Audit of the Federal Employees Health Benefits Program Operations at Aetna Open Access Northern New Jersey

Published by the Office of Personnel Management, Office of Inspector General on 2016-07-15.

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

             OFFICE OF AUDITS

                Final Audit Report

                   AETNA OPEN ACCESS
                 NORTHERN NEW JERSEY

                                            Report Number 1C-JR-00-15-046
                                                    July 15, 2016
                                                               -- CAUTION --

This audit report has been distributed to Federal officials who are responsible for the administration of the audited program. This audit report may
contain proprietary data which is protected by Federal Law (18 U.S.C. 1905). Therefore, while this audit report is available under the Freedom of
Information Act and made available to the public on the OIG webpage, caution needs to be exercised before releasing the report to the general public
as it may contain proprietary information that was redacted from the publicly distributed copy.
               Audit of the Federal Employees Health Benefits Program Operations at
                              Aetna Open Access – Northern New Jersey 

Report No. 1C-JR-00-15-046                                                                           July 15, 2016

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

The primary objective of the audit        We determined that portions of the 2012 and 2013 MLR
was to determine if Aetna Open            calculation were not prepared in accordance with the laws and
Access – Northern New Jersey (Plan)       regulations governing the FEHBP and the requirements
was in compliance with the provisions     established by OPM. Specifically, our audit identified the
of its contract and the provisions of     following:
the laws and regulations governing
the Federal Employees Health              	 The Plan’s use of “Direct Premiums Written” in
Benefits Program (FEHBP). We                 determining the large group premium ratio does not
verified whether the Plan met the            produce the most accurate results. The Plan should use
Medical Loss Ratio (MLR)                     “Direct Premiums Earned”, which most accurately
requirements established by the U.S.         represents the premium specific to the calendar year.
Office of Personnel Management.
We also verified whether the Plan         	 In contract years 2012 and 2013, the Plan did not use a fair
developed the FEHBP premium rates            and equitable allocation method to determine the federal
using complete, accurate and current         income tax expense related to the FEHBP.
                                          	 The Plan included medical and pharmacy claims not
What Did We Audit?                           allowed by the FEHBP in the incurred claims amount used
                                             in the 2013 MLR submission.
Under Contract CS 2867, the Office
of the Inspector General performed        Although these findings affected the 2012 and 2013 MLR
an audit of the FEHBP operations at       calculations, the findings did not result in a penalty for these
the Plan. The audit covered the           contract years.
Plan’s 2012 and 2013 FEHBP
premium rate build-ups and MLR            The audit also showed that the rating documentation provided
submissions. Our audit fieldwork          was sufficient to support the 2012 and 2013 FEHBP premium
was conducted from September 14,          rates.
2015 through September 24, 2015,
at the Plan’s office in Blue Bell,

 Michael R. Esser
 Assistant Inspector General
 for Audits

ACA      Affordable Care Act
CFR      Code of Federal Regulations
FEHBAR   Federal Employees Health Benefits Acquisition Regulations
FEHBP    Federal Employees Health Benefits Program
HHS      U.S. Department of Health and Human Services
MLR      Medical Loss Ratio
OIG      Office of the Inspector General
OPM      U.S. Office of Personnel Management
Plan     Aetna Open Access – Northern New Jersey
SSSG     Similarly-Sized Subscriber Group
TCR      Traditional Community Rating



          EXECUTIVE SUMMARY ......................................................................................... i 

          ABBREVIATIONS ..................................................................................................... ii 

  I.	     BACKGROUND ..........................................................................................................1 

  II.	    OBJECTIVES, SCOPE, AND METHODOLOGY ..................................................3 

  III.	   AUDIT FINDINGS AND RECOMMENDATIONS.................................................8

          1. Medical Loss Ratio ..................................................................................................8 

  IV.	    MAJOR CONTRIBUTORS TO THIS REPORT ..................................................15 

          Appendix (Aetna’s March 28, 2016 response to the draft report) 

            I. BACKGROUND
This final report details the audit results of the Federal Employees Health Benefits Program
(FEHBP) operations at Aetna Open Access – Northern New Jersey (Plan). The audit was
conducted pursuant to the provisions of Contract CS 2867; 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

                                                1                          Report No. 1C-JR-00-15-046
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 4,657 contracts and 8,719 members as of March 31, 2012, and 3,786 contracts
and 6,916 members as of March 31, 2013, as shown in the chart below.

