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U.S~OFFICEOF PERSONNEL MANAGEMENT 

OFFICE OF THE INSPEctoRGENEm 

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This.audit repl,lJ-t hasbeen distributed 10 Federal offidals who are responslblef')r theadministratioil oftheaudiled program•.this 

.auditl-epOi1may contain pl'9prietary data which is protcCied by Fedel-ai law (iSU.S.C. 1905), Therefoi-e, whiie tllis iiuditrep9rt is 

3vailal;* under the Freedom ')f1nrDrina~iml Attand madeavaiIablcto the pupli': on the ole webpage,cautioJl.Jlceds to be exerCise.d 

before r:eleasing the report io the generai public as it may ~on!ain proprietary information that was redacted from tile PilbliClY 

dis!j-ibutedeopy. . 
UNITED STATES OFFICE OF PERSONNEL MANAGEMENT 


Washington, DC 20415 


Office oUII'.". 

Inspector G(".I;\~ral 

AUDIT REPORT 


Federal Employees Health Benefits Program 


Community-Rated Health Maintenance Organization 


PacifiCare of Texas 


Contract Number 2908- Plan Code GF 


Cypress, California 


Report No. lC-GF-OO-09-006 Date: September 8, 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 

Inspector General 

EXECUTIVE SUMMARY 


Federal Employees Health Benefits Program 


Community-Rated Health Maintenance Organization 


PacifiCare of Texas 


Contract Number 2908 - Plan Code GF 


Cypress, California 


Report No. lC-GF-OO-09-006 Date: September 8, 2009 

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

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

2006 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 ofPersonnel Management's rating instructions for the years audited. 

www.opm.gov www.usaJobs.gov 
CONTENTS 


Page 

EXECUTNE SlJMMARy............................................................................................... i 


I. INTRODUCTION AND BACKGROUND ................................ ~ .................................... 1 


II. OBJECTNES, SCOPE, AND METHODOLOGY ......................................................... 3 


III. RESULTS OF AUDIT .................................................... ; ............................................... 5 


N. MAJOR CONTRIBUTORS TO THIS REPORT ............................................................ 6 

I. INTRODUCTION AND BACKGROUND 

In trod uction 

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

at PacifiCare ofTexas (Plan). The audit covered contract years 2006 through 2008. The audit 

was conducted pursuant to the provisions ofContract CS 29G8; 5 U.S.C. Chapter 89; and 5 Code 

of Federal Regulations (CFR) Chapter 1, Part 890. The audit was perfonned 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, ammitants, 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 carriers to the Federal Employees Health Benefits Act 

and implementing regulations promulgated 

byOPM. FEHBP Contracts/Members 

March 31 

The FEHBP should pay a market price rate, 

which is defined as the best rate offered to 

either ofthe two groups closest in size to the 

FEHBP. In contracting with communityrated 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 Dallas and San' Antonio areas. The last audit conducted by our office 

covered contract years 2001 through 2005. The audit showed that the Plan's rating of the 

FEHBP was in accordance with the applicable laws, regulations, and OPM's rating instructions 

for the Yl:ars audited. 

The preliminary results ofthis audit were discussed with Plan officials at an exit conference and 

through subsequent correspondence. Since the audit showed that the Plan's rating ofthe FEHBP 

was in accordance with the applicable laws, regulations, and instructions, we did not issue a draft 

report. 

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 

FEHEP 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 ofthe laws and regulations governing the FEHBP. 

We conducted this perfOlmance 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 2006 

r-----------------------------~ 

FEHBP Premiums Paid to Plan 

$40 

$30 II! 

I: 

~ 

~ $20 

$10 

$0 

through 2008. For these years, the FEHBP paid 


approximately $106.7 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 ofdetecting 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 ofthe 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 the 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, enrollment, 

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 rdiability. 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 perfonned at the Plan's office in Cypress, California, during January 

2009. Additional audit work was completed at our field 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 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 

perfonned 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, arid OPM's rating instructions for contract years 2006 through 2008. 

Consequently, we did not identify any questioned costs and no corrective action is necessary. 

5 

IV. MAJOR CONTRIBUTORS TO THIS REPORT 

Comniunity-Rated Agdits Group 

Auditor -In-Charge 

Lead Auditor 

Chief 

Senior Team Leader 

6