oversight

Audit of the Federal Employees Health Benefits Program Operations at Aetna Open Access - Capitol Region

Published by the Office of Personnel Management, Office of Inspector General on 2017-01-31.

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

U.S. OFFICE OF PERSONNEL MANAGEMENT
    OFFICE OF THE INSPECTOR GENERAL
             OFFICE OF AUDITS




                Final Audit Report

        AUDIT OF THE FEDERAL EMPLOYEES HEALTH
           BENEFITS PROGRAM OPERATIONS AT
          AETNA OPEN ACCESS – CAPITOL REGION

                                             Report Number 1C-JN-00-16-019
                                                    January 31, 2017


                                                                -- CAUTION --

This audit report has been distributed to Federal officials who are responsible for the administration of the subject program. This non-public version
may contain confidential and/or proprietary information, including information protected by the Trade Secrets Act, 18 U.S.C. § 1905, and the Privacy
Act, 5 U.S.C. § 552a. Therefore, while a redacted version of this report is available under the Freedom of Information Act and made publicly available
on the OIG webpage (http://www.opm.gov/our-inspector-general), this non-public version should not be further released unless authorized by the OIG.
              EXECUTIVE SUMMARY 

                 Audit of the Federal Employees Health Benefits Program Operations at                                                                       

                                  Aetna Open Access – Capitol Region 

Report No. 1C-JN-00-16-019                                                                                                                        January 31, 2017


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

The primary objective of the audit                              This report identifies $16,169,511 in questioned costs to the
was to determine if Aetna Open                                  FEHBP. We determined that portions of the MLR calculation
Access – Capitol Region (Plan) was                              were not prepared in accordance with the laws and regulations
in compliance with the provisions of                            governing the FEHBP and the requirements established by
its contract and the provisions of the                          OPM. Specifically, our audit identified the following:
laws and regulations governing the
Federal Employees Health Benefits                               	 The Plan’s use of “Direct Premiums Written” in
Program (FEHBP).                                                   determining the large group premium ratio does not
                                                                   produce the most accurate results. The Plan should use
What Did We Audit?                                                 “Direct Premiums Earned”, which more accurately
                                                                   represents the premium specific to the calendar year.
Under Contract CS 1766, the Office
of the Inspector General (OIG)                                  	 The Plan did not use a fair and equitable allocation method
performed an audit of the FEHBP                                    to determine the federal income tax expense related to the
operations at the Plan. We verified                                FEHBP.
whether the Plan met the Medical
Loss Ratio (MLR) requirements
                                                                	 The Plan included medical claims not allowed by the
established by the U.S. Office of
                                                                   FEHBP in the incurred claims used to develop the 2013
Personnel Management (OPM) for
                                                                   MLR submission.
contract year 2013. We also
verified whether the Plan developed
                                                                	 The documentation provided by the Plan did not support
the FEHBP premium rates using
                                                                   the manual pharmacy claim adjustment used to adjust the
complete, accurate, and current data
                                                                   incurred claims in the Plan’s 2013 MLR submission.
for contract year 2013. Our audit
fieldwork was conducted from
                                                                Finally, the audit recommends an area for program
February 22, 2016, through
                                                                improvement to address concerns identified during the
August 1, 2016, at the Plan’s office
                                                                dependent eligibility review related to the documentation being
in Blue Bell, Pennsylvania and in
                                                                maintained by the Plan to support overage dependent
our OIG offices.
                                                                eligibility.


 _____________________
 Michael R. Esser
 Assistant Inspector General
 for Audits
                                                                               i
        This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary
                        information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
                                            ABBREVIATIONS


    CFR                            Code of Federal Regulations
    FEHBAR                         Federal Employees Health Benefits Acquisition Regulations
    FEHBP                          Federal Employees Health Benefits Program
    HHS                            U.S. Department of Health and Human Services
    MLR                            Medical Loss Ratio
    OIG                            Office of the Inspector General
    OPM                            U.S. Office of Personnel Management
    Plan                           Aetna Open Access – Capitol Region
    SSSG                           Similarly-Sized Subscriber Group




                                                                       ii
This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary
                information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
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.................................................7


                 A. Medical Loss Ratio ..................................................................................................7 


                 B. Program Improvement Area ..................................................................................13 


                 EXHIBIT A (Summary of Medical Loss Ratio Penalty Underpayment) 


                 EXHIBIT B (2013 Medical Loss Ratio Penalty Underpayment) 


                 APPENDIX (Aetna’s September 19, 2016 response to the draft report) 


                 REPORT FRAUD, WASTE, AND MISMANAGEMENT





 This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary
                 information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
                                          I. BACKGROUND
This final report details the audit results of the Federal Employees Health Benefits Program
(FEHBP) operations at Aetna Open Access – Capitol Region (Plan). The audit was conducted
pursuant to the provisions of Contract CS 1766; 5 United States Code Chapter 89; and 5 Code of
Federal Regulations (CFR) Chapter 1, Part 890. The audit covered contract year 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 (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. State-mandated traditional
community-rated carriers continue to be subject to the SSSG comparison rating methodology.

