Pharmacy Benefit Managers Rebate Information 1

TOPIC: Pharmacy Benefit Managers Rebate Information OFFICE: Auditor STATE: WA DATE: 12/30/10 QUESTION / ISSUE: The Washington State Auditor’s Office would like to know if other states have conducted any audits that reviewed the impact of their states' pharmacy benefits manager(s) (PBMs) on the costs of prescription drugs paid for by the state. We are particularly interested in how the state calculates and pays the PBM for their services related to prescription drug rebates, including whether they are paid with a set fee or if the PBM retains a percentage of the rebate itself (including what the percentage is). It would also be helpful to know the amount of prescription drug cost in a fiscal year and the corresponding rebate/fee amount retained by the PBM.

State Comments Georgia Attached is an electronic copy of the program evaluation and follow-up review on Drug

Rebate Program. The report is in pdf format. Maryland The state of Maryland is self insured and the state’s Pharmacy Benefit Manager (PBM), as a

vendor, administers the prescription drug program under a fixed fee contract. Under that contract, the PBM pays for insured state employees’ prescription drugs and then is reimbursed by the state. Another contract exists with independent auditors, who attest to the propriety of the claims submitted by PBM. The state also receives 100% of all drug rebates, nothing is retained by PBM. The cost of the Maryland State Prescription Program for FY 2010 totaled approximately $355.7 million, which includes $4 million in payments to the PBM for administering the program. The state also received $23.3 million in prescription drug rebates during FY 2010. The following are some of the significant administrative services the State’s PBM provides. 1) Eligibility Tracking: Among others the vendor maintains and updates eligibility records,

and accepts electronic transfer of eligibility data in a format that is compatible with the State or Pharmacy Program Pool Participants systems.

2) Claims Administration: Provides an integrated system for processing retail, mail order and specialty pharmacy claims and processes electronic and paper claims.

3) Member Services: Provides a toll-free customer service line and on-line WEB-based customer service support for support relating to claims payment, eligibility, ID card status, pharmacy locations, benefit design questions, general questions and appeals.

4) Clinical and Cost Management Programs: Ensures pharmacies provide free information to members on general health information such as adverse drug events, medication safety and storage, poison control and child safety. Substitutes the drug prescribed with another drug only if there is a benefit to the health of the member or a savings to the State or other Maryland Prescription Drug Program participant.

5) Network Management: Maintains a comprehensive network of participating retail pharmacies; provides mail service and specialty pharmacy service; and conducts ongoing auditing and quality assurance for participating retail, mail order and specialty pharmacies.

Michigan In 2006, the Michigan Office of the Auditor General released an audit on selected Medicaid pharmaceutical drug transactions that cited Michigan's Department of Community Health for not sufficiently monitoring the Medicaid pharmacy benefits manager. Please see Finding 1 of that report. The link to the report is http://www.audgen.michigan.gov/comprpt/docs/r3911504.pdf Page 7 of the report notes that the PBM processed payments totaling $1.6 billion to pharmacy providers covering 31.6 million drug claims for the period October 1, 2002 through September 30, 2004. The PBM received payments of $7.8 million and $10.0 million for the fiscal years ending 9/30/03 and 9/30/04, respectively.

Pharmacy Benefit Managers Rebate Information 2

State Comments Missouri You may find the following reports issued by our office to be of interest:

No. 2002-48, Cost Containment for State Prescription Drug Expenditures No. 2002-29, Oversight Controls in the State's Medicaid Prescription Drug Program They are available at the website www.auditor.mo.gov; click on "Audit Reports" on the home page and then on "Listings by Date Released" on the next page.

Wisconsin We have not conducted an audit that specifically reviews the impact of Wisconsin's pharmacy benefit manager (PBM) on the cost of prescription drugs paid for by the state. However, as part of our annual financial audit of the state's health insurance programs, we review certain PBM procedures and documentation related to prescription drug rebates. There is not a direct relationship between the prescription drug rebate program and the state's monthly administrative fee payments to the PBM. However, an indirect relationship exists through an incentive plan agreed upon by the state and PBM. The state pays the PBM a negotiated fee every month, which is based on the number of individuals covered by the prescription drug plan during the month. This fee is established by the contract between the state and the PBM and adjusted annually, based on the consumer price index. The fee per covered individual was $3.04 in 2007, $3.16 in 2008, $3.29 in 2009, and $3.29 in 2010. Prescription drug rebates are separately calculated by the PBM and remitted to the state on a quarterly basis. The rebates received by the PBM are based on contracts negotiated between the PBM and the drug manufacturers and the entire rebate received by the PBM is distributed to its clients. Documentation supporting the completeness of these rebates is reviewed by the state and also by the Legislative Audit Bureau during our annual financial audit work. The state has developed an incentive plan to encourage the PBM to minimize net costs paid by the state. One way in which costs are reduced is by the PBM obtaining the highest rebates possible. Each year, representatives from the state, the PBM, and a consulting health care actuary meet to determine how to trend net costs for the upcoming year. This involves agreeing on an expected percentage increase in net costs over the prior year, which is subsequently adjusted for actual inflation and participation levels. If the increase in the state's net costs is lower than the agreed-upon percentage, after factoring in these adjustments, the state will provide the PBM an incentive payment equal to 20 percent of the realized savings. Because of the way this process works, we are unable to provide either the cost incurred by the PBM in managing the rebate program or the exact benefit retained by the PBM. However, Table 1 presents the state's total PBM administrative costs, incentive payments, and rebate revenue for the past three years. Data for 2010 is not yet available.  

Table 1 Administrative Costs, Incentive Payments, and Rebates

Calendar Year

PBM Administrative

Costs

PBM Incentive Payments

Rebate Revenues Received

by the state

2007 $8,273,761 $1,659,018 $16,835,226 2008 8,707,662 1,589,715 19,673,650 2009 9,286,202 0 20,141,338

State Of Georgia

Program Evaluation

DRUG REBATE PROGRAM

JANUARY 1997

Department of Medical Assistance

Prepared by Office of Planning and Budget

Department of Audits

Table of Contents

Letter of Transmittal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i

Executive Summary . . . . . . .

