So why should the IG community become involved? Why us? I answer it with another question. Why should we not get involved? We have one of the most diverse and talented criminal investigative cadres in the federal government. Indeed, a vast majority of our special agents have come from traditional law enforcement agencies. These individuals have all been highly trained and are extremely capable of dealing with complex, criminal cases. Certainly, our 23-year IG community history has given us the opportunity to illustrate our competence in the area of criminal investigations. When we consider the small amount of time that our IG community would need to invest, with its resources of almost 3,000 special agents,
the potential impact of this outreach effort far exceeds the investment.

In closing, I respectfully suggest that the White House look favorably upon the suggestion of a Presidential memorandum as an expeditious way to create a most humanitarian and worthwhile partnership. In 1990, I received a Presidential appointment to be the Inspector General at the U.S. Office of Personnel Management (OPM). From my tenure, and as the chairman of the Investigations Committee

6
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OIG Semiannual Report
Productivity Indicators Financial Impact:
Audit Recommendations for Recovery of Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . $214,341,387
Recoveries Through Investigative Actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,082,218
Management Commitments to Recover Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $59,329,197*
* Note: OPM management commitments for recovery of funds during this reporting period reflect amounts
covering current and past reporting period audit recommendations.

Accomplishments: Audit Reports Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Investigative Cases Closed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Cases Accepted for Prosecution . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Indictments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Convictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Hotline Contacts and Complaint Activity . . . . . . . . . . . . . . . . . . 626
Health Care Provider Debarments and Suspensions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,114

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October 1, 2000 - March 31, 2001
1 Statutory and RegulatoryReview

As is required under section 4 (a)(2) of the Inspector General Act of 1978, as amended, (IG Act) our office monitors and reviews legislative and regulatory proposals for their impact on the Office of the Inspector General (OIG) and the Office of Personnel Management (OPM) programs and operations. Specifically, we perform this activity to evaluate their potential for encouraging economy and efficiency and preventing fraud, waste and mismanagement. We also monitor legal issues that have a broad effect on the Inspector General community and present testimony and other communications to Congress as appropriate.

During the current reporting period, we have continued exercising our oversight responsibilities regarding regu-latory and legislative issues, examining in particular those having a direct ef-fect on our Office of Inspector General mission. With a new Congress and new Admin-istration in place, we will be monitoring with particular interest OIG's legislative priorities held over from the 106th Congress that we hope will receive early consideration. These priorities are:

Including the Federal Employees
Health Benefits Program (FEHBP) in the Health Insurance Portability and Accountability Act (HIPAA) anti-fraud provisions.
Amending the IG Act to improve
OIG operations.
Establishing statutory law enforcement authority for special agents in 23 presidentially appointed OIGs that do not currently have individual statutory authority.

We will also be following any new legis-lative proposals in the 107th Congress that may affect the IG community as a whole and our OIG operations in particular. With respect to regulatory issues, we are also hopeful that the draft administrative sanctions regulations our OIG completed last summer will be placed OIG Semiannual Report in the Federal Register for public comment and that the final regulations can be implemented later this year. More details about the importance of this administrative sanctions program to our office and our agency can be found under Administrative Sanctions Activities in this section on pages 3-4.

Legislative Review As we begin the first session of the 107th Congress, we consider the sub-jects of the three articles appearing in this section to be of utmost importance for legislative consideration and passage in this Congress.

FEHBP Inclusion in HIPAA Anti-Fraud Provisions
Since 1996, our OIG has considered its foremost legislative priority to be passage of legislation to rectify the statutory exclusion of the Federal Employees Health Insurance Program (FEHBP) from the anti-fraud enforcement provisions of the Health Insurance Portability and Accountability Act of 1996.

Health care fraud is as important an issue in the FEHBP as it is in all other federal health care programs. Unfortu-nately, our agency does not have the FEHBP Inclusion Under HIPAA a Necessity

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2 OIG Semiannual Report

same enforcement tools or sanction authorities provided to other agencies for the simple reason that the FEHBP has never been included under HIPAA's anti-fraud provisions. The latter led U.S. Attorney's offices in a number of cases to process our FEHBP health care fraud cases differently from those involving the same type of offenses existing in other federal health care programs. This gets particularly complicated when cases of fraud reveal Medicare violations as well as FEHBP violations. In those instances, the FEHBP's exclusion from HIPAA coverage means that the FEHBP portion of these cases often must be negotiated and settled separately. In some situations, this has led to significant delays in monetary recoveries for the FEHBP. Within the context of our commitment to carry out our OIG mission against waste, fraud and abuse, our office remains strongly committed to early passage of any bill that would include the FEHBP under the provisions of the Federal Employees Health Insurance Portability and Accountability Act.

Amending the IG Act
During the 106th Congress, Chairman Susan Collins, Senate Permanent Sub-committee on Investigations, introduced the Inspector General Act Amendments of 1999 (S.870), which, among other issues, addressed the following:

Setting IG term limits.
Prohibiting performance and cash
awards for IGs.
Increasing pay rates for IGs.
Providing external reviews of OIG operations.
Changing OIG reporting requirements.

Senator Collins worked closely with several IGs in drafting many of the bill's provisions that the IG community felt must be addressed through legislation. None were more important than those referenced in the preceding bulleted items and which Inspector General McFarland supported. This was one of several pieces of legislation before the Senate Govern-mental Affairs Committee that did not pass before adjournment. In early January, however, Representative Judy Biggert introduced legislation similar to S.870. This bill has been referred to the House Committee on Government Reform. Many of the provisions that Inspector General Patrick McFarland supported in S. 870 also appear in H.R. 44. We will continue to follow this legislation closely.

OIGs Need New Statutory Law Enforcement Authority Over the years, it has been demonstrated repeatedly that there is an ongoing need within the IG community to have law enforcement authority to exercise its investigative mandate under the IG Act. While the IG Act authorizes the Inspector General community to investigate fraud and other types of wrongdoing in federal programs, it is totally silent on the subject of having authority to make arrests, carry firearms, serve warrants, and perform other associated activities.

As a result of this exclusion-and prior to 1995-OIG special agents conducting criminal investigations were required to ask the Department of Justice (DOJ) for deputation from the U.S. Marshals Service on a case-by-case basis to exercise law enforcement powers to investi-gate fraud and abuse within their respective agency programs. However, by 1995, the DOJ and the IG community had agreed that this special U.S. Marshals deputation process, using a case-by-case approach, was cumbersome, time con-suming and inflexible. The workload of STATUTORY and REGULATORY REVIEW April G Community Supports IG Act Amendments

IGs Seek
Statutory
Law Enforcement
Authority

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October 1, 2000 - March 31, 2001
3

the IG community by then had evolved to the point that a more practical approach was necessary. To help resolve the problem and relieve this administrative burden for OIGs- as well as the U.S. Marshals Service- the Department of Justice agreed to provide blanket deputation to over 2,600 special agents, designating them Special Deputy U.S. Marshals. These special agents were from 23 specific OIGs, each headed by a presidentially appointed Inspector General, with none having independent law enforcement authority.

The frequency with which these law enforcement authorities have been exercised by OIG special agents is reflected in recent OIG statistics. For example, during fiscal years 1998 and 1999, special agents covered by blanket deputation made 1,294 arrests and served 694 arrest and search warrants. OIG special agents coordinate their efforts with the DOJ and other law enforcement agencies while also participating on numerous task forces.

Deputations have proven useful as an interim measure. However, the one major drawback of the blanket deputation approach remains: it must be renewed periodically, thus continuing the admin-istrative burden for OIGs and the U.S. Marshals Service. And so, during the 106th Congress, the IG community opened discussions with congressional leaders to explore the possibility of providing this type of law enforcement authority permanently via statute. We, of course, strongly support these efforts since the statute would give criminal investigators from this office and the other 22 OIGs similarly affected the sameauthorities to conduct the business of our statutorily mandated investigations as other federal criminal investigation offices outside the IG community.

2001 STATUTORY and REGULATORY REVIEW
Administrative Sanctions Activities Background.
As we have discussed on a continuing basis in our semiannual reports, OPM and our OIG have been working for several years to implement administrative sanctions of health care providers. These sanctions address their improper or wrongful conduct that threatens the interests of the FEHBP or its subscribers. Administrative sanctions, including debarments, suspensions and civil monetary penalties, can be imposed directly by an agency, and, if structured properly, can be a highly effective means of enforcing integrity in federal programs. Virtually every federal agency has some form of administrative sanctions program in place. Most notable in the health care area is the exclusion (i.e., debarment) program for Medicare providers that the OIG of the Department of Health and Human Services has conducted successfully for nearly 15 years.

Administrative sanctions authority for FEHBP providers was contained in legislation that amended the FEHB law in 1988. However, the procedures called for were far more stringent than those of any other federal sanctions program, rendering the sanctions ineffective and cost-prohibitive to operate. Especially problematic was the provision that no sanctions order could become effective until all avenues of appeal-both ad-ministrative and judicial- had been
exhausted. This virtually invited pro-longed litigation and the associated delay and expense. In 1991, the U.S. General Accounting Office identified the absence of effective sanctions authorities as a significant weakness in OPM's ability to protect the FEHBP against fraud, waste and abuse.

IG Issues
2,116
"Common Rule"
Sanctions During Reporting Period

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OIG Semiannual Report
Common rule administrative sanctions. As an interim response to the deficiencies of the FEHBP sanctions authorities provided in the 1988 amendments to the FEHB law, OPM later joined a government-wide regulatory system that provided an efficient but limited debarment authority. This regulatory system, known as the nonprocurement debarment and suspension common rule, permits debarment actions taken by one agency against providers to be applied directly by other agencies. Since 1993, our office has used these common rule regulations to implement

within the FEHBP debarments of health care providers by other federal agencies. These regulations do not, however, offer the specialized focus tailored to health care issues that is needed to support a fully effective FEHBP sanctions program, nor do they provide a means to recover FEHBP funds that have been paid to providers as a consequence of their misconduct.

During the current reporting period, we issued 2,114 common rule debarments. This represents the highest total for any reporting period in our eight years of common rule activities. In re-sponse to an especially egregious case, we were also able to use the common rule to suspend a provider (and his associated medical clinic) who had been indicted on 59 counts of health care fraud and related violations, many of them directly involving FEHBP enrollees. Our OIG special agents conducted this investigation with the assistance of the FBI. For further details concerning this case, please refer to page 33 of this report. Legislative remedy enacted. Ten years after the original - but flawed - administrative sanctions provision was enacted, Congress responded to our repeated efforts to secure a revised and effective sanctions authority by enacting the Federal Employees Health Care Pro-tection Act of 1998. This legislation became P.L. 105-266 on October 19, 1998, and contained administrative
sanctions provisions, including debar-ment, suspension and civil monetary penalties, designed specifically to safe-guard the FEHBP and its enrollees from untrustworthy health care providers. Its procedures offer a sound basis for timely and cost-effective administration of the sanctions authorities.

Drafting and implementing sanctions regulations. With passage of P.L. 105-266, our office began drafting administrative sanctions regulations in early 1999. After careful and deliberative work on these proposed regulations, we presented them to former OPM Director Lachance last summer for her review. As we reported in our semiannual report last fall, Director Lachance approved them and forwarded them to the Office of Management and Budget (OMB) in August 2000. This regulatory package was not pub-lished in the Federal Register prior to the presidential transition in January 2001. Therefore, in accordance with the new Administration's directive regarding pending and uncompleted regulatory actions, these proposed sanctions regulations have been returned to OPM for resubmission to OMB by the new OPM Director once this individual is confirmed. OPM management has indicated that issuance of the proposed sanctions regulations will be one of its highest regulatory priorities for 2001.

Administrative Sanctions Regulations to be Resubmitted

STATUTORY and REGULATORY REVIEW April 2001

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October 1, 2000 - March 31, 2001
5
Audit Activities ur audit universe contains approximately 365 audit sites, consisting of health insurance carriers, sponsors, and underwriting organizations, as well
adjustment in the aggregate amount of $214.3 million due the FEHBP. A complete listing of all these reports is pro-vided in Appendices III and V on pages 42-44 and page 45, respectively, of this report.

