Free Post Trial Brief - District Court of Federal Claims - federal

Case 1:97-cv-00187-FMA

Document 211

Filed 12/15/2003

Page 1 of 47

Nos. 97-187C, 01-148C (Judge Allegra) ______________________________________________________________________________ IN THE UNITED STATES COURT OF FEDERAL CLAIMS HEALTH INSURANCE PLAN OF GREATER NEW YORK, INC., Plaintiff, v. THE UNITED STATES, Defendant. ______________________________________________________________________________ DEFENDANT'S POST-TRIAL BRIEF ______________________________________________________________________________ PETER D. KEISLER Assistant Attorney General DAVID M. COHEN Director OF COUNSEL: SUSAN WHITMAN, ESQ. Office of General Counsel Office of Personnel Management 1900 E Street, N.W., Room 7353 Washington, D.C. 20410 JOHN E. KOSLOSKE Senior Trial Counsel Commercial Litigation Branch Civil Division Department of Justice Attn: Classification Unit 1100 L Street, N.W., Room 8012 Washington, D.C. 20530 Tele: (202) 307-0282 Attorneys for Defendant DECEMBER 15, 2003

Case 1:97-cv-00187-FMA

Document 211

Filed 12/15/2003

Page 2 of 47

TABLE OF CONTENTS Page DEFENDANT'S POST-TRIAL BRIEF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 I. BACKGROUND . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 A. B. C. D. Nature Of The Case . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Enrollment In The FEHB Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 HIP's Computerized Enrollment Systems . . . . . . . . . . . . . . . . . . . . . . . . . 5 The Evolution Of HIP's Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (1) (2) (3) The Original Claim For Contract Years 1988-1994 ($13,657,317) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 The Revised Claim For Contract Years 1988-1996 ($14,421,140) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 The Response Of The Government Trial Expert To The Revised Claim For Contract Years 1988-1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 The February 2003 Revised Underpayment Claim For Contract Years 1990-1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 The New Contingency Reserve Claim ($477,794) . . . . . . . . . . . 12 The Revived Underpayment Claim For Contract Years 1988 And 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

(4) (5) (6)

ARGUMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 I. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13

-i-

Case 1:97-cv-00187-FMA

Document 211

Filed 12/15/2003

Page 3 of 47

TABLE OF CONTENTS (CONT'D) Page II. The Underpayment Claim For Contract Years 1988 And 1989 ($2,816,676) . . . . 14 A. B. III. IV. The Approach Used By HIP To Calculate An Underpayment For 1988 And 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 HIP's Alternative Approaches For Estimating An Underpayment For 1988 And 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . 25

The Underpayment Claim For Contract Years 1990-1996 ($9,128,180) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 The Contingency Reserve Claim ($477,794) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 A. B. C. D. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 The Court Lacks Jurisdiction To Entertain The Contingency Reserve Claim . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 An Order Of Specific Performance Would Not Be Appropriate . . . . . . . 36 In Any Event, There Is No Contractual Duty To Deposit Funds Set Aside For The Administrative Reserve Into The Contingency Reserve. . . . . . . . . . . . . . . . . . . . . . . . . . 39

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

-ii-

Case 1:97-cv-00187-FMA

Document 211

Filed 12/15/2003

Page 4 of 47

TABLE OF AUTHORITIES FEDERAL CASES Aeronautical Industrial District Lodge 91 of the International Association of Machinists and Aerospace Workers, AFL-CIO v. United Technologies Corp., Pratt & Whitney, 87 F. Supp. 2d 116 (D. Conn.), aff'd, 230 F.3d 569 (2d Cir. 2000) ............................. 36 Bluebonnet Savings Bank, F.S.B. v. United States, 266 F.3d 1348 (Fed. Cir. 2001) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 Contract Cleaning Maintenance, Inc. v. United States, 811 F.2d 586 (Fed. Cir. 1987) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Ervin & Associates, Inc. v. United States, 44 Fed. Cl. 646 (1999) . . . . . . . . . . . . . . . . 34 Garrett v. General Electric Co., 987 F.2d 747 (Fed. Cir. 1993) . . . . . . . . . . . . . . . . . . 35 In re CSI Enterprises, Inc., 220 B.R. 687 (Bkrtcy.D.Colo. 1998), aff'd, 203 F.3d 834 (10th Cir. 2000) ................................................................... 17, 20 In re Lake States Commodities, Inc., 271 B.R. 575 (Bkrtcy.N.D.Ill. 2002) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,20 Luria Bros. & Co., Inc. v. United States, 177 Ct. Cl. 676, 369 F.2d 701 (1966) ........... 13 Nemer-Jeep Eagle, Inc. v. Jeep-Eagle Sales Corp., 992 F.2d 430 (2d Cir. 1993) ..................................................................................... 37 Reflectone, Inc. v. United States, 60 F.3d 1572 (Fed. Cir. 1995) . . . . . . . . . . . . . . . . . 35 San Carlos Irrigation and Drainage District v. United States, 877 F.2d 957 (Fed. Cir. 1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Transamerica Insurance Corp. v. United States, 973 F.2d 1572 (Fed. Cir. 1992) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Vanalco, Inc. v. United States, 48 Fed. Cl. 68 (2000) . . . . . . . . . . . . . . . . . . . . . . . . . . 34 Weaver-Bailey Contractors, Inc. v. United States, 19 Cl. Ct. 474, 480 (1990) . . . . . . . 28 Willems Industries, Inc. v. United States, 155 Ct. Cl. 360, 295 F.2d 821 (1966), cert. denied, 370 U.S.

-iii-

Case 1:97-cv-00187-FMA

Document 211

Filed 12/15/2003

Page 5 of 47

TABLE OF AUTHORITIES (CONT'D) FEDERAL CASES (CONT'D) Witherington Construction Corp. v. United States, 45 Fed. Cl. 208 (1999) . . . . . . . . . 34 FEDERAL STATUTES United States Code: 5 U.S.C. § 8902(a) ............................................................................................................ 2 5 U.S.C. § 8909(a) ............................................................................................................ 2 5 U.S.C. § 8909(b) ..................................................................................................... 33,39 5 U.S.C. § 8909(e) .......................................................................................................... 39 5 U.S.C. § 8913(a) ............................................................................................................ 2 28 U.S.C. § 2517 ............................................................................................................. 38 31 U.S.C. § 1304 ............................................................................................................. 38 41 U.S.C. § 605 ............................................................................................................... 34 41 U.S.C. § 605(a) .......................................................................................................... 34 41 U.S.C. § 605(c)........................................................................................................... 34 41 U.S.C. § 609(a)(1) ...................................................................................................... 34 41 U.S.C. § 612(a)........................................................................................................... 38 Public Laws: Federal Employees Health Benefits Act, 5 U.S.C. §§ 8901-14 ........................................ 1 Contract Disputes Act of 1978, as amended, 41 U.S.C. §§ 601-13 .................................. 2 REGULATIONS Code of Federal Regulations: 5 C.F.R. § 890.301(f)(4) ................................................................................................... 5

