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UNITED STATES OFFICE OF PERSONNEL MANAGEMENT
 

Washington, DC 20415
 

Office of the 

Inspector General 

AUDIT REPORT
 

Federal Employees Health Benefits Program
 

Employee Organization Plan
 

AXA Assistance
 

as Administrator for the
 

Panama Canal Area Benefit Plan
 

Contract CS 1066 Plan Code 43
 

Miami, Florida
 

REPORT NO. IB-43-00-08-048 DATE: May 20, 2009 

~~Michael R. Esser 

Assistant Inspector General 

for Audits 

www.opm.gov www.usaJobs.gov 
UNITED STATES OFFICE OF PERSONNEL MANAGEMENT
 

Washington, DC 20415
 

Office of the 

Inspector General 

EXECUTIVE SUMMARY
 

Federal Employees Health Benefits Program
 

Employee Organization Plan
 

AXA Assistance
 

as Administrator for the
 

Panama Canal Area Benefit Plan
 

Contract CS 1066 Plan Code 43
 

Miami, Florida
 

REPORT NO. IB-43-00-08-048 DATE: May 20, 2009 

This final audit report on the Federal Employees Health Benefits Program (FEHBP) operations at 

AXA Assistance (AXA), as administrator for the Panama Canal Area Benefit Plan, in Miami, 

Florida, questions $371,160 in administrative expenses and $73,257 in cash management 

practices. AXA agrees (A) with $192,696, disagrees (D) with $206,532, and did not respond 

(NR)to $45,189 of the questioned costs. Lost investment income (LII) on the questioned costs 

amounts to $15,774. 

Our limited scope audit was conducted in accordance with Government Auditing Standards. The 

audit covered capitation payments, miscellaneous health benefit payments and credits, and 

administrative expenses for contract years 2006 and 2007 as reported in the Annual Accounting 

Statements. We also reviewed AXA's cash management practices related to FEHBP funds for 

contract years 2006 and 2007. In addition, we reviewed the close-out costs of the former 

administrator, Health Network America, and the start-up costs ofAXA. 

Questioned items are summarized, as follows: 

www.opm.goY www.usajobs.goY 
HEALTH BENEFIT CHARGES 

The audit disclosed no findings pertaining to capitation payments and miscellaneous health 

benefit payments and credits. Overall, we concluded that the capitation payments charged to 

the FEHBP were paid in accordance with the provider agreements. Also, we concluded that 

the health benefit refunds and recoveries were promptly returned to the FEHBP. 

ADMINISTRATIVE EXPENSES 

• Unapproved Subcontract (D) Procedural 

AXA charged the FEHBP $998,984 from January 2006 through June 2008 for a subcontract 

with Redbridge Network and Healthcare, Inc. (Redbridge) for which prior approval was not 

sought from the Office of Personnel Management's (OPM) contracting officer. However, 

even though prior approval was not sought from OPM, the contracting officer was/is aware of 

AXA's contractual relationship with Redbridge. Therefore, since the contracting officer 

was/is aware of AXA 's contractual relationship with Redbridge and since the services 

provided by Redbridge are allowable, reasonable and/or necessary tasks for administering the 

Panama Canal Area Benefit Plan, we are reporting this issue as a procedural finding. 

• Allocation of Home Office Expenses $223,953 

AXA allocated indirect/overhead expenses to the FEHBP using estimated allocation 

percentages instead of actual. As a result, the FEHBP was overcharged for indirect/overhead 

expenses in 2007. AXA agrees with $90,678 (A) and disagrees with $133,275 (D) ofthe 

questioned charges. 

• Excess Letter of Credit Drawdown for Administrative Expenses (A) $76,361 

AXA withdrew $74,651 from the letter of credit account in excess ofthe administrative 

expense contractual limitation for 2006. As a result, the FEHBP is due $76,361, consisting 

of $74,651 for the excess drawdown and $1,710 for LII. 

• Unsupported Consulting Expenses (NR) $45,189 

AXA charged the FEHBP for unsupported, unnecessary and/or unreasonable consulting 

expenses in 2006. AXA did not respond to these questioned charges. 

• Unallocable Tax on the Service Charge fA) $25,657 

AXA inadvertently charged the FEHBP $24,653 for an unallocable ITBMS (Impuesto de 

Transferencias de Bienes Muebles y Servicios) tax on the service charges from January 2006 

through May 2008. As a result, the FEHBP is due $25,657, consisting of $24,653 for 

unallocable taxes and $1,004 for Ln. 

11 
CASH MANAGEMENT
 

• Lost Investment Income on Excess Funds (D) $73,257 

AXA did not invest excess FEHBP funds held in the Banistmo Bank account (located in 

Panama) from January 2006 through May 2008. As a result, the FEHBP is due LII of 

$73,257 on these funds. 

OTHER ITEMS REVIEWED 

At the request of the Office of PerSOlmel Management's contracting officer, we also reviewed 

the following items: 

• Close-out costs ofthe former administrator, Health Network America, and 

• Start-up costs ofAXA.
 

Our audit disclosed no audit findings for these items.
 

LOST INVESTMENT INCOME ON AUDIT FINDINGS
 

As a result of our audit findings presented in this audit report, the FEHBP is due LII of 

$15,774, calculated through December 31,2008. 

111 
CONTENTS
 

PAGE 

EXECUTIVE SUMMARy i
 

I. INTRODUCTION AND BACKGROUND 1
 

II. OBJECTIVES, SCOPE, AND METHODOLOGY 2
 

III. AUDIT FINDINGS AND RECOMMENDATIONS 5
 

A. HEALTH BENEFIT CHARGES 5
 

B. ADMINISTRATIVE EXPENSES 5
 

1. Unapproved Subcontract 5
 

2. Allocation of Home Office Expenses 9
 

3. Excess Letter of Credit Drawdown for Administrative Expenses 12
 

4. Unsupported Consulting Expenses 13
 

5. Unallocable Tax on the Service Charge 14
 

C. CASH MANAGEMENT 15
 

1. Lost Investment Income on Excess Funds 15
 

D. OTHER ITEMS REVIEWED 17
 

E. LOST INVESTMENT INCOME ON AUDIT FINDINGS 17
 

IV. MAJOR CONTRIBUTORS TO THIS REPORT 18
 

V. SCHEDULES 

A. CONTRACT CHARGES 

B. QUESTIONED CHARGES 

C. LOST INVESTMENT INCOME CALCULATION 

APPENDIX (AXA Assistance's reply, dated October 2,2008, to the draft audit report) 
I. INTRODUCTION AND BACKGROUND
 

INTRODUCTION .
 

This final audit report details the findings, conclusions, and recommendations resulting from our 

limited scope audit ofthe Federal Employees Health Benefits Program (FEHBP) operations at 

AXA Assistance (AXA) as administrator for the Panama Canal Area Benefit Plan (Plan). AXA 

is located in Miami, Florida. 

The audit was performed by the Office of Personnel Management's (OPM) Office of the Inspector 

General (DIG), as established by the Inspector General Act of 1978, as amended. 

BACKGROUND 

The FEHBP was established by the Federal Employees Health Benefits (FEHB) 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. OPM's Center for Retirement and 

Insurance Services has overall responsibility for administration of the FEHBP. The provisions of 

the FEHB Act are implemented by OPM through regulations, which are codified in Title 5, 

Chapter 1, Part 890 of the Code of Federal Regulations (CFR). Health insurance coverage is 

made available through contracts with various health insurance carriers. 

The Panama Canal Area Benefit Plan is an employee organization plan offering fee-for-service 

benefits with a point of service (POS) option. The pas option is available to Plan members 

residing in the Republic ofPanama. The Plan is authorized under Contract CS 1066 between the 

Association of Retirees of the Panama Canal Area (Association) and OPM. The Plan is 

sponsored arid administered by the Association. Enrollment in the Plan is open to members of 

the Association (Panama Canal Area) who are eligible for coverage under the FEHBP, and 

annuitants who reside in Panama that were previously enrolled in the Plan. 

Health Network America (RNA) administered the claim payments for the Plan for contract years 

1998 through 2005. Starting in 2006, AXA Assistance, as a Third Party Administrator, 

administers the claim payments for the Plan. 

Compliance with laws and regulations applicable to the FEHBP is the responsibility ofthe 

Association and AXA management. Also, management of AXA is responsible for establishing 

and maintaining a system of internal controls. 

All findings from our previous audit of the Plan (Report No. 1B-43-00-05-081, dated August 22, 

2006), covering contract years 1999 through 2004, have been satisfactorily resolved. 

The results of our audit were provided to AXA in written audit inquiries; discussed with AXA 

officials throughout the audit and at an exit conference; and were presented in detail in a draft 

report, dated August 8, 2008. AXA's comments offered in response to the draft report were 

considered in preparing our final report and are included as an Appendix to this report. 

1
 
II. OBJECTIVES, SCOPE, AND METHODOLOGY
 

OBJECTIVES
 

The objectives of our audit were to determine whether AXA charged costs and provided services 

to FEHBP members in accordance with the terms ofthe contract. Specifically, our objectives 

were as follows: 

Health Benefit Charges 

•	 To determine whether AXA complied with contract provisions relative to capitation 

payments. 

•	 To determine whether miscellaneous payments charged to the FEHBP were in
 

compliance with the terms ofthe contract.
 

•	 To determine whether credits and miscellaneous income relating to FEHBP benefit 

payments were returned promptly to the FEHBP. 