We believe it is important to illustrate the dollar significance resulting from our audits of FEHBP carriers and what this means to the FEHBP trust fund. For in-
stance, during the past six semiannual reporting periods, the OIG issued 167reports and questioned $368.9 million in inappropriate FEHBP charges as the graph below illustrates.

The sections that immediately follow explain the differences among the types of FEHBP carriers and provide audit summaries of significant final reports we issued during the past six months.

OIG Semiannual ReportHealth and Life Insurance Carrier Audits The Office of Personnel Management (OPM) contracts with private-sector firms to underwrite and provide health and life insurance benefits to federal employees, annuitants, and their dependents and survivors through the Federal Employees Health Benefits Program (FEHBP)
and the Federal Employees' Group Life Insurance program (FEGLI). Our office is responsible for auditing these benefits program activities.

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6 OIG Semiannual Report Community-Rated Plans
Our office is responsible for auditing community-rated and experienced-rated health plans. Within the first category are comprehensive medical plans, commonly referred to as health maintenance organizations (HMOs). Our community-rated HMO audit universe covers approx-imately 265 rating areas. A community-rated carrier generally sets the subscrip-tion rates based on the average revenue needed to provide health benefits to each member of a group, i.e., private companies, state or county entities, the FEHBP, etc. Under current statutes, HMO subscrip-tion rates can vary from group to group. The rates derive from two predominant rating methodologies. The key rating factors for the first methodology (com-munity rating by class) are the age and sex distribution of a group's enrollees. In contrast, the second methodology (adjusted community rating) is based on the projected use of benefits by a group using actual claims experience from a prior period of time adjusted for increases in medical cost. However, once a rate is set, it may not be adjusted to actual costs incurred. The inability to adjust to actual costs, including administrative expenses, distinguishes community-rated plans from experience-rated plans. The latter category includes experienced-rated HMOs and fee-for-service plans. For the period 1991 through 1994, the applicable regulations for HMOs required that subscription rates charged to the FEHBP be equivalent to the rates charged the two subscriber groups clos-est in size (actual number of enrollees) to the FEHBP and whose respective contracts and contain similar benefits. In 1995, the provision requiring similar benefits was eliminated. Under these revised regulations, each carrier mustcertify that the FEHBP is being offered rates equivalent to the rates given to the two groups closest in size to the FEHBP. It does this by submitting to OPM a certif-icate of accurate pricing. These rates are determined by the FEHBP-participating carrier, which is responsible for selecting the appropriate groups. Should our auditors determine that equivalent rates were not applied to the FEHBP, a con-dition of defective pricing (DP) exists. The FEHBP is entitled to a downward rate adjustment to compensate for any overcharges resulting from DP.

We issued 18 audit reports on community-rated plans during this reporting period. In these reports, our auditors recom-mended that OPM's contracting officer require the plans to return over $120 million to the FEHBP. Below is a summary of two of these reports that illustrate typical problems encountered in conducting HMO audits.

Aetna U.S. Healthcare - New York in Blue Bell, Pennsylvania Report No. 1C-JC-00-00-002 February 26, 2001

Aetna U.S. Healthcare - New York has par-ticipated in the FEHBP as a community-rated comprehensive medical plan since 1986. The plan provides primary health care services to its members throughout the New York City area. The audit covered contract years 1996, 1997 and 1999, during which time the
plan received approximately $197 million in premium payments from the FEHBP. In a previous reporting period, we is-sued a final report resulting from a

AUDIT ACTIVITIES April

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October 1, 2000 - March 31, 2001
7
2001 AUDIT ACTIVITIES separate audit for contract year 1998 wherein we had monetary findings of $315,926 in savings to the FEHBP. During this current audit, we identified $13,439,139 in questioned costs, including $10,790,653 for improper health benefit charges and $2,648,486 for lost investment income. Lost investment in-come represents the amount of interest the FEHBP would have earned on money the plan overcharged the FEHBP had the overcharges not occurred. Premium Rates A key objective of this audit was to determine if Aetna U.S. Healthcare - New York met its contract requirement to offer the FEHBP the same premium rate discounts it offered to two other groups comparable in subscriber size tothe FEHBP. Another was to examine specific health benefit premium charges that were not part of the plan's basic benefits package to see whether these charges were fair and reasonable to the FEHBP. These particular charges are known as "loadings." Finally, we looked at whether the rates were in compliance with the laws and regulations governing the FEHBP. The audit findings discussed in this report are summarized below. Discounted market rates. The audit showed that the FEHBP did not receive a market price adjustment equivalent to the largest discount given to one of the two groups closest in size to the FEHBP in either 1996 or 1997. In both years, one of the groups selected by the plan did not meet the selection criteria set forth in the FEHB Pregulations. We deter-mined that a group other than the one the plan chose was actually closer in size to the FEHBP. Our analysis of the latter group's rates showed that it had received discounts much larger than the plan gave the FEHBP in both years.

In 1996, the group that should have been selected received a 7.2 percent discount, while the FEHBP's discount was only .04 percent. We applied the difference in the discounts to the FEHBP rates and found that the FEHBP had been over-charged $4,120,200. The plan does not agree with the subscriber group we selected in lieu of the one it chose. The plan stated that both subscriber groups it identified were appropriate and that no FEHBP overcharges occurred in 1996.

In 1997, the group that we designated in place of the plan's choice received a 10.3 percent discount. Since the FEHBP did not receive a discount of any kind, we applied the full 10.3 percent to the FEHBP rates. As a result, our auditors determined that the FEHBP was over-charged $6,516,020. The plan agreed that the FEHBP is due a price adjust-ment for 1997, but not $6,516,020. The plan contends that the FEHBP is only due $1,679,489, basing its calculations on the discount it gave to one of the groups it selected over the one our auditors identified as the correct one. We strongly disagreed with the plan's position and recommended in our audit report that OPM's contracting officer require the plan to return $6,516,020 to the FEHBP.

Substance abuse loading. We also found that the plan incorrectly calculated the substance abuse loading in contract years 1997 and 1999. As mentioned earlier, a loading is a health benefits charge that is in addition to the charge for the plan'sbasic health benefits package. Based on our auditors' calculations, overcharges amounted to $71,556 in 1997 and $82,877 in 1999, for a total of $154,433. The plan agreed to return this amount to the FEHBP.

Auditors
Identify
$13.4 Million
in Questioned
Costs to FEHBP

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8 OIG Semiannual Report
AUDIT ACTIVITIES April
Lost Investment Income
The FEHBP contract with community-rated carriers states that the FEHBP is entitled to the recovery of lost investment income on defective pricing findings. We determined that the FEHBP is due $2,648,4860 from the plan for lost investment income through December 31, 2000, on the overcharges identified in the report. An additional amount is also due from the plan for the period beginning January 1, 2001, until all funds have been returned to the FEHBP.

United Healthcare Select in Minneapolis, Minnesota
Report No. 1C-H8-00-00-010 December 8, 2000

United Healthcare Select (United) entered the FEHBP in 1987 as a community-rated comprehensive medical plan. Although its headquarters are located in Minnesota, the plan provides health care services to members in the St. Louis metropolitan area as well as mid-and southern Missouri. The audit covered

Our auditors identified $9,190,865 in inappropriate charges to the FEHBP in contract years 1994, 1995, 1997, and 1998. In addition, the FEHBP is due 1,939,275 for investment income lost as a result of the overcharges. The plan agrees that the FEHBP was overcharged, but believes the overcharge is less than our auditors calculated.

Premium Rates
The primary objectives of the audit were to determine if United Healthcare Select gave the FEHBP the same premium rate discounts it gave to similarly sized groups that met the selection criteria under its FEHBP contract and if any additional health benefit charges (load-ings) the FEHBP received were fair and reasonable. We also looked at whether the rates were in compliance with the laws and regulations governing the FEHBP. All our findings relate to defective pricing that occurred because the plan did not give the FEHBP the correct premium rate discounts. Discounted rates. We found that in only two of the six contract years (1996 and 1999) we reviewed did the FEHBP re-ceive a market price adjustment equivalent to the largest discount given to the two groups closest in size to the FEHBP as called for under its contract. In the other four years (1994, 1995, 1997, and 1998), the FEHBP either did not receive equivalent discount rates (1994, 1995 and 1997) or received none (1998). In the former, United se-lected a subscriber group in these years not comparable in size to the FEHBP. Specifically, the groups the plan should have selected received discounts of 13.27 percent, 14.4 percent, and 20 percent, respectively. While the FEHBP received discounts in these years, the discounts were not as large as those given to these groups.

Since the plan incorrectly selected other plans as closest in subscriber size to the FEHBP, it violated a contract require-ment. After applying the appropriatediscounts to the FEHBP rates, we deter-mined that the FEHBP was overcharged $1,979,586 in 1994; $1,893,611 in

Auditors Determine FEHBP Due
$11. 1 Million

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October 1, 2000 - March 31, 2001

9
2001 AUDIT ACTIVITIES
1995 and $3,674,689 in 1997, totaling $7,547,886 overall. In 1998, the group that the plan cor-rectly selected received the highest discount (7.3 percent). Since the FEHBP did not receive a discount of any kind from the plan, we applied the 7.3 per-cent discount to the FEHBP rates and found that the FEHBP was overcharged $1,642,799.

Lost Investment Income Consistent with the FEHBP contract with community-rated carriers, the FEHBP is entitled to lost investment in-come on all defective pricing findings. We determined that the FEHBP is due $1,939,275 for lost investment income covering the years 1994 through 1999. In addition to this amount, we recommended that OPM's contracting officer charge the plan lost investment income on amounts due for the period beginning January 1, 2000, until all funds have been returned to the FEHBP.

Experienced-Rated Plans
In addition to community-rated, comprehensive medical plans, (refer to page 6 for a discussion of HMOs), the Federal Employees Health Benefits Program offers a variety of experience-rated plans, including fee-for-service plans, that constitute the majority of federal contracts in this category. There are also certain comprehensive medical plans that qualify as experience-rated HMOs.

An experience rate is a rate that reflects a given group's projected paid claims, administrative expenses and service charges for administering the FEHBP contract. Each carrier maintains separate accounts for its federal contract, and future premiums are adjusted to reflect the federal enrollees' actual past use of benefits. The universe of experience- rated plans currently consists of about 100 audit sites. The number of audit sites fluctuates due to contracts not being renewed or because of plan mergers and acquisitions. When auditing these plans, our auditors generally focus on three key areas:

Allowability of contract charges and the recovery of appropriate credits, including refunds.
Effectiveness of carriers' claims processing, financial and cost accounting systems.
Adequacy of internal controls to ensure proper contract charges and benefit payments.

During this reporting period, we issued 17 audit reports on experience-rated plans, one of which was an HMO comprehensive medical plan. In these reports, our auditors recommended that OPM's contracting officer require the plans to return $93.9 million to the FEHBP.

Government-Wide Service Benefit Plan

This plan comes under the broad defi-nition of a fee-for-service plan and is administered by the BlueCross and BlueShield Association (BCBS Association), which contracts with our agency on behalf of its member plans. Participating Blue Cross and Blue Shield plans throughout the United States underwrite and process the health benefits claims of their federal subscribers under the BCBS Service Benefit Plan. Approximately 46 percent of all FEHBP subscribers are enrolled in Blue Cross and Blue Shield plans nationwide.

While its headquarters are in Chicago, Illinois, for administrative purposes, the BCBS Association has established a Federal Employee Program (FEP) Post Investment Income Exceeds
$1. 9 Million

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10 OIG Semiannual Report
AUDIT ACTIVITIES April

Director's Office in Washington, D.C., to provide centralized management for the Service Benefit Plan. The Association oversees a national FEP operations center, also located in the Washington, D.C. area, whose activities include verifying subscriber eligibility; approving or dis-approving reimbursement of local plan FEHBP claims payments (using computerized system edits); and maintaining an FEHBP claims history file and an accounting of all FEHBP funds.

During this reporting period, we issued 15 BlueCross and BlueShield experience-rated reports in which our auditors cited $65.8 million in costs charged to the FEHBP that were determined unallowable under BCBS contracts. Our auditors also noted an additional $24.6 in lost investment income on these questioned costs, for a total of $90.4 million owed to the FEHBP. The following audit narrative describes the major findings from one of these reports as well as the questioned costs associated with them.

