Audit of the Federal Employees Health Benefits Program Operations at Aetna HealthFund

Published by the Office of Personnel Management, Office of Inspector General on 2015-08-31.

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

                   OFFICE OF AUDITS

             Final Audit Report

                            AETNA HEALTHFUND

                                            Report Number 1C-22-00-14-071
                                                   August 31, 2015

                                                                -- CAUTION --

This audit report has been distributed to Federal officials who are responsible for the administration of the audited program. This audit report may
contain proprietary data which is protected by Federal law (18 U.S.C. 1905). Therefore, while this audit report is available under the Freedom of
Information Act and made available to the public on the OIG webpage (http://www.opm.gov/our-inspector-general), caution needs to be exercised before
releasing the report to the general public as it may contain proprietary information that was redacted from the publicly distributed copy.

              Audit of the Federal Employees Health Benefits Program Operations at
                                       Aetna HealthFund
 Report No. 1C-22-00-14-071                                                                    August 31, 2015

Why Did We Conduct the Audit?           What Did We Find?

The primary objective of this           This report identifies $20,016,333 in questioned costs to the
performance audit was to determine if   FEHBP. Specifically, the Plan underpaid its MLR penalty for
Aetna HealthFund (Plan) was in          contract year 2012. We found that the FEHBP rates were
compliance with the provisions of its   developed in accordance with applicable laws, regulations, and
contract and the provisions of the      OPM’s rules and regulations for contract year 2012.
laws and regulations governing the
Federal Employees Health Benefits       In the MLR review, we found that the Plan did not use a fair and
Program (FEHBP). We verified if the     equitable allocation method to determine the federal income tax
Plan met the Medical Loss Ratio         expense related to the FEHBP. In addition, the Plan’s MLR
(MLR) requirements established by       calculation included overstated dental and pharmacy claims paid
the U.S. Office of Personnel            on the behalf of ineligible members, and claims paid on non-
Management (OPM). We also               covered services. Finally, the Plan incorrectly included vendor
verified if the Plan developed the      administrative expenses in the MLR calculation. As a result, the
FEHBP premium rates using               FEHBP MLR subsidization penalty account was underpaid by the
complete, accurate and current data.    Plan in the amount of $20,016,333.

What Did We Audit?

Under Contract CS 2900, the Office
of the Inspector General performed
an audit of the FEHBP operations at
the Plan. The audit covered the
Plan’s 2012 FEHBP premium rate
build-up and MLR submission. Our
audit fieldwork was conducted from
September 15, 2014 through
September 26, 2014 at the Plan’s
office in Blue Bell, Pennsylvania.

Michael R. Esser
Assistant Inspector General
for Audits

ACA      Affordable Care Act
CFR      Code of Federal Regulations
FEHBP    Federal Employees Health Benefits Program
FEHBAR   Federal Employees Health Benefits Acquisition Regulations
HHS      U.S. Department of Health and Human Services
MLR      Medical Loss Ratio
OIG      Office of the Inspector General
OPM      U.S. Office of Personnel Management
Plan     Aetna HealthFund
TCR      Traditional Community Rating
U.S.C.   United States Code



        EXECUTIVE SUMMARY ......................................................................................... i 

        ABBREVIATIONS ..................................................................................................... ii 

I.	     BACKGROUND ..........................................................................................................1 

II.	    OBJECTIVES, SCOPE, AND METHODOLOGY ..................................................3 

III.	   AUDIT FINDINGS AND RECOMMENDATIONS.................................................7

        1. MLR Penalty Underpayment ...................................................................................7 

IV.	    MAJOR CONTRIBUTORS TO THIS REPORT ..................................................11 

        Exhibit A (Summary of Questioned Costs) 

        Exhibit B (Medical Loss Ratio Questioned Cost) 

        Appendix (Aetna HealthFund’s March 24, 2015, response to the draft report) 

            I. BACKGROUND
                        TO THIS REPORT
This final report details the audit results of the Federal Employees Health Benefits Program
(FEHBP) operations at Aetna HealthFund (Plan). The audit was conducted pursuant to the
provisions of Contract CS 2900; 5 U.S.C. Chapter 89; and 5 Code of Federal Regulations (CFR)
Chapter 1, Part 890. The audit covered contract year 2012, and was conducted at the Plan’s
office in Blue Bell, Pennsylvania.

The FEHBP was established by the Federal Employees Health Benefits 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, and is administered by the U.S.
Office of Personnel Management’s (OPM) Healthcare and Insurance Office. The provisions of
the Federal Employees Health Benefits Act are implemented by OPM through regulations
codified in Chapter 1, Part 890 of Title 5, CFR. Health insurance coverage is provided through
contracts with health insurance carriers who provide service benefits, indemnity benefits, or
comprehensive medical services.

In April 2012, OPM issued a final rule establishing an FEHBP-specific Medical Loss Ratio
(MLR) requirement to replace the similarly sized subscriber group (SSSG) comparison
requirement for most community-rated FEHBP carriers (77 FR 19522). MLR is the proportion
of FEHBP premiums collected by a carrier that is spent on clinical services and quality health
improvements. The MLR for each carrier is calculated by dividing the amount of dollars spent
for FEHBP members on clinical services and health care quality improvements by the total
amount of FEHBP premiums collected in a calendar year.

The FEHBP-specific MLR rules are based on the MLR standards established by the Affordable
Care Act (ACA, P.L. 111-148) and defined by the U.S. Department of Health and Human
Services (HHS) in 45 CFR Part 158. In 2012, community-rated FEHBP carriers could elect to
follow the FEHBP-specific MLR requirements, instead of the SSSG requirements. Beginning in
2013, the MLR methodology is required for all community-rated carriers, except those that are
state mandated to use traditional community rating (TCR). State mandated TCR carriers
continue to be subject to the SSSG comparison rating methodology.

Starting with the pilot program in 2012 and for all non-TCR FEHBP carriers in 2013, OPM
required the carriers to submit an FEHBP-specific MLR. OPM required that the FEHBP-specific
MLR threshold calculation take place after the ACA-required MLR calculation, and that any
rebate amounts due to the FEHBP as a result of the ACA-required calculation be excluded from
the FEHBP-specific MLR threshold calculation. Carriers were required to report information
related to earned premiums and expenditures in various categories, including reimbursement for
clinical services provided to enrollees, activities that improve health care quality, and all other
non-claims costs.

                                                1                           Report No. 1C-22-00-14-071
If a carrier fails to meet the FEHBP-specific MLR threshold, it must make a subsidization
penalty payment to OPM within 60 days of notification of amounts due.

Community-rated carriers participating in the FEHBP are subject to various Federal, state and
local laws, regulations, and ordinances. While most carriers are subject to state jurisdiction,
many are further subject to the Health Maintenance Organization Act of 1973 (Public Law 93-
222), as amended (i.e., many community-rated carriers are Federally qualified). In addition,
participation in the FEHBP subjects the carriers to the Federal Employees Health Benefits Act
and implementing regulations promulgated by OPM.

The Plan reported 44,843 contracts and 95,637 members as of March 31, 2012, as shown in the
chart below.
                                                               FEHBP Contracts/Members
In contracting with community-rated                                   March 31

carriers, OPM relies on carrier compliance
with appropriate laws and regulations and,           100,000
consequently, does not negotiate base                 90,000
rates. OPM negotiations relate primarily              80,000
to the level of coverage and other unique
features of the FEHBP.                                50,000
The Plan has participated in the FEHBP            30,000

since 2006 and provides health benefits to        20,000
FEHBP members nationwide. A prior                      0
audit of the Plan covered contract years                               2012
                                                 Contracts            44,843
2010 and 2011. In that audit, we                 Members              95,637
determined that the FEHBP premiums
were developed in accordance with applicable laws, regulations and OPM’s Rate Instructions to
Community Rated Carriers (rate instructions) for contract years 2010 and 2011.

