u.s. OFFICE OF PERSOJ'..NEL TviA.NAGETviENT 

OFFICE OF THE INSPECTOR GENERA.L 

OFFICE OF AUDITS 

Final Audit Report
 

Subject: 

Audit of the Federal Employees Health Benefits 

Program operations at AmeriHealth HMO, Inc. 

Report No. lC-FK-OO-lO-058 

Date: March 24 ( 2011 

--CAUTJO:'l!-­

This audit report hJ35- been distriburcd to Fcdenll officialSi- who <"Ire rc~pons-ible for tile admini~~ralion 0[' th~ ~udited program. This ,wd,t 

repcn m<lY contain proprictuy dala which i~ protected b)' Fedend Jaw (18 ll.S.C. 19(5). Therefore. wldlc this audit report is :n'llilllbJe 

under the; Frc;edom of Information ;\ct and made .nailable to rile pHblic on thl: OlG webp:Jge, caution needs to be exerci~cd before 

relel:l:l-ing the. report!O the gennal p~lblic. as it may contni" IH"OQrlc(ary ill formation that mlS redacted from the publiely distributed copy. 
C~ITED STATES OfFICE OF PERSONNEL \[A,,'AGL\JENT 

Onlcc of tr.e 

Inspect,X Cien,-:r2J 

AUDIT REPORT
 

Federal Employees Health Benefits Program
 

Community Rated Health 'Vlaintenance Organization
 

AmeriHealth H'VIO, Inc.
 

Contract Number CS 1893 - Plan Code FK
 

Iselin, ]\ew Jersey
 

Report No. lC-FK-OO-10-058 Date: 3/24/2011 

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"CA"" " ",~'~I.""':';" ~'::":~~-:"'~~,:rl~~ t~- ,~;.\"

.' !\lid\aei It Esser 

Assistant Inspector General 

for Audits 

---------, ,.~ _..--.,._~ --:-~.~~~

,,'N'~~~T~~:~~'~bs. p" 
U,ITED STATES OHICE OF PU,SOI\NlcL kl.\I\ACEtvlE\'T 

CXiiL't" uf Jt::­

1~I~ptCI~J;- (Jl2n2,ClI 

EXECUTIVE SCMMARY
 

Federnl Employees Health Benefits Program
 

Communit)' Rated Health :\Iaintenance Organization
 

AmeriHcalth HMO, Inc.
 

Contract :'lumber CS 1893 - Plan Code FK
 

Iselin, :'lew .Jersey
 

Report No. lC-FK-OO-10-OS8 Date: 3/24/2011 

The Offlce of the Inspector General perfoDlled an audit of the Federal Employees Health 

Benefits Program (FEHBP) operations at AmeriHealth H\10, Inc. (Plan) The audit covered 

contract years 2007 through 20 I0 and was conducted at the Plan's office in Iselin, New Jersey. 

This repon questions $212..942 for inappropnate health benefit charges in contract years 2007 

through 2009. including $22.225 for related Inst investment income. We found that the FEHBP 

rates were developed In accordance with the Office 01' Personnel \1anagement's rules al,d 

regulations in contract year 20 IO. 

In 2007 through 2009. the Plan incorrectly appltecl the discuunt tu Ime i of the FEHBP rates. [n 

2007. the similarly sized subscriber group (SSSG) discount represented a total rate discount. 

encompassing all costs, including base medical costs and other benefit riders. Ho,vever, the 

discount was applied to the FEHBP's medical costs only (ie, line 1). exclusive of the fEHBP's 

benefn riders. Applying a total rate discount to the FEHBP's base med:cal rate IS inconsistent 

treatment; therefore, we removed the discount from line ] and applied it to line 5. For 2008 and 

2009, the proposal ip.structions state all discounts should be applied to line 5 of the FEHBP 

reconciled rates. Accordingly, we removed the discount from line 1 and computed the audited 

FEHBP rates by applying the largest discoup.t given to an SSSG to line 5 of the FEHBP rates 

As a result, tile FEHBP rates were overstated by $49,224, $1 19.028, and 522.465 !l" 2007 

through 2009, tespectively. 

~,ww.opm_go~
Consistent with the FEHBP regulations and contract, the FEHBP is due $22,225 for lost 

investment income, calculated through December 31, 20 I0, on the defective pricing findings in 

2007 through 2009. 

The Plan agreed with the findings and remitted a check for $212,942. 

