made 

on September 30,2007. According to LTCP,the correction was done in fiscal year 

2007 after the hooks were closed. Consequently, the adjustment impacted the 

. retained earnings and liability accounts instead of the expense and liability accounts. 

However, because the financial statements were finalized, LTCP decided not to 

reflect the adjustment in fiscal year 2007 statements. 

LTCP Comments: 

LTCP agrees with the finding. It stated that the error of $301 ,416 was identified as an 

uncorrected misstatement in the Summary of Uncorrected Misstatements in its 

September 30,2007 financial statement audit performed by its external audit firm 

RSM McCladrey. However, it was not disclosed in the Experience Fund Financial 

Statements. The variance was identified by LTCP prior to the publication ofthe 

financial statements but subsequent to the completion of fieldwork. Given that the 

'amount ofthe error as compared to the 2007 Experience Fund's total premium 

revenue was deemed to be immaterial, LTCP decided not to make an adjustment to 

the financial statements. However, a correcting entry was made by LTCP to the 

Fund's general ledger. 

8 
OIG Response 

We concur with LTCP's comments and verified that appropriate adjustments 

to the Fund's general ledger account were made. However, to date, we have 

not been provided with a copy ofthe subsequent year's financial statements to 

ensure that this overstatement was corrected. 

Recommendation 2 

We recommend that the contracting officer request and review a copy ofthe Federal 

Long Term Care Experience Fund, Statement of Fiduciary Operations and Changes in 

Fund Balance for fiscal year 2008 to verify that LTCP corrected the statements for the 

fiscal year 2007 overstatement. 

c. ADMINISTRATIVE EXPENSES 

1. Unallowable Lobbying Costs $10,638 

LTCP did not deduct the lobbying costs from their American Health Insurance Plans 

(AHIP) membership dues during fiscal years 2002 through April 2009. As a result, 

the FLTCIP is due $10,638. 

48 CFR 31.205.-22(c) states, "When a contractor seeks reimbursement for indirect 

costs, total lobbying costs shall be separately identified in the indirect cost rate 

proposal, and thereafter treated as other unallowable activity costs." OUf review of 

account 61135, Dues & Fees, from the inception of the Program through fiscal year 

2008, showed that the AHIP membership dues charged to the FLTCIP included 

lobbying costs and other unallowable costs. 

The FLTCIP's AHIP membership dues for the 2006 Benefit Year state, "An estimated 

20% ofyour AHIP dues are attributable to lobbying activities & grassroots efforts on 

behalf of members and is not deductible." Ofthe $10,638 in unallowable charges, 

$2,910 was identified based on our analysis of the charges incurred in fiscal year 

2007. The remaining $7,728 was found by LTCP as a result of a review of the Dues 

& Fees account that it conducted in response to our draft audit report. Based on our 

review of the supporting documentation provided by LTCP, we agree with the 

overcharges it identified. 

LTCP Comments 

LTCP agrees that lobbying costs are non-reimbursable expenses. LTCP has reviewed 

all expenses charged to the Dues & Fees account from the Contract's inception 

through April 4, 2009, and determined that AHIP membership dues of$53,188 were 

charged to the FLTCIP contract during this time. Consequently, LTCP adjusted the 

account for $10,638 (20% of$53,188) on April 30, 2009, to reclassify the expense 

and charge it to its corporatecost center. 

9
 
Recommendation 3 

We recommend that LTCP ensure that the FLTCIP is not charged for unallowable 

lobbying costs in future years. 

2. Costs of Other Federal Program Charged to FLTCIP	 $146,979 

LTCP charged $146,979 to the FLTCIP that should have been charged to the
 

BENEFEDS Contract.
 

Contract RFP OPM-OI-RFP-0016, Part IV, section K9 Accounting and Allowable 

Cost (b) (ii) Administrative Expenses states, "Administrative Expenses consist of all 

actual, allocable, allowable, and reasonable expenses incurred in the adjudication of 

claims or incurred in the Carrier's overall operation of the business. Unless otherwise 

provided in the contract or FAR, administrative expenses include, but are not limited 

to, taxes, insurance and reinsurance premiums, the cost of investigation and 

settlement of claims, the cost ofmaintaining files regarding payment of claims, and 

legal expenses incurred in the litigation of benefit payments." 

