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.OFFICE OF THE INSPECTOR GENERAL 

OFFICE OF AUDITS 

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Re.port:NQ. 1C47"00"09~018

. Date~September 30; 2009' 

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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 Drug Operations
 

Contract CS 2877
 

UNICARE Life and Insurance Company
 

Plan Codes 17 and 72
 

WeIlPoint Health Networks~ Inc.
 

Mason, Ohio
 

REPORT NO. IC-17-00-09-018 DATE: Septemb~r 30, 2009 

'~/J~

~~CL~
 Michael R. Esser
 

Assistant Inspector General
 

for Audits
 

www.opm.gov www.usajobs.gov 
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 2877
 

UNICARE Life and Insurance Company
 

Plan Codes 17 and 72
 

WellPoint Health Networks, Inc.
 

Mason, Ohio
 

REPORT NO. IC-17-00-09-0 18 DATE: September 30, 2009 

The Office ofthe Inspector General has completed a perfOlmance audit of the 2004 through 2007 

UNICARE Life and Insurance Company's (UNICARE) phannacy operations as administered by 

WellPoint Health Networks, Inc. (WellPolnt). The primary objective of the audit was to 

. detennine whether WellPoint complied with the regulations and requirements contained within 

its service agreement ,vith UNICARE and Contract CS 2877 (bet\veen UNICARE 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. 

ADMINISTRATIVE EXPENSES 

Unallowable Administrative Expenses $9,330 

WellPoint charged the FEHBP $9,330 for unallowable administrative expenses in contract years 

2005 through 2007. 

www.opm.goY www.usajobs.goY 
LOST INVESTMENT INCOME
 

Lost Investment Income on Administrative Expense Overcharges $1,298 

The FEHBP is due $1,298 for lost investment income on the 2005 through 2007 administrative 

expense 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. 

DRUG MANUFACTURER REBATES 

We deteffi1ined that WellPoint returned all manufacturer drug rebates and the associated 

administrative fees to the FEHBP in compliance with the tenns ofthe service agreement between 

WelIPoint and UNICARE, as well as Contract CS 2877 between UNICARE and OPM. 

ANNUAL ACCOUNTING STATEMENT RECONCILIATION 

We reconciled the pharmacy cost reported on UNICARE's Aruma! Accounting Statements to the 

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

MAIL ORDER DRUG PROFIT REMOVAL 

We determined that WellPoint removed all profit from its mail order drug costs charged to the 

FEHBP in compliance with the terms of the service agreement between WellPoint and 

UNICARE, as well as Contract CS 2877 between UNICARE and OPM. 

Jl 
CONTENTS
 

PAGE
 

EXECUTIVE SUMMARY	 i
 

1. INTRODUCTION AND BACKGROUND	 1
 

n. OBJECTIVES, SCOPE, AND METHODOLOGY	 2
 

III. AUDIT FINDINGS AND RECOMMENDATIONS	 5
 

A. ADMINISTRATIVE EXPENSES	 5
 

1.	 UNALLOWABLE ADMIN1STATIVE EXPENSES 5
 

B. LOST INVESTMENT INCOME	 6
 

1.	 LOST INVESTMENT INCOME ON ADMINISTRATIVE
 

EXPENSE OVERCHARGES 6
 

C. DRUG MANUFACTURER REBATES	 7
 

D. ANNUAL ACCOUNTING STATEMENT RECONCILIATION :.7 

E. MAIL ORDER DRUG PROFIT REMOVAL.	 7
 

IV. MAJOR CONTRIBUTORS TO TI-lIS 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 rep0I1) 
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 UNICARE Life and Insurance Company (UNICARE) 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 Septem bel' 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 FEl-IBP. The provisions of 

the FEHD 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 servlces. 

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

United States. UNICARE, one of its primary subsidiaties, entered iDto a government-wide 

contract (CS 2877) v,"ith OPM to provide a health benefit plan authorized by the FEHB Act. 