In contracting with community-rated                    FEHBP Contracts/Members
carriers, OPM relies on carrier compliance                    March 31
with appropriate laws and regulations and,
consequently, does not negotiate base                  9,000
rates. OPM negotiations relate primarily               8,000
to the level of coverage and other unique              7,000
features of the FEHBP.
The Plan has participated in the FEHBP                 3,000
since 2002 and provides health benefits to             2,000
FEHBP members in Northern New Jersey.                  1,000
A prior audit of the Plan covered contract                        2012           2013
year 2011. There were no findings or                 Contracts    4,657          3,786
questioned costs identified in that audit.           Members      8,719          6,916

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-JR-00-15-046
                SCOPE, ANDTO THIS REPORT
 The primary objective of this performance audit was to determine whether the Plan was in
 compliance with the provisions of its contract and the laws and regulations governing the
 FEHBP. Specifically, we verified whether the Plan met the MLR requirements established by
 OPM and paid the correct amount to the Subsidization Penalty Account, if applicable.
 Additional tests were also performed to determine whether the Plan was in compliance with the
 provisions of other applicable laws and regulations.

 We conducted this performance audit in accordance 

 with generally accepted government auditing 
                      FEHBP Premiums Paid to the
 standards. Those standards require that we plan and 
 perform the audit to obtain sufficient, appropriate 

 evidence to provide a reasonable basis for our 

 findings and conclusions based on our audit 
 objectives. We believe that the evidence obtained
 provides a reasonable basis for our findings and 
 conclusions based on our audit objectives. 
 This performance audit covered contract years 2012 
 and 2013. For contract years 2012 and 2013, the 
 FEHBP paid approximately $55.5 million and $48.7 
                2012        $55.5
 million in premiums to the Plan, respectively. 
                  2013        $48.7

 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

                                                 3                           Report No. 1C-JR-00-15-046
          adjustments were supported by complete, accurate, and current source documentation;

        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 calculations 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 September 14, 2015 through September 24, 2015, at the
Plan’s office in Blue Bell, Pennsylvania.

We examined the Plan’s MLR calculations and related documents as a basis for validating the
MLR. Further, we examined claim payments and quality health expenses to verify that the cost
data used to develop the MLR was accurate, complete, and valid. We also examined the
methodology used by the Plan in determining the premium in the MLR calculations. Finally, we
used the contract, the Federal Employees Health Benefits Acquisition Regulations (FEHBAR),
and the rate instructions to determine the propriety of the Plan’s MLR calculations.

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

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

                                                4                           Report No. 1C-JR-00-15-046
                    Medical Claims Sample Selection Criteria/Methodology 

Medical Claims            Universe         Universe    Universe     Sample Criteria         Sample      Projected
 Review Area              Criteria        (Number)     (Dollars)       and Size              Type         to the

                      Medical claims
                      with procedure
                      codes 59840,
                      59841, 59850,
                      59851, 59852,
                                                                    Selected all claims
Abortion 2013         59855, 59856,                         $                                 N/A          No
                                                                    from the universe.
                      59857, 59866,
                      59870, S0190,
                      S0191, S0199,
                      S2260, S2265,
                      S2266, S2267.