Starting with the pilot program in 2012 and for all non-traditional community-rated FEHBP
carriers in 2013, OPM required the carriers to submit an FEHBP-specific MLR. This
                                                                       1                             Report No. 1C-JN-00-16-019
This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary
                information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
FEHBP-specific MLR calculation required carriers to report information related to earned
premiums and expenditures in various categories, including reimbursement for clinical services
provided to enrollees, activities that improve health care quality, and all other non-claims costs.
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. 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 47,474 contracts and 107,711 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
rates. OPM negotiations relate primarily                                    120,000
to the level of coverage and other unique                                   100,000
features of the FEHBP.                                                       80,000
                                                                             60,000
The Plan has participated in the FEHBP            40,000
since 1982 and provides health benefits to
                                                  20,000
FEHBP members in Washington, D.C.;
                                                       0
Northern, Central, and Southern Maryland;                              2013
Northern and Central Virginia; and the           Contracts            47,474
Richmond, Virginia area. A prior audit of        Members             107,711
the Plan covered contract years 2009
through 2012. There were no findings or questioned costs identified in that audit.

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-JN-00-16-019
This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary
                information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
II. OBJECTIVES, SCOPE, AND METHODOLOGY
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 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 year 2013. For contract year 2013, the FEHBP paid
approximately $587.6 million in premiums to the Plan.

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-JN-00-16-019
 This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary
                 information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
           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 February 22, 2016, through February 26, 2016, at the
Plan’s office in Blue Bell, Pennsylvania. Additional fieldwork was completed through August 1,
2016, at our offices in Jacksonville, Florida; Cranberry Township, Pennsylvania; and
Washington, D.C.

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 calculation.

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

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




                                                                       4                             Report No. 1C-JN-00-16-019
This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary
                information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
                   Medical Claims Sample Selection Criteria/Methodology 

                                                                                                                                                    Results
                                                                                                   Sample                                          Projected
Medical Claims                 Universe               Universe             Universe                                            Sample
                                                                                                 Criteria and                                        to the
 Review Area                   Criteria              (Number)              (Dollars)                                            Type
                                                                                                     Size                                          Universe
                                                                                                                                                        ?
                             Members
                                                                                                 Randomly
                          greater than or
Dependent                                                                                        selected 50
                          equal to age 26                                                                                      Random                      No 
Eligibility 2013                                                                                members from
                           designated as
                                                                                                the universe. 
                            dependent. 
                                                                                                                                                    Results
                                                                                                   Sample                                          Projected
Medical Claims                 Universe               Universe             Universe                                            Sample
                                                                                                 Criteria and                                        to the
 Review Area                   Criteria              (Number)              (Dollars)                                            Type
                                                                                                     Size                                          Universe
                                                                                                                                                        ?
                          Medical claims
                          with procedure
                          codes 59840,                                                            Selected all
                          59841, 59850,                                                           claims paid
Non-Covered
                          59851, 59852,                                                           greater than
Benefits Review
                          59855, 59856,                                                          $300 from the               Judgmental                    No
2013
                          59857, 59866,                                                            universe,
                          59870, S0190,                                                             totaling
                          S0191, S0199,                                                            $13,815.
                          S2260, S2265,
                          S2266, S2267.

                                                                                                 Selected all
                                                                                               claims from the
                           Medical claims
Coordination of                                                                                universe greater
                           for members
Benefits (COB) –                                                                               than or equal to              Judgmental                    No
                           greater than or
Medicare 2013                                                                                      $60,000,
                           equal to age
                                                                                                   totaling
                           65.
                                                                                                 $1,186,175.
                            




                                                                              5                             Report No. 1C-JN-00-16-019
       This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary
                       information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
                 Pharmacy Claims Sample Selection Criteria/Methodology

                                                                                                                                                    Results
Pharmacy Claims                  Universe                                                       Sample Criteria                  Sample            Projected
                                                       Universe            Universe
  Review Area                    Criteria                                                          and Size                       Type               to the
                                                      (Number)             (Dollars)
                                                                                                                                                   Universe?
                              Pharmacy                                                            Selected one
                              claims                                                             claim for each
High Dollar Scripts
                              greater than                                                       member in the                Judgmental                   No
2013
                              or equal to                                                       universe, totaling
                              $15,000.                                                             $545,862.
                              Members
                              greater than                                                       Randomly
Dependent                     or equal to                                                        selected 20
                                                                                                                                Random                     No 
Eligibility 2013              age 26                                                           members from the
                              designated as                                                       universe. 
                              dependent.


       We also examined the rate build-up of the Plan’s 2013 Federal rate submission and related
       documents as a basis for validating the Plan’s standard rating methodology. We verified that the
       factors, trends, and other related adjustments used to determine the FEHBP premium rates were
       sufficiently supported by source documentation. We also 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.

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




                                                                              6                             Report No. 1C-JN-00-16-019
       This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary
                       information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
III. AUDIT FINDINGS AND RECOMMENDATIONS

 A. MEDICAL LOSS RATIO                                                                                                       $16,169,511
      In order to assess the appropriateness of Aetna Open Access – Capitol Region’s (Plan)
      premium rates in 2013, it was required to file an MLR ratio submission under OPM’s MLR
      Program. The MLR program replaced the SSSG 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 OPM.

