U.S. OFFICE OF PERSONNEL MANAGEMENT 

OFFICE OF THE INSPECTOR GENERAL 

OFFICE OF AUDITS 

Final Audit Report 

Subject: 

Audit of the Federal Employees Health Benefits 

Program Operations of FirstCare - West Texas 

Report No. lC-CK-OO-08-063 

Date: September 30, 2009 

-- CAUTION-­

This audit report has been distributed to Federal officials who are responsible for the administration of the audited program. This 

audit report may contain proprietary data which is protected by Federal law (18 u.s.c. 1905). Therefore, while this audit report is 

available under the Freedom of Information Act and made available to the public on the OIG webpage, caution needs to be exercised 

before releasing the report to the general public as it may contain proprietary information that was redacted from the publicly 

distributed copy. 
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
 

First Care - West Texas
 

Contract Number 2321 - Plan Code CK
 

Austin, Texas
 

Report No. lC-CK-OO-08-063 Da~:September 30, 2009 

;lW:'ezc 

Michael R. Esser 

Assistant Inspector General 

for Audits 

. ~----- .._.._ _----~_._-_._----- _._._~_ .. -. -----­

www.opm.goy www.usajobs.goy 
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
 

First Care - West Texas
 

Contract Number 2321 - Plan Code CK
 

Austin, Texas
 

Report No. lC-CK-OO-08-063 Da~September 30, 2009 

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

Program (FEHBP) operations at First Care - West Texas (Plan). The audit covered contract 

years 2004 through 2008 and was conducted at the Plan's office in Austin, Texas. Additional 

field work was performed at our field office in Jacksonville, Florida. This report questions 

$561,007 for defective pricing in 2005 and 2006, including $95,411 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 2004, 2007, and 2008 

We determined that the FEHBP rates were overstated by $384,782 for contract year 2005 

because the Plan incorrectly calculated a benefit adjustment factor and did not apply a similarly 

sized subscriber group (SSSG) discount to the FEHBP rates. In addition, we determined that the 

FEHBP rates were overstated by $80,814 for contract year 2006 because the Plan did not apply 

an SSSG discount to the FEHBP rates. Also, the Plan could not provide adequate documentation 

to support the rates charged to the FEHBP and the SSSGs for all years audited. 

Consistent with the contract, the FEHBP is due $95,411 for lost investment income, calculated 

through July 31, 2009, on the defective pricing findings in 2005 and 2006. In addition, we 

recommend that the contracting officer recover lost investment income on amounts due for the 

period beginning August 1, 2009, until the funds have been returned to the FEHBP. 

www.opm.goy www.usajobs.gcv 
CONTENTS
 

EXEClTTIVE SlTMMARY	 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
 

3. Records Retention	 7
 

IV.	 MAJOR CONTRIBUTORS TO THIS REPORT 9
 

Exhibit A (Summary of Questioned Costs)
 

Exhibit B (Defective Pricing Questioned Costs)
 

Exhibit C (Lost Investment Income)
 

Appendix (First Care - West Texas' May 14,2009, response to the supplemental draft
 

report)
 
I. INTRODUCTION AND BACKGROUND
 

Introduction 

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

at First Care - West Texas (Plan). The audit covered contract years 2004 through 2008 and was 

conducted at the Plan's office in Austin, Texas. The audit was conducted pursuant to the 

provisions of Contract CS 2321; 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 of the 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 by OPM. 

The FEHBP should pay a market price rate, FEHBP Contracts/Members 

which is defined as the best rate offered to March 31 

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 of the FEHBP. 

The chart to the right shows the number of 

FEHBP contracts and members reported by 

the Plan as of March 31 for each contract 

year audited. 

2,500 

2,000 

1.500 

1,000 

500 

o 

2004 

• Contracts 901 

DMembers 2,255 

2005 

828 

2,046 

2006 

1,022 

2,356 

2007 

722 

1,739 

2008 

803 

1,714 
The Plan has participated in the FEHBP since 1988 and provides health benefits to FEHBP 

members throughout west Texas. The last full-scope audit covered contract years 1999 through 

2003. 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 and a supplemental draft report were 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 of the 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 2004 

through 2008. During this period, the FEHBP paid 

approximately $37.4 million in premiums to the Plan. 

