oversight

Audit of Blue Choice of Missouri's Pharmacy Operations As Administered By Wellpoint Health Networks, Inc

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)

                                                   ·U.S. OFFICE OF PERSONNEL MANAGEMENT
                                                          OFFICE OF THE INSPECTOR GENERAL:           "   ' . '                ..   ,.   .




                                                                           OFFICE OF AUDItS




Final Audit.Report
Subject: "

                           .          AUDITOF
                        ·BLUE·····C.FlOI.CE··()F··.•IVIISSO·URI'··S····


          ·wELtrPjtRil~;iii~~:s~                     2004~2007
                                                                                                                 lNC.·




                                          ReportNo. lD..,9G-O()-09..,017·


                                         Date: september 30, 2009




                                                         --CAUTION,--'
This 2u.dilreport bas been distributed to Federnl ()flieiaJswhoare responslhleIortbe admioistratio,!()ftbe audited program, This audit
relJ()rlmay cnntaln preprietary data whicb.is proteetcdby Federallaw(1~V:S.C; 1905), Therefore, wbile this-audit report isavailable
under the fteedom oOnformaii()D Ar~ aod made available to thepublie on the OIG webpage.e3uliQn needs to be exercised before
releasing the report i() the general public as It may contalnproprietary information that.was redacted from tae pnblirlydistributed copy.
                           UNITED STATES OFFICE OF PERSONNEL MANAGEMENT

                                             Washington, DC 20415


  Office of the
Inspector General




                                          AUDIT REPORT


                               Federal Employees Health Benefits Program

                                         Pharmacy Operations

                                           Contract CS 2838

                                        Blue Choice of Missouri

                                             Plan Code 9G



                                     WellPoint Health Networks, Inc.

                                              Mason, Ohio





                    REPORT NO. ID-9G-OO-09-0l7                 DATE:September 30, 2009




                                                            Michael R. Esser
                                                            Assistant Inspector General
                                                              for Audits




        www.opm.goY                                                                       www.usaJobs.goy
                            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 2838
                                        Blue Choice of Missouri
                                             Plan Code 9G


                                     WellPoint Health Networks, Inc.
                                              Mason, Ohio




                    REPORT NO. 1O-9G-00-09-017                 DATE:Septernber 30, 2009


     The Office ofthe Inspector General has completed a performance audit of the 2004 through 2007
     Blue Choice of Missouri (Blue Choice) pharmacy operations as administered by WeliPoint
     Health Networks, Inc. (WeliPoint). The primary objective of the audit was to determine whether
     WellPoint complied with the regulations and requirements contained within its service
     agreement with Blue Choice and Contract CS 2838 (between Blue Choice 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.

                                   MAIL ORDER PROFIT REMOVAL

     Unallowable Profit Included in FEHBP Mail Order Drug Charges                          $65,225

     WellPoint did not remove all of the operating gain (profit) included in the mail order drug
     charges to the FEHBP. As a result, the FEHBP was overcharged $65,225 in contract years 2006
     and 2007.




        www.opm.gov .                                                                     www.usajobs.gov
                               LOST INVESTMENT INCOME


Lost Investment Income on Mail Order Drug Overcharges                                   $9,155

The FEHBP is due $9,155 for lost investment income on the 2006 and 2007 mail order drug
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.

                              ADMINISTRATIVE EXPENSES

The administrative expenses charged to the FEHBP by WellPoint were in compliance with the
terms of the service agreement between WellPoint and Blue Choice as well as Contract CS 2838
between Blue Choice and OPM.

                            DRUG MANUFACTURER REBATES

We determined that WeHPoint returned all FEHBP manufacturer drug rebates and the associated
administrative fees to the FEHBP in compliance with the terms of the service agreement between
WellPoint and Blue Choice as well as Contract CS 2838 between Blue Choice and OPM.

               ANNUAL ACCOUNTING STATEMENT RECONCILIATION

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




                                               ii
                                      CONTENTS

                                                                                   PAGE


        EXECUTIVE SUMMARy                                                            i


  L     INTRODUCTION AND BACKGROUND                                                 1


 II.	   OBJECTIVES. SCOPE, AND METHODOLOGy                                          2


III.	   AUDIT FINDINGS AND RECOMMENDATIONS                                          5


        A.   MAIL ORDER PROFIT REMOVAL.	                                            5 .


             1.	 UNALLOWABLE PROFIT INCLUDED IN FEHBP MAIL ORDER

                 DRUG CHARGES                                                       5


        B.   LOST INVESTMENT INCOME	                                                6


             1.	 LOST INVESTMENT INCOME ON MAIL ORDER DRUG

                 OVERCHARGES                                                        6


        C.   ADMINISTRATIVE EXPENSES	                                               7


        D.   DRUG MANUFACTURER REBATES	                                             7


        E.   ANNUAL ACCOUNTING STATEMENT RECONCILIATION	                            7


IV.	    MAJOR CONTRIBUTORS TO THIS REPORT                                           8


        SCHEDULE A - CONTRACT CHARGES AND QUESTIONED COSTS

        SCHEDULE B - LOST INVESTMENT INCOME


        APPENDIX (WellPoint's response dated July 15,2009. to the draft report)