           Federal enrollees did                  For contract year 2013, the OPM-established MLR threshold
           not receive value for                  was 85 percent. Therefore, 85 cents of every health care
          their premium dollars                   premium dollar must have been spent on health care expenses.
            due to errors in the                  If carriers met the MLR threshold, no penalty was due. In
             Plan’s 2013 MLR                      contract year 2013, OPM also created an MLR corridor from
                calculation.                      the established threshold of 85 percent to 89 percent. If the
               Consequently,                      MLR was over 89 percent, the carrier received a credit equal to
             penalties totaling                   the difference between the carrier’s reported MLR and 89
           $16,169,511 are owed                   percent, multiplied by the denominator of the MLR. This credit
              to the Program.                     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 2013. Since this ratio was
      under the established threshold of 85 percent, the Plan paid a penalty to OPM of
      $14,155,486. However, during our review of the Plan’s MLR submission, we identified
      additional issues that resulted in an audited MLR that was lower than that calculated by the
      Plan. Consequently, this audit determined that the Plan owes OPM an additional
      subsidization penalty of $16,169,511 for contract year 2013. The specific issues that led to
      the additional penalty include the following:

      1. Direct Premiums Earned

            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 total large group sector premium on the U.S. Department of Health
            and Human Services (HHS) grand total MLR filing, designated as “Direct Premiums
            Written.” However, we believe the Plan’s use of “Direct Premiums Written” in
            determining the large group premium ratio does not produce the most accurate results.


                                                                         7                             Report No. 1C-JN-00-16-019
  This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary
                  information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
          Instead, “Direct Premiums Earned” should be the basis for the allocation since it more
          accurately represents the premiums earned by the Plan for the calendar year.

          “Direct Premiums Earned” is calculated by taking the “Direct Premiums Written”
          amount, adding the difference of unearned premium in the prior and current year, and
          then subtracting premium balances written off for the calendar year. The result, “Direct
          Premiums Earned,” is the actual premium the Plan received. Since the actual FEHBP
          paid premium is used for the FEHBP portion of the ratio, we believe that the actual or
          “Direct Premiums Earned” amount should be used for the large group portion of the ratio.
          The Plan’s FEHBP premium ratio using “Direct Premiums Written,” was 29.697 percent
          for 2013. However, our audited FEHBP premium ratio using “Direct Premiums Earned,”
          was 29.701 percent for 2013.

          Plan Response:

          The Plan disagrees with the use of direct premiums earned as the basis for allocating
          expenses. For components of the FEHBP MLR filing that are not addressed by
          OPM’s instructions, the Plan contends that OPM’s instructions refer plans back to the
          HHS rules. Therefore, since the Plan allocated expenses on the HHS filing using a
          direct premium written ratio, they applied the same methodology to the FEHBP MLR
          filing. The Plan states that allocating the FEHBP expenses on a direct premium
          earned ratio is not only inconsistent with the HHS expense allocations but is also in
          direct contrast to OPM’s instructions which refer plans back to using the HHS rules.

          The Plan also informed us that they have moved to a date of service premium on their
          HHS filing which will eliminate the need to report unearned premium adjustments
          starting in 2014. They state that the method of calculating the date of service premium
          is consistent with the OPM subscription income calculation and will not need any
          further adjustments.

          OIG Comment:

          We agree with the Plan that the FEHBP MLR regulations instruct plans to refer back to
          the HHS rules when they do not provide specific instructions for components of the MLR
          filing. However, the HHS rules do not explicitly state direct premiums written should be
          used when allocating expenses. The regulations state that, “HHS has therefore not
          prescribed a standardized method for allocating costs. … All costs … must be allocated
          according to generally accepted accounting methods that yield the most accurate results
          and are well documented.” Our audit tests of “Direct Premiums Earned” yields the most
          accurate result for FEHBP MLR purposes.

                                                                       8                             Report No. 1C-JN-00-16-019
This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary
                information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
          The Plan also states they allocate expenses in the HHS filing using a “Direct Premium
          Written” ratio and the same methodology should apply when allocating expenses to the
          FEHBP MLR calculation. However, the intent of OPM’s instructions was to include
          calendar year revenue, incurred claims, and expenses. “Direct Premiums Earned” is
          calculated in the same manner as OPM subscription income, by incorporating the written
          annual premium for the year and adjusting by unearned premium in the prior and current
          years. “Direct Premiums Written” does not take into account adjustments for unearned
          premium in the prior and current years and does not present an accurate premium amount
          for the calendar year period. Therefore, we disagree with the Plan’s position and assert
          that “Direct Premiums Earned” should be used when calculating the premium allocation
          ratio.

          As to the Plan’s move to a date of service premium methodology to derive its premium
          allocation ratios beginning in 2014, we tentatively agree that this move should address
          this issue going forward. However, we will need to analyze this methodology on a future
          audit before we can offer a full opinion. Because of the Plan’s move to this
          methodology, we are not making a recommendation to address this issue in this final
          report. That being said, we maintain that “Direct Premiums Earned” continues to
          represent the most accurate premium amount for allocation purposes, and we will
          continue to question this issue, where applicable, on any unaudited Aetna plan year prior
          to 2014.

    2. Tax Allocation

          Pursuant to the provision of HHS 45 Code of Federal Regulations (CFR) § 158, Plans are
          allowed to reduce the premium used in the MLR calculation by taxes and regulatory fees
          paid, excluding Federal income taxes paid on investment income and capital gains. The
          Plan allocated non-income related taxes, regulatory fees, quality health improvement
          expenses, and fraud reduction expenses that were applicable to the FEHBP by using a
          premium ratio allocation method. The premium ratio was calculated by dividing the
          FEHBP premium by the total large group sector premium on the HHS grand total MLR
          filing, of which the FEHBP is included. However, for Federal income taxes, the Plan
          attempted to calculate the gain or loss on the FEHBP as if it was its own entity. The
          result was a Federal Income tax allocation of $            to the FEHBP for contract year
          2013.
     
