oversight

Audit of UNICARE Life and Insurance Company's Pharmacy Operations as Administered by WellPoint Health Networks, Inc. 2004-2007

Published by the Office of Personnel Management, Office of Inspector General on 2009-09-30.

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

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                                                                                                                   u.s. OFFICE OF PERSONNEL MANAGEMENT
                                                                                                                                     .OFFICE OF THE INSPECTOR GENERAL
                                                                                                                                                       OFFICE OF AUDITS




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                                                                                                     Re.port:NQ. 1 C47"00"09~018

                                                                                                   . Date~September 30; 2009'



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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

                                        Pharmacy Drug Operations

                                            Contract CS 2877

                                  UNICARE Life and Insurance Company

                                          Plan Codes 17 and 72



                                     WeIlPoint Health Networks~ Inc.

                                              Mason, Ohio





                    REPORT NO. IC-17-00-09-018                 DATE:   Septemb~r      30, 2009




                                                           '~/J~
                                                            ~~CL~

                                                            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

                                          Pharmacy Operations

                                            Contract CS 2877

                                  UNICARE Life and Insurance Company

                                          Plan Codes 17 and 72



                                      WellPoint Health Networks, Inc.

                                               Mason, Ohio





                    REPORT NO. IC-17-00-09-0 18                  DATE: September 30, 2009


      The Office of the Inspector General has completed a perfOlmance audit of the 2004 through 2007
      UNICARE Life and Insurance Company's (UNICARE) phannacy operations as administered by
      WellPoint Health Networks, Inc. (WellPolnt). The primary objective of the audit was to
    . detennine whether WellPoint complied with the regulations and requirements contained within
      its service agreement ,vith UNICARE and Contract CS 2877 (bet\veen UNICARE and the Office
      of Personnel Management). The audit was conducted in Mason, Ohio, from November 3
      through November 21, 2008. Our audit results are summarized below.

                                     ADMINISTRATIVE EXPENSES

     Unallowable Administrative Expenses                                                     $9,330

     WellPoint charged the FEHBP $9,330 for unallowable administrative expenses in contract years
     2005 through 2007.




        www.opm.goY                                                                        www.usajobs.goY
                             LOST INVESTMENT INCOME


Lost Investment Income on Administrative Expense Overcharges                            $1,298

The FEHBP is due $1,298 for lost investment income on the 2005 through 2007 administrative
expense overcharges calculated through August 31,2009. In addition, the contracting officer
should recover lost investment income on amounts due for the period beginning September 1, 2009
until all questioned costs ~have been returned to the FEHBP.

                          DRUG MANUFACTURER REBATES

We deteffi1ined that WellPoint returned all manufacturer drug rebates and the associated
administrative fees to the FEHBP in compliance with the tenns of the service agreement between
WelIPoint and UNICARE, as well as Contract CS 2877 between UNICARE and OPM.

              ANNUAL ACCOUNTING STATEMENT RECONCILIATION

We reconciled the pharmacy cost reported on UNICARE's Aruma! Accounting Statements to the
supporting documentation provided by WellPoint and did not identify any material variances.

                       MAIL ORDER DRUG PROFIT REMOVAL

We determined that WellPoint removed all profit from its mail order drug costs charged to the
FEHBP in compliance with the terms of the service agreement between WellPoint and
UNICARE, as well as Contract CS 2877 between UNICARE and OPM.




                                              Jl
                                     CONTENTS

                                                                                 PAGE

       EXECUTIVE SUMMARY	                                                          i


  1.   INTRODUCTION AND BACKGROUND	                                               1


n.     OBJECTIVES, SCOPE, AND METHODOLOGY	                                        2


III.   AUDIT FINDINGS AND RECOMMENDATIONS	                                        5


       A.   ADMINISTRATIVE EXPENSES	                                              5


            1.	 UNALLOWABLE ADMIN1STATIVE EXPENSES                                5


       B.   LOST INVESTMENT INCOME	                                               6


            1.	 LOST INVESTMENT INCOME ON ADMINISTRATIVE

                EXPENSE OVERCHARGES                                               6


       C.   DRUG MANUFACTURER REBA TES	                                           7


       D.   ANNUAL ACCOUNTING STATEMENT RECONCILIATION                           :.7

       E.   MAIL ORDER DRUG PROFIT REMOVAL.	                                      7


IV.    MAJOR CONTRIBUTORS TO TI-lIS REPORT	                                       8


       SCHEDULE A - CONTRACT CHARGES AND QUESTIONED COSTS
       SCHEDULE B - LOST INVESTMENT INCOME

       APPENDIX (WellPoint's response dated May 28, 2009, to the draft rep0I1)
                    I. INTRODUCTION AND BACKGROUND


