,j I ! u.s. OFFICE OF PERSONNEL MANAGEMENT .OFFICE OF THE INSPECTOR GENERAL OFFICE OF AUDITS .' .'." . " ' .:: - ',' .,. ': . - . ' " . ,- ' .. -. '.' ,- .. ~ - , : . . .'. . ',: -'. .... "'. ." . . .: Fbi~l.A.nditReport . Subject: Re.port:NQ. 1 C47"00"09~018 . Date~September 30; 2009' . . . --CAUTION-- . Tbi$ a~di I· i'epOlthasbeen dlstri I:Ili'edto Federa Iofficlals whoa re responsible 'Iortli ca dm inis Ira lion of thea~ d,te(l progta m. 'This audi t report mayeonfainproprieiary data which is pi-oteeied by Federal law (18 U.S;t.190S).· Tbe~dore, while Ihisaudil report i$ ;i);aiJable undertbe Freed6Ji111f Inror~atii:1D Ad and made available t~ the puhiifoiJtbeOIGwebpagCr dlulioonecdslll b.e elerdsed before, releasing the repoi-t lotbe guieral pilblie as it rna)' co~taioptoprielatyjnrormalion thatwas redaetedJrom the publicly iJistributedcop)'. 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.
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)