U.S. OFFICE OF PERSONNEL MANAGEMENT OFFICE OF THE INSPECTOR GENERAL OFFICE OF AUDITS Final Audit Report AUDIT OF THE FEDERAL EMPLOYEES HEALTH BENEFITS PROGRAM OPERATIONS AT AETNA OPEN ACCESS - ATHENS AND ATLANTA Report Number 1C-2U-00-15-030 May 10, 2016 -- 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, 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. EXECUTIVE SUMMARY Audit of the Federal Employees Health Benefits Program Operations at Aetna Open Access - Athens and Atlanta Report No. 1C-2U-00-15-030 May 10, 2016 Why Did We Conduct the Audit? What Did We Find? The primary objective of the audit This report identifies $766,267 in questioned costs to the was to determine if Aetna Open FEHBP. Specifically, the Plan underpaid its MLR penalty for Access – Athens and Atlanta (Plan) contract year 2013. was in compliance with the provisions of its contract and the provisions of In the 2012 and 2013 MLR reviews, we found that the Plan did the laws and regulations governing not use a fair and equitable allocation method to derive the the Federal Employees Health federal income tax expense applied to the FEHBP. In addition, Benefits Program (FEHBP). We the Plan’s 2013 MLR calculation included overstated medical verified whether the Plan met the and pharmacy claims paid on the behalf of ineligible members. Medical Loss Ratio (MLR) As a result, the 2013 FEHBP MLR subsidization penalty requirements established by the U.S. account was underpaid by the Plan in the amount of $766,267. Office of Personnel Management. Although there were also findings related to the 2012 MLR We also verified whether the Plan calculation, these findings did not result in a penalty for this developed the FEHBP premium rates contract year. using complete, accurate and current data. The audit also showed that the rating documentation provided was sufficient to support the 2012 and 2013 FEHBP premium What Did We Audit? rates. Under Contract CS 2836, the Office of the Inspector General performed an audit of the FEHBP operations at the Plan. The audit covered the Plan’s 2012 and 2013 FEHBP premium rate build-ups and MLR submissions. Our audit fieldwork was conducted from June 15, 2015, through June 26, 2015, at the Plan’s office in Blue Bell, Pennsylvania. _______________________ Michael R. Esser Assistant Inspector General for Audits i ABBREVIATIONS ACA Affordable Care Act CFR Code of Federal Regulations FEHBAR Federal Employees Health Benefits Acquisition Regulations FEHBP Federal Employees Health Benefits Program 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 Open Access – Athens and Atlanta SSSG Similarly-Sized Subscriber Group TCR Traditional Community Rating ii IV. MAJOR CONTRIBUTORS TO THIS REPORT TABLE OF CONTENTS Page EXECUTIVE SUMMARY ......................................................................................... i ABBREVIATIONS ..................................................................................................... ii I. BACKGROUND ..........................................................................................................1 II. OBJECTIVES, SCOPE, AND METHODOLOGY ..................................................3 III. AUDIT FINDINGS AND RECOMMENDATIONS.................................................8 1. Medical Loss Ratio Penalty Underpayment ............................................................8 IV. MAJOR CONTRIBUTORS TO THIS REPORT ..................................................12 Exhibit A (Summary of Medical Loss Ratio Penalty Underpayment) Exhibit B (2013 Medical Loss Ratio Penalty Underpayment) Appendix (Aetna’s January 15, 2016 response to the draft report) REPORT FRAUD, WASTE, AND MISMANAGEMENT IV. MAJOR CONTRIBUTORS I. BACKGROUND TO THIS REPORT This final report details the audit results of the Federal Employees Health Benefits Program (FEHBP) operations at Aetna Open Access – Athens and Atlanta (Plan). The audit was conducted pursuant to the provisions of Contract CS 2836; 5 United States Code Chapter 89; and 5 Code of Federal Regulations (CFR) Chapter 1, Part 890. The audit covered contract years 2012 and 2013, 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 5 CFR Chapter 1, Part 890. 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 MLR is important because it requires health insurers to provide consumers with value for their premium payments by limiting the percentage of premium dollars that can be spent on administrative expenses and profit. For example, an MLR threshold of 85 percent requires carriers to spend 85 cents of every premium dollar on claims and limits the amount that can be spent on administrative expenses and profit to 15 cents of every dollar. 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, however, the MLR methodology was 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. This FEHBP-specific MLR calculation required carriers to report information related to earned premiums and expenditures in various 1 Report No. 1C-2U-00-15-030 categories, including reimbursement for clinical services provided to enrollees, activities that improve health care quality, and all other non-claims costs. 