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Drug Rebate Program Overview 1

Organization and Stafling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Issues Addressed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Comparison with Other States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Evaluation Methodology 4

Findings Overview . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mission, Goals, and Objectives 7 Contract Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Billing 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounting I 5

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dispute Resolution 20

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Appendix A: Drug Rebate Process 24 Appendix B: Drug Costs and Rebates Billed by State . . . . . . . . . . . . . . . . . . . . . . . . . . . 25

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Appendix C: Rebate Percentage by State 26 Appendix D: Financial Analysis of Example Billing Error . . . . . . . . . . . . . . . . . . . . . . . 27

CUUDE L. VICKERS STATE AUDITOR

(404) M E 2 1 7 4

DEPARTMENT OF AUDITS 254 Washington Street, S.W., Suite 214

Atlanta, Georgia 30334-8400

January 31, 1997

The Honorable George Hooks, Chairman Members of the Budgetary Responsibility Oversight Committee

Dear Sensrtor Hooks:

Under the provisions of O.C.G.A. 45-12-178 which requires periodic evaluations of all state programs, we have conducted a program evaluation of the Department of Medical Assistance's Drug Rebate Program. This evaluation was conducted by staff from the Department of Audits.

The results of our evaluation are summarized in the Executive Summary and are presented in detail in the b d y of the report. We would We to express our appreciation to the stdT of the Drug Rebate Program for their cooperation and assistance.

We are avdable to meet with the Budgetary Responsibility Oversight Committee at your convenience to discuss this report and address any questions from the Committee.

Tim Burgess, ~ i k c t o r Office of Planning and Budget

Sincerely,

Claude L. Vickers State Auditor

The purpose of the Drug Rebate Program is to collect federally mandated drug rebates from drug manufacturers whose prescription drugs are purchased with state and federal Medicaid funds. Some of the problems listed below are not unique to Georgia's Drug Rebate Program. Like some other states, the Department of Medical Assistance (DMA) has had difficulty managing the complexities of the Drug Rebate Program caused in part by assertive drug companies, certain federal regulations, and incorrect drug purchase and rebate data. (Page 5) Our review of the Program found that:

Mission, Goals and Objectives DMA management has not established a mission or goals and objectives for the Drug Rebate Program. Lacking leadership or direction, the Program has evolved into a patchwork of inefficient and ineffective procedures unsuitable for optimizing the collect~on of drug rebates. (Page 7)

Contract Management DMA management has not protected the State's interests in contracting with Electronic Data Systems (EDS) to perform Drug Rebate Program work. DMA management does not know how much EDS is being paid to perform Program work and has not adequately monitored EDS's Program work, much of which has been done badly. (Pages 9 through 12)

Billing The Drug Rebate Program's billing system produces invoices containing large, obvious, and preventable errors which are sent to drug manufacturers without review, In one series of billing (and accounting) errors, DMA recorded a credit of $9.4 million to one drug manufacturer's account while the manufacturer owed the Program $540,000. (Pages 13 and 14)

Accounting The Drug Rebate Program's makeshift accounting system ignores standard accounting conventions and lacks a working system of checks and balances so the Program's records are untrustworthy and the Program's assets are unprotected. The Program's accounting records cannot provide DMA management with the information necessary to monitor the performance of the Drug Rebate Program or to make informed management decisions. (Page 15 through 19)

I Dispute Resolution

The Drug Rebate Program has been ineffective in resolving disputes because disputes have been processed in a haphazard manner; there is no accurate record of unpaid or disputed balances; and EDS staff have felt overwhelmed by the volume of disputes. (Pages 20 through 23)

DMA should be commended for taking immediate and vigorous action to correct the deficiencies noted in this report as they were identified during the course of this evaluation, Among other actions, D M has entered into contracts with consultants to redesign Program systems and pursue

Drug Rebate Program Overview

During the five years from 1985 to 1990, Medicaid costs for prescription drugs grew

faster than any other component of Medicaid costs: from $2.3 billion to $4.4 billion

nationwide. State Medicaid programs were the largest purchasers of prescription

drugs in each state yet unlike large commercial buyers, states were paying "near retail" prices for drugs according to the U. S. General Accounting Office

In 1989 the Georgia General Assembly responded to rising Medicaid drug costs by

enacting a law authorizing the Department of Medical Assistance (DMA) to request

sealed bids for brand name and generic equivalent prescription drugs. In 1990, while

DMA was beginning to establish a program to reduce drug costs under the state law,

the U.S. Congress enacted the Omnibus Budget Reconciliation Act (OBRA) which

required drug manufacturers to pay state Medicaid programs rebates for outpatient

drugs based upon the lowest price available to any purchaser.

The U.S. Department of Health and Human Services' Health Care Financing

Administration (HCFA) assumed the task of administering the national Drug Re bate

Program. (See Appendix A for a chart of key participants and responsibilities.)

HCFA is responsible for establishing and updating rebate rates on each of approximately 5 5,700 outpatient prescription drugs manufactured by approximately

330 drug manufacturers. Each calendar qll;rr,er HCFA sends DMA an updated list

of rebate rates for each drug.

DMA's responsibilities include compiling drug purchase data from pharmacies'

reports of Medicaid drug sales; calculating rebates due using HCFA rebate rates; billing and collecting rebates from drug manufacturers each quarter; accounting for

amounts billed, received, and outs tanding; researching and resolving billing disputes

with drug manufacturers; and reporting Program results to HCFA. In 1993, DMA contracted with Electronic Data Systems (EDS) to perform these duties

Drug rebates collected by DMA are split between the State and the federal

government in approximately the same proportion as federal and State Medicaid

expenses were incurred The State's rebate income is used to reduce DMA's Medicaid expense. Over the past five years, Georgia's portion has ranged from

37 53% to 3 8 66%. Ex hibit 1 shows the total rebates collected and the division of

collected drug rebates between the State and federal governments.

Exhibit Rebate Collection and Distribution

SOURCE: DMA Accounting Records.

1994

1995

Total

Organization and Staffing As shown in Exhibit 2, the Drug Rebate Program is a part of DMA's Pharmacy Section within the Professional Services Division. The position of P h m a c y Section Coordinator is directly responsible for the operations of the Program.