                    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 Blue Choice ofMissouri (Blue Choice) pharmacy operations as administered
by WellPoint Health Networks, Inc. (WeIlPoint). The audit field work was conducted at
WelJPoint'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 September 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 FEHBP. The provisions of
the FEI-IB 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 services.

WellPoint Health Networks, Inc. is one of the largest publicly traded health care insurers in the
United States. Blue Choice, one of its subsidiaries, entered into a government-wide contract (CS
2838) with OPM to provide a health benefit plan authorized by the FEHB Act. Consequently,
since in this instance the health carrier (Blue Choice) and the Pharmacy Benefit Manager
(WellPoint) are part of the same entity, Blue Choice has a service agreement instead ofa contract
with WellPoint to manage the delivery and financing of prescription drug benefits for Blue
Choice health benefit purchasers. As a result of this relationship, the Pharmacy Benefit Manager
(PBM) agreement was fully transparent where actual prices were passed through to the FEHBP.

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

This was our first audit of the Blue Choice pharmacy benefit operations as administered by
WellPoint.
The objectives of our audit were to determine whether WellPoint's charges to the FEHBP and
services provided to FEHBP members were in accordance with the terms of the service
agreement between WellPoint and Blue Choice as well as Contract CS 2838 between Blue
Choice and OPM. Our specific objectives were as follows:

     Administrative Expenses

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

     Drug Manufacturer Rebates

     •	 To determine if the conect 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 determine if the FEHBP was credited for any administrative fees earned by
        WellPoint as a result of FEHBP rebates.

     Annual Accounting Statement (AAS) Reconciliation

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

     .Mail Order Profit Removal

     •	 To determine whether Well Point properly removed profit included in the Mail Order
        pharmacy 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 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.

We reviewed Blue Choice's Annual Accounting Statements for contract years 2004 through
2007. During this period, Blue Choice paid $103,103,722 in prescription drug charges (see
Schedule A).




                                               2

In planning and conducting the audit, we obtained an understanding of WellPoint's internal
control structure to help determine the nature, timing, and extent of our auditing procedures.
This was detenninedto 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 control structure, we do not express an opinion on WellPoint's
system of internal controls taken as a whole.

In conducting our audit, we relied to 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 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 beJieve
that the data was sufficient to achieve the audit objectives.

We also conducted. tests to determine 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 Reconunendations" section of this 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 six cost centers with the highest amounts charged the
         FEHBP in 2007, totaling $90,348 (from a universe of27 cost centers totaling
         $168,098). Specifically, we 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 allowable.

      Drug Manufacturer Rebates

     •	   From the largest FEHBP carrier administered by Wel1Point, we judgmentally selected
          10 drug 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 drug products from each manufacturer
               and compared the contract rebate terms with WellPoint's billing for the second
               quarter of 2007 to verify that the correct rebate percentages were being applied.




                                                  3

           b.	 To determine if administrative fees earned by WellPoint as a result ofFEHBP
               drug utilization were properly returned to the FEHBP,.we reviewed all 2006 and
               2007 administrative fee credits, totaling $18,117 and $14,453, respectively, and
               verified that the amount was returned to the FEHBP.

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

     AAS Reconciliation

     •	 To determine ifthe amounts reported by Blue Choice on the AAS were accurate, we
        reconciled WellPoint's general ledger total 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 pharmacy benefits, we judgmentally selected the latest three months of mail order
        pharmacy claims data that was readily available from 2007 (the most current year
        included in our audit scope). Specifically, we reviewed the claims for the months of
        September through November 2007, and we verified WellPoint'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 2838 and the service agreement
between Blue Choice and WellPoint to determine if processing and administrative fees charged
to the FEHBP were in compliance with the terms of the contract and service agreement.
     · .
The results of the audit were provided to WellPoint in written inquiries and were discussed with
WellPoint officials throughout the audit and at the exit conference. In addition, a draft report,
dated May 19,2009, was provided to WellPoint for review and comment. WellPoint's
comments on the draft repOli were considered in preparing the final report and are included as an
Appendix to this report,




                                                4

             III. AUDIT FINDINGS AND RECOMMENDATIONS


. A. MAIL ORDER PROFIT REMOVAL


   1. Unallowable Profit Included in FEHBP Mail Order Drug Charges                        $65,225

     WellPoint did not remove all of the operating gain (profit) included in the mail order drug
     charges to the FEHBP. As a result, the FEHBP was overcharged $65,225 in contract years
     2006 and 2007.