-iv-

Case 1:97-cv-00187-FMA

Document 211

Filed 12/15/2003

Page 6 of 47

TABLE OF AUTHORITIES (CONT'D) REGULATIONS (CONT'D) Code of Federal Regulations (cont'd): 5 C.F.R. § 890.503 .......................................................................................................... 33 5 C.F.R. § 890.503(b) ..................................................................................................... 33 48 C.F.R. § 52.233-1 (1987) ........................................................................................... 35 MISCELLANEOUS 12 Corbin, Contracts § 1170 (1979) ................................................................................ 38 Federal Personnel Manual Supplement 890-1: § S5-1a ........................................................................................................................ 3 § S6-2a ........................................................................................................................ 3 § S6-2b ........................................................................................................................ 3 § S7-1 .......................................................................................................................... 4 § S7-3a ........................................................................................................................ 4 § S7-3d ........................................................................................................................ 4 § S7-3e ........................................................................................................................ 4 § S7-3f ......................................................................................................................... 4 § S7-3g ........................................................................................................................ 4 § S13-2a ....................................................................................................................... 4 § S13-2a(2) .................................................................................................................. 4 § S13-2a(3) .................................................................................................................. 4 § S13-4f ........................................................................................................................ 4 § S13-8b(2) .................................................................................................................. 4

-v-

Case 1:97-cv-00187-FMA

Document 211

Filed 12/15/2003

Page 7 of 47

TABLE OF AUTHORITIES (CONT'D) MISCELLANEOUS (CONT'D) Federal Personnel Manual Supplement 890-1 (cont'd): § S13-8b(2) .................................................................................................................. 4 § S13-8c(5) .................................................................................................................. 4 § S19-1b ....................................................................................................................... 5 § S19-3a ....................................................................................................................... 5 Restatement (Second) of Contracts § 359(1) (1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Restatement (Second) of Contracts § 360(a) (1981) . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 Restatement (Second) of Contracts § 357 comment c (1981) . . . . . . . . . . . . . . . . . . . . 37

-vi-

Case 1:97-cv-00187-FMA

Document 211

Filed 12/15/2003

Page 8 of 47

IN THE UNITED STATES COURT OF FEDERAL CLAIMS HEALTH INSURANCE PLAN OF GREATER NEW YORK, INC., Plaintiff, v. THE UNITED STATES, Defendant. ) ) ) ) ) ) ) ) ) )

Nos. 97-187C, 01-148C (Judge Allegra)

DEFENDANT'S POST-TRIAL BRIEF I. A. BACKGROUND Nature Of The Case

Plaintiff, Health Insurance Plan of Greater New York, Inc. (HIP), provides health care benefits to the private and public employment sectors in the Greater New York area. Stip. ¶ 25, JX 19, at 10.1/ HIP is a prepaid plan, also referred to as a "health maintenance organization" or "HMO," that participates in the Federal Employees Health Benefits (FEHB) Program Id. A prepaid plan provides or arranges for health care by designated physicians, hospitals, and other providers in particular locations. Id. HIP's FEHB plan is a community-rated, individual practice, prepaid benefits plan. Stip. ¶ 27, JX 19, at 10. The FEHB Program is administered by the Office of Personnel Management (OPM). Stip. ¶ 1, JX 19, at 1. The Federal Employees Health Benefits Act (FEHB Act) authorizes OPM to contract with "qualified carriers" offering "health benefits plans," such as HIP, for a renewable In this post-trial brief, "Stip. ¶ ____" refers to the referenced paragraph(s) of the "Pretrial Stipulations" filed on September 10, 2003, a copy of which is included in the record of trial as Joint Exhibit No. 19; "JX ____" refers to the referenced joint trial exhibit(s); "PX ____" refers to the referenced plaintiff's trial exhibit(s); "DX ____" refers to the referenced defendant's trial exhibit(s); and "Tr. ____(____)" refers to the referenced page(s) and line(s) of the transcript of the trial in this case.
1

Case 1:97-cv-00187-FMA

Document 211

Filed 12/15/2003

Page 9 of 47

term of at least one year and to "prescribe regulations necessary to carry out" the Act. 5 U.S.C. §§ 8902(a), 8913(a). During the period from 1988 through 1996, HIP participated in the FEHB Program through a series of one-year contracts, each with an effective date of January 1 of the applicable year. Stip. ¶ 27, JX 19, at 10. HIP entered a contract effective on January 1, 1985, which was renewed annually in 1986, 1987, 1988, 1989, and 1990 (1985 Contract), Stip. ¶ 28, JX 19, at 10, a contract effective on January 1, 1991, which was renewed annually in 1992, 1993, 1994, and 1995, Stip. ¶ 32, JX 19, at 13, and a contract effective on January 1, 1996 (1996 Contract). Stip. ¶ 36, JX 19, at 13. Each of those contracts provided that, in consideration of the services or benefits provided by HIP to subscribers, the Government would pay HIP, from employee, annuitant, and Government contributions paid into the Employees Health Benefits Fund (EHB Fund)2/ for HIP's FEHB Program plan, the contractual premiums less the amounts set aside by OPM for the contingency reserve established for HIP in the EHB Fund and for OPM's administrative expenses. 1985 Contract, §§ 1.2, 3.1(a), JX 1, at pp. 85-4, 85-14; 1991 Contract, § 3.1(a), JX 5, at p. III-1; 1996 Contract, § 3.1(a), JX 10, at p. 20. HIP brings these consolidated actions for damages for breach of contract as a result of the alleged underpayment by the Government of premiums to HIP for health care benefits made available to Federal employees and annuitants under the Federal Employees Health Benefits Program (FEHB Program) for the 1988-1996 interval. These actions are subject to the Contract Disputes Act of 1978, as amended (41 U.S.C. §§ 601-13) (CDA). The appeal in No. 97-187C is from the "deemed denial" by OPM of HIP's January 14, 1997 claim of $13,657,317.52 for The FEHB Act established in the United States Treasury the EHB Fund, which is administered by OPM. 5 U.S.C. § 8909(a). The contributions of employees or annuitants and the Government which make up the health benefits premiums are paid into the EHB Fund. Id.
2

-2-

Case 1:97-cv-00187-FMA

Document 211

Filed 12/15/2003

Page 10 of 47

alleged unpaid premiums for con-tract years 1988 through 1994. PX 60. The appeal in No. 01148C is from the denial by OPM of HIP's claim of $1,352,112.39 for alleged unpaid premiums for contract years 1995 and 1996. PX 61; PX 62. At trial, HIP contended that it has been "damaged" in the total amount of $12,422,651, a sum that includes $2,816,676 in alleged unpaid premiums for contract years 1988 and 1989, $9,128,181 in alleged unpaid premiums for contract years 1990 through 1996, and $477,794 for deposits to the contingency reserve for HIP that the Government allegedly should have made but did not make, i.e., four percent of the alleged unpaid premiums for contract years 1988 through 1996. B. Enrollment In The FEHB Program

Under the FEHB Program, a Federal employee or annuitant selects the health benefits plan that he or she desires and is "enrolled" in the plan. Stip. ¶ 2, JX 19, at 2. An eligible employee must register either to enroll in a plan or not to enroll, which, with certain exceptions, must be done within 31 days after becoming eligible. Stip. ¶ 13, JX 19, at 7; FPM Supplement 890-1 ("Federal Employees Health Benefits") (FPM Supp. 890-1), § S5-1a, JX 11, at 17. Each plan has two types of enrollment: self-only (single) and self-and-family (family). A self-only enrollment "provides benefits for only for the enrolled employee" and a self-and-family enrollment "provides benefits for the enrolled employee and eligible family members." Stip. ¶ 13, JX 19, at 7; FPM Supp. 890-1, § S6-2a & b, JX 11, at 21. Except for a change from a self-and-family enrollment to a self-only enrollment, which may be made at any time, an employee may enroll or make other changes in enrollment only in connection with certain events enumerated in subchapter 7 of FPM Supp. 890-1, including, -3-