II 
CONTENTS 

EXECUTIVE SUMMARy	 i
 

I. INTRODUCTION AND BACKGROUND	 1
 

II.	 OBJECTIVES, SCOPE, AND METHODOLOGy 3
 

III.	 AUDIT FINDINGS AND RECOMMENDATIONS 5
 

Premium Rate Review 5
 

I. Defective Pricing	 5
 

2. Lost Investment Income	 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)
 
,/ 4,500 

I­ ,/ 4,000 

,/I3,500 

- 3,000 V .---­ ,/ 2,500 

,/ 2,000 

,/ 1,500 

1,000 

500 

0 

~Contracts

DMembers 

F' 

- F' 

"" f-= ;­ .---­

'­ ~.

- t1'! 

r-~- !"'I " -

:-1 - I- 'I I2007 

" L.. '. 

2008 

I 

"". , '" 

2009 

4,1 

"'" ' -.1 

2010 "" 

1,997 ',546 1,450 1,262 

4,423 2596 I 2,,986 2,473 

I. INTRODUCTION AND BACKGROUND
 

Introduction 

\\'e completed an audit of the Federal Employees Health Benefits Program (FEHBP) operations 

at AmeriHealth HMO, Inc, (Plan), The audit covered contract years 2007 through 2010 and was 

conducted at the Plan's offices in Iselin, Nevi Jersey, The audit ,vas conducted pursuant to the 

provisions of Contract CS 1893; 5 U,S,c. Chapter 89: and 5 Code of Federal Regulations (CFR) 

Chapter L Part 890, The audit ,vas perfomled by the Office of Persormel 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 Act (Public La,v 86­


382), enacted on September 28,1959, The FEHBP ,vas created to provide health insurance
 

benefits for federal employees, arlliuitants, and dependents. The FEHBP is administered by
 

OPM's Healthcare and Insurance Oftlce, The provisions of the Federal Employees Health
 

Benefits Act are implemented by OPM through regulations coditled in Chapter 1, Part 890 of
 

Title 5, CFR, Health insurance coverage is provided through contracts viith various health
 

ins'Jrance carriers ,vho provide service benefits, indemnity benefits, or comprehensive medical
 

serVIces,
 

Community-rated caITiers participating in the FEHBP are subject to various federal, state and
 

local laws, regulations, and ordinances, While most caITiers are subject to state jurisdiction,
 

many are further subject to the Health Maintenance Organization Act of 1973 (?ublic Lavv 93­


222), as amended (i,e" many communitv-rated cmiers are federally qualitied), In addition,
 

participation in the FEHBP subjects the caITiers to the Federal Employees Health Benefits Act
 

and implementing regulations promulgated by
 

OPM,
 FEHBP Contracts/Members 

March 31 

The FEHBP should pay a market price rate, 

,vhich is defined as the best rate offered to 

either of the t,vo groups closest in size to the 

FEHBP. In contracting ,vith community-rated 

carriers, OPlvI relies on carTier compliance 

,vith appropriate lavis and regulations and. 

consequently, does not negotiate base rates, 

OPlvI 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 !vlarch 31 of each contract year 

audited, 
The Plan has participated in the FEHBP since 1980 and provides comprehensive medical 

services to FEHBP members throughout the State of New Jersey. The last audit of the Plan 

conducted by our office was a full scope audit of contract years 2003 through 2006. 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 was also provided to the Plan for review and comment. The Plan agreed with the 

findings and remitted a check for $212,942, representing full payment for the findings. 

2
 
FEHBP Premiums Paid to Plan 

$20 

$15 

$10 

I!II Re'venue $18 9	 S':63 

II. OBJECTIVES, SCOPE. AND i\lETHODOLOGY 

Objectives 

The primary objecrives ofthe audit were to verify that the Plan ofrered 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 FEHBl' 

We conducted this performance audit in 

accordance with generally accepted 

government auditing standards. Those 

standards require that we plan and perlixn: the 

audit to obtain sufticiel:L appropriate evidence 

to provide a reasonable basis for our findings 

and conclusions based on our audit objectives. 

v"e believe that the evidence obtained 

provides a reasonable basis for our fjndings 

and conclusions based on our audit objectives. 

This perfonnance audit covered contract years 

2007 through 20 10. For contract years 2007 

through 2009. the FEHBP paid appro, imateJy 

$50.8 millio11 in premiems to the Plan. 1 The premiums paid for each contract year audited are 

shown on the chart above. 