The preliminary results of this audit were discussed with Plan officials at an exit conference and
in subsequent correspondence. A draft report was also provided to the Plan for review and
comment. The Plan’s comments were considered in preparation of this report and are included,
as appropriate, as the Appendix to the report.

                                                 2                               Report No. 1C-22-00-14-071
The primary objective of this performance audit was to determine whether the Plan was in
compliance with the provisions of its contract and the laws and regulations governing the
FEHBP. Specifically, we verified whether the Plan met the MLR requirements established by
OPM and paid the correct amount to the Subsidization Penalty Account, if applicable.
Additional tests were performed to determine whether the Plan was in compliance with the
provisions of the laws and regulations governing the FEHBP.

We conducted this performance audit in                              FEHBP Premiums Paid to the Plan
accordance with generally accepted government
auditing standards. Those standards require that                 $450.0
we plan and perform the audit to obtain sufficient,              $400.0

appropriate evidence to provide a reasonable basis               $300.0
for our findings and conclusions based on our                    $200.0
audit objectives. We believe that the evidence                   $100.0
obtained provides a reasonable basis for our                      $50.0
findings and conclusions based on our audit                                            2012
                                                                 Revenue              $416.5

This performance audit covered contract year 2012. For contract year 2012, the FEHBP paid
approximately $416.5 million in premiums to the Plan.

Office of the Inspector General (OIG) audits of community-rated carriers are designed to test
carrier compliance with the FEHBP contract, applicable laws and regulations, and the rate
instructions. These audits are also designed to provide reasonable assurance of detecting errors,
irregularities, and illegal acts.

We obtained an understanding of the Plan’s internal control structure, but we did not use this
information to determine the nature, timing, and extent of our audit procedures. However, the
audit included such tests of the Plan’s rating system and such other auditing procedures
considered necessary under the circumstances. Our review of internal controls was limited to the
procedures the Plan has in place to ensure that:

        The rates charged to the FEHBP are developed in accordance with the Plan’s standard
         rating methodology and the claims, factors, trends, and other related adjustments are
         supported by complete, accurate, and current source documentation; and

                                                3                                  Report No. 1C-22-00-14-071
       The FEHBP MLR calculation is accurate, complete, and valid; claims were processed
        accurately; appropriate allocation methods are used; and, that any other costs associated
        in its MLR calculation are appropriate.

In conducting the audit, we relied to varying degrees on computer-generated billing, enrollment,
and claims data provided by the Plan. We did not verify the reliability of the data generated by
the various information systems involved. However, nothing came to our attention during our
audit testing utilizing the computer-generated data to cause us to doubt its reliability. We believe
that the available data was sufficient to achieve our audit objectives. Except as noted above, the
audit was conducted in accordance with generally accepted government auditing standards,
issued by the Comptroller General of the United States.

The audit fieldwork was performed from September 15, 2014 through September 26, 2014 at the
Plan’s office in Blue Bell, Pennsylvania.

We examined the Plan’s MLR calculation and related documents as a basis for validating the
MLR. Further, we examined claim payments and quality health expenses to verify that the cost
data used to develop the MLR was accurate, complete and valid. We also examined the
methodology used by the Plan in determining the premium in the MLR calculation. Finally, we
used the contract, the Federal Employees Health Benefits Acquisition Regulations (FEHBAR),
and the rate instructions to determine the propriety of the Plan’s MLR calculation.

To gain an understanding of the internal controls in the Plan’s claims processing system, we
reviewed the Plan’s claims processing policies and procedures and interviewed appropriate Plan
officials regarding the controls in place to ensure that claims were processed accurately. Other
auditing procedures were performed as necessary to meet our audit objective.

To test whether the Plan accurately processed and paid FEHBP claims for contract year 2012 and
complied with its contract, we tested for potential claim errors within the full claims population
of           medical claim lines and           pharmacy claim lines, totaling $               and
$           , respectively.

The tests performed, along with the methodology, are detailed below by Medical and Pharmacy

                                                 4                           Report No. 1C-22-00-14-071
                   Medical Claims Sample Selection Criteria/Methodology 

                                                  Sample      Sample                                 Projected
  Medical Claims                                                            (Claim        Sample
                          Sample Criteria         Universe   Universe                                  to the
   Review Area                                                               Lines/        Type
                                                 (Number)    (Dollars)                               Universe
Coordination of         Paid claims over
Benefits (COB) -        $50,000 for patients        21       $                All       Judgmental      No
Medicare                age 65+
                        All claim lines with
Bundling/               CPT codes 80047 and
                                                    57           $            All       Judgmental      No
Unbundling              80048 (Basic
                        Metabolic Panel)
                        All claims >$25,000
Duplicate Claims –
                        that meet duplicate       No Hits            N/A     N/A           N/A         N/A
Best Match Criteria
                        best match criteria
                        All claims paid for
Deceased Member
                        identified deceased        136           $            All       Judgmental      No
                        All claim lines with
                        elective abortion CPT
                        codes 59812, 59820,
                        59821, 59830, 59840,        11           $            All       Judgmental      No
Benefits (Abortion)
                        59841, 59850, 59851,
                        59852, 59855, 59856,
                        59857, 59866
Non-Covered             All claim lines with
Benefits (Eye           elective abortion CPT      125           $            All       Judgmental      No
Exercises)              code 92065

Non-Covered             All claim lines with
Benefits (Radial        LASIK CPT code            No Hits            N/A      N/A          N/A         N/A 
Keratotomy)             65771 
Non-Covered             All claim lines with
Benefits (reversal of   CPT code 55400 for
                                                  No Hits            N/A      N/A          N/A         N/A 
voluntary surgical      males and 58750 for
sterilization)          females 
                        All claim lines with
                        CPT code 55970 for
Benefits (sex                                     No Hits            N/A      N/A          N/A         N/A
                        males and 55980 for
                        All claims >$1,000 for
                        dependent members           28           $            All       Judgmental      No
                        age 26 and 27

                                                         5                          Report No. 1C-22-00-14-071
               Pharmacy Claims Sample Selection Criteria/Methodology

 Pharmacy Claims                            Sample           Sample                       Sample       Projected
                       Sample Criteria                                     (Claim
   Review Area                              Universe        Universe                       Type          to the
                                           (Number)         (Dollars)                                  Universe?
                       Pharmacy claims
Member Enrollment                              17           $                 All       Judgmental         No
                       All pharmacy
Dependent              claims >$500
                                               23           $                 All       Judgmental         No
Eligibility            paid for members
                       age 26
                                                                          Sample of
                       All pharmacy                                       20 claims
High Dollar Drugs                              90           $                             Random           No
                       claims > $5,000                                     totaling
                       All pharmacy
                       claims paid for
Deceased Member
                       identified              148              $             All       Judgmental         N/A

        We also examined the rate build-up of the Plan’s 2012 Federal rate submission and related
        documents as a basis for validating the Plan’s standard rating methodology. We verified that the
        factors, trends, and other related adjustments used to determine the FEHBP premium rate(s) were
        sufficiently supported by source documentation. Further, we examined claim payments to verify
        that the cost data used to develop the FEHBP rates was accurate, complete and valid. Finally, we
        used the contract, the FEHBAR, and the rate instructions to determine the propriety of the
        FEHBP premiums and the reasonableness and acceptability of the Plan’s rating system.

