oversight

Audit of AXA Assistance as Administrator for Panama Canal Area in Miami, Florida

Published by the Office of Personnel Management, Office of Inspector General on 2009-05-20.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                                               us OFFICE OF PERSONNEL MANAGEMENT
                                                                           .       ' .   '        " .      -         .'.             '   .


                                                                       OFFICE OF THE INSPECTOR GENERAL
                                                                                        OFFICE OF AUDITS




"
    Ftnal AUdIt Report.            '   ,'.               .-   '.     "".




          "

'~"bject:                  '



                               •AlJD1TOF'!\XAJ\S$t$tA~CE·
                   .....#\.Sl\.~~INlsr~"J'9~~9~tH~..
                    :PANAMACANALAR.EA.·BENEFIT.'PLAN
                                                     .
                       ,,,' .' " ,'MJAMJ,FLORIDA<                                                              '',',',' ' ,



                                             , ,ltep()rlNq. 1~..43~O()-08""048 "





                                                                   ~-CAVTION-,
                                                                             ''
              '.       .                             .                                            .

                   .                                                                         '.                 .

                                                 ,                             '




    Thisaudit report bas been distributed toFederal officials who are responsible for theadministratitlli of the audiledprogram', This
    au~it report may I:ontaill proprietarydata which is protectedby Federal Isw (18 U.S.C.1905); therefore, while this audit report is
    aV:iilabltun~er'the Freedom of Iiiforination Act, caution needs to be exercised before releasing the report to the general public.
                           UNITED STATES OFFICE OF PERSONNEL MANAGEMENT

                                             Washington, DC 20415


  Office of the
Inspector General




                                           AUDIT REPORT




                                   Federal Employees Health Benefits Program

                                           Employee Organization Plan


                                               AXA Assistance

                                            as Administrator for the

                                        Panama Canal Area Benefit Plan


                                  Contract CS 1066              Plan Code 43

                                                Miami, Florida





                      REPORT NO. IB-43-00-08-048                     DATE:   May 20,    2009




                                                            ~~-
                                                              Michael R. Esser
                                                              Assistant Inspector General
                                                                for Audits



        www.opm.gov                                                                         www.usaJobs.gov
                           UNITED STATES OFFICE OF PERSONNEL MANAGEMENT

                                              Washington, DC 20415


  Office of the
Inspector General




                                      EXECUTIVE SUMMARY



                                 Federal Employees Health Benefits Program

                                         Employee Organization Plan


                                             AXA Assistance

                                          as Administrator for the

                                      Panama Canal Area Benefit Plan


                                Contract CS 1066              Plan Code 43

                                              Miami, Florida





                    REPORT NO. IB-43-00-08-048                   DATE:    May 20, 2009


      This final audit report on the Federal Employees Health Benefits Program (FEHBP) operations at
      AXA Assistance (AXA), as administrator for the Panama Canal Area Benefit Plan, in Miami,
      Florida, questions $371,160 in administrative expenses and $73,257 in cash management
      practices. AXA agrees (A) with $192,696, disagrees (D) with $206,532, and did not respond
      (NR)to $45,189 of the questioned costs. Lost investment income (LII) on the questioned costs
      amounts to $15,774.

      Our limited scope audit was conducted in accordance with Government Auditing Standards. The
      audit covered capitation payments, miscellaneous health benefit payments and credits, and
      administrative expenses for contract years 2006 and 2007 as reported in the Annual Accounting
      Statements. We also reviewed AXA's cash management practices related to FEHBP funds for
      contract years 2006 and 2007. In addition, we reviewed the close-out costs of the former
      administrator, Health Network America, and the start-up costs ofAXA.

      Questioned items are summarized, as follows:




        www.opm.goY                                                                       www.usajobs.goY
                            HEALTH BENEFIT CHARGES

    The audit disclosed no findings pertaining to capitation payments and miscellaneous health
    benefit payments and credits. Overall, we concluded that the capitation payments charged to
    the FEHBP were paid in accordance with the provider agreements. Also, we concluded that
    the health benefit refunds and recoveries were promptly returned to the FEHBP.

                           ADMINISTRATIVE EXPENSES

•   Unapproved Subcontract (D)                                                      Procedural

    AXA charged the FEHBP $998,984 from January 2006 through June 2008 for a subcontract
    with Redbridge Network and Healthcare, Inc. (Redbridge) for which prior approval was not
    sought from the Office of Personnel Management's (OPM) contracting officer. However,
    even though prior approval was not sought from OPM, the contracting officer was/is aware of
    AXA's contractual relationship with Redbridge. Therefore, since the contracting officer
    was/is aware of AXA 's contractual relationship with Redbridge and since the services
    provided by Redbridge are allowable, reasonable and/or necessary tasks for administering the
    Panama Canal Area Benefit Plan, we are reporting this issue as a procedural finding.

•   Allocation of Home Office Expenses                                                 $223,953

    AXA allocated indirect/overhead expenses to the FEHBP using estimated allocation
    percentages instead of actual. As a result, the FEHBP was overcharged for indirect/overhead
    expenses in 2007. AXA agrees with $90,678 (A) and disagrees with $133,275 (D) of the
    questioned charges.

•   Excess Letter of Credit Drawdown for Administrative Expenses (A)                    $76,361

    AXA withdrew $74,651 from the letter of credit account in excess of the administrative
    expense contractual limitation for 2006. As a result, the FEHBP is due $76,361, consisting
    of $74,651 for the excess drawdown and $1,710 for LII.

•   Unsupported Consulting Expenses      (NR)                                           $45,189

    AXA charged the FEHBP for unsupported, unnecessary and/or unreasonable consulting
    expenses in 2006. AXA did not respond to these questioned charges.

•   Unallocable Tax on the Service Charge fA)                                           $25,657

    AXA inadvertently charged the FEHBP $24,653 for an unallocable ITBMS (Impuesto de
    Transferencias de Bienes Muebles y Servicios) tax on the service charges from January 2006
    through May 2008. As a result, the FEHBP is due $25,657, consisting of $24,653 for
    unallocable taxes and $1,004 for Ln.




                                                11
                                  CASH MANAGEMENT


•   Lost Investment Income on Excess Funds (D)                                             $73,257

    AXA did not invest excess FEHBP funds held in the Banistmo Bank account (located in
    Panama) from January 2006 through May 2008. As a result, the FEHBP is due LII of
    $73,257 on these funds.

                              OTHER ITEMS REVIEWED

    At the request of the Office of PerSOlmel Management's contracting officer, we also reviewed
    the following items:

       •   Close-out costs of the former administrator, Health Network America, and
       •   Start-up costs ofAXA.


    Our audit disclosed no audit findings for these items.


             LOST INVESTMENT INCOME ON AUDIT FINDINGS


    As a result of our audit findings presented in this audit report, the FEHBP is due LII of
    $15,774, calculated through December 31,2008.




                                                 111
                                          CONTENTS

                                                                                       PAGE

       EXECUTIVE SUMMARy                                                                     i


  I.   INTRODUCTION AND BACKGROUND                                                           1


 II.   OBJECTIVES, SCOPE, AND METHODOLOGY                                                    2


III.   AUDIT FINDINGS AND RECOMMENDATIONS                                                    5


       A.   HEALTH BENEFIT CHARGES                                                           5


       B.   ADMINISTRATIVE EXPENSES                                                          5


            1.   Unapproved Subcontract                                                      5

            2.   Allocation of Home Office Expenses                                          9

            3.   Excess Letter of Credit Drawdown for Administrative Expenses               12

            4.   Unsupported Consulting Expenses                                            13

            5.   Unallocable Tax on the Service Charge                                      14


       C.   CASH MANAGEMENT                                                                 15


            1. Lost Investment Income on Excess Funds                                       15


       D.   OTHER ITEMS REVIEWED                                                            17


       E.   LOST INVESTMENT INCOME ON AUDIT FINDINGS                                        17


IV.    MAJOR CONTRIBUTORS TO THIS REPORT                                                    18


V.     SCHEDULES

       A.   CONTRACT CHARGES
       B.   QUESTIONED CHARGES
       C.   LOST INVESTMENT INCOME CALCULATION


       APPENDIX       (AXA Assistance's reply, dated October 2,2008, to the draft audit report)
                     I. INTRODUCTION AND BACKGROUND

INTRODUCTION .


This final audit report details the findings, conclusions, and recommendations resulting from our
limited scope audit ofthe Federal Employees Health Benefits Program (FEHBP) operations at
AXA Assistance (AXA) as administrator for the Panama Canal Area Benefit Plan (Plan). AXA
is located in Miami, Florida.

The audit was performed by the Office of Personnel Management's (OPM) Office of the Inspector
General (DIG), as established by the Inspector General Act of 1978, as amended.

BACKGROUND

The FEHBP was established by the Federal Employees Health Benefits (FEHB) Act (Public Law
86-382), enacted on September 28, 1959. The FEHBP was created to provide health insurance
benefits for federal employees, annuitants, and dependents. OPM's Center for Retirement and
Insurance Services has overall responsibility for administration of the FEHBP. The provisions of
the FEHB Act are implemented by OPM through regulations, which are codified in Title 5,
Chapter 1, Part 890 of the Code of Federal Regulations (CFR). Health insurance coverage is
made available through contracts with various health insurance carriers.

The Panama Canal Area Benefit Plan is an employee organization plan offering fee-for-service
benefits with a point of service (POS) option. The pas option is available to Plan members
residing in the Republic of Panama. The Plan is authorized under Contract CS 1066 between the
Association of Retirees of the Panama Canal Area (Association) and OPM. The Plan is
sponsored arid administered by the Association. Enrollment in the Plan is open to members of
the Association (Panama Canal Area) who are eligible for coverage under the FEHBP, and
annuitants who reside in Panama that were previously enrolled in the Plan.