CareFirst BlueCross BlueShield
in Owings Mills, Maryland
Report No. 1A-10-06-99-055 November 13, 2000

Our audit of the FEHBP operations at CareFirst BlueCross BlueShield (CareFirst) took place at the plan's head-quarters in Owings Mills, Maryland. We reviewed health benefit payments made by the plan from July 1, 1995 through June 30, 1999, as well as administrative expenses and miscellaneous payments covering contract years 1993-1998. In performing this audit, we determined whether the plan charged costs to the FEHBP and provided services to FEHBP members in accordance with the terms of the contract. As a result, our auditors questioned $4,783,026 in claim paments; $1,050,772 in administrative expenses; and $51,308 in refunds. Of these amounts, the BCBS Association agreed with $4,384,336 and disagreed with $1,449,462. Lost investment in-come on these questioned costs totaled $162,763. Final calculations by our auditors regarding all inappropriate charges and lost investment income to the FEHBP totaled $5,996,561.

Health Benefits
During the period July 1, 1995 through June 30, 1999, the plan made $843 million in actual FEHBP claim payments. We selected claims at random as well as in specific health benefit categories, principally those concerning coordination of benefits with Medicare and potential duplicate payments. We also reviewed specific financial and account-ing areas, such as refunds and other miscellaneous credits relating to FEHBP claim payments. Our findings relating to health benefit charges totaled $4,783,026. Some of our findings in these areas were: Coordination of benefits. Although we have identified coordination of benefits (COB) problems during our audits at many other plans, we were surprised by the magnitude of this problem at CareFirst. We identified 11,080 claim lines where the FEHBP paid as primary insurer when Medicare was actually the primary insurer. We estimated that these claim payment errors cost the FEHBP $4,418,596.
CareFirst's explanation for this COB oversight was that no information existed in the FEP national claims system database maintained at the FEP operations center to make the plan aware that this coordination was necessary.

Auditors
Calculate
$5,996,561 Owed
to the FEHBP

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October 1, 2000 - March 31, 2001 11
2001 AUDIT ACTIVITIES
Inappropriate Health Benefit Charges Total $4,783,026

However, when this Medicare information was later added to the FEP claims system, CareFirst still failed to review and adjust the members' prior claim lines back to the Medicare effective dates. Therefore, the claims benefit charges remained charged to the FEHBP in their entirety. These claims had to do with Medicare Parts A and B. Similarly, CareFirst did not follow its procedures and coordinate inpatient claims when patients had Medicare Part B only. We have recommended that OPM's con-tracting officer disallow these uncoordinated claim payments and instruct CareFirst to make a diligent effort to recover these overpayments and credit all amounts recovered to the FEHBP.

Medicare Part A helps pay for care in hospitals, skilled nursing facilities, hospices, and some home health care. Medicare Part B helps pay for doctors, outpatient hospital care, and some other medical services that Part A does not cover, such as services of physical and occupational therapists and some home health services.

Duplicate claim payments. Our auditors also determined that CareFirst inappropriately charged the FEHBP for duplicate claim payments during the period covered by this audit. Of the approximately $843 million in claims paid during this period, we identified 428 duplicate claim payments, totaling $301,637. However, we concluded that this relatively small number of duplicate claim payments indicated that CareFirst had effective controls in place to minimize such payments. Recoveries and refunds. CareFirst did not provide documentation to substantiate

that five fraud recoveries and one health benefit refund ($41,768 and $7,155, respectively), had been credited to the FEHBP. The FEHBP contract requires the carrier to retain and make available all records applicable to a contract year that support the annual statement of operations. As a result, we recommended that the contracting officer ensure that the plan credits the FEHBP for these recoveries.

Administrative Expenses
During our review of administrative expenses from 1993-1998, we noted that CareFirst charged the FEHBP for unal-lowable and unsupported costs totaling $1,111,489, the bulk of which related to unallowable subcontract costs. We also noted that the plan undercharged the FEHBP $60,717 for pension costs it was entitled to receive from the FEHBP. Under the terms of its FEHBP contract, CareFirst can charge personnel expenses, including salary and pension costs, as administrative expenses for work associated with the contract.

Unallowable subcontract costs. CareFirst charged the FEHBP for two subcontracts that were not approved by OPM's con-tracting officer. Federal regulations specifically state that the plan must notify and receive approval from the contracting officer in advance of entering into a subcontract or subcontract modification if:
(1) the amount of the subcontract exceeds $100,000; and
(2) the amount is at least 25 percent of the total cost of the subcontract. In each instance, the contracting officer denied the plan's request for approval.

Since OPM's contracting officer did not approve these two subcontracts, we determined that the FEHBP is due $1,085,941 for costs associated with these subcontracts.

Plan Charges the FEHBP
$1, 085,941 in Costs for Denied Subcontracts

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12 OIG Semiannual Report
AUDIT ACTIVITIES April
Experienced-Rated Comprehensive Medical Plans

As explained earlier in this section, comprehensive medical plans fall into either the community-rated or experience-rated category and are commonly referred to as health maintenance orga-nizations (HMOs). The critical difference between the two categories stems from how premium rates are calculated for each (see page 6). Like other health insurance plans par-ticipating in the FEHBP, experienced-rated HMOs offer what is termed a "point of service" product. Under this option, members have the choice of using a designated network of providers or using non-network providers at additional costs. In selecting one health provider over another (the point of ser-vice), a member's choice has specific monetary and medical implications. For example, if a member chooses a non-network provider, the member will pay a substantial portion of the charges and the benefits available may be less comprehensive.

As mentioned previously, we issued one comprehensive medical plan audit report during this reporting period. The following audit narrative describes the major findings from this report, along with questioned costs associated with those findings.

Hawaii Medical Service Association
in Honolulu, Hawaii
Report No. 1D-87-00-00-030 January 31, 2001

Hawaii Medical Service Association (HMSA) is a comprehensive medical plan, located in Honolulu, Hawaii, providing health benefits to approximately 27,000 federal enrollees and their families in Hawaii. In addition to offering comprehensive health services and benefits for accidents, illness and injury, HMSA places emphasis on preventive benefits, such as office visits, physical examinations, immunizations and well-child care. The purpose of this audit, which covered contract years 1995-1999, was to determine whether HMSA charged costs to the FEHBP and provided services to FEHBP members in accordance with the terms of its contract. Our auditors examined health benefit payments made by HMSA from 1997 through 1999, as well as miscellaneous adjustments, ad-ministrative expenses and cash management processes. At the conclusion of this audit, our auditors determined that HMSA improperly charged the FEHBP $736,856 in claim payments and never credited the FEHBP $15,569 for a refund. Final calculations by our auditors regarding amounts owed the FEHBP totaled $752,425. HMSA agreed with all the questioned amounts.

Health Benefits
During the period 1997 through 1999, HMSA paid $300 million in actual claim payments. We selected claims at random, as well as in specific health benefits cateegories, principally those concerning coordination of benefits with Medicare and duplicate payments. We also reviewed FEHBP claim payments activities relating to refunds and uncashed checks. Our findings related to health benefit charges totaled $752,425. The findings in these areas are highlighted below.

Coordination of benefits. For the period 1997-1999, our auditors identified 35 inpatient claim overpayments, totaling $763,362, where the FEHBP paid as the

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October 1, 2000 - March 31, 2001
13
2001 AUDIT ACTIVITIES
primary insurer when Medicare Part A or B was the primary insurer. This type of inappropriate charge occurs when there is a failure to coordinate benefits properly with Medicare coverage. We recommended that OPM's contracting officer disallow these uncoordinated claim payments, and instruct HMSA to make a diligent effort to collect these payments and credit all amounts recovered to the FEHBP. Duplicate payments. Our auditors also determined that HMSA charged the FEHBP inappropriately for duplicate claim payments. During the review period of 1997-1999, we identified 14 duplicate claim payments, resulting in overcharges of $21,055 to the FEHBP. This relatively small number of duplicate claim payments indicated to our auditors that HMSA had effective controls in place to minimize payments of this type. Nevertheless, we recommended that OPM's contracting officer disallow the duplicate payments, instructing HMSA to be conscientious in trying to collect these payments and credit all amounts recovered to the FEHBP. Claim payment errors. For the period January 1, 1999 through December 31, 1999, we selected 80 claims and deter-mined if HMSA paid these claims properly. As a result of this review, our audi-tors identified four claim payment errors, resulting in overcharges of $40,298 to the FEHBP. We also identified 11 additional claim payment errors during our coordination of benefits review that showed that the plan undercharged the FEHBP $87,859.

Our auditors determined that under-charges exceeded overcharges to the FEHBP for the above 15 claim payment errors, for a net of $47,561 in under-charges. In recommending that OPM's contracting officer direct HMSA to make a diligent effort to collect the

Auditors Determine $752,425
Owed to
the FEHBP

claim overpayments and credit all amounts recovered to the FEHBP, our auditors also recommended that OPM's contracting officer allow HMSA to charge the FEHBP for the claim under-charges if additional payments are made to the providers to correct the under-payment errors.

Under its FEHBP contract, should HMSA be able to demonstrate that all forms of claim overpayments cited in our audit report were made in good faith and can show further that it made a reasonable effort to collect these funds, then OPM's contracting officer can consider all uncollected amounts (i.e., questioned costs by our auditors) to be allowable charges to the FEHBP. This applies to all FEHBP Blue Cross and Blue Shield plan contracts. Miscellaneous adjustments. In review-ing HMSA's procedures for handling FEHBP refunds and uncashed health benefit checks, we identified one instance where HMSA did not credit the FEHBP $15,569 for a refund.

Administrative Expenses
During our review of administrative expenses from 1995-1999, we noted that HMSA allocated unallowable advertising, public relations, and lobbying expenses of $1,383,217 to the FEHBP. Federal regulations specifically state that lobbying expenses are unallowable. Regarding advertising and public relation expenses, federal regulations generally state that such costs are unallowable. For the same period, however we noted that $7,321,836 in administrative expenses were not reimbursed to HMSA since it had exceeded the contract limitation set for administrative expenses reimbursement. Our auditors, therefore, did not recommend any monetary adjustments for this finding.

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14 OIG Semiannual Report
AUDIT ACTIVITIES April
Employee Organization Plans

Employee organization plans also fall into the category of experience-rated and may operate or sponsor participating health benefits programs. The two largest types of employee organizations are federal employee unions and
associations. Some examples are the American Postal Workers Union, the National Association of Letter Carriers, the Government Employees Hospital Association and the Special Agents Mu-tual Benefit Association. These plans operate on a fee-for-service basis, which allows members to obtain treatment
through facilities or providers of their choice.

During the reporting period, we issued one employee organization plan audit report relating to the Mail Handlers Benefit Plan (MHBP) (Report No. 1D-
87-00-00-030). Specifically, we examined the FEHBP operations at the plan's administrator, Claims Administration Corporation (CAC), based in Rockville, Maryland. CAC processes FEHBP claims on behalf of Continental Assurance Company, which underwrites this plan.

The audit covered contract years 1997-1999, and was conducted to determine whether costs were charged appropriately under the terms of MHBP's FEHBP contract. As a result of the audit, our auditors questioned $1,851,747 for duplicate claim payments, $709,889 for uncoor-dinated claim payments with Medicare (see page 12 for COB issue addressed in previous audit narrative), and other claim payment errors for $114,779. In total, our auditors questioned $2,676,415 for
inappropriately charged FEHBP claim payments covering the contract years we examined. CAC agreed with all questioned costs.

Plan Agrees With $2,676,415in Audit Findings

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October 1, 2000 - March 31, 2001
15
Information Systems Audits In accordance with the Inspector General Act of 1978, as amended, we conduct and supervise independent and objective audits of agency programs and operations to prevent and detect fraud, waste and abuse.To assist in fulfilling this mission, we perform information systems audits of health and life insurance carriers that participate in the Federal Employees Health Benefits Program (FEHBP) and the Federal Employees' Group Life Insurance program (FEGLI). We also audit the agency's computer systems development and management activities.

