[Audit Report on Funds Transferred to the United Mine Workers of America Combined Benefit Fund by the Office of Surface Mining Reclamation and Enforcement ]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 01-I-187

Title: Audit Report on Funds Transferred to the United Mine Workers
       of America Combined Benefit Fund by the Office of Surface
       Mining Reclamation and Enforcement 

 
 Date: February 5, 2001

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 U.S. Department of the Interior   Office of Inspector General
  
  
  EXECUTIVE SUMMARY
                              
  Funds Transferred to the United Mine Workers of
  America Combined Benefit Fund by the Office of
  Surface Mining Reclamation and Enforcement
  Report No. 01-I-187
  February 2001
  
  The United Mine Workers of America Combined Benefit Fund (CBF) provides health care
  and death benefits for approximately 65,000 retired union coal mine workers and their
  dependents.  The United Mine Workers of America Health and Retirement Fund (UMWAF)
  manages the CBF and annually submits a bill to the Office of Surface Mining Reclamation
  and Enforcement (OSM) to transfer a portion of the interest earned on the Abandoned Mine
  Reclamation Fund to the CBF.  The transferred interest is used to reimburse the costs of
  "unassigned" beneficiaries, representing mine workers whose former employers are out of
  business or cannot be identified to pay the workers  health care premiums.
  
  The former Director of OSM requested this audit to determine whether the amounts
  transferred to the CBF for unassigned beneficiaries were accurate and whether the amounts
  paid for the health care of these beneficiaries were accurate.  Our review included the transfer
  bills for fiscal years 1996 through 2000.
  
  We concluded that, in general, the transferred amounts were accurately determined and that
  amounts paid for the health care of beneficiaries were accurate.  We found, however, that the 
  UMWAF understated the transfer bills for fiscal years 1999 and 2000 by $885,000 and
  $427,000, respectively.  When informed of these matters, the UMWAF properly recovered
  the $885,000 in an adjustment to the fiscal year 2000 bill and agreed to recover the $427,000
  in an adjustment to the fiscal year 2001 bill.
  
  We recommended that the OSM ensure that the funds transferred to the CBF for fiscal year
  2001 are increased by the amount of the understated fiscal year 2000 transfer bill.
  
  During our audit, the OSM raised concerns about the provision of benefits to individuals who
  were added as beneficiaries after enactment of the Coal Act in July 1992.  Because of
  differing legal opinions on the eligibility of these "after-acquired beneficiaries" between our
  office and the General Counsel for the UMWAF, we suggested that the OSM work with the
  Congress, the Office of Management and Budget, and other stakeholders to resolve this
  matter.  
  
  AUDITEE COMMENTS AND OFFICE OF INSPECTOR GENERAL EVALUATION
  
  The OSM concurred with the report s recommendation and agreed to ensure that the
  recommendation is implemented.  Based on the response, the recommendation  was
  considered resolved but not implemented.  OSM also agreed to work with all interested
  parties to resolve the issue involving the after-acquired beneficiaries.
        E-IN-OSM-002-99(A)-R
  
  
  
  February 5, 2001
  
  AUDIT REPORT
                              
  Memorandum
  
  To:     Director, Office of Surface Mining Reclamation and Enforcement
  
  From:    Roger La Rouche
  Assistant Inspector General for Audits
  
  Subject:  Audit Report on Funds Transferred to the United Mine Workers of America
  Combined Benefit Fund by the Office of Surface Mining Reclamation and Enforcement
  (No. 01-I-187)
  
  INTRODUCTION
  
  This report presents the results of our audit of funds transferred during fiscal years 1996
  through 2000 from the Office of Surface Mining Reclamation and Enforcement's (OSM)
  Abandoned Mine Reclamation Fund to the United Mine Workers of America Combined
  Benefit Fund (CBF).  We performed this audit at the request of the former Director of OSM. 
  The objective of our audit was to determine whether (1) the amounts of the fund transfers to
  the CBF for unassigned beneficiaries were accurately determined and (2) the amounts paid
  for the health care of these beneficiaries were accurate.
  
  BACKGROUND
  
  The CBF is a private employee benefit trust fund that provides health care and death benefits
  for eligible union coal mine workers who retired before July 21, 1992 and their dependents. 
  The United Mine Workers of America Health and Retirement Funds (UMWAF), with
  administrative offices located in Washington, D.C., manages the CBF under the direction of
  a seven-member board of trustees.
  
