Office of Personnel Management, Office of Inspector General | U.S. Office of Personnel Management | Audit of the Mail Handlers Benefit Plan's Pharmacy Operations as Administered by CaremarkPCS Health for 2009 and 2010

Audit of the Mail Handlers Benefit Plan's Pharmacy Operations as Administered by CaremarkPCS Health for 2009 and 2010

Published by the Office of Personnel Management, Office of Inspector General on 2012-12-13.

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

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

Final Audit Report
Subject:

AUDIT OF THE MAIL HANDLERS BENEFIT
PLAN’S PHARMACY OPERATIONS AS
ADMINISTERED BY CAREMARKPCS HEALTH
FOR 2009 AND 2010

Report No. 1B-45-00-12-017

Date: December 13, 2012 _ _

--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 that 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 REPORT

AUDIT OF THE MAIL HANDLERS BENEFIT PLAN’S
PHARMACY OPERATIONS AS ADMINISTERED BY
CAREMARKPCS HEALTH FOR 2009 AND 2010

CONTRACT NO. CS 1146
PLAN CODES 41, 45, AND 48

Report No. 1B-45-00-12-017 Date: ________________
December 13, 2012

____________________________
Michael R. Esser
Assistant Inspector General
for Audits

AUDIT OF THE MAIL HANDLERS BENEFIT PLAN’S
PHARMACY OPERATIONS AS ADMINISTERED BY
CAREMARKPCS HEALTH FOR 2009 AND 2010

CONTRACT NO. CS 1146
PLAN CODES 41, 45, AND 48

Report No. 1B-45-00-12-017 Date: ________________
December 13, 2012

The enclosed audit report details the results of our audit of the Mail Handlers Benefit Plan’s
(Plan) pharmacy operations as administered by CaremarkPCS Health [a subsidiary of CVS
Caremark Corporation], the Plan’s pharmacy benefit manager (PBM), for 2009 and 2010. The
primary objective of our audit was to determine if the Plan complied with the regulations and
requirements contained within Contract CS 1146, between the Plan and the Office of Personnel
Management (OPM), and the requirements within its contract with the PBM. The audit was
performed at the PBM’s location in Northbrook, Illinois, from February 13, 2012 to March 2,
2012.

The audit covered mail and retail pharmacy claims and the Plan’s adherence to its contractual
requirements for contract years 2009 and 2010. The results of our audit have been summarized
below.

MEMBER ELIGIBILITY REVIEW

The results of our review showed that the Plan had the appropriate procedures in place to verify
member eligibility prior to pharmacy claims being paid.

i
COVERED DRUG REVIEW

The results of our review showed that the Plan had the appropriate procedures in place to ensure
that excluded drugs, specialty drugs, and high quantity prescriptions were only covered when
members received prior authorization.

ADJUDICATION REVIEW

The results of our review showed that the Plan and the PBM had appropriate procedures in place
to deny duplicate claims, claims from debarred pharmacies, and claims with zero quantities
dispensed.

PRICING REVIEW

The results of our review showed that the Plan and the PBM priced pharmacy claims according
to the agreed-upon rate and returned all rebates that were due to the Federal Employees Health
Benefits Program.

PRESCRIPTION REVIEW

The results of our review showed that the Plan and the PBM had policies and procedures in place
to properly handle high dollar prescriptions, drug refills, and expired prescriptions.

COMPLIANCE REVIEW

• Annual Fraud and Abuse Reporting Requirements Procedural

The Plan’s 2009 annual fraud and abuse report was missing a costs and benefits analysis of
the Plan’s fraud and abuse program, and it did not include the number of cases referred to
OPM’s and the Office of the Inspector General.

