oversight

Audit of the American Postal Workers Union's Pharmacy Operations As Administered By Medco Health Solutions 2003-2006

Published by the Office of Personnel Management, Office of Inspector General on 2009-08-14.

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:

                                                       .                 .

                     AUDIT ·OF THE.

          AlVIERICAN>POSTALW:01U(ERSUNION'S· .

                              PtIARl\t1ACYOPERATIONS . .
                         . . ASA])1VIINISTERED BY·
                          MEDCOHEAt THSOLUTIONS
                                                      2t103- ,2006


                                          Report No. IH-02-00-08-002

                                                           -     " .

                                          Date:            Atlgust±4, 2009




                                                               ~-CAUTI0N..­
This jludit report has been distrlbuted to Federal officlals who are responsible for the administration of the audited program. This audit
report may contain proprietary dala which is protected by Federal law (18 u.s.c. 1905). Therefore, while this audit report is available
underthe Freedom oflnformation Act and made available to the public on theOIG webp:\g~, caution needs to be exercised before
releasiag the report to the general public as it maycontain proprietary iuformatlon 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 1370

                                   American Postal Workers Union

                                            Plan Code 47


                                       Medco Health Solutions

                                      Franklin Lakes, New Jersey





                    REPORT NO. IH-02-00-08-002                DATE:     August 14, 2009




                                                            Michael R. Esser
                                                            Assistant Inspector General
                                                              for Audits


        www.opm.gov                                                                       www.usejobs.gcv
                          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 1370

                                     American Postal Workers Union

                                             Plan Code 47


                                        Medeo Health Solutions

                                       Franklin Lakes, New Jersey





                    REPORT NO. IH-02-00-08-002                   DATE:   August 14. 2009


       The Office of the Inspector General has completed a performance audit of the 2003 through 2006
       American Postal Workers Union's (APWU) pharmacy operations as administered by Medco
       Health Solutions (Medco). The primary objective of the audit was to determine if Medco
       complied with the regulations and requirements contained within its contract with APWU and
       Contract 1370 (between APWU and the Office ofPersormel Management). The audit was
       conducted in Franklin Lakes, New Jersey from September 24 through September 28,2007, and
       from October 15 through November 16, 2007.

       The audit showed that the 2003 through 2006 APWU pharmacy operations were in compliance
       with the contracts.




        www.opm.goy                                                                      . www.usajobs.goy
                                  CONTENTS
                                             PAGE
        EXECUTIVE SUtvfI\.1ARY	                i


 1.     INTRODUCTION AND BACKGROUND	           1


II.	    OBJECTIVES, SCOPE, AND METHODOLOGY     2


III.	   AUDIT RESULTS                          5


IV.	    MAJOR CONTRIBUTORS TO THIS REPORT      6


        SCHEDULE A - CONTRACT CHARGES

                    I. INTRODUCTION AND BACKGROUND

INTRODUCTION


As authorized by the lnspector General Act of 1978, as amended, we conducted an audit of the
2003 through 2006 American Postal Workers Union (APWU) pharmacy operations as
administered by Medco Health Solutions (Medco). The audit field work was conducted at
Medco's offices in Franklin Lakes, New Jersey, from September 24 through September 28,2007,
and from October 15 through November 16,2007. Additional audit work was completed at 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 FEHB 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.

APWU has entered into a government-wide contract (CS 1370) with OPM to provide a health
benefit plan authorized by the FEHB Act. APWU has contracted directly with Medco to manage
the delivery and financing of prescription drug benefits for APWU health benefit purchasers.

This is our first audit ofthe APWU pharmacy benefit operations as administered by Medco.




                                               1

               II. OBJECTIVES, SCOPE, AND METHODOLOGY


OBJECTIVES

The objectives of our audit were to determine whether Medco's charges to the FEHBP and
services provided to FEHBP members were in accordance with the terms of the contracts.
Specifically, our objectives were as follows:

   Rebates·

       •	 To determine whether pharmaceutical manufacturer rebates were correctly calculated
          and returned to the FEHBP in accordance with the Medco and APWU contracts.

   Payment Reconciliation

       •   To determine whether APWU paid for only those items billed/charged by Medea.

   Processing and Administrative Fees

       •	 To determine whether processing and administrative fees charged to the FEHBP were
          in compliance with the terms of the contract between Medco and APWU .
       •	 To identify areas of the contract between Medco and APWU requiring improvement.

