THE FEDERAL EMPLOYEES HEALTH BENEFITS ACT REQUIRES THAT RATES CHARGED UNDER HEALTH PLAN CONTRACTS REFLECT, REASONABLY AND EQUITABLY, THE COST OF BENEFITS PROVIDED. FOR THE KAISER HEALTH PLANS OF NORTHERN AND SOUTHERN CALIFORNIA, THE CSC HAS NOT DETERMINED WHETHER THIS REQUIREMENT HAS BEEN MET. SINCE A SMALL ERROR CAN SIGNIFICANTLY INCREASE GOVERNMENT COST, THE COMMISSION MUST DETERMINE WHETHER THE TWO RATES ARE REASONABLE AND EQUITABLE. LIMITED AUDITING OF THE PLANS HAS BEEN UNSATISFACTORY BECAUSE NO EVALUATION CRITERIA EXIST. THE COMMISSION SHOULD (1) DEVELOP CRITERIA TO EVALUATE THE REASONABLENESS AND EQUITY OF RATES OF COMMUNITY-RATED, COMPREHENSIVE HEALTH PLANS LIKE THE KAISERS AND (2) COMPREHENSIVELY AUDIT THE CALIFORNIA KAISER PLANS. THE AUDITS SHOULD INCLUDE AN EVALUATION OF KAISER'S PRACTICES OF CONSISTENTLY UNDERESTIMATING THE EARNINGS EXPECTED FROM APPLYING PREMIUM RATES; HAVING DIFFERENT CONTRACT RENEWAL DATES, BUT CONSTANT PREMIUM RATES, FOR ALL MEMBER GROUPS; AND ALLOWING FOR LONG-TERM CAPITAL NEEDS. ADDITIONALLY, THE COMMISSION SHOULD DEVELOP A FINANCIAL REPORTING FORMAT FORCING FULL DISCLOSURE OF OPERATIONS RESULTS FOR ALL HEALTH PLANS COMPONENTS ORGANIZED LIKE KAISER. APPENDIXES PROVIDE SUMMARIES OF RATEMAKING FORECASTS WHEN COMPARED TO ACTUAL RESULTS OF OPERATION, 1972-76, FOR BOTH THE SOUTHERN AND THE NORTHERN CALIFORNIA PLAN. (MHP)