Health Network America (RNA) administered the claim payments for the Plan for contract years
1998 through 2005. Starting in 2006, AXA Assistance, as a Third Party Administrator,
administers the claim payments for the Plan.

Compliance with laws and regulations applicable to the FEHBP is the responsibility of the
Association and AXA management. Also, management of AXA is responsible for establishing
and maintaining a system of internal controls.

All findings from our previous audit of the Plan (Report No. 1B-43-00-05-081, dated August 22,
2006), covering contract years 1999 through 2004, have been satisfactorily resolved.

The results of our audit were provided to AXA in written audit inquiries; discussed with AXA
officials throughout the audit and at an exit conference; and were presented in detail in a draft
report, dated August 8, 2008. AXA's comments offered in response to the draft report were
considered in preparing our final report and are included as an Appendix to this report.




                                                 1

               II. OBJECTIVES, SCOPE, AND METHODOLOGY


OBJECTIVES


The objectives of our audit were to determine whether AXA charged costs and provided services
to FEHBP members in accordance with the terms of the contract. Specifically, our objectives
were as follows:

   Health Benefit Charges

   •	 To determine whether AXA complied with contract provisions relative to capitation
      payments.

   •	 To determine whether miscellaneous payments charged to the FEHBP were in

      compliance with the terms of the contract.


   •	 To determine whether credits and miscellaneous income relating to FEHBP benefit
      payments were returned promptly to the FEHBP.

   Administrative Expenses

   •	 To determine whether administrative expenses, including HNA's close-out costs and
      AXA's start-up costs, charged to the contract were actual, allowable, necessary, and
      reasonable expenses incurred in accordance with the terms of the contract and applicable
      regulations.

   Cash Management

   • - To determine whether AXA handled FEHBP funds in accordance with applicable laws
       and regulations concerning cash management in the FEHBP.

SCOPE

We conducted our performance audit in accordance with generally accepted govenunent auditing
standards. Those standards require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and conclusions based on our
audit objectives. We believe that the evidence obtained provides a reasonable basis for our
findings and conclusions based on our audit objectives.

We reviewed the Plan's FEHBP Annual Accounting Statements for contract years 2006 and 2007.
During this period, AXA paid approximately $102 million in health benefit charges and $10
million in administrative expenses (See Figure 1 and Schedule A).




                                               2

Specifically, we reviewed approximately $13 million in capitation payments made in 2006 and
2007. In addition, we reviewed miscellaneous health benefit payments and credits (e.g., refunds
and subrogation recoveries), administrative expenses, and cash management for 2006 and 2007.
In addition, we reviewed the close-out costs of the former administrator, Health Network
America, and the start-up costs of AXA for 2005 and 2006.

In planning and conducting our audit,
                                                                   Panama Canal Area Benefit Plan
we obtained an understanding of AXA's
                                                                  (AXA Assistance as Administrator)
internal control structure to help                                       Contract Charges
determine the nature, timing, and extent           $60 . , - - - - - - - - - - - - - - - - - ,
of our auditing procedures. This was
determined to be the most effective                $50

approach to select areas of audit. For
                                             ~ $40
those areas selected, we primarily relied    ~
on substantive tests of transactions and
not tests of controls. Based on our
                                             ...
                                             i     $30

                                                   $20
testing, we did not identify any
significant matters involving AXA' s               $10    +---1'/.:
internal control structure and its
operation. However, since our audit                 $0    +--­
would not necessarily disclose all                                    2006                        2007
                                                                               Contract Years
significant matters in the internal
control structure, we do not express an                   F'J Health Benefit Payments   • Administrative Expenses
opinion on AXA' s system of internal
controls taken as a whole.                                       Figure I - Contract Charges

We also conducted tests to determine whether AXA had complied with the contract, the
applicable procurement regulations (i.e., Federal Acquisition Regulations (FAR) and Federal
Employees Health Benefits Acquisition Regulations (FEHBAR), as appropriate), and the laws
and regulations governing the FEHBP. The results of our tests indicate that, with respect to the
items tested, AXA did not comply with all provisions of the contract and federal procurement
regulations. Exceptions noted in the areas reviewed are set forth in detail in the "Audit Findings
and Recommendations" section of this audit report. With respect to the items not tested, nothing
came to our attention that caused us to believe that AXA had not complied, in all material
respects, with those provisions.

In conducting our audit, we relied to varying degrees on computer-generated data provided by
AXA. Due to time constraints, we did not verify the reliability of the data generated by the
various information systems involved. However, while utilizing the computer-generated data
during our audit testing, nothing came to our attention to cause us to doubt its reliability. We
believe that the data was sufficient to achieve our audit objectives.

The audit was performed at AXA's office in Miami, Florida from June 2 through June 27, 2008.
Audit fieldwork was also performed at our offices in Washington, D.C. and Jacksonville, Florida.




                                                     3

METHODOLOGY

We obtained an understanding of the internal controls over AXA's financial and cost accounting
systems by inquiry of AXA officials.

To test AXA's compliance with the FEHBP health benefit provisions, we judgmentally selected
and reviewed 32 capitation payments, totaling $12,546,309 (from a universe of 120 capitation
payments, totaling $35,931,087), from 2006 and 2007. Our sample included eight monthly
capitation payments to Clinica San Fernando Hospital, eight monthly capitation payments to
Paitilla Hospital, eight monthly capitation payments to Panama Canal Eye Network, four
monthly capitation payments to Clinica Boyd, and four monthly capitation payments to Indelco.
We used the FEHBP contract, the Plan's benefit brochure, and AXA's provider agreements to
determine the allowability of these capitation payments. The results of the sample were not
projected to the universe of capitation payments.

We interviewed AXA personnel and reviewed AXA's policies, procedures, and accounting
records during our audit of miscellaneous health benefit payments and credits. We judgmentally
selected and reviewed 51 health benefit refunds and recoveries, totaling $271,535 (from a
universe of685 refunds and recoveries, totaling $378,404), to determine if refunds and
recoveries were promptly returned to the FEHBP. Our sample included aU refunds and
recoveries greater than $1,000. The results of the sample were not projected to the universe of
refunds and recoveries.

We judgmentally reviewed administrative expenses charged to the FEHBP for contract years
2006 and 2007. Specifically, we reviewed administrative expenses relating to cost centers,
expense accounts, out-of-system adjustments, prior period adjustments, employee health benefits,
executive compensation, subcontracts, non-recurring projects, lobbying, return on investment,
andHealth Insurance Portability and Accountability Act of 1996 compliance. We also reviewed
the close-out costs of the former administrator, Health Network America, and the start-up costs
of AXA for 2005 and 2006. We used the FEHBP contract, the FAR, and the FEHBAR to
determine the allowability, allocability, and reasonableness of charges.

We also reviewed AXA's cash management to determine whether AXA handled FEHBP funds
in accordance with Contract CS 1066 and applicable laws and regulations.




                                               4

            III. AUDIT FINDINGS AND RECOMMENDATIONS


A. HEALTH BENEFIT CHARGES

  The audit disclosed no findings pertaining to capitation payments and miscellaneous health
  benefit payments and credits. Overall, we concluded that the capitation payments charged to
  the FEHBP were paid in accordance with the provider agreements. Also, we concluded that
  the health benefit refunds and recoveries were promptly returned to the FEHBP.

B. ADMINISTRATIVE EXPENSES

  1. Unapproved Subcontract                                                            Procedural

     AXA charged the FEHBP $998,984 from January 2006 through June 2008 for a
     subcontract with Redbridge Network and Healthcare; Inc. (Redbridge) for which prior
     approval was not sought from the contracting officer. As a result, the FEHBP was
     charged for unapproved subcontract costs.

     Contract CS 1066, Part 1, Section 1.16 states, "(a) The Carrier will notify the Contracting
     Officer in writing at least 30 days in advance of entering into any subcontract ... if the
     amount of the subcontract or modification charged to the FEHB Program equals or exceeds
     $550,000 and is at least 25 percent of the total subcontract cost. ... In determining whether
     the amount chargeable to the FEHBProgram contract for a given subcontract or
     modification equals or exceeds the $550,000 threshold, the following rules apply: (1) For
     initial advance notification, the Carrier shall add the total cost/price for the base year and all
     options, including quantity or service options and option periods.... (c) The Carrier will
     obtain the Contracting Officer's written consent before placing any subcontract for which
     advance notification is required under paragraph (a) of this clause."

     Contract CS 1066, Part III, section 3.2 (b)(1) states, "The Carrier may charge a cost to the
     contract for a contract term if the cost is actual, allowable, allocable, and reasonable,"

     On September 21, 2005, AXA entered into a subcontract with Redbridge to lead the
     implementation process ofAXA's contract with the Panama Canal Area Benefit Plan
     (PCABP). The Redbridge subcontract also included a clause stating that Redbridge
     would provide on-going account management functions and track competitors to defend
     the account and strengthen AXA's position for subsequent yearly renewals. The terms of
     the subcontract consisted of a yearly retainer fee of $400,000 and full reimbursement of
     expenses related to the PCABP project, including travel and entertainment. The duration
     of the subcontract is the same length of time as the contract between AXA and the
     PCABP. The PCABP contracted with AXA for a period of three years starting on
     January 1, 2006. Therefore, we determined that the cost of the Redbridge subcontract
     would be $1.2 million ($400,000 x 3 years = $1,200,000) plus related expenses over the
     three-year period.




