U.S. OFFICE OF PERSONNEL MANAGEMENT 

OFFICE OF THE INSPECTOR GENERAL 

OFFICE OF AUDITS 

Final Audit Report

Subject: 

AUDIT OF 

BLUECROSS BLUESHIELD OF ARIZONA 

PHOENIX, ARIZONA

Report No. 1A-10-56-13-047 

 Date: 

--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 propriety information that was redacted from the publicly distributed copy. 
AUDIT REPORT 

Federal Employees Health Benefits Program 

Service Benefit Plan Contract CS 1039

BlueCross BlueShield Association

Plan Code 10 

BlueCross BlueShield of Arizona

Plan Codes 030/530

Phoenix, Arizona

REPORT NO. 1A-10-56-13-047 DATE: ______________ 

______________________

Michael R. Esser 

Assistant Inspector General 

 for Audits 

--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 that 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 propriety information that was redacted from the publicly distributed copy. 
i 

EXECUTIVE SUMMARY 

Federal Employees Health Benefits Program 

Service Benefit Plan Contract CS 1039

BlueCross BlueShield Association

Plan Code 10

BlueCross BlueShield of Arizona

Plan Codes 030/530

Phoenix, Arizona

REPORT NO. 1A-10-56-13-047 DATE: ______________ 

This final audit report on the Federal Employees Health Benefits Program (FEHBP) operations 

at BlueCross BlueShield of Arizona (Plan), located in Phoenix, Arizona, questions $1,901,078 in 

administrative expenses. The report also includes a procedural finding for the Plan’s Fraud and 

Abuse (F&A) Program. The BlueCross BlueShield Association (Association) agreed (A) with 

the questioned charges and generally agreed with the procedural finding regarding the Plan’s 

F&A Program. 

Our limited scope audit was conducted in accordance with Government Auditing Standards. The 

audit covered miscellaneous health benefit payments and credits and administrative expenses 

from 2008 through 2012 as reported in the Annual Accounting Statements. In addition, we 

reviewed the Plan’s cash management activities and practices related to FEHBP funds from 2008 

through 2012 and the Plan’s F&A Program from 2008 through May 31, 2013. 

The audit results are summarized as follows: 
ii

MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS

The audit disclosed no findings pertaining to miscellaneous health benefit payments and 

credits. Overall, we concluded that the Plan returned health benefit refunds and recoveries, 

including medical drug rebates, to the FEHBP in a timely manner, and properly charged 

miscellaneous payments to the FEHBP. 

ADMINISTRATIVE EXPENSES 

 Unreasonable and/or Unallocable Costs (A) $1,107,107 

The Plan charged unreasonable and/or unallocable cost center expenses of $1,128,845 to the 

FEHBP. In addition, the Plan made an unnecessary out-of-system adjustment, resulting in 

the Plan inadvertently excluding $21,738 in chargeable costs. As a result, the Plan 

overcharged the FEHBP $1,107,107 (net) from 2008 through 2012. 

 Post-Retirement Benefit Costs (A) $802,171 

The Plan overcharged the FEHBP $802,171 for post-retirement benefit costs in 2011 and 

2012. 

 Pension Costs (A) ($8,200)

The Plan undercharged the FEHBP $8,200 for pension costs from 2010 through 2012. 

CASH MANAGEMENT 

The audit disclosed no findings pertaining to the Plan’s cash management activities and 

practices. Overall, we concluded that the Plan handled FEHBP funds in accordance with 

Contract CS 1039 and applicable laws and regulations.

FRAUD AND ABUSE PROGRAM 

 Special Investigations Unit Procedural

The Plan is not in compliance with the communication and reporting requirements for fraud 

and abuse cases that are set forth in Contract CS 1039 and FEHBP Carrier Letter 2011-13. 

Specifically, the Plan did not report, or did not timely report, all fraud and abuse cases to the 

Office of Personnel Management’s Office of the Inspector General (OIG). The Plan’s noncompliance may be due in part to incomplete and/or untimely reporting of fraud and abuse 

cases to the Association’s Federal Employee Program Director’s Office (FEPDO), as well as 

inadequate controls at the FEPDO to monitor and communicate the Plan’s cases to the OIG. 

Without awareness of these existing potential fraud and abuse issues, the OIG cannot 

investigate the broader impact of these potential issues on the FEHBP as a whole. The 

Association generally agreed with this procedural finding.
CONTENTS

PAGE 

EXECUTIVE SUMMARY .............................................................................................. i 

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

II. OBJECTIVES, SCOPE, AND METHODOLOGY .........................................................3

III. AUDIT FINDINGS AND RECOMMENDATIONS .......................................................6

A. MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS ...........6

B. ADMINISTRATIVE EXPENSES ..........................................................................6

 

1. Unreasonable and/or Unallocable Costs ............................................................6

2. Post-Retirement Benefit Costs ..........................................................................8

3. Pension Costs .....................................................................................................9

C. CASH MANAGEMENT ......................................................................................11

D. FRAUD AND ABUSE PROGRAM ....................................................................11

1. Special Investigations Unit .............................................................................11

IV. MAJOR CONTRIBUTORS TO THIS REPORT ..........................................................15

 V. SCHEDULES 

A. CONTRACT CHARGES 

B. QUESTIONED CHARGES 

APPENDIX (BlueCross BlueShield Association response, dated November 22, 2013,

to the draft audit report)
1

I. INTRODUCTION AND BACKGROUND 

INTRODUCTION 

This final audit report details the findings, conclusions, and recommendations resulting from our 

limited scope audit of the Federal Employees Health Benefits Program (FEHBP) operations at 

BlueCross BlueShield of Arizona (Plan). The Plan is located in Phoenix, Arizona.