Case 1:97-cv-00187-FMA

Document 211

Filed 12/15/2003

Page 11 of 47

among others, a new appointment, a return from military service, the "open season" provided annually by OPM, or a change in marital or family status. Stip. ¶ 13, JX 19, at 7; FPM Supp. 890-1, §§ S7-1, S7-3a,d,e,f & g, JX 11, at 27-29. Health benefits actions are recorded on either Standard Form 2809 (SF 2809) or Standard Form 2810 (SF 2810), each of which contains instructions explaining its use. FPM Supp. 890-1, § S13-2a(1), JX 11, at 55. The SF 2809 "is the form initiated and signed by an employee to register an election to enroll or not to enroll, to change enrollment, or to cancel." Id., § S13-2a(2), JX 11, at 55; see also id. at § S5-1b, JX 11, at 17 ("All registrations ­ to enroll, not to enroll, to change enrollment, or to cancel enrollment ­ must be made on Standard Form 2809."). The SF 2810 "is the form initiated by the employing office to record changes in an enrollment not requiring the signature of the employee." Stip. ¶ 18, JX 19, at 8; FPM Supp. 890-1, § S13-2a(3), JX 11, at 55. The SF 2810 "is used for terminations of enrollment (as opposed to employee-initiated cancellations), reinstatements, changes in appointing office or payroll office, and employee name chan-ges." Id. There are several copies of each SF 2809 and SF 2810, including one copy for the enrollee, one copy for the employing office, one copy for enrollee's payroll office, and one copy for the carrier. Stip. ¶ 19. The employing office copy of a SF 2809 or SF 2810 is filed in the enrollee's Official Personnel Folder (OPF) maintained by the employing office. Stip. ¶ 20, JX 19, at 8; FPM Supp. 890-1, § S13-4f, S13-8b(2) & c(5), JX 11, at 56, 57. The carrier copy of a SF 2809 or SF 2810 is sent to the carrier with a transmittal form, the Standard Form 2811 (SF 2811) ("Transmittal and Summary Report to Carrier"). Stip. ¶ 21, JX 19, at 9; FPM Supp. 890-1, § S19-1b, JX 11, at 81. An original and two copies of the SF -4-

Case 1:97-cv-00187-FMA

Document 211

Filed 12/15/2003

Page 12 of 47

2811 are prepared by the employing agency. Stip. ¶ 21, JX 19, at 9; FPM Supp. 890-1, § S19-3a, JX 11, at 81. The original and one copy of the SF 2811 are sent to the carrier. Id. The second copy is retained by the payroll office pending return to the payroll office of the duplicate certified by the carrier. Id. After June 1995, OPM permitted the following transactions between OPM and carriers to be accepted by telephone without the need for "paper confirmations:" reinstatement actions; changes or corrections of enrollment effective dates; transfer-in actions from an employing agency to the retirement system; other actions when an enrollee is awaiting medical care; addition of family members to a family enrollment; and enrollment confirmations. Stip. ¶ 23, JX 19, at 9; FEHBP Letter No. 96-21 (4/10/96), PX 38(third page). Beginning with the November 1996 FEHB program "Open Season," employees of certain agencies were given the option of using automated "Employee Express" transmissions instead of the SF 2809 to make Open Season enrollment changes and to make a cancellation of enrollment or change from self-and-family to self-only coverage (same plan) outside of Open Season. Stip. ¶ 24, JX 19, at 9; FEHBP Letter No. 96-33 (7/1/96), PX 39. An Open Season new enrollment, however, does not take effect until, at the earliest, the first day of the first pay period of the that begins in the next following contract year. Stip. ¶ 16, JX 19, at 7-8; 5 C.F.R. § 890.301(f)(4). Thus, any new enrollment in HIP's FEHB Program plan during the 1996 Open Season using an "Employee Express" transmission would not have taken effect until the 1997 contract year, which is outside the period of HIP's claims. C. HIP's Computerized Enrollment Systems

The various estimates by HIP over the years of the amount of health benefits premiums to -5-

Case 1:97-cv-00187-FMA

Document 211

Filed 12/15/2003

Page 13 of 47

which it allegedly is entitled for contract years 1988 through 1996 all are based upon enrollment data that were extracted by HIP from its computerized enrollment systems and provided by HIP to its damages expert, John W. Wills, who made adjustments to it. Wills Tr. 616(3-7); 619(1-7); 624(6-10); 630(21-25); 544(23-25)-545(1-8); 668(7). From 1988 until July 1994, HIP's primary enroll-ment system was a computerized enrollment system called the "Insured Persons Master File" (IPMF). Stip. ¶ 51, JX 19, at 18. In 1992, HIP began a conversion of its computerized enrollment system from IPMF to a new computerized enrollment system called "Q/Care," which eventually replaced IPMF as HIP's enrollment system. Stip. ¶ 52, JX 19, at 18. At that time, HIP transferred electronically ("migrated") enrollment data for FEHB plan members active on IPMF as of March 1, 1992, with two years of enrollment his-tory. Thus, for example, if a member enrolled in the HIP FEHB plan in 1978 and IPMF indicated that the member continued to be active in the plan as of March 1, 1992, enrollment data for that member were transferred to Q/Care, except that the member's first period of coverage in Q/Care would be in 1990 rather than in 1978. As a result, HIP used a default start date of March 1, 1990, in Q/Care. Stip. ¶ 53, JX 19, at 18. From 1992 until July 1994, HIP entered enrollment data for members of its FEHB plan into IPMF and then transferred the data electronically to Q/Care through a process referred to by HIP as "backbridging." Stip. ¶ 54, JX 19, at 18. Beginning in July 1994, HIP entered all enrollment data into Q/Care and then "backbridged" the data to IPMF. Stip. ¶ 55, JX 19, at 18. Beginning in November 1995, HIP entered and maintained enrollment data only in Q/Care. Stip. ¶ 56, JX 19, at 18. As of November 1995, enrollment data no longer were entered into IPMF.

-6-

Case 1:97-cv-00187-FMA

Document 211

Filed 12/15/2003

Page 14 of 47

The electronic enrollment data relied upon by Mr. Wills for his underpayment analysis were extracted by HIP from IPMF and Q/Care and "downloaded" to two databases created by the HIP underpayment engagement team: IHISTORY.DB and TIMELINE.DB. IPMF data are contained in IHISTORY.DB and Q/Care data are contained in TIMELINE.DB. Wills Tr. 615(413). D. (1) The Evolution Of HIP's Claims The Original Claim For Contract Years 1988-1994 ($13,657,317)

The original premium underpayment claim was for contract years 1988 through 1994. HIP sought a payment to it of for $13,657,317.52 for "unpaid premiums," PX 60, at 1, 6, i.e., the difference between total premiums allegedly due HIP for the 1988-1994 contract years and the amount of premiums paid by the Government to HIP for the same period. Wills Tr. 616(12-15). The premiums allegedly due HIP for contract years 1988 through 1994 were calculated by HIP's designated trial expert, John W. Wills, C.P.A., using enrollment information contained in IHISTORY.DB. Wills Tr. 616(3-7); DX 67, at 67/2.3/ (2) The Revised Claim For Contract Years 1988-1996 ($14,421,140)

In January 2002, Mr. Wills issued a report in which he concluded that, for contract years

