Anthem’s 62% Profit Margin in Federal Employees Health Benefits Contract

The OIG found that Anthem paid its own corporate sibling as if it were an outside vendor. The maneuver transformed a cost-based function into a source of "unlimited profit."

When the Office of Inspector General (OIG) audited Anthem Blue Cross and Blue Shield insurance plans for federal employees recently, auditors appeared to be conducting a typical contract compliance review.

While they may not have been looking for a smoking gun, they stumbled upon one.

At first glance, the report on Elevance Health’s Anthem Blue Cross and Blue Shield insurance under the Federal Employees Health Benefits Program (FEHBP) looks like just another technical review, questioning charges and payments across familiar audit categories such as uncollected claim overpayments, administrative expense overcharges, medical drug rebates, provider offsets and lost investment income. The auditors’ stated goal was to “obtain reasonable assurance” that Anthem was complying with contract terms. The review took a turn from the routine when the OIG looked at how Elevance is using a common insurance practice known as subrogation.

The issue of subrogation emerged after the OIG observed irregularities in recoveries and fees being passed through the plan. Subrogation – recovering costs from insurers, auto carriers or liable third parties – is a familiar function. But the structure Anthem created is not.

Anthem Inc. became Elevance Health Inc. in 2022 and also launched Carelon health services. Elevance became the name of the parent company, but the name Anthem was retained for the health plans the company operates across the country. Carelon, a wholly owned Elevance subsidiary, is a corporate sibling of the Anthem health plan division, and it’s the fastest-growing of the two. In fact, Elevance views Carelon as the company’s profit engine.

The OIG discovered that Anthem treated Carelon as a commercial provider of services in an arm’s length transaction and paid Carelon a percentage of recoveries, even though, as OIG wrote, this was a “related party transaction.” Auditors discovered that Anthem had contracted its subrogation work to Carelon, and then billed the FEHBP a percentage-based “fee,” deducted directly from the recoveries, and recorded it as a health benefit expense rather than an administrative cost. The subrogation fees then passed through FEHBP as medical claims, thereby avoiding oversight limits on administrative costs and creating “unlimited” profit on a function that should have been cost-based.

Self-enrichment

The OIG was especially troubled because the transaction was a “related party transaction,” which in government contracting is the polite way of saying you’re paying yourself. Worse, the OIG found that:

“The method Anthem uses to charge these subrogation recovery fees results in unlimited profits for essentially an ‘in-house’ service…

And that:

“Elevance Health, Anthem, and/or Carelon should not benefit or self-enrich at the expense of the FEHBP.”

The auditors also concluded that:

“... the only profit that can be charged to the FEHBP is the negotiated annual service charge…”

But Anthem had charged $39,235,156 in subrogation fees plus $5,638,360 in lost investment income – exactly the kind of profit the contract prohibits.

What’s most shocking about this audit isn’t what Anthem did – it’s how openly they did it, and how little anyone plans to do about it.

To appreciate the magnitude of the audit discovery, it helps to understand how the Federal Employees Health Benefits Program actually operates – and who really runs it. The FEHBP is a roughly $70 billion annual program covering more than eight million federal workers, retirees and dependents. Yet the federal government does not administer these benefits directly. Instead, it contracts with the Blue Cross Blue Shield Association (BCBSA), which then delegates day-to-day administration to individual Blue plans across the country.

Among those plans, Anthem administers services in 14 states – more than any other Blue plan – and during the audit period was responsible for $40.6 billion in FEHBP benefit payments and $2.1 billion in administrative expenses. Anthem isn’t simply one contractor in a crowded field; it is the dominant operational arm of the BCBSA for a vast portion of the federal population. When Anthem selects a vendor, sets payment terms or withholds documentation, it is not a peripheral actor – it is effectively shaping how the federal health plan functions.

What’s worse than getting caught red-handed breaching the contract? The company’s response. Its posture throughout the report is equal parts dismissive, pedantic and openly defiant. It insisted the fees represented “allowable, commercially reasonable charges,” argued that subrogation was a “commercial service,” and maintained that the costs were “not subject to cost analysis.”

