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
 

WellPoint 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 ofCaliforni 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. 

www.opm.goY www.usajobs.goY 
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 ofPersonnel 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 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 ofWellPoint's intemal 

control structure to help determine 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 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 ofthe 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 ofJanuary, 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 

and compared the contract rebate terms with WellPoint's billing for the 2nd 

quarter 2007 to verify that the correct rebate percentages were being applied. 

3
 
b.	 We reviewed a1l2006 and 2007 administrative fee credits, totaling $19,457 and· 

$12,355, respectively, to determine if administrative fees earned by WellPoint 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 ifthe 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 ofmonies 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 WellPoint and BCC to determine if processing and administrative 

fees charged to the FEHBP were in compliance with the.terms ofthe contract and the service 

agreement. 

4
 
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. 

5
 
IV. MAJOR CONTRIBUTORS TO THIS REPORT 

Special Audits Group 

Auditor-In-Charge 

SAG Group Chief 

Senior Team Leader 

6
 
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