                      Medical claims
                      amount paid
Coordination of
                      greater than                                  Selected all claims
Benefits (COB) –                                       $                                      N/A          No
                      $15,000 for                                   from the universe.
Medicare 2013
                      members greater
                      than age 64.
                      Members over
                                                                     Selected the 10
                      age 26 who are
Dependent                                                            highest claims
                      not the                          $                                  Judgmental       No 
Eligibility 2013                                                      paid, totaling
                      subscriber or a
                      Medical claims
                                                                    Selected all claims
                      with procedure
                                                                     where the copay
                      codes 98940,
Chiropractic                              (   of the                 amount does not
                      98941, 98942                         $                              Judgmental       No 
Copay 2013                                    had a                 equal $0. The 16
                      and 98943 and
                                          $0 copay)                   selected claims
                      copay does not
                                                                       totaled $ . 
                      equal $35. 
                                                                       Selected the
                      Medical claims
                                                                    highest paid claim
                      for females ran
                                                                     from each of the
Gender Specific –     against a list of
Male Only             226 procedure
                                                        $            procedure codes:     Judgmental       No
Procedures Paid       codes identified
                                                                    54150 and 76870.
for Females 2013      as male only
                                                                      The 2 selected
                                                                      claims totaled

                                                            5                          Report No. 1C-JR-00-15-046
 Medical Claims                          Universe    Universe    Sample Criteria and                  Projected 
                    Universe Criteria                                                   Sample Type
  Review Area                           (Number)     (Dollars)          Size                            to the 

                                                                     Selected the
                                                                 highest paid claim
                                                                  from each of the
                    Medical claims
                                                                  procedure codes:
                    for males ran
Gender Specific –                                                  11980, 84702,
                    against a list of
Female Only                                                        84703, 88104,
                    451 procedure                    $                                  Judgmental       No
Procedures Paid                                                    88108, 88161,
                    codes identified
for Males 2013                                                     88172, 88173,
                    as female only
                                                                   88184, 88185,
                                                                 88187, 88188, and
                                                                   88189. The 13
                                                                   selected claims
                                                                   totaled $4,916.

                                                                    Selected the
                    Medical claims
                                                                 highest paid claim
                    containing non-
                                                                  from each of the
                    covered benefit
Non-Covered                                                         32 procedure
                    procedure codes
Benefits Review                                      $              codes in the        Judgmental       No 
                    (total of 1,209
2013                                                              universe results.
                                                                  The 32 selected
                                                                   claims totaled
                                                                 Selected all claims
                                                                 from the universe
                                                                  where the claim
                    Medical claims                                  payment was
                    containing vision                             greater than the
                    related procedure                            member allowance
Eyeglasses and
                    codes (total of                  $             of $100 for the      Judgmental       No 
Contacts 2013 
                    121 vision                                     high option or
                    related procedure                            $200 for the basic
                    codes).                                         option. Total
                                                                 sample included 5
                                                                   claims totaling
                                                                        $    .

                                                         6                         Report No. 1C-JR-00-15-046
                   Pharmacy Claims Sample Selection Criteria/Methodology

 Pharmacy Claims          Universe                                  Sample Criteria       Sample       Projected
                                          Universe    Universe
   Review Area            Criteria                                     and Size            Type          to the
                                         (Number)     (Dollars)
High Dollar             claims greater
                                                      $            selected 14 claims     Random          No
Prescriptions 2013      than or equal
                                                                   totaling $234,277.
                        to $10,000.
                        All pharmacy
                        claims with a
High Quantity           quantity                                   Selected all claims
                                                       $                                    N/A           No 
Dispensed 2013          dispensed                                  from the universe. 
                        greater than
                        1,000 units. 
                        Members                                     Selected the first
                        over age 26                                  12 highest paid
                        who are not                    $             claims from the     Judgmental       No 
Eligibility 2013
                        the subscriber                              universe, totaling
                        or a spouse.                                     $11,771.  

        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
        rates were sufficiently supported by source documentation. 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.

        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.

                                                          7                        Report No. 1C-JR-00-15-046

  1. Medical Loss Ratio                                                                  Procedural

     Aetna Open Access – Northern New Jersey (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 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 the
     U.S. Office of Personnel Management (OPM).