PERFORMANCE REVIEW

The results of our review showed that the PBM was held accountable for the performance
standards outlined in its contract with the Plan. We also identified several value based benefits
and drug utilization reviews implemented by the Plan to help reduce member costs and improve
performance.

ii
CONTENTS
PAGE

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

I. INTRODUCTION AND BACKGROUND ........................................................................1

II. OBJECTIVES, SCOPE, AND METHODOLOGY .............................................................2

III. AUDIT FINDINGS AND RECOMMENDATION ............................................................6

A. MEMBER ELIGIBILITY REVIEW ..........................................................................6

B. COVERED DRUG REVIEW .....................................................................................6

C. ADJUDICATION REVIEW ......................................................................................6

D. PRICING REVIEW ....................................................................................................6

E. PRESCRIPTION REVIEW ........................................................................................6

F. COMPLIANCE REVIEW ..........................................................................................6

1. Annual Fraud and Abuse Reporting Requirements ..............................................6

G. PERFORMANCE REVIEW ......................................................................................7

IV. MAJOR CONTRIBUTORS TO THIS REPORT ................................................................9

SCHEDULE A – CONTRACT CHARGES

SCHEDULE B – SUMMARY OF FINDINGS

APPENDIX (Plan’s response to the draft report, dated July 30, 2012)
I. INTRODUCTION AND BACKGROUND
INTRODUCTION

This report details the results of our audit of the Mail Handlers Benefit Plan’s (Plan) pharmacy
operations as administered by CaremarkPCS Health [a subsidiary of CVS Caremark
Corporation], the Plan’s pharmacy benefit manager (PBM), for 2009 and 2010. The audit was
conducted pursuant to the provisions of Contract CS 1146; Title 5 United States Code, Chapter
89; and Title 5, Code of Federal Regulations, Chapter 1, Part 890 (5 CFR 890). The audit was
performed by the Office of Personnel Management’s (OPM) Office of the Inspector General
(OIG), as established by the Inspector General Act of 1978, as amended. The audit was
performed at the PBM’s location in Northbrook, Illinois, from February 13, 2012 to March 2,
2012.

BACKGROUND

The Federal Employees Health Benefits Program (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 Healthcare and Insurance Office (HIO) has overall responsibility for
administration of the FEHBP, including the publication of program regulations and agency
guidance. As part of its administrative responsibilities, the HIO contracts with various health
insurance carriers that provide service benefits, indemnity benefits, and/or comprehensive
medical services. The provisions of the FEHB Act are implemented by OPM through
regulations codified in 5 CFR 890.

The Plan began participating in the FEHBP in 1963 under Contract CS 1146 between OPM and
the National Postal Mail Handlers Union, a division of the Laborers International Union of North
America. The Plan is open to all federal employees, postal employees, and annuitants who are
eligible to enroll in the FEHBP. The Plan is an experience rated fee-for-service plan
underwritten by First Health Life & Health Insurance Company and Cambridge Life Insurance
Company [Coventry Health Care, Inc.].

PBMs are primarily responsible for processing and paying prescription drug claims. The
services typically include both retail and mail order drug benefits. For drugs acquired through
the “local” drugstore, the PBMs contract directly with the approximately 50,000 retail
pharmacies located throughout the United States. For maintenance prescriptions that typically
do not need to be filled immediately, PBMs offer the option of mail order pharmacies. The PBM
is used by the Plan to develop, allocate, and control costs related to the pharmacy claims program.

The Plan’s pharmacy operations and responsibilities under contract CS 1146 are carried out by
the PBM, which is located in Northbrook, Illinois. Section 10 of Contract CS 1146 includes a
provision that allows for audits of the program’s operations. Our responsibility is to review the
performance of this PBM to determine if the Plan charged costs to the FEHBP and provided
services to its members in accordance with this contract. This was our first audit of the Plan’s
pharmacy operations.

1
II. OBJECTIVES, SCOPE, AND METHODOLOGY
OBJECTIVES

The primary objectives of this audit were to:

• Obtain reasonable assurance that the Plan complied with the provisions of the FEHB Act and
regulations that are included, by reference, in the FEHBP contract.

• Obtain reasonable assurance of the Plan’s compliance with the provisions of the contract
with the PBM.

