u.s. OFFICE OF PERSONNEL J\1ANAGEMENT 

OFFICE OF THE INSPECTOR GENERAL 

OFFICE OF AUDITS 

FillalAudit Report·
 

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PHARMA.CY·OPER.AilONS···
 

.. ASA:nlVIINIs'TEltED:BY '.
 

MEDCOIIEALTH SOLUTIONS
 . '2003~ 2006 '.' ... . .. 

. Report No. 1M~02~OO-08~004

Date: August 14,2009' 

. --CAUTION~

This audit report has been distributed to Federal officialswbo arerespo~sible (or theadooinislration of the audited program. This audit 

report may contain proprietary .data which is protected by F«Jerallaw (18U.S.C.190S)..Therefore, while this.audit report is a.,.aiiable 

under tbe Freedomoflnformation Act and mllde available to the public on the QIG webpage,calltion needs 10 be exercised before 

releasing the report 10 the general public as itma}'c'Onlain pnjpriffl,lry iu(ormalioiHhlit 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
 

Phannacy Operations
 

Contract CS 1063
 

Government Employees Hospital Association
 

Plan Code 31
 

Medco Health Solutions
 

Franklin Lakes, New Jersey
 

REPORT NO. IH-02-00-08-004 DATE: August 14, 2009 

Michael R. Esser 

Assistant lnspector General 

for Audits 

www.opm.gov www.usajobs.gov 
UNITED STATES OFFICE OF PERSONNEL MANAGEMENT
 

Washington, DC 20415
 

Office of the 

Inspeclor General 

EXECUTIVE SUMMARY
 

Federal Employees Health Benefits Program
 

Pharmacy Operations
 

Contract CS 1063
 

Government Employees Hospital Association'
 

Plan Code 31
 

Medco Health Solutions
 

Franklin Lakes~ New Jersey
 

REPORT NO. IH-02-00-08-004 DATE:August 14, 2009 

The Office of the Inspector General has completed a perfonnance audit ofthe 2003 tluough 2006 

Government Employees Hospital Association's (GEHA) pharmacy operations as administered by 

Medco Health Solutions (Medco). The primary objective ofthe audit was to detemline ifMedco 

complied with the regulations and requirements contained within its contract with GEHA and 

Contract 1063 (between GEHA and the Office of Personnel Management). The audit was 

conducted in Franklin Lakes, New Jersey from September 24 through September 28, 2007, and 

from October 15 tlu'ough November 16,2007. 

The audit showed that the 2003 tluough 2006 GEHA pharmacy operations were in compliance 

with the contracts. 

www.opm.gov www.usaJobs.gov 
CONTENTS
 

PAGE 

EXECUTIVE SUMMARy	 i
 

I. INTRODUCTION AND BACKGROUND	 1
 

II.	 OBJECTIVES, SCOPE, AND MElHODOLOGY 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 Inspector General Act of 1978, as amended, we conducted an audit of the 

2003 through 2006 Government Employees Hospital Association (GEHA) 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 I, 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. 

GEHA has entered into a government-wide contract (CS 1063) with OPM to provide a health 

benefit plan authorized by the FEHB Act. GEHA has contracted directly with Medco to manage 

the delivery and financing of prescription drug benefits for GEHA health benefit purchasers. 

This is our first audit oftlle GEHA pharmacy benefit operations as administered by Medco. 

I
 
II. OBJECTIVES, SCOPE, AND METHODOLOGY
 

OBJECTIVES 

The objectives ofour audit were to determine whether Medco's charges to the FEHBP and 

services provided to FEHEP members were in accordance with the terms of the 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 GEHA contracts. 

Payment Reconciliation 

• To detennine whether GEHA paid for only those items billed/charged by Medeo. 

Processing and Administrative Fees 

•	 To detennine whether processing and administrative fees charged to the FEHBP were 

in compliance with the terms ofthe contract between Medco and GEHA. 

•	 To identify areas ofthe contract between Medco and GEHA requiring improvement. 

Drug Interchange Program 

•	 To determine whether costs charged to the FEHBP for Drug Interchange Programs 

were charged in accordance with the GEHAIMedco contracts. 

•	 To determine if savings amounts reported by Medeo were properly calculated. 

