Audit of the Federal Employees Health Benefits Program Operations at Coventry Health Care of Kansas, Inc.

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-HA-00-15-033
                                                    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
                               Coventry Health Care of Kansas, Inc. 

Report No. 1C-HA-00-15-033                                                                          May 10, 2016

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

The primary objective of the audit      This report identifies $121,675 in questioned costs to the FEHBP.
was to determine if Coventry Health     Specifically, the Plan underpaid its MLR penalty for contract year
Care of Kansas (Plan) was in            2013.
compliance with the provisions of its
contract and the provisions of the      In the 2012 and 2013 MLR reviews, we found that the Plan did
laws and regulations governing the      not use a fair and equitable allocation method to derive the federal
Federal Employees Health Benefits       income tax expense applied to the FEHBP. In addition, the Plan’s
Program (FEHBP). We verified            2013 MLR claims data was inaccurately submitted to OPM and
whether the Plan met the Medical        contained claims paid on annuitants that should have been
Loss Ratio (MLR) requirements           coordinated with Medicare. As a result, the 2013 FEHBP MLR
established by the U.S. Office of       subsidization penalty account was underpaid by the Plan in the
Personnel Management (OPM). We          amount of $121,675. Although there were also findings related to
also verified whether the Plan          the 2012 MLR calculation, these findings did not result in a
developed the FEHBP premium rates       penalty for this 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
What Did We Audit?                      FEHBP premium rates

Under Contract CS 1948, 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     Coventry Health Care of Kansas, Inc.
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.................................................6

          1. Medical Loss Ratio Penalty Underpayment ............................................................6 

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

          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 Coventry Health Care of Kansas, Inc. (Plan). The audit was conducted
pursuant to the provisions of Contract CS 1948; 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-HA-00-15-033
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 3,815 contracts and 8,054 members as of March 31, 2012, and 3,491 contracts
and 7,326 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 2005 and provides health benefits to             2,000
FEHBP members in the Kansas City                       1,000
Metropolitan Area (Kansas and Missouri).                   0
                                                                  2012           2013
A prior audit of the Plan covered contract           Contracts    3,815          3,491
years 2009 and 2010. All findings related            Members      8,054          7,326
to that audit were resolved.

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-HA-00-15-033
                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 $38.5 million and $37 
                  2012         $38.5
 million in premiums to the Plan, respectively.
                   2013         $37.0

 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-HA-00-15-033
              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:

                  Medical Claims Sample Selection Criteria/Methodology
                   Universe      Universe        Universe     Sample Criteria and         Sample       Projected
Claims Review
                   Criteria     (Number)         (Dollars)           Size                  Type          to the
                                                                Selected all medical
                                                               claims greater than or
Coordination of   Medical
                                                                equal to $        for
Benefits (COB)    claims for                 $                                          Judgmental           No
                                                                 members age 65 or
Medicare 2012     contract
                                                               older, resulting in 15
                  year 2012
                                                             claims totaling $

                                                         4                         Report No. 1C-HA-00-15-033
                  Universe      Universe        Universe      Sample Criteria and        Sample        Projected
Claims Review
                  Criteria     (Number)         (Dollars)            Size                 Type           to the
                                                                Selected all medical
                                                               claims greater than or
Coordination of   Medical
                                                                equal to $         for
Benefits (COB)    claims for                $                                            Judgmental       No 
                                                                 members age 65 or
Medicare 2013     contract
                                                               older, resulting in 18
                  year 2013 
                                                             claims totaling $          
                                                                 Selected all claims
                                                              greater than or equal to
                  All                                             $          plus 33
                  Medical                                     random claims selected
System                                                                                   Judgmental
                  claims for                $                   by paid group dollar
Discount                                                                                    and           No
                  contract                                       strata and place of
Review 2012                                                                               Random
                  year 2012                                   service, resulting in 50
                                                                    claims totaling
                                                                 Selected all claims
                                                              greater than or equal to
                  All                                             $100,000 plus 28
                  Medical                                     random claims selected Judgmental
                  claims for                $                   by paid group dollar        and           No
                  contract                                       strata and place of      Random
Review 2013
                  year 2013                                   service, resulting in 50
                                                                    claims totaling

       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.

                                                        5                         Report No. 1C-HA-00-15-033

  1. Medical Loss Ratio Penalty Underpayment                                              $121,675

    Coventry Health Care of Kansas, Inc. (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 MLR filing, of which the FEHBP is included. However, for Federal
    income taxes, the Plan attempted to calculate the gain or loss on the FEHBP as if it was its

                                              6                             Report No. 1C-HA-00-15-033
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 calculations, 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 $           and $        .