OIG audits of commumty-rated carriers are designed to test carrier compliance with the FEHBP 

contract, applicable laws and regulations, and OP\·l rate instructions. These audits are also 

designed to provide reasonable assurance of detecting errors, irregularities, and illegal acts. 

We obtained an understanding orthe Plan's internal control structure. but we did not use this 

infonnation to determine the nature, timing, and extent of our audit procedures. HOIveveL the 

audit included such tests of the Plan's rating systems and such other auditing procedures 

considered necessary under the circumstances Our review of internal controls was limited to the 

procedures the Plan ha5 in placc 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 .. eqUlvalen! to the best 

rate offered to an SSSG): and 

•	 the loadings to the FEHBP rates were reasonable and equitable. 

The premiums pa~d for 2010 were not a'vailable at the rirne this report was compleTed 
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 performed in accordance with generally accepted government auditing standards, 

issued by the Comptroller General of the United States. 

The audit fieldwork was performed at the Plan's office in Iselin, New Jersey, during August 

2010. Additional audit work was completed at our offices in Washington, D.C., Jacksonville, 

Florida, and Cranberry Township, Pennsylvania. 

Methodology 

We examined the Plan's federal rate submissions and related documents as a basis for validating 

the market price rates. Further, we examined claim payments to verify that the cost data used to 

develop the FEHBP rates was accurate, complete, and valid. In addition, we examined the rate 

development documentation and billings to other groups, such as the SSSGs, to determine if the 

market price rate 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 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 RECOMMENDAnONS 

Premium Rate Review 

1. Defective Pricing $190,717 

The Certificates of Accurate Pricing the Plan signed for contract years 2007 through 2009 

were defective. In accordance with federal regulations, the FEHBP is therefore due a rate 

reduction for these years. Application of the defective pricing remedies shows that the 

FEHBP is entitled to premium adjustments totaling $190,717 (see Exhibit A). We found that 

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

year 2010. 

FEHBAR 1652.215-70 provides that carriers proposing rates to OPM are required to submit a 

Certificate of Accurate Pricing certifying that the 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 a market price (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. 

We agree with the Plan's selection 0 as the SSSGs for contract 

year 2007. Our analysis of the SSSGs' rates shows that_eceived a ~ercent

discount and Grinspec Trust received a.percent discount. 

Our analysis of the FEHBP rates shows that the Plan applied an_percent discount to line 

I of the FEHBP rates. We do not agree with applying the discount to line 1, which represents 

the FEHBP's base medical costs, exclusive of any benefit riders. The SSSG discount 

represents a total rate discount, encompassing all costs, including base medical and other 

benefit riders. Therefore, applying the discowlt to the FEHBP's line I rates is inconsistent, 

and we calculated our audited FEHBP rates by removing the discount from line I and 

applying the largest SSSG discount identified during our review to line 5. 

Since OPM requires the FEHBP rates to be at least equivalent to the best rates given to an 

SSSG, we recalculated the FEHBP rates by applying the factors, trends, and the.percent 

discount given to Grinspec Trust. A comparison of our audited line 5 rates to the Plan's 

reconciled line 5 rates shows that the FEHBP was overcharged $49,224 in 2007 (see Exhibit 

B). 

We agree with the Plan's selection of 

as the SSSGs for contract year 2008. Our analysis of the SSSGs' rates shows 

5 
that received a.percent discount and eceived 

a.percent discount. 

Our analysis of the FEHBP rates shows that the Plan applied an.percent discount to line 

I of the FEHBP rates, as well as a.percent discount to the prescription drug (Rx) portion 

of the rate. As stated in the 2008 proposal instructions, all discounts should be applied to line 

5 of the FEHBP reconciled rates. Accordingly, we calculated our audited rates by removing 

the discounts from line I and the Rx rate and applying the largest SSSG discount identified 

during our review to line 5. 

Since OPM requires the FEHBP rates to be at least equivalent to the best rates for an SSSG, 

we recalculated the FEHBP rates by applying the factors, trends, and 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 $119,028 in 2008 (see Exhibit 

B). 

The analysis ofthe SSSGs' rates shows that received an_ 

percent discount and eceived a percent discount. 

Our analysis of the FEHBP rates shows that the Plan applied an.percent discount to line 

1 ofthe FEHBP rates, as well as an _percent discount to the Rx portion of the rate. As 

stated in the 2009 proposal instructions, all discounts should be applied to line 5 of the 

FEHBP reconciled rates. Accordingly, we calculated our audited rates by removing the 

discounts from line 1 and the Rx rates and applying the largest SSSG discount identified 

during our review to line 5. 