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 3,803 contracts and 8,220 members as of March 31, 2012, and 3,010 contracts and 6,226 members as of March 31, 2013, as shown in the chart below. In contracting with community-rated FEHBP Contracts/Members carriers, OPM relies on carrier compliance March 31 with appropriate laws and regulations and, consequently, does not negotiate base 9,000 rates. OPM negotiations relate primarily 8,000 to the level of coverage and other unique 7,000 6,000 features of the FEHBP. 5,000 4,000 The Plan has participated in the FEHBP 3,000 since 1983 and provides health benefits to 2,000 FEHBP members in Athens, Georgia and 1,000 Atlanta, Georgia. A prior audit of the Plan 0 2012 2013 covered contract year 2011. There were Contracts 3,803 3,010 no findings or questioned costs identified. Members 8,220 6,226 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 an Appendix to the report. 2 Report No. 1C-2U-00-15-030 II. IV. OBJECTIVES, MAJOR CONTRIBUTORS SCOPE, ANDTO METHODOLOGY THIS REPORT Objectives 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 also performed to determine whether the Plan was in compliance with the provisions of other applicable laws and regulations. Scope We conducted this performance audit in accordance with generally accepted government auditing FEHBP Premiums Paid to the standards. Those standards require that we plan and Plan perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit $54 objectives. We believe that the evidence obtained $52 $50 Million provides a reasonable basis for our findings and $48 conclusions based on our audit objectives. $46 $44 This performance audit covered contract years 2012 $42 $40 and 2013. For contract years 2012 and 2013, the Revenue FEHBP paid approximately $51.8 million and $46.4 2012 $51.8 million in premiums to the Plan, respectively. 2013 $46.4 The Office of the Inspector General’s (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 were developed in accordance with the Plan’s standard rating methodology and the claims, factors, trends, and other related adjustments were supported by complete, accurate, and current source documentation; and 3 Report No. 1C-2U-00-15-030 The FEHBP MLR calculations were accurate, complete, and valid; claims were processed accurately; appropriate allocation methods were used; and, that any other costs associated with its MLR calculation were 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 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 June 15, 2015, through June 26, 2015, at the Plan’s office in Blue Bell, Pennsylvania. Methodology We examined the Plan’s MLR calculations 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 calculations. 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 calculations. 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 objectives. The tests performed, along with the methodology, are detailed below by Medical and Pharmacy claims: Medical Claims Sample Selection Criteria/Methodology Results Medical Claims Universe Universe Universe Sample Criteria Sample Projected Review Area Criteria (Number) (Dollars) and Size Type to the Universe? Medical Judgmentally claims for Coordination of selected 20 claims members Benefits (COB) $ greater than or Judgmental No greater than Medicare 2013 equal to $15,000 or equal to totaling $871,258 age 65. 4 Report No. 1C-2U-00-15-030 Results Medical Claims Universe Universe Universe Sample Criteria Sample Projected Review Area Criteria (Number) (Dollars) and Size Type to the Universe? Members Randomly with medical selected a sample Member claims $ of 25 members Random No Eligibility 2013 greater than from the universe, or equal to totaling $607,553 $10,000 Members Selected all included in members in the the medical universe greater Dependent claims data N/A than or equal to Judgmental No Eligibility 2013 designated age 26, totaling “dependent” members Medical claims containing CPT codes Selected all 82330, unbundled claims Bundling/ 82374, from the universe. Unbundling – Basic 82435, $ Total sample Judgmental No Metabolic Panel 82565, includes 2013 82947, claims, totaling 84132, $ 84295, 84520, 80047, 80048 Medical claims Selected all containing unbundled claims Bundling/ CPT codes from the universe. Unbundling – 80051, $ Total sample Judgmental No Electrolyte Panel 82374, includes 14 2013 82435, claims, totaling 84132, $ 84295 Members included in Randomly the medical Deceased Members selected a sample claims data, N/A Random No 2013 of 20 members greater than from the universe or equal to age 78 5 Report No. 1C-2U-00-15-030 Results Medical Claims Universe Universe Universe Sample Criteria Sample Projected Review Area Criteria (Number) (Dollars) and Size Type to the Universe? Medical claims with procedure codes 59812, 59820, 59821, Non-Covered 59830, Selected all claims Benefits (Abortion) 59840, $ N/A No from the universe 2013 59841, 59850, 59851, 59852, 59855, 59856, 59857, 59866 Sorted universe by highest amount paid and selected top 15, totaling $21,082. Medical Duplicate Review Randomly Judgmental claims