The audit was performed by the Office of Personnel Management’s (OPM) Office of the 

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 (FEHB) 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. OPM’s Healthcare and Insurance 

Office has overall responsibility for administration of the FEHBP. The provisions of the FEHB 

Act are implemented by OPM through regulations, which are codified in Title 5, Chapter 1, Part 

890 of the Code of Federal Regulations (CFR). Health insurance coverage is made available 

through contracts with various health insurance carriers. 

The BlueCross BlueShield Association (Association), on behalf of participating BlueCross and 

BlueShield plans, has entered into a Government-wide Service Benefit Plan contract (CS 1039) 

with OPM to provide a health benefit plan authorized by the FEHB Act. The Association 

delegates authority to participating local BlueCross and BlueShield plans throughout the United 

States to process the health benefit claims of its federal subscribers. This Plan is one of 

approximately 64 local BlueCross and BlueShield plans participating in the FEHBP. 

The Association has established a Federal Employee Program (FEP1) Director’s Office in 

Washington, D.C. to provide centralized management for the Service Benefit Plan. The FEP 

Director’s Office coordinates the administration of the contract with the Association, member 

BlueCross and BlueShield plans, and OPM. 

The Association has also established an FEP Operations Center. The activities of the FEP 

Operations Center are performed by CareFirst BlueCross BlueShield, located in Washington, 

D.C. These activities include acting as fiscal intermediary between the Association and member 

plans, verifying subscriber eligibility, approving or disapproving the reimbursement of local plan 

payments of FEHBP claims (using computerized system edits), maintaining a history file of all 

FEHBP claims, and maintaining an accounting of all program funds. 

Compliance with laws and regulations applicable to the FEHBP is the responsibility of the 

Association and Plan management. Also, management of the Plan is responsible for establishing 

and maintaining a system of internal controls. 

 

1

 Throughout this report, when we refer to "FEP", we are referring to the Service Benefit Plan lines of business at 

the Plan. When we refer to the "FEHBP", we are referring to the program that provides health benefits to federal 

employees.
2

All findings from our previous audit of the Plan (Report No. 1A-10-56-07-024, dated 

April 4, 2008) for contract years 2002 through 2006 have been satisfactorily resolved. 

The results of this audit were provided to the Plan in written audit inquiries; were discussed with 

Plan and/or Association officials throughout the audit and at an exit conference; and were 

presented in detail in a draft report, dated September 26, 2013. The Association’s comments 

offered in response to the draft report were considered in preparing our final report and are 

included as an Appendix to this report. 

 
3

II. OBJECTIVES, SCOPE, AND METHODOLOGY

OBJECTIVES 

The objectives of our audit were to determine whether the Plan charged costs to the FEHBP and 

provided services to FEHBP members in accordance with the terms of the contract. Specifically, 

our objectives were as follows: 

Miscellaneous Health Benefit Payments and Credits 

 To determine whether miscellaneous payments charged to the FEHBP were in 

compliance with the terms of the contract. 

 To determine whether credits and miscellaneous income relating to FEHBP benefit 

payments were returned promptly to the FEHBP. 

Administrative Expenses 

 To determine whether administrative expenses charged to the contract were actual, 

allowable, necessary, and reasonable expenses incurred in accordance with the terms 

of the contract and applicable regulations. 

Cash Management 

 To determine whether the Plan handled FEHBP funds in accordance with applicable 

laws and regulations concerning cash management in the FEHBP. 

Fraud and Abuse Program 

 To determine whether the Plan's communication and reporting of fraud and abuse 

cases were in compliance with the terms of Contract CS 1039 and the applicable 

FEHBP Carrier Letters. 

SCOPE 

We conducted our limited scope performance audit in accordance with generally accepted 

government auditing standards. Those standards require that we plan and perform the audit to 

obtain sufficient and 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. 

We reviewed the BlueCross and BlueShield FEHBP Annual Accounting Statements as they 

pertain to Plan codes 030 and 530 for contract years 2008 through 2012. During this period, the 

Plan paid approximately $1.4 billion in health benefit charges and $113 million in administrative 

expenses (See Figure 1 and Schedule A). 
Blu eCross BlueShield of Arizona 

Contract C harges 

$400 

~ 

.2 

$300 

~ $200 

"' 

$100 

$0 

2008 2009 2010 2011 2012 

Contract Years 

Cl Health Benefit Payments •Administrative Expenses 

Figure 1 - Conu·act Charges 

Specifically, we reviewed miscellan eous health benefit payments and credits (e.g., reftmds, 

subrogation recoveries, medical dmg rebates, and fraud recoveries), administrative expenses, and 

cash man agement activities for 2 008 through 2012. We also reviewed the Plan's F&A Program 

for 2008 through May 31,2013 . 

In planning an d conducting our audit, we 

obtained an understanding of the Plan 's 

intem al conu·ol sti11cture to help detennine 

the nature, timing, and extent of our 

auditing procedures. This was detennined 

to be the most effective approach to select 

areas of audit. For those areas selected, we 

primarily relied on substantive tests of 

u·ansactions an d not tests of conu·ols. 

Based on our testing, we did not identify 

any significant matters involving th e Plan 's 

intem al conu·ol sti11cture an d its operations . 

However, since our audit would not 

necessarily disclose all significant matters in 

th e intemal control structure, we do not 

express an opinion on the Plan 's system of 

intem al conu·ols taken as a whole. 