From the start of the Program in 1989 until December 1993, all Program work was

done by DMA personnel. In August 1993, DMA amended an existing contract with

EDS to transfer some of the Drug Rebate Program clerical work to EDS. At present,

EDS personnel are now the only full-time Program staff.

The federal Drug Rebate Program began in the latter half of 1991,

49,432,434

52,180,088

$1 95,900,835

DMA units other than the Pharmacy Section support Program operations. DMA's

Benefits Recovery section receives and deposits rebate checks, whle the Accounting

section records cash receipts and periodically remits the federal portion to HCFA. DMA' s Contract Management staff share the responsibility for monitoring EDS 's

contract performance with the Pharmacy Section Director

18,551,992

19,708,479

S 74,196,483

30,880,442

32,471,669

$121,704,352

Exhibit 2 Department of Medical Assistance Organizational Chart

' I

Maternal and Chlld Health Dlvls~on

Source: DMA Records

Issues Addressed This report presents the results of a program evaluation of DMA's Drug Rebate Program. The evaluation addressed the following issues.

To determine whether the Program has goals and objectives for effectively and efficiently optimizing the colIection of rebates due to the State.

+ To determine if DMA manages the contract with EDS to ensure that the optimum amount of rebates are collected.

w To determine whether the billing sys tern produces accurate invoices

To determine whether the accounting for drug rebates collected and drug rebates owed to the State is proper and sufficient to protect the State's financial interests.

To determine whether the dispute process is administered properly to protect the State's financial interests.

Comparison with Other States In response to the federal law mandating drug rebates, 48 states and the District of Columbia created drug rebate programs. (Arizona and Tennessee have "managed care" systems). Appendices B and C show the total drug cost and rebates billed for all states with rebate programs. Georgia reported the eleventh highest Medicaid drug costs and rebates billed while the percentage of rebates billed to drug costs was at the national average of 17%. In 1995, drug manufacturers were required by law to rebate the greater of either 15.2% of the amount Medicaid paid for a drug or the amount charged to Medicaid which exceeded the "best" (or lowest) price for which the drug was sold to another purchaser.

Evaluation Methodology This evaluation focused on the Program's activities of contract management, billing, accounting, and dispute resolution from August 199 1 when HCFA began regulating the Program to June 3 0,1996. Program functions carried out by both DMA staff and EDS contract staff were reviewed. DMA and EDS personnel were interviewed; DMA and EDS policies and procedures and management information systems were reviewed; financial transactions were tested on a sample basis; and the contract between DMA and EDS as it pertains to Drug Rebate Program work was reviewed. The accounting records and system of intend controls as maintained by EDS were reviewed thoroughly; however the systems of accounting and internal controls which DMA uses for all of its programs and activities were reviewed only to the extent that they pertained to Drug Rebate Program transactions.

Ovewiew

Georgia's 339 participating drug manufacturers are large, profit-driven companies, some of which have annual revenue in the billions of dollars. These companies have staffs and consulting firms specializing in searching state's drug purchase data for errors. In contrast, the drug companies' primary contact with the State has been two EDS clerks who perform Program work under contract to DMA.

For the four years of financial records reviewed, drug manufacturers paid 25% of Program invoices for the exact amount billed, (but the dollar amount of these invoices which were paid exactly amounted to only 2% of the total dollars collected). Approximately 36% of payments were for more than the invoice amount and 39% of payments were for less. This has created a substantid backlog of unpaid and disputed balances which require additional attention and work.

Federal regulations have also created administrative problems. During the period in which HCFA and a drug manufacturer negotiate a-rebate amount for a particular drug, the manufacturer is permitted to sell the drug through the Medicaid program but must pay estimated rebates. States therefore receive payments they have not solicited and must keep track of unbilled payments to be able to settle any differences remaining when the rebate is formalizd. Georgia's Program staff do not review unsolicited payments and do not account for estimated payments separately, so staff cannot properly resolve this type of difference.

Pharmacies which file Medicaid drug claims can make errors such as entering incorrect drug identification codes, reporting generic drugs as proprietary drugs, and using incorrect units of measure. For example, a pharmacist may report a bottle of 100 pills as 100 units instead of 1 unit of 100 pills, causing the rebate billed to be 100

times too high. DMA management is in the process of establishing a system in which drug vendors will have to submit transaction data for review and approval before filing Medicaid claims.

The problems listed above are not unique to Georgia's Drug Rebate Program. Audit reports for 14 other states' drug rebate programs show that, like Georgia, many of these states have also had problems managing the complexities of the rebate process:

13 programs needed to improve their dispute resolution process; 12 programs did not charge interest on past due balances;

L 1 1 programs had not established a hearing process to resolve disputes; 6 programs did not properly process adjustments; and 6 needed to improve accounting for rebates receivable.

Mission, Goals, and Objectives

DMA management has not established a mission or goals and objectives for the Drug Rebate Program. Lacking leadership or direction, the Program has evolved into a patchwork of inefficient and ineffective procedures unsuitable for optimizing the collection of drug rebates owed to the State.

DMA management has not defined the Program's mission, goals, or objectives in order to focus the s W s efforts, The Program has been staffed by two contract employees who have been supervised intermittently by DMA's Pharmacy Services Coordinator, who has other unrelated responsibilities. Hindered by a cumbersome, makeshift accounting system and a flawed billing system which has kept the backlog of bilIing disputes growing, Program staff have not been able to effectively pursue drug rebates owed to the State. In 1995, DMA collected $52 million in drug rebates, $19 million of which was retained by the State, yet management has not ensured that the Program was operated properly.