        In addition, we examined the Plan’s financial information and evaluated the Plan’s financial
        condition and ability to continue operations as a viable ongoing business concern.

                                                        6                           Report No. 1C-22-00-14-071

1. MLR Penalty Underpayment                                                       $20,016,333

  The Plan elected to participate in the 2012 MLR pilot program offered to certain FEHBP
  carriers. MLR pilot program carriers must meet the OPM-established MLR threshold of 89
  percent. Therefore, 89 cents of every health care premium dollar must be spent on health care
  expenses. If the MLR threshold is less than 89 percent, a carrier
  will owe a subsidization penalty equal to the difference between the    The Plan underpaid
  threshold and the carrier’s actual MLR.                                    its 2012 MLR
                                                                         subsidization penalty
  The Plan calculated an MLR of           percent and paid a penalty of   payment to OPM in
  $3,205,977 to OPM before the deadline of August 31, 2013.                  the amount of
  However, during our review of the Plan’s MLR submission, we                 $20,016,333.
  found the following issues.

  Tax Allocation
  Pursuant to the provision of HHS 45 Code of Federal Regulation (CFR) § 158, Plans are
  allowed to reduce the premium used in the MLR calculation by taxes and regulatory fees paid,
  excluding Federal income taxes paid on investment income and capital gains. The Plan
  allocated non-income related taxes, regulatory fees, quality health improvement expenses, and
  fraud reduction expenses that were applicable to the FEHBP by using a premium ratio
  allocation method. The premium ratio was calculated by dividing the FEHBP premium by the
  total large group sector premium on the HHS grand total MLR filing, of which the FEHBP is
  included. However, for Federal income taxes, the Plan attempted to calculate the gain or loss
  on the FEHBP as if it was its own entity. The result was a Federal Income tax allocation of
  $22,573,129 to the FEHBP, even though the grand total HHS Federal income tax amount for
  large groups was $12,732,786.

  Additionally, HHS 45 CFR § 158.170 requires that the Plan’s allocation method be based on a
  generally accepted accounting method. However, we found that the Plan’s method used to
  allocate the Federal income taxes to the FEHBP is not applied proportionately, appropriately,
  and is not based on a generally accepted accounting method. Also, it is not suitable to treat
  the FEHBP as if it were its own entity since expenses are not tracked at the group level and
  the method is not related to actual expenses incurred. As the Plan did for several other
  expenses in its MLR calculation, the premium ratio allocation method is more appropriate and
  yields a more accurate result and is supportable (i.e., well documented). Therefore, we
  recalculated the Federal income tax allocation using the premium ratio method and

                                           7                             Report No. 1C-22-00-14-071
determined that the FEHBP’s portion of Federal income tax is $1,036,575. As a result, we
reduced the premium in our audited MLR calculation by $1,036,575.

Plan’s Comments (see Appendix):
The Plan disagrees with the OIG’s Federal income tax allocation in the 2012 MLR
calculation. The Plan contends that their methodology of calculating the FEHBP net income
and applying the corporate tax rate of 35 percent is a more accurate representation of the
FEHBP federal income tax expense. The Plan states that net income, not premium, should be
used to allocate income taxes since income and losses are what determines taxes. Also, the
Plan states that its income tax allocation method for the FEHBP conforms to generally
accepted accounting principles. Several examples were provided by the Plan to show
different scenarios using their allocation method compared to the OIG’s method (see
Appendix). In addition, the Plan continuously asserts that the method used for its FEHBP
Federal income tax allocation is the same method they used for their HHS MLR filing.

OIG’s Response to the Plan’s Comments:
The OIG disagrees with the Plan and asserts that the Plan’s method used to calculate the
FEHBP Federal income tax does not conform to the HHS 45 CFR § 158, which states, “All
costs reported by issuers must be allocated according to generally accepted accounting
methods that yield the most accurate results and are well documented.” The Plan did not
allocate a portion of the Federal income tax expense that was reported on the Plan’s statutory
financial statements, but instead calculated an FEHBP net income value that is not well
documented. Ultimately, the Plan’s FEHBP net income calculation is unverifiable and is not
an equitable basis to determine the FEHBP Federal income tax expense.

The HHS regulations require a portion of taxes be allocated to each of the MLR health
insurance markets (e.g., individual, small group, large group, etc.), which the Plan refers to as
MLR pools. To determine each pools’ Federal income tax amount, including that of the HHS
large group pool, the Plan calculated the net income for the large group pool, divided by the
net income for the entire company and multiplied by the Federal income taxes reported on the
annual statement. This methodology adheres to the HHS regulation by allocating a portion of
the Federal income taxes reported by the Plan on their statutory financial statements.

However, the Plan did not consistently use this method to determine the Federal income tax
attributable to the FEHBP, which is part of the HHS large group pool. Instead of allocating a
portion of the reported Federal income tax to the FEHBP as required by HHS 45 CFR § 158,
the Plan calculated the FEHBP net income and multiplied by the corporate tax rate of 35
percent. This method is inconsistent with the Plan’s Federal income tax allocation for the
HHS MLR pools and not well documented since the FEHBP’s net income cannot be verified.

                                              8                            Report No. 1C-22-00-14-071
The Plan’s removal of expenses in the FEHBP net income calculation distorts the expenses
reported for the HHS large group pool. Since the FEHBP is part of the large group sector,
those expenses should be removed from the large group net income calculation as well. If
they are not removed then the expenses are spread out amongst the rest of the large group
sector which will understate the amount of taxes allocated to the large group pool. Since the
Plan cannot track expenses on a group level, contractual exclusions or variances in contractual
expenses cannot be accurately tracked, rendering it impossible to determine any one group’s
net income (i.e., not well documented).
The premium ratio allocation method yields a more accurate result to determine the FEHBP
Federal income tax expense, since it adheres to the HHS regulation and was used by the Plan
in several other MLR cost allocations areas. Therefore, we recalculated the Federal income
tax allocation using the premium ratio method and determined that the FEHBP’s portion of
Federal income tax is $1,036,575. As a result, we reduced the premium in our audited MLR
calculation by $1,036,575.
Dental Claims
The 2012 OPM MLR instructions require the Plan to utilize claims incurred from January 1,
2012 through December 31, 2012, and paid through March 31, 2013. However, the Plan used
calendar year 2011 dental claims data in its MLR calculation. The 2012 dental claims amount
was $            , and the 2011 dental claims amount was $             , resulting in a
$973,820 overstatement in claims costs used by the Plan in its MLR calculation. We updated
our audited MLR calculation to reflect the correct 2012 dental claims. As a result, the
incurred claims are $973,820 less in the audited MLR calculation.

Plan’s Comments (see Appendix):
The Plan agrees with our finding.

Vendor Payments
Pursuant to the provision of HHS 45 CFR § 158.140, the Plan failed to remove $71,669 of
FEHBP incurred claims that were used to cover administrative costs for vendors. As a result,
we removed the $71,669 from the incurred claims in our audited MLR calculation.

Plan’s Comments (see Appendix):
The Plan agrees with our finding.