  The  CBF was created by the Coal Industry Retiree Health Benefit Act of 1992 (26 U.S.C.
   9701-9722), replacing two health benefit plans established in 1950 and 1974 that were
  experiencing severe financial difficulties.  Commonly known as the Coal Act, this legislation
  holds coal operators and related companies responsible for paying monthly premiums for the
  costs of health benefits relating to their retired mine workers and dependents (known as
  "assigned" beneficiaries).  In addition, if the OSM transfer explained in the paragraphs that
  follow is insufficient, coal operators and related companies are required to pay a monthly
  premium for the health care costs of retired mine workers (and dependents) who were
  employed by coal operators that are no longer in business, have no related successor
  company, or whose former employer cannot be identified (known as "unassigned"
  beneficiaries).  Also, these companies pay a premium for the death benefits covering all
  beneficiaries.  As of October 1999, the CBF served a total population of 65,261, consisting
  of 48,289 (74 percent) assigned beneficiaries and 16,972 (26 percent) unassigned
  beneficiaries.
  
  Under the Coal Act, the Social Security Administration is responsible for computing the per
  beneficiary health premium and for assigning the retired mine workers to their former
  employers or related companies.  In September of each year, the Social Security
  Administration provides this information to the UMWAF, where the list of assigned
  beneficiaries is reviewed and adjusted as necessary.  UMWAF computes the premium
  liability for each coal operator by multiplying the per beneficiary health premium by the
  number of assigned beneficiaries, and it issues the bills to the operators on a monthly basis. 
  At the beginning of fiscal year 2000, the UMWAF prepared a total of 401 premium
  assessment bills for coal operators and related companies.
  
  Although the Coal Act obligates operating coal companies to pay the health care premiums
  for unassigned beneficiaries, the Act provides for a Federal subsidy.  Specifically, the Coal
  Act authorizes a transfer of up to $70 million of the interest earned on the principal balance
  of the Abandoned Mine Reclamation Fund in a fiscal year to the CBF to pay the estimated
  expenditures of unassigned beneficiary premiums.  If interest is insufficient to cover the
  estimated expenditures, the OSM may access a reserve consisting of interest earned from
  October 1, 1992 through September 30, 1995.
  
  In accordance with the Coal Act, the OSM has completed the transfers to the CBF at
  approximately the beginning of each fiscal year since fiscal year 1996.  The amounts
  transferred are based on bills submitted by the UMWAF, which include current medical and
  administrative costs, as well as any adjustments to these costs for prior years.  The details
  of each transfer are presented in Appendix 1.  
  
  With an average beneficiary age of 78 and the CBF statutorily closed to additional retirees,
  the population served by the CBF gradually decreases in size as the beneficiaries die.  To
  illustrate, the population of about 112,000 beneficiaries at the CBF's creation in 1992
  decreased to 65,261 as of October 1999, during which time the annual mortality rate rose
  from 5 percent to about 8 percent.  An analysis prepared by the UMWAF's actuarial
  consultant projected that the CBF will serve a diminishing number of beneficiaries each year,
  estimating that the CBF will have 337 beneficiaries in 2045.
  
  SCOPE OF AUDIT
  
  Our audit scope consisted of a review of the annual transfers made from the Abandoned
  Mine Reclamation Fund to the CBF during fiscal years 1996 through 2000.  The audit
  fieldwork was conducted primarily at the offices of the UMWAF in Washington, D.C.,
  where we interviewed cognizant officials and reviewed relevant records, including audit
  reports of CBF activities prepared by the UMWAF's independent public accounting firm,
  KPMG, LLP.  We also interviewed officials of the public accounting firm.  We visited the
  Social Security Administration in Baltimore,  Maryland, to interview officials
  knowledgeable of the process of assigning fund beneficiaries.  We also interviewed
  cognizant OSM officials in Washington, D.C., and Lakewood, Colorado, and reviewed their
  records relating to the transfer of funds.
  
  Our audit was conducted in accordance with the "Government Auditing Standards," issued
  by the Comptroller General of the United States.  Accordingly, we included such tests of
  records and other auditing procedures that were considered necessary under the
  circumstances.  As part of the audit, we reviewed the internal controls to the extent we
  considered necessary to accomplish our audit objective.  We found no significant weaknesses
  in internal controls; however, we noted one minor weakness, that the UMWAF had not
  conducted an independent quality control review of the annual transfer bill (see Results of
  Audit section of this report).  If the UMWAF implements our suggestion, we believe that its
  internal controls will be improved.
  