As discussed in the Contract Management, Billing, Accounting, and Dispute Resolution sections of this report, the variety, magnitude, and duration of problems in all of the Drug Rebate Program's significant activities point to

an unfocused program. For example:

Contract Management - When Program duties were transferred to EDS in 1993, the contract did not include expected goals, objectives, or outcomes. EDS was not provided any incentive to perform well and DMA did not include meaningfuI performance standards or penalties that could be used to compel adequate performance. (See pages 9 to 12)

Billin% The Program's billing system has not had internal checks to flag impossible or unrealistic amounts billed. Frequently, the rebate amount billed has exceeded the cost of the drug to Medicaid. One manufacturer was sent an invoice for $50 million in charges; approximately the amount collected by the Program for a year. (See pages 13 and 14)

Accounting - The accounting system cannot provide management with the minimum information necessary to monitor and evaluate the Program's performance or make informed decisions. The Drug Rebate Program's accounting records cannot be relied upon because the accounting system lacks most of the accounting conventions and internal controls designed to ensure that complete and accurate records are kept. (See pages 15 to 19)

Dispute Resolution - Disputes for more than $10,000 have accumulated at the rate of $2 milIion per year. By policy, the Program has dismissed underpayments of less than $10,000 per manufacturer, per quarter. In theory, a manufacturer could underpay rebates owed by just less than $40,000 per year and not be contacted. Program staff have claimed they lacked the time or assistance to manage al I of the disputes. (See pages 20 to 23)

DMA management should formalize the purpose of the Drug Rebate Program by establishing a mission. Goals should be defined to focus Program activities on the accomplishment of the mission. Standards and objectives shodd be set to communicate management's expectations for the performance of specific activities. Performance should be measured against the standards and objectives and corrective action shodd be taken when deficiencies are identified.

During the course of this evaluation, D M management established goals and objectives to focus Drug Rebate Program efforts on the accomplishment of the Program 'sfuPodamentalpurpose: to maximize the coddection of drug rebates. Moreover, D M management has expressed a commitmenr to dedicate the resources necessary to correcd deficiencies identijied in his report, Specific corrective actions are described at the end of each finding.

Contract Management

DMA management cannot support the decision to transfer work to EDS either on the basb of cost savings or the benefit of improved Program operations.

DMA management does not know how much EDS is being paid to perform Drug Rebate Program work because the contract price for the 1993 contract amendment which transferred Drug Rebate Program work to EDS included unrelated work such as establishing a "Nursing Facility Inquiry Unit" and a LbPTi~r Approval Unit," and enrolling all Medicaid providers and maintaining provider files. DMA management does not h o w whether the contract benefiw the Drug Rebate Program and the State financially, or if it simply freed DMA of Program tasks for an unknown price.

A DMA memorandum states that HCFA wanted DMA to demonstrate that the transfer of clerical work to EDS would result in savings. In a formal bid to acquire the additional work, EDS included a projection which claimed that if DMA paid EDS $1,085,220 per year to assume aU of the duties transferred by the 1993 amendment, including those unrelated to the Drug Rebate Program, DMA would save $53,436 per year. DMA management asserted that their staff assisted EDS in creating the projection; however, DMA management could not produce the financial foundation for the projection, nor could EDS.

The transfer of Drug Rebate Program duties to EDS did not improve operations since EDS did not change DMA's system of processing rebates significantly. Errors created by DMA staff before EDS assumed Program duties remained unresolved at the time of this evaluation and new errors by EDS staff have been added. EDS's proposal (a formal part of the contract) predicted that DMA would be able ". . . to more effectively focus its energies on such responsibilities as setting and reviewing policy, long term planning, and program development . . ." none of which has been evident in the management of the Drug Rebate Program.

DMA management should reevaluate and document the costs and benefits associated with having EDS perform Program functions and compare those

with the costs and benefits of having DMA staff do the work. When the contract is subject ta renewal or change, management should select the dternative which best serves the interests of the Program and the State.

D M manugemeplt has engaged a comuItingJivm to determine whether it is

more economical to continue to pay a condPactor to perform Drug Rebate Program work UP* to have D M stafldo the work. D M management has expressed the intention to reevaluate its contract with EDS.

DMA does not have a clear contractual basis for holding EDS responsible for substandard work since DMA's contract with EDS does not include many of the Program functions performed by EDS and also lacks any meaningful performance standards for the work which is specified.

The contract between DMA and EDS for Drug Rebate Program work identifies five clerical tasks EDS is to perform but does not mention most of the work done by EDS staff. The contract specifies updating pharmacy files; mailing drug manufacturer invoices; notifying pharmacies of new drug additions; notifying pharmacies of new manufacturers and distributors; and identifying and recolving dl "Dlutbfiab udalr: ex~e~tions." The contract

does not include resolving billing disputes with drug manufacturers, record keeping, or reporting Program results, all of which demand substantial amounts of the EDS staffs time.

As an indication of the process of passing off duties to EDS, an internal DMA memorandum from the Contract Management Section dated five months after the 1993 contract amendment was signed states, "This drug

rebate dispute resolution is another whole job (or part of a job) that has not been addressed in the EDS switch." Without revising the contract or specifying any performance measures, EDS staff now work disputes.

The contract does not establish standards for minimal accuracy in billing, accounting, or reporting, nor are there any standards which would tend to promote the accomplishment of implicit Program gods, such as collecting all of the drug rebates due to the State. Such standards could be as simple as

requiring that past-due notices be sent to drug manufactures which have not paid or registered a dispute within 60 days of the invoice date or as

comprehensive as establishing a quality control review function to periodically test the accuracy and timeliness of the billing and collection process.

I f DMA management decides that it is in the best interests of the Program and the State to continue using contracted services to do Program work, the next contract should specifically define each of the duties for which EDS or another service provider is to be held responsible. Program goals and objectives should be incorporated into the contract in the form of procedures and performance standards designed to achieve them. Meaningful penalty provisions should be included and exercised as needed to compel acceptable performance.

DMA management has not adequately monitored EDS's performance and failed to take effective actions when significant problems have arisen.

DMA Drug Rebate Program personnel and Contract Management personnel are responsible for ensuring that work done by EDS meets the Program's requirements, but neither group has monitored EDS's performance. DMA Drug Rebate Program staff stated they did not know what EDS could be held responsible for and claimed never to have seen the contract provisions. DMA Contract Management staff stationed at EDS's ofices stated that Iimited monthly testing of Drug Rebate Program work had begun during the course of this evaluation in June 1996 (two years and six months after EDS began doing Program work) but could not provide notes, checklists, or other documentation to support that assertion.

EDS's Drug Rebate Program work has been poor since the work was transferred. DMA staff struggled with the Program' s accounting and administrative difficulties for two years before turning duties over to EDS, but fundamental flaws in the Program's systems were not fixed before giving it to EDS. EDS has not been required to make improvements.