We also conducted tests to detennine whether the Plan had complied with the conu·act, th e 

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

Employees Health Benefits Acquisition Regulations (FEHBAR) , as appropriate), and the laws 

and regulations goveming the FEHBP. The results of our tests indicate that, with respect to the 

items tested, the Plan did not comply with all provisions of the conu·act and federal procurement 

regulations. Exceptions noted in the areas reviewed are set f01th 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 the Plan had not complied, in all material 

respects, with those provisions. 

In conducting our audit, we relied to va1y ing degrees on computer-generated data provided by 

th e FEP Director 's Office and the Plan. Due to time constraints, we did not verify the reliability 

of the data generated by th e various inf01mation systems involved. However, while utilizing th e 

computer-generated data during our audit testing, nothing came to our attention to cause us to 

doubt its reliability. We believe that the data was sufficient to achieve our audit objectives. 

The audit was perfon ned at th e Plan's office in Phoenix, Arizona from Jlme 4, 2 0 13 through 

June 27, 2013 . Audit fieldwork was also perf01med at our office in Cranbeny Township, 

Pennsylvania. 

4 

5

METHODOLOGY 

We obtained an understanding of the internal controls over the Plan’s financial, cost accounting 

and cash management systems by inquiry of Plan officials. 

We interviewed Plan personnel and reviewed the Plan’s policies, procedures, and accounting 

records during our audit of miscellaneous health benefit payments and credits. We also 

judgmentally selected and reviewed 173 high dollar health benefit refunds, totaling $6,712,193 

(from a universe of 65,808 refunds, totaling $32,571,930); 22 special plan invoices (SPI), 

totaling $2,627,885 in net FEP payments (from a universe of 167 SPIs, totaling $11,906,913 in 

net FEP payments); 12 fraud and abuse recoveries, totaling $87,437 (from a universe of 201 

recoveries, totaling $132,491); and all FEP medical drug rebate amounts, totaling $28,692, to 

determine if refunds and recoveries were promptly returned to the FEHBP and if miscellaneous 

payments were properly charged to the FEHBP.2

 The results of these samples were not projected 

to the universe of miscellaneous health benefit payments and credits. 

We judgmentally reviewed administrative expenses charged to the FEHBP for contract years 

2008 through 2012. Specifically, we reviewed administrative expenses relating to cost centers, 

natural accounts, out-of-system adjustments, prior period adjustments, pension, post-retirement, 

employee health benefits, executive compensation, non-recurring projects, gains and losses, 

return on investment, subcontracts, and the Health Insurance Portability and Accountability Act 

of 1996. We used the FEHBP contract, the FAR, and the FEHBAR to determine the 

allowability, allocability, and reasonableness of charges. 

We reviewed the Plan’s cash management activities and practices to determine whether the Plan 

handled FEHBP funds in accordance with Contract CS 1039 and applicable laws and regulations. 

We also interviewed the Plan’s Special Investigations Unit regarding the effectiveness of the 

F&A Program, as well as reviewed the Plan’s communication and reporting of fraud and abuse 

cases to test compliance with Contract CS 1039 and the applicable FEHBP Carrier Letters. 

 

2

 The sample of health benefit refunds included all solicited refund receipts of $15,000 or more, all unsolicited 

refund receipts of $30,000 or more, and all provider offsets of $22,000 or more. For the SPI sample, we selected 

two SPI’s with the highest miscellaneous payment amounts and two SPI’s with the highest miscellaneous credit 

amounts from each year in the audit scope, as well as two SPI’s with the highest restitution income amounts during 

the audit scope. For the sample of fraud and abuse recoveries, we selected all recoveries of $2,000 or more. 
6

III. AUDIT FINDINGS AND RECOMMENDATIONS 

A. MISCELLANEOUS HEALTH BENEFIT PAYMENTS AND CREDITS 

The audit disclosed no findings pertaining to miscellaneous health benefit payments and 

credits. Overall, we concluded that the Plan returned health benefit refunds and recoveries, 

including medical drug rebates, to the FEHBP in a timely manner, and properly charged 

miscellaneous payments to the FEHBP. 

B. ADMINISTRATIVE EXPENSES 

1. Unreasonable and/or Unallocable Costs $1,107,107 

The Plan charged unreasonable and/or unallocable cost center expenses of $1,128,845 to 

the FEHBP. In addition, the Plan made an unnecessary out-of-system adjustment, 

resulting in the Plan inadvertently excluding $21,738 in chargeable FEP costs. As a 

result, the Plan overcharged the FEHBP $1,107,107 (net) from 2008 through 2012. 

Contract CS 1039, Part III, section 3.2 (b)(1) states, “The Carrier may charge a cost to the 

contract for a contract term if the cost is actual, allowable, allocable, and reasonable.”

48 CFR 31.201-4 states, “A cost is allocable if it is assignable or chargeable to one or 

more cost objectives on the basis of relative benefits received or other equitable 

relationship. Subject to the foregoing, a cost is allocable to a Government contract if ita) Is incurred specifically for the contract; 

b) Benefits both the contract and other work, and can be distributed to them in 

reasonable proportion to the benefits received; or 

c) Is necessary to the overall operation of the business, although a direct relationship 

to any particular cost objective cannot be shown.”