Pharmacy Claims Paid on Ineligible Members
Per the FEHBP certificate of coverage, dependent coverage ends once the dependent turns 26
years of age. We identified three ineligible members who exceeded the dependent age limit.
Six pharmacy claims, totaling $2,180, were incorrectly paid on behalf of the three ineligible
members. As a result, we removed $2,180 from the incurred claims in our audited MLR

                                             9                           Report No. 1C-22-00-14-071
Plan’s Comments (see Appendix):
The Plan agrees with our finding.

Non-Covered Benefits
Only FEHBP claims incurred for covered benefits should be included in the Plan’s MLR
calculation. Elective abortion claims are not covered under the FEHBP, except when the life
of the mother is endangered or the pregnancy resulted from rape or incest. We reviewed 11
abortion claims and determined that 10 of these claims were elective and should not have
been covered. These 10 elective abortion claims totaled $8,470. As a result, we removed
$8,470 from the incurred claims in our audited MLR calculation.

Plan’s Comments (see Appendix):
The Plan agrees with our finding.

Based upon the issues outlined above, our audited MLR calculation resulted in an MLR of
83.25 percent compared to the Plan’s calculated MLR of       percent. The result is an MLR
penalty underpayment of $20,016,333 (see Exhibit B).

Recommendation 1

We recommend that the contracting officer require the Plan to return $20,016,333 to the MLR
subsidization penalty account for contract year 2012.

Recommendation 2

We recommend that the contracting officer require the Plan to implement proper system edits
to prevent claims from being paid for ineligible members and non-covered benefits.

                                           10                          Report No. 1C-22-00-14-071


             , Auditor-in-Charge

          , Auditor

         , Auditor

          , Senior Team Leader

          , Chief

                                   11   Report No. 1C-22-00-14-071
                              EXHIBIT A

                         Aetna HealthFund
                     Summary of Questioned Costs

Contract Year 2012

Medical Loss Ratio Questioned Costs                       $20,016,333

Total Questioned Costs                                    $20,016,333

                                                   Report No. 1C-22-00-14-071
                                    EXHIBIT B
                                  Aetna HealthFund 

                                 MLR Questioned Costs 

                                                                  Per Audit         Per Plan
2012 FEHBP MLR Target                                               89%               89%

Claims Expense
Medical and Pharmacy Claims
Dental Claims                                                    $              $
Health Savings Account Deposits
Finding: Vendor Payments
Finding: Non-covered benefits
Finding: Pharmacy Claims paid on termed members
Less: Prescription Drug - Rebate
Allowable Fraud Reduction Expense
Less: Healthcare Receivables Current
Incurred Claims
Expenses to Improve Health Care Quality
Total Adjusted Incurred Claims                                   $336,032,315   $337,051,618

Earned Premium                                                   $409,883,534   $409,883,534
Less: Federal and State Taxes and Licensing or Regulatory Fees    $6,226,652     $27,571,630
Adjusted Premiums                                                $403,656,882   $382,311,904
Less: Defective Pricing Finding (Due OPM)                             $0              $0
Total Adjusted Premiums less Defective Pricing Finding           $403,656,882   $382,311,904

Total Adjusted Incurred Claims (MLR Numerator)                   $336,032,315   $337,051,618
Total Adjusted Premiums less Defective Pricing (MLR
            Denominator)                                         $403,656,882   $382,311,904
FEHB MLR Calculation                                               83.25%         88.16%
Penalty Calculation                                              $23,222,310     $3,205,977
Penalty Paid                                                      $3,205,977     $3,205,977
MLR Underpayment Finding (Due OPM)                               $20,016,333         $0

                                                                      Report No. 1C-22-00-14-071

            980 Jolly RoadBlue Bell, PA 19422 
                                                                Executive Director 
                                                                FEHBP Underwriting 
        March 24, 2015                                          Email:        @aetna.com 
      Chief, Community‐Rated Audits Group 
      U.S. Office of Personnel Management 
      Office of the Inspector General 
      800 Cranberry Woods Drive, Suite 270 
      Cranberry Township, PA 16066 
      Re: Audit of Aetna HealthFund 
             Contract Number CS 2900 – Plan Code 22 
             Report No. 1C‐22‐00‐14‐071 
      Dear            : 
      Thank you for the opportunity to respond to the draft audit report dated February 24, 2015.  
      After careful review of the draft report, we agree with the draft report’s findings on Dental 
      Claims, Vendor Payments, Non‐Covered Benefits, and Pharmacy Claims Paid on Ineligible 
      Members.  However, discussed in detail in the attached response, we respectfully disagree with 
      the OIG’s findings that the Aetna HealthFund’s method to determine the portion of federal 
      income taxes attributed to the FEHBP was not fair and equitable for purposes of calculating the 
      2012 Minimum Loss Ratio.  We believe that Aetna HealthFund’s calculation of federal income 
      taxes was consistent with the standard required in the MLR regulations and accordingly the 
      subsidization penalty in the draft report is overstated.  
      Please see the attached analysis in support of Aetna HealthFund’s position.  If you have any 
      questions as you review our response please call.  

      Executive Director 
                                                                                 Report No. 1C-22-00-14-071
    cc:  Alan Spielman 
         Assistant Director for Federal Employees Insurance Operations 
         Lloyd Williams 
         Deputy Assistant Director for Federal Employees Insurance Operations 
         Chief, Health Insurance Group III 
         Health Insurance Group III 
         Actuaries group 
         Audit Resolution 
         Contract Specialist, Health Insurance Group III 
         President, Federal Plans 

                                                                          Report No. 1C-22-00-14-071
    Response to Draft Report dated February 24, 2015
               Audit of Aetna HealthFund
                 Blue Bell, Pennsylvania
              Report No. 1C‐22‐00‐14‐071

                                          Report No. 1C-22-00-14-071
I.          Introduction/Executive Summary ................................................................................................  10
II.         Medical Loss Ratio Background ...................................................................................................  10
III.          Tax Allocations and Generally Accepted Accounting Method ................................................. 11
       a.  Background ...............................................................................................................................  11
       b.  Aetna HealthFund Income Tax Allocations ............................................................................... 11
IV.           OIG Tax Allocation Audit Findings.............................................................................................
       a.  AHF FEHBP Tax Allocation not proportionate, appropriate or a GAAM................................... 12
       b.  AHF FEHBP Tax Allocation exceeded HHS Tax allocated to all Large Group MLR Pools .......... 13
       c.  AHF FEHBP Tax Allocation treats FEHBP Plan Code as a legal entity........................................
            1.       Allocation of expenses to determine Plan’s net income or loss. ...................................... 14
            2.       Income tax expense or refund allocated based on net income ........................................ 14
V.  AHF Income Tax Allocation Method ............................................................................................  14
VI.	          Examples of Income Tax Allocation ‐ AHF Method and Draft Report Method ........................ 15
       Example 1 ......................................................................................................................................... 15
       Example 2 ......................................................................................................................................... 16
       Example 3 ......................................................................................................................................... 18
VII.          Aetna’s Response to Other OIG Findings..................................................................................
VIII.             Conclusion .............................................................................................................................  20
Revised Penalty Calculation .................................................................................................................  21