     In a settlement agreement effective December 2006, OPM and WellPoint as parties to
     specific FEHBP Contracts (including Contract CS 2838, Blue Choice of Missouri),
     agreed that WellPoint's mail order pharmacy affiliate included a profit element in the
     mail order drug charges that was inappropriately passed on to the FEHBP by the FEHBP
     HMOs. WellPoint agreed to pay a monetary settlement to the FEHBP for the recovery of
     profit included in the mail orderchargesincalendaryears2001tluough2005.In
     addition, Wel1Point stated that its agreement with the health plans provides for all drug
     pricing at cost.

     For contract years 2006 and 2007, we reviewed the procedures implemented by WellPoint
     for identifying and removing the operating gain (profit) from the FEHBP mail order
     drugs.

     To test whether WellPointproperly removed all profit from FEHBP's mail order drug
     charges, we obtained WellPoint's 2007 FEHBP Mail Order Service Claims spreadsheet,
     which identified the profit included in each drug charge. Using the claims data and the
     profit formula provided by WeJlPoint, we recalculated the profit to be removed from Blue
     Choice's mail order drug charges from September to November 2007.

      We compared our calculation of the profit included in the drug claims with WellPoint's
      reported profit and identified a $1.50 variance per script. Specifically, we calculated the
      profit by taking the total paid (patient co-pay and carrier payment), less cost of goods sold
      (COGS) and administrative cost. Our calculation of the COGS agreed with WellPoint's
      COGS. However, when we subtracted the COGS and administrative cost from the total
      paid. our profit was $1.50 higher per script than what was reported by WellPoint.

     We informed WellPoint of the profit variance during our on-site visit. WellPoint stated
     that the $1.50 per script charge was erroneously excluded from the profit calculation.
     Therefore, the amount of profit to be returned to the FEHBP was understated. The $1.50
     per script (which was a dispensing fee) was not removed from the pricing system forthis
     client as it was for the other FEHBP clients. As a result, the FEHBP was overcharged
     $8,396 from September to November 2007 due to Welll'oint's profit removal
     miscalculation.

      In our draft repmi, we requested that WeIlPoint review and correct its profit calculation for
      contract year 2006 and the remainder of contract year 2007 to identify all additional profit


                                                5

    that was not removed from FEHBP mail order drug charges, provide the 01G support for
    the calculations, and reimburse the FEHBP for the additional overcharges identified.

    WelJPoint Comment:

    WeIlPoint agrees with this finding. The $1.50 per script fee had not been removed from
    the pricing system for the Blue Choice client as it had been for the other FEHBPclients.
    An analysis of Blue Choice scripts dispensed in the mail order pharmacy from January 1,
    2006 through December 31, 2007, showed that the FEHBP was overcharged $65,225
    during this period (this amount includes the $8,396 we originally identified). WellPoint
    agrees to reimburse the FEHBP this amount.

    At the beginning of2008, this client was transitioned to a different claims system which
    eliminated this error.

     OIG Comment:

     We reviewed WellPoint'srecaJculation of the additional profit to be removed from the
     mail order pharmacy drug claims from January 1,2006 through December 31, 2007, and
     concur that the FEHBP is due $65,225 for mail order pharmacy overcharges.

     Recommendation 1

     We recommend that the contracting officer ensure that WellPoint returns to the FEHBP
     $65,225 for mail order pharmacy claims overcharges from January 1,2006 through
     December 31, 2007.

     Recommendation 2

     We recommend that the contracting officer require WellPoint to ensure that the new
     claims system identifies and removes all profit and other unallowable charges from
     FEHBP's mail order pharmacy claims.

B. LOST INVESTMENT INCOME

  1. Lost Investment Income on Mail Order Drug Overcharges                              $9,155

     In accordance with.FEHBP regulations and Contract CS 2838 between aPM and Blue
     Choice, the FEHBP is entitled to recover lost investment income on the mail order drug
     overcharges, which totaled $65,225 for contract years 2006 and 2007.

    Contract CS 2838, 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 10 the govemment based on a simple
    interest formula from the date the funds should have been credited to the date the funds
    are returned.




                                             6
        We determined that the FEHBP is due $9,155 for lost investment income, calculated
        through August 31, 2009 (see Schedule B). In addition, the FEHBPis entitled to recover
        lost investment income on.amounts due beginning on September 1, 2009, until all
        questioned costs have been returned to the FEHBP.