Since OPM requires the FEHBP rates to be at least equivalent to the best rates for an SSSG, 

we recalculated the FEHBP rates by applying the factors, trends, and 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 $22,465 in 2009 

(see Exhibit B). 

Plan's Comments: 

The Plan submitted a check, dated February II, 20 11, totaling $212,942 ($190,717 defective 

pricing plus $22,225 lost investment income). This evidences concurrence by the Plan to our 

defective pricing findings and no further action is required. 

6 
Recommendation 1 

After receiving the draft report, the Plan returned $190,717 to the FEHBP for defective 

pricing in contract years 2007 through 2009. Since we verified that the Plan returned 

$190,717 to the FEHBP, no further action is required. 

2. Lost Investment Income $22,225 

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 2007 through 2009. We determined that the FEHBP is due $22,225 for lost 

investment income, calculated through December 31,2010 (see Exhibit C). 

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 of the overcharge caused by the defective data. In addition, when 

the rates are reduced due to defective pricing, the regulation states that the govemment is 

entitled to a refund and simple interest on the amount of the overcharge from the date the 

overcharge was paid to the carrier until the overcharge is liquidated. 

Our calculation oflost investment income is based on the United States Department of the 

Treasury's semiannual cost of capitat rates. 

Plan's Comments: 

The Plan submitted a check, dated February II, 20 II, totaling $212,942 ($190,717 defective 

pricing plus $22,225 lost investment income). This evidences concurrence by the Plan to our 

lost investment income finding and no further action is required. 

Recommendation 2 

After receiving the draft report, the Plan returned $22,225 to the FEHBP for lost investment 

income on the defective pricing findings in contract years 2007 through 2009. Since we 

verified that the Plan returned $22,225 to the FEHBP, no further action is required. 

7
 
IV. MAJOR CONTRIBUTORS TO THIS REPORT 

Community-Rated Audits Group 

Auditor-In-Charge 

~uditor
 

Senior Team Leader 

Chief 

8
 
Exhibit A 

AmcriHealth HMO, Inc. 

Summary of Questioned Costs 

Defective Pricing Questioned Costs: 

Contract Year 2007 

Contract Year 2008 

Contract Year 2009 

$49,224 

$119,028 

$22,465 

Total Defective Pricing Questioned Costs: $190,717 

Lost Investment Income: $22.225 

Total Questioned Costs: $212,942 
Exhibit B 

Page 1 of2 

AmeriHealth HMO, Inc. 

Defective Pricing Questioned Costs 

FEHBP Line 5 - Reconciled Rate 

FEHBP Line 5 - Audited Rate 

Overcharge 

To Annualize Overcharge: 

3/31/07 enrollment 

Pay Periods 

Subtotal 

26 

Total 2007 Defective Pricing Questioned Costs $49.224 
Exhibit B 

Page 2 of2 

AmeriHealth HMO, Inc. 

Defective Pricing Questioned Costs 

2009 - High Option 

FEHBP Line 5 - Reconciled Rate 

FEHBP Line 5 - Audited Rate 

Family 

Overcharge 

To Annualize Overcharge: 

3/31/09 enrollment 

Pay Periods 

Subtotal 

Total 2009 High Option Defective Pricing Questioned Costs $21,814 

2009 - Standard Option 

FEHBP Line 5 - Reconciled Rate 

FEHBP Line 5 - Audited Rate 

Overcharge 

To Annualize Overcharge: 

3/31/09 enrollment 

Pay Periods 

Subtotal 

Total 2009 Standard Option Defective Pricing Questioned Costs 

Total 2009 Defective Pricing Questioned Costs $22.465 
EXHIBITC 

AmeriHealth HMO, Inc. 

Lost Investment Income 

Year 2007 2008 2009 2010 Total
 

Audit Findings:
 

1. Defective Pricing $49,224 $1 J9,028 $22,465 $0 $190,717 

Totals (per year): $49,224 $119,028 $22,465 $0 $190,717 

Cumulative Totals: $49,224 $168,252 $190,717 $190,717 $190,717 

Avg. Interest Rate (per year): 5.500% 4.938% 5.2500% 3.1875% 

Interest on Prior Years Findings: $0 $2,430 $8,833 $6,079 $17,342 

Current Years Interest: $1,354 $2,939 $590 $0 $4,883 

Total Cumulative Interest
 

Calculated Through
 

December 31, 2010: $1,354 $5,369 $9,423 $6,079
 $22,225