DX 67 is a work paper prepared by Brian Hoyt of Fountainhead LLC for Mr. Wills some time after October 2002. Wills Tr. 610(21-23). Among other things, this document "provides a summary background of previous underpayment analyses." DX 67, at 67/1. Mr. Wills does not disagree with any statement contained in DX 67. Wills Tr. 612(13-16). Mr. Hoyt was an associate of Mr. Wills at Arthur Anderson (AA) and member of its HIP underpayment claim engagement team from 1996 until November 1999, at which time Mr. Hoyt left AA for a position with King, Pagano & Harrison (KPH), the law firm of plaintiff's counsel where he continued to "provide some services" on the HIP underpayment claim. Wills Tr. 608(13-19), 609(21-25)-610(1-5). Mr. Hoyt was employed by KPH until October 2002, at which time he left the law firm and established Fountainhead LLC. Wills Tr. 610(6-10).
3

-7-

Case 1:97-cv-00187-FMA

Document 211

Filed 12/15/2003

Page 15 of 47

1988 through 1996, the Government underpaid premiums by $14,421,140. PX 92, at 2 ("Expert Report of John Wills, CPA" dated January 17, 2002, at 2). He arrived at that figure by subtracting the amount of premiums that he computed the Government paid HIP for the 1988-1996 contract years from the amount of premiums to which he determined HIP was entitled for those years. Wills Tr. 618(20-25); PX 92, at 10, 12. The premiums allegedly due HIP for the 19881996 interval were calculated based upon a combination of enrollment information contained in IHISTORY.DB and TIMELINE.DB. Wills Tr. 619(1-12). (3) The Response Of The Government Trial Expert To The Revised Claim For Contract Years 1988-1996

The Government's trial expert, Thomas F. Grogan, C.F.E.,4/ tested the integrity of the HIP electronic enrollment data relied upon by Mr. Wills by comparing, for a randomly-selected sample of 197 subscribers to HIP's FEHB Program plan, Federal enrollment documents (i.e., SF-2809s and SF-2810s and other comparable documentation) with the HIP electronic enroll-

Mr. Grogan was offered and certified at trial as an expert in the fields of damages and the evaluation of premium-underpayment calculations. Grogan Tr. 1116(20-25)-1117(1-4). Mr. Grogan is a principal in the forensic services practice of KPMG LLP in Philadelphia, Pennsylvania, an international accounting and consulting firm, Grogan Tr. 1108(11-20), where he performs (and directs others in performing) accounting, financial, and statistical analyses to quantify liability and damages issues relating to business disputes and incidents of fraud. Grogan Tr. 1108(24-25)-1109(1-5). Mr. Grogan is a Certified Fraud Examiner, a professional certified in the use of tools of accounting, financial analysis, statistical analysis, and data base analysis for the purpose of investigating, quantifying, and reporting on business disputes and incidents of fraud. Grogan Tr. 1111(22-25)-1112(1-4). He has a B.A. degree in Economics and a M.S. degree in Finance. Grogan Tr. 1109(6-9). Mr. Grogan has testified as an expert on numerous occasions in Federal and state courts. Grogan Tr. 1112(16-25)-1113(1). For the past three years, Mr. Grogan has served as a court-appointed Special Master and Auditor in Federal district court in litigation that concerns a premium underpayment dispute between a managed care plan similar to HIP and a provider of radiology services in which he was asked to resolve a wide variety of liability and damages issues of the type that are involved in the present litigation between HIP and the Government. Grogan Tr. 1114(8-25)-1115(1-23).
4

-8-

Case 1:97-cv-00187-FMA

Document 211

Filed 12/15/2003

Page 16 of 47

ment data relied upon by Mr. Wills. DX 34, at 34/8-34/12. On May 28, 2002, Mr. Grogan issued a report in which he opined that, based upon the results of the sample analysis and a related statistical analysis, that the electronic enrollment data relied upon by Mr. Wills to estimate premiums due for the 1988-1996 contract years are "inaccurate" and that "[HIP's] reliance on this inaccurate data results in an overestimate of [its] estimate of underpaid premiums." DX 34, at 34/16. Mr. Grogan also opined that, "[b]ased on the data we have evaluated, properly accounting for the errors in [HIP's] data would result in an estimate of underpaid premiums ranging from ($3,000,166) to $5,907,810, with a midpoint of $1,453,322 (at the 95 percent confidence level.)." Id. On September 27, 2002, Mr. Grogan issued an addendum to his May 28, 2002 report. The addendum updated the analysis described in Mr. Grogan's May 2002 report "to reflect our review of additional Federal enrollment documentation (SF-2809s and SF-2810s) produced by [HIP] on September 6, 2002 . . . ." DX 35, at 35/1. The additional Federal enrollment documents related to 140 subscribers in HIP's FEHB Program plan, 21 of whom were not included by Mr. Grogan in the results of the sample testing procedures described in his May 2002 report "because no enrollment documents were available for review at that time." Id. As a result of the documentation produced by HIP for the 21 additional subscribers, Mr. Grogan expanded his testing procedures to include them and that expanded the size of the sample to 218 subscribers. Id., at 35/1-35/2. Mr. Grogan opined that the additional documentation produced by HIP "further supports our conclusion that the [HIP] enrollment data relied upon by [HIP] in preparing [its] claim is inaccurate" and that, "[b]ased on the expanded sample of 218 subscribers, properly accounting -9-

Case 1:97-cv-00187-FMA

Document 211

Filed 12/15/2003

Page 17 of 47

for the errors in [HIP's] data would result in an estimate of underpaid premiums ranging from ($1,953,748) to $6,673,578, with a midpoint of ($3,640,085) (at the 95 percent confidence level.)." DX 35, at 35/2. On October 11, 2002, Mr. Grogan issued a second update to his May 2002 report to reflect his review of additional Federal enrollment forms (SF-2809s and SF-2810s) produced by OPM on October 11, 2002, relative to Lynn Giovanniello, a member of the subscriber sample analyzed by Mr. Grogan. DX 36, at 36/1. Mr. Grogan opined that "[t]he additional documentation made available by OPM supports our conclusion that the [HIP] enrollment data relied upon by [HIP] in preparing [its] claim is inaccurate" and that, "[b]ased on the sample of 218 subscribers, properly accounting for the errors in [HIP's] data would result in an estimate of underpaid premiums ranging from ($7,595,876) to $6,750,258, with a midpoint of ($422,809) (at the 95 percent confidence level.)." DX 36, at 36/2. (4) The February 2003 Revised Underpayment Claim For Contract Years 1990-1996

Mr. Wills testified that he "looked at" Mr. Grogan's May 2002 report and the two updates to it and concluded that Mr. Grogan had raised valid issues about the accuracy of the HIP enrollment data upon which Mr. Wills' January 2002 formulation of the HIP underpayment claim was based. Wills Tr. 619(13-24); 620(6-10). Mr. Wills then investigated the discrepancies between Federal enrollment documentation and the HIP enrollment database identified by Mr. Grogan at the individual subscriber level. This investigation included discussions in December 2002 with HIP officials Valerie Reardon (HIP's Senior Vice President of Compliance and Internal Audit, Reardon Tr. 85(21-23), Janet Pinto (HIP's Managing Director of Enrollment, DX 114 (Pinto deposition transcript, at 5(7-10), 6(9-11)), and Harold Wilson about the enrollment discrepancies. - 10 -