                                                5

This subcontract exceeded the $550,000 threshold requiring written consent from OPM's
contracting officer. Formal approval of this three-year subcontract was never sought or
received from the contracting officer. Although Redbridge was referred to in the original
proposal to OPM, the terms and compensation details were not included in the proposal.
In addition, AXA did not provide documentation supporting the development of
Redbridge's annual service fee of $400,000.

We also noted in the 2008 Redbridge subcontract that AXA will pay Redbridge 10
percent of the pre-approved annual administrative expense budget of$3.6 million as the
annual service fee. No additional documentation was provided by AXA or Redbridge to
support the development of this 10 percent figure.

On October 17,2005, OPM's contracting officer approved reimbursement of start-up and
non-recurring costs that were incurred by AXA/Redbridge for the PC.A.BP. The approval
was solely for pre-contract costs incurred during the implementation stage. After
implementation, AXA continued to charge the FEHBP for services provided by
Redbridge without receiving approval from the contracting officer.

We obtained and reviewed statements of work performed by Redbridge. We identified
that Redbridge provided AXA with account management for services including, but not
limited to, the following:

•	 Preparing for and representing AXA at Asociacion de Jubilados del Area Canalera
    (AlAe) board meetings;
•	 Managing provider enrollment and negotiations;
•	 Assisting with provider relations and provider network development;
•	 Handling staff changes;
• . Implementing programs and processes with medical management;
•	 Coordinating installation of the new member card system;
•	 Discussing information teclmology (IT) issues, including claims system (MAG),
    medical software (CAS), and web portal issues; and
•	 Conferring on a regular basis with AXA management and providing general oversight.

All these services are allowable, reasonable, and/or necessary tasks for administering the
Panama Canal Area Benefit Plan.

Likewise, AXA charged the FEHBP for overhead support, which included executive
management, human resources, and information teclmology services provided by the
Chicago and Mexico offices. Also, AXA charged the FEHBP for administrative salaries,
including but not limited to, a human resource supervisor, a finance supervisor, an IT
supervisor, a network provider director, and several medical managers in the Panama
office. Based on our review, there could be a duplication of effort between AXA and
Redbridge in managing and administrating the PCABP. Services provided under the
Redbridge subcontract are the same or similar to services already provided by AXA.




                                         6

In summary, the FEHBP was charged for subcontract costs for which prior approval was
not sought from Ol'M's contracting officer. However, even though prior approval was
not sought from aPM, the contracting officer was/is aware of AX A's contractual
relationship with Redbridge. Therefore, since the contracting officer was/is aware of
AXA's contractual relationship with Redbridge and since the services provided by
Redbridge are allowable, reasonable and/or necessary tasks for administering the Panama
Canal Area Benefit Plan, we are reporting this issue as a procedural finding.

AXA's Response:

AXA disagrees with the finding.

AXA states, "Prior to the formation of AX A Florida,AXA Assistance USA prepared and
submitted a proposal in June 2005 to the Plan (via AON Consulting) for third party
administrative services. This proposal detailed the types of administrative services to be
provided to the plan, including network management, claims processing and recordkeeping,
eligibility determinations, fraud prevention, coordination of benefits, medical management.
... The proposal expressly identified Redbridge Network & Healthcare ('Redbridge') as a
company with which AXA would partner in providing the administrative services to the
Plan.... Specifically, Redbridge was identified as a company that 'provides international
third party administration business development and account management support services'
and was listed as one of two companies to which AXA would subcontract certain
administrative services.... the proposal provided in-depth background on both AXA and
Redbridge.... the proposal identified the management team that would he responsible for
the delivery of administrative services to the Plan and this list included individuals from
both AXA and Redbridge.... Also, the rates and fees proposed            were based on a build
up that included both AXA's and Redbridge's administrative costs           Finally, when AXA
submitted the proposal to the Plan, it stated as follows: 'We are pleased to present this
proposal with our global business development partner, Redbridge Network & Healthcare,
a highly experienced organization in the international benefits industry.' ...

 When the administrative services contract award decision was made, AJAC, on behalf of
 the Plan, notified Redbridge - rather than AXA - of the award to AXA/Redbridge: 'The
 Association of Retirees from The Canal Area (AJAC) take ... this opportunity to notify
.you that your organization was awarded the contract as our TPA for 2006, starting as of
 Septembet!!J!llj15.'
                  '" Amon the individuals copied on this correspondence were _
_       an                     both aPM contracting officers.... Redbridge acknowledged
 the notice 0 award on behalf of AXA and itself: 'It is my great pleasure to accept this news
 on behalf of AX A and our organization. ... I would like to report that we have already
 begun discussions to organize the implementation of the Panama Canal Area Benefit Plan
 effective immediately for January 1st start date .... The OPM contracting officers were
 copied on this correspondence as well. ...

. Subsequent to the award of the contract, Redbridge provided a variety of administrative
  services to AlAC to supplement those provided by AXA. For example, Redbridge was



                                         7

   the primary point of contact with AlAC representatives and met with AlAC on a regular
   basis to discuss ... hospital and provider contracting issues, provider problems, OPM
   governance, program development, personnel, and even administrative expense issues ...
   Redbridge also met with OPM personnel to discuss issues associated with the provision
   of administrative services to AlAC, "and assisted AlAC in preparing presentations for
   OPM.... AXA and Redbridge provided different services to AlAC; there was no
   duplication of services.... The aPM contracting officer approved government
   reimbursement of start-up and non-recurring costs incurred by 'AXA Assistancel
   Redbridge Network & Healthcare' for the Plan ....

   On September 21, 2005, AXA and Redbridge formalized their contractual relationship....
   The agreement signed by the two parties provided that Redbridge would assume the lead
   for implementation of the administrative services and manage the conversion from the prior
   administrative service provider to AXA.... The parties agreed that AXA would
   compensate Redbridge for its services in the amount of $33,333 a month, for a total annual
   fee of $400,000, plus reimbursement of reasonable expenses related to the project, such as
   travel. ... The annual fee in AXA's agreement with Redbridge ($400,000) was the same
   amount as was included in the budget used to develop the proposed rates and fees in
   Section E of the AXA/Redbridge proposal. ... The term of the agreement between AXA
   and Redbridge was designated as the duration of the contract between AXA and AlAC. . . .

    In December 2005, AXA entered into a Health Benefit Administrative Services
    Agreement with AlAC, effective January 1,2006. . . . The AJACIAXA Contract
    identifies AlAC as the contractor under Contract No. CS 1066 with OPM, and describes
    AXA's role as the subcontractor to AlAC for purposes of providing administrative
    services.... Section 4.1 provides that AlAC 'represents and warrants to AXA that it has
    the power and authority to execute this Agreement under the terms of [Contract No.
    CSI066] ... and that the terms of this Agreement may be carried out by the Parties
"' "without conflict with or default under [Contract No. CSl 066] or applicable Laws.' ...
    The AJACIAXA Contract is made subject to applicable laws and regulations, including
    the FEHBA, FEHBAR, and FAR and it flows down to AXA 'applicable clauses' in the
    FEHBAR clause matrix ... Section 5.2 specified that for application of the clauses,
    AlAC took the position of 'the government' or 'OPM,' and AXA took the position of the
    'contractor' or 'carrier! ... Appendix B of the AlACIAXA Contract governs the
    payment amounts to AXA and provides for actual administrative expenses to be
    reimbursed (not to exceed the applicable contractual expense limitation), plus the
    reimbursement of taxes and payment of a service charge .... Because the value of the
    contract exceeds $550,000, aPM would have reviewed and approved the AlACIAXA
    Contract, pursuant to Section 1.16 of Contract No. CS 1066 (FEHBAR 1652.244-70,
    Subcontracts). The AJACIAXA Contract was originally executed for a three-year period,
    with one-year renewal terms, but at the end of2007, the term of the AJAC/AXA Contract
    was revised to a one-year contract, with one-year renewal terms!'

   AXA also states, "The Draft Audit Report finding concerning Redbridge's costs is
   unsupportable for a number of reasons. First, the requirement in Contract No. CS 1066 for



                                           8
   prior approval of subcontracts does not apply to the Redbridge agreement because it does
   not meet the threshold amount that triggers the requirement for prior approval. Second,
   AJAC, the party in the position to approve the Redbridge agreement, did so via ratification
   or, alternatively, appropriately waived the requirement for advance approval. Third, if
   OPM also has the right to approve the Redbridge agreement, it has approved it via
   ratification or, alternatively, appropriately waived the requirement for advance approval."

   OIG Comments:

   Our position is that AXA should have sought approval from the contracting officer for the
   Redbridge subcontract as required by Contract CS 1066. Although Redbridge was
   referred to as management consultants in AXA's original proposal, the costs associated
   with Redbridge were not included. Therefore, the contracting officer was not aware of
   the extent of Redbridge's subcontract costs. Contract CS 1066, Part 1, Section 1.16,
   states "(a) The Carrier will notify the Contracting Officer in writing at least 30 days in
   advance of entering into any subcontract ... if the amount of the subcontract or
   modification charged to the FEHB Program equals or exceeds $550,000 and is at least 25
   percent of the total subcontract cost." The term of the subcontract with Redbridge was
   for three years starting with 2006 as the base year and 2007 and 2008 as the option
   periods. The subcontract cost for each year totaled $400,000. Therefore, AXA's
   subcontract with Redbridge totaled $1.2 million ($400,000 * 3 years) from 2006 through
   2008, which required prior approval of the contracting officer.