2001 AUDIT ACTIVITIES

Our information systems audit group, while relatively new, continues to gain experience through audits of health insurance carriers participating in the Federal Employees Health Benefits Pro-gram (FEHBP) as well as through its reviews of OPM computer systems security activity. Thus far, the results are encouraging. The inherent need for this type of over-sight lies in the reality that the federal government is heavily reliant on infor-mation systems to administer federal programs, manage federal resources, and accurately report costs and benefits. Any breakdown in federal computer systems, including systems of federal contractors, can compromise the government's efficiency and effectiveness and increase the costs of federal projects and programs. The importance of this issue is also under-scored by the increasing frequency of malicious threats to government computer systems, outbreaks of destructive computer viruses, Web site defacements,and theft of valuable or sensitive information in computer databases.

To counter this threatening climate, our office audits various agency computer systems development and security-related activities. In addition, our office audits general and applications controls at health carriers under contract with OPM to provide health benefits under the FEHBP. General controls are defined as the policies and procedures that apply to an entity's overall computing environ-ment. Application controls are those directly related to individual computer applications, such as a carrier's payroll system or benefits payment system. General controls provide a secure setting in which computer systems can operate, while application controls ensure that
the systems completely and accurately process transactions.

During this reporting period, we com-pleted a review of OPM's efforts to protect the critical infrastructure of its computer-based systems. We also completed one external audit of general computer controls at an FEHBP health carrier. A summary of our audit find-ings and recommendations, as well as customer response to both, follows.

Audit of General Information System Controls
American Postal Workers Union Health Plan in Silver Spring, Maryland
Report No. 1B-47-00-00-027 January 2, 2001

The American Postal Workers Union Health Plan (APWU), in Silver Spring, Maryland, has received approximately

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16
OIG Semiannual Report
$400 million in FEHBP program income associated with its FEHBP contract.

Our auditors conducted this particular audit, which covers contract year 1999, to obtain reasonable assurance that APWU had implemented proper controls over the integrity, confidentiality and avail-ability of computerized data associatedwith its FEHBP contract operations. We evaluated the plan's internal control structure, specifically its general information system controls, using industry standards, guidance contained in the General Accounting Office's Federal Information System Controls Audit Manual, along with pertinent federal law and regulations.

This review included examining how well the company was managing security policy and access controls, along with software changes related to its general information systems. Our auditors also assessed whether there was an appropriate segregation of duties among APWU employees who were involved in the plan's general information sys-tems. For example, we wanted to make sure that, where necessary, different in-dividuals were involved at critical steps of a given process rather than the same people having access to each of these steps. Additionally, we looked at controls over the mainframe operating system and examined the company's plan for keeping the totality of its computer systems running after a disaster, natural or otherwise.

Our audit revealed several areas where APWU could improve its computer-related general control structure. These areas are: developing a comprehensive security plan; tightening access controls; improving software development and change controls; implementing a disas-ter recovery plan; and strengthening controls over the mainframe operating system.

Our auditors made a number of recom-mendations to address these internal
control weaknesses. As a result, APWU agreed to:

Publish a corporate security policy.
n Introduce a security awareness training program.
Improve security-related personnel controls.
Tighten access controls on its mainframe computer.
Establish policy regarding software
change management.
Formally document its disaster recovery program.
Enhance the integrity of its main-
frame operating system.

We believe that our review of informa-tion system general controls at APWU, along with our specific recommenda-tions, will serve the dual purpose of protecting the private medical records of federal employees enrolled in this health plan and preventing any potential fraud, waste and abuse in the FEHBP.

Review of OPM's Compliance with
Presidential Decision Directive 63 Report No. 4A-OP-00-00-075 December 15, 2000
We conducted a review of OPM's compliance with Presidential Decision Directive 63 (PDD 63), dated May 1998. This directive requires that each department and agency of the federal govern-ment be responsible for protecting its own critical infrastructure.

AUDIT ACTIVITIES April
PWU Agrees with OIG Computer Security Recommendations

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October 1, 2000 - March 31, 2001
17
As defined in PDD 63, critical infra-structures are systems so vital that their incapacity or destruction would have a debilitating impact on national defense or economic security. Within the context of our agency's operations, we believe that OPM's retirement, health insurance, and life insurance programs are examples of such critical infrastructures. Advances in information technology have caused computer-based infrastructuresto become increasingly automated and interlinked, and have created new vulnerabilities due to equipment failures, human error, weather, along with physical and cyber attacks. Cyber attacks, of course, come primarily through the Internet. To combat these increased vulnerabilities, PDD 63 requires each agency to:

Appoint an individual (Chief Information Assurance Officer) to lead its efforts in identifying and protecting an agency's critical infrastructure.
Develop a plan for protecting an agency's critical infrastructure.
Cooperate with a national infrastructure protection center that will serve as the national focal point for threat assessment, warning, investigation, and response to attacks on critical infrastructures.
Develop controls to restrict its computer systems access to only authorized individuals.
Note: Access controls would include physical access restrictions, as well as "logical" access restrictions, such as passwords.
Work with the Office of Management and Budget to include assigned infra-structure assurance functions within its Government Performance and Results Act strategic planning and performance measurement frame-work.

In the fall of 1999, the President's Council on Integrity and Efficiency (PCIE) and the Executive Council on Integrity and Efficiency (ECIE) agreed that the Inspector General community could provide support for the President's directive by initiating a government-wide review of agency infrastructure assurance programs. The review would consist of four phases. Phases I and II relate to critical computer-based infrastructures, while Phases III and IV relate to critical physical infrastructures. In order to complete the reviews in a consistent manner, a PCIE/ECIE working group was established. The working group, chaired by the OIG at the National Aeronautics and Space Administration, has the overall responsibility to:

Develop review guides.
Coordinate the efforts of the participating Offices of Inspector General.
Prepare and issue consolidated reports summarizing the results of the reviews.
Make government-wide recommendations as appropriate.
Conduct follow-up work regarding
recommendations.

In turn, the participating OIGs are responsible for conducting reviews at their respective agencies and reporting the results to the working group.

In accordance with Phase I of this multi-agency assessment, we evaluated the adequacy of OPM's planning and assess-ment activities for protecting its critical computer-based infrastructure. Specifically, this included a review of OPM's critical infrastructure protection plan, asset identification efforts, and vulnerability assessments as appropriate. Our Phase I review shows that OPM management officials have a strong commitment to protecting the agency's 2001 AUDIT ACTIVITIES
G Community Provides Support for PDD 63 Agency Infrastructure Assurance Program Initiative

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OIG Semiannual Report
AUDIT ACTIVITIES April
critical assets. The agency has devoted significant efforts to improving the over-all security of OPM's information sys-tems. However, we have observed that OPM has not taken the action neces-sary to address formally those critical infrastructure planning and assessment requirements defined in PDD 63. We believe that the computer security control efforts that have been introduced and planned can be used as a basis to meet the directive's requirements.

Agency officials believe that PDD 63 requirements should be addressed using security best practices criteria instead of requiring strict implementation. Theyalso indicated that a lack of adequate funding limits OPM's ability to implement this presidential directive.
Our office's position is straightforward: We believe that PDD 63 applies to OPM and that it is in OPM's best interest to comply with it as a structured strategy to minimize the risksassociated with cyber attacks. Certainly, recent events, including the Melissa and I Love You virus attacks on computer hard drives and files, have highlighted an increased risk for all computer systems to cyber attack. As we indicated above, OPM has taken information technology security very seriously. For example, we have noted steps OPM management has taken to enhance, update and consolidate OPM's information technology security policies. Agency management has also refocused and increased resource commitments to this highly visible issue.

While we agree that these steps provide improved protection for OPM's critical infrastructure, we also continue to believe that formally implementing PDD 63 will enhance our agency's efforts to protect its critical computer-based infrastructure. This has led us to recommend to OPM management that it take the action necssary to implement PDD 63. Our office has now completed its Phase I review and forwarded those results and recommendations to the IG community's President's Council on Integrity and Efficiency and Executive Council on Integrity and Efficiency. The PCIE/ECIE consolidated Phase I report to the Office of Management and Budget can be reviewed on the IGNet Web site at http://www.ignet.gov/randp/rpts.html#2001.

As the above audit work illustrates, in today's computer-dependent work environment, it is essential that we take the position that security measures are of paramount importance in protecting sensitive data and ensuring that federal
funds are safeguarded. To this end, we recognize the significant role our information systems audits group can play by helping the FEHBP health insurancecarriers assess their security risks and make improvements where necessary.

Likewise, regarding our oversight of OPM's internal computer systems and operations, our auditors believe that monitoring the work performed by independent external auditors provides additional assurance that our agency's computer-based operations will remain secure.

)IG Recommends OPM Officials Formally Implement PDD 63

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October 1, 2000 - March 31, 2001
19
2001 AUDIT ACTIVITIES

Other External Audits When requested by Office of Personnel Management (OPM) procurement officials, our office conducts pre-and post-award contract audits relating to the acquisition of goods and services by agency program offices. We also conduct audits of the local organizations of the Combined Federal Campaign (CFC), the only authorized fund-raising drive conducted in federal installations throughout the world.

Agency Contract Audits

Our office conducts two types of agency contract audits. We perform pre-award contract audits to:
(1) ensure that a bidding contractor is capable of meeting contractual requirements;
(2) assess whether estimated costs are realistic and reasonable; and
(3) determine if the contract complies with all applicable federal regulations. In the other instance, we conduct post-award contract audits to ensure that costs claimed to have been incurred under the terms of an existing contract are accurate and in accordance with provisions of federal contract regulations.

These audits provide OPM procurement officials with the best information available for use in contract negotiations and oversight. In the case of post-award ontract audits, for example, the verification of actual costs and performance charges may be useful in negotiating future contract modifications pertainingto cost-savings and efficiency. During this reporting period, we con-ducted one pre-award and one post-award contract audit at the request of OPM's Office of Contracting and Administrative Services (OCAS). The following summaries include some of the determinations we made concerning these audits.

Pre-Award Contract Audit
In August 2000, OPM management issued a request for proposals to provide consolidated facilities management ser-vices at the Federal Executive Institute (FEI) in Charlottesville, Virginia. FEI is a residential training center for advanced study and executive development. Two potential contractors, ARAMARK Services, Inc,. and Wastren, Inc., submitted proposals to OPM's Office of Contracting and Administrative Services. ARAMARK had held the previous contract for providing consolidated facilities management services at FEI. In the following section, we discuss our post-award audit of ARAMARK and its costs charged to OPM under the expired contract. Wastren, Inc. is a multi-service corporation, located in Grand Junction, Colorado, that has significant experience in performing facility management services. OCAS requested our office audit the proposal submitted by Wastren, Inc.
Our audit determined the cost proposal submitted by Wastren, Inc., may not have

been an accurate assessment of its total estimated costs required to fulfill the
agency's contract requirements. We pro-vided our report (No. 6A-2A-00-01-030), 26
26 Page 27 28
20 OIG Semiannual Report
AUDIT ACTIVITIES April
to OPM's procurement officials to use in contract negotiation. Based on our
audit results, OCAS awarded the con-tract to ARAMARK.

Post-Award Contract Audit
As we described in our semiannual report issued last fall, the subject of this post-

award audit was the facilities management contractor at the Federal Executive In-
stitute (FEI) in Charlottesville, Virginia. ARAMARK Services, Inc., provided a
full range of services to FEI, including food preparation, security, and grounds
maintenance, during its multiple-year contract until that contract ended
December 31, 2000.
We completed the audit and issued our report (No. 6A-2A-00-00-070) on

January 31, 2001. We verified actual expenses charged by ARAMARK to FEI
for services performed from January 1996 through the end of calendar year 2000,
and evaluated the company's compliance with the provisions in its contract and
with federal regulations. We concluded that ARAMARK was in general compli-
ance with both. However, we did note in our report that ARAMARK manage-
ment was remiss in the following areas:

Did not have written policies and procedures for determining employee eligibility for performance awards and the distribution of performance awards paid under the contract.
Did not distribute a performance
award paid under the contract to an employee who had earned the compensation, because the employee had since left the employ of ARAMARK.
Did not properly use and make pay-
ments from the petty cash fund.
Did not verify, in all instances, its
billings to ensure only accurate and complete charges were submitted to OPM.
Did not approve time cards or manual
changes to time

Combined Federal Campaign Executive Order 10927 designated the U.S. Civil Service Commission (the precursor of OPM) as the agency respon-sible for arranging national voluntary health and welfare agencies to solicit funds from federal employees and members of the armed services at their place of employment. Since then, there have been additional executive orders, one public law (P.L. 100-202), and new federal regulations (5 CFR 950) that:

Define the role of local CFCs.
Cite the Office of Personnel Management's specific oversight responsibilities relating to the Combined

Federal Campaign. Since its inception on March 18, 1961, the CFC has netted over $4 billion in charitable contributions. An estimated 387 local campaigns participated in the 1999 Combined Federal Campaign, the most recent year for which statistical
the 1999 CFC, while expenses totaled $18 million.