The EDS staff assigned to Program work were not taught how to do all of their required tasks correctly. A DMA memorandum stated that an EDS employee had been trained and tested on processing drug manufacturer

payments but had not been trained to handle accounts receivable; billing or tracking outstanding invoices; preparing reports of program results; or calculating interest on unpaid balances. Still, the author concluded that the trainee ". . . should be able to perform said functions."

Even without actively monitoring EDS ' s work, DMA management was aware of indications that EDS was not producing accurate work but failed to take effective action. Examples include:

DMA management found it necessary to write HCFA to ask permission to write off $66 million in reported drug rebates receivable because reports to HCFA prepared by EDS were overstated.

EDS reported to DMA that in 1994 collections were 120% of the amount billed and in one quarter, collections were shown as 299% of the amount billed. For 1995, EDS claimed to have collected 10 1 % of amounts billed. Despite the improbability that the Program could consistently collect more than it billed, DMA management did not investigate.

EDS submits quarterly accounting records which contained all of the ~,mn discussed in thc findings ill L ~ I G Awoundng section of this report. (Pages 15 to 19) For example, five (3 1 %) of 16 quarterly spreadsheet accounting records contained incorrect totals.

Quarterly reports prepared by EDS for D M and submitted to HCFA showed that the number of unresolved disputes was growing.

DMA management should monitor EDS's Drug Rebate Program work closely and take action to address problems as they arise. Those who are responsible for monitoring should clearly understand EDS's responsibilities and the steps to be taken if work is found to be unacceptable. DMA Program staff should begin working with EDS staff to correct systematic errors and to ensure that EDS stafTknow how to perform the work properly.

D M management has engaged a comu~ting$rm to assisf in designing reporis io provide all of the information needed to moPzitor Program perfo~.mance. D M management has stated that EDS has been instructed to provide specific managemen6 information until the new reporting system has been impbmenred

The Program's billing system produces invoices containing large, obvious, and preventable errors which are sent to drug manufacturers without review.

The Medicaid drug purchases reported by pharmacies and the rebate amounts provided by HCFA are not always correct, and in such cases amounts billed to drug manufacturers are incorrect as well. DMA's computer billing program does not, however, contain "edits" or computer program steps designed to detect and report unreasonable or unlikely billings and error conditions. In addition, Program staff do not review invoices for reasonableness, so drug manufacturers are sent invoices containing obvious errors which must be resolved subsequently through the dispute process.

Such errors are frequent. DMA was required to recall all invoices for one quarter because the data used had been for the preceding quarter. In a sample of 50 unpaid or disputed bills, 2 1 (42%) were found to contain a total of 1 8 1 errors in which the Program billed the manufacturer more for rebates than Medicaid had actually paid for the drugs. In total the Program biIled $30,254,918 in rebates on drugs which had cost Medicaid only $398,745.

The following example shows how the Program unwittingly recorded a credit

of $9,459,43 0 to one manufacturer's account when the manufacturer still owed the Program $540,570: a total error of $10 milIion. Since this error was never detected by Program staff, this example shows the real effects and

potential costs of the lack of checks in the billing systems. (See Appendix D for a table of the following information.)

The Program's billing system showed one manufacturer owed rebates totaling $50,182,464, which is approximately the amount collected from all manufacturers for all of 1 995.

Rather than printing the total as $50,182,464, the billing system printed the total as $1 82,464 on the invoice because the program dlowed only seven digits in the total so the number 5 from the $50 million total was cut off. Program staff mailed the invoice to the manufacturer and recorded $1 82,464 in the accounting records as due

from the manufacturer despite 26 individual charges on the invoice that were higher than the printed total.

The manufacturer paid $954,5 1 7, or $772,053 more than the total on the invoice. The payment was "banked" without investigation and the $772,053 "excess" was recorded as a credit to the manufacturer. If the overpayment had been investigated, the errors could have been caught, but Program staff do not investigate overpayments.

Thebillingsystemissuedacreditof$47,69I,756thenextquarterto correct the gross overbilling ermr of the previous quarter. Again, the total printed on the invoice was cut off to a credit of $7,69 1,756 and Program staff increased the credit balance to $8,463,809.

Ignoring the $7 million credit, the drug manufacturer paid $995,62 1. Again the payment was banked without question and credited to the manufacturer's account, increasing the total credit to $9,45 9,43 0. Previous underpayments totaling $148,165 were written off against the manufacturer's credit balance of more than $9 million.

When the effects of the Program's errors are removed, the manufacturer actually underpaid the Program by $540,5 70.

DMA management should install steps in the billing program to identify and report questionable amounts and potential errors. Program staff should investigate any items so identified and correct errors before sending invoices to manufacturers rather than after. Program staff should investigate overpayments to identify underbilling errors and errors such as the one described above. When systematic billing errors are identified, steps should be taken to correct the causes of such problems to minimize future occurrences. Program staff should reverse the series of errors described in the example above and should attempt to recover any unpaid balance still owed by the manufacturer concerned.

D M management h conhaacted with a comultingfirrn to develop aprocess fm producing accurate quarterly invoices. DM4 's new "Dispute Resolution Contractor" is responsible for collecting the outstanding balance resulting frum the series of billing and accounting errors described above. D M management asserted tha6 EDS has been iwtructed to research the accounting record for similar errors; to adopt a new invoice format; and to correct the field Zimitations which cut off the seventh digit of the invoice total.

Accounting

The Drug Rebate Program's financial records do not follow standard accounting conventions and internal controls are inadequate, so the Program's records are untrustworthy and the Program's assets are unprotected.

Accounting Conventions Business accounting is based upon a "double entry," debit and credit system. This provides a balancing set of records in which if one account is changed, another account must be changed to preserve the balanced state. The Drug Rebate Program's method of recordkeeping, however, was developed in 1991 by a person without accounting expertise who was assigned to administer the Program. The procedures have not changed significantly since then. The Program's spreadsheet based records are "single entry," and there is no system of accounts to keep track of cash, receivables, or income. As a result, changes can be made to drug manufacturers' accounts without leaving an auditable trail.