Case 1:97-cv-00187-FMA

Document 211

Filed 12/15/2003

Page 18 of 47

Wills Tr. 620(11-24). Following Mr. Wills' discussions with the HIP personnel, he "re-ran" the HIP underpayment claim by combining or merging the HIP enrollment databases, i.e., IPMF (IHISTORY.DB) and Q/Care (TIMELINE.DB), to create the HIP__MAST.DB. Wills Tr. 622(323). On February 28, 2003, Mr. Wills issued a "supplemental report" that contained a revised premium underpayment claim for contract years 1990 through 1996 and no claim for contract years 1988 or 1989. PX 93 (second page) ("Supplemental Expert Report of John Wills, CPA" dated February 28, 2003 (second page)). The underpayment claim for 1988 and 1989 was "dropped from the calculation" at that point. Wills Tr. 624(3-5). According to Mr. Hoyt, the IPMF enrollment data for 1988 and 1989 had been "purged" and thus were "likely incomplete." DX 67, at 67/10. Therefore, "claims for these two years were not calculated." Id.; see also Wills Tr. 613(13-17, 24-25)-614(1-4). In the February 2003 report, Mr. Wills noted that Mr. Grogan "pointed out differences in effective dates of enrollment coverage for certain subscribers from the enrollment database from which the initial claim was computed." PX 93 (second page). Mr. Wills stated that "[t]hese differences were investigated" and that, "[a]s a result, the [HIP] enrollment database was revised and the premiums for 1990 through 1996 were recalculated" and that "[t]he recalculation was based on combining the two enrollment databases used by [HIP], IPMF and Q/Care, into one enrollment database." Id. The claim for 1990-1996 was based upon the new HIP__MAST.DB. Wills Tr. 624(6-10). Using this "revised" data base, Mr. Wills concluded that there was a premium underpayment of $12,320,379 for the 1990-1996 contract years, "assuming that the payment information included in Defendant's Responses to Plaintiff's Requests for Admission is correct," - 11 -

Case 1:97-cv-00187-FMA

Document 211

Filed 12/15/2003

Page 19 of 47

and, "[i]n the event that the admission is not correct with respect to the payments, then the premium underpayment is calculated to be $9,708,388." PX 93 (second page). (5) The New Contingency Reserve Claim ($477,794)

In addition to the premium underpayment calculation for contract years 1990-1996, Mr. Wills' February 2003 report contained a contingency reserve claim for $477,794 that was not included in his January 2002 report or raised in either of HIP's certified claims. PX 93 (fourth page). Mr. Wills testified that, as of January 2002, he was not aware of a desire by HIP to assert a contingency reserve fund claim, Wills Tr. 654(10-14), and that he had not been asked by plaintiff's counsel to address a contingency reserve claim. Wills Tr. 654(15-18). It was not until after January 2002 that plaintiff's counsel informed Mr. Wills of his desire to bring the contingency reserve claim at which time plaintiff's counsel requested that Mr. Wills calculate the value of the loss to the contingency reserve fund established for HIP. Wills Tr. 654(19-25)-655(1-7). (6) The Revived Underpayment Claim For Contract Years 1988 And 1989

In June 2003, HIP's trial expert issued a new report in which he estimated a premium under-payment to HIP of $2,816,676 for contract years 1988 and 1989 based upon a different method of estimating premiums due than that used by him to estimate premiums due for the 1990-1996 contract years. "Supplemental Expert Report of John Wills, CPA" dated June 2, 2003, DX 103. Mr. Wills developed this alternate method of estimating a premium underpayment at the request of plaintiff's counsel in May 2003. Wills Tr. 646(8-17). The methodology developed by Mr. Wills to estimate premiums due for 1988 and 1989 is not based upon the identification of enrollment time lines for indi-vidual subscribers as in the case of the method used by Mr. Wills to estimate premiums due for con-tract years 1990-1996. Instead, Mr. Wills relied - 12 -

Case 1:97-cv-00187-FMA

Document 211

Filed 12/15/2003

Page 20 of 47

upon summary enrollment statistics for HIP's FEHB Program plan contained in quarterly headcount reports prepared by HIP for 1988 and 1989 called a "Table 1 Report (Summary of FEHB Enrollment)," DX 103, at DX 103/2-103/3, the source of which is HIP's internal enrollment system. Strassberg Tr. 515(19-22). From the Table 1 Reports, which do not identify subscribers, Mr. Wills was only able to calculate a "composite enrollment" without enrollment time lines for that was not tied to individual subscribers as he had done in the case of the under-payment estimate for contract years 1990-1996. Wills Tr. 637(12-23). ARGUMENT I. Introduction

To recover for a breach of contract, HIP must "establish: (1) a valid contract between the parties, (2) an obligation or duty arising out of the contract, (3) a breach of that duty, and (4) damages caused by the breach." San Carlos Irrigation and Drainage District v. United States, 877 F.2d 957, 959 (Fed. Cir. 1989). HIP "bears the burden of proving the fact of loss with certainty, as well as the burden of proving the amount of loss with sufficient certainty so that the determination of the amount will be more than mere speculation." Willems Industries, Inc. v. United States, 155 Ct. Cl. 360, 376, 295 F.2d 822, 831 (1961), cert. denied, 370 U.S. 903 (1962); accord Luria Bros. & Co., Inc. v. United States, 177 Ct. Cl. 676, 698, 369 F.2d 701, 714 (1966) ("Proof of damage is essential before estimates can be received of the amount thereof."). In the present case, the issues of breach of contract, fact of loss, and amount of loss converge because the evidence offered by HIP to establish all three is the same. It consists of an estimate, in the aggregate, of premiums due under HIP's plan for each contract year in the claim interval (1988-1996), compared with the premiums paid by the Government to HIP, in the aggre- 13 -

Case 1:97-cv-00187-FMA

Document 211

Filed 12/15/2003

Page 21 of 47

gate, for each contract year in the claim period. If the estimates are competent, then HIP has established both a breach of contract and damages. By contrast, if the estimates are flawed, HIP has failed to demonstrate a breach of con-tract, much less that it has been harmed. Because of this convergence of liability and damages in the proofs, the competence of HIP's calculations of premiums due should be evaluated under the more exacting standard of proof required to establish the breach of an obligation or duty arising under a con-tract and the fact of loss rather than the lenient "fair-and-reasonable-approximation" standard used by courts5/ to determine the amount of damages once breach of contract, fact of loss, causation, and foreseeability are established. II. A. The Underpayment Claim For Contract Years 1988 And 1989 ($2,816,676) The Approach Used By HIP To Calculate An Underpayment For 1988 And 1989

The method relied upon by HIP at trial for its premium underpayment calculations for contract years 1988 and 1989 was developed by its trial expert, John Wills, in May 2003, six years after the complaint in Case No. 97-187C was filed and just three months before the trial of this case. Wills Tr. 646(8-17). Under this method, identified as "Approach Number One" in Mr. Wills's June 2, 2003 report, see DX 103, at 103/2,6/ summary statistics for self-only and self-and-

E.g., Bluebonnet Savings Bank, F.S.B. v. United States, 266 F.3d 1348, 1356-57 (Fed. Cir. 2001) ("If a reasonable probability of damage can be clearly established, uncertainty as to the amount will not preclude recovery, and the court's duty is to make a fair and reasonable approximation of the damages.") (internal quotation marks omitted)).
5

Mr. Wills's June 2, 2003 report contains two additional methods for estimating premiums due, discussed below, neither of which was addressed by Mr. Wills during his direct examination at trial or mentioned in Mr. Wills's final report in this case issued on September 8, 2003, see PX 121, one week before the start of trial. These additional methods are "Approach Number Two" (the "HIP Percent" method) and "Approach Number Three" (the "National (continued...)
6