  We also reviewed the Secretary's Annual Statements and Reports to the President and the
  Congress for fiscal years 1994 and 1995, which were required by the Federal Managers'
  Financial Integrity Act; the Departmental Reports on Accountability for fiscal years 1996
  through 1998, which include information required by the Act; and the OSM's annual
  assurance statements on management controls for fiscal years 1996 through 1999.  We
  determined that none of the reported weaknesses were directly related to the objective and
  scope of this audit.
  
  In addition, we reviewed the OSM's Annual Performance Plan for fiscal year 2000, as
  required by the Government Performance and Results Act.  We determined that the transfer
  of funds was not covered by any of the established mission and performance goals contained
  in the Plan.  Therefore, we did not perform specific audit steps regarding the Government
  Performance and Results Act.
  
  PRIOR AUDIT COVERAGE
  
  Neither the Office of Inspector General nor the General Accounting Office has issued any
  audit reports during the past 5 years concerning the CBF.  Additionally, the Offices of
  Inspector General of the Social Security Administration and the Department of Health and
  Human Services have not issued any audit reports on the CBF.  However, the organizations
  involved in the CBF have been audited annually by independent public accounting firms (see
  Results of Audit section).
  
     RESULTS OF AUDIT
  
  We found that, in general, the amounts transferred from the Abandoned Mine Reclamation
  Fund to the CBF for fiscal years 1996 through 2000 were accurately determined in
  accordance with the Coal Industry Retiree Health Benefit Act of 1992 and that the amounts
  paid for the health care of beneficiaries were accurate.  We found, however, that the
  UMWAF understated the transfer bill for fiscal year 1999 by about $885,000 and understated
  the transfer bill for fiscal year 2000 by about $427,000.  We attributed these errors to the lack
  of a quality control verification over the very complex computations of the fund transfer
  amounts.  After we brought this matter to the attention of the UMWAF officials, the
  understatement for fiscal year 1999 was appropriately recovered in an adjustment to the
  transfer for fiscal year 2000.  The officials stated that the understatement for fiscal year 2000
  would be corrected by an addition to the transfer for fiscal year 2001.  Since the two audit
  exceptions represented only about 1 percent of the total transfer for the applicable fiscal year,
  we concluded that the exceptions were not a material misstatement of the transfers.  Finally,
  in the Other Matters section, we discuss the need for clarification of who is eligible to receive
  benefits from the CBF.
  
  Annual Fund Transfers
  
  The Coal Act amended the Surface Mining Control and Reclamation Act (30 U.S.C. 1232)
  to provide for annual transfers from the Abandoned Mine Reclamation Fund to the CBF. 
  The Coal Act states, "If, for any fiscal year, the amount transferred is more or less than the
  amount required to be transferred, the Secretary shall appropriately adjust the amount
  transferred for the next fiscal year."  Accordingly, the amount of each fund transfer since the
  initial transfer made in fiscal year 1996 has been adjusted in subsequent years.  These annual
  adjustments have ranged from 5 to 48 percent of the amount originally transferred.  The
  adjustments were made for two reasons.  First, the transfer represents a prepayment for the
  estimated health costs for the upcoming year and, according to the Coal Act, must be revised
  when the actual costs become known.  The process of accumulating the actual cost data takes
  up to 2 years to complete because of time delays in receiving medical claims documentation
  from care providers.  Second, the number of beneficiaries classified as unassigned has varied
  widely since the Coal Act was enacted in 1992 because of appeals and lawsuits filed by coal
  operators challenging both the assignments made by the Social Security Administration and
  the adjustments made by the UMWAF.  For example, a June 1998 Supreme Court decision
  in favor of the plaintiff in Eastern Enterprises v. Apfel resulted in the reclassification of at
  least 4,000 beneficiaries previously assigned to Eastern Enterprises and other similar
  companies to the unassigned category.  Other lawsuits in litigation at the end of our
  fieldwork could have similar impacts on the number of unassigned beneficiaries.
  
  Based on our audit, we concluded that the computations for the original fund transfers and
  the subsequent adjustments contained in the bills for fiscal years 1996 through 2000 were
  generally accurate and established the correct amount of health benefit and administrative
  costs associated with unassigned beneficiaries.  However, we found two exceptions.  First,
  on the bill for fiscal year 1999, we found an incorrect prior period adjustment and a
  misstatement of actual costs pertaining to fiscal year 1996, which resulted in an $884,702
  net understatement of the transfer.  We informed UMWAF officials of this matter, and they
  made the necessary adjustments on the bill for fiscal year 2000.  We verified that the
  adjustments were appropriate and resulted in a correct recovery of funds.  Second, on the bill
  for fiscal year 2000, we found errors pertaining to fiscal years 1996 and 1997 as follows: an
  incorrect adjustment and incorrect unassigned population numbers in calculating the drug
  expenses and various errors in computing the medical expenses.  These errors resulted in a
  $427,117 net understatement of the transfer.  We informed UMWAF officials of this matter,
  and they agreed with our determination and said that they would make the necessary
  corrections to the transfer for fiscal year 2001.
  