   Drug Interchange Program

       •	 To determine whether costs charged to the FEHBP for Drug Interchange Programs
           were charged in accordance with the APWUlI\.1edco contracts.
       • . To determine if savings amounts reported by Medco were properly calculated.

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 findings and conclusions based on the
audit objectives. We believe that the evidence obtained provides a reasonable basis for am
findings and conclusions based on the audit objectives.

We reviewed the APWU Annual Accounting Statements for contract years 2003 through 2006.
During this period, Medco paid approximately $496 million in retail pharmacy drug charges (See
Schedule A) .

In planning and conducting the audit, we obtained an understanding ofMedco's internal 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


                                                2

  testing, we did not identify any significant matters involving Medco'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 Medco's system of internal
. controls taken asa whole.

 In conducting the audit we relied to varying degrees on computer-generated data provided by

 Medco. 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 doubt its reliability. We believe that the

 data was sufficient to achieve the audit objectives.


 We also conducted teststo determine whether Medco had complied with the contract, 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. The results of our tests indicate that, with respect to the items tested, Medco
 complied with all provisions ofthe contract and federal procurement regulations.

 METHODOLOGY

 To test Medco's compliance with the contracts we reviewed the following areas:

 };>	   For our review ofrebates, we reviewed the entire universe of rebates paid by Medea to
        APWU for 2003 through 2006, to determine whether rebates were correctly calculated and
        returned to the FEHBP.

 };>	     For our payment reconciliation review, we judgmentally selected five invoices (totaling
          $18,991,371) from Medco to APWU (the first payment each year for 2003 through 2006 and
          the last payment in 2006) to verify the correct amount was paid. This universe included 100
        . invoices with payments totaling $440,220,252.

 )	 For our processing and administrative fees review, we judgmentally selected certain charges
    from Medea invoices to determine whether the fees charged were in compliance with the
    Medco/APWU contracts. Specifically, we selected 10 invoices (five 2005 invoices and five
    2006 invoices) paid to APWU totaling $483,494, based on high dollar amounts. The
    universe included 25 invoices totaling ($1,221,083). Our sample review consisted of:

         •	 Copay Reviews, RationalMed payments, and Medicaid fee reviews related to invoice
            dates of June 21, September 13, and December 6 of2005;
         •	 RationalMed payment reviews for invoice dates of July 19 and November 8 of2005;
         •	 RationalMed payments and Medicaid fee reviews related to invoice dates of January 31,
            September 12, and November 7 of2006; and
         •	 Medicaid fee reviews related to invoice dates of January 3 and May 23 of2006.

 ;..	 Finally, for our drug interchange review, we judgmentally selected interchange samples to

      determine whether the costs charged were in accordance with the Medco/APWU contracts



                                                     3

     and whether the savings amounts reported by Medco were properly calculated. Specifically,
     we chose every 10lh line item starting from line 2 ofAPWU's interchange universe
     spreadsheet for a total sample size of 100 interchanges totaling $8,376. The universe
     included 16,988 interchange samples totaling $1,573,404.

  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 taken as a whole. We used the Contract CS 1370
. and the contract between Medco and APWU to determine if processing and administrative fees
  charged to the FEHBP were in compliance with the tenus of the contract.




                                                  4

                                  III. AUDIT RESULTS


Based on our review of rebate payments, processing and administrative fees, drug interchanges,
and payment reconciliations, we found that the APWU pharmacy operations-for 2003 through
2006, as administered by Medeo, were administered in accordance with the contracts.




                                               5

             IV. MAJOR CONTRIBUTORS TO THIS REPORT

Special Audits Group

~uditor
                  Auditor

              Auditor



                  Senior Team Leader

                   Chief, Special Audits Grou

                Deputy Assistant Inspector General for Management




                                            6

                                                                                                         SCHEDULE A

                                              AUDIT OF THE

                                    AMERICAN POSTAL WORKERS UNION'S

                                         PHARMACY OPERATIONS

                               AS ADMmlSTERED BY MEDCO HEALTH SOLUTIONS

                                      FR~NKLm LAKES, NEW JERSEY



                                          CONTRACT CHARGES
                                      REPORT NUMBER: IH-02-00-08-002

CONTRACT CHARGES                                2003           2004           2005           2006            TOTAL

A. PHARMACY BENEFIT PAYMENTS             I    $120,050,664    $121,379,543   $116,073,052   $138888903     $496,392,162