- 14 -

Case 1:97-cv-00187-FMA

Document 211

Filed 12/15/2003

Page 22 of 47

family enrollment in HIP's FEHB Program plan contained in quarterly "Table 1 Reports" were averaged by quarter. DX 103, at 103/2-103/3; PX 121, at 4. The averaged self-only and selfand-family "composite enrollments" were then multiplied by the applicable daily premium rates and totaled by year to produce an estimate of premiums due for the contract year. Id. Next, the estimate of premiums due and premiums paid by the Government for that year were compared to determine whether there was an underpayment and, if so, the amount of the underpayment. Id. The aggregate underpayment determined by Mr. Wills for 1988 and 1989 is $2,816,676. Id.7/ Approach Number One is a flawed method of determining the existence of an underpayment for contract years 1988 and 1989. As Mr. Wills acknowledged, under this method, the enrollment statistics contained in the Table 1 Reports are an "essential component" of estimating premiums due. Wills Tr. 630(21-25). Prior to issuing the June 2003 report that unveiled this method of determining an underpayment, Mr. Wills did not speak with any HIP employee about any aspect of the engagement to calculate an underpayment for 1988 and 1989 based upon the Table 1 Reports. Wills Tr. 632(3-16). Mr. Wills did not discuss the content of the Table 1 Reports relied upon by him with any HIP personnel or even attempt to ascertain the source of enrollment statistics contained in the Table 1 Reports. Wills Tr. 633(11-25)-634(1-2). As of the time he issued the June 2, 2003 report, Mr. Wills was not aware of the source of the enrollment statistics contained in the Table 1 Reports, other than that they "came from HIP enrollment,"

(...continued) Average Percent" method). See DX 103, at 103/3-103/4.
The underpayment determined for 1988 is $1,186,196 ($38,465,166.81 (premiums due) less $37,278,970.80 (premiums paid)). DX 103, at 103/5; PX 121, at Exhibit A. The underpayment determined for 1989 is $1,630,480 ($47,657,387.85 (premiums due) less $46,026,907.48 (premiums paid)). Id.
7

6

- 15 -

Case 1:97-cv-00187-FMA

Document 211

Filed 12/15/2003

Page 23 of 47

Wills Tr. 634(9), and he had taken no steps to confirm that the source of those statistics was the IPMF enrollment system. Wills Tr. 634(10-21). The accuracy of the enrollment statistics contained in the Table 1 Reports relied upon by Mr. Wills to estimate premiums due is dependent upon the accuracy of the underlying data base from which those statistics apparently were generated ­ the IPMF enrollment system. In marked contrast to his assertions about the "rigorous analyses" employed to ensure the accuracy of the enrollment data relied upon by him to estimate premiums due for contract years 1990-1996, see PX 121, at 8, Mr. Wills did nothing to test the accuracy of the enrollment data contained in the Table 1 Reports upon which his estimates of premiums due for 1988 and 1989 are based.8/ When confronted with that fact at trial, the only justifications offered by Mr. Wills for his reliance upon the Table 1 Reports are that the reports were "generated contemporaneously" and "produced [by HIP] in response to a requirement by the OPM" and that he therefore "viewed [the Table 1 Reports] as relevant data in compiling the claim and didn't ask beyond what was on the

The June 2, 2003 report contains no discussion whatsoever of anything that Mr. Wills did to test or otherwise satisfy himself as to the accuracy and reliability of the enrollment statistics contained in the Table 1 Reports he used to estimate premiums due. See DX 103; Wills Tr. 634(22-25)-635(1-2). The September 2003 report does not describe any testing of the enrollment statistics contained in the Table 1 Reports either. See PX 121, at 3-5. Mr. Wills justified his reliance upon those data by stating that the Table 1 reports are based upon actual enrollment data rather than estimates and his assumption that OPM uses Table 1 Reports to adjust every plan's rates annually and as a factor in auditing each plan's rates. Id., at 4. At trial, however, Mr. Wills retreated from the statement contained in his September 2003 report: "[T]he primary factor was that they were contemporaneously produced from HIP enrollment at each quarter and produced to OPM in response to OPM requirements. My understand-ing of how they were used within OPM may or may not be correct, but the primary purpose of using the reports was that they had the data from the historical period by quarter and it done in response to OPM requirements." Wills Tr. 642(21-25)-643(1-6).
8

- 16 -

Case 1:97-cv-00187-FMA

Document 211

Filed 12/15/2003

Page 24 of 47

report themselves." Wills Tr. 635-(17-25)-636(1).9/ When asked on cross-examination to admit that the reason he had not tested the enrollment statistics contained in the Table 1 Reports is that he had no way of testing the accuracy of those data, Mr. Wills responded: "I don't know if I could test the accuracy or not." Wills Tr. 636(2-8). In similar circumstances, courts have given no evidentiary weight to expert testimony. In In re Lake States Commodities, Inc., 271 B.R. 575, 587-88 (Bkrtcy.N.D.Ill. 2002), the court gave "no weight" to an expert's report "due to the lack of meaningful testing of the information upon which it is based and the insufficient validation of the underlying sources." In that case, the expert had opined that a report prepared by another consultant, which contained a summary of 11,598 business transactions obtained from banking and other business records relating to the debtor, was accurate, without having performed a statistical sampling of those transactions. Id. at 587. And, in In re CSI Enterprises, Inc., 220 B.R. 687, 696-97 (Bkrtcy.D.Colo. 1998), aff'd, 203 F.3d 834 (10th Cir. 2000), the court gave no weight to the opinion of an expert as to the amount of debt owed by a party where the opinion was based upon a financial statement and other sources of information which had not been audited or other-wise tested to establish their accuracy. The explanation offered by Mr. Wills for estimating premiums due for contract years 1988 and 1989 based upon summary enrollment statistics contained in Table 1 Reports instead of electronic data contained in the computerized enrollment system used by HIP at that time (IPMF) is that "certain of the [HIP] archived data for the pre-1990 period was not retrievable." PX 121, at 3; see also Wills Tr. 613(9-12) ("It was clear that the production system of IPMF omitted some On direct examination, Mr. Wills testified that the Table 1 Reports "would be a reliable basis for taking a snapshot of enrollment for each quarter" "[b]ecause it's information that was produced con-temporaneously and it was actually sent to OPM." Wills Tr. 545(23-25)-546(1-5).
9

- 17 -

Case 1:97-cv-00187-FMA

Document 211

Filed 12/15/2003

Page 25 of 47

records and that some records had been pulled off and put on what they called their purge system."). The notion that IPMF enrollment records for 1988 and 1989 are incomplete, however, was seemingly contradicted by the trial testimony two HIP officials. Ms. Carmen Bynum, HIP's Managing Director of Information Services for Application Development and Support Services and an employee of HIP's Information Services organization during 1988-1996, testified that she could not recall having ever had any difficulty locating material from the IPMF system that had been archived. Bynum Tr. 336(23-25). Mr. Jay Steinberger, HIP's Director of System Development for Enrollment and Billing, which is in the "computer software area" of HIP, testified that, when FEHB Program plan enrollment data were downloaded from IPMF for purposes of HIP's claims, to the best of his knowledge, HIP was able to retrieve "all archived data from the IPMF system." Steinberger Tr. 522(25)-523(1-6).10/ If in fact HIP's IPMF enrollment data for 1988 and 1989 are complete, as the testimony of Ms. Bynum and Mr. Steinberger would suggest, then Mr. Wills does not have an excuse for not employing the same methodology to evaluate an underpayment for contract years 1988 and 1989 that he has used for the 1990-1996 interval, under which enrollment time lines for individual subscribers can be developed based upon electronic data and the validity of the computerized enrollment data can be tested.