INTRODUCTION


As authorized by the Inspector General Act of 1978, as amended, we conducted an audit of the
2004 through 2007 UNICARE Life and Insurance Company (UNICARE) pharmacy operations
as administered by WellPoint Health Networks, Inc. (WellPoint). The audit field work was
conducted at WellPoint's offices in Mason, Ohio, from November 3 through
November 21, 2008. Additional audit work was completed in our Washington, D.C. office.

BACKGROUND

The Federal Employees Health Benefits Program (FEHBP) was established by the Federal
Employees Health Benefits (FEHB) Act (Public Law 86-382), enacted on Septem bel' 28, 1959.
The FEHBP was created to provide health insurance benefits for federal employees, annuitants,
and dependents. The Office of Personnel Management's (OPM) Center for Retirement and
Insurance Services has overall responsibility for administration of the FEl-IBP. The provisions of
the FEHD 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 that provide service
benefits, indemnity benefits, or comprehensive medical servlces.

WellPoint Health Networks, Inc. is one of the largest publicly traded health care insurers in the
United States. UNICARE, one of its primary subsidiaties, entered iDto a government-wide
contract (CS 2877) v,"ith OPM to provide a health benefit plan authorized by the FEHB Act.
Consequently, since in this instance the health carrier (UNICARE) and the Pharmacy Benefit
Manager (WeIlPoinf) arc part of the same entity, UNICARE has a service agreement instead ofa
contract with VlcllPoint to manage the delivery and financing of prescription drug benefits for
UNICARE health benefit purchasers. As a result of this relationship, the Pharn1acy Benefit
Manager (PBM) agreement was fully transparent where actual prices were passed through to the
FEHBP.

On April 13,2009, it \vas announced that Express Scripts (a large national PBM) had acquired
WellPoint's PBM business. As a result of1his acquisition, the favorable conditions resulting
from WellPoint's subsidiary relationship with its PBM that benefited the FEHBP in this case no
longer exist.

.This was our first audit of the UNICARE pharmacy benefit operations as administered by
 WellPoint.
               II. OBJECTIVES, SCOPE, AND METHODOLOGY

OBJECTIVES


The objectives of the audit wer~ to detelmine whether WeUPoint's charges to the FEHBP and
services provided to FEHBP members were in accordance with the telms of the service
agreement between WellPoint and UNICARE as well as Contract CS 2877 between UNICARE
and OPM. Our specific objectives were as follows:

     Administrative Expenses

     •	 To determine whether the administrative expenses charged to the FEHBP were
        allowable, reasonable and aUocable.

     Drug Manufacturer Rebates

     •	 To determine ifthe correct rebate percentages were used to calculate FEHBP drug
        manufacturer rebates;
     •	 To determine whether the FEHBP was credited the appropriate amount of drug
        manufacturer rebates in a timely manner; and
     •	 To detetmine if the FEHBP was credited for any administrative fees earned by
        WellPoint as a result ofFEHBP rebates.

     Annual Accounting Statement (AAS) Reconciliation

     •	 To detem1ine whether the costs charged to the FEHBP by WellPoint reconciled to those
        reported to aPM on the AAS .

    . Mail Order Profit Removal

     •	 To detetmine whether WellPoint properly removed profit included in the Mail Order
        phmmacy charges to the FEHBP.

SCOPE

We conducted this performance audit in accordance with generally accepted government
auditing standards. Those standards require that we plan and perfOlm 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.

We reviewed UNICARE's Annual Accounting Statements for contract years 2004 through 2007.
During this period, UNICARE paid $40,530,410 in prescription dmg charges (see Schedule A).

