oversight

Audit of Federal Blue HMO Ohio'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 IN~PE(JTOR GENERi\L.
                                                                                                       QFFICEOFAUDITS




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                                            Report N()~ lD:R5"00~09-016


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                                                            .' -..CAUTION....
 l'Jii~ lluditnport has bun distribllted to Federal offiCials who are responsible fOT tbe administration of the audited:pi-ogram. This audit
 r:epo:rt maycoDtaiDpropriet1ry~llta which is pro(~cted by Feilerallaw (lS·U.S.C.J90S). Tbmfon,while this audit report is available
 under the Freedom onilformationAd and made availa.ble to tb~ public oil the OIGwebpage, caution needs. to be.mrcised before
 releasing tbe report to tbegellerid pUbllcasit may conblin proprietary information that was redacted from the publicly distributed 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 1659

                                         Federal Blue HMO Ohio

                                              Plan Code R5



                                     Well Point Health Networks, Inc.

                                               Mason, Ohio





                    REPORT NO. ID-R5-00-09-016                  DATE: September 30, 2009




                                                          ~c~
                                                            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 1659

                                         Federal Blue HMO Ohio

                                              Plan Code R5



                                     WellPoint Health Networks, Inc.

                                              Mason, Ohio





                    REPORT NO. ID-R5-00-09-016                   DATE: September 30, 2009


     The Office of the Inspector General has completed a perfonnance audi t of the 2004 through 2007
     Federal Blue HMO Ohio's (Blue HMO) pharmacy operations as administered by WellPoint
     Health Networks, Inc. (WeIlPoint). The primary objective of the audit was to detennine whether
     WellPoint complied with the regulations and requirements contained within Contract CS 1659
     (between Blue HMO and the Oftlce of Personnel Management) and its service agreement with
     Blue HMO. The audit was conducted in Mason, Ohio, from November 3 through
     November 21,2008. Our audit results are summarized below.

                                  DRUG MANUFACTURER REBATES

     Untimely Return of Rebates                                                           $1,521,954

     WellPoint did not retum all 2006 and 2007 drug manufacturer rebates, totaling $1,521,954, to the
     FEHBP in a timely manner. This oversight was not identified by WellPoint until our audit in
     November 2008. As a result, WellPoint refunded the rebates to the FEHBP in May 2009.




        www.opm.gov                                                                        www.usaJobs.gov
                              LOST INVESTMENT INCOME


Lost Investment Income on Manufacturer Rebates                                        $169,576

The FEHBP is due lost investment income of $169,576, calculated through April 30,2009, on
the untimely return of manufacturer rebates related to contract years 2006 and 2007.

                              ADMINISTRATIVE EXPENSES

The administrative expenses charged to the FEHBP by WellPoint were in compliance with the
tenns of the service agreement between WellPoint and Blue HMO as well as Contract CS 1659
between Blue HMO and OPM.

              ANNUAL ACCOUNTING STATEMENT RECONCILIATION

We reconciled the pharmacy cost reported on Blue HMO's Annual Accounting Statements to the
supporting documentation provided by Wel1Point and did not identify any material variances.

                        MAIL ORDER DRUG PROFIT REMOVAL

We detennined that WeIlPoint removed all profit from its mail order drug costs charged to the
FEHBP in compliance with the telms of the service agreement between WellPoint and Blue
HMO as well as Contract CS 1659 between Blue HMO and OPM.