with Exact Matches $ selected 15 and No exact match 2013 additional claims Random duplicates for review, totaling $2,549. Total sample of 30 claims, totaling $23,631 Pharmacy Claims Sample Selection Criteria/Methodology Results Pharmacy Claims Universe Sample Criteria Sample Projected Universe Universe Review Area Criteria and Size Type to the (Number) (Dollars) Universe? Sorted by highest Pharmacy dollar prescription High Dollar claims greater $ paid and selected Judgmental No Prescriptions 2013 than or equal the top 10 totaling to $1,000 $343,085 6 Report No. 1C-2U-00-15-030 Results Pharmacy Claims Universe Sample Criteria Sample Projected Universe Universe Review Area Criteria and Size Type to the (Number) (Dollars) Universe? Members included in Randomly the pharmacy Deceased Members selected a sample claims data, N/A Random No 2013 of 20 members greater than from the universe or equal to age 78 Members Randomly with selected a sample Member pharmacy $ of 25 members Random No Eligibility 2013 claims greater from the universe, than or equal totaling $209,364 to $5,000 Members Selected all included in members in the Dependent the pharmacy universe greater N/A Judgmental No Eligibility 2013 claims data than or equal to designated age 26, totaling 15 “dependent” members We also examined the rate build-up of the Plan’s 2012 and 2013 Federal rate submissions 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. 7 Report No. 1C-2U-00-15-030 III. AUDIT FINDINGS AND RECOMMENDATIONS 1. Medical Loss Ratio Penalty Underpayment $766,267 Aetna Open Access - Athens and Atlanta (Plan) elected to participate in the 2012 Medical Loss Ratio (MLR) pilot program offered to certain Federal Employees Health Benefits Program (FEHBP) carriers. The MLR pilot program replaced Similarly-Sized Subscriber Group requirements with an MLR threshold. Simply stated, the MLR is the ratio of FEHBP incurred claims (including expenses for health care quality improvement) to total premium revenue determined by the U.S. Office of Personnel Management (OPM). For contract year 2012, the OPM-established MLR threshold for MLR pilot program carriers was 89 percent. Therefore, 89 cents of every health care premium dollar must have been spent on health care expenses. If the MLR was less than 89 percent, a carrier will owe a subsidization penalty equal to the difference between the threshold and the carrier’s actual MLR. For contract year 2013, OPM changed the MLR threshold to 85 percent and created an MLR corridor. If carriers met the MLR threshold, no penalty is due. If the MLR was over 89 percent, the carrier receives a credit equal to the difference between the carrier’s reported MLR and 89 percent, multiplied by the denominator of the MLR. This credit can be used to offset any future MLR penalty and is available until it is used up by the Plan or the Plan exits the FEHBP. The Plan calculated an MLR of percent for contract year 2012, and percent for contract year 2013. However, during our review of the Plan’s MLR submissions, we found the following issues. Tax Allocation Pursuant to the provision of U.S. Department of Health and Human Services (HHS) 45 Code of Federal Regulations (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 8 Report No. 1C-2U-00-15-030 it was its own entity. The result was a Federal Income tax allocation of $ and $ to the FEHBP for contract years 2012 and 2013, respectively. 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. A more appropriate method, which the Plan used for several other expenses in its MLR calculation, is the premium ratio allocation method. This method yields a more accurate result and is supportable. 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 $ and $ , for contract years 2012 and 2013, respectively. As a result, we reduced the premium in our audited MLR calculations by $ in 2012 and $ in 2013. Plan Response: The Plan disagrees with the OIG’s Federal income tax allocation in the 2012 and 2013 MLR calculations. The Plan contends that their methodology of calculating the FEHBP net income and applying the applicable tax rate 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 the tax expense. Additionally, the Plan maintains that its income tax allocation method for the FEHBP conforms to generally accepted accounting principles. Finally, it asserts that the method used for its FEHBP Federal income tax allocation is the same method used for its HHS MLR filing. OIG Comment: 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 9 Report No. 1C-2U-00-15-030 MLR pools. To determine each pool’s 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 the amount by a 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. The Plan’s removal of expenses in the FEHBP net income calculation also 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. Consequently, it is our position that 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 allocation 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 $ and $ , for contract years 2012 and 2013, respectively. As stated above, we reduced the premium in our audited MLR calculations by $ in 2012 and $ in 2013. MLR Claims Data During our review of the Plan’s MLR submission for contract year 2013, we determined that the incurred claims amount included in the Plan’s MLR calculation was incorrect. Specifically, the Plan included medical and pharmacy claim amounts not allowed by the FEHBP. Per the FEHBP certificate of coverage, dependent coverage ends once the dependent turns 26 years of age. We identified four ineligible members who exceeded the dependent age limit in 10 Report No. 1C-2U-00-15-030 the 2013 claims data. Fifty-five medical claims, totaling $ , were incorrectly paid on behalf of the four ineligible members. Additionally, two pharmacy claims, totaling $ , were incorrectly paid on behalf of two of the four ineligible members. As a result, we removed $ from the 2013 incurred claims total used in the numerator of the audited MLR calculation. Plan Response: The Plan agrees with the MLR claims findings and has updated their calculation of the 2013 OPM MLR rebate accordingly. Conclusion We recalculated the Plan’s 2012 and 2013 MLR submission with the adjusted federal income tax expense, allocated on a premium ratio basis. Additionally, we removed the incorrectly paid dependent eligibility claims from the numerator of the 2013 MLR calculation. The audited MLR calculation for contract year 2012 resulted in no underpayment of the MLR subsidization penalty. However, the audited MLR calculation for contract year 2013 resulted in an MLR subsidization penalty underpayment of $766,267. (See Exhibit B) Recommendation 1 We recommend that the contracting officer require the Plan to return $766,267 to the MLR subsidization penalty account for contract year 2013. 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. 11 Report No. 1C-2U-00-15-030 IV. MAJOR CONTRIBUTORS TO THIS REPORT COMMUNITY-RATED AUDITS GROUP , Auditor-in-Charge , Senior Team Leader , Group Chief 12 Report No. 1C-2U-00-15-030 EXHIBIT A Aetna Open Access - Athens and Atlanta Summary of Medical Loss Ratio Penalty Underpayment Contract Year 2013 Medical Loss Ratio Penalty $766,267 Total Penalty Due OPM $766,267 Report No. 1C-2U-00-15-030 EXHIBIT B Aetna Open Access - Athens and Atlanta 2013 Medical Loss Ratio Penalty Underpayment Plan Audited 2013 FEHBP MLR Lower Threshold (a) 85% 85% 2013 FEHBP MLR Upper Threshold (b) 89% 89% Claims Expense Incurred Claims (Medical and Pharmacy) $ $ Capitation $ $ Dental Rider $ $ Less: Incorrectly Paid Dependent Eligibility Claims ($ ) Less: Prescription Drug Rebate ($ ) ($ ) Less: Vendor Payments ($ ) ($ ) Less: Pharmacy Claims Adjustments and Subrogation ($ ) ($ ) Adjusted Incurred Claims $ $ Paid Medical Incentive Pools and Bonuses $ $ Less: Healthcare Receivables ($ ) ($ ) Expenses to Improve Health Care Quality $ $ Total Adjusted Incurred Claims $ $ Premiums Premium Income $46,433,295 $46,433,295 Less: Federal and State Taxes and Licensing or Regulatory Fees ($ ) ($ ) Adjusted Premium $ $ Less: Defective Pricing Finding (Due OPM) $ Total Adjusted Premium (c) $ $ Total Adjusted Incurred Claims (MLR Numerator) $ $ Total Adjusted Premium less Defective Pricing (MLR Denominator) $ $ FEHBP MLR Calculation (d) % % Penalty Calculation (If (d) is less than (a), ((a-d)*c) $ $ Credit Calculation (If (d) is greater than (b), ((d-b)*c) $ $ Total Penalty Due OPM $766,267 Report No. 1C-2U-00-15-030 APPENDIX August 7, 2015 980 Jolly Road, Blue Bell, PA 19422 Executive Director FEHBP Underwriting Tel: Email: @aetna.com January 15, 2016 Chief, Community‐Rated Audits Group U.S. Office of Personnel Management Office of the Inspector General 1900 E Street NW, Room 6400 Washington, DC 20415 Re: Audit of Aetna Open Access ‐ Athens and Atlanta Contract Number CS 2836 – Plan Code 2U Report No. 1C‐2U‐00‐15‐030 Dear : Thank you for the opportunity to respond to the draft audit report dated November 19, 2015. After careful review of the draft report, we agree with the draft report’s findings on the medical and pharmacy claims not allowed by the FEHBP under the MLR Claims Data section of the report. However, we respectfully disagree with the OIG’s findings that the Aetna Open Access’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 and 2013 Minimum Loss Ratio. We believe that Aetna Open Access’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. DELETED BY OIG – NOT RELEVANT FOR FINAL REPORT Report No. 1C-2U-00-15-030 Please see the attached analysis in support of Aetna Open Access’s position. If you have any questions as you review our response, please contact me. Sincerely, Executive Director cc: Alan Spielman Assistant Director for Federal Employees Insurance Operations, OPM Lloyd Williams Deputy Assistant Director for Federal Employees Insurance Operations, OPM Chief, Health Insurance Group III, OPM Actuaries group, OPM Chief, Audit Resolution, OPM President, Federal Plans, Aetna Report No. 1C-2U-00-15-030 Response to Draft Report dated November 19, 2015 Audit of Aetna Open Access – Athens and Atlanta Blue Bell, Pennsylvania Report No. 1C‐2U‐00‐15‐030 Report No. 1C-2U-00-15-030 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 Open Access – Athens and Atlanta Plan Code 2U, (hereinafter, the “Plan”) for the contract years 2012 and 2013 Medical Loss Ratio (“MLR”) program. The Draft Report found that the Plan underpaid its 2013 MLR subsidization penalty DELETED BY OIG – NOT RELEVANT FOR FINAL REPORT. The Plan agrees with the Draft Report’s findings on the medical and pharmacy claims not allowed by the FEHBP. DELETED BY OIG – NOT RELEVANT FOR FINAL REPORT The Plan also respectfully disagrees with the finding pertaining to the tax allocation methodology. Specifically, the Plan disagrees with the 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 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 policyholders. 