  Internal Controls
  
  We attributed the primary cause of the two calculation errors to the lack of an independent
  quality control review over the complex computations of the fund transfer amounts. 
  Specifically, to determine the amount of funds to be transferred from the Abandoned Mine
  Reclamation Fund to the CBF, the UMWAF obtains voluminous data from the Social
  Security Administration and the health provider organizations that provide medical and drug
  care to the beneficiaries.  While medical costs are directly recorded, allocations are necessary
  to determine the administrative expenses charged to the CBF.  To develop this information
  for the transfer bill, numerous spreadsheets are prepared that calculate and distribute the
  health costs associated with unassigned beneficiaries.  Consequently, many opportunities for
  error exist in the process of computing the fund transfer amounts.  The transfer bill and the
  supporting computation worksheets, however, have not been subjected to an independent
  quality control review for accuracy.  At the end of our fieldwork, UMWAF officials agreed
  with our suggestion to institute a quality control review of the computations on the bills,
  beginning with the bill for fiscal year 2001, before they are submitted to the OSM.  This
  quality verification, in our opinion, will improve the accuracy of the transfer process.
  
  Except for the errors discussed previously, we concluded that the various internal controls
  involved in the CBF provided reasonable assurance that a significant error would not occur
  in the transfer of funds from the Abandoned Mine Reclamation Fund.  The internal controls
  also served to verify that the amounts of the payments for the health care of beneficiaries
  were correct.  More specifically, each principal organization (the UMWAF and the medical
  and drug provider companies) performing functions related to the CBF had a formal quality
  control system in place.  For example, the UMWAF's Internal Audit Department conducts
  an audit on a biennial basis of the medical and drug provider companies to verify the
  accuracy of health claims.  These audits include examinations for payments of unallowable
  benefits, excessive payments, duplicate payments, accurate reporting of claims processing
  activities, and compliance with applicable laws and regulations.  Additionally, the medical
  and drug provider companies have internal quality assurance departments that similarly
  evaluate the accuracy of health benefit claims submitted to the UMWAF.  Another level of
  verification is provided by the independent public accounting firms engaged each year by
  the UMWAF and the medical and drug provider companies to audit their respective financial
  statements.  Specifically, in the past year, KPMG, LLP, audited the UMWAF; Arthur
  Andersen, LLP, audited United HealthCare Corporation (the medical claims manager) and
  Advance Paradigm, Inc. (the prescription drug provider); and Deloitte & Touche, LLP,
  audited First Health Group Corporation (the medical care provider).  Each organization
  received an "unqualified opinion" on its most recent audit, indicating that the financial
  statements were fairly presented without material misstatement.  Further, the UMWAF
  engaged its public accounting firm to perform a special review, known as the Agreed Upon
  Procedures, to verify the unassigned beneficiary listing of the CBF for fiscal years 1997
  through 1999.  This special review found no misstatements for fiscal years 1998 and 1999
  and disclosed only minor exceptions in the listing for fiscal year 1997.  In summary, our
  review of selected reports issued by these organizations concluded that the internal controls
  over the CBF were effective.
  
  Recommendation
  
  We recommend that the Director of OSM ensure that the funds transferred to the United
  Mine Workers of America Combined Benefit Fund for fiscal year 2001 are increased by the
  $427,117 amount of the understated funds relating to fiscal year 2000.
  
  OSM Response and Office of Inspector General Reply
  
  In the October 13, 2000 response (Appendix 4) to the draft report, the Acting Director, OSM,
  the OSM said that it will ensure that the understated amount of $427, 117 is accounted for
  in the fiscal year 2001 bill and that it will work with the UMWAF in resolving the "after-
  acquired" beneficiaries issue.  Subsequent to the response, the OSM notified us that the
  interpreted amount was corrected in the transfer bill.  Based on the response and the
  subsequent information, we consider the recommendation resolved and implemented.  
  