                                                                                                                       Report No. 1C-22-00-14-071
I.    Introduction/Executive Summary 

      Aetna submits the following comments to the above mentioned draft report (“Draft 
      Report”) issued by the Office of Personnel Management (“OPM”) Office of Inspector 
      General (“OIG”) under the Federal Employees Health Benefits Program (“FEHBP”). The 
      audit covered the FEHBP contract for the Aetna HealthFund Plan Code 22, (hereinafter, 
      the “Plan”) for the contract year 2012 Medical Loss Ratio (“MLR”) pilot program. 
      The Draft Report found that the Plan underpaid its 2012 MLR subsidization penalty in 
      the amount of $20,088,002.  The Draft Report cites five specific findings that make up 
      the $20,088,002.  The Plan agrees with the Draft Report’s findings on Dental Claims, 
      Vendor Payments, Non‐Covered Benefits, and Pharmacy Claims Paid on Ineligible 
      As discussed in detail below, the Plan disagrees with the finding pertaining to the tax 
      allocation methodology. Specifically, the Plan disagrees with OIG’s use of the premium 
      ratio allocation method to determine the FEHBP’s portion of federal income tax. The 
      federal MLR regulations at 45 C.F.R. §158.170 require that the tax allocation method be 
      based upon a generally accepted accounting method (“GAAM”) that is expected to yield 
      the most accurate results. The Plan believes its calculation is correct and meets the 
      standards set under a GAAM and therefore satisfies the requirements of 45 C.F.R. § 
      158.170. In this response, the Plan demonstrates through a detailed explanation and 
      supporting examples that the method the Plan used to allocate Federal income tax 
      provides the most accurate results, and is consistent with the method used to calculate 
      the Department of Health and Human Services (“HHS”) MLR filings.  

II.   Medical Loss Ratio Background 

      The Affordable Care Act (“ACA”) passed in 2010 included a requirement that a minimum 
      amount of premiums collected by health insurance carriers must be spent on medical 
      benefits.  This requirement became known as the MLR and requires health insurance 
      carriers to meet a predetermined threshold for the percentage of premium that is spent 
      on medical benefits.  Failure to meet the threshold requires a rebate of premium to 
      The MLR is calculated as total claims paid divided by premiums.  However, the ACA 
      allows for certain adjustments to both the claim and premium numbers in the ratio.  
      Claims include medical benefits paid on behalf of members and are adjusted by the cost 
      of health care quality improvement activities (“QIA”).  Premiums include premium 
      revenue from members and plan sponsors and are adjusted by federal and state taxes, 
      and licensing and regulatory fees.  
      In 2012, OPM adopted an MLR requirement for the FEHBP on a pilot basis and the Plan 
      elected to participate in the pilot.  See 77 Fed. Reg. 19522 (April 2, 2012).  OPM 
      published MLR regulations and other guidance that generally adopts the HHS MLR 
      guidelines in addition to a few requirements specific to the FEHBP MLR program.  

                                                                         Report No. 1C-22-00-14-071
    III.   Tax Allocations and Generally Accepted Accounting Method 

     a.      Background 
             The amount of federal taxes to be used as an adjustment to premiums is the amount 
             allocated to health insurance coverage reported on the MLR form.  A health insurer 
             pays federal taxes on all of its business net income on a combined basis.  Consequently, 
             the amount of federal income tax related to health insurance coverage reported on the 
             MLR form must be allocated.  The ACA did not include specific rules for calculating 
             MLR.  Rather, HHS was directed to establish detailed rules by regulation.  HHS 
             promulgated regulations in 2010 and 2011 that contain detailed rules, including the 
             method to allocate expenses in the MLR calculation.  75 Fed. Reg. 74864 (Dec. 1, 2010) 
             as amended by 76 Fed. Reg. 76574 (Dec. 7, 2011). 
             The applicable regulation states in part, “[a]llocation to each category should be based 
             on a generally accepted accounting method that is expected to yield the most accurate 
             results.” and “[a]ny basis adopted to apportion expenses must be that which is 
             expected to yield the most accurate results and may result from special studies of 
             employee activities, salary ratios, premium ratios or similar analyses.” (see 45 C.F.R. §§ 
             158.170(b)(1) and (3)).  

     b.      Aetna HealthFund Income Tax Allocations 
             The Plan adopted a method to allocate federal income tax that is based upon the net 
             income or loss generated by the “reporting unit.”  With respect to the HHS MLR filing, 
             the “reporting unit” is the MLR segment and contract situs or location (“MLR Pool”) as 
             outlined in the HHS filing form1.  For the FEHBP MLR filing, the “reporting unit” is the 
             Plan Code that is included in the FEHBP MLR filing form2.  With respect to federal 
             income tax returns, the “reporting unit” is the legal entity. 
             Allocated income tax can be either an expense or a refund depending on whether a 
             reporting unit experiences net income or loss.  For the HHS and FEHBP MLR tax 
             allocations, Aetna allocates income tax expense to reporting units with net income and 
             an income tax refund to reporting units with a net loss.  This allocation is consistent 
             with Generally Accepted Accounting Principles (“GAAP”) as promulgated by the 
             Financial Accounting Standards Board and with Statutory Accounting Principles (“SAP”) 
             as promulgated by the National Association of Insurance Commissioners.  In fact, the 
             MLR calculation for income taxes instructs the use of SAP as the accounting standard 
             for such taxes. 
             The income tax allocation method that Aetna uses for the FEHBP MLR reporting and 
             HHS MLR reporting is consistent with the United States (“US”) accounting principles 
             explained above.  The only difference between Aetna’s HHS MLR reporting and FEHBP 
             MLR reporting is that the HHS form includes all the MLR Pools in a legal entity.  The 
             FEHBP MLR form includes only the reported Plan Code activity and that Plan Code may 
     The 2012 HHS MLR reporting form and instructions are included as Exhibits A and B, respectively. 
     The 2012 FEHBP MLR reporting form and instructions are included as Exhibit C and D, respectively.

                                                                                           Report No. 1C-22-00-14-071
          include more than one legal entity.  Therefore, Aetna allocates general and 
          administrative expenses along with the Plan Code’s premiums and incurred claims in 
          order to determine the net income or loss from the Plan Code.  The final step is the 
          allocation of income tax expense or refund to the Plan Code using the tax rate 
          applicable to the net income or loss in Aetna’s income tax returns. 
          Unlike income taxes, non‐income taxes, such as employment taxes and QIA expenses, 
          are not based on income.  Therefore, these specific items are allocated based on the 
          premium ratio allocation method used by the Plan, with which the Draft Report agrees. 

IV.      OIG Tax Allocation Audit Findings  

          The Draft Report contains a preliminary finding that the Plan did not use a fair and 
          equitable allocation method to determine the portion of Federal income taxes 
          attributed to the FEHBP and identifies a draft MLR penalty underpayment of 
          $20,088,002.  According to the Draft Report, the premium ratio allocation method that 
          the Plan used for non‐income tax expenses and QIA is also the appropriate method for 
          income tax expense.  
          The Plan respectfully disagrees that the premium ratio allocation method is an 
          appropriate method to allocate income taxes as there is no conceptual basis in 
          applicable US accounting standards for income taxes to be determined based solely on 
          premium.  It is net income or loss that generates income tax expense and refunds 
          under US tax laws and regulations, as well as US accounting principles.  Relying solely 
          on premiums produces inaccurate results as this method ignores a fundamental 
          accounting principle that income taxes are determined on net income or loss. 

      a. AHF FEHBP Tax Allocation not proportionate, appropriate or a GAAM 
          The Draft Report states, “the Plan’s method used to allocate the Federal income tax to 
          the FEHBP is not applied proportionately, appropriately, and is not based on a generally 
          accepted accounting method.”   
          As discussed previously in this response, the Plan asserts that with respect to allocating 
          income taxes, a GAAM must account for income net of expenses (i.e., net income or 
          loss) in order to be appropriate and yield an accurate result.  The Plan’s tax allocation 
          method is appropriate as Plan Codes reporting net loss are allocated a proportionate 
          income tax refund and Plan Codes reporting net income are allocated a proportionate 
          income tax expense.   
          This allocation method is consistent with the HHS MLR tax allocations that allocate a 
          proportionate income tax refund to MLR Pools reporting net losses and income tax 
          expense to MLR Pools reporting net income.  
          The Plan’s income tax allocation method is a GAAM and conforms with GAAP and SAP 
          accounting principles that produce income tax expense for reporting units with net 
          income and income tax refund for reporting units with net losses. 