                                               11
                                      CONTENTS

                                                                                       PAGE


        EXECUTIVE SUMMARy	                                                               i


  I.    INTRODUCTION AND BACKGROUND	                                                    1


 II.	   OBJECTIVES, SCOPE, AND METHODOLOGy                                         _    2


III.	   AUDIT FINDINGS AND RECOMMENDATIONS                                         _    5


        A.   DRUG MANUFACTURER REBATES	                                            _    5


             1. UNTIMELY RETURN OF REBATES	                                        _    5


        B.   LOST INVESTMENT INCOME	                                                    6


             1. LOST INVESTMENT INCOME ON MANUFACTURER REBATES                          6


        C.   ADMINISTRATIVE EXPENSES	                                                   6


        D.   ANNUAL ACCOUNTING STATEMENT RECONCILIATION	                                6


        E.   MAIL ORDER DRUG PROFIT REMOVAL                           _	                7


IV.	    MAJOR CONTRlBUTORS TO THIS 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 rep011)

                    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 Federal Blue HMO Ohio (Blue HMO) 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 September 28, 1959.
The FEHBP was created to provide health insurance benefits tor federal employees, ammitants,
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, Part 890 of the Code ofFederal 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 HMO, one of its subsidiaries, entered into a government-wide contract (CS
1659) with OPM to provide a health benefit plan authorized by the FEHB Act. Consequently,
since in this instance the health carrier (Blue HMO) and the Pharmacy Benefit Manager
(WellPoint) are part of the same entity, Blue HMO has a service agreement instead of a contract
with WellPoint to manage the delivery arid financing of prescription drug benefits for Blue HMO
health benefit purchasers. As a result of this relationship, the Phamlacy Benefit Manager (PBM)
agreement was fully transparent where actual prices were passed through to the FEHBP.

On April 13,2009, it was mmounced 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 PBM that benefited the FEHBP in this case no
longer exist.

This was our first audit of the Blue HMO pharmacy benefit operations as administered by

WellPoint.





                                                I

The objectives of our audit were to detelTIline whether Wellpoint's charges to the FEHBP and
services provided to FEHBP members were in accordance with the telTIlS of the service
agreement between WellPoint and Blue HMO as well as Contract CS 1659 between Blue HMO
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 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 if the FEHBP was credited for any administrative fees earned by
        WellPoint as a result ofFEHBP rebates.

     Arumal Accounting Statement (AAS) Reconciliation

     •	 To determine whether the costs charged to the FEHBP by WellPoint reconciled to those
        repOlied to OPM 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 government
auditing standards. Those standards require that we plan and perfonn 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 HMO's Annual Accounting Statements for contract years 2004 tln'ough 2007.
During this period, Blue HMO paid $179,579,687 in prescription drug charges (see Schedule A).

In phmning and conducting the audit, we obtained an understanding of WellPoint's intemal
control stmcture to help detennine the nature, timing, and extent of our auditing procedures.



                                                2

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 theintemal 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 infonnation 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 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 goveming the FEHBP. Exceptions noted in the areas reviewed are set forth in
detail in the «Audit Findings and Recommendations" 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 to the
         FEHBP in 2007, totaling $125,435 (from a universe of32 cost centers totaling
         $433,329). 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

      •	 From the largest FEHBP carrier administered by WellPoint, we judgmentally selected
         10 drug manufacturers (from a universe of 80 drug manufacturers), with the highest
         FEHBP rebates eamed 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 of2007 to verify that the COlTect rebate percentages were being applied.

           b.	 To determine if the rebates (including administrative fees) earned by WellPoint as
               a result ofFEHBP drug utilization were properly retumed to the FEHBP, we
               reviewed WellPoint's annual reconciliation of the total billed to the manufacturers
              for the 2006 and 2007 rebates due Blue HMO and the actual payments received,
              and verified that the total rebate amount receIved from the manufacturers was
              returned to the FEHBP.

           c.	 To determine iftheFEHBP 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 drawdovvn reports.

     AAS Reconciliation

     •	 To determine if the amounts reported by Blue HMO 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
        pharmacy claims data that were 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 1659 and the service agreement
between Blue HMO 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 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. WellPoint's comments
on the draft report were considered in preparing the final repoti and are included as an Appendix
to this report..