Administrative Expenses 

•	 To determine whether administrative expenses, including HNA's close-out costs and 

AXA's start-up costs, charged to the contract were actual, allowable, necessary, and 

reasonable expenses incurred in accordance with the terms of the contract and applicable 

regulations. 

Cash Management 

• - To determine whether AXA handled FEHBP funds in accordance with applicable laws 

and regulations concerning cash management in the FEHBP. 

SCOPE 

We conducted our performance audit in accordance with generally accepted govenunent 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. 

We reviewed the Plan's FEHBP Annual Accounting Statements for contract years 2006 and 2007. 

During this period, AXA paid approximately $102 million in health benefit charges and $10 

million in administrative expenses (See Figure 1 and Schedule A). 

2
 
F'J HealthBenefit Payments • Administrative Expenses 

2007 

Contract Years 

2006 

$0 +--­

Panama Canal Area Benefit Plan 

(AXA Assistance as Administrator) 

Contract Charges 

$20 

$60 .,-----------------, 

$10 +---1'/.: 

$50 

$40 

i $30 ... 

Specifically, we reviewed approximately $13 million in capitation payments made in 2006 and 

2007. In addition, we reviewed miscellaneous health benefit payments and credits (e.g., refunds 

and subrogation recoveries), administrative expenses, and cash management for 2006 and 2007. 

In addition, we reviewed the close-out costs ofthe former administrator, Health Network 

America, and the start-up costs of AXA for 2005 and 2006. 

In planning and conducting our audit, 

we obtained an understanding of AXA's 

internal control structure to help 

determine the nature, timing, and extent 

of our auditing procedures. This was 

determined to be the most effective 

approach to select areas of audit. For 

those areas selected, we primarily relied 

on substantive tests oftransactions and 

not tests of controls. Based on our 

testing, we did not identify any 

significant matters involving AXA's 

internal control structure and its 

operation. However, since our audit 

would not necessarily disclose all 

significant matters in the internal 

control structure, we do not express an 

opinion on AXA's system ofinternal 

controls taken as a whole. Figure I - Contract Charges 

We also conducted tests to determine whether AXA had complied with the contract, the 

applicable procurement regulations (i.e., Federal Acquisition Regulations (FAR) and Federal 

Employees Health Benefits Acquisition Regulations (FEHBAR), as appropriate), and the laws 

and regulations governing the FEHBP. The results of our tests indicate that, with respect to the 

items tested, AXA did not comply with all provisions ofthe contract and federal procurement 

regulations. Exceptions noted in the areas reviewed are set forth in detail in the "Audit Findings 

and Recommendations" section of this audit report. With respect to the items not tested, nothing 

came to our attention that caused us to believe that AXA had not complied, in all material 

respects, with those provisions. 

In conducting our audit, we relied to varying degrees on computer-generated data provided by 

AXA. Due to time constraints, we did not verify the reliability of the data generated by the 

various information systems involved. However, while utilizing the computer-generated data 

during our audit testing, nothing came to our attention to cause us to doubt its reliability. We 

believe that the data was sufficient to achieve our audit objectives. 

The audit was performed at AXA's office in Miami, Florida from June 2 through June 27, 2008. 

Audit fieldwork was also performed at our offices in Washington, D.C. and Jacksonville, Florida. 

3
 
METHODOLOGY 

We obtained an understanding of the internal controls over AXA's financial and cost accounting 

systems by inquiry of AXA officials. 

To test AXA's compliance with the FEHBP health benefit provisions, we judgmentally selected 

and reviewed 32 capitation payments, totaling $12,546,309 (from a universe of 120 capitation 

payments, totaling $35,931,087), from 2006 and 2007. Our sample included eight monthly 

capitation payments to Clinica San Fernando Hospital, eight monthly capitation payments to 

Paitilla Hospital, eight monthly capitation payments to Panama Canal Eye Network, four 

monthly capitation payments to Clinica Boyd, and four monthly capitation payments to Indelco. 

We used the FEHBP contract, the Plan's benefit brochure, and AXA's provider agreements to 

determine the allowability of these capitation payments. The results of the sample were not 

projected to the universe ofcapitation payments. 

We interviewed AXA personnel and reviewed AXA's policies, procedures, and accounting 

records during our audit of miscellaneous health benefit payments and credits. We judgmentally 

selected and reviewed 51 health benefit refunds and recoveries, totaling $271,535 (from a 

universe of685 refunds and recoveries, totaling $378,404), to determine if refunds and 

recoveries were promptly returned to the FEHBP. Our sample included aU refunds and 

recoveries greater than $1,000. The results of the sample were not projected to the universe of 

refunds and recoveries. 

We judgmentally reviewed administrative expenses charged to the FEHBP for contract years 

2006 and 2007. Specifically, we reviewed administrative expenses relating to cost centers, 

expense accounts, out-of-system adjustments, prior period adjustments, employee health benefits, 

executive compensation, subcontracts, non-recurring projects, lobbying, return on investment, 

andHealth Insurance Portability and Accountability Act of 1996 compliance. We also reviewed 

the close-out costs of the former administrator, Health Network America, and the start-up costs 

of AXA for 2005 and 2006. We used the FEHBP contract, the FAR, and the FEHBAR to 

determine the allowability, allocability, and reasonableness of charges. 

We also reviewed AXA's cash management to determine whether AXA handled FEHBP funds 

in accordance with Contract CS 1066 and applicable laws and regulations. 

4
 
III. AUDIT FINDINGS AND RECOMMENDATIONS
 

A. HEALTH BENEFIT CHARGES 

The audit disclosed no findings pertaining to capitation payments and miscellaneous health 

benefit payments and credits. Overall, we concluded that the capitation payments charged to 

the FEHBP were paid in accordance with the provider agreements. Also, we concluded that 

the health benefit refunds and recoveries were promptly returned to the FEHBP. 

B. ADMINISTRATIVE EXPENSES 

1. Unapproved Subcontract Procedural 

AXA charged the FEHBP $998,984 from January 2006 through June 2008 for a 

subcontract with Redbridge Network and Healthcare; Inc. (Redbridge) for which prior 

approval was not sought from the contracting officer. As a result, the FEHBP was 

charged for unapproved subcontract costs. 

Contract CS 1066, Part 1, Section 1.16 states, "(a) The Carrier will notify the Contracting 

Officer in writing at least 30 days in advance of entering into any subcontract ... ifthe 

amount ofthe subcontract or modification charged to the FEHB Program equals or exceeds 

$550,000 and is at least 25 percent of the total subcontract cost. ... In determining whether 

the amount chargeable to the FEHBProgram contract for a given subcontract or 

modification equals or exceeds the $550,000 threshold, the following rules apply: (1) For 

initial advance notification, the Carrier shall add the total cost/price for the base year and all 

options, including quantity or service options and option periods.... (c) The Carrier will 

obtain the Contracting Officer's written consent before placing any subcontract for which 

advance notification is required under paragraph (a) of this clause." 

Contract CS 1066, Part III, section 3.2 (b)(1) states, "The Carrier may charge a cost to the 

contract for a contract term if the cost is actual, allowable, allocable, and reasonable," 

On September 21, 2005, AXA entered into a subcontract with Redbridge to lead the 

implementation process ofAXA's contract with the Panama Canal Area Benefit Plan 

(PCABP). The Redbridge subcontract also included a clause stating that Redbridge 

would provide on-going account management functions and track competitors to defend 

the account and strengthen AXA's position for subsequent yearly renewals. The terms of 

the subcontract consisted of a yearly retainer fee of $400,000 and full reimbursement of 

expenses related to the PCABP project, including travel and entertainment. The duration 

ofthe subcontract is the same length of time as the contract between AXA and the 

PCABP. The PCABP contracted with AXA for a period of three years starting on 

January 1, 2006. Therefore, we determined that the cost of the Redbridge subcontract 

would be $1.2 million ($400,000 x 3 years = $1,200,000) plus related expenses over the 

three-year period. 

5
 
This subcontract exceeded the $550,000 threshold requiring written consent from OPM's 

contracting officer. Formal approval of this three-year subcontract was never sought or 

received from the contracting officer. Although Redbridge was referred to in the original 

proposal to OPM, the terms and compensation details were not included in the proposal. 

In addition, AXA did not provide documentation supporting the development of 

Redbridge's annual service fee of $400,000. 

We also noted in the 2008 Redbridge subcontract that AXA will pay Redbridge 10 

percent of the pre-approved annual administrative expense budget of$3.6 million as the 

annual service fee. No additional documentation was provided by AXA or Redbridge to 

support the development of this 10 percent figure. 

On October 17,2005, OPM's contracting officer approved reimbursement of start-up and 

non-recurring costs that were incurred by AXA/Redbridge for the PC.A.BP. The approval 

was solely for pre-contract costs incurred during the implementation stage. After 

implementation, AXA continued to charge the FEHBP for services provided by 

Redbridge without receiving approval from the contracting officer. 

We obtained and reviewed statements ofwork performed by Redbridge. We identified 

that Redbridge provided AXA with account management for services including, but not 

limited to, the following: 

•	 Preparing for and representing AXA at Asociacion de Jubilados del Area Canalera 

(AlAe) board meetings; 

•	 Managing provider enrollment and negotiations; 

•	 Assisting with provider relations and provider network development; 

•	 Handling staff changes; 

• . Implementing programs and processes with medical management; 

•	 Coordinating installation ofthe new member card system; 

•	 Discussing information teclmology (IT) issues, including claims system (MAG), 

medical software (CAS), and web portal issues; and 

•	 Conferring on a regular basis with AXA management and providing general oversight. 