   Recommendation 1

   We recommend that the contracting officer instruct AXA to submit the Redbridge
   subcontract arrangement for approval going forward. Also, the contracting officer should
   require AXA to provide documentation supporting how Redbridge's annual service fees of
   $400,000 were developed, calculated, and lor negotiated for 2006 and 2007. In addition,
   the contracting officer should require AXA to provide documentation supporting how
   Redbridges's service fee arrangement (10 percent of the pre-approved annual
   administrative expense budget) was developed, calculated, andlor negotiated for 2008.

2. Allocation of Home Office Expenses                                                $223,953

   AXA allocated indirect/overhead expenses to the FEHBP using estimated allocation
   percentages instead of actual. As a result, the FEHBP was overcharged $223,953 for
   indirect/overhead expenses in 2007.

   Contract CS 1066, Part III, section 3.2 (b)(I) states, "The Carrier may charge a cost to the
   contract for a contract term if the cost is actual, allowable, allocable, and reasonable." .

   Contract CS 1066, Appendix B (Subscription Rates, Charges, Allowances and
   Limitations), states that the administrative expenses must be actual, but not to exceed the
   contractual expense limitation.



                                            9
   48 CFR 31.201-4 states, "A cost is allocable if itis assignable or chargeable to one or
   more cost objectives on the basis of relative benefits received or other equitable
   relationship. Subject to the foregoing, a cost is allocable to a Government contract if it ­
   (a)	    Is incurred specifically for the contract;
   (b)	    Benefits both the contract and other work, and can be distributed to them in

           reasonable proportion to the benefits received; or

   (c)	    Is necessary to the overall operation of the business, although a direct relationship
           to any particular cost objective cannot be shown."

   In 2006 and 2007, AXA allocated indirect/overhead administrative expenses from the
   Chicago and Mexico offices using two types of allocation methods (three-factor and full
   time employee (FTE)). The three-factor method allocated expenses relating to
   administrative overhead. TheFTE method allocated expenses specifically relating to
   human resources and information technology in Chicago. Since there is a direct
   relationship with the FTE method and human resources/information technology expenses,
   this method is reasonable and appropriate for these types of expenses. In our
   recalculation of the three-factor method, we identified those expenses that were allocated
   by the FTE method and then excluded those expenses from the three-factor method
   allocation base for Chicago.

    During our review of the three-factor method, we found that AXA used budgeted
    numbers for the three-factor components (revenues, assets, and salaries). AXA should
    have used actual amounts as reported in the company's financial statements and the home
    office's (Chicago) financial statements. AXA allocated 19 percent and 17 percent of
    Chicago's overhead expenses to the FEHBP in 2006 and 2007, respectively. Based on
    our recalculations using actual numbers in the three-factor method, we determined that 24
    percent and 11 percent should have been applied to Chicago's overhead expenses in 2006
. _ and 2007, respectively. Consequently, AXA undercharged the FEHBP $189,589 in 2006
... and overcharged the FEHBP $103,113 in 2007 for Chicago's overhead expenses.

   In 2006 and 2007, the Mexico office offered oversight to the Panama office, and
   therefore, incurred overhead expenses similar to a home office. Although the Mexico
   office is truly not the home office for AXA Assistance Florida, the Mexico office did
   incur indirect expenses for salaries, benefits, and telephone. On average, AXA allocated
   29 percent and 31 percent of Mexico's indirect expenses to the FEHBP in 2006 and 2007,
   respectively. However, we determined that 24 percent and 11 percent should have been
   applied to Mexico's indirect expenses in 2006 and 2007, respectively. Consequently,
   AXA overcharged the FEHBP $16,176 in 2006 and $120,840 in 2007 for Mexico's
   indirect expenses.

   In total for contract year 2006, the FEHBP was net undercharged by $173,413 ($189,589
   undercharge + $16,176 overcharge) for indirect/overhead expenses. However, since AXA
   reached the administrative expense ceiling for contract year 2006, no monetary adjustment
   is required.




                                             10

In total for contract year 2007, the FEHBP was overcharged by $223,953 ($103,113 +
$120,840) for indirect/overhead expenses. Since AXA did not exceed the administrative
expense ceiling for contract year 2007, the FEHBP is due $223,953 for these overcharges.

AXA's Response:

AXA agrees with $90,678 and disagrees with $133,275 of the questioned overcharges for
2007.

AXA states, "During the audit AXA and the OIG auditors discussed and agreed to apply
one allocation percentage for the Home Office (Chicago) and the Mexico Office since the
previous percentage used was based on budgeted numbers instead of actual numbers.
After the new percentage was calculated, the results were to apply 24% and 10.9% to
2006 and 2007, respectively, to the overhead expenses incurred by the Chicago office and
the Mexico office. The new percentages were applied using an actual corporate base of
administrative expenses from both offices.

Applying the percentage calculated, 24.9% and 10.9%, to the respective years, AXA
concluded that the Plan was overcharged $90,000 and not $223,000 as the OIG auditors
are claiming. Our view on this is that all types of indirect expenses including salaries
from the Chicago office should be included in the corporate base because it gives a true
picture of the amount of support that the Chicago office dedicates and contributes to the
Plan....

The OIG calculation excludes from the base for the Chicago Office the FTE expenses for
the Human Resources and Information Technology departments, both of which support
the Plan activities. We respectfully request a review of such and the finding adjusted
accordingly in the final audit report."

OIG Comments:

AXA did not provide additional documentation that changed our position. We will
continue to exclude the FTE expenses (human resource and information technology
expenses) from the allocation base since these expenses were already allocated to the
FEHBP by AXA using the FTE method. By including the FTE expenses in the three­
factor method allocation base, AXA would be allocating these expenses twice to the
FEHBP. Since human resource and information technology expenses have a direct
relationship with the FTE count, allocating these expenses to the FEHBP using the FTE
ratio is a reasonable and appropriate method.

Recommendation 2

We recommend that the contracting officer disallow $223,953 for indirect/overhead
expenses that were overcharged to the FEHBP in 2007.




                                        11

3. Excess Letter of Credit Drawdown for Administrative Expenses                         $76.361

   AXA withdrew $74,651 from the letter of credit (LOC) account in excess of the
   administrative expense contractual limitation for 2006. As a result, the FEHBP is due
   $76,361, consisting of $74,651 for the excess drawdown and $1,71 0 for lost investment
   income (LII).

    Contract CS 1066, Part III, section 3.2 (b)(l) states, "The Carrier may charge a cost to the
    contract for a contract term if the cost is actual, allowable, allocable, and reasonable."
    Also, Appendix B (Subscription Rates, Charges, Allowances and Limitations) of the
  . contract states that the administrative expenses must be actual, but not to exceed the

    contractual expense limitation.


   Contract CS 1066, Part III, section 3.4(d) states, "Investment income lost as a result of
   unallowable, unallocable, or unreasonable charges against the contract shall be paid from
   the first day of the contract term following the contract term in which the unallowable
   charge was made and shall end on the earlier of: (l) the date the amounts are returned to
   the Special Reserve (or the Office of Personnel Management); (2) the date specified by
   the Contracting Officer; or (3) the date of the Contracting Officer's Final Decision."

   48 CFR 52.232-17(a) states, "all amounts that become payable by the Contractor ... shall
   bear simple interest from the date due .. , The interest rate shall be the interest rate
   established by the Secretary of the Treasury as provided in Section 611 of the Contract
   Disputes Act of 1978 (Public Law 95-563), which is applicable to the period in which the
   amount becomes due, as provided in paragraph (e) of this clause, and then at the rate
   applicable for each six-month period as fixed by the Secretary until the amount is paid."

   During our reconciliation of the LOC drawdowns for administrative expenses to the
   contractual expense limitation, we identified that AxA withdrew $74,651 in excess of the
   administrative expense limitation for contract year 2006. The Plan's contractual expense
   limitation for contract year 2006 totaled $4,154,329; however, AXA withdrew
   $4,228,980 from the LaC account for administrative expenses. As a result, the FEHBP is
   due $76,361, consisting of $74,651 for the excess LaC drawdown and $1,710 for LII on
   the excess drawdown calculated through June 25, 2008.

   AXA's Response:

   AXA agrees with the finding and will credit the FEHBP for the excess LaC drawdown as
   well as the LII on the excess drawdown.

   Recommendation 3

   We recommend that the contracting officer ensure that AXA credits the FEHBP $74,65 I
   for the excess LOC drawdown.




                                            12

   Recommendation 4

   We recommend that the contracting"officer ensure that AXA credits the FEHBP $1,710
   for LII on the excess LOC drawdown (plus interest accruing after June 25, 2008).

4. Unsupported Consulting Expenses                                                       $45,189

   AXA charged the FEHBP $45,189 for unsupported, unnecessary and/or unreasonable
   consulting expenses in 2006.

   Contract CS 1066, Part III, Section 3.2 (b) (1) states, "The Carrier may charge a cost to
   the contract for a contract term if the cost is actual, allowable, allocable, and reasonable."

   48 CFR 31.201-3 (a) states, "A cost is reasonable if, in its nature and amount, it does not
   exceed that which would be incurred by a prudent person in the conduct of competitive
   business. Reasonableness of specific costs must be examined with particular care in
   connection with firms or their separate divisions that may not be subject to effective
   competitive restraints. No presumption of reasonableness shall be attached to the
   incurrence of costs by a contractor. If an initial review of the facts results in a challenge
   of a specific cost by the contracting officer or the contracting officer's representative, the
   burden of proof shall be upon the contractor to establish that such cost is reasonable."