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. Report No. 1C-2U-00-15-030 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. 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 Open Access‐Athens and Atlanta 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 form. For the FEHBP MLR filing, the “reporting unit” is the Plan Code that is included in the FEHBP MLR filing form. 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 the Plan 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 the Plan’s HHS MLR reporting and Report No. 1C-2U-00-15-030 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 include more than one legal entity. Therefore, the Plan 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 the Plan’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 for contract year 2013 DELETED BY OIG – NOT RELEVANT FOR FINAL REPORT. 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. DELETED BY OIG – NOT RELEVANT FOR FINAL REPORT 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. Aetna Open Access 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. Report No. 1C-2U-00-15-030 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. b. Aetna Open Access 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 entity since expenses are not tracked at the group level and the method is not related to actual expenses incurred. A more appropriate method, which the Plan used for several other expenses in its MLR calculation, is the premium ratio allocation 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. 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: Aetna Open Access 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. The Plan 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 Report No. 1C-2U-00-15-030 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. Please reference the examples in the Plan’s response to the Draft Report of Aetna HealthFund, Report No. 1C‐22‐00‐14‐071. Example 1 in this report illustrates how two hypothetical plan codes (Ohio and Texas) 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. Aetna Open Access 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. 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. 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. Please reference the examples in the Plan’s response to the Draft Report of Aetna HealthFund, Report No. 1C‐22‐00‐14‐071, which 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. Aetna’s Response to Other OIG Findings DELETED BY OIG – NOT RELEVANT FOR FINAL REPORT Medical and Pharmacy Claims Paid on Ineligible Members – The Plan agrees with the Draft Report’s finding of $ and has applied this adjustment to the updated MLR calculation at the end of this response. DELETED BY OIG – NOT RELEVANT FOR FINAL REPORT Report No. 1C-2U-00-15-030 VII. Conclusion As explained above and demonstrated in the examples referenced, 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 all adjustments made during the onsite portion of the audit and to remove the $ in medical and pharmacy claims paid on ineligible members. The updated MLR calculation results in the Plan meeting the 85.0% MLR threshold, and thus no penalty is owed to the FEHBP for 2013. Report No. 1C-2U-00-15-030 Revised Penalty Calculation Aetna Open Access Georgia MLR Questioned Costs Contract year 2013 DELETED BY OIG – NOT RELEVANT FOR FINAL REPORT Plan ‐ Draft Report Plan ‐ Contract Year 2013 Response Original Target MLR Ratio 85.00% 85.00% $ Adjusted Incurred Claims $ Quality Health Improvement Expenses $ $ $ MLR Numerator $ $46,433,29 Premium Income $46,433,295 5 Federal and State Taxes and Licensing or Regulatory Fees $ $ Less: RBA Finding(s) $ $ $ MLR Denominator $ FEHBP MLR Calculation % % Penalty Due to OPM $ $ Total Questioned Cost $0 $0 Report No. 1C-2U-00-15-030 Report Fraud, Waste, and Mismanagement 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- report-fraud-waste-or-abuse By Phone: Toll Free Number: (877) 499-7295 Washington Metro Area: (202) 606-2423 By Mail: Office of the Inspector General U.S. Office of Personnel Management 1900 E Street, NW Room 6400 Washington, DC 20415-1100 Report No. 1C-2U-00-15-030
Audit of the Federal Employees Health Benefits Program Operations at Aetna Open Access - Athens and Atlanta
Published by the Office of Personnel Management, Office of Inspector General on 2016-05-10.
Below is a raw (and likely hideous) rendition of the original report. (PDF)