All these services are allowable, reasonable, and/or necessary tasks for administering the 

Panama Canal Area Benefit Plan. 

Likewise, AXA charged the FEHBP for overhead support, which included executive 

management, human resources, and information teclmology services provided by the 

Chicago and Mexico offices. Also, AXA charged the FEHBP for administrative salaries, 

including but not limited to, a human resource supervisor, a finance supervisor, an IT 

supervisor, a network provider director, and several medical managers in the Panama 

office. Based on our review, there could be a duplication of effort between AXA and 

Redbridge in managing and administrating the PCABP. Services provided under the 

Redbridge subcontract are the same or similar to services already provided by AXA. 

6
 
In summary, the FEHBP was charged for subcontract costs for which prior approval was 

not sought from Ol'M's contracting officer. However, even though prior approval was 

not sought from aPM, the contracting officer was/is aware of AXA's contractual 

relationship with Redbridge. Therefore, since the contracting officer was/is aware of 

AXA's contractual relationship with Redbridge and since the services provided by 

Redbridge are allowable, reasonable and/or necessary tasks for administering the Panama 

Canal Area Benefit Plan, we are reporting this issue as a procedural finding. 

AXA's Response: 

AXA disagrees with the finding. 

AXA states, "Prior to the formation ofAX A Florida,AXA Assistance USA prepared and 

submitted a proposal in June 2005 to the Plan (via AON Consulting) for third party 

administrative services. This proposal detailed the types of administrative services to be 

provided to the plan, including network management, claims processing and recordkeeping, 

eligibility determinations, fraud prevention, coordination of benefits, medical management. 

... The proposal expressly identified Redbridge Network & Healthcare ('Redbridge') as a 

company with which AXA would partner in providing the administrative services to the 

Plan.... Specifically, Redbridge was identified as a company that 'provides international 

third party administration business development and account management support services' 

and was listed as one oftwo companies to which AXA would subcontract certain 

administrative services.... the proposal provided in-depth background on both AXA and 

Redbridge.... the proposal identified the management team that would he responsible for 

the delivery of administrative services to the Plan and this list included individuals from 

both AXA and Redbridge.... Also, the rates and fees proposed were based on a build 

up that included both AXA's and Redbridge's administrative costs Finally, when AXA 

submitted the proposal to the Plan, it stated as follows: 'We are pleased to present this 

proposal with our global business development partner, Redbridge Network & Healthcare, 

a highly experienced organization in the international benefits industry.' ... 

When the administrative services contract award decision was made, AJAC, on behalf of 

the Plan, notified Redbridge - rather than AXA - ofthe award to AXA/Redbridge: 'The 

Association ofRetirees from The Canal Area (AJAC) take ... this opportunity to notify 

.you that your organization was awarded the contract as our TPA for 2006, starting as of 

Septembet!!J!llj15.' '" Amon the individuals copied on this correspondence were _ 

_ an both aPM contracting officers.... Redbridge acknowledged 

the notice 0 award on behalf ofAXA and itself: 'It is my great pleasure to accept this news 

on behalfofAX A and our organization. ... I would like to report that we have already 

begun discussions to organize the implementation of the Panama Canal Area Benefit Plan 

effective immediately for January 1st start date .... The OPM contracting officers were 

copied on this correspondence as well. ... 

.Subsequent to the award ofthe contract, Redbridge provided a variety of administrative 

services to AlAC to supplement those provided by AXA. For example, Redbridge was 

7
 
the primary point of contact with AlAC representatives and met with AlAC on a regular 

basis to discuss ... hospital and provider contracting issues, provider problems, OPM 

governance, program development, personnel, and even administrative expense issues ... 

Redbridge also met with OPM personnel to discuss issues associated with the provision 

of administrative services to AlAC, "and assisted AlAC in preparing presentations for 

OPM.... AXA and Redbridge provided different services to AlAC; there was no 

duplication of services.... The aPM contracting officer approved government 

reimbursement of start-up and non-recurring costs incurred by 'AXA Assistancel 

Redbridge Network & Healthcare' for the Plan .... 

On September 21, 2005, AXA and Redbridge formalized their contractual relationship.... 

The agreement signed by the two parties provided that Redbridge would assume the lead 

for implementation of the administrative services and manage the conversion from the prior 

administrative service provider to AXA.... The parties agreed that AXA would 

compensate Redbridge for its services in the amount of $33,333 a month, for a total annual 

fee of $400,000, plus reimbursement of reasonable expenses related to the project, such as 

travel. ... The annual fee in AXA's agreement with Redbridge ($400,000) was the same 

amount as was included in the budget used to develop the proposed rates and fees in 

Section E of the AXA/Redbridge proposal. ... The term of the agreement between AXA 

and Redbridge was designated as the duration ofthe contract between AXA and AlAC. . . . 

In December 2005, AXA entered into a Health Benefit Administrative Services 

Agreement with AlAC, effective January 1,2006. . . . The AJACIAXA Contract 

identifies AlAC as the contractor under Contract No. CS 1066 with OPM, and describes 

AXA's role as the subcontractor to AlAC for purposes of providing administrative 

services.... Section 4.1 provides that AlAC 'represents and warrants to AXA that it has 

the power and authority to execute this Agreement under the terms of [Contract No. 

CSI066] ... and that the terms of this Agreement may be carried out by the Parties 

"' "without conflict with or default under [Contract No. CSl 066] or applicable Laws.' ... 

The AJACIAXA Contract is made subject to applicable laws and regulations, including 

the FEHBA, FEHBAR, and FAR and it flows down to AXA 'applicable clauses' in the 

FEHBAR clause matrix ... Section 5.2 specified that for application of the clauses, 

AlAC took the position of 'the government' or 'OPM,' and AXA took the position of the 

'contractor' or 'carrier! ... Appendix B ofthe AlACIAXA Contract governs the 

payment amounts to AXA and provides for actual administrative expenses to be 

reimbursed (not to exceed the applicable contractual expense limitation), plus the 

reimbursement oftaxes and payment of a service charge .... Because the value ofthe 

contract exceeds $550,000, aPM would have reviewed and approved the AlACIAXA 

Contract, pursuant to Section 1.16 of Contract No. CS 1066 (FEHBAR 1652.244-70, 

Subcontracts). The AJACIAXA Contract was originally executed for a three-year period, 

with one-year renewal terms, but at the end of2007, the term of the AJAC/AXA Contract 

was revised to a one-year contract, with one-year renewal terms!' 

AXA also states, "The Draft Audit Report finding concerning Redbridge's costs is 

unsupportable for a number of reasons. First, the requirement in Contract No. CS 1066 for 

8 
prior approval of subcontracts does not apply to the Redbridge agreement because it does 

not meet the threshold amount that triggers the requirement for prior approval. Second, 

AJAC, the party in the position to approve the Redbridge agreement, did so via ratification 

or, alternatively, appropriately waived the requirement for advance approval. Third, if 

OPM also has the right to approve the Redbridge agreement, it has approved it via 

ratification or, alternatively, appropriately waived the requirement for advance approval." 

OIG Comments: 

Our position is that AXA should have sought approval from the contracting officer for the 

Redbridge subcontract as required by Contract CS 1066. Although Redbridge was 

referred to as management consultants in AXA's original proposal, the costs associated 

with Redbridge were not included. Therefore, the contracting officer was not aware of 

the extent of Redbridge's subcontract costs. Contract CS 1066, Part 1, Section 1.16, 

states "(a) The Carrier will notify the Contracting Officer in writing at least 30 days in 

advance of entering into any subcontract ... if the amount ofthe subcontract or 

modification charged to the FEHB Program equals or exceeds $550,000 and is at least 25 

percent of the total subcontract cost." The term of the subcontract with Redbridge was 

for three years starting with 2006 as the base year and 2007 and 2008 as the option 

periods. The subcontract cost for each year totaled $400,000. Therefore, AXA's 

subcontract with Redbridge totaled $1.2 million ($400,000 * 3 years) from 2006 through 

2008, which required prior approval of the contracting officer. 

Recommendation 1 

We recommend that the contracting officer instruct AXA to submit the Redbridge 

subcontract arrangement for approval going forward. Also, the contracting officer should 

require AXA to provide documentation supporting how Redbridge's annual service fees of 

$400,000 were developed, calculated, andlor negotiated for 2006 and 2007. In addition, 

the contracting officer should require AXA to provide documentation supporting how 

Redbridges's service fee arrangement (10 percent ofthe pre-approved annual 

administrative expense budget) was developed, calculated, andlor negotiated for 2008. 

2. Allocation of Home Office Expenses $223,953 

AXA allocated indirect/overhead expenses to the FEHBP using estimated allocation 

percentages instead of actual. As a result, the FEHBP was overcharged $223,953 for 

indirect/overhead expenses in 2007. 

Contract CS 1066, Part III, section 3.2 (b)(I) states, "The Carrier may charge a cost to the 

contract for a contract term if the cost is actual, allowable, allocable, and reasonable." . 

Contract CS 1066, Appendix B (Subscription Rates, Charges, Allowances and 

Limitations), states that the administrative expenses must be actual, but not to exceed the 

contractual expense limitation. 