For the period 2008 through 2012, the Plan allocated administrative expenses of 

$128,727,158 (before adjustments) to the FEHBP from 226 cost centers. From this 

universe, we selected a judgmental sample of 36 cost centers to review, which totaled 

$84,261,426 in expenses allocated to the FEHBP. We selected the cost centers based on 

high dollar amounts, high dollar allocation methods, and our nomenclature review and 

trend analysis. We reviewed the expenses from these cost centers for allowability, 

allocability, and reasonableness. 

During this period, the Plan also made 60 out-of-system adjustments, totaling $2,974,247 

in net charge adjustments to the FEHBP. From this universe, we selected and reviewed a 

judgmental sample of 16 adjustments, totaling $47,499 in net credit adjustments, for the 

purpose of determining if the Plan properly charged or credited these adjustments to the 

FEHBP. We selected the highest charge and credit adjustments from each year in the 

audit scope, as well as additional adjustments based on our nomenclature review. 
7

Based on our review, we determined the following: 

 The Plan did not reasonably allocate cost center (CC) expenses to the FEHBP for 

CC’s 0406 (ICS - Benefit Analysis/Benefit Programming) and 0506 (Benefit 

Programming). The Plan used allocation methods such as project reporting, 

participants, and claims to allocate these CC expenses to the FEP, when the Plan 

should have used the benefit packages method. As a result, the FEHBP was 

overcharged $1,105,407 for these CC expenses. 

 The Plan charged CC expenses to the FEHBP that did not benefit the FEHBP. 

Specifically, as a result of an interview with the manager for CC 0840 (Network 

Management), we determined that the Plan inappropriately allocated $23,438 in 

printing costs to the FEP for the Plan’s local line of business directories. These costs 

were allocated to the FEP from CC’s 0840 (Network Management), 0832 (Provider 

Network Administration), and 0409 (eChannel Business Operations) from 2008 

through 2012. 

 The Plan made an unnecessary out-of-system adjustment to reduce costs charged 

from CC 0647 (Care Coordination). Specifically, the Plan identified an allocation 

error and appropriately adjusted the allocation method in the system in October 2010. 

However, at year-end, the Plan also made a manual out-of-system adjustment to 

correct the same error. As a result of this oversight, the Plan reduced these FEP costs 

twice, resulting in an undercharge of $21,738 to the FEHBP. 

In total, these errors resulted in net overcharges of $1,107,107 to the FEHBP from 2008 

through 2012. 

Association’s Response: 

The Association agrees with this finding. The Association states, “The Plan agreed with 

this finding and submitted Prior Period Adjustments (PPA) to adjust the costs in the 

amount of $1,107,107 on October 3, 2013.” 

The Association also states, “the Plan has implemented the following:

 The Cost Center Review (CCR) template has been revised and formatted in Excel, 

replacing the Word template. This allows the Plan to extract data from their Cost 

Accounting System and other Excel files resulting in efficiencies and better accuracy. 

 To help ensure that cost center managers are reviewing the allocation percentages to 

each line of business, the CCR template now requires the user to select ‘Yes’ or ‘No’

as to whether their cost center supports a line of business. If the cost center indicates 

they support FEP, an additional question is asked as to whether the FEP percentage is 

reasonable. As it was before, the cost center’s management approval of how their 

cost center is allocating to lines of business is required. 
8

 A CCR template will be completed for every cost center annually and will continue to 

be peer reviewed in Cost Accounting and require the Cost Accounting manager’s 

sign-off. . . .” 

OIG Comments: 

The Plan has unfunded allowable costs from 2008 through 2012. Since the Plan’s total 

unreimbursed costs exceed the uncontested questioned costs, the prior period adjustments 

should be netted against the Plan’s unfunded costs. Therefore, there is no impact on the 

amount charged to the FEHBP, which makes a lost investment income (LII) calculation 

unnecessary for this finding. 

Recommendation 1

We recommend that the contracting officer verify that the Plan submitted prior period 

adjustments of $1,107,107 (i.e., $109,549 for 2008; $121,945 for 2009; $140,019 for 

2010; $324,254 for 2011; and $411,340 for 2012) to properly reduce the filed costs on 

the Plan’s annual cost submissions for 2008 through 2012. 

2. Post-Retirement Benefit Costs $802,171 

The Plan overcharged the FEHBP $802,171 for post-retirement benefit (PRB) costs in 

2011 and 2012. 

As previously cited from Contract CS 1039, costs charged to the FEHBP must be actual, 

allowable, allocable and reasonable. 

48 CFR 31.205-6(o)(2) states, “To be allowable, PRB costs must be reasonable and 

incurred pursuant to law, employer-employee agreement, or an established policy of the 

contractor. In addition, to be allowable, PRB costs must also be calculated in accordance 

with paragraphs (o)(2)(i), (ii), or (iii) of this section.”

48 CFR 31.205-6(o)(3) states, “To be allowable, costs must be funded by the time set for 

filing the Federal income tax return or any extension thereof. PRB costs assigned to the 

current year, but not funded or otherwise liquidated by the tax return time, shall not be 

allowable in any subsequent year.”

From 2008 through 2012, the Plan charged $1,285,237 to the FEHBP for PRB costs. The 

Plan used the cash (pay as you go) method from 2008 through 2010 and the accrual 

method in 2011 and 2012 to charge PRB costs to the FEHBP. We reviewed the Plan’s 

calculations of the PRB costs chargeable to the FEHBP and determined if these costs 

were calculated in accordance with 48 CFR 31.205-6(o). Based on our review, we 

determined that the Plan overcharged the FEHBP $802,171 for PRB costs. 
9

The following summarizes the exceptions noted: 

 The Plan did not make an out-of-system adjustment for PRB costs in 2011, resulting 

in an overcharge of $788,245 to the FEHBP. This adjustment should have been made 

to reduce FEP costs to the lower of benefit cost or the contribution amount. In this 

case, the adjustment should have reduced FEP costs to $0 because the Plan did not 

fund PRB costs in 2011. 