          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,
                                                                       9                             Report No. 1C-JN-00-16-019
This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary
                information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
          appropriately, and is not based on a generally accepted accounting method. Also, it is not
          suitable to treat the FEHBP as if it were its own entity since expenses are not tracked at
          the group level and the method is not related to actual expenses incurred. A more
          appropriate method, which the Plan used for several other expenses in its MLR
          calculation, is the premium ratio allocation method. This method yields a more accurate
          result and is supportable (i.e., well documented).

          Therefore, we recalculated the Federal income tax allocation using the premium ratio
          method and determined that the FEHBP’s portion of Federal income tax due was
          $          for contract year 2013. As a result, we reduced the premium in our audited
          MLR calculations by $            in 2013.

          Plan Response:

          The Plan disagrees with the OIG’s Federal income tax allocation in the 2013 MLR
          calculation. 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 that a portion of taxes be allocated to each of the MLR
          health insurance markets (e.g., individual, small group, large group, etc.), which the Plan
          refers to as MLR pools. To determine each pool’s Federal income tax amount, including
          that of the HHS large group pool, the Plan calculated the net income for the large group

                                                                      10                             Report No. 1C-JN-00-16-019
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                information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
          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 tax allocation using the premium ratio method.
          We determined that the FEHBP’s portion of Federal income tax was $                for
          contract year 2013. We reduced the premium in our audited MLR calculation by
          $           in contract year 2013.

    3. MLR Claims Data

          During our review of the Plan’s MLR submission for contract year 2013, we determined
          that the incurred claims amount included in the Plan’s MLR calculation was incorrect.
          Specifically, the Plan included medical claim amounts not allowed by the FEHBP.

          We identified abortion procedure codes, which are defined as non-covered benefits per
          the benefit brochure, for FEHBP members in the 2013 medical claims data. The results
          of our query and review disclosed a total of $     claims that were improperly paid.
          We removed these claims from the MLR numerator for contract year 2013.

                                                                      11                             Report No. 1C-JN-00-16-019
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                information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
          Plan Response:

          The Plan agrees with the Draft Report’s findings of $        and has applied this
          adjustment to the updated MLR calculation at the end of their response. The Plan has
          an action plan in place to address this finding going forward.

    4. Adjusted Incurred Claims

          The Plan’s adjusted incurred claims calculation in its 2013 MLR submission contained an
          error. The Plan reported a pharmacy claims adjustment credit of $              in their
          MLR calculation. However, in responding to our requests for supporting documentation,
          the Plan identified that $         in claims adjustments were not applicable to the 2013
          contract year, resulting in an actual adjustment of $         . Consequently, we
          included a pharmacy adjustment claims credit of $             in our audited MLR
          calculation.

          Plan Response:

          The Plan agrees with the Draft Report’s credit of $        to the pharmacy manual
          adjustments in the MLR calculation. This adjustment results in an actual pharmacy
          manual adjustment of $          . The Plan has identified the cause of this
          misreported data and has implemented internal controls to mitigate the use of incorrect
          data for the 2014 and later MLR submissions.

    Conclusion

    We recalculated the Plan’s 2013 MLR submission using direct premiums earned for
    allocation of expenses. We also adjusted the income tax expenses on a premium ratio basis.
    Finally, we removed the incorrectly paid medical claims and revised the pharmacy claims
    adjustment credit in the numerator of the MLR calculation. Our audited MLR calculation
    resulted in a net additional subsidization penalty due to OPM of $16,169,511 for contract
    year 2013.

    Recommendation 1

    We recommend that the contracting officer require the Plan to return $16,169,511 to the
    MLR subsidization penalty account for contract year 2013.




                                                                      12                             Report No. 1C-JN-00-16-019
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                information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
    Recommendation 2

    We recommend that the contracting officer require the Plan to either calculate the FEHBP’s
    Federal income tax allocation using the premium ratio method or a method which is well
    documented and supported.

    Recommendation 3

    We recommend that the contracting officer verify that the Plan has implemented proper
    system edits to prevent the payment for non-covered benefits.

    Recommendation 4

    We recommend that the contracting officer verify that the Plan has implemented internal
    controls to mitigate the use of incorrect and unsupported data in the MLR calculations prior
    to filing with OPM.

B. PROGRAM IMPROVEMENT AREA                                                                                                 Procedural

    We reviewed a sample of 50 members equal to or greater than age 26 that were designated as
    dependents in the claims data submitted by the Plan to OPM. Our review disclosed that
    neither the Plan nor OPM had sufficient documentation to support the disabled dependent
    status for 8 of the 50 members.

    Per the FEHBP Handbook, the employing office is responsible for determining if a
    dependent is incapable of self-support, maintaining necessary records, and notifying the Plan
    by letter. The Plan may continue coverage for a dependent over the age of 26, if it
    determines that the dependent had a disability that could cause them to be incapable of
                                                   self-support during adulthood before reaching
        The Plan did not have appropriate
                                                   the age 26. If the Plan continues the
          processes in place to adequately
                                                   dependent’s coverage, it must send an
         support the eligibility of disabled
                                                   approval notice to the member and advise that
        dependents, which could ultimately
                                                   member to send a copy of the notice to the
     result in improper Program payments.
                                                   employing office.