        Our calculation oflost investment income was based on the United States Department 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, WellPoint did not address lost investment income in its response to
         the draft report.

        Recommendation 3

        We recommend that the contracting officer require Well Point to refund the FEHBP
        $9,155 for lost investment income calculated through August 31, 2009, on the 2006 and
        2007 mail order drug overcharges.

        Recommendation 4

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

c.   ADMINISTRATIVE EXPENSES

     The administrative expenses charged to the FEHBP by WellPoint were in compliance with
     the terms ofthe service agreement between WellPoint and Blue Choice as well as Contract
     CS 2838 between Blue Choice and OPM.

D. 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 terms of the service agreement between WellPoint
     and Blue Choice as well as ContractCS 2838 between Blue Choice and OPM.

E. ANNUAL ACCOUNTING STATEMENT RECONCILIATION

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




                                                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 BENEFIT PROGRAM

                                                        PHARMACY OPERATIONS

                                                       BLUE CHOICE OF MISSOURI


                                                   CONTRACT CHARGES AND QUESTIONED COSTS
                                                        REPORT NUMBER: ID-9G-00-09-017

CONTRACT CHARGES                                     2004           2005           2006          2007       2008        2009           TOTAL

A. PHARMACY BENEFIT PAYMENTS                      $17,346,965    $19,856,978    $24,221,717   $25,040,495          $0          $0    $86,466,155
B. ADMINISTRATIVE EXPENSES                          5,021,086      4,307,011      4,074,027     3,235,443           0           0     16,637,567

                                              I $22,368,051      $24,163,989    $28,295,744   $28,275,938                           $103,103,722

QUESTIONED COSTS                                     2004           2005           2006          2007                                  TOTAL

A. PHARMACY BENEFIT PAYMENTS                                $0             $0           $0            $0           $0          $0            $0
   I. MAIL ORDER PHARMACY OVERCHARGES                                              $33,986       $31,239           $0          $0       $65,225

B. LOST INVESTMENT INCOME ON AUDIT FINDINGS                 $0             $0         $924        52,728     $3,220      $2,283           $9,155

TOTAL QUESTIONED COSTS                        I             50             $0      534,910       $33,967     $3,220      $2,283         $74,380
                                                                                                         SCHEDULEB

                                             FEDERAL EMPLOYEES HEALTH BENEFIT PROGRAM

                                                        PHARMACY OPERATIONS

                                                       BLUE CHOICE OF MISSOURI


                                                      LOST INVESTMENT INCOME
                                                    REPORT NUMBER ID~9G~00·09-017

  Year                                                   2006           2007           2008      2009       Total
Audit Finding:
MAIL ORDER PHARMACY OVERCHARGES                        $33,986        $31,239            $0        $0      $65,225


                             Totals (per year):        $33,986        $31,239            $0         $0     $65,225
                            Cumulative Totals;         $33,986        $65,225       $65,225    $65,225     $65,225

                  Avg. Interest Rate (per year);      5.4375%        5.5000%        4.9375%   5.2500%

              Interest on Prior Years Findings;            $0          $1,869        $3,220     $2,283     $7,372

                       Current Years Interest:           $924           $859             $0        $0      $1,783

  Total Cumulative Interest Calculated ThrOUg~f          $924          $2,728        $3,220    $2,283      $9,155
                               August 31, 2009:
                                                                               APPENDIX



      ~
   WELLPOINT


Response to OPM Audit Report No. ID-9G-00-09-017


Date: July 15, 2009



Prepared by:



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

Response to aPM Draft Audit Report No. 1D-90-00-09-017

DearMs._

Attached is WellPoint's to draft audit report No. ID-9G-00-09-017. If you have any
questions please feel free to contact me.


Sincerely,
A. REMOVAL OF PROFIT FROM DRUG CHARGES

    1. Unallowable Profit Included in FEHBP Mail Order Drug Charges                   $8,396

       Blue Choice Response

       The plan agrees with this finding.

       Blue Choice Draft Response

       A $1.50 dispensing fee was erroneously charged on FEHBP Missouri (Blue
       Choice) scripts dispensed in the mail order pharmacy, The $1.50 per script
       fee had not been removed from the pricing system for the Blue Choice client
       as it had been for the other FEHBP clients.

       An analysis of Blue Choice scripts dispensed in the mail order pharmacy from
       11112006 through 12/3112007 concluded that FEHBP was overcharged
       $65,225 (see attached support) during this period. We will reimburse the
       FEHBP for this amount.

       At the beginning of 2008, this client was transitioned to a different claim
       system; therefore, this error was eliminated at that point in time..