 In 2012, the Plan made an out-of-system adjustment but removed an amount less than 

what the Plan should have, resulting in an overcharge of $13,926 to the FEHBP. The 

Plan stated that this was the result of an oversight in removing all non-chargeable 

costs.

Association’s Response: 

The Association agrees with this finding. The Association states, “The Plan agreed with 

this finding and submitted Prior Period Adjustments totaling $802,171 on 

October 3, 2013.” 

The Association also states, “This overcharge was a result of an oversight of the Plan’s 

procedures. The Plan’s procedures have been strengthened to ensure this does not 

happen in the future.”

OIG Comments: 

The Plan has unfunded allowable costs for 2011 and 2012. Since the Plan’s total 

unreimbursed costs exceed the uncontested questioned costs, the prior period adjustments 

should be netted against the Plan’s unfunded costs. Therefore, there is no impact on the 

amount charged to the FEHBP, which makes an LII calculation unnecessary for this 

finding. 

Recommendation 2 

We recommend that the contracting officer verify that the Plan submitted prior period 

adjustments of $802,171 (i.e., $788,245 for 2011 and $13,926 for 2012) to properly 

reduce the filed costs on the Plan’s annual cost submissions for 2011 and 2012. 

3. Pension Costs ($8,200)

The Plan undercharged the FEHBP $8,200 for pension costs from 2010 through 2012. 

As previously cited from Contract CS 1039, costs charged to the FEHBP must be actual, 

allowable, allocable and reasonable. 
10

48 CFR 31.205-6(j)(2) states, “The cost of all defined-benefit pension plans shall be 

measured, allocated, and accounted for in compliance with the provisions of 48 CFR 

9904.412, Cost accounting standard for composition and measurement of pension cost, 

and 48 CFR 9904.413, Adjustment and allocation of pension cost. The costs of all 

defined-contribution pension plans shall be measured, allocated, and accounted for in 

accordance with the provisions of 48 CFR 9904.412 and 48 CFR 9904.413. Pension 

costs are allowable subject to the referenced standards and the cost limitations and 

exclusions set forth in paragraph (j) (2) (i) and in paragraphs (j) (3) through (8) of this 

subsection.”

FAR limits the amount of pension cost that may be charged to a government contract to 

the amount of any cash contribution to the pension fund trustee, or the amount of expense 

calculated in accordance with Cost Accounting Standard (CAS) 412 and 413, whichever 

is lower. 

For the period 2008 through 2012, the Plan allocated $8,958,621 to the FEP for pension 

costs. We reviewed all of the FEP pension costs to determine if the amounts were 

properly charged to the FEHBP in accordance with the federal regulations. Based on our 

review, we determined that the Plan made errors when adjusting the FEP pension costs to 

the lower of the CAS amounts or cash contributions. Specifically, the Plan overcharged 

the FEHBP $4,674 in 2010 and undercharged the FEHBP $7,406 and $5,468 in 2011 and 

2012, respectively. The effect of these errors is a net undercharge to the FEHBP of 

$8,200 for pension costs from 2010 through 2012. 

Association’s Response: 

The Association agrees with this finding. The Association states, “The Plan agreed with 

this finding and filed the appropriate Prior Period Adjustments on October 3, 2013.” 

OIG Comments: 

The Plan has unfunded allowable costs from 2010 through 2012. Since the Plan’s total 

unreimbursed costs exceed the uncontested questioned costs, the prior period adjustments 

should be netted against the Plan’s unfunded costs. There is no impact on the amount 

charged to the FEHBP, which makes an LII calculation on the 2010 overcharge 

unnecessary for this finding. 

Recommendation 3 

We recommend that the contracting officer verify that the Plan submitted prior period 

adjustments to properly adjust the filed costs on the Plan’s annual cost submissions for 

the pension cost overcharge of $4,674 in 2010, the pension cost undercharge of $7,406 in 

2011, and the pension cost undercharge of $5,468 in 2012. 
11

C. CASH MANAGEMENT 

The audit disclosed no findings pertaining to the Plan’s cash management activities and 

practices. Overall, we concluded that the Plan handled FEHBP funds in accordance with 

Contract CS 1039 and applicable laws and regulations. 

D. FRAUD AND ABUSE PROGRAM 

1. Special Investigations Unit Procedural

The Plan is not in compliance with the communication and reporting requirements for 

fraud and abuse cases that are set forth in Contract CS 1039 and FEHBP Carrier Letter 

(CL) 2011-13. Specifically, the Plan did not report, or did not timely report, all fraud and 

abuse cases to the OIG. The Plan’s non-compliance may be due in part to incomplete 

and/or untimely reporting of fraud and abuse cases to the Association’s FEP Director’s 

Office (FEPDO), as well as inadequate controls at the FEPDO to monitor and 

communicate the Plan’s FEP fraud and abuse cases to the OIG. Without awareness of 

these existing potential fraud and abuse issues, the OIG cannot investigate the broader 

impact of these potential issues on the FEHBP as a whole. 

Contract CS 1039, Section 1.10 (a)(12) requires the Carrier to notify the contracting 

officer of any significant events, which includes instances of fraud, within 10 working 

days after they become aware of it. 