We reviewed the invoice transactions for fiscal year 2007, and found the following: 

•	 One invoice from Carousel Industries ofNorth America for the amount of 

$131,986, for Telecom equipment to prepare the BENEFEDS Call Center for 

Open Season. 

•	 Two invoices from Web Performance, Inc., for $14,993, for a software 

maintenance contract for software to load test the BENEFEDS website. 

We informed LTCP of the error through an e-mail on May 19, 2009. LTCP agrees
 

that the costs in question were incorrectly classified as FLTCIP expenses.
 

Subsequent to the completion ofthe audit, LTCP provided us documentation showing
 

that it corrected the error in fiscal year 2009.
 

OUf previous audit also showed that other federal program expenses were incorrectly
 

charged to the FLTCIP. As this is still a concern in our current audit, we believe that
 

LTCP should revise or evaluate its internal controls to prevent the costs of other
 

federal programs from being charged to the FLTCIP going forward.
 

LTCP Comments 

LTCP agrees with this finding and corrected for these errors during May of2009. 

Recommendation 4 

As this was an audit finding in the previous audit, we recommend that LTCP improve 

oversight of its cost segregation practices amongst its various programs to ensure that 

the FLTCIP is only charged for its program-related costs. 

10
 
D. LOST INVESTMENT INCOME ON AUDIT FINDINGS $16,918 

The FLTCIP is due $16,918 for lost investment income on the findings subject to the 

recovery of lost investment income 

The FLTCIP contract (OPM-OI-RFP-00I6, section 1.48 (Investment Income» requires, 

among other things, that the carriers pay the Program lost investment income on charges 

made against the contract which are not allowable, allocable, or reasonable. It provides 

that all amounts payable will bear simple interest compounded semiannually at the rates 

established by the Secretary ofthe Treasury. 

We computed investment income that would have been earned using the semiannual rates 

specified by the Secretary of the Treasury on a fiscal year basis. The computations show 

that the FLTCIP is due $16,918 for lost investment income, calculated for the period 

from October 1,2005 through June 30, 2009, on questioned costs for fiscal years 2006 

through 2009. 

LTCP Comments: 

The draft report did not include a section covering lost investment income on the audit 

findings. Therefore, the Plan did not address lost investment income in commenting on 

the draft report. However, it should be noted that LTCP did return to the program 

amounts questioned related to unallowable lobbying costs ($10,638) and costs of other 

federal programs charged to the FLTCIP ($146,979) in April and May of2009. 

Consequently, future years' interest calculations should be adjusted to reflect the return 

of these funds to the Program. 

Recommendation 6 

We recommend that the contracting officer direct the Plan to credit the FLTCIP $16,918, 

plus interest accruing after June 30,2009, on the remaining audit findings to the 

Experience Fund for lost investment income. 

II
 
IV. MAJOR CONTRIBUTORS TO THIS REPORT 

.Special Audits Group 

, Auditor 

Auditor-In-Charge 

, Group Chief (202) 606-4745 

Senior Team Leader 

12
 
SCHEDULE A 

Long Term Care Partners, LLC
 

Portsmouth, New Hampshire
 

Statement of Fiduciary Operations and Changes in Fund Balance
 

(Recreated from the IPA Financial Statements)
 