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

                                             7                           Report No. 1C-HA-00-15-033
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 $            and $

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 MLR calculations was incorrect for pharmacy
claims, capitation, dental claims, and pharmacy rebates. The Plan provided updated,
corrected claims figures for each of these categories which were used in the audited review
of the Plan’s MLR calculation.

                                            8                          Report No. 1C-HA-00-15-033
In addition, we reviewed 50 system medical claims for the 2013 contract year and
determined that 2 of these claims were incorrectly coordinated with Medicare, resulting in an
overpayment of $          . As a result, we removed $         from the incurred claims in our
audited MLR calculation.

We updated our audited MLR calculation to reflect the corrected 2013 pharmacy claims,
capitation amounts, dental claims and pharmacy rebates, as well as the removal of the two
claims that were not coordinated with Medicare. As a result, the numerator of the audited
2013 MLR calculation was reduced by $            .

Plan Response:

The Plan agrees with the MLR claims findings related to the incorrectly coordinated
Medicare claims and has updated their calculation of the 2013 OPM MLR rebate


We recalculated the Plan’s 2012 and 2013 MLR submissions with the adjusted federal
income tax expense, allocated on a premium ratio basis. Additionally, we updated our
audited MLR calculations to reflect the corrected 2013 pharmacy claims, capitation amounts,
dental claims and pharmacy rebates, as well as the removal of the two claims that were not
coordinated with Medicare. 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 computation
of $121,675 (see Exhibit B).

Recommendation 1

We recommend that the contracting officer require the Plan to return $121,675 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 properly coordinate the payment of claims with Medicare.

                                            9                         Report No. 1C-HA-00-15-033
Recommendation 3

We recommend that the contracting officer require the Plan to submit accurate and valid
claims data per the criteria issued yearly in the FEHBP Program Carrier Letter entitled
Claims Data Requirements for Non-Traditional Community-Rated Carriers.

                                           10                        Report No. 1C-HA-00-15-033


        , Auditor-in-Charge

         , Senior Team Leader

              , Group Chief

                                11   Report No. 1C-HA-00-15-033
                            EXHIBIT A

            Coventry Health Care of Kansas, Inc. 

      Summary of Medical Loss Ratio Penalty Underpayment 

    Contract Year 2013

    Medical Loss Ratio Penalty                  $121,675

    Total Penalty Due OPM                       $121,675

                                                   Report No. 1C-HA-00-15-033

                                          EXHIBIT B

                           Coventry Health Care of Kansas, Inc. 

                      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
Adjusted Incurred Claims                                          $                $
Expenses to Improve Health Care Quality                                                    $
Total Adjusted Incurred Claims                                    $                $

Premium Income                                                    $37,467,061      $37,467,061
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                                                                  $121,675

                                                                       Report No. 1C-HA-00-15-033

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 Coventry Health Care of Kansas, Inc 
                                  Contract Number CS 1948 – Plan Code HA & 9H 
                                  Report No. 1C‐HA‐00‐15‐033 
       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 
       claims that were paid incorrectly due to coordination with Medicare under the MLR Claims Data 
       section of the report.  However, we respectfully disagree with the OIG’s findings that the 
       Coventry Health Care of Kansas, Inc’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 Coventry Health Care of Kansas, Inc’s calculation of 
       federal income taxes was consistent with the standard required in the MLR regulations and 
       accordingly the subsidization penalty in the draft report is overstated.  
       Please see the attached analysis in support of Coventry Health Care of Kansas, Inc’s position.  If 
       you have any questions as you review our response, please contact me. 

                                                                             Report No. 1C-HA-00-15-033


      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-HA-00-15-033
Response to Draft Report dated November 19, 2015
   Audit of Coventry Health Care of Kansas, Inc.
              Blue Bell, Pennsylvania
           Report No. 1C‐HA‐00‐15‐033