Consequently, since in this instance the health carrier (UNICARE) and the Pharmacy Benefit 

Manager (WeIlPoinf) arc part of the same entity, UNICARE has a service agreement instead ofa 

contract with VlcllPoint to manage the delivery and financing of prescription drug benefits for 

UNICARE health benefit purchasers. As a result of this relationship, the Pharn1acy Benefit 

Manager (PBM) agreement was fully transparent where actual prices were passed through to the 

FEHBP. 

On April 13,2009, it \vas announced that Express Scripts (a large national PBM) had acquired 

WellPoint's PBM business. As a result of1his 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 UNICARE pharmacy benefit operations as administered by 

WellPoint. 
II. OBJECTIVES, SCOPE, AND METHODOLOGY
 

OBJECTIVES
 

The objectives ofthe audit wer~ to detelmine whether WeUPoint's charges to the FEHBP and 

services provided to FEHBP members were in accordance with the telms of the service 

agreement between WellPoint and UNICARE as well as Contract CS 2877 between UNICARE 

and OPM. Our specific objectives were as follows: 

Administrative Expenses 

•	 To determine whether the administrative expenses charged to the FEHBP were 

allowable, reasonable and aUocable. 

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 detetmine if the FEHBP was credited for any administrative fees earned by 

WellPoint as a result ofFEHBP rebates. 

Annual Accounting Statement (AAS) Reconciliation 

•	 To detem1ine whether the costs charged to the FEHBP by WellPoint reconciled to those 

reported to aPM on the AAS. 

. Mail Order Profit Removal 

•	 To detetmine whether WellPoint properly removed profit included in the Mail Order 

phmmacy 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 perfOlm 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 UNICARE's Annual Accounting Statements for contract years 2004 through 2007. 

During this period, UNICARE paid $40,530,410 in prescription dmg charges (see Schedule A). 

In planning and conducting the audit, we obtained an lmderstanding ofWellPoillt's internal 

control stmcture to help detem1ine the nature, timing, and extent ofour auditing procedures. 

2
 
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 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 controlstructure, we do not express an opinion on WellPoint's 

system of internal controls taken as a whole. 

In conducting our audit, we relied 10 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 infOlmation 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 detemline 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 Recommendations" section oftms 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 6 cost centers with the highest amounts charged to the 

FEHBP in 2007, totaling $38,024 (from a universe of 23 cost centers totaling $73,178). 

We then 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 

alJowabIe. 

Drug Manufacturer Rebates 

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

10 dmg 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 dmg products from each manufacturer 

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

qum1er of 2007 to verify that the COlTect rebate percentages were being applied. 

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

dmg utilization were properly retumed to the FEHBP, we reviewed all 2006 and 
2007 administrative fee credits, totaling $7,633 and $6,078, respectively, and 

verified the amount was returned to the FEHBP. 

c.	 To detennine if the FEHBP was properly credited for rebates received, we 

reviewed all FEHBP rebates for 2004 through 2007 and traced them from 

WeUPoint's general ledger to the AAS and the drawdown reports. 

AAS Reconciliation 

•	 To detennine if the amounts reported by UNICARE 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 

phannacy claims data that was readily available from 2007 (the most CUlTent year 

included in our audit scope). Specifically, we reviewed the claims for the months of 

September through November 2007 and we verified WelIPoint'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 2877 and the service agreement 

between UNICARE and WellPoint to determine if processing and administrative fees charged to 

the FEHBP were in compliance with the tenns ofthe contract and service agreement. 

The results of the 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. WelIPoint's 

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

Appendix to this report. 

4
 
III. AUDIT FINDINGS AND RECOMMENDATIONS
 

A. ADMINISTRATIVE EXPENSES
 

1. Unallowable Administrative Expenses $9,330 

WellPoint charged the FEHBP $9,330 in unallowable administrative expenses in
 

contract years 2005 through 2007.
 