Fiscal Year 2007 

Revenue 

Premiums revenue $295,625,215 

Invesunentincorne 45,359,002 

Total revenue $340~984,217

Expenses 

Claims expenses, including changes in disabled life reserves $30,727,625 

Deferred acquisition costs tax 7,681,142 

Profit char~e 22,221,599 

Interest expense 214,345 

OPM administrative expenses 633,914 

LTCP administrative expenses 17,585,200 

Total expenses $79~063,825

Change in fund balance $261,920,392 

Fund balance at beginning of year 782,005,782 

Fund balance at end of year $1,043~926,174
SCHEDULEB 

LONG TERM CARE PARTNERS, LLC 

I PORTSMOUTH, NEW HAMPSHIRE , , 

QUESTIONED CHARGES 

QUESTIONED CHARGES 

A. CLAIM PAYMENTS 

1. The Claims System Does Not Accurately Track Claim Payments 

B. CASH MANAGEMENT 

1. Delay in Transfer of FLTCIP Premiums 

2. Overstatement of the Experience Fund's 2007 Financial Statements
 

TOTAL CASH MANAGEMENT I
 

FISCAL YEAR 

2007 

Procedural. 

Procedural 

$301,416 

$301,416 

$10,638 

146,979 

$157,617 

$459,033 

I 

C. ADMINISTRATIVE EXPENSES 

l. Unallowable Lobbying Costs
 

2.· Cost of Other Federal Program Charged to FLTCIP
 

TOTAL ADMINISTRATIVE EXPENSES I
 

TOTAL QUESTIONED CHARGES I I 
LONG TERM CARE PARTNERS, LLC 

PORTSMOUTH, NEW HAMPSHIRE 

LOST INVESTMENT INCOME 

SCHEDULEC 

FY 2005 

(10/1104-9130/05) 

FY 2006 

(10/1105-9130/06) 

FY 2007 

(10/1106-9/30/07) 

FY 2008 

(10/1107-9/30/08) 

FY 2009 

(10/1108-9130/09) Total 

QUESTIONED CI!i\RGES (Subject to Lost Investment Income) 

ADMINISTRATIVE EXPENSE CHARGES 

I. Unallowable Lobbying Costs 

2. Costsof OtherFederalProgramCharged to FLTCIP 

$1,132 

50 

$2,910 

$0 

52,182 

$146,979 

$2,668 

$0 

51,746 

$0 

510,638 

$146,979 

CUMULATIVE TOTALS $1132 $4042 5153203 $155871 $157617 $157,617 

LOST INVESTMENT INCOME CALCULATION 

a. Prior Year's Total Questioned (Principal) 

b. Prior Year's Interest 

c. Cumulative Total 

$0 

Q 

IQ 

51,132 

Q 

$1.132 

54,042 

a 

$4,100 

5153,203 

284 

5153,487 

$155,871 

8,112 

$163,983 

Treasury Rates 

d. Average Interest Rate (per fiscal year) . e. Interest OD Prior Years findings $0 $58 $226 $7,828 $8,806 516,918 

Total Interest by Year $0 $58 $226 $7,828 $8,806 $16,918 
Appendix 

Long Term Care Partn~rs. llC c;*.lo~TermCare 100 Arboretum Drive -, Partners, LLC 2889 MAY 6 PH 31 8ismouth. NH0380l·7833 

April 30, 2009 

Chief 

Special Audits Group 

Office ofthe Inspector General 

U. S. Office of Personnel Management
 

Theodore Roosevelt Building
 

1900 E St. NW, Room 6400
 

Washington, DC 204 I5-1100
 

Re: Audit Report Number IG~LT~OO~08~047

Dear_, 

We have received and reviewed Audit Report Number 1G-LT-OO-08-047, which reported on Federal 

Long Term Care Insurance Program (FLTCIP) operations at Long Term Care Partners, LLC during 

FY2007 and FY2008 through July 31, 2008. Thank you for providing us with an opportunity to 

respond to the issues identified in the report. 

Audit Finding AI: Claims System Does Not Accurately Tralk Claim Payments 

This procedural issue addresses the fact that our claims system is not programmed to correctly reflect 

the processing of void checks and related adjustments. We,agree with this finding, and have identified 

this issue ona list ofitems to be included in a future release, scheduled for later this year and 

contingent on Contract renewal. In the meantime, we will continue to account for these by means of 

our current process. 

