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)

             OFFICE OF AUDITS

                Final Audit Report


                                            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.

               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

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



          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) 

            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
features of the FEHBP.
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
                SCOPE, ANDTO
                             THIS REPORT
 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.

 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 
 perform the audit to obtain sufficient, appropriate 

 evidence to provide a reasonable basis for our 

 findings and conclusions based on our audit 
 objectives. We believe that the evidence obtained
 provides a reasonable basis for our findings and 
 conclusions based on our audit objectives. 
 This performance audit covered contract years 2012 
 and 2013. For contract years 2012 and 2013, the 
 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;

                                                 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.

       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
                  Medical Claims Sample Selection Criteria/Methodology
 Medical Claims        Universe       Universe       Universe      Sample Criteria        Sample       Projected
  Review Area          Criteria      (Number)        (Dollars)        and Size             Type          to the
                      claims for
Coordination of                                                    selected 20 claims
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
Medical Claims       Universe        Universe   Universe      Sample Criteria        Sample      Projected
Review Area          Criteria       (Number)    (Dollars)        and Size             Type         to the
                     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  
                     Members                                     Selected all
                     included in                               members in the
                     the medical                               universe greater
                     claims data                        N/A    than or equal to     Judgmental      No
Eligibility 2013
                     designated                               age 26, totaling
                     “dependent”                                   members
                     CPT codes
                                                                  Selected all
                                                              unbundled claims
Bundling/            82374,
                                                              from the universe.
Unbundling – Basic   82435,
                                                    $            Total sample       Judgmental      No
Metabolic Panel      82565,
2013                 82947,
                                                                claims, totaling
                     claims                                       Selected all
                     containing                               unbundled claims
                     CPT codes                                from the universe.
Unbundling –
                     80051,                         $            Total sample       Judgmental      No
Electrolyte Panel
                     82374,                                       includes 14
                     82435,                                     claims, totaling
                     84132,                                          $
                     included in
                     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
Medical Claims        Universe          Universe    Universe     Sample Criteria        Sample      Projected
Review Area           Criteria         (Number)     (Dollars)       and Size             Type         to the
                      claims with
Non-Covered           59830,
                                                                 Selected all claims
Benefits (Abortion)   59840,                         $                                    N/A          No
                                                                 from the universe
2013                  59841,
                                                                 Sorted universe by
                                                                   highest amount
                                                                  paid and selected
                                                                   top 15, totaling
Duplicate Review                                                      Randomly         Judgmental
                      claims with
Exact Matches                                       $                selected 15          and          No
                      exact match
2013                                                              additional claims     Random
                                                                      for review,
                                                                   totaling $2,549.
                                                                 Total sample of 30
                                                                   claims, totaling

               Pharmacy Claims Sample Selection Criteria/Methodology

 Pharmacy Claims        Universe                                  Sample Criteria        Sample     Projected
                                         Universe    Universe
   Review Area          Criteria                                     and Size             Type        to the
                                        (Number)     (Dollars)
                                                                  Sorted by highest
                                                                 dollar prescription
High Dollar           claims greater
                                                    $             paid and selected    Judgmental      No
Prescriptions 2013    than or equal
                                                                 the top 10 totaling
                      to $1,000

                                                         6                       Report No. 1C-2U-00-15-030
 Pharmacy Claims         Universe                                    Sample Criteria       Sample      Projected
                                         Universe     Universe
   Review Area           Criteria                                       and Size            Type         to the
                                        (Number)      (Dollars)
                       included in
                       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 
                                                                    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

        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

  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

    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

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

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.


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


         , 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                                    $                        $

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

August 7, 2015

   980 Jolly Road, Blue Bell, PA 19422 

      Executive Director 
      FEHBP Underwriting 
      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 

                                                                              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.  


      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 
          with the Draft Report’s findings on the medical and pharmacy claims not allowed by the 
          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 
          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 
      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 
      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 
          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.  

                                                                              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
                                                                                   FOR FINAL
                                                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                                      $                                                            

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 


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                                                                           Report No. 1C-2U-00-15-030