9 
48 CFR 31.201-4 states, "A cost is allocable if itis assignable or chargeable to one or 

more cost objectives on the basis of relative benefits received or other equitable 

relationship. Subject to the foregoing, a cost is allocable to a Government contract if it ­

(a)	 Is incurred specifically for the contract; 

(b)	 Benefits both the contract and other work, and can be distributed to them in
 

reasonable proportion to the benefits received; or
 

(c)	 Is necessary to the overall operation ofthe business, although a direct relationship 

to any particular cost objective cannot be shown." 

In 2006 and 2007, AXA allocated indirect/overhead administrative expenses from the 

Chicago and Mexico offices using two types of allocation methods (three-factor and full 

time employee (FTE)). The three-factor method allocated expenses relating to 

administrative overhead. TheFTE method allocated expenses specifically relating to 

human resources and information technology in Chicago. Since there is a direct 

relationship with the FTE method and human resources/information technology expenses, 

this method is reasonable and appropriate for these types of expenses. In our 

recalculation of the three-factor method, we identified those expenses that were allocated 

by the FTE method and then excluded those expenses from the three-factor method 

allocation base for Chicago. 

During our review ofthe three-factor method, we found that AXA used budgeted 

numbers for the three-factor components (revenues, assets, and salaries). AXA should 

have used actual amounts as reported in the company's financial statements and the home 

office's (Chicago) financial statements. AXA allocated 19 percent and 17 percent of 

Chicago's overhead expenses to the FEHBP in 2006 and 2007, respectively. Based on 

our recalculations using actual numbers in the three-factor method, we determined that 24 

percent and 11 percent should have been applied to Chicago's overhead expenses in 2006 

. _ and 2007, respectively. Consequently, AXA undercharged the FEHBP $189,589 in 2006 

... and overcharged the FEHBP $103,113 in 2007 for Chicago's overhead expenses. 

In 2006 and 2007, the Mexico office offered oversight to the Panama office, and 

therefore, incurred overhead expenses similar to a home office. Although the Mexico 

office is truly not the home office for AXA Assistance Florida, the Mexico office did 

incur indirect expenses for salaries, benefits, and telephone. On average, AXA allocated 

29 percent and 31 percent of Mexico's indirect expenses to the FEHBP in 2006 and 2007, 

respectively. However, we determined that 24 percent and 11 percent should have been 

applied to Mexico's indirect expenses in 2006 and 2007, respectively. Consequently, 

AXA overcharged the FEHBP $16,176 in 2006 and $120,840 in 2007 for Mexico's 

indirect expenses. 

In total for contract year 2006, the FEHBP was net undercharged by $173,413 ($189,589 

undercharge + $16,176 overcharge) for indirect/overhead expenses. However, since AXA 

reached the administrative expense ceiling for contract year 2006, no monetary adjustment 

is required. 

10
 
In total for contract year 2007, the FEHBP was overcharged by $223,953 ($103,113 + 

$120,840) for indirect/overhead expenses. Since AXA did not exceed the administrative 

expense ceiling for contract year 2007, the FEHBP is due $223,953 for these overcharges. 

AXA's Response: 

AXA agrees with $90,678 and disagrees with $133,275 ofthe questioned overcharges for 

2007. 

AXA states, "During the audit AXA and the OIG auditors discussed and agreed to apply 

one allocation percentage for the Home Office (Chicago) and the Mexico Office since the 

previous percentage used was based on budgeted numbers instead of actual numbers. 

After the new percentage was calculated, the results were to apply 24% and 10.9% to 

2006 and 2007, respectively, to the overhead expenses incurred by the Chicago office and 

the Mexico office. The new percentages were applied using an actual corporate base of 

administrative expenses from both offices. 

Applying the percentage calculated, 24.9% and 10.9%, to the respective years, AXA 

concluded that the Plan was overcharged $90,000 and not $223,000 as the OIG auditors 

are claiming. Our view on this is that all types of indirect expenses including salaries 

from the Chicago office should be included in the corporate base because it gives a true 

picture ofthe amount of support that the Chicago office dedicates and contributes to the 

Plan.... 

The OIG calculation excludes from the base for the Chicago Office the FTE expenses for 

the Human Resources and Information Technology departments, both of which support 

the Plan activities. We respectfully request a review of such and the finding adjusted 

accordingly in the final audit report." 

OIG Comments: 

AXA did not provide additional documentation that changed our position. We will 

continue to exclude the FTE expenses (human resource and information technology 

expenses) from the allocation base since these expenses were already allocated to the 

FEHBP by AXA using the FTE method. By including the FTE expenses in the threefactor method allocation base, AXA would be allocating these expenses twice to the 

FEHBP. Since human resource and information technology expenses have a direct 

relationship with the FTE count, allocating these expenses to the FEHBP using the FTE 

ratio is a reasonable and appropriate method. 

Recommendation 2 

We recommend that the contracting officer disallow $223,953 for indirect/overhead 

expenses that were overcharged to the FEHBP in 2007. 

11
 
3. Excess Letter of Credit Drawdown for Administrative Expenses $76.361 

AXA withdrew $74,651 from the letter of credit (LOC) account in excess of the 

administrative expense contractual limitation for 2006. As a result, the FEHBP is due 

$76,361, consisting of $74,651 for the excess drawdown and $1,710 for lost investment 

income (LII). 

Contract CS 1066, Part III, section 3.2 (b)(l) states, "The Carrier may charge a cost to the 

contract for a contract term ifthe cost is actual, allowable, allocable, and reasonable." 

Also, Appendix B (Subscription Rates, Charges, Allowances and Limitations) ofthe 

. contract states that the administrative expenses must be actual, but not to exceed the
 

contractual expense limitation.
 

Contract CS 1066, Part III, section 3.4(d) states, "Investment income lost as a result of 

unallowable, unallocable, or unreasonable charges against the contract shall be paid from 

the first day ofthe contract term following the contract term in which the unallowable 

charge was made and shall end on the earlier of: (l) the date the amounts are returned to 

the Special Reserve (or the Office ofPersonnel Management); (2) the date specified by 

the Contracting Officer; or (3) the date ofthe Contracting Officer's Final Decision." 

48 CFR 52.232-17(a) states, "all amounts that become payable by the Contractor ... shall 

bear simple interest from the date due .. , The interest rate shall be the interest rate 

established by the Secretary ofthe Treasury as provided in Section 611 of the Contract 

Disputes Act of 1978 (Public Law 95-563), which is applicable to the period in which the 

amount becomes due, as provided in paragraph (e) ofthis clause, and then at the rate 

applicable for each six-month period as fixed by the Secretary until the amount is paid." 

During our reconciliation ofthe LOC drawdowns for administrative expenses to the 

contractual expense limitation, we identified that AxA withdrew $74,651 in excess of the 

administrative expense limitation for contract year 2006. The Plan's contractual expense 

limitation for contract year 2006 totaled $4,154,329; however, AXA withdrew 

$4,228,980 from the LaC account for administrative expenses. As a result, the FEHBP is 

due $76,361, consisting of $74,651 for the excess LaC drawdown and $1,710 for LII on 

the excess drawdown calculated through June 25, 2008. 

AXA's Response: 

AXA agrees with the finding and will credit the FEHBP for the excess LaC drawdown as 

well as the LII on the excess drawdown. 

Recommendation 3 

We recommend that the contracting officer ensure that AXA credits the FEHBP $74,65 I 

for the excess LOC drawdown. 

12
 
Recommendation 4 

We recommend that the contracting"officer ensure that AXA credits the FEHBP $1,710 

for LII on the excess LOC drawdown (plus interest accruing after June 25, 2008). 

4. Unsupported Consulting Expenses $45,189 

AXA charged the FEHBP $45,189 for unsupported, unnecessary and/or unreasonable 

consulting expenses in 2006. 

Contract CS 1066, Part III, Section 3.2 (b) (1) states, "The Carrier may charge a cost to 

the contract for a contract term if the cost is actual, allowable, allocable, and reasonable." 

48 CFR 31.201-3 (a) states, "A cost is reasonable if, in its nature and amount, it does not 

exceed that which would be incurred by a prudent person in the conduct of competitive 

business. Reasonableness of specific costs must be examined with particular care in 

connection with firms or their separate divisions that may not be subject to effective 

competitive restraints. No presumption of reasonableness shall be attached to the 

incurrence of costs by a contractor. If an initial review of the facts results in a challenge 

of a specific cost by the contracting officer or the contracting officer's representative, the 

burden of proof shall be upon the contractor to establish that such cost is reasonable." 

We identified expenses paid to Millennium International Healthcare Strategies, Inc. 

(Millennium) during our review of consulting expenses. AXA entered into an agreement 

with Ponce de Leon from Millennium, dated September 21, 2005. Ponce de Leon agreed 

to develop a specific provider contracting plan and strategy for AXA by January 2006. 

The payment terms of the agreement, $10,000 per month plus business related expenses, 

were for four months from October 2005 through January 2006. However, we identified 

expenses paid to Millennium after the agreement term ended. These payments made after 

January 2006 were unsupported, unnecessary, and/or unreasonable costs to the FEHBP. 

As a result, theFEHBP is due $45,189 for these consulting expenses. 

AXA's Response: 

AXA did not respond to this finding in their response to the draft audit report. 

DIG Comments: 

AXA did not provide additional documentation to support the questioned consulting 

expenses of$45,189. Therefore, we will continue to question this amount as 

unsupported, unnecessary and/or unreasonable. 

