·U.S. OFFICE OF PERSONNEL MANAGEMENT 

OFFICE OF THE INSPECTOR " '.' GENERAL . . ,. . : 

OFFICE OF AUDItS 

Final Audit.Report 

Subject: " 

. AUDITOF 

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2004~2007

ReportNo. lD..,9G-O()-09..,017· 

Date: september 30, 2009 

--CAUTION,--' 

This 2u.dilreport bas been distributed to Federnl ()flieiaJswhoare responslhleIortbe admioistratio,!()ftbe audited program, This audit 

relJ()rlmay cnntaln preprietary data whicb.is proteetcdby Federallaw(1~V:S.C; 1905), Therefore, wbile this-audit report isavailable 

under the fteedom oOnformaii()D Ar~ aod made available to thepublie on the OIG webpage.e3uliQn needs to be exercised before 

releasing the report i() the general public as It may contalnproprietary information that.was redacted from tae pnblirlydistributed 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 2838
 

Blue Choice of Missouri
 

Plan Code 9G
 

WellPoint Health Networks, Inc.
 

Mason, Ohio
 

REPORT NO. ID-9G-OO-09-0l7 DATE:September 30, 2009 

Michael R. Esser 

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 2838 

Blue Choice of Missouri 

Plan Code 9G 

WellPoint Health Networks, Inc. 

Mason, Ohio 

REPORT NO. 1O-9G-00-09-017 DATE:Septernber 30, 2009 

The Office ofthe Inspector General has completed a performance audit ofthe 2004 through 2007 

Blue Choice of Missouri (Blue Choice) pharmacy operations as administered by WeliPoint 

Health Networks, Inc. (WeliPoint). The primary objective of the audit was to determine whether 

WellPoint complied with the regulations and requirements contained within its service 

agreement with Blue Choice and Contract CS 2838 (between Blue Choice and the Office of 

Personnel Management). The audit was conducted in Mason, Ohio, from November 3 through 

November 21, 2008. Our audit results are summarized below. 

MAIL ORDER PROFIT REMOVAL 

Unallowable Profit Included in FEHBP Mail Order Drug Charges $65,225 

WellPoint did not remove all of the operating gain (profit) included in the mail order drug 

charges to the FEHBP. As a result, the FEHBP was overcharged $65,225 in contract years 2006 

and 2007. 

www.opm.gov . www.usajobs.gov 
LOST INVESTMENT INCOME
 

Lost Investment Income on Mail Order Drug Overcharges $9,155 

The FEHBP is due $9,155 for lost investment income on the 2006 and 2007 mail order drug 

overcharges, calculated through August 31, 2009. In addition, the contracting officer should 

recover lost investment income on amounts due for the period beginning September 1, 2009 until 

all questioned costs have been returned to the FEHBP. 

ADMINISTRATIVE EXPENSES 

The administrative expenses charged to the FEHBP by WellPoint were in compliance with the 

terms of the service agreement between WellPoint and Blue Choice as well as Contract CS 2838 

between Blue Choice and OPM. 

DRUG MANUFACTURER REBATES 

We determined that WeHPoint returned all FEHBP manufacturer drug rebates and the associated 

administrative fees to the FEHBP in compliance with the terms of the service agreement between 

WellPoint and Blue Choice as well as Contract CS 2838 between Blue Choice and OPM. 

ANNUAL ACCOUNTING STATEMENT RECONCILIATION 

We reconciled the pharmacy cost reported on BJue Choice's AnnuaJ Accounting Statements to 

the supporting documentation provided by WellPoint and did not identify any material variances. 

ii 
CONTENTS
 

PAGE
 

EXECUTIVE SUMMARy i
 

L INTRODUCTION AND BACKGROUND 1
 

II.	 OBJECTIVES. SCOPE, AND METHODOLOGy 2
 

III.	 AUDIT FINDINGS AND RECOMMENDATIONS 5
 

A. MAIL ORDER PROFIT REMOVAL.	 5 .
 

1.	 UNALLOWABLE PROFIT INCLUDED IN FEHBP MAIL ORDER
 

DRUG CHARGES 5
 

B. LOST INVESTMENT INCOME	 6
 

1.	 LOST INVESTMENT INCOME ON MAIL ORDER DRUG
 

OVERCHARGES 6
 

C. ADMINISTRATIVE EXPENSES	 7
 

D. DRUG MANUFACTURER REBATES	 7
 

E. ANNUAL ACCOUNTING STATEMENT RECONCILIATION	 7
 

IV.	 MAJOR CONTRIBUTORS TO THIS REPORT 8
 

SCHEDULE A - CONTRACT CHARGES AND QUESTIONED COSTS
 

SCHEDULE B - LOST INVESTMENT INCOME
 

APPENDIX (WellPoint's response dated July 15,2009. to the draft report)
 
I. INTRODUCTION AND BACKGROUND
 

INTRODUCTION
 

As authorized by the Inspector General Act of 1978, as amended, we conducted an audit ofthe 

2004 through 2007 Blue Choice ofMissouri (Blue Choice) pharmacy operations as administered 

by WellPoint Health Networks, Inc. (WeIlPoint). The audit field work was conducted at 

WelJPoint'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 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 FEI-IB 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. 

