REPORT DIGEST DEPARTMENT OF HEALTHCARE AND FAMILY SERVICES - TEACHER HEALTH INSURANCE SECURITY FUND FINANCIAL AUDIT For the Year Ended: June 30, 2008 Summary of Findings: Total this audit 2 Total prior audit 1 Release Date: July 8, 2009 State of Illinois Office of the Auditor General WILLIAM G. HOLLAND AUDITOR GENERAL To obtain a copy of the Report contact: Office of the Auditor General Iles Park Plaza 740 E. Ash Street Springfield, IL 62703 (217) 782-6046 or TTY (888) 261-2887 This Report Digest and Full Report are available on the worldwide web at www.auditor.illinois.gov

SYNOPSIS The Department did not obtain an independent internal control review of its third parties involved with the processing of health insurance claims for the Teachers Retirement Insurance Program. The Department did not charge the correct health insurance premium rates for the Teachers Retirement Insurance Program. {Financial Information and Activity Measures summarized on the reverse page.}

DEPARTMENT OF HEALTHCARE AND FAMILY SERVICES

TEACHER HEALTH INSURANCE SECURITY FUND

FINANCIAL AUDIT

Year Ended June 30, 2008

FINANCIAL OPERATIONS (in thousands)

FY 2008

Additions Contributions Employer...……..................................................... State...……........................................................... Plan Member: Activities...……............................................... Retirees...……................................................. Federal government Medicare Part D...................... Consolidated Omnibus Budget Reconciliation Act Total contributions............................................ Interest income...……................................................. Total additions.................................................. Deductions Benefit payments......................................................... Administrative expense................................................ Total deductions............................................... Net increase/(decrease) .......................................... Net assets held in trust for other postemployment benefits Beginning of year.................................................. End of year..........................................................

$ 63,458 68,596 84,611 140,248 19,930 209 377,052 3,122 380,174 380,852 2,867 383,719 (3,545) 65,790 $ 62,245

SUPPLEMENTARY INFORMATION

FY 2008

Number of retirees and beneficiaries receiving benefits……...... Number of waived retirees who may elect healthcare coverage in the future...…….............................................................. Number of terminated plan members entitled to but not yet receiving benefits……........................................................ Number of active plan members............................................... Total…........................................................................ Number of participating employers...........................................

62,936 15,507 15,521 165,572 259,536 1,005

AGENCY DIRECTOR

During Audit Period: Mr. Barry S. Maram

Currently: Mr. Barry S. Maram

No assurance to prevent errors or irregularities No third party independent internal control review obtained for 1 of 4 third party service providers 15% of health insurance expenses processed by third party service providers have no internal control review Department disagrees with auditors Auditor’s comment Reports not obtained until after auditors requested them Health care premium rate-setting methodology not adequate Teacher Retirement System benefit recipients and dependent beneficiaries overcharged a total of $155,529 Department agrees with auditors Auditor’s comment

