U.S. OFFICE OF PERSONNEL MANAGEMENT
OFFICE OF THE INSPECTOR GENERAL
OFFICE OF AUDITS
Final Audit Report
AUDIT OF THE FEDERAL EMPLOYEES HEALTH
BENEFITS PROGRAM OPERATIONS AT
COVENTRY HEALTH CARE OF KANSAS, INC.
Report Number 1C-HA-00-15-033
May 10, 2016
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This audit report has been distributed to Federal officials who are responsible for the administration of the audited program. This audit report may
contain proprietary data which is protected by Federal Law (18 U.S.C. 1905). Therefore, while this audit report is available under the Freedom of
Information Act and made available to the public on the OIG webpage, caution needs to be exercised before releasing the report to the general public
as it may contain proprietary information that was redacted from the publicly distributed copy.
EXECUTIVE SUMMARY
Audit of the Federal Employees Health Benefits Program Operations at
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
i
ABBREVIATIONS
ACA Affordable Care Act
CFR Code of Federal Regulations
FEHBAR Federal Employees Health Benefits Acquisition Regulations
FEHBP Federal Employees Health Benefits Program
HHS U.S. Department of Health and Human Services
MLR Medical Loss Ratio
OIG Office of the Inspector General
OPM U.S. Office of Personnel Management
Plan Coventry Health Care of Kansas, Inc.
SSSG Similarly-Sized Subscriber Group
TCR Traditional Community Rating
ii
IV. MAJOR CONTRIBUTORS TO THIS REPORT
TABLE OF CONTENTS
Page
EXECUTIVE SUMMARY ......................................................................................... i
ABBREVIATIONS ..................................................................................................... ii
I. BACKGROUND ..........................................................................................................1
II. OBJECTIVES, SCOPE, AND METHODOLOGY ..................................................3
III. AUDIT FINDINGS AND RECOMMENDATIONS.................................................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)
REPORT FRAUD, WASTE, AND MISMANAGEMENT
IV. MAJOR CONTRIBUTORS
I. BACKGROUND
TO THIS REPORT
This final report details the audit results of the Federal Employees Health Benefits Program
(FEHBP) operations at 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
6,000
features of the FEHBP.
5,000
4,000
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
II.
IV. OBJECTIVES,
MAJOR CONTRIBUTORS
SCOPE, ANDTO
METHODOLOGY
THIS REPORT
Objectives
The primary objective of this performance audit was to determine whether the Plan was in
compliance with the provisions of its contract and the laws and regulations governing the
FEHBP. Specifically, we verified whether the Plan met the MLR requirements established by
OPM and paid the correct amount to the Subsidization Penalty Account, if applicable.
Additional tests were also performed to determine whether the Plan was in compliance with the
provisions of other applicable laws and regulations.
Scope
We conducted this performance audit in accordance
with generally accepted government auditing
FEHBP Premiums Paid to the
standards. Those standards require that we plan and
Plan
perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our
$39
findings and conclusions based on our audit
$38
objectives. We believe that the evidence obtained
$37
$36
Million
provides a reasonable basis for our findings and
$35
conclusions based on our audit objectives.
$34
$33
$32
This performance audit covered contract years 2012
$31
$30
and 2013. For contract years 2012 and 2013, the
Revenue
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;
and
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.
Methodology
We examined the Plan’s MLR calculations and related documents as a basis for validating the
MLR. Further, we examined claim payments and quality health expenses to verify that the cost
data used to develop the MLR was accurate, complete, and valid. We also examined the
methodology used by the Plan in determining the premium in the MLR calculations. Finally, we
used the contract, the Federal Employees Health Benefits Acquisition Regulations (FEHBAR),
and the rate instructions to determine the propriety of the Plan’s MLR calculations.
To gain an understanding of the internal controls in the Plan’s claims processing system, we
reviewed the Plan’s claims processing policies and procedures and interviewed appropriate Plan
officials regarding the controls in place to ensure that claims were processed accurately. Other
auditing procedures were performed as necessary to meet our audit objectives.
The tests performed, along with the methodology, are detailed below:
Medical Claims Sample Selection Criteria/Methodology
Results
Medical
Universe Universe Universe Sample Criteria and Sample Projected
Claims Review
Criteria (Number) (Dollars) Size Type to the
Area
Universe?
Selected all medical
All
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
Results
Medical
Universe Universe Universe Sample Criteria and Sample Projected
Claims Review
Criteria (Number) (Dollars) Size Type to the
Area
Universe?
Selected all medical
All
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
System
claims for $ by paid group dollar and No
Discount
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
system.
In addition, we examined the Plan’s financial information and evaluated the Plan’s financial
condition and ability to continue operations as a viable ongoing business concern.
5 Report No. 1C-HA-00-15-033
III. AUDIT FINDINGS AND RECOMMENDATIONS
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
MLR.
For contract year 2013, OPM changed the MLR threshold to 85 percent and created an MLR
corridor. If carriers met the MLR threshold, no penalty is due. If the MLR was over 89
percent, the carrier receives a credit equal to the difference between the carrier’s reported
MLR and 89 percent, multiplied by the denominator of the MLR. This credit can be used to
offset any future MLR penalty and is available until it is used up by the Plan or the Plan exits
the FEHBP.