The Contract CS 2877, Section 3.2 (2)(ii) states that "Administrative expenses consists of 

all actual, allowable, allocable and reasonable expenses incurred in the adjudication of 

subscriber claims or incuned in the Carrier's overall operation of the business." 

As administrator ofUNICARE's FEHBP phannacy operations, WellPoint is paid for its 

actual administrative expenses. WellPoint's administrative expenses are captured on a 

corporate level and designated to the various pharmacy and pham13cy-reJated cost 

centers. WellPoint then allocates expenses captured by cost center to the health carriers 

included in its corporate network based primarily on the Carriers' membership or 

weighted membership compared to the total corporate membership. 

To determine whether the administrative expenses WellPoint charged to the FEHBP were 

reasonable, allocable and allowable, we reviewed WellPoint's procedures for allocating 

phmmacy-related expenses and reviewed the administrative cost centers to identifY any 

unallowable expenses. 

Our review found that WellPoint's allocation methods were reasonable and complied 

with the contract. However, we identified one unallowable cost center that was charged 

to the FEHBP in contract years 2005 through 2007. The unallowable expenses included 

in this cost center pertained to phannacy marketing and product development activities 

and were not expenses related to FEHBP phannac)' claims. 

As a result of including an unallowable cost center in the costs charged 10 the FEHBP, 

Well Point overcharged the FEHBP $9,330. 

WellPoint Comments: 

WellPoint agreed with the finding and stated that it would be retuming $9,330 to the 

FEHBP. Additionally, WellPoint developed new procedures to ensure that the FEHBP is 

charged only for the appropriate administrative expenses. 

Recommendation 1 

We recommend that the contracting oflicer ensure that WellPoint returns $9,330 to the 

FEHBP for unallowable administrative expenses charged to UNICARE in contract years 

2005 through 2007. 

5
 
Recommendation 2 

We recommend that the contracting officer ensure that WelIPoint has instituted the new 

procedures referred to in its response to the draft report. 

B. LOST INVESTMENT INCOME 

1. Lost Investment Income on Administrative Expense Overcharges $1,298 

In accordance with FEHBP regulations and Contract CS 2877 between aPM and 

UNJCARE, the FEHBP is entitled to recover lost investment income (LIl) on the 

untimely return of drug manufacturer rebates to the FEHBP, which totaled $9,330 

relating to contract years 2006 and 2007. The LIl on these untimely returned rebates 

amounts to $1,298, through August 31,2009. 

Contract CS 2877, 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 f0I111uJa from the date the funds should have been credited to the dale the funds 

are returned. 

We determined that the FEHBP is due $1,298 in LIl, calculated through August 31, 2009 

(See Schedule B). In addition, the FEHBP is entitled to recover L1I on amounts due 

beginning on September 1,2009, until all questioned costs have been retumed to the 

FEHBP. 

Our calculation of LII was based on the United States Dcpm1ment 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, WeHPoint did not address lost investment income in its response to 

the draft report. 

Recommendation 3 

We recommend that the contracting officer require We11Point to refund the FEHBP 

$1,298 for lost investment income calculated through August 31, 2009, on the 2005 

through 2007 administrative expense overcharges. 

Recommendation 4 

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

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

FEHBP. 

6
 
C. 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 telms ofthe service agreement between WellPoint 

and UNICARE, as well as Contract CS 2877 between UNICARE and OPM. 

D. ANNUAL ACCOUNTING STATEMENT RECONCILIATION 

We reconciled the phamlacy cost reported on UNICARE's Annual Accounting Statements to 

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

variances. 

E. MAIL ORDER DRUG PROFIT REMOVAL 

We detetmined that WellPoint removed all profit from its mail order drug costs charged 10 

the FEHBP in compliance with the tetms ofthe service agreement between WellPoint and 

UNICARE, as well as Contract CS 2877 between UNICARE and OPM. 