                                     Report No. 1C-HA-00-15-033
I.    Introduction/Executive Summary 
      Coventry Health Care of Kansas 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 Coventry 
      Health Care of Kansas, Inc. Plan Code HA & 9H, (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 DELETED
      BY OIG – NOT RELEVANT FOR FINAL REPORT The Plan agrees with the Draft 
      Report’s findings on the medical claims that were paid incorrectly due to coordination 
      with Medicare. 
      The Plan respectfully disagrees with the finding pertaining to the tax allocation 
      methodology. Specifically, the Plan disagrees with OIG’s use of the premium ratio 
      allocation method to determine the FEHBP’s portion of federal income tax. The federal 
      MLR regulations at 45 C.F.R. §158.170 require that the tax allocation method be based 
      upon a generally accepted accounting method (“GAAM”) that is expected to yield the 
      most accurate results. The Plan believes its calculation is correct and meets the 
      standards set under a GAAM and therefore satisfies the requirements of 45 C.F.R. § 
      158.170. In this response, the Plan demonstrates through a detailed explanation that 
      the method the Plan used to allocate Federal income tax provides the most accurate 
      results, and is consistent with the method used to calculate the Department of Health 
      and Human Services (“HHS”) MLR filings.  

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

                                                                         Report No. 1C-HA-00-15-033
           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.        Coventry Health Care of Kansas, Inc. 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/Coventry 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 Coventry Health Care of Kansas, Inc. 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 Coventry’s 
           HHS MLR reporting and FEHBP MLR reporting is that the HHS form includes all the MLR 

                                                                              Report No. 1C-HA-00-15-033
      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, 
      Aetna/Coventry allocates general and administrative expenses along with the Plan 
      Code’s premiums and incurred claims in order to determine the net income or loss 
      from the Plan Code.  The final step is the allocation of income tax expense or refund to 
      the Plan Code using the tax rate applicable to the net income or loss in 
      Aetna/Coventry’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.	 Coventry Health Care of Kansas, Inc. FEHBP Tax Allocation not 
      proportionate, appropriate or a GAAM 
      The Draft Report states, “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.”   
      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.   

                                                                         Report No. 1C-HA-00-15-033
    This allocation method is consistent with the HHS MLR tax allocations that allocate a 
    proportionate income tax refund to MLR Pools reporting net losses and income tax 
    expense to MLR Pools reporting net income.  
    The Plan’s income tax allocation method is a GAAM and conforms with GAAP and SAP 
    accounting principles that produce income tax expense for reporting units with net 
    income and income tax refund for reporting units with net losses. 

b. Coventry Health Care of Kansas, Inc. 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: 
                              Coventry Health Care of Kansas, Inc 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 

                                                                            Report No. 1C-HA-00-15-033
      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. 
      Coventry Health Care of Kansas, Inc. does not allocate income tax expense or refund on 
      the HHS MLR filings using a premium ratio used for non‐income taxes because a 
      premium ratio would not be a GAAM that yields the most accurate result.  The same 
      method is necessary for the FEHBP MLR filing; the income tax allocation method must 
      be different from the allocation method for non‐income tax and other non‐tax 
      expenses in order to be a GAAM.  If a premium ratio is used to allocate income tax, the 
      same amount of income tax would be allocated to two Plan Codes with the same 
      premium income even though one incurred significantly higher claims.  Please 
      reference the examples in the Plan’s response to Draft Report of Aetna HealthFund, 
      Report No. 1C‐22‐00‐14‐071. Example 1 in the 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.	 Coventry Health Care of Kansas, Inc.  Income Tax Allocation 
      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. 


                                                                         Report No. 1C-HA-00-15-033
VI.	 Coventry Health Care of Kansas, Inc. Response to Other OIG 
            Medical Claims Paid Incorrectly Based on Coordination with Medicare – The Plan 
            agrees with the Draft Report’s finding of $        and has applied this adjustment into 
            the updated MLR calculation at the end of this response.  
            The Plan is currently researching Recommendation 4 and will schedule time with OIG to 
            discuss the next steps once more information is available.  

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 claims incorrectly 
        paid due to coordination with Medicare. The updated MLR calculation results in the Plan 
        meeting the 85% MLR threshold for 2013 and thus no penalty is owed to the FEHBP. 

                                                                             Report No. 1C-HA-00-15-033
                                                     Revised	Penalty

                                                 Coventry Health Care of Kansas,
                                                     MLR Questioned Costs
                                                      Contract year 2013 
                                                                                      BY OIG –
                                                                                      FOR FINAL
Contract Year 2013                                Plan ‐ Draft Report Response                                Plan ‐ Original 

Target MLR Ratio                                                   85%                                                 85% 

Adjusted Incurred Claims                                   $                                                   $                       
Quality Health Improvement Expenses                            $                                                   $           
MLR Numerator                                              $                                                   $                       

Premium Income                                             $37,467,061                                         $37,467,061 
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-HA-00-15-033

               Report Fraud, Waste, and 


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

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

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                                                                       Report No. 1C-HA-00-15-033