13
 
Recommendation 5 

We recommend that the contracting officer disallow $45,189 in unsupported, unnecessary 

and/or unreasonable consulting expenses that were charged to the FEHBP in 2006. 

5. Unallocable Tax on the Service Charge $25,657 

AXA inadvertently charged the FEHBP $24,653 for an unallocable ITBMS (Impuesto 

de Transferencias de Bienes Muebles y Servicios) tax on the service charges from 

. January 2006 through May 2008. As a result, the FEHBP is due $25,657, consisting of 

$24,653 for unallocable taxes and $1,004 for LI1. 

Contract CS 1066, Part III, section 3.2 (b)(l) states, "The Carrier may charge a cost to the 

contract for a contract term if the cost is actual, allowable, allocable, and reasonable. In 

addition, the Carrier must: (i) on request, document and make available accounting 

support for the cost tojustify that the cost is actual, reasonable and necessary; and (ii) 

determine the cost in accordance with: (A) the terms ofthis contract ...." Part III, 

section 3.7(a) states, "Any service charge negotiated shall be set forth in Appendix Band 

shall be the total profit that can be charged to the contract." 

Contract CS 1066, Part III, section 3.4(d) states, "Investment income lost as a result of 

unallowable, unallocable, or unreasonable charges against the contract shall he paid from 

.the first day of the contract term following the contract term in which the unallowable 

charge was made and shall end on the earlier of: (1) the date the amounts are returned to 

the Special Reserve (or the Office of Personnel Management); (2) the date specified by 

the Contracting Officer; or (3) the date ofthe Contracting Officer's Final Decision." 

48.CFR 52.232-17(a) states, "all amounts that become payable by the Contractor ... shall 

.bear simple interest from the date due ... The interest rate shall be the interest rate 

established by the Secretary ofthe Treasury as provided in Section 611 ofthe Contract 

Disputes Act of 1978 (Public Law 95-563), which is applicable to the period in which the 

amount becomes due, as provided in paragraph (e) of this clause, and then at the rate 

applicable for each six-month period as fixed by the Secretary until the amount is paid." 

During our review ofthe LOC drawdowns in 2006 and 2007, we identified ITBMS taxes 

that were computed on the service charges and subsequently charged to the FEHBP. The 

ITBMS tax is equivalent to a sales tax. The ITSMS tax (five percent) is assessed on the 

service charge that the Panama office receives from AXA. AXA shares fifty percent of 

the service charge with the Panama office. The service charge is paid to AXA by OPM. 

In our opinion; a tax on the service charge is not chargeable (an unnecessary cost) to the 

FEHBP. 

14
 
We quantified the total ITBMS taxes charged to the FEHBP from January 2006 through 

May 2008 and assessed LII on the principle amount. As a result, the FEHBP is due 

$25,657, consisting 0[$24,653 for unallocable taxes and $1,004 for LII calculated 

through June 5, 2008. 

AXA's Response: 

AXA agrees with the finding and returned the questioned amounts to the LOC account on 

June 5 and June 13, 2008. 

Recommendation 6 

Since we verified that AXA returned $24,653 to the FHEBP for the unallocable tax 

charges, no further action is required. 

Recommendation 7 

Since we verified that AXA returned $1,004 to the FEHBP for LII on the unallocable tax 

charges, no further action is required. 

C. CASH MANAGEMENT 

1. Lost Investment Income on Excess Funds $73,257 

AXA did not invest excess FEHBP funds held in the Banistmo Bank account (located in 

Panama) from January 2006 through May 2008. As a result, the FEHBP is due $73,257 

for LII on these funds. 

Contract CS 1066, Part III, section 3.4(a) states, "The Carrier shall invest and reinvest all 

FEHB funds on hand that are in excess ofthe funds needed to promptly discharge the 

obligations incurred under this contract. The Carrier shall seek to maximize investment 

income with prudent consideration to the safety and liquidity of investments." In 

addition, section 3.4(e) states, "Investment income lost as a result of failure to credit 

income due the contractor failure to place excess funds in income producing investments 

and accounts shall be paid from the date the funds should have been invested ...." 

48 CFR 52.232-17(a) states, "all amounts that become payable by the Contractor ... shall 

bear simple interest from the date due ... The interest rate shall be the interest rate 

established by the Secretary of the Treasury as provided in Section 611 ofthe Contract 

Disputes Act of 1978 (Public Law 95-563), which is applicable to the period in which the 

amount becomes due, as provided in paragraph (e) ofthis clause, and then at the rate 

applicable for each six-month period as fixed by the Secretary until the amount is paid." 

During our review of investment income, we found that AXA held excess FEHBP funds 

in a non-interest bearing Banistmo Bank account from January 2006 through May 2008. 

In accordance with the FEHBP contract, all excess FEHBP funds should be placed in 

15
 
income producing investments and accounts. AXA stated that it did not invest excess 

funds due to the volatility in the Latin American markets and only kept enough funds in 

this account to cover claims and capitation payments. On average, we noted that there 

was an excess daily balance remaining in this account 0[$789,180 in 2006 and $427,097 

in 2007. We also identified an average excess daily balance in this account of $360,629 

[rom January 2008 through May 2008. 

We calculated the LII amount for each month by multiplying the average daily balance by 

the applicable semiannual Treasury rate. We calculated LII 0[$42,541 and $23,579 in 

2006 and 2007, respectively, on the excess funds. We also calculated LIl of$7,137 on 

the excess funds for the period January 2008 through May 2008. As a result, the FEHBP 

is due LIl of$73,257 on the excess FEHBP funds that were not being invested from 

January 2006 through May 2008. 

AXA's Response: 

AXA disagrees with the finding. AXA states, "even ifAXA agreed with the OIG in the 

fact that the funds need to be invested, we would like the OIG to consider that AXA 

already opened a saving account at Banistmo Bank, in Panama, but it took 3 months to do 

it, due to all the paperwork involved.... Also, the interest rate paid on investments in 

Panama is only 1.5% per year, and the OIG is applying the standard Federal interest rate. 

Also, as stated before, AXA did not invest the excess funds due to the volatility in the 

Latin America markets and AXA only left funds in the account to cover claims and 

capitation payments. This balance was never used for any other purpose.... 

Considering that AXA's intention was to protect FEHBP funds from any economic risk 

and that the earning would have been minimal ifAXA had invested the money in 

Panama, we respectfully request that the OIG reconsider and spare AXA from having to 

',"pay the high amount ofLIl on excess funds that were imposed and remove this finding 

from the final audit report." 

OIG Comments: 

AXA did not invest the excess FEHBP funds as required by Contract CS 1066, Part III, 

section 3.4(a). Therefore, AXA is liable for the investment income lost on these funds. 

Recommendation 8 

We recommend that the contracting officer direct AXA to credit the FEHBP $73,257 for 

LIl on the excess FEHBP funds that were not properly invested from January 2006 

through May 2008 (plus interest accruing after May 31, 2008). 

16
 
D. OTHER ITEMS REVIEWED 

At the request ofOPM's contracting officer, we also reviewed the following items: 

• Close-out costs ofthe former administrator, Health Network America, and 

• Start-up costs ofAXA. 

Our audit disclosed no audit findings for these items. 

E. LOST INVESTMENT INCOME ON AUDIT FINDINGS $15,774 

As a result of the audit findings presented in this report, the FEHBP is due LII of$15,774 

from January I, 2007 through December 31, 2008. 

48 CFR 52.232-17(a) states, "all amounts that become payable by the Contractor ... shall 

bear simple interest from the date due ... The interest rate shall be the interest rate 

established by the Secretary of the Treasury as provided in Section 611 of the Contract 

Disputes Act of 1978 (Public Law 95-563), which is applicable to the period in which the 

amount becomes due, as provided in paragraph (e) of this clause, and then at the rate 

applicable for each six-month period as fixed by the Secretary until the amount is paid." 

We computed investment income that would have been earned using the semiannual rates 

specified bythe Secretary of the Treasury. Our computations show that the FEHBP is due 

LII of$15,774 from January 1,2007 through December 31, 2008 on questioned costs for 

contract years 2006 and 2007 (see Schedule C). 

AXA's Response: 

The draft audit report did not include an audit finding for LlI. Therefore, AXA did not 

address this item in its reply. 

Recommendation 9 

We recommend that the contracting officer direct AXA to credit $15,774 (plus interest 

accruing after December 31, 2008) to the Special Reserve for LII on audit findings. 