7
 
IV. MAJOR CONTRIBUTORS TO THIS REPORT 

Special Audits Group 

Auditor-In-Charge 

Auditor 

Group Chief 

Senior Team Leader 

8
 
CONTRACT CHARGES 2004 

A. PHARMACY BENEfJT CHARGES 57.167,677 

B. ADMINISTR,\TIVE EXPENSES 2,252,998 

I 59.420,675 

QUESTIONED COSTS 2004 

A. ADMINISTRATIVE EXPENSES 

1. UNALLOWABLE ADMINISTR4.TIVE EXPENSES SO 

B. LOST INVESTMENT INCOME (LlI) 

1. LII ON ADMINISTR4.TIVE EXPENSE OVERCHARGES 0 

TOTAL QUESTIONED COSTS 

I SO 

SCHEDULE A 

FEDERAL EMPLOYEES HEALTH BENEFITS PROGRAM 

PHARMACY OPERATIONS
 

UNICARE LIFE AND INSURANCE COMPA1\'Y
 

CONTRACT CHARGES AND QUESTIONED COSTS
 

REPORT NVi\'lBER: lC-17-00-09-018 

2005 2006 2007 2008 2009 TOTAL 

57,653,493 $8,388,366 $8,825,557 SO SO $32,035,093 

2.122.173 2,113,534 2,006,613 0 0 8,495,318 

$9,775.666	 $10,501,900 510,832,170 $0 ·$0 $40,530,411 

2005 2006 2007 2008 2009 TOTAL 

5698 53,315 $5,317 $0 $0 $9,330 

15 128 367 461 327 1,298 

$713 $3.443 $5,684 5461 $327 510,628 
YellI' 

Audit Finding: 

l:;CHEDULEB 

FEDERAL EMPLOYEES HEALTH BENEFIT PROGRAM 

PHARMACY OPERATIONS 

liNICARE LIFE AND INSURANCE COMPANY 

LOST INVESTMENT INCOME 

REPORT NUMBER lC-17-00-09-018 

200-1 2005 2006 2007 2008 2009 Total 

SO S698 53,315 $5,317 $0 $0 $9,330 

Totals (per year): 

Cumulative Totals: 

SO 

SO 

S698 

$698 

$3,315 

$4,013 

$5,317 

$9,330 

SO 

$9,330 

SO 

$9,330 

$9,330 

$9,330 

Avg. Interest Rlite (per year): 4.2500% 4.3750% 5.4375% 5.5000% 4.9375% 5.2500% 

Intel"est on Prior Years Findings: SO SO 538 $221 5461 5327 51,047 

Current Years Interest: SO 5115 $90 $146 SO $0 $251 

August 31,2009; 

Total Cumulative Interest Calculated ThrOUg~1 SO S15 $128 $367 5461 $327 $1,298 

VNALLO\VABLE ADMINISTRATIVE EXPENSES 
APPENDIX
 


 

WELLPOINT~
 

Response to OPM Audit Report No. lC-17-00-09-018 

Date: May 28, 2009 

Prepared by: 

Office of Personnel Management 

Office of the Inspector General 

Attention: 

1900 E Street NW, Room 6400 

Washington, DC 20415-1100 

Response to OPM Draft Audit Report No. IC-17-00-09-018 

Dear 

Attached is WellPoint's to draft audit report No.1 C-17-00-09-018. If you have any 

questions please feel free to contact me. 

Sincerely, 
A•.ADMINISTRATIVE EXPENSES 

1.	 Unallowable Administrative Expenses Charged to the FEHBP $9,330 

UNICARE Response 

The plan agrees with this finding. 

UNICARE Draft Response 

The plan agrees with the Ending. Please note, the plan will be relllming 

$9,330 to the Program. Attached arc procedures to ensure theFEI-JBP is 

charged only for the appropriate administrative expenses.