The Plan calculated an MLR of percent for contract year 2012, and percent for
contract year 2013. However, during our review of the Plan’s MLR submissions, we found
the following issues.
Tax Allocation
Pursuant to the provision of U.S. Department of Health and Human Services (HHS) 45 Code
of Federal Regulations (CFR) § 158, Plans are allowed to reduce the premium used in the
MLR calculation by taxes and regulatory fees paid, excluding Federal income taxes paid on
investment income and capital gains. The Plan allocated non-income related taxes,
regulatory fees, quality health improvement expenses, and fraud reduction expenses that
were applicable to the FEHBP by using a premium ratio allocation method. The premium
ratio was calculated by dividing the FEHBP premium by the total large group sector
premium on the HHS 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
verified.
The Plan’s removal of expenses in the FEHBP net income calculation also distorts the
expenses reported for the HHS large group pool. Since the FEHBP is part of the large group
sector, those expenses should be removed from the large group net income calculation as
well. If they are not removed, then the expenses are spread out amongst the rest of the large
group sector which will understate the amount of taxes allocated to the large group pool.
Since the Plan cannot track expenses on a group level, contractual exclusions or variances in
contractual expenses cannot be accurately tracked, rendering it impossible to determine any
one group’s net income.
Consequently, it is our position that the premium ratio allocation method yields a more
accurate result to determine the FEHBP Federal income tax expense, since it adheres to the
HHS regulation and was used by the Plan in several other MLR cost allocation areas.
Therefore, we recalculated the Federal income tax allocation using the premium ratio method
and determined that the FEHBP’s portion of Federal income tax is $ and $
for contract years 2012 and 2013, respectively. As stated above, we reduced the premium in
our audited MLR calculations by $ 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
accordingly.
Conclusion
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
IV. MAJOR CONTRIBUTORS TO THIS REPORT
COMMUNITY-RATED AUDITS GROUP
, 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 $ $
Premiums
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
APPENDIX
August 7, 2015
980 Jolly Road, Blue Bell, PA 19422
Executive Director
FEHBP Underwriting
Tel:
Email: @aetna.com
January 15, 2016
Chief, Community‐Rated Audits Group
U.S. Office of Personnel Management
Office of the Inspector General
1900 E Street NW, Room 6400
Washington, DC 20415
Re: Audit of 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
Sincerely,
Executive Director
cc: Alan Spielman
Assistant Director for Federal Employees Insurance Operations, OPM
Lloyd Williams
Deputy Assistant Director for Federal Employees Insurance Operations, OPM
Chief, Health Insurance Group III, OPM
Actuaries group, OPM
Chief, Audit Resolution, OPM
President, Federal Plans, Aetna
Report No. 1C-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
policyholders.
The MLR is calculated as total claims paid divided by premiums. However, the ACA
allows for certain adjustments to both the claim and premium numbers in the ratio.
Claims include medical benefits paid on behalf of members and are adjusted by the cost
of health care quality improvement activities (“QIA”). Premiums include premium
revenue from members and plan sponsors and are adjusted by federal and state taxes,
and licensing and regulatory fees.
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
year 2013 DELETED BY OIG – NOT RELEVANT FOR FINAL REPORT.
According to the Draft Report, the premium ratio allocation method that the Plan used
for non‐income tax expenses and QIA is also the appropriate method for income tax
expense.
DELETED BY OIG – NOT RELEVANT FOR FINAL REPORT
The Plan respectfully disagrees that the premium ratio allocation method is an
appropriate method to allocate income taxes as there is no conceptual basis in
applicable US accounting standards for income taxes to be determined based solely on
premium. It is net income or loss that generates income tax expense and refunds
under US tax laws and regulations, as well as US accounting principles. Relying solely
on premiums produces inaccurate results as this method ignores a fundamental
accounting principle that income taxes are determined on net income or loss.
a. 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
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.
Report No. 1C-HA-00-15-033
VI. Coventry Health Care of Kansas, Inc. Response to Other OIG
Findings
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
Calculation
Coventry Health Care of Kansas,
Inc
MLR Questioned Costs
Contract year 2013
DELETED
BY OIG –
NOT
RELEVANT
FOR FINAL
REPORT
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
Mismanagement
Fraud, waste, and mismanagement in
Government concerns everyone: Office of
the Inspector General staff, agency
employees, and the general public. We
actively solicit allegations of any inefficient
and wasteful practices, fraud, and
mismanagement related to OPM programs
and operations. You can report allegations
to us in several ways:
By Internet: http://www.opm.gov/our-inspector-general/hotline-to-
report-fraud-waste-or-abuse
By Phone: Toll Free Number: (877) 499-7295
Washington Metro Area: (202) 606-2423
By Mail: Office of the Inspector General
U.S. Office of Personnel Management
1900 E Street, NW
Room 6400
Washington, DC 20415-1100
Report No. 1C-HA-00-15-033
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)