oversight

Audit of the Government Employees Hospital Association's Pharmacy Operations As Administered By Medco Health Solutions

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 J\1ANAGEMENT
                                                                 OFFICE OF THE INSPECTOR GENERAL
                                                                                  OFFICE OF AUDITS




FillalAudit Report·

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                                              AssmaIATION'S .

                               PHARMA.CY·OPER.AilONS···

                                .. ASA:nlVIINIs'TEltED:BY '.

                          MEDCOIIEALTH SOLUTIONS

                                 .       '2003~                          2006              '.' ...          . ..


                                         . Report No. 1M~02~OO-08~004

                                           Date: August 14,2009'




                                                        .   --CAUTION~-
This audit report has been distributed to Federal officialswbo arerespo~sible (or theadooinislration of the audited program. This audit
report may contain proprietary .data which is protected by F«Jerallaw (18U.S.C.190S).. Therefore, while this.audit report is a.,.aiiable
under tbe Freedomoflnformation Act and mllde available to the public on the QIG webpage,calltion needs 10 be exercised before
releasing the report 10 the general public as it ma}'c'Onlain pnjpriffl,lry iu(ormalioiHhlit 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

                                        Phannacy Operations

                                          Contract CS 1063

                              Government Employees Hospital Association

                                            Plan Code 31


                                       Medco Health Solutions

                                      Franklin Lakes, New Jersey





                    REPORT NO. IH-02-00-08-004                DATE: August 14, 2009




                                                            Michael R. Esser
                                                            Assistant lnspector General
                                                              for Audits



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                          UNITED STATES OFFICE OF PERSONNEL MANAGEMENT

                                             Washington, DC 20415


   Office of the
Inspeclor General




                                     EXECUTIVE SUMMARY




                              Federal Employees Health Benefits Program

                                        Pharmacy Operations

                                          Contract CS 1063

                              Government Employees Hospital Association'

                                            Plan Code 31


                                        Medco Health Solutions

                                       Franklin Lakes~ New Jersey





                    REPORT NO. IH-02-00-08-004                   DATE:August 14, 2009


       The Office of the Inspector General has completed a perfonnance audit of the 2003 tluough 2006
       Government Employees Hospital Association's (GEHA) pharmacy operations as administered by
       Medco Health Solutions (Medco). The primary objective of the audit was to detemline ifMedco
       complied with the regulations and requirements contained within its contract with GEHA and
       Contract 1063 (between GEHA and the Office of Personnel Management). The audit was
       conducted in Franklin Lakes, New Jersey from September 24 through September 28, 2007, and
       from October 15 tlu'ough November 16,2007.

       The audit showed that the 2003 tluough 2006 GEHA pharmacy operations were in compliance
       with the contracts.




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                                CONTENTS

                                                 PAGE

        EXECUTIVE SUMMARy	                         i


  I.    INTRODUCTION AND BACKGROUND	               1


 II.	   OBJECTIVES, SCOPE, AND MElHODOLOGY         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 Inspector General Act of 1978, as amended, we conducted an audit of the
2003 through 2006 Government Employees Hospital Association (GEHA) 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 ofthe FEHBP. The provisions of
the FEHB Act are implemented by OPM through regulations, which are codified in Title 5,
Chapter I, 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.

GEHA has entered into a government-wide contract (CS 1063) with OPM to provide a health
benefit plan authorized by the FEHB Act. GEHA has contracted directly with Medco to manage
the delivery and financing of prescription drug benefits for GEHA health benefit purchasers.

This is our first audit oftlle GEHA pharmacy benefit operations as administered by Medco.




                                               I

               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 FEHEP 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 GEHA contracts.

   Payment Reconciliation

       •   To detennine whether GEHA paid for only those items billed/charged by Medeo.

   Processing and Administrative Fees

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

   Drug Interchange Program

       •	 To determine whether costs charged to the FEHBP for Drug Interchange Programs
          were charged in accordance with the GEHAIMedco contracts.
       •	 To determine if savings amounts reported by Medeo were properly calculated.

SCOPE

We conducted this perfollnance audit in accordance with generally accepted government auditing
standards. Those standards require that we plan and pelfOIm 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 om
findings and conclusions based on the audit objectives.