Our CFC audits traditionally cover two consecutive campaign years and focus

Auditors
Call
for Tighter
Contractor
Operational
Controls

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October 1, 2000 - March 31, 2001 21
2001 AUDIT ACTIVITIES
on the eligibility of participating local charities, local campaign compliance with
federal regulations and OPM guidelines, as well as testing financial records of the
various local campaigns. This testing includes reviewing budgets, certified
financial statements, general ledgers, bank statements and pledge cards to en-
sure that budgets, expenses, as well as cash receipts and disbursements, are ac-
counted for correctly. Combined Federal Campaign audits will not ordinarily
identify savings to the government, be-cause the funds involved are charitable
donations made by federal employees, not federal entities. While infrequent, our
audit efforts can result in an internal re-ferral to our OIG investigators for po-
tential fraudulent activity. We reported one such case in our semiannual report
issued last fall.
During the current reporting period, we issued one draft and nine final CFC

reports, a listing of the latter is on page 47 in Appendix VI. We have summarized one of these reports below to illustrate results typically obtained in a CFC audit.

1998 and 1999 Combined Federal Campaigns of
Southern New Jersey in Rancocas, New Jersey
Report No. 3A-CF-00-01-035 March 30, 2001

We audited the Combined Federal Cam-paigns for Southern New Jersey for 1998
and 1999 with the objective of deter-mining if the administrator conducted
these Combined Federal Campaigns in

accordance with federal regulations and OPM's CFC guidelines.
The United Way of Burlington County served as the administrator for both
campaigns. As a CFC administrator, its responsibilities included developing
campaign plans and budgets, conduct-ing pledge drives, collecting donations,
and disbursing contributor donations to charities within the various localities
of the southern New Jersey campaign area.

Based on our audit, we concluded that the United Way of Burlington County
conducted these campaigns in accor-dance with federal regulations and
OPM guidelines with the following notable exceptions:

Did not distribute funds to charities in southern New Jersey in a timely manner nor on a monthly basis.
Made one distribution to an incorrect charity.
Charged certain unsupportable expenses in its capacity as administrator.
Did not send notification letters to
charities in a timely manner, inform-ing them of the amounts donated to them.
Did not submit an administrator application that met all federal regula-tions and OPM guidelines.
Did not prepare the campaign brochure in accordance with federal regulations and OPM guidelines.
Did not see that contributor pledge card data was accurately entered into its administrator data base.

(Note: In two instances, these errors resulted in erroneous distributions to charities in southern New Jersey.) OIG Notes Need for Stricter Adherence to CFC Regulations and Guidelines

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22 OIG Semiannual Report
OPM Internal Audits Our office also has responsibility for conducting audits and evaluations
and inspections of the Office of Personnel Management's (OPM) programs and administrative operations. For example, we conduct audits of OPM's
consolidated financial statements required by the Chief Financial Officers Act (CFO Act); government-wide activities based on our par-
ticipation in the President's Council on Integrity and Efficiency; OPM's compliance with laws and regulations, such as the Prompt Payment Act,
the Federal Managers' Financial Integrity Act (FMFIA), the Federal Financial Management Improvement Act (FFMIA) and the Government
Performance and Results Act of 1993 (GPRA). Further, we conduct performance audits and evaluations and inspections of OPM programs
that involve the retirement, employee development, and personnel management activities.

ur internal audits staff consists of O auditors and program evaluators
working together to provide recommen-dations for improving the economy and
efficiency of our agency operations. We use a risk-based methodology to assess
OPM's activities and establish annual work agendas. To accomplish this, we
calculate a risk rating by assigning nu-meric values to risk factors within the
agency's program offices. The objective is to identify high impact areas where
the OIG can provide the best possible benefit to the agency.

To ensure that we achieve our goals, we carefully plan, conduct and monitor our
activities in accordance with govern-ment standards that apply to audits or
to evaluations and inspections. We also involve OPM program managers in
every step of the process to ensure that we have met their needs, addressed
concerns and obtained feedback on how we can improve our auditing and
evaluation activities. We believe this cooperative spirit ensures that all
parties involved with our activities are satisfied with the final product.

During this reporting period, we com-pleted three internal audits and issued

final reports in the following areas: (1) OPM's financial statements; (2) agency
compliance with the Government Per-formance and Results Act (GPRA); and
(3) agency compliance with the Federal Managers' Financial Integrity Act
(FMFIA). The following pages contain descriptions of our audit efforts in each
of these areas, including an article on the ongoing financial accounting assistance
our office is providing to the Office of the Chief Financial Officer (OCFO).

OPM's Consolidated Financial Statements Audit
As we have described in previous semi-annual reports, our agency contracts
with an independent public accounting (IPA) firm to perform OPM's consoli-
dated financial statements audit. This fiscal year 2000 CFO Act audit relates
to OPM's retirement, health and life insurance benefits programs, as well
as its revolving fund (RF) and salaries and expense (S&E) accounts. The IPA
provides audit reports on: (1) the fair-ness of the consolidated financial state-
ments and their conformance with gen-erally accepted accounting principles;

AUDIT ACTIVITIES April 29
29 Page 30 31
October 1, 2000 - March 31, 2001 23
2001 AUDIT ACTIVITIES
(2) agency management's internal con-trols over financial reporting; and
(3) agency management's compliance with laws and regulations.

This is the first year that OPM has issued consolidated financial statements. In
prior years, OPM prepared separate financial statements for each benefits
program, revolving fund, and salaries and expense accounts. Our office monitored
the IPA's performance to ensure that all work was conducted in accordance with
the contract and in compliance with government auditing standards and
other authoritative references pertaining to OPM's financial statements. Specifi-
cally, we participated in the planning, performance and reporting phases of
the audit through participation in key meetings and review of the IPA's work
papers and reports.
Based on our monitoring efforts, we concurred with the IPA's reports on the

consolidated financial statements, inter-nal controls, and compliance with laws
and regulations. A summary relating to this audit report appears below.

OPM's FY 2000 Consolidated Financial
Statements Report No. 4A-CF-00-00-074
February 16, 2001

Under a contract monitored by our office, the international accounting firm
of KPMG LLP (KPMG) performed audits of OPM's FY 2000 consolidated
financial statements. KPMG's audit cov-ered the retirement, health and life in-
surance programs, revolving fund (RF) and salaries and expense (S&E) accounts.

As we have mentioned in previous semi-annual reports, the benefits programs are
key to the flow of benefits to federal civilian employees, annuitants and their
respective dependents, and operate under the following names: the Civil
Service Retirement System, the Federal Employees Retirement System, the
Federal Employees Health Benefits Program, and the Federal Employees'
Group Life Insurance program. These programs are administered by OPM's
Retirement and Insurance Service.
Consolidated & Benefits Programs Financial Statements

KPMG determined that the consolidated fiscal year 2000 financial statements and
the individual statements of the three benefits programs were presented fairly
in all material respects and were pre-pared in conformance with generally
accepted accounting principles.
KPMG noted improvements in the in-ternal control environments of all three

benefits programs as well as continued areas of concern in the RF and S&E ac-
counts during fiscal year 2000. KPMG considered these latter issues in the RF
and S&E accounts to be reportable conditions. Reportable conditions are
defined as items that if left uncorrected could jeopardize the agency's ability to
record, process, summarize and report financial data accurately, although they
would not result in material misstatements to the consolidated financial statements.
If the items would result in material misstatements, then they are defined as
material weaknesses.
Table 1 on the next page includes report-able conditions that KPMG identified

during its audit work on the financial statements. This was the first time since
the CFO Act was implemented that none

)PM
Improves
Financial
Management
for FY 2000

30
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24 OIG Semiannual Report
AUDIT ACTIVITIES April
of the reportable conditions was con-sidered to be a material weakness in
the agency's internal controls over financial reporting.

Specifically, KPMG reported the following conditions as needing improvement:

Controls over program administration for community-rated health carriers.
Quality control over annual financial statement preparation.
Budgetary accounting structure of
the Office of the Chief Financial Officer (OCFO)*
*Note: Budgetary accounts are in-cluded in two financial statements: the statement of budgetary resources and statement of financing. Without a set of self-balancing accounts to summarize budgetary activity, the risk of reporting inaccurate budget-ary figures exists.
Account analysis and other significant reconciliation procedures of OCFO.

Table 1: FY 2000 Internal Control Weaknesses Health Life Salaries
Retirement Benefits Insurance Revolving & Expense Issues Program Program Program Fund Accounts
................................................................................................................................................................................ Controls Over Program Administration for N/A RC N/A N/A N/A

the Community-Rated Health Carriers
Quality Control Over Annual Financial NRC NRC NRC RC RC
Statement Preparation

Budgetary Accounting Structure NRC NRC NRC RC RC
Account Analysis and Other Significant NRC NRC NRC RC RC Reconciliation Procedures of OCFO

EDP General Control Environment RC RC RC RC RC
RC = A reportable condition NRC = No reportable condition N/A = Not applicable to the program

Deficiencies
Still Noted In
OPM's Financial
Reporting for
FY 2000

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October 1, 2000 - March 31, 2001 25
2001 AUDIT ACTIVITIES
and Budget (OMB) Bulletin No. 01-02, Audit Requirements for Federal Financial
Statements, except for the following ar-eas where OPM's financial management
systems did not substantially comply with the requirements of the Federal Manag-
ers' Financial Integrity Act:

Federal financial management system
requirements.
n Federal accounting standards (RF
and S&E only).
Standard general ledger at the transaction level (RF and S&E only).

OPM FACTS Transmissions Procedures Our agency submits our consolidated financial statements (CFS) to the
Department of the Treasury through FACTS (federal agencies centralized trial balance system). Treasury compiles and summarizes the FACTS data at the department level. As part of this process, it also requires selected agency Offices of the Chief Financial Officer and Of-fices of Inspector General (OIGs), including OPM, to compare and identify any differences between the FACTS data summarized by Treasury and an agency's consolidated financial statements submitted to the Office of Management and Budget (OMB). Treasury outlines specific procedures for OCFOs and OIGs to perform for this verification process.

We commented on FACTS procedures in our previous semiannual report, em-
phasizing their importance in preparing the government-wide consolidated fi-
nancial statements and notes issued March 31 of each year. The notes are
a vital component, reflecting both key accounting policies and procedures and
other accounting data that assist the reader in interpreting the CFS. Treasury
requires each agency's OCFO to trans-

mit electronically a list of all standard general ledger accounts with preclosing
balances prepared at fiscal year's end and the notes. What appears to be a simple
procedure of transmitting and verifying data is complicated by the many trans-
missions and parties involved.
For the FY 2000 verification, insufficient planning and control over this process

continued to impede successful comple-tion by financial managers. Despite these
difficulties, we performed the agreed-upon procedures prescribed by OMB,
the U.S. Treasury and the General Ac-counting Office (GAO). In prior years,
OPM did not prepare or transmit con-solidated agency financial statements or
provide all of the required documentation necessary to perform the verification
procedures required by Treasury. Con-sequently, we could not perform the
specific agreed-upon procedures. In-stead, our OIG and KPMG performed
other procedures to ensure that a verifi-cation process was completed.

Our FY 2000 verification identified the following two differences between the
FACTS data summarized by Treasury and OPM's consolidated financial statements
submitted to OMB:

An accounts receivable amount
The line item total entitled "Liabilities & Net Position" was understated on the Treasury-summarized FACTS data by $24.2 million. In addition, OPM is required to provide explanations for any differences that are identified. As of the date of our agreed-upon procedure report to OMB, the U.S. Treasury and GAO, OPM man-agement was still researching the dif-
ferences we identified.

