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OFFICE OF TIIE IN~PE(JTORGENERi\L. 

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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
 

WellPoint 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 ofthe Inspector General has completed a perfonnance audit ofthe 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 ofmanufacturer 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 ofthe 

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 ofthe 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 ofthe 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 ofthe 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 ifthe 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 ifthe 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 ofour 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 oftransactions 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 ofthe 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 ifthe 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 ofmonies 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 ofthe 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 ofthe 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 ofthe 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 

Auditor-In-Charge 

Senior Team Leader 

Group Chief (202) 606-4745
 

8
 
CONTRACT CHARGES 2004 2005 2006 2007 2008 2009 

$0 

TOTAL 

A. PHARMACY BENEFIT PAYMENTS $31,641,907 $35,206,875 543,297,017 $42,921,059 SO $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 

A. PHARMACY BENEFIT PAYMENTS 

2004 2005 2006 2007 2008 2009 TOTAL 

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 

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 
SCHEDULEB 

Year 

Audit Finding: 

UNTIMELY RETURN OF MANUFACTURER REBATES 

2006 

$474,374 

2007 

$1,047,580 

2008 

$0 

2009 

$0 

Total 

$1,521,954 

Totals (per year): 

Cumulative Totals: 

$474,374 

$474,374 

$1,047,580 

$1,521,954 

$0 

$1,521,954 

$0 

$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

April 30, 2009: 

$12,897 $54,899 $75,146 $26,634 $169,576 

FEDERAL EMPLOYEES HEALTH BENEFIT PROGRAM
 

PHARMACY OPERAnONS
 

FEDERAL BLUE HMO OHIO
 

LOST INVESTMENT INCOME 

REPORT NUMBER lD-R5-00-09-016 
, . 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. ID-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.