CL 2011-13 (Mandatory Information Sharing via Written Case Notifications to OPM’s 

Office of the Inspector General), dated June 17, 2011, states that all Carriers “are 

required to submit a written notification to the OPM OIG . . . within 30 working days of 

becoming aware of a fraud, waste or abuse issue where there is a reasonable suspicion 

that a fraud has occurred or is occurring against the Federal Employees Health Benefits 

(FEHB) Program.” There is no dollar threshold for this requirement. 

During the period January 1, 2013 through May 31, 2013, the Plan opened 34 fraud and 

abuse cases. Of these, we identified and reviewed 29 cases with FEP exposure to 

determine if these cases were reported to the OIG as required by Contract CS 1039 and 

CL 2011-13. Based on our review, we determined that notifications for only 3 of the 29 

fraud and abuse cases with FEP exposure were sent to the OIG. Because all of these

cases have FEP exposure, and there is no dollar threshold for reporting suspected fraud 

against the FEHBP, these cases should have been reported to the OIG as required by 

CL 2011-13. Moreover, the three notifications that the OIG received were sent 66 to 278 

days after the Plan had identified the FEP exposure, which does not meet the 30-day 

timeliness requirement defined in CL 2011-13. Additionally, the Plan noted that one of 

these fraud and abuse cases had an indication of potential patient harm, significant media 

attention, or other exceptional circumstances. However, neither the OIG nor OPM’s

contracting officer was notified of this issue, as required by Contract CS 1039 and 

CL 2011-13. 
12

The Plan’s non-compliance with the communication and reporting requirements in 

Contract CS 1039 and CL 2011-13 may be due, in part, to the Plan untimely 

communicating or not reporting potential FEP fraud and abuse cases to the FEPDO’s 

Special Investigations Unit (SIU). The FEPDO’s SIU sends notifications of fraud and 

abuse cases to the OIG on behalf of the Plan. However, the Plan must first report the 

fraud and abuse cases with FEP exposure to the FEPDO’s SIU, which is accomplished 

when the Plan enters the cases into the FEPDO’s Fraud Information Management System 

(FIMS).3 The Plan and the FEPDO’s internal policies and procedures require the Plan to 

enter a case into FIMS as soon as an investigation is opened and/or within 30 days of any 

relevant FEP fraud activity. However, of the 29 cases with FEP exposure during the 

period January 1, 2013 through May 31, 2013, we determined that 17 cases were entered 

into FIMS untimely and 12 cases were not entered into FIMS at all. We noted that the 

Plan subsequently added the 12 cases into FIMS as a result of our audit. Without timely 

FIMS case entries by the Plan, the FEPDO’s SIU cannot meet the FEHBP’s contractual 

communication and reporting requirements. 

Ultimately, both the Plan’s untimely reporting of potential FEP cases to the FEPDO’s

SIU and the FEPDO SIU’s inadequate controls to monitor the Plan’s FIMS entries and 

notify the appropriate entities of these cases have resulted in a failure to meet the 

communication and reporting requirements that are set forth in Contract CS 1039 and 

CL 2011-13. The lack of referrals and/or untimely case notifications did not allow the 

OIG to investigate whether other FEHBP Carriers are exposed to the identified provider 

committing fraud against the FEHBP. This also does not allow the OIG’s Administrative 

Sanctions Group to be notified timely. Consequently, this non-compliance by the Plan 

and FEPDO may result in additional improper payments being made by other FEHBP 

Carriers. 

Recommendation 4

We recommend that the contracting officer require the Association to provide evidence or 

supporting documentation ensuring that the Plan has implemented the necessary 

procedural changes to meet the communication and reporting requirements of fraud and 

abuse cases that are set forth in Contract CS 1039 and CL 2011-13. We also recommend 

that the contracting officer instruct the Association to provide the Plan with more 

oversight to ensure the timely and complete entry of all FEP fraud and abuse cases into 

FIMS, and concurrently, timely and complete communication of those cases to the OIG. 

Association’s Response: 

The Association states, “The Plan has agreed with this recommendation and implemented 

the following procedures on September 16, 2013: 

 The Plan now enters cases into FIMS at the conclusion of the triage process or 

preliminary investigation. Plan SIU’s triage/preliminary investigation process 

 

3

 FIMS is a multi-user, web-based case-tracking database that the FEPDO’s SIU developed in-house. 
13

includes the identification of claims exposure within 30 days of receipt which will aid 

in the timely entry to FIMS. 

 The Plan implemented a quality review process during triage/preliminary 

investigation to monitor compliance of FIMS entries. 

 The Plan updated their desk level procedure revising the scope, policy and procedure 

to define the new triage and quality review process for FIMS entry.”

Recommendation 5 

To ensure that all FEHBP Carriers are reporting statistics to OPM based on the same 

definitions, we recommend that the contracting officers prepare and distribute to all 

Carriers the definitions for the terms “fraud”, “waste”, “abuse”, and “reasonable 

suspicion”.

Association’s Response: 

The Association states, “BCBSA issued a revised FEP Fraud Waste and Abuse Program 

Standards Manual in December 2012 that includes the requirements of the FEHBP, 

industry standards, case sharing and reporting guidelines, as well as the annual reporting 

requirements of Carrier Letters 2003-23, 2003-25 and 2011-13. The FEPDO will 

continue to update this manual as needed based on guidance received from the 

contracting officer.” 

Recommendation 6 

We recommend that the contracting officer direct the Association to provide OPM and 

the OIG full access to FIMS. 