17
 
IV. MAJOR CONTRIBUTORS TO THIS REPORT 

Experience-Rated Audits Group 

Auditor 

Team Leader 

Chie 

Senior Team Leader 

Community-Rated Audits Group 

Senior Team Leader 

18
 
AS ADMINISTRATOR FOR THE PANAMA CANAL AREA BENEFIT PLAN 

CONTRACT CHARGES 

A.	 HEALTH BENEFIT CHARGES 

PLAN CODE 43
 

CLAIM PAYMENTS
 

OTHER ADJUSTMENTS
 

TOTAL 

B.	 ADMINISTRATIVE EXPENSES 

PLAN CODE 43
 

PRIOR PERIOD ADJUSTMENTS
 

TOTAL
 

C.	 SERVICE CHARGE
 

TOTAL CONTRACT CHARGES
 

SCHEDULE A 

V. SCHEDULES
 

AXA ASSISTANCE
 

MIAMI, FLORIDA
 

CONTRACT CHARGES 

2006 2007 TOTAL 

$49,104,480 $50,508,389 $99,612,869 

90,984 2,137,978 2,228,962 

I $49,195,464 $52,646,367 . $101,841,831 II 

$5,108,817 $4,280,144 $9,388,961 

960,587 960,587 ° 

I $6,069,404 $4,280,144 $10,349,548 II 

I $429,929 $389,518 $819,447 

I $55,694,797 $57,316,029 . $113,010,826 • 

I 
, AXA ASSISTANCE , , 

AS ADMINISTRATOR FOR THE PANAMA CANAL AREA BENEFIT PLAN 

MIAMI, FLORIDA 

QUESTIONED CHARGES 

AUDIT FINDINGS 2006 2007 

A. HEALTH BENEFIT CHARGES I $0 $0

B. ADMINISTRATIVE EXPENSES	 

SCHEDULEB 

2008 TOTAL 

$0 $0 I 

1. Unapproved Subcontract (tf'#u.JlIJ¥...!)	 $0 $0 $0 

~.Proc~ D

2. Allocation of Rome Office Expenses>	 0 223,953 0 -zz-",~53

3. Excess Letter of Credit Drawdown for Administrative Expenses** 74,651	 0 1,710 76,361 

4. Unsupported Consulting Expenses-	 45,189 0 0 45,189 

5. Unallocable Tax on the Service Charge**	 10,748 10,326 4,583 25,657 

TOTAL ADMINISTRATIVE EXPENSES I $130,588 S234,279 S6,293 $371,160 • 

- C.	 CASH MANAGEMENT 

1.	 Lost Investment Income on Excess Funds** I S42,541 $23,579 $7,137 $73,257 I 

D.	 OTHER ITEMS REVIEWED I $0 $0 SO $0 I 

E.	 LOST INVESTMENT INCOME ON AUDIT FINDINGS I SO $2,485 $13,289 SI5,774 I 

TOTAL QUESTIONED CHARGES I $173,129 $260,343 $26,719 $460,191 I 

* The audit finding is subject to calculation of lost investment income on Schedule, C. 

** The audit finding is not subject to calculation of lost investment income on Schedule C. 
AXA ASSISTANCE
 

AS ADMINISTRATOR FOR THE PANAMA CANAL AREA BENEFIT PLAN
 

MIAMI, FLORIDA
 

LOST INVESTMENT INCOME CALCULATION
 

LOST INVESTMENT INCOME 2006 2007 

A. QUESTIONED CHARGES (Subject to Lost Investment Income) 

Allocation of Home Office Expenses $0 $223,953 

Unsupported Consulting Expenses 45,189 

TOTAL ADMINISTRATIVE EXPENSES I $45,189 $223,953 

B. LOST INVESTMENT INCOME CALCULATION - Simple Interest Method 

a. Prior Year's Total Questioned (principal) $0 $45,189 

b. Cumulative Total Q 

c. Total $0 $45,189 

d. Treasury Rate: January 1 - June 30 5.125% 5.250% 

e. Interest (d * c) $0 $1,186 

f. Treasury Rate: July 1 - December 31 5.750% 5.750% 

g. Interest (f * c) $0 $1,299 

Total Interest By Year (e + g) I $0 $2,485 

0 

Q 

2008 

$0 

0 

$0 

$223,953 

45,189 

$269,142 

4.750% 

$6,392 

5.125% 

$6,897 

$13,289 

SCHEDULEC
 

TOTAL 

$223,953 

45,189 

$269,142 

$7,578 

$8,196 

$15,774 

II 

II 
APPENDIX
 

..
 

October 2, 2008 

U.8. Office of Personnel Management 

Office of the Inspector General 

1900 E. Street, NW 

Room 6400 

Washington, D. C_ 20415-1100 

Re: Response to OPM Report No. 1B-43-00·08-048, Draft of a 

Proposed Report. "Report on the Audit ofAXA Assistance 

Florida As Administrator for the Panama Canal Area Benefit 

Plan" 

Dear 

AXA Assistance Florida, Inc. hereby submits its response to the Draft "Report 

on the Audit ofAXA Assistance Florida As Administrator for the Panama Canal 

Area Benefit Plan" ("Draft Audit Report"), dated August 8, 2008, of the Office of 

Personnel Management ("OPM") Office ofInspector General ("OIG"). This response 

addresses Audit Findings and Recommendations regarding Unapproved 

Subcontract and Consulting Expenses, as associated with Redbridge Network and 

Healthcare, Inc.; Allocation of Home Office Expenses; Excess Letter of Credit 

Drawdown for Administrative Expenses; Unallocable Tax on Service Charge; and 

Lost Investment Income on FEHBP Funds. 
I. Background 

AXA Assistance Florida, Inc. ("AXA Florida") was formed in 2005 by AXA 

Assistance USA, Inc. (collectively, "AXA"), an entity that is part of the AXA Group 

of Companies, a world-wide global insurance and financial services enterprise. AXA 

Florida was formed to perform administrative services for the Asociacion de 

Jubilados del Area Canalera ("AJAC") in its capacity as group health plan 

insurance board for the Panama Canal Area Benefit Plan ("the Plan"). The Plan 

provides health benefits to qualified individuals pursuant to the FederalEmployees 

Health Benefits Program. 

Prior to the formation ofAXA Florida, AXA Assistance USA prepared and 

submitted a proposal in June 2005 to the Plan (via AON Consulting) for third party 

administrative services. This proposal detailed the types of administrative services 

to be provided to the Plan, including network management, claims processing and 

recordkeeping, eligibility determinations, fraud prevention, coordination of benefits, 

medical management. See Exh. 1 (AXA Assistance USAJRedbridge proposal). The 

proposal expressly identified Redbridge Network & Healthcare ("Redbridge") as a 

company with which AXA would partner in providing the administrative services to 

the Plan. Id. at 1, 16, 19. Specifically, Redbridge was identified as a company that 

"provides international third party administration business development and 

account management support services" and was listed as one of two companies to 

which AXA would subcontract certain administrative services. Id. at 1. In section 

F of the proposal, titled "Company Background & History," the proposal provided 

2
 
in..depth background on both AXA and Redbridge. Id. at 16. Section G of the 

proposal identified the management team that would be responsible for the delivery 

of administrative services to the Plan and this list included individuals from both 

AXA and Redbridge. Id. at 17-19. Also, the rates and fees proposed in Section E 

were based on a build up that included both AXA's and Redbridge's administrative 

costs. See Exh. 2, 'if 3 (Decl. of Olivier Van Poperinghe). Finally, when AXA 

submitted the proposal to the Plan, it stated as follows: "We are pleased to present 

this proposal with our global business development partner, Redbridge Network & 

Healthcare, a highly experienced organization in the international benefits 

industry." 1 Exh. 1 at i. 

When the administrative services contract award decision was made, AJAC, 

on behalf of the Plan, notified Redbridge - rather than AXA - of the award to 

AXAJRedbridge: "The Association of Retirees from The Canal Area (AJAC) take [sic] 

this opportunity to notify you that your organization was awarded the contract as 

our ... TPA for 2006, starting as of September 15." See Exh. 4 (Sept. 15, 2005 email 

fro~AJAC, to Redbridge). Among the individuals copied

on this correspondence were both OPM 

contracting officers. Id. Redbridge acknowledged the notice of award on behalf of 

Redbridge also submitted a copy of the proposal to the Plan, with a cover 

letter stating: "Please find attached a proposal from AXA Assistance USA for the 

administration of the Panama Canal Area Benefit Plan, as requested. Redbridge 

Network & Healthcare provides business development and account management 

support to AXA for large cases, and we will have direct responsibilities for the 

deliverables in this 1'0 osal." See Exh. 3 (June 8, 20051tr. fro~

Redbridge, t AON Consulting). 

3
 
AXA and itself: "It is my great pleasure to accept this news on behalf ofAXA and 

our organization. . .. I would like to report that we have already begun discussions 

to organize the implementation of the Panama Canal Area Benefit Plan effective 

immediately for January 1st start date. Mr. [ofAXA] and I will 

meet with [an AON representative] ... for a planning session and we will be in 

close contact with you throughout this process beginning next week. See Exh. 5 

(Sept. 16,2005 email from , Redbridge, to AJAC). The 

OPM contracting officers were copied on this correspondence as well. Id. 

Subsequent to the award of the contract, Redbridge provided a variety of 

administrative services to AJAC to supplement those provided by AXA. For 

example, Redbridge was the primary point of contact with AJAC representatives 

and met with AJAC on a regular basis to discuss, e.g., hospital and provider 

contracting issues, provider problems, OPM governance, program development, 

personnel, and even administrative expense issues. Exh. 2, 6. Redbridge also met 

with OPM personnel to discuss issues associated with the provision of 

administrative services to AJAC, and assisted AJAC in preparing presentations for 

OPM. Id., 7. AXA and Redbridge provided different services to AJAC; there was 

no duplication ofservices. ta.. 5. The OPM contracting officer approved 

government reimbursement of start-up and non-recurring costs incurred by "AXA 

Assistance/Redbridge Network & Healthcare" for the Plan. See Exh. 6 (undated Itr, 

fro~OPM,to AXA). 