We reviewed the GEHA Annual Accounting Statements for contract years 2003 through 2006.
Ouring this period, Medco paid approximately $1.8 billion in retail pharmacy drug charges (See
Schedule A).

In planning and conducting the audit, we obtained an tmderstanding ofMedco's internal control
structure to help determine the nature, timing, and extent of our auditing procedures. This was
detennined 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 as a whole.

In conducting the audit we relied to varying degrees on computer-generated data provided by
Medco. Due to time constraints, we did nOl verify the reliability of the data generated by the
vanous infonnation 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 tests to 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 r~gulations governing
the FEHBP. The results of our tests indicate that, with respect to the items tested, Medco
complied with all provisions of the contract and federal procurement regulations.

METHODOLOGY

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

);>	   For our review of rebates, we judgementally selected the top 6 out of 117 dmg manufacturers
       by claim dollar for 2003 through 2006 and reviewed the entire lU1iverse of rebates paid to
       Medco by the manufacturers. We then compared this amount to the amount paid by Medco
       to GEHA for 2003 through 2006, to detennine whether rebates were correctly calculated and
       returned to the FEHBP.

);>	   For our payment reconciliation review, we judgementally selected five invoices (totaling
       $61,966,505) from Medco to GEHA (one invoice per year for 2003 through 2005 and two
       invoices in 2006) to verify the correct amount was paid. This universe included 154 invoices
       with payments totaling $1,743,811,253.

);>	   For our processing and administrative fees review we judgementally selected certain charges
       from Medco invoices to determine whether the fees charged were in compliance with the
       Medco/GEHA contract. Specifically, we selected six invoices (two 2005 invoices and four
       2006'invoices) paid to GEHA totaling $428,63 L We also reviewed the allowabiIity and
       reasonableness of the Medicare flat fees charged to the sampled 2005 invoices, and credits
       for excess copays that occUlTed in 2006. Our sample review consisted of:

          •	 Prior Authorization and Smart Rules 2 reviews related to invoice dates of March 29
             and December 6 Qf 2005; and
          •	 Prior Authorization and Smmi Rules 2 reviews related to invoice dates of January 31,
             Mm"ch 28, June 20, and September 12 of2006.




                                                  3

»	 Finally, for our drug interchange review, we judgemental1y selected interchange samples to
   determine whether the costs charged were in accordance with the Medco/GEHA contract and
   whether the savings amounts reported by Medco were properly calculated. While no
   standardized selection process was utilized to select the interchanges reviewed, we did select
   a total sample size of 100 interchanges totaling $13,396. The universe included 53,756
   interchange samples totaling $6,922,579.

The above sa.mpJes that were selected and reviewed in perfonning the audit were not statistically
based. Consequently, the results could not be projected to the universe since it is unJikely that
the results are representative of the universe taken as a whole. We used the Contract CS 1063
and the contract between Medco and GEHA to detennine if processing and administrative fees
charged to the FEHBP were in compliance with the tenns 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 GEHA pharmacy operations for 2003 through
2006, as administered by Medco, were administered in accordance with the contracts.




                                               5

               IV. MAJOR CONTRIBUTORS TO THIS REPORT

Special Audits Group

                  Auditor

                    Auditor

               Auditor




                   Senior Team Leader

                    Chief, Special Audits Group

Jill S. Henderson, Deputy Assistant Inspector General for Management




                                             6

                                                                                                            SCHEDULE A

                                               AUDIT OF THE
                                GOVERNMENT EMPLOYEE HOSPITAL ASSOCIAnON
                                           PHARMACY OPERATIONS
                                AS ADMINISTERED BY MEDCO HEALTH SOLUTIONS
                                        FRANKLIN LAKES, NEW JERSEY

                                           CONTRACT CHARGES
                                       REPORT NUMBER: lH-02-00-08-004

CONTRACT CHARGES                                 2003           2004           2005          ·2006               TOTAL

A. PHA..RMACY BENEFIT CHARGES             I    $428,457 343    $435,370,596   $462 369,339   $424,487 769   $1,750,685,047 ..