WellPoint Health Networks, Inc. is one of the largest publicly traded health care insurers in the 

United States. Blue Choice, one of its subsidiaries, entered into a government-wide contract (CS 

2838) with OPM to provide a health benefit plan authorized by the FEHB Act. Consequently, 

since in this instance the health carrier (Blue Choice) and the Pharmacy Benefit Manager 

(WellPoint) are part of the same entity, Blue Choice has a service agreement instead ofa contract 

with WellPoint to manage the delivery and financing of prescription drug benefits for Blue 

Choice health benefit purchasers. As a result ofthis 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 ofthis acquisition, the favorable conditions resulting 

from WellPoint's subsidiary relationship with its PEM that benefited the FEHBP in this case no 

longer exist. 

This was our first audit of the Blue Choice pharmacy benefit operations as administered by 

WellPoint. 
The objectives of our audit were to determine whether WellPoint's charges to the FEHBP and 

services provided to FEHBP members were in accordance with the terms ofthe service 

agreement between WellPoint and Blue Choice as well as Contract CS 2838 between Blue 

Choice 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 if the conect 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 if the FEHBP was credited for any administrative fees earned by 

WellPoint as a result of FEHBP 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 Well Point 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 perform 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 Choice's Annual Accounting Statements for contract years 2004 through 

2007. During this period, Blue Choice paid $103,103,722 in prescription drug charges (see 

Schedule A). 

2
 
In planning and conducting the audit, we obtained an understanding of WellPoint's internal 

control structure to help determine the nature, timing, and extent of our auditing procedures. 

This was detenninedto 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 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 ofthe 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 beJieve 

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 governing the FEHBP. Exceptions noted in the areas reviewed. are set forth in 

detail in the "Audit Findings and Reconunendations" section ofthis 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 the 

FEHBP in 2007, totaling $90,348 (from a universe of27 cost centers totaling 

$168,098). Specifically, we reviewed the costs charged to the FEHBP in the months of 

January, July, and December of 2007 to determine ifthe amounts charged were 

necessary, reasonable, and allowable. 

Drug Manufacturer Rebates 

•	 From the largest FEHBP carrier administered by Wel1Point, we judgmentally selected 

10 drug manufacturers (from a universe of 80 drug manufacturers), with the highest 

FEHBP rebates earned 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 of 2007 to verify that the correct rebate percentages were being applied. 

3
 
b.	 To determine if administrative fees earned by WellPoint as a result ofFEHBP 

drug utilization were properly returned to the FEHBP,.we reviewed all 2006 and 

2007 administrative fee credits, totaling $18,117 and $14,453, respectively, and 

verified that the amount was returned to the FEHBP. 

c.	 To determine ifthe FEHBP 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 drawdown reports. 

AAS Reconciliation 

•	 To determine ifthe amounts reported by Blue Choice on the AAS were accurate, we 

reconciled WellPoint's general ledger total 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 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 WellPoint's profit calculation and 

the return of monies 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 of the universe as a whole. We used Contract CS 2838 and the service agreement 

between Blue Choice 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 of the audit were provided to WellPoint in written inquiries and were discussed with 

WellPoint officials throughout the audit and at the exit conference. In addition, a draft report, 

dated May 19,2009, was provided to WellPoint for review and comment. WellPoint's 

comments on the draft repOli were considered in preparing the final report and are included as an 

Appendix to this report, 

4
 
III. AUDIT FINDINGS AND RECOMMENDATIONS
 

. A. MAIL ORDER PROFIT REMOVAL
 

1. Unallowable Profit Included in FEHBP Mail Order Drug Charges $65,225 

WellPoint did not remove all of the operating gain (profit) included in the mail order drug 

charges to the FEHBP. As a result, the FEHBP was overcharged $65,225 in contract years 

2006 and 2007. 

In a settlement agreement effective December 2006, OPM and WellPoint as parties to 

specific FEHBP Contracts (including Contract CS 2838, Blue Choice of Missouri), 

agreed that WellPoint's mail order pharmacy affiliate included a profit element in the 

mail order drug charges that was inappropriately passed on to the FEHBP by the FEHBP 

HMOs. WellPoint agreed to pay a monetary settlement to the FEHBP for the recovery of 

profit included in the mail orderchargesincalendaryears2001tluough2005.In 

addition, Wel1Point stated that its agreement with the health plans provides for all drug 

pricing at cost. 