The premiums paid for each contract year audited are 

shown on the chart to the right. 

FEHBP Premiums Paid to Plan 

$10 

$8 

lI) 

e 

g
 $6

:i
 

$4 

$2 

$0 

• Revenue 

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 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, enrollment, 

and claims data provided by the Plan. We did not verify the reliability of the 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 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 Austin, Texas, during September 2008. 

Additional audit work was completed at our offices in Cranberry Township, Pennsylvania; 

Jacksonville, Florida; and 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 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 (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 Pricing $465,596 

The Certificates of Accurate Pricing the Plan signed in contract years 2005 and 2006 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 $465,596 (see Exhibit A). We found that 

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

years 2004, 2007 and 2008. 

Carriers proposing rates to OPM are required to submit a Certificate of Accurate Pricing 

which certifies that 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. If it is found that the FEHBP was charged higher than the market 

price rate (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 rate. 

We agree with the Plan's selection of_and as the SSSGs for contract year 

2005. Our analysis ofthe rates charged to the SSSGs shows that _received a. 

percent discount, which was not applied to the FEHBP audited rates. did not 

receive any discount. 

In reviewing the FEHBP rates, we found that the Plan erroneously calculated a benefit 

adjustment factor based on a change from a $100 inpatient admission copay to a $500 

inpatient admission copay. The Plan's calculation included a_benefit adjustment factor 

on a separate line in the rate development. However, upon further review we found that the 

~enefit adjustment factor was also included within the medical benefit adjustment 

calculations, resulting in the FEHBP being charged twice for that factor. Therefore, we 

removed the individual benefit adjustment factor line item. This resulted in a total benefit 

adjustment factor of_ 

We re-developed the FEHBP's rates using a benefit adjustment factor of _and by 

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

to the Plan's reconciled line 5 rates shows that the FEHBP was overcharged $384,782 in 2005 

(see Exhibit B). 

Plan's Comments (See Appendix): 

The Plan disagrees with the methodology used by the auditors to determine the discount given 

to _ The Plan states that the calculation for revenue should be based on the membership 

5
 
of the richer plan and not the membership of both benefit packages being offered. In addition, 

the Plan agreed that the total benefit adjustment factor for the FEHBP should be_ As a 

result of the items above, the Plan states that the FEHBP is owed $115,751 for contract year 

2005. 

OIG's Response to the Plan's Comments: 

The Plan stated that the methodology used to determine discounts is not appropriate for groups 

that convert from one benefit plan to two benefit plan offerings nor would it be appropriate for 

any group that has more than one benefit offering. When groups convert from one plan to two 

it is a common practice to use a weighted average of the two plans to determine the total 

revenue for the group. As a result, we continue to recommend that the FEHBP rates be 

adjusted by the "percent discount provided to a similarly sized subscriber group. 

Additionally, according to correspondence provided by the Plan during the audit, the benefit 

calculation for the FEHBP is correct. The result was a medical benefit factor of ~hich

was used in the audited rates. As a result, we agree with the Plan and recommend that the 

FEHBP rates be adjusted by the total benefit adjustment factor of_ 

We agree with the Plan's selection of and as the SSSGs for contract 

2006. Our analysis ofthe rates charged to the SSSGs shows that received a_ percent discount, which was not applied to the FEHBP. _did not receive a discount. 

We re-developed the FEHBP's rates by applying the _ercent discount given to _ 

_ A comparison of our audited line 5 rates to the Plan's reconciled line 5 rates shows 

that the FEHBP was overcharged $80,814 in 2006 (see Exhibit B). 

Plan's Comments (See Appendix): 

The Plan states that the rate reduction is the result of using a lower rate for the large claim 

pooling charge. The Plan agreed that the FEHBP is due $80,814 for contract year 2006. 

Recommendation 1 

We recommend that the contracting officer require the Plan to return $465,596 to the FEHBP 

for defective pricing in contract years 2005 and 2006. 