     For contract year 2012, the OPM-established MLR threshold for MLR pilot program carriers
     was 89 percent. Therefore, 89 cents of every health care premium dollar must have been
     spent on health care expenses. If the MLR was less than 89 percent, a carrier will owe a
     subsidization penalty equal to the difference between the threshold and the carrier’s actual

     For contract year 2013, OPM changed the MLR threshold to 85 percent and created an MLR
     corridor. If carriers met the MLR threshold, no penalty is due. If the MLR was over 89
     percent, the carrier receives a credit equal to the difference between the carrier’s reported
     MLR and 89 percent, multiplied by the denominator of the MLR. This credit can be used to
     offset any future MLR penalty and is available until it is used up by the Plan or the Plan exits
     the FEHBP.

     The Plan calculated an MLR of       percent for contract year 2012, and    percent for
     contract year 2013. However, during our review of the Plan’s MLR submissions, we found
     the following issues.

     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 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. 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.

                                                  8                           Report No. 1C-JR-00-15-046
“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
ratios using “Direct Premiums Written,” were 8.6041 percent and 9.4878 percent for 2012
and 2013, respectively. However, our audited FEHBP premium ratios using “Direct
Premiums Earned,” were 8.6126 percent and 10.0037 percent for 2012 and 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. 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 not prescribed a standardized
method for allocating costs and all costs must be allocated according to generally accepted
accounting methods which yield the most accurate results and are well documented.” Our
audit tests of “Direct Premiums Earned” yields the most accurate result for FEHBP MLR

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

                                            9                          Report No. 1C-JR-00-15-046
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.

Tax Allocation

Pursuant to the provision of U.S. Department of Health and Human Services (HHS) 45 Code
of Federal Regulations (CFR) § 158, Plans are allowed to reduce the premium used in the
MLR calculation by taxes and regulatory fees paid, excluding Federal income taxes paid on
investment income and capital gains. The Plan allocated non-income related taxes,
regulatory fees, quality health improvement expenses, and fraud reduction expenses that
were applicable to the FEHBP by using a premium ratio allocation method. The premium
ratio was calculated by dividing the FEHBP premium by the total large group sector
premium on the HHS grand total MLR filing, of which the FEHBP is included. However,
for State and 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 State Income tax allocation of $
and $          and a Federal Income tax allocation of $        and $             to the FEHBP
for contract years 2012 and 2013, respectively.

HHS 45 CFR § 158.170 requires that the Plan’s allocation method be based on a generally
accepted accounting method. However, we found that the Plan’s method used to allocate the
Federal income taxes to the FEHBP is not applied proportionately, appropriately, and is not
based on a generally accepted accounting method. Also, it is not suitable to treat the FEHBP
as if it were its own entity since expenses are not tracked at the group level and the method is
not related to actual expenses incurred. A more appropriate method, which the Plan used for
several other expenses in its MLR calculation, is the premium ratio allocation method. This
method yields a more accurate result and is supportable (i.e., well documented).

                                             10                           Report No. 1C-JR-00-15-046
Therefore, we recalculated the Federal income tax allocation using the premium ratio method
and determined that the FEHBP’s portion of State income tax owed was $              and
$        , for contract years 2012 and 2013 respectively. Additionally, we determined that the
FEHBP’s portion of Federal income tax due was $             and ($        ), for contract years
2012 and 2013, respectively. As a result, we reduced the premium in our audited MLR
calculations by $           in 2012 and $          in 2013.

Plan Response:

The Plan disagrees with the OIG’s Federal income tax allocation in the 2012 and 2013
MLR calculations. The Plan contends that their methodology of calculating the FEHBP
net income and applying the applicable tax rate is a more accurate representation of the
FEHBP federal income tax expense. The Plan states that net income, not premium,
should be used to allocate income taxes since income and losses are what determines the
tax expense. Additionally, the Plan maintains that its income tax allocation method for the
FEHBP conforms to generally accepted accounting principles. Finally, it asserts that the
method used for its FEHBP Federal income tax allocation is the same method used for its
HHS MLR filing.