   We identified expenses paid to Millennium International Healthcare Strategies, Inc.
   (Millennium) during our review of consulting expenses. AXA entered into an agreement
   with Ponce de Leon from Millennium, dated September 21, 2005. Ponce de Leon agreed
   to develop a specific provider contracting plan and strategy for AXA by January 2006.
   The payment terms of the agreement, $10,000 per month plus business related expenses,
   were for four months from October 2005 through January 2006. However, we identified
   expenses paid to Millennium after the agreement term ended. These payments made after
   January 2006 were unsupported, unnecessary, and/or unreasonable costs to the FEHBP.
   As a result, theFEHBP is due $45,189 for these consulting expenses.

   AXA's Response:

   AXA did not respond to this finding in their response to the draft audit report.

   DIG Comments:

   AXA did not provide additional documentation to support the questioned consulting
   expenses of$45,189. Therefore, we will continue to question this amount as
   unsupported, unnecessary and/or unreasonable.




                                             13

   Recommendation 5

   We recommend that the contracting officer disallow $45,189 in unsupported, unnecessary
   and/or unreasonable consulting expenses that were charged to the FEHBP in 2006.

5. Unallocable Tax on the Service Charge                                               $25,657

    AXA inadvertently charged the FEHBP $24,653 for an unallocable ITBMS (Impuesto
    de Transferencias de Bienes Muebles y Servicios) tax on the service charges from
  . January 2006 through May 2008. As a result, the FEHBP is due $25,657, consisting of
    $24,653 for unallocable taxes and $1,004 for LI1.

   Contract CS 1066, Part III, section 3.2 (b)(l) states, "The Carrier may charge a cost to the
   contract for a contract term if the cost is actual, allowable, allocable, and reasonable. In
   addition, the Carrier must: (i) on request, document and make available accounting
   support for the cost tojustify that the cost is actual, reasonable and necessary; and (ii)
   determine the cost in accordance with: (A) the terms ofthis contract ...." Part III,
   section 3.7(a) states, "Any service charge negotiated shall be set forth in Appendix Band
   shall be the total profit that can be charged to the contract."

   Contract CS 1066, Part III, section 3.4(d) states, "Investment income lost as a result of
   unallowable, unallocable, or unreasonable charges against the contract shall he paid from
  .the first day of the contract term following the contract term in which the unallowable
   charge was made and shall end on the earlier of: (1) the date the amounts are returned to
   the Special Reserve (or the Office of Personnel Management); (2) the date specified by
   the Contracting Officer; or (3) the date of the Contracting Officer's Final Decision."

   48.CFR 52.232-17(a) states, "all amounts that become payable by the Contractor ... shall
  .bear simple interest from the date due ... The interest rate shall be the interest rate
   established by the Secretary of the Treasury as provided in Section 611 of the Contract
   Disputes Act of 1978 (Public Law 95-563), which is applicable to the period in which the
   amount becomes due, as provided in paragraph (e) of this clause, and then at the rate
   applicable for each six-month period as fixed by the Secretary until the amount is paid."

   During our review ofthe LOC drawdowns in 2006 and 2007, we identified ITBMS taxes
   that were computed on the service charges and subsequently charged to the FEHBP. The
   ITBMS tax is equivalent to a sales tax. The ITSMS tax (five percent) is assessed on the
   service charge that the Panama office receives from AXA. AXA shares fifty percent of
   the service charge with the Panama office. The service charge is paid to AXA by OPM.
   In our opinion; a tax on the service charge is not chargeable (an unnecessary cost) to the
   FEHBP.




                                            14

     We quantified the total ITBMS taxes charged to the FEHBP from January 2006 through
     May 2008 and assessed LII on the principle amount. As a result, the FEHBP is due
     $25,657, consisting 0[$24,653 for unallocable taxes and $1,004 for LII calculated
     through June 5, 2008.

     AXA's Response:

     AXA agrees with the finding and returned the questioned amounts to the LOC account on
     June 5 and June 13, 2008.

     Recommendation 6

     Since we verified that AXA returned $24,653 to the FHEBP for the unallocable tax
     charges, no further action is required.

     Recommendation 7

     Since we verified that AXA returned $1,004 to the FEHBP for LII on the unallocable tax
     charges, no further action is required.

C. CASH MANAGEMENT

  1. Lost Investment Income on Excess Funds                                               $73,257

     AXA did not invest excess FEHBP funds held in the Banistmo Bank account (located in
     Panama) from January 2006 through May 2008. As a result, the FEHBP is due $73,257
     for LII on these funds.

     Contract CS 1066, Part III, section 3.4(a) states, "The Carrier shall invest and reinvest all
     FEHB funds on hand that are in excess of the funds needed to promptly discharge the
     obligations incurred under this contract. The Carrier shall seek to maximize investment
     income with prudent consideration to the safety and liquidity of investments." In
     addition, section 3.4(e) states, "Investment income lost as a result of failure to credit
     income due the contractor failure to place excess funds in income producing investments
     and accounts shall be paid from the date the funds should have been invested ...."

     48 CFR 52.232-17(a) states, "all amounts that become payable by the Contractor ... shall
     bear simple interest from the date due ... The interest rate shall be the interest rate
     established by the Secretary of the Treasury as provided in Section 611 of the Contract
     Disputes Act of 1978 (Public Law 95-563), which is applicable to the period in which the
     amount becomes due, as provided in paragraph (e) of this clause, and then at the rate
     applicable for each six-month period as fixed by the Secretary until the amount is paid."

     During our review of investment income, we found that AXA held excess FEHBP funds
     in a non-interest bearing Banistmo Bank account from January 2006 through May 2008.
     In accordance with the FEHBP contract, all excess FEHBP funds should be placed in


                                               15

   income producing investments and accounts. AXA stated that it did not invest excess
   funds due to the volatility in the Latin American markets and only kept enough funds in
   this account to cover claims and capitation payments. On average, we noted that there
   was an excess daily balance remaining in this account 0[$789,180 in 2006 and $427,097
   in 2007. We also identified an average excess daily balance in this account of $360,629
   [rom January 2008 through May 2008.

   We calculated the LII amount for each month by multiplying the average daily balance by
   the applicable semiannual Treasury rate. We calculated LII 0[$42,541 and $23,579 in
   2006 and 2007, respectively, on the excess funds. We also calculated LIl of$7,137 on
   the excess funds for the period January 2008 through May 2008. As a result, the FEHBP
   is due LIl of$73,257 on the excess FEHBP funds that were not being invested from
   January 2006 through May 2008.

   AXA's Response:

   AXA disagrees with the finding. AXA states, "even ifAXA agreed with the OIG in the
   fact that the funds need to be invested, we would like the OIG to consider that AXA
   already opened a saving account at Banistmo Bank, in Panama, but it took 3 months to do
   it, due to all the paperwork involved.... Also, the interest rate paid on investments in
   Panama is only 1.5% per year, and the OIG is applying the standard Federal interest rate.
   Also, as stated before, AXA did not invest the excess funds due to the volatility in the
   Latin America markets and AXA only left funds in the account to cover claims and
   capitation payments. This balance was never used for any other purpose....

    Considering that AXA's intention was to protect FEHBP funds from any economic risk
    and that the earning would have been minimal ifAXA had invested the money in
    Panama, we respectfully request that the OIG reconsider and spare AXA from having to
',"pay the high amount ofLIl on excess funds that were imposed and remove this finding
    from the final audit report."

   OIG Comments:

   AXA did not invest the excess FEHBP funds as required by Contract CS 1066, Part III,
   section 3.4(a). Therefore, AXA is liable for the investment income lost on these funds.

   Recommendation 8

   We recommend that the contracting officer direct AXA to credit the FEHBP $73,257 for
   LIl on the excess FEHBP funds that were not properly invested from January 2006
   through May 2008 (plus interest accruing after May 31, 2008).




                                          16

D. OTHER ITEMS REVIEWED

  At the request ofOPM's contracting officer, we also reviewed the following items:

     •   Close-out costs ofthe former administrator, Health Network America, and
     •   Start-up costs ofAXA.

  Our audit disclosed no audit findings for these items.

E. LOST INVESTMENT INCOME ON AUDIT FINDINGS                                             $15,774

  As a result of the audit findings presented in this report, the FEHBP is due LII of$15,774
  from January I, 2007 through December 31, 2008.

  48 CFR 52.232-17(a) states, "all amounts that become payable by the Contractor ... shall
  bear simple interest from the date due ... The interest rate shall be the interest rate
  established by the Secretary of the Treasury as provided in Section 611 of the Contract
  Disputes Act of 1978 (Public Law 95-563), which is applicable to the period in which the
  amount becomes due, as provided in paragraph (e) of this clause, and then at the rate
  applicable for each six-month period as fixed by the Secretary until the amount is paid."

  We computed investment income that would have been earned using the semiannual rates
  specified bythe Secretary of the Treasury. Our computations show that the FEHBP is due
  LII of$15,774 from January 1,2007 through December 31, 2008 on questioned costs for
  contract years 2006 and 2007 (see Schedule C).

  AXA's Response:

  The draft audit report did not include an audit finding for LlI. Therefore, AXA did not
  address this item in its reply.

  Recommendation 9

  We recommend that the contracting officer direct AXA to credit $15,774 (plus interest
  accruing after December 31, 2008) to the Special Reserve for LII on audit findings.