2. Lost Investment Income $95,411 

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 2006. We determined that the FEHBP is due $95,411 for lost 

investment income, calculated through July 31, 2009 (see Exhibit C). In addition, the FEHBP 

6
 
is entitled to lost investment income for the period beginning August 1,2009, until all
 

defective pricing amounts have been returned to the FEHBP.
 

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 were 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 regulations state 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. 

We calculated the lost investment income amount based on the United States Department of 

the Treasury's semiannual cost of capital rates. 

Plan's Comments (See Appendix): 

The Plan believes its response should result in the adjustment ofthe lost investment charge. 

DIG's Response to the Plan's Comments: 

Lost investment income should be calculated on the defective pricing amounts actually due the 

FEHBP. Therefore, our lost investment income calculation is based on the defective pricing 

amounts discussed in this report and has been adjusted accordingly. 

Recommendation 2 

We recommend that the contracting officer require the Plan to return $95,411 to the FEHBP 

for lost investment income, calculated through July 31,2009, on the 2005 and 2006 findings. 

We also recommend that the contracting officer recover lost investment income on amounts 

due for the period beginning August 1, 2009, until the funds have been returned to the 

FEHBP. 

3. Records Retention 

The Plan did not provide adequate documentation to support the rates charged to theFEHBP 

and the SSSGs for all years audited. The Federal Acquisitions Regulations 1652.204-70 

requires the carrier to retain all records for six years after the end ofthe contract term to which 

the records relate. 

Without appropriate supporting documentation, it is difficult to determine ifthe FEHBP rates 

were established in accordance with the Plan's contract, applicable regulations, and OPM 

community-rating guidelines. Under these circumstances, we may have to depend on other 

data, and at times, different rating methodologies to determine the appropriateness of the 

FEHBP rates. The outcome ofour analysis based on the best information available may result 

7
 
in a less desirable outcome to the Plan. Therefore, it is in the best interest of a plan to retain 

the information needed to verify the FEHBP and the SSSGs rates. 

Plan's Comments (See Appendix): 

The Plan did not provide any additional comment on this item. 

Recommendation 3 

We recommend that the contracting officer assess the maximum penalty allowed in the 

contract between aPM and the Plan for the Plan's breech of the records retention clause. 

In addition, we recommend that the contracting officer inform the Plan that: 

•	 aPM expects it to fully comply with the records retention provisions of the contract 

and all applicable regulations; 

•	 it should maintain copies of all pertinent rating documents that show the factors and 

calculations the Plan uses in developing the actual rates for the FEHBP and the 

groups closest in size to the FEHBP for each unaudited year; 

•	 it should maintain copies of the enrollment reports and other necessary supporting 

documents for the FEHBP and the groups closest in size to the FEHBP for each 

unaudited year; and 

•	 the applicable community-rated performance factors described in FEHBAR 

1609.7101-2 will be adversely affected if information requested during audits is not 

provided. 

8
 
IV. MAJOR CONTRIBUTORS TO THIS REPORT 

Community-Rated Audits Group 

Auditor 

Auditor-In-Charge 

Chief 

Senior Team Leader 

9
 
Exhibit A 

First Care - West Texas
 

Summary of Questioned Costs
 

Defective Pricing Questioned Costs: 

Contract Year 2005 

Contract Year 2006 

$384,782 

$80,814 

Total Defective Pricing Questioned Costs: 

Lost Investment Income: 

$465,596 

$95,411 

Total Questioned Costs: $561.007 
Exhibit B 

First Care - West Texas 

Defective Pricing Questioned Costs 

FEHBP Line 5 - Reconciled Rate 

FEHBP Line 5 - Audited Rate 

Overcharge 

To Annualize Overcharge: 

x 3/16/05 enrollment 

x Pay Periods 

Subtotal 

Total 2005 Defective Pricing Questioned Costs $384,782 

FEHBP Line 5 - Reconciled Rate 

FEHBP Line 5 - Audited Rate 

Overcharge 

To Annualize Overcharge: 

x 3116/06 enrollment 

x Pay Periods 

Subtotal 

Total 2006 Defective Pricing Questioned Costs $80,814 

Total Defective Pricing Questioned Costs $465,596 
KXHlBITC 

First Care - West Texas 

Lost Investment Income 

Year 2005 2006 2007 2008 2009 Total 

Audit Findings: 