)IG and
KPMG
Note Disparities
in FACTS Data

32
32 Page 33 34
26 OIG Semiannual Report
Performance Audits
The purpose of our performance audits is to provide an independent assessment

of how well our agency operates its various programs and activities. These
audits help improve public accounta-bility and facilitate decisionmaking by
those within the agency responsible for implementing changes in those programs
and activities. We conduct two types of performance audits: (1) economy and
efficiency audits, and (2) program audits.
Economy and efficiency audits determine:

Whether the agency is acquiring and managing resources (personnel, property and space) prudently and proficiently and the causes of any practices that do not lend themselves to economy and efficiency.
Whether the agency has complied with laws and regulations relating to its operations. Program audits determine:
- The extent to which the desired results or benefits established by the Congress or another authorizing body are being achieved.
- The effectiveness of organizations, programs, activities or functions.
- Agency compliance with significant laws and regulations.

During this reporting period, we again concentrated our performance audit efforts on program audits. Specifically, we reviewed documentation relating to our agency's Government Performance and Results Act (GPRA) data.

>The Government Performance and Results Act, enacted in 1993, is commonly referred to as the Results Act or by its acronym GPRA. It was designed to produce improvements in government performance and accountability in federal programs and includes directives for federal agencies and departments to

Verification and validation reviews. We issued a draft report to OPM manage-
ment regarding our verification and validation reviews. The objectives of
our reviews were to: (1) verify and validate performance data for selected
FY 2000 GPRA performance indicators in our agency's performance report, and
(2) evaluate the effectiveness of controls over performance measurement data.

We focused our reviews on key OPM program offices and important perfor-
mance goals and measures for FY 2000.
The OPM performance plan submitted to Congress with its FY 2000 budget

request established five general agency goals, 117 program goals, and 458 per-
formance indicators. We selected 116 performance indicators from 42 program
goals to verify and validate from eight major program offices. Included in our
selection were many of the goals that relate to our top management issues
reported to members of the House and Senate in letters dated December 1, 2000.
A description of the top management issues and the status of OPM's actions
on these issues appear in Table 2 on the next page.

AUDIT ACTIVITIES April
uditors
Note OPM's
Commitment to
A Reporting
Accurate
Performance Data

33
33 Page 34 35
October 1, 2000 - March 31, 2001 27
Table 2: Summary of Top Management Issues Previously
Included in Top Issue Reported Management Issues? Agency Actions
................................................................................................................................................................................ OPM's Financial Management Yes OPM is developing a centralized enrollment system. The system

Oversight of the FEHBP requirements are being defined and a pilot process is expected (CRC enrollment reconciliations) to be completed in the next year.

Reconciliation of OPM's Yes OCFO has devoted significant resources to resolving this issue Fund Balance with in the last three years. OCFO has improved reconciliation
Treasury Account procedures, but there were still large differences between cash balances as of the end of FY 2000. Resolution is not expected
in the short term.
Data Reconciliation Yes OCFO has developed detail reports supporting general ledger and Control balances to be used in reconciliations.

OCFO has increased the level of contractor support in assisting with creating and revising transaction codes, and recently imple-
mented several critical transaction codes.
OCFO has assigned responsibility for all transaction code work
to a senior-level manager.

Revolving Fund and Yes OCFO has contracted for help with development of needed Salaries & Expense Accounts transaction codes, improved the audit trail for year-end adjusting
Financial Statement Preparation entries. OPM prepared a Statement of Financing, including RF and S&E accounts, in its FY 2000 consolidating financial statements.

Retirement Systems Yes OPM has put in place an RSM project team for reengineering busi-
Modernization (RSM) ness processes related to the federal civilian retirement program.

OPM's GPRA Implementation Yes OPM is planning to strengthen its data validation and verification procedures, will ensure that the next performance report more
clearly describes the link between each performance measure and overall strategic goals and more clearly explain how continuing
goals and objectives address the agency's management challenges.
OPM's Office of Executive Resources Management (OERM) will have numerical data checked by more than one person to ensure

accuracy. However, OERM does not have the resources, nor do they see the benefit of establishing a complex data control process,
to track and analyze this information.
Human Resources Management Yes OPM has designed a work force planning model that will allow line managers to analyze their current work force. Also, OPM
performs oversight reviews in federal agencies covering human resource management areas, including reviews of agency adher-
ence to merit system principles.
Health Care Fraud and Yes OPM management and the OIG have worked together to have Abuse in the Federal Employees legislation amended. Though an amendment has been included
Health Benefits Program in at least four bills introduced in the 106th Congress, none has passed to date.

2001 AUDIT ACTIVITIES

34
34 Page 35 36
28 OIG Semiannual Report
uditors
Review
OPM's FMFIA
Compliance
Efforts

While we found that OPM needs to improve controls over the performance
reporting process, we are encouraged that OPM management has been respon-
sive to our findings and recommenda-tions and has already taken steps to
implement some improvements.
Performance reporting is still a new pro-cess to the federal government. While

improvement and better guidance is needed, OPM is committed to present-
ing accurate and consistent data. With each year, OPM has gained experience
in reporting its performance results. The following are areas within OPM program
operations we identified in our verifica-tion and validation reviews that need to
be addressed and improved:

Establishing policies and procedures for obtaining and compiling perform-ance data.
Better oversight and monitoring of performance data by OPM managers.
Better documentation for supporting performance data.
Disciplined use of cutoff controls (specific time frames) to coincide with performance data.
More reliable performance data.
Performance results that correlate to pertinent measures.
Availability of measurement data tosupport performance results.

While not all program offices had the same issues described in the preceding

bullets, all of these deficiencies point to the need for OPM's performance results
to be accurate and reliable.

As we continue to oversee the agency's
compliance with the Results Act, our
evaluators and auditors will continue to
provide oversight and assistance to the
agency in preparing its strategic plans,
along with the agency's annual perform-ance plans and reports.

OCFO's FMFIA Compliance Efforts
We reviewed OPM's Federal Managers'
Financial Integrity Act (FMFIA) report-
ing process for FY 2000. Specifically, we
examined documentation supporting
the FMFIA process, comparing it to the
results from our consolidated financial
statement audits, required by the CFO
Act.

We also analyzed management's summary of FMFIA internal control weaknesses

and financial system nonconformances and found it to be complete. OPM re-
ported four material weaknesses (as defined on page 23), four weaknesses it
corrected in FY 2000, but are still subject to validation, three material nonconform-
ances, and one material nonconformance that was corrected and now subject to
validation. A nonconformance is defined as an agency's accounting system that
does not conform to the principles, standards and related requirements pre-
scribed by the U.S. Comptroller General.
In our opinion, the results of our and
KPMG's work provide sufficient evidence
to support the overall conclusion reached
by OPM. OCFO has been working
diligently to correct the control weak-
nesses reported, and is making progress
in many areas.

AUDIT ACTIVITIES April

35
35 Page 36 37
October 1, 2000 - March 31, 2001 29
2001 AUDIT ACTIVITIES
OIG Accounting Assistance
We have continued to work with the Office of the Chief Financial Officer (OCFO) to provide accounting assistance to help improve and correct some previously identified reportable conditions and material internal control weaknesses (see pages 24 and 25, respectively). As we described in our semiannual re-port issued last fall, these areas include the agency's training and management assistance (TMA) program and OCFO's cash management and payroll account-ing issues. We are encouraged by the progress OCFO has made in these areas, but significant improvements are still necessary to correct those designated as material weaknesses. We have described these reviews in more detail below.

Training management assistance.

As of March 2001, the total difference in revenue balances between the general ledger and TMA's recordkeeping system is approximately $42 million. We are assisting OCFO in reconciling differences between TMA's recordkeeping system and the general ledger system by comparing individual project balances and transactions. Progress has been slow, due to the age of these projects and the large number of projects and minimal supporting documentation for the trans-actions in the general ledger system. We will continue working with OCFO to correct the TMA project balances in the general ledger.

Cash reporting process.

Our efforts to improve internal controls over the >agency's cash reporting process have been focused on two areas:
(1) manual adjustments to the monthly cash man-agement transactions report to the U.S. Treasury (reports otherwise gener-ated automatically from the financial management system), and
(2) reconciling the significant differences between OPM's cash management records and Treasury's records. OCFO began implementing these improvements during the latter part of FY 2000. We have reviewed the documentation since implementation and have noted that the new controls need to be applied more consistently. Payroll outsourcing. As we described in our last semiannual report, an OIG and OCFO quality improvement team identified numerous problems within the payroll accounting process. At the same time, the quality improvement team was developing methods to correct some of the problems identified, while researching the various causes for others. Since that report, OPM has decided to contract out our payroll activities to the General Services Administration (GSA). The technical term for this type of interagency support is called "cross-servicing." Our office is participating in this process to ensure that controls are in place to maximize the accuracy of OPM's payroll activities and GSA information transfers to OPM financial systems.

OIG Assists OCFO in Improving Controls Over Its Financial Activities

36
36 Page 37 38
October 1, 2000 - March 31, 2001
31
OIG Semiannual Report
Investigative Activities

The Office of Personnel Management (OPM) administers benefits from its trust funds for all federal civilian employees and annuitants partici-pating in the federal government's retirement, health and life insurance programs. These trust fund programs cover approximately 9.5 million current and retired civilian employees, their spouses and dependents(coverage for these latter two categories is limited by law) and disburse about $61 billion annually. Other responsibilities of the agency include
administration of the Combined Federal Campaign (CFC). The investigation of potential fraud involving OPM's trust funds, the CFC, and other agency programs, along with employee misconduct and other wrong-doing, occupies the majority of our OIG investigative efforts.

During this reporting period, the majority of our case work involved fraud committed by individuals and cor-porate entities against the three trust fund programs (health, retirement and life insurance) administered by our agency on behalf of all civilian federal employees, retired annuitants and any dependents or spouses eligible to receive these program benefits.

We aggressively pursued criminal and civil prosecutions against all persons and businesses we identified as having en-gaged in some form of trust fund fraud.Our efforts resulted in ten arrests and ten convictions, along with $7,024,218 in judicial and administrative monetary recoveries. We opened 21 investigations, closed 19, and 69 were still in progress at the end of the period. For additional information on investigative activity during this reporting period, refer to Table 1 on page 34 of this section. We received a total of 626 hotline calls and complaints during this reporting period that covered health care fraud, retirement fraud, as well as employee misconduct or other suspected wrong-doing by individuals. Information we obtain through these hotline calls, as well as written complaints received in the office, continue to be extremely helpful to us in our investigative efforts to protect the programs under the jurisdiction of our agency. Please consult page 36 in this section for additional statistical data relating to our OIG hotline and complaint activity.

Health Care-Related Fraud and Abuse agencies in the executive branch place on combating health care fraud, we coordinate our investigations with the Department of Justice (DOJ), the FBI, and other federal, state and local law enforcement agencies.

At the national level, we are participating members of DOJ's health-care fraud working groups. We work actively with the various U.S. Attorney's offices in their efforts to further consolidate and increase the focus of investigative resources in those regions that have been particularly vulnerable to fraudulent schemes and practices engaged in by unscrupulous health care providers. Additionally, our office maintains a close liaison with other federal law enforcement agencies participating in health care fraud investigations throughout the country. As a consequence, we participate in many health-care fraud working groups that simultaneously represent governmental interests at the federal, state and local levels.

37
37 Page 38 39
32
OIG Semiannual Report
INVESTIGATIVE ACTIVITIES
April

Our OIG special agents also work closely with the numerous health insurance carriers participating in the FEHBP, providing an effective means for reporting instances of possible fraud by FEHBP health care providers and subscribers. Our investigators, of course, continue to have a close working relationship with OIG auditors on fraud issues that may arise during the course of FEHBP health
carrier audits. The following narratives describe three of the cases we closed in the area of health care fraud during this reporting period.

Major Hospital Chain Involved in Billing Fraud Our OIG has been involved in an on-going five-year investigation with the
Department of Justice and other federal and state agencies regarding a national
hospital chain, HCA-The Healthcare Company (formerly known as Columbia/HCA Healthcare Corporation). HCA-The Healthcare Company allegedly conspired to defraud various government health insurance programs out of millions of dollars. These programs include Medicare; TriCare (the successor to CHAMPUS), which insures our military personnel, retirees and family members; the FEHBP; and Medicaid, a federally sponsored program administered by the states for the working poor and
the indigent. This investigation focused on Columbia HCA's outpatient billing practices for laboratory tests that later were determined not medically necessary or not ordered by physicians. Other billing violations involved falsifying diagnostic codes through upcoding. Upcoding occurs when treatment codes are changed to reflectsome type of high-end service not per-formed to gain greater reimbursement
from insurance companies.