• Determine whether costs charged to the FEHBP and services provided to its members were
in accordance with the terms of the FEHBP contract and federal regulations.

SCOPE

We conducted this performance audit in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our audit findings and
conclusions based on the audit objectives. We believe that the evidence obtained provides a
reasonable basis for our findings and conclusions based on the audit objectives.

This performance audit covered pharmacy claims and the Plan’s adherence to its contractual
requirements for contract years 2009 and 2010. The audit scope included a review of the PBM’s
compliance with the Health Insurance Portability and Accountability Act (HIPAA), its fraud and
abuse program, and internal controls related to its claim processing system. In 2009 and 2010,
the Plan paid $792,077,332 in prescription drug charges (claims net of rebates and adjustments)
to the PBM (see Schedule A).

In planning and conducting the audit, we obtained an understanding of the Plan’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 of transactions and not tests of controls. Based on our
testing, we did not identify any significant matters involving the Plan’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 the Plan’s system of internal
controls taken as a whole.

In conducting our audit, we relied to varying degrees on computer-generated data provided by
the Plan. 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 audit testing, nothing came to our attention to cause us to doubt its reliability. We believe
that the data was sufficient to achieve the audit objectives.

2
We also conducted tests to determine whether the Plan had complied with the Contract, service
agreements, applicable procurement regulations (i.e., Federal Acquisition Regulations and
Federal Employees Health Benefits Acquisition Regulations, as appropriate), and the laws and
regulations governing the FEHBP. Exceptions noted in the areas reviewed are set forth in the
“Audit Findings and Recommendation” section of this report. With respect to the items not
tested, nothing came to our attention that caused us to believe that the Plan and the PBM had not
complied, in all material respects, with those provisions.

METHODOLOGY

To test whether the Plan accurately charged the FEHBP for 2009 and 2010 prescription drug
benefits and complied with its contractual requirements, we performed the following audit steps.
The 2009 and 2010 claims universe used in the audit steps below included 14,317,837 pharmacy
claims totaling $845,724,503. The Plan reported 367,699 members enrolled for 2009 and
332,284 members enrolled for 2010.

Member Eligibility Review

• We reviewed all claims to determine if the member was eligible in the Plan’s system at
the time the prescription was filled.
• To determine if the Plan properly enrolled dependent members, we identified all 833
dependents age 23 and over (760 disabled and 73 non-disabled) that had claims paid in
2009 and 2010. We verified the eligibility of all 73 non-disabled dependents and selected
a judgmental sample of 32 members, out of 760 disabled dependents, to determine if the
Plan could support each member’s disability status. The judgmental sample was picked
by selecting every 25th member from the list of 760 disabled dependents.
• We reviewed all claims to determine if any payments were made to non-FEHBP
members, or members enrolled in another group or plan code.

Covered Drug Review

• We reviewed all claims to determine if the Plan and the PBM denied payments for drugs
that were excluded from coverage.
• We reviewed all 391 claims, totaling $1,296,161, which had a quantity dispensed of
8,000 or more to determine if the large quantities of drugs were allowable.
• We reviewed all claims to determine if the Plan and the PBM documented its
authorization of drugs requiring prior approval.
• We conducted a meeting with the Plan and the PBM to obtain detailed information on
system edits, prior authorizations, excluded drugs, etc.

Adjudication Review

• We reviewed all claims to determine if any payments were made for duplicate claims or
zero quantities dispensed.
• We reviewed all claims to determine if any payments were made to debarred pharmacies.

3
Pricing Review

• We tested the validity of our claims data by observing queries within the PBM’s claims
system to ensure that the totals matched.
• We reviewed prior audit reports from both internal and external auditors that tested the
Plan’s pricing of pharmacy claims and determined if the appropriate discounts were given
to the FEHBP.
• We reviewed rebate reports and account credits to determine if rebates, recoveries,
settlements, and adjustments were properly returned to the FEHBP.
• We obtained the Plan’s annual accounting statements and compared them to the PBM’s
billings to determine if the Plan added any additional administrative fees or profit to the
pharmacy claims.