In planning and conducting the audit, we obtained an lmderstanding ofWellPoillt's internal
control stmcture to help detem1ine the nature, timing, and extent of our auditing procedures.



                                                2

This was detennined 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 WellPoint's internal control
structure and its operation. However, since our audit would not necessarily disclose all
significant matters in the internal controlstructure, we do not express an opinion on WellPoint's
system of internal controls taken as a whole.

In conducting our audit, we relied 10 varying degrees on computer-generated data provided by
WellPoint. Due to time constraints, we did not verify the reliability of the data generated by the
various infOlmation 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.

We also conducted tests to detemline whether WellPoint had complied with the contract and
service agreement, the 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
detail in the "Audit Findings and Recommendations" section oftms audit report. With respect to
items not tested, nothing came to our attention that caused us to believe that WellPoint has not
complied, in all material respects, with those provisions.


METHODOLOGY
To test WellPoint's compliance with the contracts we reviewed the following areas:

     Administrative Expenses

      •	 We judgmentally selected 6 cost centers with the highest amounts charged to the
         FEHBP in 2007, totaling $38,024 (from a universe of 23 cost centers totaling $73,178).
         We then reviewed the costs charged to the FEHBP in the months of January, July, and
         December of 2007 to determine if the amounts charged were necessary, reasonable, and
         alJowabIe.

     Drug Manufacturer Rebates

     •	 From the largest FEHBP carrier administered by WellPoint, we judgmentally selected
        10 dmg manufacturers (from a universe of 80 drug manufacturers), with the highest
        FEHBP rebates earned from 2004 through 2007. From this sample:

          . a.	 We randomly selected and reviewed two dmg products from each manufacturer
                and compared the contract rebate terms with WellPoint's billing for the second
                qum1er of 2007 to verify that the COlTect rebate percentages were being applied.

           b.	 To determine if administrative fees earned by WellPoint as a result ofFEHBP
               dmg utilization were properly retumed to the FEHBP, we reviewed all 2006 and
              2007 administrative fee credits, totaling $7,633 and $6,078, respectively, and
              verified the amount was returned to the FEHBP.

           c.	 To detennine if the FEHBP was properly credited for rebates received, we
               reviewed all FEHBP rebates for 2004 through 2007 and traced them from
               WeUPoint's general ledger to the AAS and the drawdown reports.

     AAS Reconciliation

     •	 To detennine if the amounts reported by UNICARE on the AAS were accurate, we
        reconciled WellPoint's general ledger totals for 2004 through 2007 to the AAS.

     Mail Order Profit Removal

     •	 To determine if the FEHBP was properly credited for any profit included in the mail
        order phannacy benefits, we judgmentally selected the latest three months of mail order
        phannacy claims data that was readily available from 2007 (the most CUlTent year
        included in our audit scope). Specifically, we reviewed the claims for the months of
        September through November 2007 and we verified WelIPoint's profit calculation and
        the return of monies to the FEHBP.

The samples above that were selected and reviewed were not statistically based. Consequently,
the results 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 2877 and the service agreement
between UNICARE and WellPoint to determine if processing and administrative fees charged to
the FEHBP were in compliance with the tenns of the contract and service agreement.

The results of the audit were provided to WellPoint in written inquiries and were discussed with
WellPoint officials tluoughout the audit and at the exit conference. In addition, a draft report,
dated May 14,2009, was provided to WellPoint for review and comment. WelIPoint's
comments on the draft repOli were considered in preparing the final repmi and are included as an
Appendix to this report.




                                                4

           III. AUDIT FINDINGS AND RECOMMENDATIONS


A. ADMINISTRATIVE EXPENSES


  1. Unallowable Administrative Expenses                                                    $9,330

     WellPoint charged the FEHBP $9,330 in unallowable administrative expenses in

     contract years 2005 through 2007.


     The Contract CS 2877, Section 3.2 (2)(ii) states that "Administrative expenses consists of
     all actual, allowable, allocable and reasonable expenses incurred in the adjudication of
     subscriber claims or incuned in the Carrier's overall operation of the business."