On December 14, 2000, Columbia HCA agreed to a $745 million civil settlement with the Department of Justice. The FEHBP portion of the settlement was $5.8 million in restitution. An additional $2.5 million in lost investment income (interest) for the FEHBP trust fund is to be determined by the Justice Department at a later date.

CVS Subsidiary Engages in RX Drugs Billing Fraud On February 21, 2001, the Department of Justice and the CVS Corporation signed a settlement agreement in which CVS agreed to pay the federal government $4 million. This payment was to resolve CVS's federal liability for the alleged submission of false prescription claims by Revco, a CVS subsidiary. The FEHBP portion of this payment is $300,000.

This settlement follows a four-year investigation of several pharmaceutical firms billing customers in full for only partially filled prescriptions. Revco billed FEHBP members and their insur-ance companies at full price for these prescriptions, while only providing them with the amount of a drug in stock at the time of pickup. Under these circumstances, FEHBP members receiving less than what their prescriptions called for would then be asked to return to pick up the remainder of these prescriptions at a later date. On those occasions when members
failed to return, the drugs would be returned to Revco's inventory. Afterwards, Revco failed to amend the insurance claims to reflect that patients received only a portion of their prescribed medications, resulting in Revco overbilling their customers' insurance carriers.

Settlement
Yields
$5.8 Million
Recovery for
FEHBP

38
38 Page 39 40
October 1, 2000 - March 31, 2001 33 2001 INVESTIGATIVE ACTIVITIES
Medical Clinic Physician Involved in Major Billing Fraud Our office participated in a three-yearinvestigation concerning allegations that a Texas physician, Dr. Dipakkumar (Dipak) Patel, owner and operator of the Midland Walk-in Clinic in Midland, Texas, had engaged in health care fraud
over several years. The alleged fraud resulted in millions of dollars being paid to Dr. Patel by federal health insurance programs as well as private
insurance programs.

We were joined by the FBI, the Defense Criminal Investigative Service, the OIG at the Department of Health and Human Services, as well as the State of Texas Attorney General's office, in looking into this case. The investigation conirmed that Dr. Dipak Patel fraudulently billed various federal programs, including the FEHBP, as well as several private insurance programs, for $1.6 million
during the period January 1, 1995 through July 22, 1999. Dr. Patel was able to do this by generating false diagnoses to justify billing unnecessary services.

On January 25, 2001, Dr. Patel was indicted by a federal grand jury in the Western District of Texas in Midland on 51 counts of mail fraud, one count of health care fraud, and seven counts of money laundering. A trial date is expected to be set for late August or early September 2001. The outcome of this
case will be reported in a later semi-
annual report.

To protect the interest of the FEHBP
and its subscribers, in the interim, our office recently suspended both the physician and his clinic from participating in the FEHBP.

Retirement Fraud and Special Investigations

In addition to health care fraud, our office works closely with other federal, state and local law enforcement officials to uncover fraud involving OPM's retirement and life insurance program trust funds.

Our office's proactive efforts to identify fraud against OPM's retirement fund takes two forms: (1) we routinely re-view Civil Service Retirement System (CSRS) annuity records for indications of unusual circumstances, and (2) we maintain contact with the federal annu-itant population, including telephone calls and on-site visits to the homes of annuitants listed in OPM's retirement records. While our fraud recoveries in this area are, for the most part, smaller than in the health care fraud area, criminal prosecutions and sentences tend to
be more significant. In addition, this office conducts special investigations in other areas having to do with serious criminal violations and misconduct by OPM employees. These cases primarily involve the theft of gov-ernment funds and property.

Cited below are three retirement fraud investigations that were completed during this reporting period.

CSRS Annuity Overpayment Linked to Son Our office initiated an investigation of the son of a deceased CSRS annuitant living in Phoenix, Arizona, who was alleged to have received CSRS annuity benefits intended for his deceased father for a period of 14 years following the father's death in 1977. The son received over $414,600 in annuity funds to which he was not entitled during this period.

West Texas Provider Indicted for Health CareFraud Totaling $1. 6 Million

39
39 Page 40 41
34 OIG Semiannual Report INVESTIGATIVE ACTIVITIES April Based on our investigation, and with the assistance of the U.S. Secret Service, the against him. In November 1998, the U.S. Attorney's office and the Phoenix bank where the annuity funds were de-posited entered into an agreement that provided for the bank to reimburse the federal government $100,000 for a breach of contract claim. It did so, although not admitting guilt, for allegedly failing to notify the government when it learned of the annuitant's death in 1978.

In January 1999, the annuitant's son and his parents' estate filed for bankruptcy. Afterwards, in November 30, 1999, the Department of Justice and the annuitant's son and the parents' estate reached a negotiated agreement wherein the house owned by them jointly would be sold and the proceeds from the sale would be assigned to the government. The amount of $197,033 was returned to the federal government as a result of the sale of the house in December 2000.

Daughter of CSRS Retiree Guilty of Annuity Fraud In January 1998, our special agents began investigating a case of annuity fraud involving a New York City resident named Judy Bennett, the daughter of a deceased Civil Service Retirement System (CSRS) annuitant.

CSRS Trust Fund Receives$197,033 in Settlement

Table 1: Investigative Highlights
Judicial Actions: Arrests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Indictments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Convictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Administrative Actions 1 : . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0
Judicial Recoveries: Fines, Penalties, Restitutions and Settlements . . . . . . . . . $6,755,379

Administrative Recoveries: Settlements and Restitutions . . . . . . . . . . . . . . . . . . . . . . . . $268,839
Total Funds Recovered . . . . . . . . . . . . . . . . . . . . . . $7,024,218
1 Includes suspensions, reprimands, demotions, resignations, removals, and reassignments.

40
40 Page 41 42
October 1, 2000 - March 31, 2001 35 2001 INVESTIGATIVE ACTIVITIES With the cooperation and assistance of the New York City Office for Public Assistance, the U.S. Secret Service, and the OIG at the Social Security Administration, our investigators were success-ful in confirming that over a 13-year period, the daughter of this annuitant had illegally used her father's retirement
benefits during this period. These CSRS annuity benefits totaled $122,262 during this time frame. After failing to notify OPM of her father's death in 1983, Ms. Bennett was able to access the deceased annuitant's retirement benefits through an account they shared. These government annuity pay-ments were deposited electronically to the joint account. Ms. Bennett plead guilty to theft of gov-ernment funds in U.S. District Court in New York City in July 2000. Appear-ing again in that court on December 1, 2000, she was sentenced to six months' home confinement, three years of supervised probation, and was ordered to make restitution to the government for the full amount of $122,262 she had illegally received.

Annuitant's Son Admits to Retirement Fraud
In a proactive attempt to identify annu-ity fraud, special agents from our office
routinely check the validity of annuitant's addresses and other identifying information. During August 1999, our special agents discovered that a CSRS nnuitant residing in Fairfax County, Virginia, had actually died in 1986.

Further investigation disclosed that the deceased annuitant's son, Norman Johnston, had access to these benefits through a bank account held jointly by Mr. Johnston and his mother. Access was further facilitated since these CSRS annuity benefits were deposited electronically into the account. After being arrested on July 10, 2000, the annuitant's son pleaded guilty to wire fraud. On October 27, 2000, in U.S. District Court in Alexandria, Virginia, Mr. Johnston was sentenced to six months' home confinement with electronic monitoring, two years of supervised probation, 100 hours of community service, and ordered to make restitution in the amount of $66,247 to the government. This amount was in addition to the $16,454 previously recovered from the joint account, for a total of $82,701.

OIG Hotlines and Complaint Activity
The information we receive on our OIG hotlines is generally concerned with FEHBP health care fraud, retirement fraud and other complaints that may warrant special investigations. Our office receives inquiries from the general public, OPM employees, contractors and others interested in reporting waste, fraud and abuse within the agency. In addition to hotline callers, we receive information from individuals who choose to write letters or who appear in our office. Those who report information can do so openly, anonymously or con-fidentially without fear of reprisal.

Retirement Fraud and Special Investigations
The Retirement and Special Investigations hotline provides the same assistance as traditional OIG hotlines in that it is used for reporting waste, fraud and abuse

Restitution of $122,262 Ordered Following Conviction

41
41 Page 42 43
36 OIG Semiannual Report INVESTIGATIVE ACTIVITIES April
The Retirement and Special Investigations hotline and complaint activity for this reporting period included 86 telephone calls, 46 letters, 5 agency referrals, and 66 complaints initiated by the OIG, for a total of 203. Our administrative monetary recoveries resulting from retirement and special investigation complaints totaled $114,266.

Health Care Fraud
The primary reason for establishing an OIG hotline was to handle complaints from subscribers in the Federal Employ-ees Health Benefits Program administered by OPM. The hotline number is listed in the brochures for all the health insur-
ance plans associated with the FEHBP. While the hotline is designed to provide an avenue to report fraud by subscribers, health care providers or FEHBP carriers, frequently callers have requested assistance with disputed claims and services disallowed by the carriers. Each caller receives a follow-up call or letter from

Table 2: Hotline Calls and Complaint Activity
Retirement and Special Investigations Hotline
and Complaint Activity: Retained for Investigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132

Referred to: OIG Office of Audits. . . . . . . . . . . . . . . . . . . . . . . . 0
OPM Groups and Offices. . . . . . . . . . . . . . . . . . . . 41
Other Federal Agencies. . . . . . . . . . . . . . . . . . . . . . 30

Total. . . . . . . . . . . . . . . . . . . . . . . . . . 203
Health Care Fraud Hotline and Complaint Activity: Retained for Investigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198

Referred to: OPM Groups and Offices . . . . . . . . . . . . . . . . . . . 93
Other Federal/State Agencies. . . . . . . . . . . . . . . . . 42
Health Insurance Carriers or Providers . . . . . . . . . 90
Total . . . . . . . . . . . . . . . . . . . . . . . . . 423
Total Contacts. . . . . . . . . . . . . . . . . . . . . . . . 626

either the OIG hotline coordinator, the insurance carrier or another OPM program office as appropriate. The Health Care Fraud hotline and complaint activity for the reporting period involved 165 telephone calls and 258 letters, for a total of 423. During this period, the administrative monetary re-coveries pertaining to health care fraud complaints totaled $154,733.

OIG-Initiated Complaints
As illustrated earlier in this section, we respond to complaints reported to our office by individuals, government entities at the federal, state and local levels, as well as FEHBP health care insurance carriers and their subscribers. We also initiate our own inquiries as a means to respond effectively to allegations involving fraud, abuse, integrity, and oc-casionally malfeasance. Our office will initiate an investigation if complaints and inquiries can be substantiated.

>42
42 Page 43 44
October 1, 2000 - March 31, 2001 37
2001 INVESTIGATIVE ACTIVITIES
An example of a specific type of complaint that our office will initiate involves retirement fraud. This might occur when our agency has already received information indicating an overpayment to an annuitant has been made. At that point, our review would determine whether there were sufficient grounds to justify our involvement due to the potential for fraud. There were 18 such complaints associated with agency in-quiries during this reporting period.

Another example of an OIG-initiated complaint occurs when we review the agency's automated annuity records system for certain items that may indi-cate a potential for fraud. If we uncover some of these indicators, we initiate personal contact with the annuitant to
determine if further investigation is warranted. This investigative activity resulted in 48 instances where our office initiated personal contacts to verify the status of the annuitant. We believe that these OIG initiatives complement our hotline and outside complaint sources to ensure that our office can continue to be effective in its role to guard against and identify instances of fraud, waste and abuse.

