u.s. OFFICE OF PERSONNEL MANAGEMENT 

OFFICE OF THETNSPECTOR GENERAL 

OFFICE OF AUDITS 

Final Alldlt Report 

. Subject: 

. . . . . . . . . . 

.... ,Al1(litoftbe Federal Employees lIealth Benefits 

··.Progranl·.· Oper~tiollS·· of··'J?acitiCare.·of 'Colorado' 

Report No. 1 C'-D6~OO~09'-005 

Date: November. 12; ·2009 

-- CAUTION -­

This audit report has been distiibutedtoFederal offidalswho are responsibie for the administration of tlle.audited program. This 

audit report may c~ntainproprietlliry data. which is protected byFederal law (18U.S.C. i90~)_ Therefore, while Ihis audit report i$ 

available under the Freedom of Information Act and made available .10 the public on ihe OIG webpage, caution needs to be exercised 

before releasing the report to Ihe general public as il may contain proprietary i'nCormalion that was redacted from the publici)' 

distributed copy.' '., . 
UNITED STATES OFFICE OF PERSONNEL MANAGEMENT 


Washington, DC 20415 


Office of the 

Inspector General 

EXECUTIVE SUMMARY 


Federal Employees Health Benefits Program 


Community-Rated Health Ma'intenance Organization 


PacifiCare of Colorado 


Contract Number 1761 - Plan Code D6 


Cypress, California 


Report No. lC-D6-00-09-00S Dak:November 12, 2009 

The Office ofthe Inspector General perfonned an audit ofthe Federal Employees Health Benefits 

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

2005 through 2008 and was conducted at the Plan's office in Cypress, California. We found that 

the FEHBP rates were developed in accordance with the Office ofPersonnel Management's rules 

and regulations in the years audited. This report details a procedural finding related to a non~ 

covered eye exercise benefit which was incorrectly paid by the Plan. 

www.opm.gov www.usajobs.gov 
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 


PacifiCare of Colorado 


Contract Number 1761 - Plan Code D6 


Cypress, California 


Report No. lC-D6-00-09-005 Dak: November 12, 2009 

Michael R. Esser 

Assistant Inspector General 

for Audits 

----------------.-- ---------------------------------­ www.opm.gov www.usaJobs.gov 
CONTENTS 


Page 

EXECUTIVE SUMMARy............................................................................................... i 


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


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


III. 	 AUDIT FINDINGS AND RECOMMENDATION ........................................................ 5 


Premium Rate Review ...................................................................................................... 5 


Claims Review .................................................................................................................. 5 


1. Payment ofNon-Covered Services .............................................................................. 5 


IV. 	 MAJOR CONTRlBUTORS TO THIS REPORT ........................................................... 6 


Appendix (PacifiCare of Colorado's October 2,2009, response to the draft report) 

I. INTRODUCTION AND BACKGROUND 


Introduction 

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

at PacifiCare of Colorado (Plan). The audit covered contract years 2005 through 2008 and was 

conducted at the Plan's office in Cypress, California. The audit was conducted pursuant to the 

provisions of Contract CS 1761; 5 U .S.C. Chapter 89; and 5 Code of Federal Regulations (CFR) 

Chapter I, Part 890. The audit was performed by the Office ofPersonnel 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 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 I, 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 earners 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 camers are federally qualified). In addition, 

participation in the FEHBP subjects the 

carriers to the Federal Employees Health FEHBP Contracts/Members 

Benefits Act March 31 and implementing regulations 

promulgated by OPM. 

The FEHBP should pay a market price rate, 

which is defined as the best rate offered to 

either of the two groups closest in size to the 

FEHBP. In contracting with communityrated carriers, OPM relies on carrier 

compliance with appropriate laws and 

regulations and, consequently, does not 

negotiate base rates. OPM negotiations relate 

primarily to the level of coverage and other 

unique features of the FEHBP. 

The chart to the right shows the number ofFEHBP contracts and members reported by the Plan 

as of March 3 I for each contract year audited. 

1 

The Plan has participated in the FEHBP since 1978 and provides health benefits to FEHBP 

members throughout the Metropolitan Denver, Boulder, and Colorado Springs areas. The last 

full-scope audit covered contract years 2000, 200),2003 and 2004. AU questioned costs 

associated with that audit have been resolved. 

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

through subsequent correspondence. A draft report was also provided to the Plan for review and 

comment. The Plan's comments were considered in the preparation ofthis 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 ofthe laws and regulations governing the FEHBP. 

FEHBP Premiums Paid to Plan 

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 2005 


through 2008. For these years, the FEHBP paid 


approximately $359.8 million in premiums to the Plan. 


The premiums paid for each contract year audited are shown on the chart to the right. 


DIG 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 ofthe Plan's internal control structure, but we did not use this 


information to determine the nature, timing, and extent of our audit procedures. However, the 


audit included such tests ofthe Plan's rating system and such other auditing procedures 


considered necessary under the circumstances. Our review 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 SSSGs); and 

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

In conducting the audit, we relied to varying degrees on computer-generated bil1ing, emoUment, 

and claims data provided by the Plan. We did nol verify the reliability of the data generated by 

3 
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 of the United States. 