OIG Comment:

The OIG disagrees with the Plan and asserts that the Plan’s method used to calculate the
FEHBP Federal and State income tax does not conform to 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 and State 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 and State 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
MLR pools. To determine each pool’s Federal and State 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 and State
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 and State
income tax attributable to the FEHBP, which is part of the HHS large group pool. Instead of

                                             11                           Report No. 1C-JR-00-15-046
allocating a portion of the reported Federal and State 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 and state tax rate of 9 percent. This method is
inconsistent with the Plan’s Federal and State income tax allocation for the HHS MLR pools
and is 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 and State income tax allocation using the premium
ratio method. We determined that the FEHBP’s portion of Federal income tax was $
and ($         ), for contract years 2012 and 2013, respectively. The FEHBP’s portion of
State income tax was $            and $       , for contract years 2012 and 2013, respectively.
We reduced the premium in our audited MLR calculations to account for these amounts.

MLR Claims Data

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

According to the FEHBP certificate of coverage, dependent coverage ends once the
dependent turns 26 years of age. During our review of the 2013 medical claims data, we
identified two ineligible members who exceeded the dependent age limit and generated 54
medical claims which were incorrectly paid. Our review of the 2013 pharmacy claims data
also identified five ineligible members who exceeded the dependent age limit and generated
five pharmacy claims which were incorrectly paid.

Additionally, the 2013 FEHBP benefit brochure states that members enrolled in the High
Option plan receive a $100 allowance towards the purchase of corrective eyeglasses and
frames or contact lenses every 24 months. Members enrolled in the Basic Option receive a

                                             12                          Report No. 1C-JR-00-15-046
$200 allowance for corrective eyeglasses and frames or contact lenses per 24 month period.
We reviewed medical claims relating to eyeglasses and contacts to verify that members were
receiving the appropriate allowances. Our review identified two members enrolled in the
High Option plan who received a higher allowance than what was allowed in the benefit
brochure. Both members received a $200 allowance instead of a $100 allowance, increasing
the claims cost by $100 for each member.

We also identified procedure codes which are typically only paid for male or female
members in the 2013 medical claims data and ran queries on both sets of procedure codes
against the opposite sex, to determine if there were any claims paid. We found no instances
of claims being paid for female members from our male only procedure code list. However,
we did find one female procedure code which was paid in eight separate instances for six
different male members.

Finally, we identified procedure codes which are defined as non-covered benefits per the
benefit brochure and queried this list of procedure codes against the 2013 medical claims
data. The results of our query and review disclosed three different procedure codes that were
improperly paid.

Plan Response:

The Plan agrees with the findings for medical and pharmacy claims paid on ineligible
members. The Plan is currently working with the OIG and OPM to implement an
appropriate action plan to address this finding going forward.

The Plan agrees with the findings for inappropriate eyeglass allowances. The Plan
intends to provide refresher training instructions via a memorandum for claims processors
to address this mistake going forward.

The plan agrees with the findings for gender specific claims paid on ineligible members.
The Plan intends to provide refresher training instructions via a memorandum for claims
processors to address this mistake going forward.

The plan agrees with the findings for non-covered benefits. The Plan intends to provide
refresher training instructions via a memorandum for claims processors to address this
mistake going forward.


We recalculated the Plan’s 2012 and 2013 MLR submissions using direct premiums earned
for allocation of expenses. We also adjusted the income tax expenses on a premium ratio

                                           13                          Report No. 1C-JR-00-15-046
basis. Finally, we removed the incorrectly paid medical and pharmacy claims from the
numerator of the MLR calculation. The results show our audited MLR calculations were
higher than the OPM prescribed thresholds of 89 percent and 85 percent in contract years
2012 and 2013, respectively, and, consequently, resulted in no subsidization penalty for both

Recommendation 1

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

Recommendation 2

We recommend that the contracting officer verify that the Plan submits an appropriate action
plan to address the payment of medical and pharmacy claims for ineligible members.