OIG
Proactive
Efforts Help
Thwart
Annuity Fraud

43
43 Page 44 45
October 1, 2000 - March 31, 2001 39
Index of Reporting Requirements Inspector General Act of 1978 (as amended)

OIG Semiannual Report Page

Section 5 (a) (1): Significant problems, abuses
and deficiencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-29

Section 5 (a) (2): Recommendations regarding significant
problems, abuses and deficiencies . . . . . . . . . . . . . 15-18, 23-29

Section 5 (a) (3): Recommendations described in previous
semiannual reports on which corrective
action has not been completed . . . . . . . . . . . . . . . . . . . . . . . 41

Section 5 (a) (4): Matters referred to prosecutive authorities . . . . . . . . . . . 32-35
Section 5 (a) (5): Summary of instances where information was
refused during this reporting period . . . . . . . . . . . . . No Activity

Section 5 (a) (6): Listing of audit reports issued during
this reporting period . . . . . . . . . . . . . . . . . . . . . . . . . . . 42-47

Section 5 (a) (7): Summary of particularly significant reports . . . . . . . . . . . . 6-29
Section 5 (a) (8): Audit reports containing questioned costs . . . . . . . . . . . . 42-44
Section 5 (a) (9): Audit reports containing recommendations
for better use of funds . . . . . . . . . . . . . . . . . . . . . . . . No Activity

Section 5 (a) (10): Summary of unresolved audit reports issued
prior to the beginning of this reporting period . . . . . . . . . . . 41

Section 5 (a) (11): Significant revised management decisions
during this reporting period . . . . . . . . . . . . . . . . . . . No Activity

Section 5 (a) (12): Significant management decisions
with which OIG disagreed during
this reporting period . . . . . . . . . . . . . . . . . . . . . . . . . No Activity 44
44 Page 45 46
October 1, 2000 - March 31, 2001 41
Appendix I: Final Reports Issued With Questioned Costs October 1, 2000 to March 31, 2001
.................................................................................................................................................................................................................
Number of Questioned Unsupported Subject Reports Costs 1 Costs 1

A. Reports for which no management 19 $ 65,673,570 $5,611,160 decision had been made by the beginning of the reporting period
B. Reports issued during the 30 214,341,387 898,354 reporting period with findings
.................................................................................................................................................................................................................
Subtotals (A+B) 49 280,014,957 6,509,514

C. Reports for which a management 18 62,449,122 5,636,708 decision was made during the

reporting period:
1. Disallowed costs 59,329,197 5,636,708
2. Costs not disallowed 3,119,925 0
D. Reports for which no management 31 217,565,835 872,806 decision has been made by the end of the reporting period
Reports for which no management 3 8,106,692 2 0 decision has been made within 6 months of issuance .................................................................................................................................................................................................................

1 Questioned costs represent recommendations for recovery of funds resulting from OIG audits. Unsupported costs are included in
questioned costs. 2
Resolution of this item has been postponed at the request of the OIG.

OIG Semiannual Report

Appendix II: Final Reports Issued With Recommendations for Better Use of Funds October 1, 2000 to March 31, 2001
.................................................................................................................................................................................................................
Number of Dollar Subject Reports Value

No activity during this reporting period 0 $ 0
................................................................................................................................................................................................................. 45
45 Page 46 47
42 OIG Semiannual Report
Appendix III: Insurance Audit Reports Issued October 1, 2000 to March 31, 2001
.................................................................................................................................................................................................................
Report Issue Questioned Unsupported Number Subject (Standard Audits) Date Costs Costs

1A-10-82-00-026 Blue Cross and Blue Shield of Kansas October 12, 2000 $852,317 $ in Topeka, Kansas

1A-10-34-00-065 Blue Cross and Blue Shield of October 12, 2000 North Dakota in Fargo, North Dakota
1C-RR-00-00-067 Prudential HealthCare HMO - October 12, 2000 Oklahoma City in Houston, Texas
TW-00-99-058 PCA Health Plans of Texas October 12, 2000 1,218,341 in Louisville, Kentucky
1C-N9-00-00-068 Geisinger Health Plan October 16, 2000 in Danville, Pennsylvania
10-55-96-032 Independence Blue Cross October 18, 2000 73,273,083 in Philadelphia, Pennsylvania
1A-10-57-00-034 Highmark Blue Cross and Blue Shield October 23, 2000 990,060 in Pittsburgh, Pennsylvania
10-06-99-055 CareFirst Blue Cross and Blue Shield November 13, 2000 5,996,561 25,548 in Owings Mills, Maryland
PW-00-00-006 Community Health Plan dba November 20, 2000 51,714 Kaiser Permanente in Latham, New York
H8-00-00-010 United HealthCare Select December 8, 2000 11,130,140 in Minneapolis, Minnesota
V8-00-00-001 Aetna U.S. HealthCare of the December 11, 2000 20,866,353 Mid-Atlantic in Blue Bell, Pennsylvania

68-00-99-043 Harvard Pilgrim HealthCare, Inc., December 11, 2000 477,539 in Dedham, Massachusetts
10-85-99-054 CareFirst Blue Cross and Blue Shield December 20, 2000 5,468,489 in Washington, D.C.
75-00-96-029 Humana Michael Reese HMO Plan January 16, 2001 7,763,346 872,806 in Chicago, Illinois

1A-10-31-00-069 Wellmark Blue Cross and Blue Shield January 17, 2001 248,781 of Iowa in Des Moines, Iowa
.................................................................................................................................................................................................................

APPENDICES April 46
46 Page 47 48
October 1, 2000 - March 31, 2001 43
Appendix III: Insurance Audit Reports Issued October 1, 2000 to March 31, 2001
.................................................................................................................................................................................................................
Report Issue Questioned Unsupported Number Subject (Standard Audits) Date Costs Costs

1A-10-95-00-033 Trigon Blue Cross and Blue Shield January 17, 2001 $ 556,165 $ in Richmond, Virginia A-10-53-01-010 Blue Cross and Blue Shield of Nebraska January 19, 2001 166,135 in Omaha, Nebraska 1C-GF-00-00-003 PacifiCare of Texas in Dallas, Texas January 29, 2001 4,598,962
1D-87-00-00-030 Hawaii Medical Service Association January 31, 2001 752,425 in Honolulu, Hawaii 1A-10-74-01-024 Wellmark of South Dakota February 5, 2001 in Sioux Falls, South Dakota UR-00-96-030 Humana Health Plan of Texas February 9, 2001 26,057,092 in San Antonio, Texas 1A-10-11-00-035 Blue Cross and Blue Shield of February 15, 2001 1,157,851 Massachusetts in Boston, Massachusetts 1A-10-84-01-002 Blue Cross and Blue Shield of February 15, 2001 37,490 Utica-Watertown in Utica, New York D2-00-96-028 Humana Health Plan of Louisville February 22, 2001 8,190,253 in Louisville, Kentucky 1A-10-69-01-001 Regence Blue Shield February 22, 2001 342,322 in Seattle, Washington 1C-SU-00-00-007 Aetna U.S. HealthCare of Philadelphia February 22, 2001 9,811,061 in Blue Bell, Pennsylvania 1C-JC-00-00-002 Aetna U.S. HealthCare of New York February 26, 2001 13,439,139 in Blue Bell, Pennsylvania 1A-10-12-01-011 Blue Cross and Blue Shield of Western March 1, 2001 100,125 New York in Buffalo, New York 1C-UM-00-00-022 NYLCare Health Plans of the Gulf Coast, Inc., March 5, 2001 1,030,560 in Houston, Texas TM-00-00-009 QualMed Washington Health Plan March 5, 2001 175,614 in Bellevue, Washington
.................................................................................................................................................................................................................

2001 APPENDICES 47
47 Page 48 49
44 OIG Semiannual Report
Appendix III: Insurance Audit Reports Issued October 1, 2000 to March 31, 2001
.................................................................................................................................................................................................................
Report Issue Questioned Unsupported Number Subject (Standard Audits) Date Costs Costs

1C-TX-00-01-029 Humana Health Plan of Texas, Inc., March 6, 2001 $ $ in Corpus Christi, Texas

1A-10-55-00-063 Independence Blue Cross March 12, 2001 1,250,027 in Philadelphia, Pennsylvania
1C-P3-00-00-008 Aetna U.S. HealthCare of New Jersey March 13, 2001 14,242,064 in Blue Bell, Pennsylvania
1C-JB-00-00-019 Prudential HealthCare HMO of the March 16, 2001 1,420,963 Mid-Atlantic in Baltimore, Maryland
1B-45-00-00-064 Claims Administration Corporation March 26, 2001 2,676,415 as Administrator for the Mail Handlers
Benefit Plan in Rockville, Maryland .................................................................................................................................................................................................................
TOTALS $214,341,387 $898,354

APPENDICES April 48
48 Page 49 50
October 1, 2000 - March 31, 2001 45
2001 APPENDICES
Appendix IV: Internal Audit Reports Issued October 1, 2000 to March 31, 2001
.................................................................................................................................................................................................................
Report Issue Funds Put to Questioned Number Subject Date Better Use Costs

4A-CF-00-00-074 Office of Personnel Management's February 16, 2001 $ $ Fiscal Year 2000 Consolidated
Financial Statements ................................................................................................................................................................................................................
TOTALS $ $

Appendix V: Information Systems Audit Reports Issued October 1, 2000 to March 31, 2001
.................................................................................................................................................................................................................
Report Issue Funds Put to Questioned Number Subject Date Better Use Costs

4A-OP-00-00-075 Critical Infrastructure Protection in December 15, 2000 $ $ Presidential Decision Directive 63
in Washington, D.C.
1B-47-00-00-027 Information System General Controls January 2, 2001 at American Postal Workers Union

Health Plan in Silver Spring, Maryland ................................................................................................................................................................................................................
TOTALS $ $ 49
49 Page 50 51
46 OIG Semiannual Report
Appendix VI: Combined Federal Campaign and Other External Audit Reports Issued October 1, 2000 to March 31, 2001
.................................................................................................................................................................................................................
Report Issue Funds Put to Questioned Number Subject Date Better Use Costs

3A-CF-00-00-060 The 1997 and 1998 Combined Federal October 16, 2000 $ $ Campaigns for Military, Veterans and
Patriotic Service Organizations of America in Corte Madera, California

3A-CF-00-00-059 The 1997 and 1998 Combined Federal October 23, 2000 Campaigns for Health and Medical
Research Charities of America in Corte Madera, California

3A-CF-00-00-058 The 1997 and 1998 Combined Federal October 23, 2000 Campaigns for Animal Funds of America
in Corte Madera, California
3A-CF-00-00-061 The 1997 and 1998 Combined Federal November 27, 2000 Campaigns for Christian Service Charities

in Springfield, Virginia
3A-CF-00-00-031 The 1997 and 1998 Combined Federal November 30, 2000 Campaigns for the Heartland

in Kansas City, Missouri
3A-CF-00-00-062 The 1997 and 1998 Combined Federal December 5, 2000 Campaigns for Earth Share

in Washington, D.C.
3A-CF-00-00-050 The 1997 and 1998 Combined Federal December 19, 2000 Campaigns for the National Capital Area

in Washington, D.C.
3A-CF-00-00-025 The 1997 and 1998 Combined Federal January 16, 2001 Campaigns of Santa Clara/San Benito

Counties in Santa Clara, California
3A-CF-00-00-045 The 1997 and 1998 Combined Federal February 9, 2001 Campaigns of Central Ohio

in Columbus, Ohio ................................................................................................................................................................................................................

APPENDICES April 50
50 Page 51 52
October 1, 2000 - March 31, 2001 47
Appendix VI: Combined Federal Campaign and Other External Audit Reports Issued October 1, 2000 to March 31, 2001
.................................................................................................................................................................................................................
Report Issue Funds Put to Questioned Number Subject Date Better Use Costs

3A-CF-00-01-035 The 1998 and 1999 Combined Federal March 20, 2001 $ $ Campaigns of Southern New Jersey
in Rancocas, New Jersey
6A-2A-00-00-070 Costs Incurred by Aramark Services, Inc., January 31, 2001 under Contract OPM-96-BPO5508

in Charlottesville, Virginia
6A-2A-00-01-030 Cost Proposal by Wastren, Inc., March 15, 2001 to Provide Services at the

Federal Executive Institute in Charlottesville, Virginia
................................................................................................................................................................................................................
TOTALS $ $

2001 APPENDICES 51
51 Page 52 53
United States
Office of
Personnel
Management

Office of the
Inspector
General

Report Fraud, Waste or Abuse
to the Inspector General The Director of the Office of Personnel Management

and the Inspector General need your help to assure the
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Please Call the :

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HOTLINE

You may also visit or write:
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April 2001
OIG-SAR-24

United States
Office of Personnel Management

Office of the Inspector General 53

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