SCOPE 

We conducted this perfollnance audit in accordance with generally accepted government auditing 

standards. Those standards require that we plan and pelfOIm 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 om 

findings and conclusions based on the audit objectives. 

We reviewed the GEHA Annual Accounting Statements for contract years 2003 through 2006. 

Ouring this period, Medco paid approximately $1.8 billion in retail pharmacy drug charges (See 

Schedule A). 

In planning and conducting the audit, we obtained an tmderstanding ofMedco's internal control 

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

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 of internal 

controls taken as a whole. 

In conducting the audit we relied to varying degrees on computer-generated data provided by 

Medco. Due to time constraints, we did nOl verify the reliability ofthe data generated by the 

vanous infonnation 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 tests to 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 r~gulations 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 of rebates, we judgementally selected the top 6 out of 117 dmg manufacturers 

by claim dollar for 2003 through 2006 and reviewed the entire lU1iverse of rebates paid to 

Medco by the manufacturers. We then compared this amount to the amount paid by Medco 

to GEHA for 2003 through 2006, to detennine whether rebates were correctly calculated and 

returned to the FEHBP. 

);>	 For our payment reconciliation review, we judgementally selected five invoices (totaling 

$61,966,505) from Medco to GEHA (one invoice per year for 2003 through 2005 and two 

invoices in 2006) to verify the correct amount was paid. This universe included 154 invoices 

with payments totaling $1,743,811,253. 

);>	 For our processing and administrative fees review we judgementally selected certain charges 

from Medco invoices to determine whether the fees charged were in compliance with the 

Medco/GEHA contract. Specifically, we selected six invoices (two 2005 invoices and four 

2006'invoices) paid to GEHA totaling $428,63 L We also reviewed the allowabiIity and 

reasonableness of the Medicare flat fees charged to the sampled 2005 invoices, and credits 

for excess copays that occUlTed in 2006. Our sample review consisted of: 

•	 Prior Authorization and Smart Rules 2 reviews related to invoice dates of March 29 

and December 6 Qf 2005; and 

•	 Prior Authorization and Smmi Rules 2 reviews related to invoice dates of January 31, 

Mm"ch 28, June 20, and September 12 of2006. 

3
 
»	 Finally, for our drug interchange review, we judgemental1y selected interchange samples to 

determine whether the costs charged were in accordance with the Medco/GEHA contract and 

whether the savings amounts reported by Medco were properly calculated. While no 

standardized selection process was utilized to select the interchanges reviewed, we did select 

a total sample size of 100 interchanges totaling $13,396. The universe included 53,756 

interchange samples totaling $6,922,579. 

The above sa.mpJes that were selected and reviewed in perfonning the audit were not statistically 

based. Consequently, the results could not be projected to the universe since it is unJikely that 

the results are representative ofthe universe taken as a whole. We used the Contract CS 1063 

and the contract between Medco and GEHA to detennine ifprocessing and administrative fees 

charged to the FEHBP were in compliance with the tenns of the contract. 

4
 
III. AUDIT RESULTS
 

Based on our review ofrebate payments, processing and administrative fees, drug interchanges, 

and payment reconciliations, we found that the GEHA pharmacy operations for 2003 through 

2006, as administered by Medco, were administered in accordance with the contracts. 

5
 
IV. MAJOR CONTRIBUTORS TO THIS REPORT 

Special Audits Group 

Auditor 

Auditor 

Auditor 

Senior Team Leader 

Chief, Special Audits Group 

Jill S. Henderson, Deputy Assistant Inspector General for Management 

6
 
CONTRACT CHARGES 2003 2004 2005 ·2006 TOTAL 

A. PHA..RMACY BENEFIT CHARGES I $428,457 343 $435,370,596 $462 369,339 $424,487 769 $1,750,685,047 

SCHEDULE A 

AUDIT OF THE 

GOVERNMENT EMPLOYEE HOSPITAL ASSOCIAnON 

PHARMACY OPERATIONS 

AS ADMINISTERED BY MEDCO HEALTH SOLUTIONS 

FRANKLIN LAKES, NEW JERSEY 

CONTRACT CHARGES 

REPORT NUMBER: lH-02-00-08-004 

..