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· 

MEDCOHEAtTHSOLUTIONS 

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 ofthe 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 ofthe 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 ofthe 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 ofprescription 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 ofthe 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 ofthe contract between Medco and APWU . 

•	 To identify areas ofthe 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 ifsavings 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 ofour 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 ofinternal 

. 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 ofJuly 19 and November 8 of2005; 

•	 RationalMed payments and Medicaid fee reviews related to invoice dates ofJanuary 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 

CONTRACT CHARGES 

A. PHARMACY BENEFIT PAYMENTS I 

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 

2003 2004 2005 2006 TOTAL 

$120,050,664 $121,379,543 $116,073,052 $138888903 $496,392,162