  Other Matters
  
  At our exit conference, OSM officials stated that the transfer bill should not include health
  costs for any beneficiaries added after the enactment of the Coal Act in July 1992 and that
  this position was supported by the Office of the Solicitor.  Specifically, in a memorandum
  dated December 29, 1999 to the Department of the Interior's Director of Budget, the
  Solicitor stated that the eligibility provisions of the Coal Act limited CBF health benefit
  coverage to "individuals actually receiving benefits as of July 20, 1992."  Reviewing the
  eligibility of beneficiaries was not part of our original audit scope.  To address the concerns
  raised by the  OSM, however, we performed a legal analysis of the eligibility requirements
  of the Coal Act, requested the opinion of the UMWAF on eligibility, and identified the
  number of beneficiaries added to the CBF population after passage of the Coal Act in July
  1992 (known as "after-acquired beneficiaries").  
  
  As stated in a July 12, 2000 memorandum (Appendix 2), our General Counsel concluded that
  after-acquired beneficiaries were not eligible to receive benefits as follows:
  
  Based on the plain language of the statute, it appears that children born of or
  adopted by and individuals who marry eligible workers on or after July 21,
  1992 are not eligible to receive benefits from the United Mine Workers of
  America Combined Benefit Fund.  There is no language in the statute that
  contradicts this conclusion, and the legislative history does not further
  describe what Congress meant when it explicitly and narrowly defined the
  class of retirees and dependents of retirees to be included in the coverage of
  the Fund.
  
  In a July 6, 2000 letter (Appendix 3) to our office, the General Counsel for the UMWAF,
  regarding the provisions cited by the Office of Inspector General, stated, "On their face . .
  .  would seem to preclude the enrollment of the after-acquired beneficiaries."  However, the
  General Counsel also stated that "the U.S. Court of Appeals for the District of Columbia
  Circuit has held, with respect to another provision of the Coal Act, that, where a court can
  conclude that the plain meaning of the statute is contrary to the evident intent of Congress,
  the intended result should prevail over the plain meaning."
  
  In this regard, the General Counsel concluded:
  
       Congress stated its intention that the 1950 and 1974 Benefit Plans should
       continue under the Coal Act, with the same level of coverage and for the
       same beneficiaries as were covered by these plans prior to the Coal Act; and
       both plans then included provisions that dependent family members were
       covered. . . . [Therefore] a reasonable construction of [the sections cited by
       the Office of Inspector General], in light of Congressional intent to have the
       CBF continue the prior coverage of the 1950 and 1974 Benefit Plans, is to
       view the limitations of those sections to those individuals who were eligible
       and receiving benefits as of July 20, 1992 as applying to coal industry retirees
       or their surviving spouses, who would be primary beneficiaries of the CBF,
       but as not applying to the dependents of these primary beneficiaries. 
       Accordingly, it would be reasonable to exclude retirees or primary
       beneficiaries who were not eligible and receiving benefits from either the
       1950 or 1974 Plan as of July 20, 1992, but nevertheless to include the after-
       acquired beneficiaries of retirees or primary beneficiaries who were eligible
       and receiving benefits at the cut-off date.  This has been the approach taken
       by the CBF.
  
  Regarding the impact of the after-acquired beneficiaries on the CBF, we found, using
  unaudited data provided by the UMWAF, that as of June 16, 2000 the CBF was providing
  health benefits for 956 after-acquired beneficiaries, consisting of 753 assigned (reimbursed
  by the coal operators) and 203 unassigned (reimbursed by the OSM under the AML fund
  transfer) beneficiaries.  In comparison, at the time of the first transfer bill made by the OSM
  in October 1995, the CBF population had 147 unassigned after-acquired beneficiaries.  The
  OSM paid about $2.3 million in health benefit costs for after-acquired beneficiaries in its
  transfer bills for fiscal years 1996 through 2000, representing 1 percent of the total amount
  transferred.  We estimate that the health care costs incurred for these beneficiaries in fiscal
  year 2000 will be approximately $590,000.  We also noted that the after-acquired
  beneficiaries were dependents of mine workers or related persons who had satisfied the Coal
  Act's eligibility requirements for the CBF.  The  203 dependents consisted of 143 spouses,
  40 children, 18 grandchildren, and 2 disabled adults.
  
  We suggest that the OSM work with the Office of the Solicitor, the UMWAF, the Congress,
  and the Office of Management and Budget to clarify who is eligible to receive benefits from
  the CBF because of the differing legal opinions and the impact on beneficiaries.
  
  Since the recommendation is considered resolved and implemented, no further response to
  this report is required (see Appendix 5).
  
  Section 5(a) of the Inspector General Act (5 U.S.C. app. 3) requires the Office of Inspector
  General to list this report in its semiannual report to the Congress.  In addition, the Office of
  Inspector General provides audit reports to the Congress.