Association’s Response: 

The Association states, “BCBSA continues to partially disagree with the recommendation 

to provide the OPM OIG full access to FIMS . . . FIMS is an internal management 

reporting system used by BCBSA and Local Plans to report Fraud, Waste and Abuse 

cases. Before cases can be accepted into FIMS, they must be reviewed and evaluated by 

BCBSA consultants, who then work with Local Plans to ensure the proper data elements 

are entered. As such, unlimited access by the OIG to the system at this time would result 

in potential inefficiencies for FEP. However, in order to provide the OPM OIG 

investigators with efficient, effective and faster access to cases, BCBSA initiated a 

process where BCBSA and OPM OIG staff meet on a monthly basis at the FEP 

Director’s Office to review case activity. Beginning in July 2013, the meeting location 

moved to the FEPOC, where we expect the meetings to continue.”
14

OIG Comments: 

We continue to recommend that the contracting officer direct the Association to provide 

the OPM and the OIG with full access to FIMS, a program fully paid for by OPM with 

FEHBP funds. Full access is necessary for OPM and the OIG to monitor the 

Association’s fraud and abuse activity and the FEPDO’s oversight, and will allow the 

OIG to make inquiries when we notice Plan non-compliance by a BCBS plan and/or the 

FEPDO such as untimely reporting. In addition, it will provide necessary information for 

analysis purposes prior to future OIG audits. This alone will save time and money for the 

local BCBS plans and the FEPDO. 

The analysis of this Plan’s fraud and abuse cases showed that the Plan’s entries into 

FIMS had significant timeliness issues. Of the 29 cases with FEP exposure during the 

period January 1, 2013 through May 31, 2013, we determined that 17 cases were entered 

into FIMS untimely and 12 cases were not entered into FIMS until after the audit. If the 

OIG had full access to FIMS, at least 17 cases would have been reviewed and 

investigated by us. Also, we would have notified the Plan and FEPDO of the untimely 

reporting issue in real time and resolved the issue much earlier. 
15

IV. MAJOR CONTRIBUTORS TO THIS REPORT 

Experience-Rated Audits Group 

, Lead Auditor 

 Auditor 

, Auditor 

, Auditor 

, Chief (

, Senior Team Leader 
 SCHEDULE A

A. HEALTH BENEFIT CHARGES

PLAN CODES 030 $120,766,703 $132,973,322 $143,545,645 $160,838,429 $169,470,206 $727,594,305

MISCELLANEOUS PAYMENTS AND CREDITS 1,854,873 2,475,383 2,713,773 2,510,618 2,352,266 11,906,913

PLAN CODES 530 114,963,966 121,346,431 130,615,478 137,900,103 151,094,759 655,920,737

MISCELLANEOUS PAYMENTS AND CREDITS 0 0 0 0 0 0

TOTAL HEALTH BENEFIT CHARGES $237,585,542 $256,795,136 $276,874,896 $301,249,150 $322,917,231 $1,395,421,955

B. ADMINISTRATIVE EXPENSES

PLAN CODE 030 $21,323,316 $22,304,662 $22,218,803 $23,949,677 $24,806,556 $114,603,014

BUDGET SETTLEMENT REDUCTIONS (397,255) (281,867) (672,654) 0 0 (1,351,776)

TOTAL ADMINISTRATIVE EXPENSES $20,926,061 $22,022,795 $21,546,149 $23,949,677 $24,806,556 $113,251,238

TOTAL CONTRACT CHARGES $258,511,603 $278,817,931 $298,421,045 $325,198,827 $347,723,787 $1,508,673,193

* This audit covered miscellaneous health benefit payments and credits, administrative expenses, and cash management activities from 2008 through 2012.

TOTAL 

V. SCHEDULES

BLUECROSS BLUESHIELD OF ARIZONA

PHOENIX, ARIZONA

CONTRACT CHARGES

CONTRACT CHARGES* 2008 2009 2010 2011 2012
SCHEDULE B

AUDIT FINDINGS 2008 2009 2010 2011 2012 TOTAL 

A. MISCELLANEOUS HEALTH BENEFIT PAYMENTS

 AND CREDITS $0 $0 $0 $0 $0 $0

B. ADMINISTRATIVE EXPENSES

 1. Unreasonable and/or Unallocable Costs $109,549 $121,945 $140,019 $324,254 $411,340 $1,107,107

 2. Post-Retirement Benefits Costs 0 0 0 788,245 13,926 802,171

 3. Pension Costs 0 0 4,674 (7,406) (5,468) (8,200)

 TOTAL ADMINISTRATIVE EXPENSES $109,549 $121,945 $144,693 $1,105,093 $419,798 $1,901,078

C. CASH MANAGEMENT $0 $0 $0 $0 $0 $0

D. FRAUD AND ABUSE PROGRAM

 1. Special Investigations Unit (Procedural) $0 $0 $0 $0 $0 $0

 TOTAL FRAUD AND ABUSE PROGRAM $0 $0 $0 $0 $0 $0

TOTAL QUESTIONED CHARGES $109,549 $121,945 $144,693 $1,105,093 $419,798 $1,901,078

BLUECROSS BLUESHIELD OF ARIZONA

PHOENIX, ARIZONA

QUESTIONED CHARGES
November 22, 2013 

, Group Chief 

Experience-Rated Audits Group 

Office of the Inspector General 

U.S. Office of Personnel Management 

1900 E Street, Room 6400 

Washington, DC 20415-11000 

Reference: OPM DRAFT AUDIT REPORT 

BlueCross BlueShield of Arizona 

Audit Report Number 1A-10-56-13-047 

(Dated September 26, 2013 and Received September 26, 2013) 

Dear : 

This is the BlueCross BlueShield of Arizona response to the above referenced U.S. 