Recommendation 3

We recommend that the contracting officer verify that the Plan issued the training instruction
memorandums to their claims processors to correct the claims processing errors identified in
this report.

                                            14                           Report No. 1C-JR-00-15-046


        , Auditor-in-Charge

          , Senior Team Leader

             , Group Chief

                                 15   Report No. 1C-JR-00-15-046


   980 Jolly Road, Blue Bell, PA 19422 

      Executive Director 
      FEHBP Underwriting 
      Email:            @aetna.com 
       March 28, 2016 
       Chief, Community‐Rated Audits Group 
       U.S. Office of Personnel Management 
       Office of the Inspector General 
       1900 E Street NW, Room 6400 
       Washington, DC 20415 
       Re:  Audit of Aetna Open Access – Northern New Jersey 
               Contract Number CS 2867 – Plan Code JR 
               Report No. 1C‐JR‐00‐15‐046 
       Dear                : 
       Thank you for the opportunity to respond to the draft audit report dated January 28, 2016.  
       After careful review of the draft report, we agree with the draft report’s findings on the medical 
       and pharmacy claims not allowed by the FEHBP under the MLR Claims Data section of the 
       report.  However, we respectfully disagree with the OIG’s findings that the Aetna Open Access’s 
       method to determine the portion of federal income taxes attributed to the FEHBP was not fair 
       and equitable for purposes of calculating the 2012 and 2013 Minimum Loss Ratio.  We believe 
       that Aetna Open Access’s calculation of federal income taxes was consistent with the standard 
       required in the MLR regulations. 
       We also respectfully disagree with the Draft Report’s recommendation to use “Direct Premiums 
       Earned” when calculating the premium ration used to determine non‐income related taxes, 
       regulatory fees, quality health improvement expenses, and fraud reduction expenses 
                                                                                Report No. 1C-JR-00-15-046
   Please see the attached analysis in support of Aetna Open Access’s position.  If you have any 
   questions as you review our response, please contact me.  


      Executive Director
cc:	        Alan Spielman 
            Assistant Director for Federal Employees Insurance Operations, OPM 
            Lloyd Williams 
            Deputy Assistant Director for Federal Employees Insurance Operations, OPM 
            Janet L. Barnes
            Director, Internal Oversight and Compliance
            Mark W. Lambert
            Associate Director, Merit System Audit and Compliance

            Chief, Health Insurance Group III, OPM

            Actuaries group, OPM

            Chief, Audit Resolution, OPM

            President, Federal Plans, Aetna

                                                                           Report No. 1C-JR-00-15-046
 Response to Draft Report dated January 28, 2016
Audit of Aetna Open Access – Northern New Jersey
              Blue Bell, Pennsylvania
            Report No. 1C‐JR‐00‐15‐046

                                      Report No. 1C-JR-00-15-046
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 – Northern New Jersey 
      Plan Code JR, (hereinafter, the “Plan”) for the contract years 2012 and 2013 Medical 
      Loss Ratio (“MLR”) program. 
      The Draft Report cites three 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 and pharmacy 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. 
      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 

                                                                         Report No. 1C-JR-00-15-046

       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‐Northern New Jersey 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-JR-00-15-046

         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 
c.       Aetna Open Access‐Northern New Jersey 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. 

                                                                            Report No. 1C-JR-00-15-046

      Allocated income tax can be either an expense or a refund depending on whether a 
      reporting unit experiences net income or loss.  For the HHS and FEHBP MLR tax 
      allocations, Aetna allocates income tax expense to reporting units with net income and 
      an income tax refund to reporting units with a net loss.  This allocation is consistent 
      with Generally Accepted Accounting Principles (“GAAP”) as promulgated by the 
      Financial Accounting Standards Board and with Statutory Accounting Principles (“SAP”) 
      as promulgated by the National Association of Insurance Commissioners.  In fact, the 
      MLR calculation for income taxes instructs the use of SAP as the accounting standard 
      for such taxes. 
      The income tax allocation method that the Plan uses for the FEHBP MLR reporting and 
      HHS MLR reporting is consistent with the United States (“US”) accounting principles 
      explained above.  The only difference between the Plan’s HHS MLR reporting and 
      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. 
      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-JR-00-15-046

a.   Aetna Open Access FEHBP Tax Allocation not proportionate, appropriate or a GAAM 

    The Draft Report states, “the Plan’s above described 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 
    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.   

