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 Op.erations of FirstCare - Central Texas 

Report No. lC-6U-OO-08-064 


Date: September 30, 2009 


-- CAUTION -­

This audit report bas be.;n distributed to }'ederal officials who are responsible for Ihe administration oftbe audited program. This audit 

report may cOntain proprietary data which is protected by Federal law (18 U.S.C.19(1S). Therefore, while this audit report is available 

under the Freedom of Information ACI and made available to Ihe public on the OIG webpage, caution needs 10 be exercised before 

releasing the report to the general public·as it may contain proprietary information that was redacted from tire publicly distributed copy. 
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 


FirstCare - Central Texas 


Contract Number 2321 - Plan Code 6U 


Austin, Texas 


Report No. lC-6V-OO-08-064 Dah:September 30, 2009 

Michael R. Esser 

Assistant Inspector General 

for Audits 

www.opro.gov www.usaJobs.gov 
UNITED STATES OFFICE OF PERSONNEL MANAGEMENT 


Washington, DC 20415 


Office of the 

Inspector General 

EXECUTIVE SUMMARY 


Federa1 Employees Health Benefits Program 


Community-Rated Health Maintenance Organization 


FirstCare - Central Texas 


Contract Number 2321 - Plan Code 6U 


Austin, Texas 


Report No. 1C-6U-OO-08-064 Date: september 30, 2009 

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

Benefits Program (FEHBP) operations at FirstCare - Central Texas (Plan). The audit covered 

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

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

$174,372 for defective pricing in 2004 and 2005, including $33,755 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 2006, 2007, and 2008. 

We determined that the FEHBP rates were overstated by $86,760 for contract year 2004 because 

the incurred claims used by the Plan were incorrect. In contract year 2005, the Plan incorrectly 

calculated a benefit adjustment load resulting in questioned costs of$53,857. 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 $33,755 for lost investment income, calculated 

tlnough July 31,2009, on the defective pricing findings in 2004 and 2005. 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.gov www.usajobs.gov 
CONTENTS 


EXECU'TIVE SUMMARy .......................................................................... ' .................... 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 lnvestm'ent Income ............................................................................................. 6 


3. Records Retention .................................................................................... : ................. 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 (FirstCare - Central Texas' May 13,2009, response to the Supplemental Draft 


Report) 


2 

I. INTRODUCTION AND BACKGROUND 


Introduction 

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

of FirstCare - Central Texas (Plan) in Austin, Texas. The audit covered contract years 2004 

through 2008. The audit was conducted pursuant to the provisions of Contract 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 ofPersonnel Management's (OPM) Office ofthe Inspector General, 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 ofTitle 5, CFR. Health insurance coverage is provided through contracts with various 

health insurance carriers that provide service benefits, indemnity benefits, orcomprehensive 

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 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 

ofcoverage and other unique features of the 

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. 

March 31 

1 

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


members throughout central Texas. The last audit of the Plan conducted by our office was a full 


scope audit of contract years 2000 through 2003. All issues related to that audit were resolved. 


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


A draft report and a supplemental draft report were provided to the Plan for review and 


comments. The Plan's comments were considered in the preparation ofthis final report and are 


included, as appropriate, in the Appendix. 


2 

II. OBJECTIVES, SCOPE, AND METHODOLOGY 


Objectives 

The primary objectives ofthe audit were to verify tha~ 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 detennine 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 FEHBP Premiums Paid to Plan 

2004 through 2008. During this period, the 

FEHBP paid approximately $71.0 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 ofthe Plan's rating systems and such other auditing procedures as we 

considered necessary under the circumstances. Our review ofinternal 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. 

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 dwing our 

audit testing utilizing the computer generated data to cause us to doubt its reliability. We 

determined that the data available 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 conducted at the Plan's office in Austin, Texas, during September 2008. 

Additional audit work was completed at our offices in Washington, D. C. and Jacksonville, 

Florida. 

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 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 of the FEHBP premiums and the reasonableness and acceptability of the Plan's rating 

systems. 

To gain an understanding of the 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 $140,617 

The Certificates of Accurate Pricing the Plan signed in contract years 2004 and 2005 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 $140,617 (see Exhibit A). We found that 

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

years 2006, 2007, and 2008. 

Carriers proposing rates to OPM are required to submit a Certificate ofAccurate 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. Ifit 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 of the FEHBP premiums to the equivalent market price rate. 

In developing the FEHBP rates for contract year 2004, the Plan used $7,586,276 for medical 

incurred claims. However, documentation provided by the Plan shows that the incurred 

medical claims should have been $7,336,415. Therefore, we redeveloped the 2004 FEHBP 

rates using $7,336,415 for medical incurred claims. As a result, the FEHBP was overcharged 

$86,760 in contact year 2004 (see Exhibit B). . 

Plan's Comments (See Appendix): 

This finding was a mistake identified as Extension of Coverage in the Supplemental Draft 

report; therefore, the Plan has not had a chance to address it. 

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 0_. We re-developed the FEHBP's rates using the recalculated 


benefit factor, which resulted in an overcharge to the FEHBP of $53,857 for 2005 (see Exhibit 


B). 

5 

Plan's Comments (See Appendix): 

The Plan agrees that the FEHBP is due $53,857 for 2005. 

Recommendation 1 

We recommend that the contracting officer require the Plan to return $140,617 to the FEHBP 

for defective pricing in contract years 2004 and 2005. 