4
 
On September 21, 2005, AXA and Redbridge formalized their contractual 

relationship. See Exh. 7 (Sept. 21, 2005 AXAJRedbridge agreement). The 

agreement signed by the two parties provided that Redbridge would assume the 

lead for implementation of the administrative services and manage the conversion 

from the prior administrative service provider to AXA. Id. at 1. The parties agreed 

that AXA would compensate Redbridge for its services in the amount of $33,333 a 

month, for a total annual fee of $400,000, plus reimbursement ofreasonable 

expenses related to the project, such as travel. Id. at 1-2. The annual fee in AXA's 

agreement with Redbridge ($400,000) was the same amount as was included in the 

budget used to develop the proposed rates and fees in Section E of the 

AXAJRedbridge proposal. Exh. 2, "if 3. The term of the agreement between AXA and 

Redbridge was designated as the duration of the contract between AXA and AJAC. 

Exh. 7 at 2. 

In December 2005, AXA entered into a Health Benefit Administrative 

Services Agreement with AJAC, effective January 1, 2006. See Exh. 8 (AJAC/AXA 

Contract). The AJAC/AXA Contract identifies AJAC as the contractor under 

Contract No. CS1066 with OPM, and describes AXA's role as the subcontractor to 

AJAC for purposes of providing administrative services. Id. at 1, § 2.1. Section 4.1 

provides that AJAC "represents and warrants to A~ that it has the power and 

authority to execute this Agreement under the terms of [Contract No. CS1066j in 

[sicj behalf of the Plan and OPM and that the terms of this Agreement may be 

carried out by the Parties without conflict with or default under [Contract No. 

5
 
CSI066] or applicable Laws." Ld: § 4.1. The AJAC/AXA Contract is made subject to 

applicable laws and regulations, including the FEHBA, FEHBAR, and FAR and it 

flows down to AXA "applicable clauses" in the FEHBAR clause matrix at 48 CFR 

§ 1652.3. Id. § 5.2. Section 5.2 specified that for application of the clauses, AJAC 

took the position of "the government" or "OPM," and AXA took the position of the 

"contractor" or "carrier."2 Id. Appendix B of the AJAC/AXA Contract governs the 

payment amounts to AXA and provides for actual administrative expenses to be 

reimbursed (not to exceed the applicable contractual expense limitation), plus the 

reimbursement of taxes and payment of a service charge.f Id. at App. B; App. B in 

Amendment No. 2008. Because the value of the contract exceeds $550,000, OPM 

would have reviewed and approved the AJAC/AXA Contract, pursuant to Section 

1.16 of Contract No. CSI066 (FEHBAR 1652.244-70, Subcontracts). The AJAC/AXA 

Contract was originally executed for a three-year period, with one-year renewal 

terms, but at the end of 2007, the term of the AJAC/AXA Contract was revised to a 

one-year contract, with one-year renewal terms. ld. § 9.1 in Amendment No. 2008. 

2 This language was omitted in the revision ofsection 5.2, effective January 1, 

2008. Exh. 8 at § 5.2 in Amendment No. 2008. 

3 The contractual expense limitation in the original agreement, effective 

January 1, 2006, was $4,134,895, and the service charge amount was $429,929. 

The contractual expense limitation in Amendment No. 2008, effective January 1, 

2008, was $3,600,000, and the service charge amount was $400,000. 

6 
II. Response to Audit Findings 

A. Unapproved Subcontract and Consulting Expenses 

The Draft Audit Report found that AXA charged FEHBP $998,984 between 

January 2006 and June 2008 for costs associated with AXA's contract with 

Redbridge. Audit Report at 1. The Redbridge costs consisted of $980,000 in fees 

plus $18,984 in travel expenses. Id. at 2. The auditors determined that AXA's 

contract with Redbridge was subject to Section 1.16 in Contract CS 1066, which 

requires the carrier to obtain written consent from the OPM contracting officer 

before entering into a subcontract that exceeds $550,000. Id. Because AXA had not 

obtained written consent from the OPM contracting officer, the auditors deemed the 

Redbridge costs to be unallowable. Id. at 2. 

The Draft Audit Report finding concerning Redbridge's costs is unsupportable 

for a number ofreasons. First, the requirement in Contract No. CSI066 for prior 

approval of subcontracts does not apply to the Redbridge agreement because it does 

-

not-meet the threshold amount that triggers the requirement for prior approval. 

Second, AJAC, the party in the position to approve the Redbridge agreement, did so 

via ratification or, alternatively, appropriately waived the requirement for advance 

approval. Third, ifOPM also has the right to approve the Redbridge agreement, it 

has approved it via ratification or, alternatively, appropriately waived the 

requirement for advance approval. 

7
 
1. The Redbridge Agreement Falls Below The Prior Approval 

Threshold Amount 

FEHBAR 1652.244-70, incorporated into No. CSI066 at Section 1.16, 

requires prior approval of subcontracts in certain situations. Specifically, the 

regulation states: "The Carrier will notify the Contracting Officer in writing at least 

30 days in advance of entering into any subcontract or subcontract modification, ... 

, if the amount of the subcontract or modification charged to the FEHB Program 

equals or exceeds $550,000 and is at least 25 percent of the total subcontract ·cost. _. 

. For initial advance notification, the Carrier shall add the total cost/price for the 1 

base year and all options, including quantity or service options and option periods." 

48 CFR §§ 1652.244-70(a), 1652.244-70(a)(I) (Contract No. CSI066 §§ 1.16(a), 

1. 16(a)(I». AXA's agreement with Redbridge was a de-facto one-year base contract 

with a value of $400,000, and no option periods. As such, it did not reach the 

threshold value of $550,000 for which prior approval is required under section 

1652.244-70(a) (section 1.16(a) of Contract No_ CSI066). 

AJAC's contract with OPM, Contract No. CSI066, is a one-year contract 

renewable at the option of OPM. 48 CFR § 1652.249-70. The AJAC/AXA Contract ­

a subcontract to AJAC's Contract No. CS1066, and approved by aPM - is 

fundamentally a one-year contract because its performance is entirely dependent 

upon AJAC performing Contract No. CSI066. If aPM were to decline to renew 

Contract No. CSI066 with AJAC, then AJAC would cease to have need for AXA's 

administrative services. AJAC exists only to oversee the Plan and it conducts no 

business other than that related to the Plan, so it would have no reason to continue 

8
 
to use AXA's administrative services if it were no longer an OPM contractor. While 

there is not a specific termination provision in the AJAC/AXA Contract addressing 

its termination due to a non-renewal of AJAC's contract with OPM, AJAC and AXA 

would certainly agree to terminate their Contract in the circumstance where AJAC 

no longer held a contract with OPM.4 Exh. 2, 4. Similarly, ifOPM were to decline 

to renew Contract No. CSI066 with AJAC, then AJAC and AXA would cease to have 

need for Redbridge's administrative services. The Redbridge agreement specifically 

states that it is coterminous with the duration of the AJAC/AXA Contract, so 

termination of the AJAC/AXA Contract would result in termination of the 

Redbridge agreement. Thus, because both the AJAC/AXA Contract and the 

Redbridge agreement are dependent on AJAC holding Contract No. CSI066, which 

is a one-year contract, both the AJAC/AXA Contract and the Redbridge agreement 

are de-facto one-year contracts as well. 

Because the Redbridge agreement is a de-facto one-year contract, the value of 

.the.base year is $33,333 a month, or $400,000 total. The Redbridge agreement does 

not provide for option years. Thus, the value of the Redbridge agreement was well 

below the $550,000 threshold for obtaining prior approval. Accordingly, AXA was 

not required to obtain approval for the Redbridge agreement prior to entering into it 

in September 2005, and there is no basis now for OPM to disallow the costs 

associated with the Redbridge agreement. 

In fact, while the original AJAC/AXA Contract was drafted as a three-year
 

contract, the sole purpose for this three-year term was to provide AXA with a
 

sufficient basis for the amortization of capital expenditures. Exh. 2, 4.
 

9 

4 
2.	 aPM Lacks Authority to Approve the Redbridge Agreement; 

AJAC Holds that Authority and Ratified the Agreement Or, 

Alternativel}:, Waived the Requirement for Prior Approval 

The audit report findings concerning the Redbridge costs are based on the 

mistaken premise that aPM has authority to require prior approval ofAXA's 

subcontracts. In fact, there is no direct contractual relationship between aPM and 

AXA. Furthermore, the OPM-approved contract between AJAC and AXA does not 

provide for prior approval by aPM of subcontracts entered into by AXA. Exh.8 

(AJAC/AXA Contract). This lack of privity and the lack of an express contract 

provision granting approval authority to aPM establishes beyond a doubt that aPM 

does not have authority to disapprove a subcontract entered into by AXA. Instead, 

to the extent the AJACIAXA Contract incorporates FEHBAR 1652.244-70, AJAC is 

the entity with authority to require and grant prior approval ofAXA's 

subccntracts." 

According to FEHBAR 1652.244-70, approval by AJAC could occur in several 

ways in addition to the standard prior written consent method. First, AJAC could 

"ratify in writing any such subcontract for which written consent was not obtained. 

Ratification will constitute the consent of [AJAC]." 48 CFR § 1652.244-70(c). 

Second, AJAC could waive the requirement for advance notification and consent 

where "[AXA] and subcontractor [here, Redbridge] submit an application or renewal 

as a contractor team arrangement ... and (1) [AJAC] evaluated the arrangement 

Section 1.16 of Contract No. CS1066 is not incorporated or referenced 

anywhere in the AJAC/AXA Contract. See Exh. 8 (AJACIAXA Contract). 

10 

5 
during negotiation of the contract ... and (2) [Redbridge's] price and/or costs were 

included in [AXA's] rates that were reviewed and approved by [AJAC] during 

negotiation of the contract ...." Id. § 1652.244-70(d). The facts demonstrate that 

AJAC approval has been granted, or, alternatively, appropriately waived such that 

the Redbridge costs are allowable. 

