Civil Service Should Audit Kaiser Plans' Premium Rates under the Federal Employees Health Benefits Program To Protect the Government

HRD-78-42: Published: Jan 23, 1978. Publicly Released: Jan 23, 1978.

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The Federal Employees Health Benefits (FEHB) program provided health insurance coverage for 9.5 million participants in 1976 and 9.7 million participants in 1977. The Kaiser-Permanente Medical Care Program (Kaiser) is the largest prepaid group practice program in the United States. The Federal Employees Health Benefits Act requires that rates charged under health plans' contracts shall reasonably reflect the cost of benefits provided. It is important that the Civil Service Commission (CSC) determine whether rates of the Kaiser plans of northern and southern California are reasonable since they are used to calculate the government's contribution to the FEHB program.

CSC has made only limited audits of the Kaiser plans and has not followed up on these audits. One reason that audits have not been comprehensive was that CSC lacked criteria for evaluating reasonableness of rates. Kaiser plans are community-rated with premium rates based on the projected health care experience of all groups expected to be enrolled in the plan, in contrast to other plans which are based only on the experience of federal participants. The inclusion of nonfederal groups makes it more difficult to determine whether rates are reasonable for federal employees. Some characteristics of the Kaiser plans which require evaluation for their impact on the federal rate are: (1) Kaiser may use excess revenues as management sees fit and increase premiums to recover losses; (2) rates are designed to meet not only current health benefit costs but also long-term capital needs; and (3) the plans consistently underestimated revenues that would be derived from proposed premium rates.

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