                                                                          Report No. 1C-JR-00-15-046

     With respect to the FEHBP, this allocation was used only for those expenses that are 
     applicable to the FEHBP business.  For instance, the Plan’s expense allocation 
     specifically excluded state premium tax expense and broker commissions since FEHBP 
     premiums are exempt from state premium tax and the FEHBP does not use brokers. 

     2. Income tax expense or refund allocated based on net income 
     As discussed above, income tax expense or refunds are fundamentally different from 
     non‐income tax or other non‐tax expenses because they are based upon the net 
     income or loss of the reporting unit.  Therefore, it is necessary to determine net 
     income or loss in order to appropriately allocate income taxes to the Plan Code. 
     The Plan’s method to allocate income tax expense or refund applies the non‐income 
     tax and non‐tax expense allocation method discussed in the section above to 
     determine the net income or loss from the Plan Code and then uses this result to 
     allocate income tax expense or refund to the Plan Code.  This is not an attempt to treat 
     the Plan Code as if it were its own legal entity, but necessary to determine the 
     appropriate income tax expense or refund to allocate to the Plan Code. 
     The Plan does not allocate income tax expense or refund on the HHS MLR filings using a 
     premium ratio used for non‐income taxes because a premium ratio would not be a 
     GAAM that yields the most accurate result.  The same method is necessary for the 
     FEHBP MLR filing; the income tax allocation method must be different from the 
     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 

                                                                         Report No. 1C-JR-00-15-046

               expense for Plan Codes that generate net income or an income tax refund for Plan 
               Codes that generate net losses.   
               The Draft Report method differs from the Plan’s method in that it utilizes the gross 
               premium ratio, used to allocate expenses other than income tax, to allocate the total 
               income tax expense or refund for all large group pools.  This method does not account 
               for the fact that some Plan Codes generate net income and others generate a net loss.  
               Please reference the examples in the Plan’s response to the Draft Report of Aetna 
               HealthFund, Report No. 1C‐22‐00‐14‐071, which demonstrate why the Plan’s method is 
               proportionate, consistent and accurate. These standards establish that the Plan’s 
               method is a GAAM that yields the most accurate results. 
VI.        Aetna’s Response to Other OIG Findings 
               Medical and Pharmacy Claims Paid on Ineligible Members – The Plan agrees with the 
               Draft Report’s finding of $          and has applied this adjustment to the updated 
               MLR calculation at the end of this response. The Plan is currently working with OIG and 
               OPM to implement an appropriate action plan to address this finding going forward. 
               Inappropriate Eyeglasses Allowance Applied – The Plan agrees with the Draft Report’s 
               findings of $200 and has applied this adjustment to the updated MLR calculation at the 
               end of this response. The Plan intends to provide refresher training instructions via a 
               memorandum for claims processors to address this mistake going forward. 
               Gender Specific Claims Paid on Ineligible Members – 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 intends to provide refresher training 
               instructions via a memorandum for claims processors to address this mistake going 
               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 intends to provide refresher training instructions via a memorandum for 
               claims processors to address this mistake going forward. 

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 

                                                                                   Report No. 1C-JR-00-15-046

        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 ineligible medical and 
        pharmacy claims. The updated MLR calculation results in the Plan meeting the 85.0% 
        MLR threshold, and therefore no penalty is owed to the FEHBP for 2012 or 2013. 

                                                                           Report No. 1C-JR-00-15-046



                   Report Fraud, Waste, and

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

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

          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-JR-00-15-046