                                              17

              IV. MAJOR CONTRIBUTORS TO THIS REPORT

Experience-Rated Audits Group

              Team Leader

             Auditor




                   Chie

             Senior Team Leader

Community-Rated Audits Group

                    Senior Team Leader




                                         18

                                                                                     SCHEDULE A
                                        V. SCHEDULES


                                       AXA ASSISTANCE

                   AS ADMINISTRATOR FOR THE PANAMA CANAL AREA BENEFIT PLAN
                                        MIAMI, FLORIDA


                                     CONTRACT CHARGES

CONTRACT CHARGES                                    2006             2007             TOTAL

A.	 HEALTH BENEFIT CHARGES

   PLAN CODE 43

   CLAIM PAYMENTS
                                  $49,104,480      $50,508,389         $99,612,869
   OTHER ADJUSTMENTS
                                    90,984        2,137,978           2,228,962

   TOTAL                                     I      $49,195,464      $52,646,367       . $101,841,831 II

B.	 ADMINISTRATIVE EXPENSES

   PLAN CODE 43
                                        $5,108,817    $4,280,144          $9,388,961
   PRIOR PERIOD ADJUSTMENTS
                               960,587                           960,587
                                                                              °
   TOTAL
                                    I          $6,069,404    $4,280,144         $10,349,548 II

C.	 SERVICE CHARGE
                          I           $429,929      $389,518             $819,447 I

   TOTAL CONTRACT CHARGES
                   I      $55,694,797      $57,316,029 .      $113,010,826 •
                                                                                                                                          SCHEDULEB
                                                                        ,
                                                                     , ,
                                                               AXA ASSISTANCE
                                           AS ADMINISTRATOR FOR THE PANAMA CANAL AREA BENEFIT PLAN
                                                                MIAMI, FLORIDA

                                                                            QUESTIONED CHARGES

AUDIT FINDINGS                                                                                    2006         2007        2008            TOTAL

A. HEALTH BENEFIT CHARGES                                                                     I          $0           $0            $0              $0 I


                                                                                                                                            ~.
B. ADMINISTRATIVE EXPENSES	

     1.   Unapproved Subcontract (tf'#u.JlIJ¥...!)	                                                      $0           $0            $0      Proc~ D
     2.   Allocation of Rome Office Expenses>	                                                            0      223,953              0       -zz-",~53
     3.   Excess Letter of Credit Drawdown for Administrative Expenses**                             74,651	           0          1,710        76,361
     4.   Unsupported Consulting Expenses-	                                                          45,189            0              0        45,189
     5.   Unallocable Tax on the Service Charge**	                                                   10,748       10,326          4,583        25,657

     TOTAL ADMINISTRATIVE EXPENSES                                                            I    $130,588     S234,279        S6,293       $371,160 •

C.	 CASH MANAGEMENT                                                                                                        -

     1.	 Lost Investment Income on Excess Funds**                                             I     S42,541      $23,579        $7,137        $73,257 I

D.	 OTHER ITEMS REVIEWED                                                                      I          $0           $0            SO              $0 I

E.	 LOST INVESTMENT INCOME ON AUDIT FINDINGS                                                  I          SO       $2,485       $13,289        SI5,774 I

     TOTAL QUESTIONED CHARGES                                                                 I    $173,129     $260,343       $26,719       $460,191 I

 *   The audit finding is subject to calculation of lost investment income on Schedule, C.
** The audit finding is not subject to calculation of lost investment income on Schedule C.
                                                                                                                SCHEDULEC

                                                            AXA ASSISTANCE

                                       AS ADMINISTRATOR FOR THE PANAMA CANAL AREA BENEFIT PLAN

                                                            MIAMI, FLORIDA


                                                 LOST INVESTMENT INCOME CALCULATION


LOST INVESTMENT INCOME                                                      2006        2007        2008         TOTAL

A. QUESTIONED CHARGES (Subject to Lost Investment Income)

  Allocation of Home Office Expenses                                               $0    $223,953          $0       $223,953
  Unsupported Consulting Expenses                                              45,189           0           0         45,189

  TOTAL ADMINISTRATIVE EXPENSES                                        I      $45,189    $223,953          $0       $269,142 II


B. LOST INVESTMENT INCOME CALCULATION - Simple Interest Method

  a. Prior Year's Total Questioned (principal)                                     $0     $45,189    $223,953
  b. Cumulative Total                                                              Q           Q       45,189
  c. Total                                                                         $0     $45,189    $269,142

  d. Treasury Rate: January 1 - June 30                                       5.125%      5.250%      4.750%

  e. Interest (d * c)                                                              $0      $1,186      $6,392         $7,578

  f. Treasury Rate: July 1 - December 31                                      5.750%      5.750%      5.125%

  g. Interest (f * c)                                                              $0      $1,299      $6,897         $8,196

      Total Interest By Year (e + g)                                   I           $0      $2,485     $13,289        $15,774 II
                                                                                APPENDIX


                                             ..


                                       October 2, 2008




U.8. Office of Personnel Management
Office of the Inspector General
1900 E. Street, NW
Room 6400
Washington, D. C_ 20415-1100



             Re:   Response to OPM Report No. 1B-43-00·08-048, Draft of a
                   Proposed Report. "Report on the Audit ofAXA Assistance
                   Florida As Administrator for the Panama Canal Area Benefit
                   Plan"


Dear

       AXA Assistance Florida, Inc. hereby submits its response to the Draft "Report

on the Audit ofAXA Assistance Florida As Administrator for the Panama Canal

Area Benefit Plan" ("Draft Audit Report"), dated August 8, 2008, of the Office of

Personnel Management ("OPM") Office ofInspector General ("OIG"). This response

addresses Audit Findings and Recommendations regarding Unapproved

Subcontract and Consulting Expenses, as associated with Redbridge Network and

Healthcare, Inc.; Allocation of Home Office Expenses; Excess Letter of Credit

Drawdown for Administrative Expenses; Unallocable Tax on Service Charge; and

Lost Investment Income on FEHBP Funds.
I.    Background

      AXA Assistance Florida, Inc. ("AXA Florida") was formed in 2005 by AXA

Assistance USA, Inc. (collectively, "AXA"), an entity that is part of the AXA Group

of Companies, a world-wide global insurance and financial services enterprise. AXA

Florida was formed to perform administrative services for the Asociacion de

Jubilados del Area Canalera ("AJAC") in its capacity as group health plan

insurance board for the Panama Canal Area Benefit Plan ("the Plan"). The Plan

provides health benefits to qualified individuals pursuant to the FederalEmployees

Health Benefits Program.

      Prior to the formation ofAXA Florida, AXA Assistance USA prepared and

submitted a proposal in June 2005 to the Plan (via AON Consulting) for third party

administrative services. This proposal detailed the types of administrative services

to be provided to the Plan, including network management, claims processing and

recordkeeping, eligibility determinations, fraud prevention, coordination of benefits,

medical management. See Exh. 1 (AXA Assistance USAJRedbridge proposal). The

proposal expressly identified Redbridge Network & Healthcare ("Redbridge") as a

company with which AXA would partner in providing the administrative services to

the Plan. Id. at 1, 16, 19. Specifically, Redbridge was identified as a company that

"provides international third party administration business development and

account management support services" and was listed as one of two companies to

which AXA would subcontract certain administrative services. Id. at 1. In section

F of the proposal, titled "Company Background & History," the proposal provided




                                          2

in..depth background on both AXA and Redbridge. Id. at 16. Section G of the

proposal identified the management team that would be responsible for the delivery

of administrative services to the Plan and this list included individuals from both

AXA and Redbridge. Id. at 17-19. Also, the rates and fees proposed in Section E

were based on a build up that included both AXA's and Redbridge's administrative

costs. See Exh. 2,   'if 3 (Decl. of Olivier Van Poperinghe). Finally, when AXA
submitted the proposal to the Plan, it stated as follows: "We are pleased to present

this proposal with our global business development partner, Redbridge Network &

Healthcare, a highly experienced organization in the international benefits

industry." 1 Exh. 1 at i.

        When the administrative services contract award decision was made, AJAC,

on behalf of the Plan, notified Redbridge - rather than AXA - of the award to

AXAJRedbridge: "The Association of Retirees from The Canal Area (AJAC) take [sic]

this opportunity to notify you that your organization was awarded the contract as
  ...
our TPA for 2006, starting as of September 15." See Exh. 4 (Sept. 15, 2005 email

fro~ AJAC, to                               Redbridge). Among the individuals copied

on this correspondence were                                             both OPM

contracting officers. Id. Redbridge acknowledged the notice of award on behalf of

       Redbridge also submitted a copy of the proposal to the Plan, with a cover
letter stating: "Please find attached a proposal from AXA Assistance USA for the
administration of the Panama Canal Area Benefit Plan, as requested. Redbridge
Network & Healthcare provides business development and account management
support to AXA for large cases, and we will have direct responsibilities for the
deliverables in this 1'0 osal." See Exh. 3 (June 8, 20051tr. f r o ~
Redbridge, t                          AON Consulting).




                                            3

AXA and itself: "It is my great pleasure to accept this news on behalf ofAXA and

our organization. . .. I would like to report that we have already begun discussions

to organize the implementation of the Panama Canal Area Benefit Plan effective

immediately for January 1s t start date. Mr.                     [ofAXA] and I will

meet with [an AON representative] ... for a planning session and we will be in

close contact with you throughout this process beginning next week. See Exh. 5

(Sept. 16,2005 email from                    , Redbridge, to             AJAC). The

OPM contracting officers were copied on this correspondence as well. Id.

      Subsequent to the award of the contract, Redbridge provided a variety of

administrative services to AJAC to supplement those provided by AXA. For

example, Redbridge was the primary point of contact with AJAC representatives

and met with AJAC on a regular basis to discuss, e.g., hospital and provider

contracting issues, provider problems, OPM governance, program development,

personnel, and even administrative expense issues. Exh. 2,      ~   6. Redbridge also met

with OPM personnel to discuss issues associated with the provision of

administrative services to AJAC, and assisted AJAC in preparing presentations for

OPM. Id.,   ~   7. AXA and Redbridge provided different services to AJAC; there was

no duplication of services.   ta..   ~ 5. The OPM contracting officer approved

government reimbursement of start-up and non-recurring costs incurred by "AXA

Assistance/Redbridge Network & Healthcare" for the Plan. See Exh. 6 (undated Itr,

fro~OPM,to                                 AXA).