    While the Plan is not required by the FEHBP Handbook to maintain the supporting
    documentation for disabled dependents, it is best practice for the Plan to maintain this type of
    documentation. Additionally, the FEHBP Handbook specifies that the Plan may approve
    disabled dependent coverage in certain cases. In instances such as these, we expect the Plan
    to provide sufficient documentation to support the disabled dependent determination.

                                                                      13                             Report No. 1C-JN-00-16-019
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                information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
    Also, there are instances when dependent status is only approved for a certain time period
    (e.g., one year or three years). However, the Plan’s system is only capable of updating a
    dependent with a handicap indicator on a permanent basis. Due to the Plan’s system
    limitations, claims for ineligible dependents could be paid for an undefined amount of time.

    The Plan agrees that neither the Plan nor OPM could provide the appropriate documentation
    at the time of the audit review. The Plan has developed an action plan to rectify this issue
    going forward.

    Recommendation 5

    We recommend that the contracting officer verify that the Plan has implemented internal
    controls to properly indicate and document disabled dependents in their system.




                                                                      14                             Report No. 1C-JN-00-16-019
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                information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
                                                     EXHIBIT A

                             Aetna Open Access - Capitol 

                  Summary of Medical Loss Ratio Penalty Underpayment 



                 Contract Year 2013

                 Medical Loss Ratio Penalty                                                          ($30,324,997)

                 Plan's Penalty Payment to OPM                                                       ($14,155,486)

                 Total Additional Penalty Due OPM                                                    ($16,169,511)




                                                                                                        Report No. 1C-JN-00-16-019
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               information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
                                                                EXHIBIT B

                                          Aetna Open Access - Capitol 

                                  2013 Medical Loss Ratio Penalty Underpayment 

                                                                                                             Plan                                Audited
2013 FEHBP MLR Lower Threshold (a)                                                                           85%                                  85%
2013 FEHBP MLR Upper Threshold (b)                                                                           89%                                  89%

Claims Expense
Incurred Claims (Medical and Pharmacy)
Less: Incorrectly Paid Non-Covered Benefits Claims
Pharmacy Rider
Less: Prescription Drug Rebate
Capitation
Less: Vendor Payments
Dental Rider
Less: Pharmacy Claims Adjustments
Less: Subrogation
Adjusted Incurred Claims

Paid Medical Incentive Pools and Bonuses
Less: Healthcare Receivables
Expenses to Improve Health Care Quality
Total Adjusted Incurred Claims

Premiums
Premium Income                                                                                          $587,560,183                           $587,560,183
Less: Federal and State Taxes and Licensing or Regulatory Fees
Adjusted Premium
Less: Defective Pricing Finding (Due OPM)                                                                                $0                                   $0
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)                                               ($14,155,486)1                           ($30,324,997)
Credit Calculation (If (d) is greater than (b), ((d-b)*c)                                                        $0                                       $0
Total Penalty Due OPM                                                                                                                          ($16,169,511)

      1
       The Plan penalty paid of $           matches what was actually received by OPM for contract year 2013. It is slightly
      off from what would be due by following the calculation formula due to rounding errors.
                                                                                                               Report No. 1C-JN-00-16-019
          This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary
                         information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
                                                             APPENDIX


                                                                                                                1425 Jolly Road 
                                                                                                                Blue Bell, PA  19422 
                                                                                                                 

                                                                                                                                
                                                                                                                Executive Director 
                                                                                                                FEHBP Underwriting 
           September 19, 2016                                                                                   Tel:                 
                                                                                                                Email:        @aetna.com
          
                                   
         Chief, Community‐Rated Audits Group 
         U.S. Office of Personnel Management 
         Office of the Inspector General 
         1900 E Street NW, Room 6400 
         Washington, DC 20415 
          
         Re: Audit of Aetna Open Access – Capitol 
           Contract Number CS 1766 – Plan Code JN 
           Report No. IC‐JN‐00‐16‐019 
          
         Dear             : 
          
         Thank you for the opportunity to respond to the draft audit report dated August 5, 2016.  After careful 
         review of the draft report, we agree with a portion of the draft report’s findings on the medical and 
         pharmacy claims not allowed by the FEHBP under the MLR Claims Data section of the report.  However, 
         we respectfully disagree with the OIG’s findings that the Aetna Open Access’s method to determine the 
         portion of federal income taxes attributed to the FEHBP was not fair and equitable for purposes of 
         calculating the 2013 Minimum Loss Ratio.  We believe that Aetna Open Access’s calculation of federal 
         income taxes was consistent with the standard required in the MLR regulations. 
          
         We also respectfully disagree with the Draft Report’s recommendation to use “Direct Premiums Earned” 
         when calculating the premium ratio used to determine non‐income related taxes, regulatory fees, quality 
         health improvement expenses, and fraud reduction expenses allocations. 
          
                                     Deleted by OIG ‐ Not Relevant to the Final Report 
          
         Please see the attached analysis in support of Aetna Open Access’s position.  If you have any questions as 
         you review our response, please contact me.  
     