2. Lost Investment Income $33,755 

In accordance with the 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 2004 and 2005. We detennined that the FEHBP is due $33,755 for lost 

investment income, cal.culated through July 31, 2009. In addition, the FEHBP is entitled to 

lost investment income for the period beginning August 1,2009, until all defective pricing 

finding amounts have been returned to the FEHBP. 

Federal Employees Health Benefits Acquisition Regulation 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 regulation states that the govemnient 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 ca1culation oflost investment income is based on the United States Department of the 

Treasury's semiannual cost of capital rates. 

Plan's Comments (See Appendix): 

The Plan states the value should be adjusted based on its response to the findings. 

OIG's Response to the Plan's Comments: 

Lost investment income should be calculated on the defective pricing amOlmts actuaHy due 

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

pricing amounts discussed in this report. 

Recommendation 2 

We recommend that the contracting officer require the Plan to return $33,755 to the FEHBP 

for lost investment income for the period January 1,2005, through July 3].2009 (see Exhibit 

C). In addition, we recommend that the contracting officer recover lost investment income On 

amounts due for the period beginning August 1, 2009 until all defective pricing amounts have 

been returned to the FEHBP. 

6 

3. Records Retention 

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

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 if the FEHBP rates 

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

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

data, and at times, different rating methodologies to ~etermine the appropriateness ofthe 

FEHBP rates. The outcome of our analysis based on the best infonnation available may result 

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. 

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 ofthe 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 ofthe 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 perfonnance factors described in FEHBAR 

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

provided. 

7 

IV. MAJOR CONTRIBUTORS TO THIS REPORT 

Community-Rated Audits Group 

Auditor 

Auditor-In-Charge 

Chief 

Senior Team Leader 

8 

Exhibit A 

FirstCare - Central Texas 


Summary of Questioned Costs 


Defective Pricing Questioned Costs: 

Contract Year 2004 

Contract Year 2005 

$86,760 

$53,857 

Total Defective Pricing Questioned Costs: 

Lost Investment Income: 

$140,617 

$33,755 

Total Questioned Costs: $174,372 
Exhibit B 

FirstCare - Central Texas 

Defective Pricing Questioned Costs 

FEHBP Line 5 - Reconciled Rate 

FEHBP Line 5 - 2004 Audited Rate 

Overcharge 

To Annualize Overcharge: 

x 3/31104 enrollment 

x Pay Periods 

Subtotal 

Total 2004 Defective Pricing Questioned Costs $86,760 

FEHBP Line 5 - Reconciled Rate 

FEHBP Line 5 - 2005 Audited Rate 

Overcharge 

To Annualize Overcharge: 

x 3/31/05 enrollment 

x Pay Periods 

Subtotal 

Total 2005 Defective Pricing Questioned Costs $53,857 

Total Defective Pricing Questioned Costs $140,617 
EXHIBITC 

FirstCare - Central Texas 

Lost Investment Income 

Year 2004 2005 2006 2007 2008 2009 Total 

Audit Findings: 

I. Defective Pncing $86,760 $53,857 $0 $0 $0 $0 $140,617 

Totals (per year): $86,760 $53,857 $0 $0 $0 $0 $140,617 

Cumulative Totals: $86,760 $140,6[7 $[40,617 $[40,617 $[10,617 $140,6[7 $789,845 

Avg. Interest Rate (per year)' 4.2500% 4.3750% 5.4375% 5.5000% 4.9375% 56250% 

Interest on Prior Years Findings: $0 $3,796 $7,646 $7,734 $6,943 $4,6[4 $30,733 

Current Years Interest: $1,844 $[,178 $0 $0 $0 $0 $3,022 

Total Cumulative Interest Calculated 

Through July 31, 2009: $[,844 $4,974 $7,646 $7,734 $6,943 $4,6141 $33,755 
;~C):;n N. HUT. 183 Appendix FirstCare Au,till. T.:::-.:as ""8-)0

) i 2 ~:; -, ·GOOO 

~ H EA L T H P LAN 5"" BOU il.ll---3­

\\·,vw. Firs[Care.conl 

20D91-L~ Y15 PM 3: 24 

May 13,2009 

Chief. Community-Rated Audits Group 

U.S. Office of Personnel Management 

Office of Inspector General 

1900 E Street, NW 

Room 6400 

Washington, D.C. 204! 5-11 00 

Dear ••••• 

This is in response to your Supplementa! Draft Audit letter dated April 24, 2009 for carrier 6U that was 

received on May 4, 2009. \Ve have compktcd U;JI ('valuation o'-the Draft Audit and Ollr response follows. 

Deleted by OIG - Not relevant to the Final Report 

2, 	 Error found in Auditors Excel Spreadsheet 

\-\--'bile looking through the spreadsheet. we noticed that a facIal' shown ill Cell £>25 of the Tab labeled 

TEHP[3" did not include all ofSeclioll G.c.] (projected cost pmpm) nor Seclion CI.d (benetit factor 

adjustment). As a result of correcting the large claim amount back to $8 I8,754 and including Column 

. b·of the above noted sections, Cell P25 changes from the audited amount of .973 to .994. The Benefit 

factor adjustment is applied to the overall Medical component which includes Capitation; therefore, the 

.992 factor is applied to both Column J and Column L as shown in Tab labeled "FEHBP_Adj" ill lhe 

~'\cel file, "6U Exhibit B". 

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

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

. $464,587 but $53,857 as sho.\,11 in Tab labeled "Ex..bibn AJ\dj"" in the Excel file, "6U Exhibit 13". 

Deleted by OIG - Not relevant to the Final Report 
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 ha ve aLlY questions 

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

V ice President of ACluari(l1 Services 

FirstCare Health Plans 

Attachments