                                               4

            III. AUDIT FINDINGS AND RECOMMENDATIONS


A. DRUG MANUFACTURER REBATES


  1. Untimely Return of Rebates                                                       $1,521,954

    WellPoint did not return all drug manufacturer rebates earned by the FEHBP in 2006 and
    2007 in a timely manner. Specifically, WellPoint did not return rebates totaling $1,521,954
    to the FEHBP (for contract years 2006 and 2007) Wltil May 2009.

    Contract CS ] 659, Section 3.2 (i) states that "Benefit costs consist of payments made and
    liabilities incurred for covered health care services on behalf of FEHBP subscribers less any
    refunds, rebates, allowances or other credits received." In addition, WellPoint stated that its
    agreement with the health plans provides for the pass-through of all rebates.

    WellPoint's procedure for returning Blue HMO's FEHBP rebates and administrative fees is
    to return, in advance of receipt, 80 percent of both the rebates and administrative fees to the
    FEHBP that it billed to drug manufacturers. WellPoint then reconciles against the actual
    amount received from the drug manufacturers and returns any remaining monies (true-ups)
    to the FEHBP.

    During our audit, we requested that WellPoint provide documentation supporting the
    return of all rebates and administrative fees to the FEHBP. As a result of our request,
    WellPoint discovered that some rebates for contract years 2006 and 2007 were not
    returned to the FEHBP. Specifically, WellPoint did not return those rebates and
    administrative fee monies due the FEHBP following the year-end reconciliation. We
    found that Blue HMO was due additional rebates of$I,521,954 ($474,374 and $1,047,580
    for contract years 2006 and 2007, respectively). WellPoint stated that although year-end
    tme-ups are typically settled by FEHBP draw downs, it has no fonnal procedures in place
    that required these monies to be transferred to the FEHBP within a specific timeframe.
    Not having procedures in place to ensure that the draw downs for rebate true-ups are
    performed in a specific timeframe may result in the FEHBP not receiving all rebates in
    accordance with the Contract.

    We subsequently verified through OPM's Center for Financial Services, Office of the Chief
    Financial Officer, that WellPoint returned $1,521,954 to the FEHBP on May 14,2009.

     WellPoint's Comments:

    WellPoint agrees with the finding and states that it used the above process only for Blue
    HMO. Additionally, WelIPoint stated that Blue HMO no longer pm1icipates in the
    FEHBP.




                                              5

     Recommendation 1

     We recommend that the contracting officer ensure that WellPoint has put procedures in
     place to properly return all rebates due the FEHBP from Blue HMO beginning
     January 1,2008, through its exit from the FEHBP.

B. LOST INVESTMENT INCOME

  1. Lost Investment Income on Manufacturer Rebates                                   $169,576

     In accordance with FEHBP regulations and Contract CS 1659 between OPM and Blue
     HMO, the FEHBP is entitled to recover lost investment income (LIl) on the untimely
     retum of drug manufacturer rebates to the FEHBP, which totaled $1,521,954 relating to
     contract years 2006 and 2007. The LIl on these untimely retumed rebates amounts to
     $169,576, through April 30,2009.

     Contract CS 1659, 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 formula from the date the funds should have been credited to the date the f,mds
     are returned.

     We detennined that the FEHBP is due $169,576 in LIl, calculated through April 30,2009
     (See Schedule B). Our calculation of LIl was based on the United States Department of
     Treasury's semialillual cost of capital rates.

     WellPoint's Comments:

     The draft report did not include a section covering LIl on the audit findings. Therefore,
     WellPoint did not address LIl inits response to the draft repOlt.

     Recommendation 2

     We recommend that the contracting officer require WellPoint to refund the FEHBP
     $169,576 for LIl related to phannacy manufacturer rebates.

C. ADMINISTRATIVE EXPENSES

  The administrative expenses charged to the FEHBP by WellPoint were in compliance with
  the temlS of the service agreement between WellPoint and Blue HMO as well as Contract
  CS J659 between Blue HMO and OPM.