Prescription Review

• We reviewed all 58 claims that were $35,000 or greater, totaling $2,696,963, to
determine if the high dollar claims were properly supported by the original scripts.

Compliance Review

• We reviewed our prior audits of the PBM’s HIPAA policies to determine if there were
any changes during the past year and if the policies still comply with federal regulations.
• We reviewed the Plan’s and the PBM’s policies and procedures for fraud and abuse to
determine if they complied with all eight industry standards for fraud and abuse programs
as outlined in the FEHBP Carrier Letter 2003-23.
• We reviewed the information provided by the PBM in response to our Claims Processing
Questionnaire to determine what edits and controls were used in its claims processing
system.
• We reviewed the PBM’s internal control policies and procedures to ensure that there
were segregation of duties, physical safeguards, management review of high dollar
claims, and controls to limit the risks associated with data entry.
• We held a meeting with the Plan and the PBM to discuss what internal controls they had
in place related to the processing and payment of claims.
• We reviewed the Plan’s annual fraud and abuse reports that were submitted to OPM to
determine if the Plan complied with all of the reporting requirements listed in the
Contract.

Performance Review

• We reviewed the Plan’s value-based benefit initiatives that were implemented for the
FEHBP to determine if the initiatives reduced costs or increased benefits for FEHBP
members.
• We reviewed the 2009 and 2010 Performance Guarantee Reports to determine if the
PBM met the performance requirements of the Plan and OPM.
• We reviewed the PBM’s Drug Utilization Reports and met with the Plan to determine
how it used the reports to help reduce or contain pharmacy costs.

4
Only those samples specifically identified as such were statistically based. Consequently, the
results of the non-statistical samples could not be projected to the universe since it is unlikely
that the results are representative of the universe as a whole. We used Contract CS 1146 to
determine if claim processing and administrative fees charged to the FEHBP were in compliance
with the terms of the Contract.

The results of our audit were discussed with Plan officials throughout the audit and at an exit
conference. We also issued a draft report to the Plan on June 14, 2012, for review and comment.
The Plan’s response and comments to our draft report were considered in preparing the final
report and are included as an Appendix.

5
III. AUDIT FINDINGS AND RECOMMENDATION
A. MEMBER ELIGIBILITY REVIEW

The results of our review showed that the Plan had the appropriate procedures in place to
verify member eligibility prior to pharmacy claims being paid.

B. COVERED DRUG REVIEW

The results of our review showed that the Plan had the appropriate procedures in place to
ensure that excluded drugs, specialty drugs, and high quantity prescriptions were only
covered when members received prior authorization.

C. ADJUDICATION REVIEW

The results of our review showed that the Plan and the PBM had appropriate procedures in
place to deny duplicate claims, claims from debarred pharmacies, and claims with zero
quantities dispensed.

D. PRICING REVIEW

The results of our review showed that the Plan and the PBM priced pharmacy claims
according to the agreed-upon rate and returned all rebates that were due to the FEHBP.

E. PRESCRIPTION REVIEW

The results of our review showed that the Plan and the PBM had policies and procedures in
place to properly handle high dollar prescriptions, drug refills, and expired prescriptions.

F. COMPLIANCE REVIEW

1. Annual Fraud and Abuse Reporting Requirements Procedural

The following exceptions were identified during our review of the Plan's fraud and abuse
program:

• The Plan’s 2009 annual fraud and abuse report, which was submitted to OPM on
March 31, 2010, was missing a costs and benefits analysis of the Plan's fraud and
abuse program; and

• The Plan’s 2009 annual fraud and abuse report did not address the number of cases
referred to OPM and the OIG.

Contract CS 1146, paragraph 1.9(a), Detection of Fraud and Abuse, states that the Carrier
must submit annual fraud and abuse reports to OPM addressing an annual analysis of

6
costs and benefits for its fraud and abuse program and the number of cases referred to
OPM and the OIG.

