CONTENTS 

Page 

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

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

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

III. RESULTS OF THE AUDIT............................................................................................ 5 

IV. MAJOR CONTRIBUTORS TO THIS REPORT............................................................ 6 
 

 

 

 

 

 

 

I. INTRODUCTION AND BACKGROUND
 

Introduction 

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

at PacifiCare of Nevada (Plan) in Cypress, California. The audit covered contract years 2009 

and 2010. The audit was conducted pursuant to the provisions of Contract CS 2899; 5 U.S.C. 

Chapter 89; and 5 Code of Federal Regulations (CFR) Chapter 1, Part 890. The audit was 

performed by the Office of Personnel Management’s (OPM) Office 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 Healthcare and Insurance Office. The provisions of the Federal Employees Health 

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

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

insurance carriers that provide service benefits, indemnity benefits, or comprehensive medical 

services. 

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

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

many are further subject to the Health Maintenance Organization Act of 1973 (Public Law 93­

222), as amended (i.e., many community-rated carriers are federally qualified). In addition, 

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

and implementing regulations promulgated by 

OPM. FEHBP Contracts/Members 

March 31 

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 community-rated 

carriers, OPM relies on carrier compliance 

with appropriate laws and regulations and, 

consequently, does not negotiate base rates. 

OPM negotiations relate primarily to the level 

of coverage and other unique features of the 

FEHBP. 

The chart to the right shows the number of 

FEHBP contracts and members reported by 

the Plan as of March 31 of each contract year audited. 

0 

500 

1,000 

1,500 

2,000 

2,500 

Contracts 1,262 1,255 

Members 2,464 2,452 

2009 2010 

1 
The Plan has participated in the FEHBP as a community-rated comprehensive medical plan since 

1983 and provides comprehensive medical services to FEHBP members throughout Nevada. 

The last audit of the Plan conducted by our office was a full scope audit of contract years 2004 

through 2008. There were no findings during the previous audit. The Plan ceased participation 

in the FEHBP effective December 31, 2010. 

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

Since the audit showed that the Plan’s rating of the FEHBP was in accordance with the 

applicable laws, regulations, and instructions, we did not issue a draft report. 

2 
 

 

 

 

 

 

 

 

 

 

 

 

II. OBJECTIVES, SCOPE, AND METHODOLOGY
 

Objectives 

The primary objectives of the audit were to verify that the Plan offered market price rates to the 

FEHBP and to verify that the loadings to the FEHBP rates were reasonable and equitable. 

Additional tests were performed to determine whether the Plan was in compliance with the 

provisions of the laws and regulations governing the FEHBP. 

Scope 

We conducted this performance audit in FEHBP Premiums Paid to Plan 

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 

2009 and 2010. For these contract years, the 

$0 

$2 

$4 

$6 

$8 

$10 

$12 

Millions 

Revenue $10.10 $9.96 

2009 2010 

FEHBP paid approximately $20.1 million in 

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

above. 

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

contract, applicable laws and regulations, and OPM rate instructions. These audits are also 

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

We obtained an understanding of the Plan’s internal control structure, but we did not use this 

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

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

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

procedures the Plan has in place to ensure that: 

• The appropriate similarly sized subscriber groups (SSSG) were selected; 

•	 The rates charged to the FEHBP were the market price rates (i.e., equivalent to the best 

rate offered to an SSSG); and 

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

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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 Cypress, California, during March 

2011. Additional audit work was completed at our offices in Cranberry Township, Pennsylvania 

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 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, 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 system. 

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. RESULTS OF THE AUDIT
 

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 2009 and 2010. 

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

necessary. 

. 

5 
6 

IV. MAJOR CONTRIBUTORS TO THIS REPORT

Community-Rated Audits Group 

 

, Auditor-In-Charge 

, Auditor 

, Chief 

, Senior Team Leader