                                                                              Report No. 1C-22-00-14-071
    b. AHF FEHBP Tax Allocation exceeded HHS Tax allocated to all Large Group MLR Pools 
          The Draft Report states, “for federal income taxes, the Plan attempted to compute the 
          gain or loss on the FEHBP as if it was its own entity.  The result was a Federal Income 
          tax allocation of $22,573,129 to FEHBP; even though the grand total HHS Federal 
          income tax for large groups was $12,732,785.”   
          The Plan disagrees with the Draft Report.  During the on‐site audit, Plan staff provided 
          the OIG auditors with a revised income tax allocation that showed the correct income 
          tax expense is $14,268,997 and not $22,573,129 as reported on the original MLR filing3. 
          Therefore, the Draft Report’s comparison of the Plan’s tax allocation to the HHS federal 
          income tax for all large group pools of $12,732,785 should be based upon this revised 
          income tax expense.   
          The Plan’s income tax allocation method for FEHBP MLR reporting allocates income tax 
          expense to Plan Code units that report net income and income tax refunds to Plan 
          Code units that report net loss.  Aetna’s income tax allocation method for HHS MLR 
          reporting allocates income tax expense to MLR Pools that report net income and 
          income tax refunds to MLR Pools that report net loss.  For 2012 HHS MLR reporting, 
          Aetna Life Insurance Company (the legal entity that reports the AHF Plan Code) had 28 
          HHS large group pools that were allocated income tax refunds totaling $29,469,383 and 
          22 HHS large group pools that were allocated income tax expense totaling 
          $42,202,1684.  Therefore, an MLR Pool can be allocated more income tax expense than 
          the total of all of the MLR Pools within the Large Group segment5. 
          The Plan’s FEHBP income tax expense allocation is consistent with the HHS MLR tax 
          allocations where MLR Pools reporting net income are allocated income tax expense 
          and MLR Pools reporting a net loss are allocated income tax refunds. 

    c. AHF FEHBP Tax Allocation treats FEHBP Plan Code as a legal entity 
          The Draft Report states, “it is not suitable to treat the FEHBP as if it were its own legal 
          entity since expenses are not tracked at the group level and the method is not related 
          to actual expenses incurred.  As the Plan did for several other expenses in its MLR 
          calculation, the premium ratio allocation method is a more appropriate method.” 
          The Plan did not treat the Plan Code as if it were its own legal entity.  Rather, the Plan 
          simply computed the net income or loss attributable to the Plan Code, as that is the 
          reporting unit required to file the FEHBP MLR form.  This computation included the 
          actual premiums and claims associated with the Plan Code and associated expenses 
          allocated to the Plan Code.   

   During the onsite portion of the OIG audit, Aetna agreed that certain expenses allocated to the Plan Code were 

incorrect and adjusted net income reported by the Plan Code.  Consequently, the allocated income tax expense 

was reduced to $14,268,997. 

   Attached Exhibit E details the income tax allocation to all MLR Pools in the HHS Large Group that total 


   For example, see the DC MLR Pool in Exhibit E.

                                                                                           Report No. 1C-22-00-14-071
     1. Allocation of expenses to determine Plan’s net income or loss. 
      The Plan applied the following premium ratio to allocate non‐income tax expenses and 
      other non‐tax expenses to determine the Plan’s net income or loss: 
                               AHF Plan Code Premium                                           
                                 Legal Entity Premium for all HHS Large Group Pools 
     Since the Plan Code was included in the HHS Large Group pools, this ratio is a GAAM 
     that yields the most accurate allocation of non‐income tax expenses and other non‐tax 
     expenses such as QIA.   
     With respect to the FEHBP, this allocation was used only for those expenses that are 
     applicable to the FEHBP business.  For instance, the Plan’s expense allocation 
     specifically excluded state premium tax expense and broker commissions since FEHBP 
     premiums are exempt from state premium tax and the FEHBP does not use brokers. 

     2. Income tax expense or refund allocated based on net income 
      As discussed above, income tax expense or refunds are fundamentally different from 
      non‐income tax or other non‐tax expenses because they are based upon the net 
      income or loss of the reporting unit.  Therefore, it is necessary to determine net 
      income or loss in order to appropriately allocate income taxes to the Plan Code. 
     The Plan’s method to allocate income tax expense or refund applies the non‐income 
     tax and non‐tax expense allocation method discussed in the section above to 
     determine the net income or loss from the Plan Code and then uses this result to 
     allocate income tax expense or refund to the Plan Code.  This is not an attempt to treat 
     the Plan Code as if it were its own legal entity, but necessary to determine the 
     appropriate income tax expense or refund to allocate to the Plan Code. 
     Aetna does not allocate income tax expense or refund on the HHS MLR filings using a 
     premium ratio used for non‐income taxes because a premium ratio would not be a 
     GAAM that yields the most accurate result.  The same method is necessary for the 
     FEHBP MLR filing; the income tax allocation method must be different from the 
     allocation method for non‐income tax and other non‐tax expenses in order to be a 
     GAAM.  If a premium ratio is used to allocate income tax, the same amount of income 
     tax would be allocated to two Plan Codes with the same premium income even though 
     one incurred significantly higher claims.  This is illustrated in Example 1 in Section VI 
     below where the Ohio and Texas Plan Codes are allocated the same income tax 
     expense under this method even though they incurred higher claims.  That result is 
     inconsistent with US accounting principles and is not the most accurate allocation 
     method as required by the HHS MLR regulations.  

V.   AHF Income Tax Allocation Method 

     The Plan’s method to allocate income tax expense or refund is based upon the net 
     income or loss associated with the Plan Code for the year.  To fully illustrate the Plan’s 

                                                                               Report No. 1C-22-00-14-071
          method, the following section provides three examples, which compare the income tax 
          allocations as proposed in the Draft Report to the income tax allocations using the 
          Plan’s method.   
          The Plan Code’s income tax allocation is the final allocation performed after calculating 
          the Plan Code’s net income.  All applicable expenses other than income taxes are 
          allocated to the Plan Code using a gross premium percentage ratio that is calculated by 
          dividing the Plan Code’s premium by the premium for all large group pools.  The Plan 
          Code’s claims and these allocated expenses are deducted from the Plan Code’s gross 
          premium to generate the net income or loss per Plan Code.  Then the income tax is 
          allocated by multiplying the Plan Code net income or loss by the applicable tax rate.  
          This produces an income tax expense for Plan Codes that generate net income or an 
          income tax refund for Plan Codes that generate net losses.  This allocation method is 
          illustrated as follows: 
                                                  Total      FL       OH          TX 
                  Gross Premiums                 1,200.0    400.0     400.0      400.0
                  Claims                        (1,075.0) (340.0) (365.0)  (370.0)
                  Allocated Expenses (Plan Code Gross Premiums divided by Total Gross 
                      Non‐income taxes             (18.0)    (6.0)      (6.0)      (6.0)
                      QIA                          (15.0)    (5.0)      (5.0)      (5.0)
                      All other G&A Expenses       (75.0)   (25.0)    (25.0)     (25.0)
                  Net Income/(Loss)                  17.0     24.0      (1.0)      (6.0)
                  Applicable Tax Rate               35%      35%       35%        35%
                  Income Tax 
                  Expense/(Refund)                   6.0      8.4      (0.4)      (2.1)
          The Draft Report method differs from the Plan’s method in that it utilizes the gross 
          premium ratio, used to allocate expenses other than income tax, to allocate the total 
          income tax expense or refund for all large group pools.  This method does not account 
          for the fact that some Plan Codes generate net income and others generate a net loss.  
          The examples below demonstrate why the Plan’s method is proportionate, consistent 
          and accurate. These standards establish that the Plan’s method is a GAAM that yields 
          the most accurate results. 