The company repeatedly pushed back with formulations that would seem to suggest that Elevance itself, and not the OIG, was the final authoritative voice on contract compliance and legality:

“We disagree with the OIG’s characterization.”

“We do not concur.”

“The services are allowable and reasonable in view of the commercial marketplace.”

When the OIG pressed for documentation to substantiate these so-called “commercially reasonable” fees, they were met with outright refusal. They were told that no such documentation existed. Unfortunately for Anthem, they proved themselves wrong in a meeting with OIG when they inadvertently displayed a detailed spreadsheet showing a cost analysis for corporate subrogation services – the very spreadsheet the company had insisted did not exist. As the OIG noted:

“Anthem inadvertently shared an Excel spreadsheet which included the total corporate Carelon subrogation costs by year - precisely the cost data we have been requesting.”

Rather than simply hand it over, the company declared the spreadsheet “not accurate,” “not relevant,” and “not responsive.”

It gets worse. When the auditors asked for a valuation prepared by the company’s accounting firm, Deloitte – the same valuation Anthem itself relied upon as proof that they had studied the reasonableness of their charges – the company responded by producing six heavily-redacted pages out of a 900-page report. That’s less than 1% of the analysis they claimed fully justified their pricing, which costs the FEHBP over $40 million.

The OIG, in its dry bureaucratic tone, noted that the company’s justification for withholding “over 99 percent of the Deloitte study” was “insufficient” – which is government-speak for, “Are you kidding me?” The OIG all but throws up its hands:

“We cannot determine the actual profit charges and/or the reasonableness of these fees due to the scope limitation created by Anthem’s refusal to provide documentation access.”

Anthem behaves as though the worst that can happen is that someone at OIG writes a sternly worded paragraph in a report that will sit unread on a government website. Unfortunately, they are probably right.

As the OIG delicately put it:

“Throughout the audit process, we encountered numerous instances where Anthem responded untimely and/or initially provided incomplete responses.”

And why would Anthem cooperate? The OIG report is unlikely to trigger meaningful enforcement, the federal Office of Personnel Management has historically acted more like a deferential plan sponsor than a regulator, and Congress appears largely uninterested in disrupting a status quo that serves the BCBSA and its licensees quite well.

62% profit margin

Ultimately, due to the lack of information from Anthem, OIG acknowledged that it was forced to estimate the degree of unallowable profit. Based on the limited corporate subrogation cost data they could see, auditors concluded that Anthem was likely earning a profit margin of approximately 62%.

Think about that: a federal contractor potentially earning a 62% profit margin on a supposedly in-house function, inside a federal health plan that legally prohibits this form of profit.

Discovery of a profit extraction model

All of this is visible only because the OIG happened to expand a limited audit sample into subrogation recoveries. The OIG did not enter the process intending to uncover a profit-extraction model. But it found one.

Which raises the question: what would the numbers look like if OIG examined all subrogation? Or payments for all Carelon services? Or fees related to recovery services, out-of-network negotiation and payment integrity? Or medical management? Or pharmacy recoveries?

The answers are not in the report.

What this audit shows is not just that Anthem crossed a line. It shows that those running the FEHBP lack the power, or the will, to draw one. If a contractor can profit in violation of the contract, get caught, and then simply withhold the evidence and declare they disagree, then the rules are performative and enforcement is imaginary. Anthem’s response – dismissing the OIG’s findings, withholding a 900-page Deloitte report, refusing cost documentation, and asserting a legal right to decide what data the government may review – reflects not caution, but confidence.

Confidence that there will be no consequence. Confidence that the FEHBP cannot or will not act. And, perhaps most troubling, confidence that the American taxpayer will never know the difference.

The contractor knowingly violated profit limits, hid the margin inside claims, refused to provide cost data, and continues billing unchanged. If this is what turns up accidentally, just imagine what would be exposed if anyone actually went looking.

Chris Deacon, JD, is a health care executive and consultant recognized for her advocacy for transparency and accountability. She previously ran New Jersey’s public sector health plan, covering 820k lives.