Accounting records are supposed to provide a historical record of financial activity. It is customary at the end of a year to close the accounting records and begin a new set. The Drug Rebate Program's records have been open for more than five years and cannot provide a reliable historical record. For example, if a manufacturer pays the Program in 1996 for a 1992 invoice, the spreadsheet records for 1992 are opened and the payment is posted. This makes it functionally impossible to perform standard audit procedures such as cross-checking bank deposits, which are chronological, with payments on

the accounting records, which are not.

In a customary closing process, the ending balances from the old set of records are entered as beginning balances in the new set. The Drug Rebate Program, however, does not cany balances forward fiom one quarterly record to the next, so when the 199 1 accounting records were lost, so too were any rebates still owed to the Program. While the amount due from 1991 is unknown, according to Program records at June 30, 1996, $2.6 million was still owed to the Program from 1992.

Internal Controls A properly functioning organization has a system of procedures or "internal controls" designed to protect the resources of the organization against loss or theft and to ensure that all transactions are recorded accurately. An essential element in a propf system of internal controls is "separation of incompatible duties." For example, to protect cash from loss or theft, a person with access

to cash (opening payment envelopes and making deposits) should not have

access to the accounting records or be involved in the reconciliation process because errors or theft could be concealed. Each of the three procedures (receiving, recording, and reconciling) should be done by different people.

Other common internal controls include: reconciling cash accounts with bank

records to ensure that all cash transactions are proper and accounted for; requiring supervisory approval of all adjustments to the accounting records; balancing the accounting records to ensure the mathematical accuracy of the

accounting system; and keeping records and supporting documentation in such a way that all transactions can be identified and independently verified. The Drug Rebate Program lacks all of these controls.

The Drug Rebate Program cannot tell whether dl of the checks received from drug manufacturers were deposited to DMA bank accounts because DMA J u ~ s r l o L xr;ounl for Program cash receipts and there has not been an

effective reconciliation process. The reconciliations which were supposed to

have been prepared monthly to compare drug rebate receipts recorded on the

EDS maintained accounting records with the deposits recorded on DMA's accounting system could not be located. Since the same people had access to drug manufacturers' payments, control over the accounting records, and

responsibility for the reconciliation, there was no separation of duties.

Effective supervisory review of accounting work is not possible with the

current accounting records. Accounting staff can intentionally or accidentally change the amount a manufacturer owes by changing the amount billed,

changing the amount paid, adding an adjustment, or typing the desired balance over the formula that is supposed to calculate the balance due without leaving a trace. Even so, aspects which could be checked have not been. Of 16 quarterly accounting records checked, '5 had math errors ranging from $1 2

to $1,780,964. The inherent mathematical accuracy of the Program's

computer spreadsheets had been bypassed by forcing incorrect totals into

celb that should have been calculated by the spreadsheet program, entering numbers as text, and using incorrect formulas.

DMA management should implement a proper accounting system with an adequate system of internal controls. While a comprehensive list of all of the attributes of proper accounting and internal control system cannot be listed here, the new accounting system should be capable of producing a compIete, accurate, and auditable history of financial transactions. Internal controls should, at a minimum, include the separation of incompatible functions, monthly reconciliations, periodic supervisory review of accounting activities, and supervisory approval of all adjustments.

D M management has contracted with a consulting firm to redesign the Drug Rebate Program's accounting and internal control systems. D M management recently epztered into a "lockbox" arrangement with a bank in which drug manufacturers ' payme~zts are to be mailed directly to the bank. Drug manufacturers have been imtructed to remit payments to the lockbox address. This has removed check handling duties @om D M employees and

made adequate separation of incompatible duties more attainable.

The Drug Rebate Program's accounting records cannot provide DMA management with the information necessary to assess the performance of the Drug Rebate Program or to make informed management decisions.

The current accounting records do not provide management with the information needed to manage the Program while mathematical errors, oversimplification, and inconsistent accounting have rendered some reports unusable. Since the accounting records are constantly changed and revised, the information used to prepare Program reports is no longer available.

For example, the following table (Exhibit 3) demonstrates how Program reports have been distorted by oversimplification. Over a four year period, uncollected billings of $19,32 1,000 have been made to look less significant' by offsetting the uncollected billings by $14,146,000 that was collected even

though it had never been billed. Billing errors totaling $20,3 24,000 were also

obscured by reducing the total amount billed Finally, forced and accidental

math errors of $1,492,000 are also reflected in the Programs records. Using

the Program's method of reporting, the percentage of billings that were

collected is 96% (omitting the effect of math errors) while the actual

percentage based on the evaluation team's analysis is only 8 1 %.

Exhibit 3 Comparison of Summary Accounting Information

Four Year Period Ended December 31,1995

I Net Billed less Net Uncollected I ,'2' Errors on accounting spreadsheets not recognized in the Program's reporting of uncollected amounts.

SOURCE: DMA Accounting Records.

In additlon to complete and accurate information, there are certain financial

reports that are necessary to properIy manage any accounts (rebates)

receivable system. The Program's system is not able to generate ihe

following information on demand:

+ An accoum history for each drug manufacturer that shows all of the billings, payments, and adjustments, as well as the balance outstanding, or a schedule of all drug manufacturers and their outstanding balances. (To prepare this information, each of 339 drug manufacturers' accounts would have to be reconstructed by quarter from the date each manufacturer entered the program to the date of the report: approximately 6,000 bills and their related payments and adj ustments.)

An "ageing report" which groups unpaid balances by the length of time they have been outstanding for each manufacturer and in total for all manufacturers. Common groupings include 30, 60, 90, and 120 days past due. Trend information should be provided so changes can be monitored.

A list of all adjustments that need to be made to change amounts billed for management's review and approval.

DMA management should develop an accounting system which is capable

of providing accurate management information. In the process, detailed

account histories should be salvaged h m the spreadsheet records and loaded

into the new system. In addition to basic reports listed above, DMA management should determine whether any other information is desired and should ensure that the new system is capable of providing it .

