u.s; OFFICE OF PERSONNEL MANAGEMENT' OFFICE OF TIIE IN~PE(JTOR GENERi\L. QFFICEOFAUDITS . . . . . . 'u· '1" "A . . d······t·· R""··,· .' ·t· 1~lna. ·aU.l . . .'..·•. epor . . . . Subj~ct:. Report N()~ lD:R5"00~09-016 .I,late: septefilber30,. 2009 .' -..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.
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)