                                               4

      On September 21, 2005, AXA and Redbridge formalized their contractual

relationship. See Exh. 7 (Sept. 21, 2005 AXAJRedbridge agreement). The

agreement signed by the two parties provided that Redbridge would assume the

lead for implementation of the administrative services and manage the conversion

from the prior administrative service provider to AXA. Id. at 1. The parties agreed

that AXA would compensate Redbridge for its services in the amount of $33,333 a

month, for a total annual fee of $400,000, plus reimbursement of reasonable

expenses related to the project, such as travel. Id. at 1-2. The annual fee in AXA's

agreement with Redbridge ($400,000) was the same amount as was included in the

budget used to develop the proposed rates and fees in Section E of the

AXAJRedbridge proposal. Exh. 2, "if 3. The term of the agreement between AXA and

Redbridge was designated as the duration of the contract between AXA and AJAC.

Exh. 7 at 2.

      In December 2005, AXA entered into a Health Benefit Administrative

Services Agreement with AJAC, effective January 1, 2006. See Exh. 8 (AJAC/AXA

Contract). The AJAC/AXA Contract identifies AJAC as the contractor under

Contract No. CS1066 with OPM, and describes AXA's role as the subcontractor to

AJAC for purposes of providing administrative services. Id. at 1, § 2.1. Section 4.1

provides that AJAC "represents and warrants to   A~    that it has the power and

authority to execute this Agreement under the terms of [Contract No. CS1066j in

[sicj behalf of the Plan and OPM and that the terms of this Agreement may be

carried out by the Parties without conflict with or default under [Contract No.




                                          5

CSI066] or applicable Laws." Ld: § 4.1. The AJAC/AXA Contract is made subject to

applicable laws and regulations, including the FEHBA, FEHBAR, and FAR and it

flows down to AXA "applicable clauses" in the FEHBAR clause matrix at 48 CFR

§ 1652.3. Id. § 5.2. Section 5.2 specified that for application of the clauses, AJAC

took the position of "the government" or "OPM," and AXA took the position of the

"contractor" or "carrier."2 Id. Appendix B of the AJAC/AXA Contract governs the

payment amounts to AXA and provides for actual administrative expenses to be

reimbursed (not to exceed the applicable contractual expense limitation), plus the

reimbursement of taxes and payment of a service charge.f Id. at App. B; App. B in

Amendment No. 2008. Because the value of the contract exceeds $550,000, OPM

would have reviewed and approved the AJAC/AXA Contract, pursuant to Section

1.16 of Contract No. CSI066 (FEHBAR 1652.244-70, Subcontracts). The AJAC/AXA

Contract was originally executed for a three-year period, with one-year renewal

terms, but at the end of 2007, the term of the AJAC/AXA Contract was revised to a

one-year contract, with one-year renewal terms. ld. § 9.1 in Amendment No. 2008.




2     This language was omitted in the revision of section 5.2, effective January 1,
2008. Exh. 8 at § 5.2 in Amendment No. 2008.
3     The contractual expense limitation in the original agreement, effective
January 1, 2006, was $4,134,895, and the service charge amount was $429,929.
The contractual expense limitation in Amendment No. 2008, effective January 1,
2008, was $3,600,000, and the service charge amount was $400,000.



                                           6
II.   Response to Audit Findings

      A. Unapproved Subcontract and Consulting Expenses

      The Draft Audit Report found that AXA charged FEHBP $998,984 between

January 2006 and June 2008 for costs associated with AXA's contract with

Redbridge. Audit Report at 1. The Redbridge costs consisted of $980,000 in fees

plus $18,984 in travel expenses. Id. at 2. The auditors determined that AXA's

contract with Redbridge was subject to Section 1.16 in Contract CS 1066, which

requires the carrier to obtain written consent from the OPM contracting officer

before entering into a subcontract that exceeds $550,000. Id. Because AXA had not

obtained written consent from the OPM contracting officer, the auditors deemed the

Redbridge costs to be unallowable. Id. at 2.

      The Draft Audit Report finding concerning Redbridge's costs is unsupportable

for a number ofreasons. First, the requirement in Contract No. CSI066 for prior

approval of subcontracts does not apply to the Redbridge agreement because it does
  -
not-meet the threshold amount that triggers the requirement for prior approval.

Second, AJAC, the party in the position to approve the Redbridge agreement, did so

via ratification or, alternatively, appropriately waived the requirement for advance

approval. Third, ifOPM also has the right to approve the Redbridge agreement, it

has approved it via ratification or, alternatively, appropriately waived the

requirement for advance approval.




                                          7

             1.     The Redbridge Agreement Falls Below The Prior Approval
                    Threshold Amount

      FEHBAR 1652.244-70, incorporated into No. CSI066 at Section 1.16,

requires prior approval of subcontracts in certain situations. Specifically, the

regulation states: "The Carrier will notify the Contracting Officer in writing at least

30 days in advance of entering into any subcontract or subcontract modification, ...

, if the amount of the subcontract or modification charged to the FEHB Program

equals or exceeds $550,000 and is at least 25 percent of the total subcontract ·cost. _.

. For initial advance notification, the Carrier shall add the total cost/price for the
                                                                  1




base year and all options, including quantity or service options and option periods."

48 CFR §§ 1652.244-70(a), 1652.244-70(a)(I) (Contract No. CSI066 §§ 1.16(a),

1. 16(a)(I». AXA's agreement with Redbridge was a de-facto one-year base contract

with a value of $400,000, and no option periods. As such, it did not reach the

threshold value of $550,000 for which prior approval is required under section

1652.244-70(a) (section 1. 16(a) of Contract No_ CSI066).

      AJAC's contract with OPM, Contract No. CSI066, is a one-year contract

renewable at the option of OPM. 48 CFR § 1652.249-70. The AJAC/AXA Contract ­

a subcontract to AJAC's Contract No. CS1066, and approved by aPM - is

fundamentally a one-year contract because its performance is entirely dependent

upon AJAC performing Contract No. CSI066. If aPM were to decline to renew

Contract No. CSI066 with AJAC, then AJAC would cease to have need for AXA's

administrative services. AJAC exists only to oversee the Plan and it conducts no

business other than that related to the Plan, so it would have no reason to continue



                                            8

to use AXA's administrative services if it were no longer an OPM contractor. While

there is not a specific termination provision in the AJAC/AXA Contract addressing

its termination due to a non-renewal of AJAC's contract with OPM, AJAC and AXA

would certainly agree to terminate their Contract in the circumstance where AJAC

no longer held a contract with OPM.4 Exh. 2,   ~   4. Similarly, ifOPM were to decline

to renew Contract No. CSI066 with AJAC, then AJAC and AXA would cease to have

need for Redbridge's administrative services. The Redbridge agreement specifically

states that it is coterminous with the duration of the AJAC/AXA Contract, so

termination of the AJAC/AXA Contract would result in termination of the

Redbridge agreement. Thus, because both the AJAC/AXA Contract and the

Redbridge agreement are dependent on AJAC holding Contract No. CSI066, which

is a one-year contract, both the AJAC/AXA Contract and the Redbridge agreement

are de-facto one-year contracts as well.

       Because the Redbridge agreement is a de-facto one-year contract, the value of

.the.base year is $33,333 a month, or $400,000 total. The Redbridge agreement does

not provide for option years. Thus, the value of the Redbridge agreement was well

below the $550,000 threshold for obtaining prior approval. Accordingly, AXA was

not required to obtain approval for the Redbridge agreement prior to entering into it

in September 2005, and there is no basis now for OPM to disallow the costs

associated with the Redbridge agreement.

4      In fact, while the original AJAC/AXA Contract was drafted as a three-year

contract, the sole purpose for this three-year term was to provide AXA with a

sufficient basis for the amortization of capital expenditures. Exh. 2, ~ 4.




                                           9
            2.	    aPM Lacks Authority to Approve the Redbridge Agreement;
                   AJAC Holds that Authority and Ratified the Agreement Or,
                   Alternativel}:, Waived the Requirement for Prior Approval

      The audit report findings concerning the Redbridge costs are based on the

mistaken premise that aPM has authority to require prior approval ofAXA's

subcontracts. In fact, there is no direct contractual relationship between aPM and

AXA. Furthermore, the OPM-approved contract between AJAC and AXA does not

provide for prior approval by aPM of subcontracts entered into by AXA. Exh.8

(AJAC/AXA Contract). This lack of privity and the lack of an express contract

provision granting approval authority to aPM establishes beyond a doubt that aPM

does not have authority to disapprove a subcontract entered into by AXA. Instead,

to the extent the AJACIAXA Contract incorporates FEHBAR 1652.244-70, AJAC is

the entity with authority to require and grant prior approval ofAXA's

subccntracts."

      According to FEHBAR 1652.244-70, approval by AJAC could occur in several

ways in addition to the standard prior written consent method. First, AJAC could

"ratify in writing any such subcontract for which written consent was not obtained.

Ratification will constitute the consent of [AJAC]." 48 CFR § 1652.244-70(c).

Second, AJAC could waive the requirement for advance notification and consent

where "[AXA] and subcontractor [here, Redbridge] submit an application or renewal

as a contractor team arrangement ... and (1) [AJAC] evaluated the arrangement



5    Section 1.16 of Contract No. CS1066 is not incorporated or referenced
anywhere in the AJAC/AXA Contract. See Exh. 8 (AJACIAXA Contract).