     As administrator ofUNICARE's FEHBP phannacy operations, WellPoint is paid for its
     actual administrative expenses. WellPoint's administrative expenses are captured on a
     corporate level and designated to the various pharmacy and pham13cy-reJated cost
     centers. WellPoint then allocates expenses captured by cost center to the health carriers
     included in its corporate network based primarily on the Carriers' membership or
     weighted membership compared to the total corporate membership.

     To determine whether the administrative expenses WellPoint charged to the FEHBP were
     reasonable, allocable and allowable, we reviewed WellPoint's procedures for allocating
     phmmacy-related expenses and reviewed the administrative cost centers to identifY any
     unallowable expenses.

     Our review found that WellPoint's allocation methods were reasonable and complied
     with the contract. However, we identified one unallowable cost center that was charged
     to the FEHBP in contract years 2005 through 2007. The unallowable expenses included
     in this cost center pertained to phannacy marketing and product development activities
     and were not expenses related to FEHBP phannac)' claims.

     As a result of including an unallowable cost center in the costs charged   10   the FEHBP,
     Well Point overcharged the FEHBP $9,330.

     WellPoint Comments:

     WellPoint agreed with the finding and stated that it would be retuming $9,330 to the
     FEHBP. Additionally, WellPoint developed new procedures to ensure that the FEHBP is
     charged only for the appropriate administrative expenses.
     Recommendation 1

     We recommend that the contracting oflicer ensure that WellPoint returns $9,330 to the
     FEHBP for unallowable administrative expenses charged to UNICARE in contract years
     2005 through 2007.




                                              5

     Recommendation 2

     We recommend that the contracting officer ensure that WelIPoint has instituted the new
     procedures referred to in its response to the draft report.

B. LOST INVESTMENT INCOME

  1. Lost Investment Income on Administrative Expense Overcharges                       $1,298

     In accordance with FEHBP regulations and Contract CS 2877 between aPM and
     UNJCARE, the FEHBP is entitled to recover lost investment income (LIl) on the
     untimely return of drug manufacturer rebates to the FEHBP, which totaled $9,330
     relating to contract years 2006 and 2007. The LIl on these untimely returned rebates
     amounts to $1,298, through August 31,2009.

    Contract CS 2877, Sections 3.4 (e) and (f), states that investment income lost as a result
    of failure to credit income due to the contract is due to the govemment based on a simple
    interest f0I111uJa from the date the funds should have been credited to the dale the funds
    are returned.

     We determined that the FEHBP is due $1,298 in LIl, calculated through August 31, 2009
     (See Schedule B). In addition, the FEHBP is entitled to recover L1I on amounts due
     beginning on September 1,2009, until all questioned costs have been retumed to the
     FEHBP.

     Our calculation of LII was based on the United States Dcpm1ment of Treasury's
     semiannual cost of capital rates.

     WellPoint Comment:

     The draft report did not include a section covering lost investment income on the audit
     findings. Therefore, WeHPoint did not address lost investment income in its response to
     the draft report.

     Recommendation 3

     We recommend that the contracting officer require We11Point to refund the FEHBP
     $1,298 for lost investment income calculated through August 31, 2009, on the 2005
     through 2007 administrative expense overcharges.

     Recommendation 4

    We recommend that the contracting otncer recover lost investment income on amounts
    due beginning September 1,2009, until all questioned costs have been returned to the
    FEHBP.




                                             6

C. DRUG MANUFACTURER REBATES

  We determined that WellPoint returned to the FEHBP all drug rebates and the associated
  administrative fees that were received from the drug manufacturers due to FEHBP subscriber
  drug utilization in compliance with the telms of the service agreement between WellPoint
  and UNICARE, as well as Contract CS 2877 between UNICARE and OPM.

D. ANNUAL ACCOUNTING STATEMENT RECONCILIATION

  We reconciled the phamlacy cost reported on UNICARE's Annual Accounting Statements to
  the supporting documentation provided by WellPoint and did not identify any material
  variances.