          
          
          

                                                                                                             Report No. 1C-JN-00-16-019
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                       information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
         
        Sincerely 




                                                                        
                      
 
        Executive Director
 
         
         
cc:	        Kiran Ahuja 
            Chief of Staff 
 
            Alan Spielman 
            Assistant Director for Federal Employees Insurance Operations, OPM 
             
            Janet L. Barnes
 
            Director, Internal Oversight and Compliance
  
             
            Lloyd Williams 
            Deputy Assistant Director for Federal Employees Insurance Operations, OPM 
             
            Edward DeHarde 
            Deputy Assistant Director for Federal Employee Insurance Operations 
             
                          

            Chief, Health Insurance Group III, OPM
 
 
                            

            Actuaries Group, OPM
 
 
                            

            Chief, Audit Resolution, OPM
 
             
                                 

            President, Federal Plans, Aetna
 




                                                                                                            Report No. 1C-JN-00-16-019
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                   information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
    Response to Draft Report dated September 19, 2016
 
                              
          Audit of Aetna Open Access – Capitol
 
                 Blue Bell, Pennsylvania
 
                              
               Report No. IC‐JN‐00‐16‐019
 
                              




                                                                                                     Report No. 1C-JN-00-16-019
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               information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
 


    I.      Introduction/Executive Summary
            Aetna submits the following comments to the above mentioned draft report (“Draft Report”) 
            issued by the Office of Personnel Management (“OPM”) Office of Inspector General (“OIG”) 
            under the Federal Employees Health Benefits Program (“FEHBP”). The audit covered the 
            FEHBP contract for the Aetna Open Access – Capitol Plan Code JN, (hereinafter, the “Plan”) 
            for the contract year 2013 Medical Loss Ratio (“MLR”) program. 
            The Draft Report cites four specific findings in the MLR calculation that were not prepared in 
            accordance with the laws and regulations governing the FEHBP and the requirements 
            established by OPM. The Plan agrees with the Draft Report’s findings on the medical claims 
            not allowed by the FEHBP. 
             
            The Plan respectfully disagrees with the Draft Report’s recommendation to calculate the 
            premium ratio used to allocate non‐income related taxes, regulatory fees, quality health 
            improvement expenses, and fraud reduction expenses with Direct Premiums Earned. The 
            Plan’s usage of the Direct Premiums Written produces the most accurate results, which is 
            explained in detail in this response. 
        
                                Deleted by OIG ‐ Not Relevant to the Final Report 
             
            The Plan also respectfully disagrees with the finding pertaining to the tax allocation 
            methodology. Specifically, the Plan disagrees with the OIG’s use of the premium ratio 
            allocation method to determine the FEHBP’s portion of federal income tax. The federal MLR 
            regulations at 45 C.F.R. §158.170 require that the tax allocation method be based upon a 
            generally accepted accounting method (“GAAM”) that is expected to yield the most accurate 
            results. The Plan believes its calculation is correct and meets the standards set under a 
            GAAM and therefore satisfies the requirements of 45 C.F.R. § 158.170. In this response, the 
            Plan demonstrates through a detailed explanation that the method the Plan used to allocate 
            Federal income tax provides the most accurate results, and is consistent with the method 
            used to calculate the Department of Health and Human Services (“HHS”) MLR filings.  


    II.     Medical Loss Ratio Background
            The Affordable Care Act (“ACA”) passed in 2010 included a requirement that a minimum 
            amount of premiums collected by health insurance carriers must be spent on medical 
            benefits.  This requirement became known as the MLR and requires health insurance carriers 
            to meet a predetermined threshold for the percentage of premium that is spent on medical 
            benefits.  Failure to meet the threshold requires a rebate of premium to policyholders. 

                                                                                                           Report No. 1C-JN-00-16-019
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                     information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
        The MLR is calculated as total claims paid divided by premiums.  However, the ACA allows 
        for certain adjustments to both the claim and premium numbers in the ratio.  Claims include 
        medical benefits paid on behalf of members and are adjusted by the cost of health care 
        quality improvement activities (“QIA”).  Premiums include premium revenue from members 
        and plan sponsors and are adjusted by federal and state taxes, and licensing and regulatory 
        fees.  
        In 2012, OPM adopted an MLR requirement for the FEHBP on a pilot basis and the Plan 
        elected to participate in the pilot.  See 77 Fed. Reg. 19522 (April 2, 2012).  OPM published 
        MLR regulations and other guidance that generally adopts the HHS MLR guidelines in 
        addition to a few requirements specific to the FEHBP MLR program.  


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

 b.	      Aetna Open Access-Capitol Non-Income related taxes, regulatory fees, quality health
          improvement expenses, and fraud reduction Expense Allocations
          The Plan allocated non‐income related taxes, regulatory fees, quality health improvement 
          expenses, and fraud reduction expenses applicable to the FEHBP filing using a premium 
          ratio allocation method.  The premium ratio is calculated by taking OPM premium for the 
          plan divided by the HHS large group Direct Premiums Written (HHS Part 2 line 1.1 on a date 
          of service basis).  The Draft Report contends, “The Plan’s use of “Direct Premiums Written” 
          in determining the large group premium ratio does not produce the most accurate results. 
          Instead, “Direct Premiums Earned” should be the basis for the allocation since it more 
          accurately represents the premiums earned by the Plan.” The Plan disagrees with the draft 
          audit report. 
                                                                                                          Report No. 1C-JN-00-16-019
  This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary
                 information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
              
             The FEHBP MLR Rules instruct plans to refer back to the HHS rules when they do not 
             provide specific instructions for components of the MLR filing, as is the case with expense 
             allocation. The Plan allocates expenses on the HHS filing using a direct written premium 
             ratio and applied a consistent approach to the FEHBP MLR filing. The use of the direct 
             written premium allocation is explicit in the HHS filing expense narrative.  Allocating the 
             FEHBP expenses on a direct premium earned basis would result in allocating the expenses 
             on a different basis than the expenses that are derived in the large group on the HHS filing.  
             Calculating the premium ratio allocation using direct premiums earned for the FEHBP would 
             be in direct contrast to the HHS expense allocation method and in contrast with the FEHBP 
             instructions that refer us back to using the HHS filing.  
              