At trial, Mr. Wills appeared somewhat flustered by this testimony. He agreed with the statement that he could not test the accuracy of enrollment statistics contained in Table 1 Reports because he did not have complete enrollment data for 1988 and 1989 from the IPMF enrollment system used to generate the Table 1 Reports, Wills Tr. 636(9-16), but added: "However, the IPMF database, as I've found over the course of the last few days, apparently there's some backup available and I don't know to what extent that has new information, but it may be able to test enrollment in the Table 1s to some archived version, I just don't know, sitting here." Wills Tr. 636(16-21).
10

- 18 -

Case 1:97-cv-00187-FMA

Document 211

Filed 12/15/2003

Page 26 of 47

Mr. Wills's opinion that Table 1 Reports are a reliable basis upon which to estimate premiums due is undercut by the fact that Mr. Wills has not used anything similar to Approach Number One in any of his numerous other premium underpayment engagements, Wills Tr. 645(3-7), and it is inconsis-tent with his prior deposition testimony that the one time he had determined that a plan's enrollment data were not a reliable basis upon which to calculate premiums due was where "the method they used to retain their records did not allow for the historical creation of time lines to enable the calculation of premiums." Wills Tr. 638(7-25)639(1-21). The Table 1 Reports used in Approach Number One were available to Mr. Wills at the time he determined that the premium underpayment methodology relied upon for the 1990-1996 contract years could not be used for 1988 and 1989. In fact, the Table 1 reports have been a part of his work papers since 1997. Wills Tr. 632(17-24), 676(17-19). The analysis reflected in Approach Number One required a "fairly short" time to complete. Wills Tr. 645(8-13). When Mr. Wills concluded that he did not have sufficient information to create reliable time lines for individual subscribers for 1988 and 1989, nothing prevented him from including a claim for 1988 and 1989 based upon Approach Number One in his February 2003 report (PX 93), Wills Tr. 645(17-23), but he did not do so. The claim for 1988 and 1989 based upon Approach Number One is in the case because plaintiff's counsel requested that Mr. Wills prepare a claim for those years upon that basis, not because Mr. Wills believes that it is an adequate basis upon which to determine an underpayment for those years. The assertion that enrollment statistics contained in Table 1 Reports should be deemed reliable because OPM supposedly relies upon them hardly demonstrates that those statistics are - 19 -

Case 1:97-cv-00187-FMA

Document 211

Filed 12/15/2003

Page 27 of 47

accurate.11/ There is nothing in the record to suggest that OPM has ever tested the enrollment system of HIP from which its Table 1 Reports are generated and concluded that the HIP enrollment system was accurate. The situation is just the opposite. On July 25, 1991, the OPM Inspector General reported the results of an audit of HIP's enrollment system in the course of an audit of HIP's operations for the 1986-1989 contract years. OPM OIG Audit Report No. 51-0089-19 dated July 25, 1991, DX 109. Among other things, the Inspector General (IG) reviewed HIP's enrollment system "to verify the accuracy of its Federal enrollment statistics reported to OPM." Id., at 109/14. The "verification consisted of matching HIP's Table 2 Report (Enrollment by Payroll Office)[12/] to OPM's Headcount Report for March 31, 1989." Id. The OPM IG found that "[t]he enrollment variance between the two was at a high level, with HIP showing significantly more enrollees than OPM." Id. The IG concluded that "HIP's enrollment system does not appear to be producing reliable FEHBP enrollment statistics." Id., at 109/9. Moreover, Ms. Nancy Kichak, OPM's Deputy Associate Director, Center for Work Force Planning and Policy Analysis, who since 1982 has been responsible for actuarial work relative to health and life insurance programs, including the negotiation of rates and rate reconciliation under the FEHB Program, testified that OPM views the accuracy of enrollment statistics contained in Table 1 Reports as "very bad" and that OPM has reduced its reliance upon those reports over the years. HIP apparently contends that the enrollment information contained in the Table 1 Reports should be deemed accurate or reliable merely because those reports are business records of the firm. See Wills Tr. 549(9-17); 676(22-23). We disagree. The documents that contained the untested in-formation that formed the basis for the testimony of the experts rejected by the courts in Lake States Commodities and CSI Enterprises also were business records.
11

The enrollment statistics contained in the Table 2 Report (Enrollment by Payroll Office) roll up to the summary enrollment levels reported in the Table 1 Report (Summary of FEHBP Enrollment).
12

- 20 -

Case 1:97-cv-00187-FMA

Document 211

Filed 12/15/2003

Page 28 of 47

Kichak Tr. 928(24-25)-929(1-2). At any rate, OPM does not place significant reliance upon the Table 1 Reports. Mr. Dennis Black, OPM's Deputy Assistant Inspector General for Audits, testified that for purposes of calculating the amount of an adjustment due a plan of the FEHB Program as a result of questioned health benefits rates, OPM IG uses enrollment from OPM headcount reports, which is based upon enrollment reported to OPM by Federal agencies, not enrollment in the Table 1 Reports submitted by plans to OPM. Black Tr. 706(1-9); 715(9-19). The OPM IG did just that in its 1991 audit of HIP. It used enrollment in the HIP FEHB Program plan set forth in OPM headcount reports to compute the amounts by which the FEHB Program was overcharged in 1987, 1988, and 1989, and to compute the amount by which the FEHB Program was undercharged in 1990. See DX 109, at 109/10-109/11, 109/19-109/22; Black Tr. 703(12-25)-705(1-14).13/ Moreover, as Ms. Kichak testified, OPM uses OPM headcount reports, not Table 1 Reports, to determine a plan's enrollment when computing adjustments to community rates as part of the annual rate reconciliation process. Kichak Tr. 863(2-25)-864(1-8). For the reconciliation of 1988 and 1989 community rates, all plans were required to submit a rate reconciliation worksheet ("Attachment III" in OPM rate reconciliation instructions for community-rated plans),

This can be demonstrated by comparing, for example, of the enrollment used by the OPM IG to calculate the questioned charges for 1989 and the enrollment set forth in HIP's Table 1 Reports for 1989. The detail provided by the OPM IG for its calculation of questioned charges for 1989 reflects that the OPM IG used "headcount" values of 7,709 for "single" enrollment (selfonly coverage) in the HIP plan and 12,401 for "family" enrollment (self-and-family coverage) in the HIP plan. DX 109, at 109/20. By contrast, the Table 1 Reports for 1989 (quarters ended 12/31/88, 3/31/89, 6/30/89, 9/30/89, and 12/31/89) reflect a range of enrollment from 9,763 to 10,248 and an average enrollment of 9,896 for self-only enrollment in the HIP plan and a range of enrollment from 11,870 to 12,240 and an average enrollment of 11,982 for self-and-family enrollment in the HIP plan. See JX 15 (Bates Nos. HIPNY01457-HIPNY01461).
13

- 21 -

Case 1:97-cv-00187-FMA

Document 211

Filed 12/15/2003

Page 29 of 47

leaving the enrollment portion of the form to be filled in by OPM using OPM headcount enrollment statistics. See Kichak Tr. 865(3-7; 17-25)-869(1-19); "1989 Reconciliation Instructions Community-Rated Plans," DX 112, at 112/1 & 112/9 ("Enrollment will be based on the March 31, 1988 semi-annual headcount."); "1990 Reconciliation Instructions Community-Rated Plans," DX 113, at 113/1 & 113/9 ("Enrollment will be based on the March 31, 1989 semi-annual headcount."). After 1990, OPM divided plans into small and large plans and gave small plans (i.e., plans with fewer than 1,500 subscribers) the option of completing the worksheets themselves, including enrollment numbers, and a plan that chose to do would retain the completed worksheet rather than submitting it to OPM. Kichak Tr. 869(20-25)-870(1-22). In that case, OPM rate reconciliation instructions allowed small plans to use enrollment statistics from Table 1 Reports because relevant OPM headcount enrollment data were not available at the time the small plans completed the rate reconciliation worksheet.14/ Apart from that case, the only use made of Table 1 Reports by OPM is in reporting to the public the number of persons covered by the FEHB Program, including dependents, and, for community-rated plans that use an "age-set, family-size adjustment," to "view their rates[.]" Kichak Tr. 922(25)-924(1-6). However, OPM uses the Table 1 Reports for these limited purpo-