                                         10
during negotiation of the contract ... and (2) [Redbridge's] price and/or costs were

included in [AXA's] rates that were reviewed and approved by [AJAC] during

negotiation of the contract ...." Id. § 1652.244-70(d). The facts demonstrate that

AJAC approval has been granted, or, alternatively, appropriately waived such that

the Redbridge costs are allowable.

      AJAC clearly approved the Redbridge agreement via ratification from the

time of award of the contract to AXA. Specifically, AJAC notified Redbridge, rather

than AXA, of the award of the contract to AXA, thereby directly acknowledging ­

and accepting - Redbridge's participation in the performance of the AJAC/AXA

Contract. Exh. 4. AJAC then received acceptance of the contract award from

Redbridge as well as definitive information about steps Redbridge and AXA would

be taking in the near future to initiate the provision of administrative services to

AJAC. Exh. 5. Throughout the time period audited by OPM, AJAC met with

Redbridge representatives concerning the AJAC/AXA Contract on a regular basis to

discuss substantive issues associated with the provision of administrative services

by AXA and Redbridge to AJAC. Exh. 2,      ~   6. Thus, AJAC's express actions,

including direct communication with Redbridge and multiple meetings with

Redbridge, have unquestionably served to ratify AXA's agreement with Redbridge.

Furthermore, and equally important, AJAC's express inactions - namely, the fact

that AJAC has never required AXA to terminate its agreement with Redbridge nor

has it taken any action to terminate Redbridge's participation in or contribution to




                                          11

the performance of the AJAC/AXA Contract - also have clearly ratified AXA's

agreement with Redbridge.

          Alternatively, AJAC has appropriately waived the requirement for advance

notification because AXA and Redbridge presented themselves as team members in

the proposal they submitted to AJAC (via AON Consulting). The proposal identified

Redbridge as AXA's partner in providing administrative services to AJAC and

provided the same type of background information on the Redbridge organization

and its leaders as it provided for AXA. Exh. 1 at 1, 16-19. AJAC assessed

Redbridge's information alongside AXA's information and evaluated the

arrangement between the parties in order to make the award decision to AXA and

Redbridge. Furthermore, the rates and fees included in the proposal reflected both

AXA and Redbridge expenses, so AJAC reviewed and approved the Redbridge

expenses in the course of evaluating and awarding the proposal. Exh. 1 at 15; Exh.

2,   ~   3. Thus, AJAC's evaluation of Redbridge and its proposed expenses, "in the form

of a teaming arrangement, and subsequent award of the contract to AXA and

Redbridge, constitutes a waiver of any requirement AXA might have had to obtain

advance approval of its agreement with Redbridge.

           Because AJAC properly ratified AXA's agreement with Redbridge or waived

the requirement for advance consent due to the fact that AXA and Redbridge had a




                                             12

teaming arrangement, there is no valid basis to disallow Redbridge's fees and costs

incurred in providing administrative services to AJAC.6

              3.	   If OPM Has Authority to Approve the Redbridge Agreement, It
                    Approved the Agreement via Ratification Or, Alternatively,
                    Waived the Requirement for Prior Approval

        If the AJAC/AXA Contract were to be interpreted as giving OPM authority to

approve AXA's subcontracts, then the rules governing subcontract approval, as

discussed above in Section II.A.2, would apply to OPM. Specifically, OPM would be

found to have approved the Redbridge agreement through ratification, or

alternatively, would be found to have appropriately waived the requirement for

prior approval based on the teaming arrangement between AXA and Redbridge.

See FEHBAR §§ 1652.244-70(c), (d).

        OPM has approved the Redbridge agreement via ratification from the time of

award of the contract to AXA. OPM was included on AJAC's notification to

Redbridge of the award of the contract to AXA and Redbridge, and it was included

on Redbridge's written response to this notice of award. Exhs. 4,5. On at least

several occasions after award of the contract, OPM met with Redbridge

representatives to discuss issues associated with the AJAC/AXA Contract. Exh 2,

~   7. Also, the OPM contracting.officer approved government reimbursement of

start-up and non-recurring costs incurred by AXA and Redbridge. Exh. 6. At no



6     As stated in Section I above, there has been no duplication of effort between
AXA and Redbridge such that there is a basis to disallow some portion of
Redbridge's fees as duplicative of amounts paid to AXA. Redbridge's work for AJAC
has been separate and distinct from AXA's services. Exh. 2, ~ 5.



                                         13
time prior to the draft audit finding has OPM taken any action to end Redbridge's

participation in the AJAC/AXA Contract, nor has it directed AJAC or AXA to take

action to terminate Redbridge. Thus, OPM's knowledge of and acquiescence in

Redbridge's services provided pursuant to the AJAC/AXA Contract - as well as

OPM's direct communication with Redbridge and approval of prior incurred costs by

Redbridge - undeniably demonstrate ratification ofAXA's agreement with

Redbridge.

          Alternatively, OPM has appropriately waived the requirement for advance

notification because OPM was involved in the evaluation of proposals for

administrative services for the Plan, and thus would have evaluated the proposal

submitted by AXA and Redbridge in which they clearly presented themselves as

team members. Exh. 1 at 1, 16-19. aPM would have assessed Redbridge's

information alongside AXA's information and evaluated the arrangement between

the parties in order to participate in the award decision to AXA and Redbridge.

Because the rates and fees included in the proposal reflected both AXA and

Redbridge expenses, OPM would have reviewed and approved the Redbridge

expenses in the course of evaluating and awarding the proposal. Exh. 1 at 15; Exh.

2,   ~   3. Thus, OPM's evaluation of Redbridge and its proposed expenses, in the form

ofa teaming arrangement, and subsequent award of the contract to AXA and

Redbridge, constitutes a waiver of any requirement AXA might have had to obtain

advance approval of its agreement with Redbridge.




                                            14

         Because OPM properly ratified AXA's agreement with Redbridge or waived

the requirement for advance consent due to the fact that AXA and Redbridge had a

teaming arrangement, the draft audit report's disallowance of Redbridge's fees and

costs incurred in providing administrative services to AJAC is unsupportable.

Conclusion on Unapproved Subcontract Expenses finding:

         As discussed above, the preliminary findings and conclusion by the OPM   ora
on the Redbridge administrative costs are wholly incorrect and meritless. AXA

requests that its comments be considered and the draft audit findings be revised

accordingly prior to issuance of a final audit report.

         B.    Allocation of Home Office Expenses

         AXA accepts the $90,678 finding and respectfully requests that the OPM DIG

reconsider the $133,275 finding regarding overcharges for 2007. AXA's request for

reconsidera tion is based on the following:

         During the audit AXA and the OIG auditors discussed and agreed to apply
    ..
one"allocation percentage for the Home Office (Chicago) and the Mexico Office since

the previous percentage used was based on budgeted numbers instead of actual

numbers. After the new percentage was calculated, the results were to apply 24%

and 10.9% to 2006 and 2007, respectively, to the overhead expenses incurred by the

Chicago office and the Mexico office. The new percentages were applied using an

actual corporate base of administrative expenses from both offices.

         Applying the percentage calculated, 24.9% and 10.9%, to the respective years,

AXA concluded that the Plan was overcharged $90,000 and not $223,000 as the




                                           15

orG auditors are claiming.   Our view on this is that all types of indirect expenses

including salaries from the Chicago office should be included in the corporate base


because it gives a true picture of the amount of support that the Chicago office


dedicates and contributes to the Plan.


Conclusion on Home Office Expenses finding:


      The OIG calculation excludes from the base for the Chicago Office the FTE

expenses for the Human Resources and Information Technology departments, both

of which support the Plan activities. We respectfully request a review of such and

the finding adjusted accordingly in the final audit report.

      C.	    Excess Letter of Credit Drawdown for Administrative
             Expenses

      AXA accepts the audit finding and will credit the FEHBP the excess LaC

drawdown as well as the LIT on the excess LaC draw down.

      D.	    Unallocable Tax on Service Charge

      AXA accepts the audit finding and returned the questioned amounts to the

LaC account on June 5 and June 13, 2008.

      E.	    Lost Investment Income on FEHBP Funds

      In this OIG finding, even ifAXA agreed with the OIG in the fact that the

funds need to be invested, we would like the OIG to consider that AXA already

opened a saving account at Banistmo Bank, in Panama, but it took 3 months to do

it, due to all the paperwork involved. See Exh. 9. Also, the interest rate paid on

investments in Panama is only 1.5% per year, and the OIG is applying the standard

Federal interest rate. Also, as stated before, AXA did not invest the excess funds



                                          16

due to the volatility in the Latin America markets and AXA only left funds in the


account to" cover claims and capitation payments. This balance was never used for


any other purpose.


Conclusion on Lost Investment Income finding:


      Considering that AXA's intention was to protect FEHBP funds from any

economic risk and that the earning would have been minimal ifAXA had invested

the money in Panama, we respectfully request that the OIG reconsider and spare

AXA from having to pay the high amount of LII on excess funds that were imposed

and remove this finding from the final audit report.



                                        ***

      AXA appreciates the opportunity to respond to the Draft Audit Report.

Please direct all questions regarding AXA's response to Lynn Me Givern, Corporate

Counsel at                                     or phone                   or Beatriz

.SousaDhief Financial Officer,                                            or phone




                                                       Sincerely
                                                  /    /----0    .
                                                            .I


                                                        livier V n Poperinghe
                                                       Chief Executive Officer
                                                       AXA Assistance USA




                                         17