For contract years 2006 and 2007, we reviewed the procedures implemented by WellPoint 

for identifying and removing the operating gain (profit) from the FEHBP mail order 

drugs. 

To test whether WellPointproperly removed all profit from FEHBP's mail order drug 

charges, we obtained WellPoint's 2007 FEHBP Mail Order Service Claims spreadsheet, 

which identified the profit included in each drug charge. Using the claims data and the 

profit formula provided by WeJlPoint, we recalculated the profit to be removed from Blue 

Choice's mail order drug charges from September to November 2007. 

We compared our calculation of the profit included in the drug claims with WellPoint's 

reported profit and identified a $1.50 variance per script. Specifically, we calculated the 

profit by taking the total paid (patient co-pay and carrier payment), less cost of goods sold 

(COGS) and administrative cost. Our calculation ofthe COGS agreed with WellPoint's 

COGS. However, when we subtracted the COGS and administrative cost from the total 

paid. our profit was $1.50 higher per script than what was reported by WellPoint. 

We informed WellPoint of the profit variance during our on-site visit. WellPoint stated 

that the $1.50 per script charge was erroneously excluded from the profit calculation. 

Therefore, the amount of profit to be returned to the FEHBP was understated. The $1.50 

per script (which was a dispensing fee) was not removed from the pricing system forthis 

client as it was for the other FEHBP clients. As a result, the FEHBP was overcharged 

$8,396 from September to November 2007 due to Welll'oint's profit removal 

miscalculation. 

In our draft repmi, we requested that WeIlPoint review and correct its profit calculation for 

contract year 2006 and the remainder of contract year 2007 to identify all additional profit 

5
 
that was not removed from FEHBP mail order drug charges, provide the 01G support for 

the calculations, and reimburse the FEHBP for the additional overcharges identified. 

WelJPoint Comment: 

WeIlPoint agrees with this finding. The $1.50 per script fee had not been removed from 

the pricing system for the Blue Choice client as it had been for the other FEHBPclients. 

An analysis ofBlue Choice scripts dispensed in the mail order pharmacy from January 1, 

2006 through December 31, 2007, showed that the FEHBP was overcharged $65,225 

during this period (this amount includes the $8,396 we originally identified). WellPoint 

agrees to reimburse the FEHBP this amount. 

At the beginning of2008, this client was transitioned to a different claims system which 

eliminated this error. 

OIG Comment: 

We reviewed WellPoint'srecaJculation of the additional profit to be removed from the 

mail order pharmacy drug claims from January 1,2006 through December 31, 2007, and 

concur that the FEHBP is due $65,225 for mail order pharmacy overcharges. 

Recommendation 1 

We recommend that the contracting officer ensure that WellPoint returns to the FEHBP 

$65,225 for mail order pharmacy claims overcharges from January 1,2006 through 

December 31, 2007. 

Recommendation 2 

We recommend that the contracting officer require WellPoint to ensure that the new 

claims system identifies and removes all profit and other unallowable charges from 

FEHBP's mail order pharmacy claims. 

B. LOST INVESTMENT INCOME 

1. Lost Investment Income on Mail Order Drug Overcharges $9,155 

In accordance with.FEHBP regulations and Contract CS 2838 between aPM and Blue 

Choice, the FEHBP is entitled to recover lost investment income on the mail order drug 

overcharges, which totaled $65,225 for contract years 2006 and 2007. 

Contract CS 2838, 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 10 the govemment based on a simple 

interest formula from the date the funds should have been credited to the date the funds 

are returned. 

6 
We determined that the FEHBP is due $9,155 for lost investment income, calculated 

through August 31, 2009 (see Schedule B). In addition, the FEHBPis entitled to recover 

lost investment income on.amounts due beginning on September 1, 2009, until all 

questioned costs have been returned to the FEHBP. 

Our calculation oflost investment incomewas based on the United States Department of 

Treasury's semiannual cost of capital rates. 

WellPoint Comment: 

The draft report did not include a section covering lost investment income on the audit 

. findings, Therefore, WellPoint did not address lost investment income in its response to 

the draft report. 

Recommendation 3 

We recommend that the contracting officer require WellPoint to refund the FEHBP 

$9,155 for lost investment income calculated through August 31, 2009, on the 2006 and 

2007 mail order drug overcharges. 

Recommendation 4 

We recommend that the contracting officer recover lost investment income on amounts 

due beginning September 1,2009, until all questioned costs have been returned to the 

FEHBP. 

c. ADMINISTRATIVE EXPENSES 

The administrative expenses charged to the FEHBP by WellPoint were in compliance with 

the terms ofthe service agreement between WellPoint and Blue Choice as well as Contract 

CS 2838 between Blue Choice and OPM. 