AJAC clearly approved the Redbridge agreement via ratification from the 

time of award of the contract to AXA. Specifically, AJAC notified Redbridge, rather 

than AXA, of the award of the contract to AXA, thereby directly acknowledging ­

and accepting - Redbridge's participation in the performance of the AJAC/AXA 

Contract. Exh. 4. AJAC then received acceptance of the contract award from 

Redbridge as well as definitive information about steps Redbridge and AXA would 

be taking in the near future to initiate the provision of administrative services to 

AJAC. Exh. 5. Throughout the time period audited by OPM, AJAC met with 

Redbridge representatives concerning the AJAC/AXA Contract on a regular basis to 

discuss substantive issues associated with the provision of administrative services 

by AXA and Redbridge to AJAC. Exh. 2, 6. Thus, AJAC's express actions, 

including direct communication with Redbridge and multiple meetings with 

Redbridge, have unquestionably served to ratify AXA's agreement with Redbridge. 

Furthermore, and equally important, AJAC's express inactions - namely, the fact 

that AJAC has never required AXA to terminate its agreement with Redbridge nor 

has it taken any action to terminate Redbridge's participation in or contribution to 

11
 
the performance of the AJAC/AXA Contract - also have clearly ratified AXA's 

agreement with Redbridge. 

Alternatively, AJAC has appropriately waived the requirement for advance 

notification because AXA and Redbridge presented themselves as team members in 

the proposal they submitted to AJAC (via AON Consulting). The proposal identified 

Redbridge as AXA's partner in providing administrative services to AJAC and 

provided the same type of background information on the Redbridge organization 

and its leaders as it provided for AXA. Exh. 1 at 1, 16-19. AJAC assessed 

Redbridge's information alongside AXA's information and evaluated the 

arrangement between the parties in order to make the award decision to AXA and 

Redbridge. Furthermore, the rates and fees included in the proposal reflected both 

AXA and Redbridge expenses, so AJAC reviewed and approved the Redbridge 

expenses in the course of evaluating and awarding the proposal. Exh. 1 at 15; Exh. 

2, 3. Thus, AJAC's evaluation of Redbridge and its proposed expenses, "in the form 

of a teaming arrangement, and subsequent award of the contract to AXA and 

Redbridge, constitutes a waiver of any requirement AXA might have had to obtain 

advance approval of its agreement with Redbridge. 

Because AJAC properly ratified AXA's agreement with Redbridge or waived 

the requirement for advance consent due to the fact that AXA and Redbridge had a 

12
 
teaming arrangement, there is no valid basis to disallow Redbridge's fees and costs 

incurred in providing administrative services to AJAC.6 

3.	 If OPM Has Authority to Approve the Redbridge Agreement, It 

Approved the Agreement via Ratification Or, Alternatively, 

Waived the Requirement for Prior Approval 

Ifthe AJAC/AXA Contract were to be interpreted as giving OPM authority to 

approve AXA's subcontracts, then the rules governing subcontract approval, as 

discussed above in Section II.A.2, would apply to OPM. Specifically, OPM would be 

found to have approved the Redbridge agreement through ratification, or 

alternatively, would be found to have appropriately waived the requirement for 

prior approval based on the teaming arrangement between AXA and Redbridge. 

See FEHBAR §§ 1652.244-70(c), (d). 

OPM has approved the Redbridge agreement via ratification from the time of 

award of the contract to AXA. OPM was included on AJAC's notification to 

Redbridge of the award of the contract to AXA and Redbridge, and it was included 

on Redbridge's written response to this notice of award. Exhs. 4,5. On at least 

several occasions after award of the contract, OPM met with Redbridge 

representatives to discuss issues associated with the AJAC/AXA Contract. Exh 2, 

7. Also, the OPM contracting.officer approved government reimbursement of 

start-up and non-recurring costs incurred by AXA and Redbridge. Exh. 6. At no 

As stated in Section I above, there has been no duplication of effort between 

AXA and Redbridge such that there is a basis to disallow some portion of 

Redbridge's fees as duplicative of amounts paid to AXA. Redbridge's work for AJAC 

has been separate and distinct from AXA's services. Exh. 2, 5. 

13 

6 
time prior to the draft audit finding has OPM taken any action to end Redbridge's 

participation in the AJAC/AXA Contract, nor has it directed AJAC or AXA to take 

action to terminate Redbridge. Thus, OPM's knowledge of and acquiescence in 

Redbridge's services provided pursuant to the AJAC/AXA Contract - as well as 

OPM's direct communication with Redbridge and approval of prior incurred costs by 

Redbridge - undeniably demonstrate ratification ofAXA's agreement with 

Redbridge. 

Alternatively, OPM has appropriately waived the requirement for advance 

notification because OPM was involved in the evaluation of proposals for 

administrative services for the Plan, and thus would have evaluated the proposal 

submitted by AXA and Redbridge in which they clearly presented themselves as 

team members. Exh. 1 at 1, 16-19. aPM would have assessed Redbridge's 

information alongside AXA's information and evaluated the arrangement between 

the parties in order to participate in the award decision to AXA and Redbridge. 

Because the rates and fees included in the proposal reflected both AXA and 

Redbridge expenses, OPM would have reviewed and approved the Redbridge 

expenses in the course of evaluating and awarding the proposal. Exh. 1 at 15; Exh. 

2, 3. Thus, OPM's evaluation of Redbridge and its proposed expenses, in the form 

ofa teaming arrangement, and subsequent award of the contract to AXA and 

Redbridge, constitutes a waiver of any requirement AXA might have had to obtain 

advance approval of its agreement with Redbridge. 

14
 
Because OPM properly ratified AXA's agreement with Redbridge or waived 

the requirement for advance consent due to the fact that AXA and Redbridge had a 

teaming arrangement, the draft audit report's disallowance of Redbridge's fees and 

costs incurred in providing administrative services to AJAC is unsupportable. 

Conclusion on Unapproved Subcontract Expenses finding: 

As discussed above, the preliminary findings and conclusion by the OPM ora 

on the Redbridge administrative costs are wholly incorrect and meritless. AXA 

requests that its comments be considered and the draft audit findings be revised 

accordingly prior to issuance of a final audit report. 

B. Allocation of Home Office Expenses 

AXA accepts the $90,678 finding and respectfully requests that the OPM DIG 

reconsider the $133,275 finding regarding overcharges for 2007. AXA's request for 

reconsideration is based on the following: 

During the audit AXA and the OIG auditors discussed and agreed to apply 

.. 

one"allocation percentage for the Home Office (Chicago) and the Mexico Office since 

the previous percentage used was based on budgeted numbers instead of actual 

numbers. After the new percentage was calculated, the results were to apply 24% 

and 10.9% to 2006 and 2007, respectively, to the overhead expenses incurred by the 

Chicago office and the Mexico office. The new percentages were applied using an 

actual corporate base of administrative expenses from both offices. 

Applying the percentage calculated, 24.9% and 10.9%, to the respective years, 

AXA concluded that the Plan was overcharged $90,000 and not $223,000 as the 

15
 
orG auditors are claiming. Our view on this is that all types of indirect expenses 

including salaries from the Chicago office should be included in the corporate base
 

because it gives a true picture of the amount of support that the Chicago office
 

dedicates and contributes to the Plan.
 

Conclusion on Home Office Expenses finding:
 

The OIG calculation excludes from the base for the Chicago Office the FTE 

expenses for the Human Resources and Information Technology departments, both 

of which support the Plan activities. We respectfully request a review of such and 

the finding adjusted accordingly in the final audit report. 

C.	 Excess Letter of Credit Drawdown for Administrative 

Expenses 

AXA accepts the audit finding and will credit the FEHBP the excess LaC 

drawdown as well as the LIT on the excess LaC drawdown. 

D.	 Unallocable Tax on Service Charge 

AXA accepts the audit finding and returned the questioned amounts to the 

LaC account on June 5 and June 13, 2008. 

E.	 Lost Investment Income on FEHBP Funds 

In this OIG finding, even ifAXA agreed with the OIG in the fact that the 

funds need to be invested, we would like the OIG to consider that AXA already 

opened a saving account at Banistmo Bank, in Panama, but it took 3 months to do 

it, due to all the paperwork involved. See Exh. 9. Also, the interest rate paid on 

investments in Panama is only 1.5% per year, and the OIG is applying the standard 

Federal interest rate. Also, as stated before, AXA did not invest the excess funds 

16
 
due to the volatility in the Latin America markets and AXA only left funds in the
 

account to" cover claims and capitation payments. This balance was never used for
 

any other purpose.
 

Conclusion on Lost Investment Income finding:
 

Considering that AXA's intention was to protect FEHBP funds from any 

economic risk and that the earning would have been minimal ifAXA had invested 

the money in Panama, we respectfully request that the OIG reconsider and spare 

AXA from having to pay the high amount of LII on excess funds that were imposed 

and remove this finding from the final audit report. 

*** 

AXA appreciates the opportunity to respond to the Draft Audit Report. 

Please direct all questions regarding AXA's response to Lynn Me Givern, Corporate 

Counsel at or phone or Beatriz 

.SousaDhief Financial Officer, or phone 

Sincerely 

/ /----0. 

.I 

livier V n Poperinghe 

Chief Executive Officer 

AXA Assistance USA 

17