The audit fieldwork was performed at the Plan's office in Cypress, California, during January 

2009. Additional audit work was completed at our office in Cranberry Township, Pennsylvania. 

Methodology 

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

the market price rates. In addition, we examined the rate development documentation and 

biI1ings to other groups, such as the SSSGs, to determine if the market price was actually charged 

to the FEHBP. Finally, we used the contract, the Federal Employees Health Benefits Acquisition 

Regulations, and OPM's Rate Instructions to Community-Rated Carriers to determine the 

propriety ofthe FEHBP premiums and the reasonableness and acceptability of the 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 RECOMMENDATION 


Premium Rate Review 

Our audit showed that the Plan's rating of the FEHBP was in accordance with the applicable 

laws, regulations, and OPM's rating instructions to carriers for contract years 2005 through 2008. 

Consequently, the audit did not identify any questioned costs and no corrective action is 

necessary. 

Claims Review 

Per FEHBP Program Carrier Letters 2006-14 and 2007-09, the Office of Personnel Management 

requires all carriers to keep on file all data necessary to justify its Adjusted Community Rating 

(ACR) rate and save back-up copies oftheir claims databases for audit purposes. We reviewed 

FEHBP claims data for contract years 2007 and 2008. We ran queries on the claims data that 

relate to hospital, physician, out-of-area, prescription drugs and injectible drugs, large claims, 

coordination of benefits, bundling of claims, and non-covered benefits according to the FEHBP 

benefit brochures. We found that in 2008, the Plan paid for non-covered benefits. 

1. Payment for Non-Covered Services 

Our review of the 2008 FEHBP claims data shows that the Plan paid for claims that related to 

eye exercises, which is a non-covered benefit according to the FEHBP benefit brochure. We 

queried claims data during the experience period ofApril 1, 2006 through March 31, 2007 and 

found that there were eight instances ofthe Plan inappropriately paying for this benefit. The 

total paid amount was $1,000. We notified the Plan of our results and requested an 

explanation for payment ofthese claims. The Plan agreed that the eye exercise claims were 

paid erroneously. The Plan also noted that their claims system was set up incorrectly. The 

Plan asserts that the system was corrected on June 9, 2009 and assures that any claims ofthis 

category will not be covered going forward. Due to this benefit being of rare usage, the Plan 

could not provide any eye exercise claims that have been submitted and rejected or any other 

documentation to show the system has been corrected. We agree with the Plan that these 

claims were paid incorrectly. Additionally, the amount in question does not have a significant 

impact on the premium rates for 2008. 

Plan~s Comments (See Appendix) 

The Plan agrees with our finding. 

Recommendation 1 

We recommend that the contracting officer require the Plan to monitor its claims system and 

track eye exercises to ensure that these claims are being reviewed and rejected as a n011­

covered benefit. 

5 
IV. MAJOR CONTRIBUTORS TO THIS REPORT 

Community-Rated Audits Group 

Audi tor-In-Charge 

Auditor 

Senior Team Leader 

Chief 

6 

Appendix 

300 South Grand Avenue. Su~le 2600 

. Los Angeles, CA 900-(1 

Telephone: 213-485·1500 

Fax: 213A3~'200 

I~LB&l~ www.IO,:xBlorrJcom 20UQ0C1-5 

Locke Lord Bisse11 &Liddell.,,, 

Attorneys & Counseiors 

October 2, 2009 

rV-Irl:rlllP.rl Audits Group 

Office of the Inspector General 

U.S. Office of Personnel Management 

1900 E. Street, NW, Room 6400 

Washington, DC 20415-1100 

RE: 	 Comments to the Draft Audit Report on PacifiCare of Colorado, Plan Code 06, Report No.1 C06-00-09-005 

Dear_ 

We represent PacifiCare of Colorado, a UnitedHealthcare Company ("UnitedHealthcare") in 

connection with the above referenced matter. UnitedHealthcare Company is responding to this audit 

on behalf of PacifiCare of Colorado ("PacifiC are," "PacifiCare of Colorado," or "the Plan.") 

On August 24, 2009, the United States Office of Personnel Management, Office of the 

Inspector General ("OPM/OIG") submitted to the Plan a "Draft Report" (1C-D6-00-09-005) ("Draft 

Report"), detailing the results of its audit of the Federal Employee Health Benefits Program ("r ':hE'P': 

operations of PacifiCare of Colorado for Contract Years 2005 through 2008. Upon submission. 

OPM/OIG requested that the Plan provide comments to the Draft Report. The Plan apprec.i,·,\W, :" 

opportunity to respond to this Draft Report. 

At the time of the audit, the Plan discussed with the OIG auditors the erroneous payment of 

claims for non-covered eye exercises. The Plan also informed OIG that the Plan had subsequently 

made corrections to its claims system that would prevent such erroneous payments in the future. The 

Plan agrees to monitor its claims system that tracks eye exercises to ensure that these claims are 

being reviewed and rejected as a non-covered benefit. 

The total amount erroneously paid was $1,000.00. It is the Pian's understanding that this 

amount had no significant impact on the 2008 rates and no amounts are due OPM on this issue. 

Please contact me at the address, phone number or e-mail on this letterhead if you have any 

questions or require additional information. We appreciate your ongoing cooperation. 

Very truly yours, 

LOCKE, LORD, BISSELL & LIDDELL LLP 

cc: 

9 

UnitedHealthcare 

Atlanta, Austin, Boston, Chicago, Dallas, Houston, London, Los Angeles, New Orleans. New York, Sacramento, Washington DC