D. DRUG MANUFACTURER REBATES 

We determined that WellPoint returned to the FEHBP all drug rebates and the associated 

administrative fees that were received from the drug manufacturers due to FEHBP subscriber 

drug utilization in compliance with the terms of the service agreement between WellPoint 

and Blue Choice as well as ContractCS 2838 between Blue Choice and OPM. 

E. ANNUAL ACCOUNTING STATEMENT RECONCILIATION 

We reconciled the pharmacy cost reported on Blue Choice's Annual Accounting Statements 

to the supporting documentation provided by WellPoint and did not identify any material 

variances. 

7 
IV. MAJOR CONTRIBUTORS TO THIS REPORT 

Special Audits Group 

Auditor-In-Charge 

Auditor 

Group Chief 

Senior Team Leader 

8
 
FEDERAL EMPLOYEES HEALTH BENEFIT PROGRAM
 

PHARMACY OPERATIONS
 

BLUE CHOICE OF MISSOURI
 

CONTRACT CHARGES AND QUESTIONED COSTS 

REPORT NUMBER: ID-9G-00-09-017 

CONTRACT CHARGES 2004 2005 2006 2007 2008 2009 TOTAL 

A. PHARMACY BENEFIT PAYMENTS $17,346,965 $19,856,978 $24,221,717 $25,040,495 $0 $0 $86,466,155 

B. ADMINISTRATIVE EXPENSES 5,021,086 4,307,011 4,074,027 3,235,443 0 0 16,637,567 

I $22,368,051 $24,163,989 $28,295,744 $28,275,938 $103,103,722 

QUESTIONED COSTS 2004 2005 2006 2007 TOTAL 

A. PHARMACY BENEFIT PAYMENTS $0 $0 $0 $0 $0 $0 $0 

I. MAIL ORDER PHARMACY OVERCHARGES $33,986 $31,239 $0 $0 $65,225 

B. LOST INVESTMENT INCOME ON AUDIT FINDINGS $0 $0 $924 52,728 $3,220 $2,283 $9,155 

TOTAL QUESTIONED COSTS I 50 $0 534,910 $33,967 $3,220 $2,283 $74,380 

SCHEDULE A 
SCHEDULEB 

FEDERAL EMPLOYEES HEALTH BENEFIT PROGRAM
 

PHARMACY OPERATIONS
 

BLUE CHOICE OF MISSOURI
 

LOST INVESTMENT INCOME 

REPORT NUMBER ID~9G~00·09-017

Year 2006 2007 2008 2009 Total 

Audit Finding: 

MAIL ORDER PHARMACY OVERCHARGES $33,986 $31,239 $0 $0 $65,225 

Totals (per year): $33,986 $31,239 $0 $0 $65,225 

Cumulative Totals; $33,986 $65,225 $65,225 $65,225 $65,225 

Avg. Interest Rate (per year); 5.4375% 5.5000% 4.9375% 5.2500% 

Interest on Prior Years Findings; $0 $1,869 $3,220 $2,283 $7,372 

Current Years Interest: $924 $859 $0 $0 $1,783 

Total Cumulative Interest Calculated ThrOUg~f $924 $2,728 $3,220 $2,283 $9,155 

August 31, 2009: 
APPENDIX
 

WELLPOINT 

Response to OPM Audit Report No. ID-9G-00-09-017 

Date: July 15, 2009 

Prepared by: 

Office ofPersonnel Management 

Office ofthe lnspector General 

Attention: 

1900 E Street NW, Room 6400 

Washington, DC 20415-1100 

Response to aPM Draft Audit Report No. 1D-90-00-09-017 

DearMs._ 

Attached is WellPoint's to draft audit report No. ID-9G-00-09-017. Ifyou have any 

questions please feel free to contact me. 

Sincerely, 
A. REMOVAL OF PROFIT FROM DRUG CHARGES 

1. Unallowable Profit Included in FEHBP Mail Order Drug Charges $8,396 

Blue Choice Response 

The plan agrees with this finding. 

Blue Choice Draft Response 

A $1.50 dispensing fee was erroneously charged on FEHBP Missouri (Blue 

Choice) scripts dispensed in the mail order pharmacy, The $1.50 per script 

fee had not been removed from the pricing system for the Blue Choice client 

as it had been for the other FEHBP clients. 

An analysis ofBlue Choice scripts dispensed in the mail order pharmacy from 

11112006 through 12/3112007 concluded that FEHBP was overcharged 

$65,225 (see attached support) during this period. We will reimburse the 

FEHBP for this amount. 

At the beginning of 2008, this client was transitioned to a different claim 

system; therefore, this error was eliminated at that point in time..