    VI.   Examples of Income Tax Allocation ‐ AHF Method and Draft Report Method 
                                             Example 1 
          Carrier has entered into 3 FEHBP Plan Codes – one each in Florida, Ohio and Texas. 
          Carrier has no other business. 
          The Florida Plan Code generates net income. 
          The Ohio and Texas Plan Codes generate net losses. 

                                                                              Report No. 1C-22-00-14-071
Non‐claim expenses are allocated based upon a Premium ratio (Ratio for each Plan Code
= $400 / $1,200 = 33.3%).
Plan Code results for 2012 are as follows:
                                             Total     FL     OH        TX 
        Plan Code Premiums                1,200.0     400.0   400.0    400.0
        Plan Code Claims                (1,075.0) (340.0) (365.0)  (370.0)
        Allocated Expenses: 
            Non‐income taxes                  (18.0)   (6.0)   (6.0)    (6.0)
            QIA                               (15.0)   (5.0)   (5.0)    (5.0)
            All other G&A Expenses            (75.0)  (25.0)  (25.0)  (25.0)
        Net Income/(Loss)                       17.0    24.0   (1.0)    (6.0)

        Applicable Tax Rate                    35%

        Income Tax
        Expense/(Refund)                        6.0

Income Tax Allocation and MLR Ratios per the Draft Report Method (premium ratio 
method used to allocate non‐ claim expenses): 
                                         Total        FL      OH        TX 
       Income Tax 
       Expense/(Refund)                    6.0       2.0      2.0      2.0  
       MLR ratio                        91.3%     86.7%    93.0%  94.2% 

Income Tax Allocation and MLR Ratios per the Plan’s Method (Net income/(loss) 
multiplied by the applicable tax rate): 
                                         Total       FL       OH       TX 
         Income Tax 
         Expense/(Refund)                   6.0      8.4     (0.4)    (2.1) 
         MLR ratio                       91.3%    88.1%    92.4%  93.3% 
The Draft Report Method allocates the same income tax expense to all three FEHBP Plan
Codes.  The Draft Report Method also allocates income tax expense to the two Plan
Codes that reported net losses for 2012 as opposed to allocating an income tax refund.
This method does not yield an accurate result because a Plan Code with a net loss would
not pay income tax but would receive a tax refund.
The Plan Method allocates an income tax refund to the two Plan Codes that reported
net losses.
                                   Example 2 
Carrier has entered into 3 FEHBP Plan Codes – one each in Florida, Ohio and Texas.
Carrier has no other business.
The Florida Plan Code generates the same net income as in Example 1.
The Ohio and Texas Plan Codes also generate net income.

                                                                   Report No. 1C-22-00-14-071
Non‐claim expenses are allocated based upon a Premium ratio (Ratio for each Plan Code
= $400 / $1,200 = 33.3%).
Plan Code results for 2012 are as follows:
                                         Total         FL      OH        TX 
         Plan Code Premiums              1,200.0   400.0    400.0   400.0  
         Plan Code Claims               (1,005.0) (340.0) (330.0)  (335.0) 
         Allocated Expenses: 
            Non‐income taxes                 (18.0)  (6.0)    (6.0)     (6.0)
            QIA                              (15.0)  (5.0)    (5.0)     (5.0)
            All other G&A Expenses           (75.0) (25.0)   (25.0)  (25.0)
         Net Income/(Loss)                     87.0   24.0     34.0     29.0 
         Applicable Tax Rate                   35%
         Income Tax 
         Expense/(Refund)                      30.5 

Income Tax Allocation and MLR Ratios per the Draft Report Method (premium ratio 
method used to allocate non‐ claim expenses): 
                                         Total        FL      OH        TX 
       Income Tax 
       Expense/(Refund)                   30.5      10.2     10.2     10.2 
       MLR ratio                        87.2%     88.5%    85.9%  87.2% 

Income Tax Allocation and MLR Ratios per the Plan’s Method (Net income/(loss) 
multiplied by the applicable tax rate): 
                                         Total       FL      OH        TX 
         Income Tax 
         Expense/(Refund)                 30.5       8.4     11.9     10.2 
         MLR ratio                       87.2%    88.1%    86.3%  87.2% 
The Draft Report Method allocates the same income tax expense to all three FEHBP Plan 
Codes.  The Draft Report Method allocates a different amount of income tax expense to 
the Florida Plan Code than in Example 1, even though the Plan Code results are identical 
to the results in Example 1.  The MLR for the Florida Plan Code is impacted by the results 
of the Ohio and Texas Plan Codes resulting in inconsistent income tax allocations among 
the Plan Codes. 
The Plan Method allocates a different income tax expense to each of the Plan Codes 
based upon the varying amount of net income.  The Plan Method allocates the same 
income tax expense and reports the same MLR for the Florida Plan Code as in Example 
1, which is accurate and appropriate since the Florida Plan Code results are the same 
under both examples. 

                                                                    Report No. 1C-22-00-14-071
                                       Example 3 
Carrier has entered into 3 FEHBP Plan Codes – one each in Florida, Ohio and Texas.
Carrier has no other business.
The Florida Plan Code generates the same net income as in Example 1.
The Ohio Plan Code generates the same net income as in Example 2.
The Texas Plan Code generates the same net loss as in Example 1.
Non‐claim expenses are allocated based upon a Premium ratio (Ratio for each Plan Code
= $400 / $1,200 = 33.3%).
Plan Code results for 2012 are as follows:
                                         Total          FL       OH        TX 
          Plan Code Premiums             1,200.0   400.0     400.0   400.0  
          Plan Code Claims              (1,005.0) (340.0) (330.0)  (370.0) 
          Allocated Expenses: 
             Non‐income taxes                (18.0)   (6.0)     (6.0)     (6.0)
             QIA                             (15.0)   (5.0)     (5.0)     (5.0)
             All other G&A Expenses          (75.0) (25.0)     (25.0)  (25.0)
          Net Income/(Loss)                    52.0   24.0       34.0     (6.0)

          Applicable Tax Rate                  35%

          Income Tax
          Expense/(Refund)                     18.2

Income Tax Allocation and MLR Ratios per the Draft Report Method (premium ratio 
method used to allocate non‐ claim expenses): 
                                         Total        FL      OH        TX 
       Income Tax 
       Expense/(Refund)                   18.2       6.1      6.1      6.1  
       MLR ratio                        89.3%     87.6%    85.0%  95.2% 

Income Tax Allocation and MLR Ratios per the Plan’s Method (Net income/(loss) 
multiplied by the applicable tax rate): 
                                         Total       FL      OH        TX 
         Income Tax 
         Expense/(Refund)                 18.2       8.4     11.9     (2.1) 
         MLR ratio                       89.3%    88.1%    86.3%  93.3% 
The Draft Report Method allocates the same income tax expense to all three FEHBP Plan 
Codes.  The Draft Report Method allocates a different amount of income tax expense to 
the Florida Plan Code than in Examples 1 and 2, even though the Plan Code results are 
identical to the results in Examples 1 and 2.  In addition, the Draft Report Method 
allocates a different amount of income tax expense to the Ohio Plan Code than in 
Example 2, even though the Plan Code results are identical to the results in Example 2.  