Because the Plan submitted its 2009 annual fraud and abuse report without several
critical elements required by OPM, the effectiveness of the Plan's fraud and abuse
program was unable to be assessed.

The Plan’s Comments:

The Plan agrees that Section 1.9 of the Contract requires carriers to submit annual fraud
and abuse reports to OPM addressing an annual analysis of costs and benefits for its fraud
and abuse program. However, it pointed out that the fraud and abuse template issued by
OPM on January 31, 2011, does not include a corresponding line item for the costs
incurred by the fraud and abuse program. For the OIG to properly analyze the
effectiveness of the Plan’s fraud and abuse program, the Plan has provided the OIG with
support to show what costs were incurred by the fraud and abuse program for 2009
through 2010. Based on the total amounts provided, the Plan shows an average savings
of $8 for every $1 expended on its efforts to detect and prevent fraud, waste, and abuse.

In response to the second part of the finding, the Plan has already begun addressing the
number of cases referred to OPM and the OIG using the January 31, 2011 fraud and
abuse template issued by OPM. Therefore, the Plan requests that this finding be dropped.

OIG Comments:

While we acknowledge the Plan’s position and the missing information that was provided
to support the claimed costs of its fraud and abuse program during our audit, the fact
remains that this information should have been included in the annual fraud and abuse
report submitted to OPM for 2009. Contract provisions under section 1.9 spell out the
Plan’s responsibilities regarding fraud and abuse reporting and are enforceable until such
time that the Contract’s requirements are modified. That being said, we commend the
Plan for taking action to ensure that the number of cases referred to OPM is documented
in future fraud and abuse reports and would encourage them to continue this practice
going forward.

Recommendation 1

We recommend that the Contracting Office ensure that the Plan’s annual fraud and abuse
reports contain all of the information required by section 1.9 of the Contract. This
includes providing a costs and benefits analysis of the Plan's fraud and abuse program,
and addressing the number of cases referred to OPM and the OIG.

G. PERFORMANCE REVIEW

The results of our review showed that the PBM was held accountable for the performance
standards outlined in its contract with the Plan. We also identified several value based

7
benefits and drug utilization reviews implemented by the Plan to help reduce member costs
and improve performance. These programs include managed drug dispensing limitations,
specialty drug management, generic equivalent alerts, member utilization summaries (I-
Benefits), and extra healthcare savings cards.

8
IV. MAJOR CONTRIBUTORS TO THIS REPORT
Special Audits Group

, Auditor-In-Charge

, Staff Auditor

, Group Chief

, Senior Team Leader

9
SCHEDULE A

AUDIT OF THE MAIL HANDLERS BENEFIT PLAN'S
PHARMACY OPERATIONS
AS ADMINISTERED BY CAREMARKPCS HEALTH
FOR 2009 AND 2010

CONTRACT CHARGES
REPORT NUMBER 1B-45-00-12-017

PRESCRIPTION DRUG BENEFITS

A. PHARMACY CLAIMS

2009 PRESCRIPTION DRUG CLAIM PAYMENTS $408,114,347
2010 PRESCRIPTION DRUG CLAIM PAYMENTS $383,962,985

TOTAL CONTRACT CHARGES $792,077,332
SCHEDULE B

AUDIT OF THE MAIL HANDLERS BENEFIT PLAN'S
PHARMACY OPERATIONS
AS ADMINISTERED BY CAREMARKPCS HEALTH
FOR 2009 AND 2010

SUMMARY OF FINDINGS
REPORT NUMBER 1B-45-00-12-017

AUDIT FINDINGS

A. COMPLIANCE REVIEW

1. Annual Fraud and Abuse Reporting Requirements Procedural
- 2009 Fraud and Abuse Report Missing Costs and Benefits Analysis
- 2009 Fraud and Abuse Report Missing Number of Cases Referred to OPM-OIG

TOTAL PROCEDURAL FINDINGS 1
AIIIH:ntlix

(~ C O V E N T RY
r Ht o ltfJ t sre

July 30, 2012 .