Office of Personnel Management (OPM) Draft Audit Report covering the Federal 

Employees’ Health Benefits Program (FEHBP). BCBSA and the Plan are committed to 

enhancing our existing procedures on issues identified by OPM. Please consider this 

feedback when updating the OPM Final Audit Report. 

Our comments concerning the findings in the report are as follows: 

A. Miscellaneous Health Benefit Payments and Credits-No Findings 

B. Administrative Expenses 

1. Unreasonable and/or Unallocable costs $1,107,107 

OPM questioned $1,107,107 in unallowable/unallocable project costs 

charged to the FEHBP in 2008-2012. The Plan agreed with this finding and 

submitted Prior Period Adjustments (PPA) to adjust the costs in the amount 

of $1,107,107 on October 3, 2013. 

 

 As noted in the draft report, the Plan has implemented the following: 

 The Cost Center Review (CCR) template has been revised and formatted 

in Excel, replacing the Word template. This allows the Plan to extract data 

from 

Federal Employee Program

1310 G Street, N.W.

Washington, D.C. 20005

202.942.1000

Fax 202.942.1125
November 22, 2013 

Page 2 of 4 

2 

their Cost Accounting System and other Excel files resulting in efficiencies 

and better accuracy. 

 To help ensure that cost center managers are reviewing the allocation 

percentages to each line of business, the CCR template now requires the 

user to select “Yes” or “No” as to whether their cost center supports a line 

of business. If the cost center indicates they support FEP, an additional 

question is asked as to whether the FEP percentage is reasonable. As it 

was before, the cost center’s management approval of how their cost 

center is allocating to lines of business is required. 

 A CCR template will be completed for every cost center annually and 

will continue to be peer reviewed in Cost Accounting and require the 

Cost Accounting manager’s sign-off. Beginning in 2012, the Sr. 

Manager has been meeting with the Cost Center manager and the 

CCR team monthly to review cost center reviews and current 

issues.” 

 

2. Post Retirement Benefit Costs $802,171 

The Plan overcharged the FEHBP $802,171 for post-retirement benefits (PRB) 

costs in 2011 and 2012. The Plan agreed with this finding and submitted Prior 

Period Adjustments totaling $802,171 on October 3, 2013. 

This overcharge was a result of an oversight of the Plan’s procedures. The 

Plan’s procedures have been strengthened to ensure this does not happen in the 

future. 

3. Pension Costs ($8,200) 

The Plan undercharged the Program for pension costs from 2010 through 2012. 

The Plan agreed with this finding and filed the appropriate Prior Period 

Adjustments on October 3, 2013. 

C. Cash Management – No findings 

D. Fraud and Abuse Program Procedural 

Recommendation 4 

OPM recommended that the contracting officer direct the Association to ensure that 

the Plan makes the referenced procedural changes. 
November 22, 2013 

Page 3 of 4 

3 

The Plan has agreed with this recommendation and implemented the following 

procedures on September 16, 2013: 

 The Plan now enters cases into FIMS at the conclusion of the triage process 

or preliminary investigation. Plan SIU’s triage/preliminary investigation 

process includes the identification of claims exposure within 30 days of 

receipt which will aid in the timely entry to FIMS. 

 The Plan implemented a quality review process during triage/preliminary 

investigation to monitor compliance of FIMS entries. 

 The Plan updated their desk level procedure revising the scope, policy and 

procedure to define the new triage and quality review process for FIMS entry. 

Recommendation 5 

OPM recommended the contracting officer provide or issue guidance on the 

definitions of Fraud, Waste and Abuse, as well as “reasonable suspicion” in order for 

the Association and the local BCBS plans to have consistent guidance on the 

expectations of OPM for reporting purposes. 

BCBSA issued a revised FEP Fraud Waste and Abuse Program Standards Manual 

in December 2012 that includes the requirements of the FEHBP, industry standards, 

case sharing and reporting guidelines, as well as the annual reporting requirements 

of Carrier Letters 2003-23, 2003-25 and 2011-13. The FEPDO will continue to 

update this manual as needed based on guidance received from the contracting 

officer. 

Recommendation 6 

OPM recommended that the contracting officer direct the Association to provide 

OPM and the OIG full access to FIMS. 

BCBSA continues to partially disagree with the recommendation to provide the OPM 

OIG full access to FIMS and BCBSA National Anti-Fraud Advisory Board (NAAB) 

meetings. FIMS is an internal management reporting system used by BCBSA and 

Local Plans to report Fraud, Waste and Abuse cases. Before cases can be accepted 

into FIMS, they must be reviewed and evaluated by BCBSA consultants, who then 

work with Local Plans to ensure the proper data elements are entered. As such, 

unlimited access by the OIG to the system at this time would result in potential 

inefficiencies for FEP. However, in order to provide the OPM OIG investigators with 

efficient, effective and faster access to cases, BCBSA initiated a process where 

BCBSA and OPM OIG staff meet on a monthly basis at the FEP Director’s office to 
November 22, 2013 

Page 4 of 4 

4 

review case activity. Beginning in July 2013, the meeting location moved to the 

FEPOC, where we expect the meetings to continue. 

We appreciate the opportunity to provide our response to this Draft Audit Report and 

request that our comments be included in their entirety as an amendment to the Final 

Audit Report. 

Sincerely, 

Managing Director, Program Assurance 

lr/md 

cc: Sylvia Pulley, Contracting Officer, OPM