See OPM Administrative Kit (May 1992), JX 17, at 17/301 ("Normally, OPM would put the March 31, 1992 Headcount enrollment figures on Line 8 [of Attachment III]. Since these figures will not be available at the time the small plan does the calculation, the plan may use its March 31, 1992 Table 1 enrollment figures."); OPM Administrative Guide for Health Plans (September 1995), JX 18, at 18/237-18/238 ("Normally, OPM would put the March 31, 1995 Headcount enrollment figures on Line 8 [of Attachment III]. Since these figures will not be available at the time the small plan does the calculation, the plan may use its March 31, 1995 Table 1 enrollment figures." (emphasis in original)).
14

- 22 -

Case 1:97-cv-00187-FMA

Document 211

Filed 12/15/2003

Page 30 of 47

ses not because it perceives the Table 1 Reports as accurate, but rather because those reports are the only available source of family size data (i.e., number of dependents) for the FEHB Program. Kichak Tr. 931(15-19).15/ HIP's position that the Table 1 Reports for 1988 and 1989 are a reliable basis upon which to estimate premiums due for those years also is undermined by its own statements about the quality of the enrollment statistics contained in those reports. In response to the finding contained in the 1991 OPM Inspector General audit report that HIP's enrollment system does not appear to be producing reliable enrollment statistics, HIP's management acknowledged that its enrollment file was significantly oversta-ted, a condition that HIP attributed to untimely notification by the Government of terminations of enroll-ment in HIP's FEHB Program plan. See DX 109, at 109/23, 109/28-109/29. Specifically, in the res-ponse to the audit report transmitted by Bernard J. Neeck, HIP's Executive Vice President and Chief Financial Officer,16/ HIP stated that enrollment "terminations are routinely reported to HIP exceptionally late, resulting in significant overstatements of the HIP enrollment file," and that, "[i]n 1990 alone, HIP wrote off more than $3 million due to FEHBP enrollment differences." DX 109, at 109/28-109/29. At the time HIP's trial expert developed the underpayment calculations for 1988 and 1989 based upon the Table 1 Reports, he did not consider either the 1991 OPM IG audit report finding Mr. Wills testified that the source of his understanding, set forth in his September 2003 report, that "Table 1 reports are used by [the Government] to adjust every plan's rates and as a factor in auditing each plan's rates, PX 121, at 4, is HIP personnel, "based on discussions they had had with counsel for HIP." Wills Tr. 643(7-13). When asked on cross examination whether his understanding had changed, Mr. Wills backed away from the statement contained in the September 2003 report. He testified: "[Table 1 Reports] may not be used in every case for determining rates and audits. I don't know sitting here today." Wills Tr. 643(17-19).
15 16

Mr. Neeck was part of HIP's "top management." Reardon Tr. 126(19-25)-127(1-10). - 23 -

Case 1:97-cv-00187-FMA

Document 211

Filed 12/15/2003

Page 31 of 47

that HIP's enrollment system did not appear to be producing reliable enrollment information or HIP's response to that finding, including its acknowledgment that the HIP enrollment file was significantly overstated. Wills Tr. 640(16-25)-641(1-9). In point of fact, Mr. Wills was not even aware of that information when he developed the estimates of premiums due for 1988 and 1989 based upon the Table 1 Reports. Wills Tr. 641(10-17). The first time that Mr. Wills "focused" upon the 1991 OPM IG audit report finding regarding the reliability of HIP's enrollment system and HIP's acknowledgment that it was overstated was when Mr. Wills was examined by defendant's counsel about those matters at a deposition of Mr. Wills in July 2003, several weeks after Mr. Wills issued the June 2003 report that embraced Approach Number One. Wills Tr. 641(2225)-642(1-4). HIP's admission of a significant overstatement of its enrollment file during the period covered by the 1991 OPM IG audit report (including 1988 and 1989), attributed to tardy reporting by employing agencies of termination of enrollments in HIP's FEHB Program plan, is consistent with contemporaneous enrollment reconciliation correspondence from HIP to the Government, specifically, an April 16, 1989 letter from Ms. Patricia Jacovina, a Reconciliation Clerk in HIP's Enrollment and Billing Depart-ment, to the Department of Health and Human Services (DHHS). JX 16; Mulryan Tr. 358(12-25). This correspondence, which concerned enrollment discrepancies between HIP's internal enrollment system and a November 5, 1988 DHHS Reconciliation Report, indicates that there were twenty-nine "terminations" (i.e., "[p]ersons listed on HIP's files, but not on DHHS files") and only one "enrollment" (i.e., "[p]ersons listed on [DHHS's] files but not on HIP's files"). JX 16, at 1-2.

- 24 -

Case 1:97-cv-00187-FMA

Document 211

Filed 12/15/2003

Page 32 of 47

B.

HIP's Alternative Approaches For Estimating An Underpayment For 1988 And 1989

As noted above, the June 2, 2003 report issued by HIP's trial expert contains two additional methods of calculating a premium underpayment for contract years 1988 and 1989, neither of which was addressed by Mr. Wills during his direct examination or mentioned in his final, September 2003 report. Nevertheless, on cross examination, Mr. Wills testified that, if the Court were to find Approach Number One not an acceptable method of determining the existence and extent of an underpayment of premiums for 1988 and 1989, either of the other two approaches addressed in his June 2, 2003 report would constitute "an acceptable alternative." Wills Tr. 649(25)-650(1-11). These alternative methods of determining an underpayment for 1989 and 1989 are also flawed. Approach Number Two ("HIP Percent" method) and Approach Number Three ("National Average Percent" method) are not based upon enrollment data of any type for HIP's FEHB Program plan for the 1988 and 1989 contract years ­ the period for which an underpayment of premiums ostensibly is being evaluated. Under the HIP Percent method, an underpayment percentage was calculated by dividing the underpayment determined by Mr. Wills for contract years 19901996 by total premiums paid to HIP for those years. DX 103, at 103/3; Wills Tr. 647(12-18). That underpayment percentage (2.33 percent) was then applied to premium payments received by HIP for 1988 and 1989, which yielded an aggregate underpayment of $1,941,026 for those years, DX 103, at 103/3, which is $875,650 lower than the underpayment calculated by Mr. Wills under Approach Number One.

- 25 -

Case 1:97-cv-00187-FMA

Document 211

Filed 12/15/2003

Page 33 of 47

Under the National Average Percent method, underpayment percentages were calculated for 1988 and 1989 based not upon any HIP enrollment data, but rather upon the "experience" of other plans participating in the FEHB Program during 1988 and 1989 for which, pursuant to an engagement by plaintiff's counsel, Mr. Wills previously determined had been underpaid health benefits premiums. DX 103, at 103/3-103/4; Wills Tr. 650(12-20). The underpayment percentages were then applied to payments received by HIP for 1988 and 1989, yielding an aggregate underpayment of $2,379,631 for those years, see "Supplemental Expert Report of John Wills, CPA" dated June 12, 2003, DX 104, at 104/4,17/ which is $437,