1. Defective Pricing $384,782 $80,814 $0 $0 $0 $465,596 

Totals (per year): $384,782 $80,814 $0 $0 $0 $465,596 

Cumulative Totals: $384,782 $465,596 $465,596 $465,596 $465,596 $465,596 

Avg. Interest Rate (per year): 4.3750% 5.4375% 55000% 4.9375% 5.6250% 

Interest on Prior Years Findings $0 $20,923 $25,608 $22,989 $[5,277 $84,797 

Current Years Interest: $8,417 $2,197 $0 $0 $0 $10,614 

Total Cumulative Interest Calculated 

Through July 31,2009 $8,417 $23,120 $25,608 $22,989 $15,277L $95,411 
Appendix 129IJO N Hn'\'. 18 

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HOO n I ""73; HEALTH PLANS" 

IV'.\ vv.FilSI Care.co IT 

2009 HAY 2I AM 10: 17 

May 14,2009 

Chief, Community-Rated Audits Group 

U.S. Office of Personnel Management 

Office of Inspector General 

1900 E Street, N \V 

Room 6400 

Washington, D.C. 20415-1100 

This is in response to your Supplemental Draft Audit letter dated April 24, 2009 for carrier CK that was 

received on May 4,2009. We have completed our evaluation of the Draft Audit and our response follows. 

I.	 2005 defective pricing item discount to have been applied from _rate development 

Our position is that the methodology used to determine discounts is not appropriate for groups that 

convert from one benefit plan to two benefit offerings nor would it be appropriate for any group that 

has more than one benefit offering. When groups convert from one plan [0 two there is always a leaner 

benefit which means by using a weighted average of the two plans will always result in a lower revenue 

than was initially rated which is the desired result of the group. Additionally there is no way of 

knowing how many employees will take which plan therefore the methodology of rating the group is to 

determine the appropriate rate change based on the current benefits then apply benefit factors to 

produce the two benefits. The more accurate measure is to use the richer plan and assume all of the 

membership chose that plan and then measure it against the original rates as shown in Exhibit B in the 

tab. The net change to rates as shown in the Aud it report is main Iy a function 

of actual enrollment in each plan and does not, in and of itself, represent a discount given to ••• 

2.	 2005 adjustment to claims for benefit changes 

We disagree with the Audit findings that the benefit calculation is incorrect. There was a proposal by 

Plan CK to change the 2004 benefits that included a $500 inpatient per admit co pay. FEHBP accepted 

all of the benefit changes with the exception of the $500 per admit copay and asked for a $100 per day 

copay up to a maximum of$500 per admission. Since we did not have the exact plan requested, we 

chose a benefit plan that had all of the benefit changes except the desired inpatient copay which was the 

original proposed plan with the $500 per admission capay and then converted it to the desired $100 per 

day copay by applying actuarial techniques. The methodology applied here is a standard underwriting 

technique Cor applying benefit changes. Therefore, we took th~plan which is a $500/admit 

plan but it had all of our other benefit changes that were accepted by FEHOP and then estimated the 

value of converting the inpatient copay component to the $1DO/day (5 day max). This calculation is 

illustrated in Exhibit A and it shows how the_benefit factor adjustment is the correct adjustment. 

3.	 2005 comparison of Plan's Reconciled Line 5 and Audited Line 5 Rates 

As a result of items listed in Sections 1 and 2 above, we believe that the amount of overcharge is not 

$476,380 but $115,751 as shown in Tab labeled "Exhibit A~Adf'" in the Excel file, "CK Exhibit B". 

4.	 2006 defective rating item- discount to have been applied from rate 

development 

The rate reduction is the result of the use of a lower rate for large claim pooling and we agree that this 

is a discount which resulted in an $80,814 overcharge. 
Deleted by OIG Not relevant to the Final Report 

6. Lost Investment Income 

As a result of the above findings, we believe this value needs to be adjusted accordingly. 

Thank you for the opportunity to respond to the supplemental draft audit report. If you have any questions 

or concerns about our interpretations of the findings, please do not hesitate to contact me. 

Thank you. 

Vice President of Actuarial Services 

FirstCare Health Plans 

Attachments