                                                                   Report No. 1C-22-00-14-071
       Lastly, the Draft Report Method allocates a different amount of income tax expense to 
       the Texas Plan Code than in Example 1, even though the Plan Code results are identical 
       to the results in Example 1.  The MLR for each Plan Code is impacted by the results of 
       the other Plan Codes resulting in inconsistent and incorrect income tax allocations even 
       when the Plan Code results are identical in the examples. 
       The Plan Method allocates the same income tax expense and reports the same MLR for 
       the Florida Plan Code as in Examples 1 and 2; allocates the same income tax expense 
       and reports the same MLR for the Ohio Plan Code as in Example 2; and allocates the 
       same income tax expense and reports the same MLR for the Texas Plan Code as in 
       Example 1.  These are correct and appropriate income tax allocations since the Plan 
       Code results have not changed in these examples. 

VII.   Aetna’s Response to Other OIG Findings 
         Dental Claims – The Plan agrees with the Draft Report’s finding of $973,820 and has 
         applied this adjustment into the updated MLR calculation in this response.  The total 
         dental claims applied in the MLR calculation are $14,205,302. 
       Vendor Payments – The Plan agrees with the Draft Report’s finding of $71,669.  
       However, in the revised calculation in Exhibit B of the Draft Report, $71,669 was 
       subtracted twice from the total claims; once in the Medical and Pharmacy Claims (line 
       one) and once in the Finding:  Vendor Payments (line four).  The Plan has applied this 
       amount once to the updated MLR calculation in this response.   
       Pharmacy Claims Paid on Ineligible Members – The Plan agrees with the Draft Report’s 
       finding of $2,180 and has applied this adjustment into the updated MLR calculation at 
       the end of this response.  
       Non‐Covered Benefits – The Plan agrees with the Draft Report that ten elective 
       abortion claims totaling $8,470 should not have been covered and has applied this 
       adjustment into the updated MLR calculation in this response. 

       To ensure accurate handling of potentially elective abortion claims going forward, our 
       claims processing team has taken the following steps: 

           	 Potentially elective abortion claims will be routed to a designated bin for three 
              specialized processors to handle.  These specialized processors will be trained 
              on the handling of these claims. 
           	 ECHS REVIEW –The Electronic Correspondence Handling System will be 
              reviewed each day to intercept any requested Medical Records to send to the 
              specialized processors for submission to Clinical Claim Review (CCR), because 
              potential abortion claims are frequently pended for Medical Records.  
           	 CLINICAL REVIEW & APPROVAL – A specialized Registered Nurse will review the 
              Medical Records to determine if the procedure is elective or therapeutic.  If 

                                                                           Report No. 1C-22-00-14-071
               therapeutic, the abortion‐case will be routed to the Sr. Medical Director, Head 
               of Women’s Health (or designee) for verification of determination.  Final 
               determination will be sent back to designated project managers. 
             DAILY REPORT – A daily report will be pulled before noon each day to identify 
               and review processed abortion claims for accuracy.  
             TRACKING – Each routed abortion claim will be tracked on a spreadsheet 
               through finalization. 
             Two managers will validate that CCR determined the claim to be therapeutic 
            	 As part of the action plan, we are in the process of performing an audit of the 
               abortion claims for the past several years and will continue to do so for future 

VIII.   Conclusion 
        As explained above and demonstrated in the examples provided, the Plan’s income tax 
        allocation method is a GAAM that yields the most accurate result.  That is, the Plan’s 
        method produces consistent results when the Plan Code results are the same, and is not 
        impacted by changes resulting from other activity occurring within the legal entity.  An 
        allocation method that produces a different result when the activity of other business or 
        Plan Codes change cannot be considered a GAAM that yields the most accurate result. 
        The Plan has updated the MLR calculation to account for the applicable adjustments 
        described in this response. These include the adjustments to the dental claims, the 
        vendor payments, the non‐covered benefits, the pharmacy claims, and the Plan’s 
        income tax allocation method. The updated MLR calculation results in the Plan owing 
        the FEHBP $8,239,479 as computed below. 

                                                                           Report No. 1C-22-00-14-071
                                     Revised Penalty Calculation
                                                   Aetna Health Fund
                                                  MLR Questioned Costs

                                                                   Adjusted Per               Per Draft               Per Original
                                                                       Plan                    Report                    Filing
2012 FEHBP MLR Target                                                  89%                      89%                       89% 

Claims Expense 
Medical and Pharmacy Claims                                         $                                                                    
Dental Claims                                                                                                                            
Health Savings Account (HSA) Deposits                                                                                                    
Finding: Vendor Payments                                                                                                                 
Finding: Non‐covered benefits paid by Plan                                                                                               
Finding: Pharmacy Claims paid on termed members                                                                                          
Less: Prescription Drugs ‐ Rebate                                                                            
Allowable Fraud Reduction Expense                                                                                                        
Less: Healthcare Receivables Current Year                                                                                              )
Incurred Claims                                                                                                                          
Expenses to Improve Health Care Quality                                                                                                  
Total Adjusted Incurred Claims                                      $336,032,315             $335,960,646             $337,051,618 

Earned Premium                                                      $409,883,534             $409,883,534             $409,883,534 
Less: Federal and State taxes and Licensing or 
Regulatory Fees6                                                     $19,459,072               $6,226,652              $27,571,630 
Adjusted Premiums                                                   $390,424,462             $403,656,882             $382,311,904 
Less: Defective Pricing Finding (Due OPM)                                     $0                       $0                       $0 
Total Adjusted Premiums less Defective Pricing 
Finding                                                             $390,424,462             $403,656,882             $382,311,904 

Total Adjusted Incurred Claims (MLR Numerator)                      $336,032,315             $335,960,646             $337,051,618 
Total Adjusted Premiums (MLR Denominator)                           $390,424,462             $403,656,882             $382,311,904 
FEHBP MLR Calculation                                                     86.07%                   83.23%                   88.16%
Penalty Calculation                                                  $11,445,456              $23,293,979               $3,205,977 
Penalty Paid                                                          $3,205,977               $3,205,977               $3,205,977 
Net MLR Underpayment Finding (Due OPM)                                  $8,239,479            $20,088,002                          $0 

       Income Tax Expense included in these amounts as follows: 
     Adjusted Per Plan                  Per Draft Report                     Per Original Filing 
        $14,268,997                         $1,036,575                            $22,573,129

                                                                                                    Report No. 1C-22-00-14-071

               Report Fraud, Waste, and 


                        Fraud, waste, and mismanagement in
                     Government concerns everyone: Office of
                         the Inspector General staff, agency
                      employees, and the general public. We
                    actively solicit allegations of any inefficient
                          and wasteful practices, fraud, and
                     mismanagement related to OPM programs
                    and operations. You can report allegations
                                to us in several ways:

     By Internet:        http://www.opm.gov/our-inspector-general/hotline-to-

      By Phone:          Toll Free Number:                  (877) 499-7295
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        By Mail:         Office of the Inspector General
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                         Washington, DC 20415-1100

                                                                           Report No. 1C-22-00-14-071