E. MAIL ORDER DRUG PROFIT REMOVAL

  We detetmined that WellPoint removed all profit from its mail order drug costs charged 10
  the FEHBP in compliance with the tetms of the service agreement between WellPoint and
  UNICARE, as well as Contract CS 2877 between UNICARE and OPM.




                                             7

                 IV. MAJOR CONTRIBUTORS TO THIS REPORT

Special Audits Group

                  Auditor-In-Charge

               Auditor


                  Group Chief

                  Senior Team Leader




                                       8

                                                                                                                                           SCHEDULE A

                                                       FEDERAL EMPLOYEES HEALTH BENEFITS PROGRAM
                                                                  PHARMACY OPERATIONS

                                                           UNICARE LIFE AND INSURANCE COMPA1\'Y


                                                         CONTRACT CHARGES AND QUESTIONED COSTS

                                                              REPORT NVi\'lBER: lC-17-00-09-018

CONTRACT CHARGES                                         2004         2005           2006           2007         2008         2009            TOTAL

A. PHARMACY BENEfJT CHARGES                             57.167,677   57,653,493     $8,388,366     $8,825,557            SO           SO    $32,035,093
B. ADMINISTR,\TIVE EXPENSES                              2,252,998    2.122.173      2,113,534      2,006,613             0            0      8,495,318

                                                   I    59.420,675   $9,775.666	   $10,501,900    510,832,170           $0           ·$0    $40,530,411

QUESTIONED COSTS                                         2004         2005           2006           2007         2008         2009            TOTAL

A. ADMINISTRATIVE EXPENSES
  1. UNALLOWABLE ADMINISTR4.TIVE EXPENSES                       SO        5698         53,315         $5,317            $0            $0        $9,330

B. LOST INVESTMENT INCOME (LlI)
   1. LII ON ADMINISTR4.TIVE EXPENSE OVERCHARGES                 0           15             128            367          461          327          1,298

TOTAL QUESTIONED COSTS
                                                   I            SO        $713         $3.443         $5,684        5461         $327          510,628
                                                                                                                                l:;CHEDULEB

                                                      FEDERAL EMPLOYEES HEALTH BENEFIT PROGRAM
                                                                 PHARMACY OPERATIONS
                                                          liNICARE LIFE AND INSURANCE COMPANY

                                                                   LOST INVESTMENT INCOME
                                                                 REPORT NUMBER lC-17-00-09-018

  Yell I'                                                200-1          2005          2006          2007       2008      2009      Total
Audit Finding:
VNALLO\VABLE ADMINISTRATIVE EXPENSES                       SO           S698         53,315        $5,317        $0        $0      $9,330



                               Totals (per year):          SO           S698         $3,315       $5,317         SO        SO      $9,330
                              Cumulative Totals:           SO           $698         $4,013       $9,330     $9,330    $9,330      $9,330

                    Avg. Interest Rlite (per year):   4.2500%        4.3750%       5.4375%       5.5000%    4.9375%   5.2500%

                Intel"est on Prior Years Findings:         SO             SO           538          $221       5461      5327      51,047

                          Current Years Interest:          SO            5115          $90          $146         SO        $0      $251

    Total Cumulative Interest Calculated ThrOUg~1          SO            S15          $128          $367       5461      $327      $1,298
                                 August 31,2009;
                                                                               APPENDIX



                  ~

   WELLPOINT~



Response to OPM Audit Report No. lC-17-00-09-018


Date: May 28, 2009



Prepared by:



Office of Personnel Management
Office of the Inspector General
Attention:
1900 E Street NW, Room 6400
Washington, DC 20415-1100

Response to OPM Draft Audit Report No. IC-17-00-09-018

Dear

Attached is WellPoint's to draft audit report No.1 C-17-00-09-018. If you have any
questions please feel free to contact me.


Sincerely,
A•. ADMINISTRATIVE EXPENSES

     1.	 Unallowable Administrative Expenses Charged to the FEHBP                  $9,330

        UNICARE Response

        The plan agrees with this finding.

        UNICARE Draft Response

        The plan agrees with the Ending. Please note, the plan will be relllming
        $9,330 to the Program. Attached arc procedures to ensure theFEI-JBP is
        charged only for the appropriate administrative expenses.