D. ANNUAL ACCOUNTING STATEMENT RECONCILIATION

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



                                              6
E. MAIL· ORDER DRUG PROFIT REMOVAL

  We detennined that WellPoint removed all profit from its mail order drug costs charged to
  the FEHBP.in compliance with the tenus of the service agreement between WellPoint and
  BIue HMO as well as Contract CS 1659 between BIue HMO and OPM.




                                              7

                 IV. MAJOR CONTRIBUTORS TO THIS REPORT

Special Audits Group

                  Auditor-In-Charge

               Auditor


                  Group Chief (202) 606-4745


                  Senior Team Leader




                                          8

                                                                                                                                     SCHEDULE A

                                                  FEDERAL EMPLOYEES i;IEALTH BENEFITS PROGRAM
                                                             PHARMACY OPERATIONS
                                                            FEDERAL BLUE HMO OHIO

                                                    CONTRACT CHARGES AND QUESTIONED COSTS
                                                         REPORT NUMBER: lD-R5-00-09-016

CONTRACT CHARGES                                     2004            2005           2006          2007       2008        2009           TOTAL

A. PHARMACY BENEFIT PAYMENTS                        $31,641,907   $35,206,875    543,297,017   $42,921,059          SO          $0    $153,066,858
B. ADMINISTRATIVE EXPENSES                            6,480,998     7,069,537      6,753,216     6,209,078           0           0      26,512,829

                                              I    $38,122,905    $42,276,412    550,050,233   549,130,137          $0          $0   $179,579,687

QUESTIONED COSTS                                     2004            2005           2006          2007       2008        2009           TOTAL

A. PHARMACY BENEFIT PAYMENTS
   1. UNTIMELY RETURN OF REBATES                            SO              $0     $474,374     $1,047,580          SO          SO      $1,521,954

B. LOST INVESTMENT INCOME ON AUDIT FINDINGS                 SO              $0      512,897       $54,899    $75,146      $26,634        $169,576

TOTAL QUESTIONED COSTS                        I             SO              $0     $487,271     S1.102,479   $75,146      $26,634      51,691,530
                                                                                                                   SCHEDULEB

                                               FEDERAL EMPLOYEES HEALTH BENEFIT PROGRAM

                                                          PHARMACY OPERAnONS

                                                         FEDERAL BLUE HMO OHIO


                                                           LOST INVESTMENT INCOME
                                                         REPORT NUMBER lD-R5-00-09-016

  Year                                                           2006            2007         2008         2009       Total
Audit Finding:
UNTIMELY RETURN OF MANUFACTURER REBATES                       $474,374      $1,047,580          $0           $0     $1,521,954



                                    Totals (per year):        $474,374      $1,047,580           $0           $0    $1,521,954
                                   Cumulative Totals:         $474,374      $1,521,954   $1,521,954   $1,521,954    $~,521,954


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

                     Interest on Prior Years Findings:             $0          $26,091     $75,146      $26,634     $127,871

                              Current Years Interest:          $12,897        $28,808           $0           $0      $41,705

        Total Cumulative Interest Calculated ThrOUg~1          $12,897        $54,899      $75,146      $26,634     $169,576
                                       April 30, 2009:
, .                                                                                          APPENDIX




            ~
         WELLPOINT.

      Response to OPM Audit Report No. ID-RS-OO-09-016


      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 -II 00

      Response to OPM Draft Audit Report No. ID-R5-00-09-016

      Dear_

      Attached is WellPoint's to draft audit report No. I D-R5-00-09-0 16. If you have any
      questions please fed free to contact me.


      Sincerely,
A.	 PHARMACUTICAL MANUFACTURER REBATES

  1.	 Untimely Return of Rebates to FEHBP                                         $1,521,954

     Blue HMO Response

     The plan agrees with this finding.

     Blue HMO Draft Response

     The plan agrees with the find.ing. The plan used the above process only for the Ohio Blue
     HMO. The Blue HMO no longer participates in the FEHPB.