             In 2013, Aetna began to report date of service (DOS) premium on the HHS filing as direct 
             written premium (HHS Part 2 line 1.1). As 2013 is a transition year, the HHS form will 
             include the prior year (2012)’s unearned premium reported. However, beginning in 2014, 
             the use of DOS premium will eliminate the need to report unearned premium adjustments.  
             In addition, the Plan uses OPM’s subscription premium in their FEHBP‐specific MLR 
             calculation. The subscription premium represents what is truly due for the proper calendar 
             year (e.g. 2014). When calculating the subscription premium, any amounts paid in 2014 for 
             calendar year 2013 is removed and any amounts that will be paid in 2015 for 2014 are 
             included. This calculation provided by OPM is consistent with the Plan’s DOS direct written 
             premium reflected on the HHS filings beginning in 2013. Therefore, the use of the HHS DOS 
             direct written premium will already be on an earned basis consistent with the OPM 
             premium and will not need any further adjustments.  Thus, the Plan asserts that the 
             appropriate basis for the expense allocation is direct premiums written. 
 
             Also, direct earned premium requires a calculation to capture unearned premium 
             adjustments in the total, whereas direct written premium is tied directly to the HHS filing 
             (part 2, line 1.1) and is less prone to error. 
 
             In order to remain consistent with the HHS filing and the OPM subscription premium in the 
             FEHBP MLR calculation, the Plan asserts that the appropriate method for calculating the 
             expense allocation is to apply direct premiums written to the premium ratio.  

    c.       Aetna Open Access-Capitol 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, 
                                                                            Report No. 1C-JN-00-16-019
     This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary
                    information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
          Aetna allocates income tax expense to reporting units with net income and an income tax 
          refund to reporting units with a net loss.  This allocation is consistent with Generally 
          Accepted Accounting Principles (“GAAP”) as promulgated by the Financial Accounting 
          Standards Board and with Statutory Accounting Principles (“SAP”) as promulgated by the 
          National Association of Insurance Commissioners.  In fact, the MLR calculation for income 
          taxes instructs the use of SAP as the accounting standard for such taxes. 
          The income tax allocation method that the Plan uses for the FEHBP MLR reporting and HHS 
          MLR reporting is consistent with the United States (“US”) accounting principles explained 
          above.  The only difference between the Plan’s HHS MLR reporting and FEHBP MLR 
          reporting is that the HHS form includes all the MLR Pools in a legal entity.  The FEHBP MLR 
          form includes only the reported Plan Code activity and that Plan Code may include more 
          than one legal entity.  Therefore, the Plan allocates general and administrative expenses 
          along with the Plan Code’s premiums and incurred claims in order to determine the net 
          income or loss from the Plan Code.  The final step is the allocation of income tax expense or 
          refund to the Plan Code using the tax rate applicable to the net income or loss in the Plan’s 
          income tax returns. 
          Unlike income taxes, non‐income taxes, such as employment taxes and QIA expenses, are 
          not based on income.  Therefore, these specific items are allocated based on the premium 
          ratio allocation method used by the Plan, with which the Draft Report agrees. 


IV.     OIG Tax Allocation Audit Findings
          The Draft Report contains a preliminary finding that the Plan did not use a fair and 
          equitable allocation method to determine the portion of Federal income taxes attributed to 
          the FEHBP.  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 to the Final Report 
                                                         
          The revised income tax allocation for 2013 calculates the correct Federal Income and Non‐
          Income tax allocation as $            . This reported amount represents the final tax 
          allocation as of the completion of the audit; however any updates resulting from the MLR 
          Claims Data findings will be incorporated into the tax calculation and updated MLR 
          calculation at the end of this response. 
          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. 
                                                                          Report No. 1C-JN-00-16-019
  This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary
                 information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
a. Aetna Open Access FEHBP Tax Allocation not proportionate, appropriate or a GAAM
       The Draft Report states, “the Plan’s method used to allocate the Federal income 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.   
        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. Aetna Open Access FEHBP Tax Allocation treats FEHBP Plan Code as a legal entity
        The Draft Report states, “it is not suitable to treat the FEHBP as if it were its own entity 
        since expenses are not tracked at the group level and the method is not related to actual 
        expenses incurred. A more appropriate method, which the Plan used for several other 
        expenses in its MLR calculation as stated above, is the premium ratio allocation method.” 
        The Plan did not treat the Plan Code as if it were its own legal entity.  Rather, the Plan 
        simply computed the net income or loss attributable to the Plan Code, as that is the 
        reporting unit required to file the FEHBP MLR form.  This computation included the actual 
        premiums and claims associated with the Plan Code and associated expenses allocated to 
        the Plan Code.   

