Office of Personnel Management, Office of Inspector General | U.S. Office of Personnel Management | Audit of Blue Choice of California's Pharmacy Operations As Administered By Wellpoint Health Networks, Inc

Audit of Blue Choice of California'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 TIIE INSPECTOR GENERAL
OFFICE OF AUDITS

. ' . . ' . ' ".

Final Audit Report
Subject: r

; . . .

AUDITOF:p'LllECROSSOF CALIl?ORNIA'S
PHARMACY ()PERATIQ,NS
. · .. ·:t\SADMJNI8TEREDBY . . .
WEJjLP()INTHEAtTII NETWORKS, INC.
2004 .,..···2007

Report No. ID-M5:--00-09-'015

Date:Septem~er 30, 2009

--CAUTION-
This audit report has been distriburcd to Fedora] officials who are responsible for the administration of the audited program. This audit
report may contain proprietary dala which is protectedbyFederal law (I8 U.S,c. 1905). Therefore, while this audit report is available
under the Freedom 9fJllIonllation Act andmade availahlcto rhe public on the OIG webpage, eautien.necds to beexercised before
releasing the report to the general public as if may contain proprietary information that was redacted from the jnibliclydistributed 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 2514

Blue Cross of California

Plan Code M5

WellPoint Health Networks, Inc.

Mason, Ohio

REPORTNo. ID-MS-OO-09-015 DATE: September 30, 2009

Michael R. Esser
Assistant Inspector General
for Audits

www.opm.gov www.usajobs.g~.
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 2S 14

Blue Cross of California

Plan Code M5

Well Point Health Networks, Inc.

Mason, Ohio

REPORT NO. ID-M5-00-09-015 DATE:Septernber 30, 2009

The Office of the Inspector General has completed a performance audit of the 2004 through 2007
Blue Cross of Cali forni a (BCC) pharmacy operations as administered by WellPoint Health
Networks, Inc. (WeIlPoint). The primary objective of the audit was to determine whether
WellPoint complied with the regulations and requirements contained within its service
agreement with BCe and Contract es 2S14 (between Bee and the Office of Personnel
Management). The audit was conducted in Mason, Ohio, from November 3 through
November 21, 2008.

The audit showed that the 2004 through 2007 Bee pharmacy operations were in compliance
with the contract and service agreement.

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CONTENTS

PAGE

EXECUTIVE SUMMARY · i

I. INTRODUCTION AND BACKGROUND 1

II. OBJECTIVES, SCOPE, AND METHODOLOGy 2

III. AUDIT RESlJLTS 5

IV. MAJOR CONTRIBUTORS TO THIS REPORT 6

SCHEDULE A - CONTRACT CHARGES

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 Cross of Califomia (BCC) 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 (FEBB) 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 FEHB Act are implemented by aPM through regulations, which are codified in Title 5,
Chapter 1, P311 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. BeC, one of its primary subsidiaries, entered into a government-wide contract
.(CS 2514) with OPM to provide a health benefit plan authorized by the FEEB Act.
Consequently, since in this instance the health carrier (BCC) and the Pharmacy Benefit Manager
(WeHPoint) are part of the same entity. Bee has a service agreement instead of a contract with
WellPoint to manage the delivery and financing of prescription drug benefits for BCC 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 aeq uisition, the favorable conditions resulting
from WellPoint's subsidiary relationship with its rBM that benefited the FEHBP in this case no
longer exist.

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

OBJECTIVES

The objectives of our audit were to determine whether Welll'oint's charges to the FEHBP and
services provided to FEHBP members were in accordance with the terms of the service
agreement between WellPoint and BeC, and Contract CS 2415 between the BCC and OPM.
Our specific objectives were as follows:

Administrative Expenses

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

Drug Manufacturer Rebates

• To determine whether the 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 determine whether the FEHBP was credited for any administrative fees eamed by
WellPoint as a result ofFEHBP 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 WellPoint properly removed profit included in the Mail Order
pharmacy charges to the FEHBP.

SCOPE

We conducted this performance audit in accordance with generally accepted govemment
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
conelusions based on the audit objectives. We believe that the evidence obtained provides a
reasonable basis for our findings and conclusions based on our audit objectives.

We reviewed Bee's Annual Accounting Statements for contract years 2004 through 2007.
During this period, the Bce paid $99,978,901 in prescription drug charges (see Schedule A).

In planning and conducting the audit, we obtained an understanding of WellPoint's intemal
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 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 believe
that the data was sufficient to achieve the audit objectives.

We also conducted tests to determine whether WeUPoint had complied with the contract and the
service agreement, the applicable procurement regulations (i.e., Federal Acquisition Regulations,
and Federal Health Benefits Acquisition Regulations, as appropriate), and the laws and
. regulations governing the FEHBP. The results of our tests indicate that, with respect to the items
tested, WellPoint complied with all provisions of the contract, the service agreement, and the
federal procurement regulations.

METHODOLOGY

To test WellPoint's compliance with the contract and the service agreement we reviewed the
following areas:

Administrative Expenses

• We judgmentally selected six cost centers with the highest amounts charged to the
FEHBP in 2007, totaling $76,920. This sample was selected from a universe of 28 cost
centers totaling $158,108. Specifically, we reviewed the costs charged to the FEHBP
in the months of January, July, and December of2007 to determine if the amounts
charged were necessary, reasonable, and allowable.

Drug Manufacturer Rebates

• We judgmentally selected 10 drug manufacturers, with the highest FEHBP rebates
earned from 2004 through 2007, totaling $6,627,565. This sample was selected from a
universe of 80 drug manufacturers with FEHBP rebates totaling $8,317,633. From this
sample:

a. We randomly selected and reviewed two drug products from each manufacturer
nd
and compared the contract rebate terms with WellPoint's billing for the 2
quarter 2007 to verify that the correct rebate percentages were being applied.

b. We reviewed a1l2006 and 2007 administrative fee credits, totaling $19,457 and·
$12,355, respectively, to determine if administrative fees earned by Well Point as
a result of FEHBP drug utilization were properly returned to the FEHBP.

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

AAS Reconciliation

• To determine if the amounts reported by Bec 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 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 WellPoinfs profit calculation and
the return of monies to the FEHBP.

The above samples that were selected and reviewed in performing the audit 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 the Contract CS 2514 and the
service agreement between Well Point and BCC to determine if processing and administrative
fees charged to the FEHBP were in compliance with the.terms of the contract and the service
agreement.

III. AUDIT RESULTS

. Based on our review of administrative expenses, drug manufacturer rebates, AAS
reconciliations, and mail order profit removal, we found that the Bee pharmacy operations for
2004 through 2007, as administered by WellPoint, were administered in accordance with the
contract and service agreement.

IV. MAJOR CONTRIBUTORS TO THIS REPORT

Special Audits Group

Auditor-In-Charge

SAG Group Chief

Senior Team Leader

SCHEDULE A

AUDIT OF
BLUE CROSS OF CALIFORNIA'S PHARMACY OPERATIONS AS
ADMINISTERED BY WELLPOINT HEALTH NETWORKS, INC.

CONTRACT CHARGES
REPORT NUMBER: ID-M5-00-09-015

CONTRACT CHARGES 2004 2005 2006 2007 TOTAL

A. PHARMACY BENEFIT PAYMENTS $18,979,760 $26,353,015 $23,394,797 $19,560,799 $88,288,371
B. ADMINISTRATIVE EXPENSES 3,063,772 3,076,332 2,988,001 2,562,425 11,690,530

TOTAL CONTRACT CHARGES $22,043,532 $29,429,347 $26,382,798 $22,123,224 $99,978,901