INTRODUCTION This digest covers the financial audit of the Teacher Health Insurance Security Fund for the year ended June 30, 2008. The financial audit report includes two significant deficiency in internal control findings. FINDINGS, CONCLUSIONS, AND RECOMMENDATIONS THIRD PARTY INTERNAL CONTROL REVIEWS NOT OBTAINED The Department did not obtain an independent internal control review (SAS 70 Report) of its third parties involved with the processing of health insurance claims for the Teachers Retirement Insurance Program. Without a review, the Department did not have assurance that information system controls to prevent errors or irregularities were established. When a user organization like the Department of Healthcare and Family Services uses service organizations, transactions that affect the Local Government Health Insurance Reserve Fund’s financial statements are subjected to controls that are, at least in part, separate from the Department’s. Consequently, it is good business practice to obtain a report from the service organization’s auditors concerning controls placed in operation and in some cases results of tests concerning operational effectiveness. These types of reports are commonly referred to as SAS 70 Reports. The Department contracts with four different third party health insurance service providers to process health insurance claims. Each of the health insurance service provider uses their own computer system to process these health insurance claims. During our review of third party health insurance service providers, we noted that the Department did not obtain an independent internal control review for one of the service providers during fiscal year 2008. Of the health insurance payments made to the four third party health insurance service providers totaling $292,678,137 in fiscal year 2008, $44,572,976 (15%) of the health insurance payments were processed under a third party health insurance service provider from which the Department did not obtain an independent internal control review. The Department stated that they negotiate long term contracts with the parties involved in processing insurance claims for the health care plans. Typical healthcare contracts have five year initial periods and up to five one-year renewal periods. One contract cited was initially negotiated with a five-year contract in 2001, for fiscal year 2002 implementation, without a “SAS 70” requirement. The contract is currently in a one-year renewal period without a “SAS 70” requirement. The Department previously submitted the relevant portions of the Sarbanes Oxley audit pertaining to internal controls as they relate to the audited financial statements for this contract. (Finding 1, pages 17-19) We recommended the Department require that each third-party health insurance service provider engage independent auditors to perform an annual independent internal control review on the controls placed in operation and the tests of their operating effectiveness. Department officials disagreed with our finding and recommendation and stated that the contract was originally executed prior to industry acceptance of “SAS 70.” Department officials continued to state that the Fiscal Year 2010 contract and renewal for the vendor not submitting “SAS 70” audits have already been negotiated and have been signed by the vendor. In order to implement this requirement for the vendor, the Department would have to renegotiate their contract. Renegotiating the contract at this date would jeopardize the contract beginning July 1, 2009. Negotiating an additional audit into the renewal would also increase the cost of the contract. The Department will include a “SAS 70” requirement to all future contracts bid with third parties involved with the processing of health insurance claims. In an auditor’s comment, we noted that we requested all third party internal control reviews from the Department and, for the contract noted above, the Department indicated that they relied on “equivalent” reviews. With regard to the contract, the Department did provide the auditors with what they called a “Sox Report” (Sarbanes Oxley Report). The documentation that the Department provided was an excel spreadsheet that documented computer controls. This spreadsheet was not accompanied by any type of cover letter or auditor’s report. After the auditors questioned the “Sox Report,” the Department contacted the vendor and the Department was informed that the “Sox Report” is actually part of the vendor’s “SAS 70” Report. The Department cannot state to the auditors that they are relying on these "equivalent" reports if they do not obtain them unless requested by the auditors. There is clearly no internal controls to obtain and review these reports. INCORRECT HEALTH INSURANCE PREMIUM RATES CHARGED The Department did not charge the correct health insurance premium rates for the Teachers Retirement Insurance Program. The Department set the fiscal year 2008 health insurance premium rates for Teachers Retirement System benefit recipient and dependent beneficiaries by increasing the prior year rate by 5%. The Department did not take into account the percentage that was to be paid by the Teacher Health Insurance Security Fund. As a result, we noted that the Department did not have an adequate rate-setting methodology used to determine the amount of the health care premiums to be charged. In addition, the Department did not present the rate-setting methodology (included but not limited to utilization levels and costs) used to determine health care premiums to the Teachers Retirement System by April 15^thas required. We also noted the following 2008 premium rates of Teachers Retirement Insurance Program health insurance were not in compliance with parameters established in State statute. · The monthly health insurance premium rate charged for a Teachers Retirement System dependent beneficiary who is Medicare primary was $240.09; however, the health insurance premium rate should have only been $229.63. The beneficiaries were overcharged a total of $152,643 during fiscal year 2008. · The monthly health insurance premium rate charged for a Teachers Retirement System benefit recipient for ages twenty three and under selecting the major medical coverage program was $139.54; however, the health insurance premium rate should have only been $117.17. The benefit recipients were overcharged a total of $2,617 during fiscal year 2008. · The monthly health insurance premium rate charged to a Teachers Retirement System benefit recipient for ages twenty three and under selecting the medical coverage program was $69.77; however, the health insurance premium rate should have only been $58.58. The benefit recipients were overcharged a total of $269 during fiscal year 2008. (Finding 2, pages 20-22) We recommended the Department ensures health insurance premium rates are set for the Teachers Health Insurance Program as required by the State Employees Group Insurance Act of 1971. We also recommended the Department ensures adequate rate setting methodologies are established and make annual required reports to the Teachers Retirement System. Department officials agreed to the finding and recommendation and stated that the Department has submitted draft legislative language to address the issue and clarify that the determination of premiums shall be limited solely to an increase of no more than 5% of the prior year. In an auditor’s comment, we noted that: 1) the Department’s corrective action plan noted in its response is overly simple and an unreasonable resolution to the issues addressed in the finding; and 2) a rate setting methodology should be developed annually and include but not be limited to utilization levels and costs as currently required by the State Employees Group Insurance Act of 1971. AUDITORS’ OPINION Our auditors state the financial statements of the Teacher Health Insurance Security Fund as of June 30, 2008, are fairly presented in all material respects. ___________________________________ WILLIAM G. HOLLAND, Auditor General WGH:TLD:pp AUDITORS ASSIGNED This audit was performed by the staff of the Office of the Auditor General.