      1. Allocation	of	expenses	to	determine	Plan’s	net	income	or	loss.	
       The Plan applied the following premium ratio to allocate non‐income tax expenses and 
       other non‐tax expenses to determine the Plan’s net income or loss: 
                                                  Aetna Open Access Plan Code Premium
                                           
                                         Legal Entity Premium for all HHS Large Group Pools
 
        Since the Plan Code was included in the HHS Large Group pools, this ratio is a GAAM that 
        yields the most accurate allocation of non‐income tax expenses and other non‐tax expenses 
        such as QIA.   
        With respect to the FEHBP, this allocation was used only for those expenses that are 
        applicable to the FEHBP business.  For instance, the Plan’s expense allocation specifically 
        excluded state premium tax expense and broker commissions since FEHBP premiums are 
        exempt from state premium tax and the FEHBP does not use brokers. 
                                                                                                        Report No. 1C-JN-00-16-019
This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary
               information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
       2. Income	tax	expense	or	refund	allocated	based	on	net	income	
        As discussed above, income tax expense or refunds are fundamentally different from non‐
        income tax or other non‐tax expenses because they are based upon the net income or loss 
        of the reporting unit.  Therefore, it is necessary to determine net income or loss in order to 
        appropriately allocate income taxes to the Plan Code. 
         The Plan’s method to allocate income tax expense or refund applies the non‐income tax 
         and non‐tax expense allocation method discussed in the section above to determine the net 
         income or loss from the Plan Code and then uses this result to allocate income tax expense 
         or refund to the Plan Code.  This is not an attempt to treat the Plan Code as if it was its own 
         legal entity, but necessary to determine the appropriate income tax expense or refund to 
         allocate to the Plan Code. 
         The Plan does not allocate income tax expense or refund on the HHS MLR filings using a 
         premium ratio used for non‐income taxes because a premium ratio would not be a GAAM 
         that yields the most accurate result.  The same method is necessary for the FEHBP MLR 
         filing; the income tax allocation method must be different from the allocation method for 
         non‐income tax and other non‐tax expenses in order to be a GAAM.  If a premium ratio is 
         used to allocate income tax, the same amount of income tax would be allocated to two Plan 
         Codes with the same premium income even though one incurred significantly higher claims.  
         Please reference the examples in the Plan’s response to the Draft Report of Aetna 
         HealthFund, Report No. 1C‐22‐00‐14‐071. Example 1 in this report illustrates how two 
         hypothetical plan codes (Ohio and Texas) are allocated the same income tax expense under 
         this method even though they incurred higher claims.  That result is inconsistent with US 
         accounting principles and is not the most accurate allocation method as required by the 
         HHS MLR regulations.  


V.     Aetna Open Access Income Tax Allocation Method
         The Plan’s method to allocate income tax expense or refund is based upon the net income 
         or loss associated with the Plan Code for the year.  The Plan Code’s income tax allocation is 
         the final allocation performed after calculating the Plan Code’s net income.  All applicable 
         expenses other than income taxes are allocated to the Plan Code using a gross premium 
         percentage ratio that is calculated by dividing the Plan Code’s premium by the premium for 
         all large group pools.  The Plan Code’s claims and these allocated expenses are deducted 
         from the Plan Code’s gross premium to generate the net income or loss per Plan Code.  
         Then the income tax is allocated by multiplying the Plan Code net income or loss by the 
         applicable tax rate.  This produces an income tax expense for Plan Codes that generate net 
         income or an income tax refund for Plan Codes that generate net losses.   
         The Draft Report method differs from the Plan’s method in that it utilizes the gross 
         premium ratio, used to allocate expenses other than income tax, to allocate the total 
         income tax expense or refund for all large group pools.  This method does not account for 
         the fact that some Plan Codes generate net income and others generate a net loss.  
                                                                                                         Report No. 1C-JN-00-16-019
 This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary
                information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
               Please reference the examples in the Plan’s response to the Draft Report of Aetna 
               HealthFund, Report No. 1C‐22‐00‐14‐071, which demonstrate why the Plan’s method is 
               proportionate, consistent and accurate. These standards establish that the Plan’s method is 
               a GAAM that yields the most accurate results. 
                
  VI.      Aetna’s	Response	to	MLR	Claims	Data	

               Non‐Covered Benefits – The Plan agrees with the Draft Report’s findings of $        and has 
               applied this adjustment to the updated MLR calculation at the end of this response. The 
               Plan has an action plan in place to address this finding going forward. 
                                         Deleted by OIG ‐ Not Relevant to the Final Report 
  
 VII.      Aetna’s	Response	to	Adjusted	Incurred	Claims	
                                         Deleted by OIG ‐ Not Relevant to the Final Report 
            
           Pharmacy Manual Adjustments – The Plan agrees with the Draft Report’s credit of $           
           to the pharmacy manual adjustments in the MLR calculation. This adjustment results in an 
           actual pharmacy manual adjustment of $          . The Plan has identified the cause of this 
           misreported data and has implemented internal controls to mitigate the use of incorrect 
           data for the 2014 and later MLR submissions. 


VIII.      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. 
            
                                         Deleted by OIG ‐ Not Relevant to the Final Report
                                                                  
            
            
            
            
            
                                                                                                             Report No. 1C-JN-00-16-019
     This report is non-public and should not be further released unless authorized by the OIG, because it may contain confidential and/or proprietary
                    information that may be protected by the Trade Secrets Act, 18 U.S.C. § 1905, or the Privacy Act, 5 U.S.C. § 552a.
                                                                                                                     



                                   Report Fraud, Waste, and
                                       Mismanagement 

                                             Fraud, waste, and mismanagement in
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                                           employees, and the general public. We
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                                         and operations. You can report allegations
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