DMA management should also critically review financial information

provided; question unusual or unreasonable reports; and investigate

unfavorable trends. For example, if the totaI of uncollected rebates receivable

more than 120 days past due grows beyond an acceptable level, management

should require that staff provide a credible explanation and a plan for

addressing any problems. If the expected improvements do not appear on the next report, a more detailed inquiry should ensue

In respume to this findlng, D M management has engaged a consulfingJirm

to deveIop a forma/ accounting syslem, supported by "appropriate information systems and management reporling, [hat accurately records, supporrs, and monifors future Medicaid rebate claims. " DMA managemen1

has asserted that EDS has also been instructed to provide reports containing

iplformation spec i$cd by D M rnanagemenr

Dispute Resolution

The Program has been ineffective in resolving disputes because disputes have been processed in a haphazard manner; there is no accurate record of unpaid or disputed balances; and contracted Program staff have felt overwhelmed by the volume of disputes.

Contracted Program staflstated that with all of their othcr responsihili ties.

they have not had enough time or assistance ~o bc able to propcrly resolve

dispules in a timely manner and havc not been ablc to "make a dcnt in'' the

backlog of older disputcs. Exhibit 4 shows the bllled value of unresolved

disputcs by year.

Exhibit 4 Uncollected Drug Rebate Balances By Year

(As Of June 30, 1996)

Total $19.32 million

Per Evaluation Team Analysis

SOURCE Program Financial Records and EDS Dlspute Log

Total 59J million ' 1 7 5207 million

Per EDS Dispute Log

The Program has not maintained an accurate record of unpaid and disputed balances, nor has the Program kept accurate records of disputes that have been resolved. A "Dispute Log" and quarterly reports of disputes to HCFA are intended to keep track of disputes, however, at the last date these two

systems were comparable, (January 19951, the HCFA report included 17 disputes totaling $2,056,000 which were not listed on the dispute log and the dispute log had 7 disputes totaling $453,000 which were not shown on the HCFA report. The Program' s accounting records were analyzed and $1 9.3 million in uncollected rebates was identified, while the dispute log showed only $9.2 million.

DMA management should commit the staff and resources necessary to research outstanding balances and begin collection and dispute resolution procedures for all significant rebates currently due to the State. Formal procedures should be established to optimize collections and dispute resolution efforts. A reporting system should be created to provide DMA management with a mechanism for evaluating the Program's performance in collecting rebates and keeping the backlog of disputes at manageable levels.

In response to thisfinding, D M management has contracted with a "dispute resolution contractor" to resolve disputes with drug manufacturers and to

pursue delinquent drug rebates. D M management has also expressed the intention to hire additional staffto work with the Drug Rebate Program.

Program management established a policy that unpaid balances less than $10,000 were not to be pursued, which resulted in the write-off of a total of $1.7 million without contacting manufacturns to determine the basis for their failure to remit payments.

Program instructions for resolving disputes state that if a drug manufacturer withholds payment of less than $10,000 and the mount billed for a single drug does not exceed $1,000, no attempt should be made to collect the

balance. From 1992 to 1995, Program staff dismissed approximately 750 unpaid balances between $100 and $10,000 totaling $1.7 million. This was

done without contacting drug mufacturers to determine why payments had been withheld, and without weighing the costs and benefits of pursuing collections.

HCFA, which has had a 62% stake in the rebates collected by the Program, does allow state Programs to waive unpaid balances under the $10,000/$1,000 limits but on@ after ulegitimate collection effortsn have been made. Federally prescribed collection procedures include reviewing the manufacturers' reasons for disputing the State's claim; providing the manufacturer with additional data supporting the State's claim; and contacting the manufacturer by telephone to resolve any differences. After these steps have been taken, HCFA then expects the Program to decide whether the cost of pursuing a claim M e r can be justified by the expected return.

DMA management should ensure that reasonable efforts are made to collect all of the drug rebates owed to the State. Disputes should be prioritized and collection work should be monitored. Documentation supporting all proposed write-offs or settlements should be reviewed by someone other than the clerks responsible for working disputes before authorizing write-offs to

ensure that reasonable collection efforts have been exhausted. An accurate accounting of aII unpaid balances and their disposition should be maintained and periodic reports should be submitted to Program management for evaluation. Program management should start "Legitimate collection efforts" to recover any properly billed rebates due that have been Mitten off.

According to D M magemenb, all unpaid balances will be pursued by the "dispute resodution cclnfractor " including those which had been previously dismissed. D M will permdt amounts of less than $100 to be written 08 but only afler legitimate colledion efSorts have been exhausted

The Program has not charged drug manufacturers interest on unpaid claims as permitted by federal regulations. As a result, revenue has been lost and manufacturers have no incentive to pay promptly.

In the first six months of 1996, the Program could have billed approximately $1 32,000 in interest based upon the net unpaid balance of $5,175,000 shown in the Program's accounting records. Using the $1 9,321,000 in unpaid balances identified by the evaluation team, six months of interest would be $493,000. While neither of these amounts can be relied upon (since the

Program's accounting records do not have the structure or accuracy to support interest calculations) they do indicate the potential for a significant amount of interest income.

The current spreadsheet accounting records make interest calculations difficult, if not impossible. To calculate interest in accordance with federal reguIations, each week the total outstanding balance for each of 339 manufacturers would have to be accumulated from quarterly spreadsheets from 1992 to the present and interest would have to be calculated using the average Treasury Bill interest rate for that week. Retroactive changes to drug manufacturers' balances, such as correction of errors or dispute settlements, would also change the amount of interest owed as well.

DMA management should implement a system capable of accurately calculating interest on unpaid balances and should bill drug manufacturers for interest on unpaid balances. Before this is done, the systematic problems and limitations of the billing system and accounting records as discussed in the previous findings should be corrected, or interest calculated on incorrect balances will only compound existing accounting and administrative problems.

DMA management has correctlj? pointed out that federal regulations insmct drug manufacturers to calculate and remit interest, however states are sttll required to verify the caEcnalations a~ld to collect interest when drug manufacturers do not voluntarily remit interest.

The consultingfirm engaged by D M manugemeni to redesign the Drug Rebate Program's systems is responsible for making recommendations to correct deficiencies in the billing and accounting systems as well as developing a process fo compute interest on past-due balances. D M management has asserted ihat drug m a n u f ~ u r e r s will be charged interest on unpaid balances.