Group Chief
Special Audits Group
U.S. Office of Personnel Management
Office of Inspector General
1900 E Street, NW, Room 6400
Washington, DC 20415- 1100

Re: OPM OIG Draft AUd~ Report No. l B-45-00- 12-o17
A udtt of the Mail Handlers Benefit Plan's Phanmacy Operations
as Administered by CaremarkPCS Health for 2009 and 2010

Dear_
Attached please fn d the response of Coventry Heatth Care r Co\le ntryj
management to U.S. Office of Personnel Management Office of Inspector
General DnaftAudit Report No. 18-45-00-1 2-017, Audlt oltheMaii Handera
Benef it Plan's Pharmacy Operations as Administered by Carema:1<PCS Health
for 2009 and 2010. Covently looks forward to discussing the contents of this
response at your convenience, and to a prorrpt and mutualty satisfactory
resolution ofth is audit Please contactme if you have any questions or require
additional information regard ing this response.

Sincerely,

Vice President- Federal Programs
Coventry Health Care, Inc.

Enclos ures

ce:
Pages 1 throu gh to deleted by the OIG

Not relevant to th e Final Rep ort

Deleted by tbe OI G

Not relevant to the Final Report

Recommendation 4
We recommend that the Contracting Office require the Plan to include an
analysis of costs and benefits of as fraud and abuse program with each annual
fraud and abuse report submitted to OPM.

Coventry Response: The a PM OIG bases this recommendation on the same
compli ance review described in Coventry's response to Recommendation '3
above. Generally speaking, the OIG's observation is, again, correct in that
Section 1.9 of the FEH8 Standard Contract requires plan carriers to furnish a PM
with an an nual cost-benefit analysis of theirfra ud and abuse program. Coventry
notes, however, that while the fraud and abuse report template transmitted in
aPM's above-referenced January 31, 2011, e-mail contains line items for several
factors that enable aPM to identify the benefits attributable to that program (i.e.,
the line items denoted Dollars Recovered , Actual Savings, and Prevented Loss),
that template does not include a corresponding line item for quantifying the costs ·
incurred to achieve these considerable benefits . That said, enclosed as Exhibits
C and D to this response are copies of (i) the MH8P's 2009 and 2010 fraud and
abuse reports submitted timely to aPM, and (ii) Coventry's March 2, 2012,

response to OPM OIG Information Request #35 from this audtt spe cifying the
costs Coventry charged the MHBP Contract in those years for its fraud and .
abuse program.

Review of those documents together reveals that during Contract Years 2009
2010, the MHBP realized approximately $16.2 miilion in cumuiative fraud and
abuse recoveries and actual/projected savings. It further evidences that during
that same time period the costs that Coventry charged just over $2.1 million in
costs to the MHBP Contract for the activities of its Special lnvestiqative Untt
(SIU) team. Accordingly, during those years the MHBP. realized benefit savings
of nearly $8 for every $1 Coventry expended on its efforts to detect and prevent
fraud. waste, and abuse.

Far these reasons, the OPM DIG should withdraw this Recommendation 4.

Recommendation 5
We recommend that the Contracting Office require the Plan to include the
number of cases referred to OPM·OIG with each annual fraud and abuse report
submitted fo OPM.

Coventry Response: As noted in the discussion of Recommendation 3 above,
OPM furnished FEHB plan carriers with a fraud and abuse reporting template by
e-mail dated January 31, 2011. That template, which Coventry has utilized in the
years following (i.e., Contract Years 2010 and 2011) contains a line item - Cases
Referred to OPM's OiG - which serves that very function. In other words,
Coventry already has begun to fumish OPM with this Information, and tt
continues to do so. See Exhibit C hereto . Accordingly, the OPM OIG should
withdraw this Recommendation 5.

Deleted by the 01 G

Xce relevant to the Final Report

Vice Presidenl- Federal Programs
Coventry Health Care, Inc.

Enclosures