Audit Finding BI: Delav in Transfer of FLTCIP Premiums 

With respect to Audit Finding B1, Delay in Transfer of FLTCIP Premiums, we agree that during the 

period in question, October I, 2006 through July 3], 2008, the cash management procedures of 

_FLTCIP premiums as performed by John Hancock were as described in the draft audit report. 

However, we don't agree that the procedures in place resulted in lost investment income to the Plan. 

As shown in the "Interest and Balances Jll.xls'' file which we provided. toyou on January 29,2008, 

and again in August, 2008, the FY2007 ,FLTCIP Experience Fund liability to John Hancock was 

reduced by an interest credit of$105,388 to offset the impact ofthe delay in-transferring the funds to 

the Separate Account. Additionally, for the period October), 2007 through September 30, 2008, 

$12,590 was credited. The total interest credit applied during the periodinquestion df$117,978 

exceeded the amount of lost investment income of $4] ,309 identified in the.aadlrreportby $76,669. 

An equi valent amount ($Il 7,978) of interest income was recorded in .the Expdnente(Fundfinancial 

statements for the same period. Moreover, during the timeframe ill whichthe cash management 

procedures as described in the report were in place (from August 28, 2003 through September 17, 

2008), a total credit of$1,317,667 has been applied to the liability balance owed to John Hancock. 

This amount of interest income is significantly higher than the combined total of lost investment 
income ($276,869) identified in the FY2005 final audit report ($41,907), the FY2006 audit report
 

($193,653), and the draft FY2007/2008 audit report ($41,309).
 

With regard to the commingling ofFLTCIP premiums with fundsfrom other lines ofJohn Hancock's 

Business, which was described in the draft report, a "separate" General Account for the FLTCIP funds 

was established in September 2008, as was noted in the draft report, and the procedures recommended 

. in the FY2006 audit report have been implemented. The Bank ofAmerica account name is "John 

Hancock Life Insurance Company Federal Long Term Care Clearing Account," and the account 

number is 004622423553. A copy ofthe October 2008 bank statement is included with this letter. 

Audit Finding B2: Overstatement of 2007 Financial Statements 

With respect to Audit Finding B2, we agree that the FY2007 Experience Fund Financial Statements 

were overstated by $301,416 due to an error in the calculation ofMetLife's DAC tax for the period of 

April to September 2007. This error wasidentified as an uncorrected misstatement in the Summary of 

Uncorrected Misstatements, September 30,2007 provided by our external audit finn, RSM 

McGladrey. However, it was not disclosed in the Experience Fund Financial Statements themselves. 

The variance was identified by us prior to the publication ofthe financial statements, but subsequent to 

the completion offieldwork. It was decided that given the amount ofthe error as compared to the total 

Premium Revenue ofthe Experience Fund for 2007, the impact ofthe known variance was immaterial 

and an adjustment was not made to the Financial Statements. However, a correcting entry was made by 

LTCP to the Fund's general ledger. A copy ofthe Summary ofUncorrected Misstatements is included 

with this letter. 

Audit Finding Cl: Unallowable Lobbying Costs 

With respect to this finding, we have reviewed 48 CFR 31.205.22(c), and agree that lobbying costs are 

a non-reimbursable expense, A review of account 61135, Dues and Fees, from Contract inception 

through 4/30/09 indicates that AHIP membership dues of$53,188.14 have been charged to the 

FLTCIP contract during this period. Consequently, an adjustment of$10,637.63 (20% ofthe total) has 

been made to reclassify this expense and charge it to our corporate cost center. A copy ofthe 

adjustment is attached. 

Deleted by the OIG
 

Not Relevant to the Final Report
 

2
 
We appreciate the opportunity to respond to the draft report, and hope that our responses have
 

provided the information and clarification needed to resolve these issues.
 

or require further information, please don't hesitate to contact me at. 

Sincerely, 

~J·~/cro Linda S. Roth, CFO
 

Long Term Care Partners, LLC
 

Enclosures 

cc:
 

FSA, Life and Long Term Care Insurances Group
 

Insurance Services Programs
 

Chief
 

Program Planning and Evaluation Group
 

Deputy Chief Financial Officer 

3