Appendix B Drug Costs and Rebates Billed as Reported by State

1995

New York Texas

Pennsylvan~a Florida Ohio Ill~no!s New Jersey Michigan Massachusetts nawgia ., LlwmtRB North Carolina Mlssourl Kentucky Indiana V ~ r g ~ n ~ a Wisconsin Alabama Washington Mississippi Connecticull South Carolma Maryland West Virginla Oklahoma Iowa Arkansas Oregon Colorado Kansas Maine Nebraska New Mexlco Rhode Island Utah New Hampshire Vermont Idaho Montana Hawall Delaware South Dakota North Dakota Alaska Nevada Wyoming *Arizona 'Mlnnesota *Tennessee Dlstrict of Columbia

Grand Total

1,007,954,392 150,313,836 15% 584,450,618 106,027,639 18%

554.567.609 89,645,846 16% 536,342,655 99,995,743 19% 485,220,465 97,259,136 20% 447,671,835 68,555,826 15% 358,470,839 62,240,335 17% 319,615,794 64,564,100 20% 305,940,354 53,656,921 18% 2fmf,0,BE# dT'mqW': ;.. -. 17% Ihl ,W.I& us0 l'fk zi8.832,oei 43,275,244 16% 264,642,237 45,060,405 17% 244,913,111 42,282,025 17% 230,363,525 39,660,999 17% 21 5,373,926 49,153,407 23% 189,408,919 32,786,507 17% 182,626,644 26,693,236 15% 180,471,071 34,833,223 19% 167,290,725 30,390,557 18% ?45,505,003 29,670,863 20% 142,344,686 26,588,863 19% 141,537,221 26,283,945 19% 129,839,476 20,248,539 16% ? 06,388,354 15,189,577 14% 7 01,777,433 17,082,335 17% 97,744,514 15,838,282 16% 84,037,805 18,887,722 22% 79,923,332 16,164,945 20% 79,030,983 13,274,426 17% 73,402,970 13,111,934 18% 64,831,073 10,418,227 16% 48,722,071 9 071,911 19% 46,719,501 8,904,676 19% 43,821,073 7,608 694 17% 35,369,262 5,046,055 14% 33,257,564 7,361,796 22% 32,939,627 5,194,765 16% 31,776,694 5,565,740 18% 21,142,331 5,561,327 26% 21,115,320 3,908,649 19% 20,950,379 3,248,462 16% 19,932,863 3,548,429 18% 19,187,459 3,392,270 18% 15,765,229 3,176,327 20% 12.451,149 2,421,571 19%

N /A N /A N /A N /A N /A N /A N /A N /A NIA

30,599,267 6,212,047 20%

10,095,445,597 $1,746,401,752 17%

Source Heath Care F~nanc~ng Adminislration "Mlnnesota d ~ d not reporl drug rebales to HCFA Ar~zona and Tennessee do not have drug rebale programs

Appendix C Rebate Percentage as Reported by State

1995

1 -1' $21,142.331 $5,561,327 - - 26% 1 . . P V~rginia , . ,. , 23 % P . ', ' ' - - - . - 3 Clregon , , 22 v/o J 4 Vermont 33,257,566 5' QhB- 6 ~ ich igan %= 7 Conneclicul 145,505,003 29,670.863 20% 4 0 Colorado 79,923,332 16.164.945 20% 4 9 , Nevada 15,765,229 3,176,327 20% 4 TO Florlaa I , 19% 5 1 1 Washington 180,471,072 34,033,223 19% 5 12 South Carol~na 142,344,686 26,508,863 19% 5 13 Marjland 141,537,221 26,283,945 19% 5 14 New Mexico 48,722,071 9,071,911 19% 5 15 Rhode Island 46,719,50? 8,904,676 19Y~ 5 16 Delaware 21 ,I 15,320 3,908,649 19% 5 17 Wyoming 12,451,149 2,421,571 19% 5 18 lexas , , , , 18% 6 19 Massachusells 305,940,354 53,656,921 18% 6 20 Mississipp~ 167,290,725 30,390,557 18% 6 21 Malne 73,402,970 13,111,934 18% 6 22 Montana 31,776,694 5,565,740 18% 6 23 North Dakota 19,932,863 3,548,429 18% 6 24 Alaska 3,392,270 18% 6 2!j New -Jersey . . 1 /% Z

LY I , Y O L , 133 r 28 Missour~ 264,642,237 45,060,405 17Y0 7 29 Kentucky 244,913,111 42,202,025 17% 7 30 Indiana 230,363.525 39,660,999 17Y0 7 31 Wiscons~n 189,408,919 32,706,507 17% 7 32 Iowa 101,777,433 17,082,335 17% 7 33 Kansas 79,030,983 13,274,426 17% 7 34 Ulah 43,821,073 7,608,694 17% 7 ?b L.amdrnia z0633b351 16% 8 36 Pennsylvania 554,567,609 89,645,846 16% 8 37 Norlh Carolma 278,832,081 43.275.244 16% 8 38 West Virginia 129,839,476 20,248,539 16% 8 39 Arkansas 97,744,514 15,038,282 16% 8 40 Nebraska 64,831,073 10,418,227 16% 8 41 Idaho 32,939,627 5,194,765 16% 8 ,42 South Dakota 20,950,379 3,248.482 16% 8 I

New York I ? , 15% 9 43 lll~nois 447,671,835 68,555,826 15% 9 45 Alabama 182,626,644 26,693.236 . . . 15% 9 4t, uKlaRoma , , 14% 10 47 New Hampsh~re 35,369,262 5,046,055 14% 10 48' 'Arlzona N IA NIA N /A NI A 49 *Minnesota NIA N /A NJA NIA 50 'Tennessee NIA NJA N /A NIA

Districl of Columbia 30,599,267 6.212.047 20% 4

Grand Total 10,095,445,597 $1,746,401,752 17% Source Healh Care ~Inancing'~%rnInlslralron - 'Minnesota did noi report drug rebales lo HCFA Arizona and Tennessee do nor have drug rebate prqrams

Appendix D Example of Billing and Accounting Errors

(1) Amounts were determlned t h r o u g m n a l y s i s of billing system calculations and drug

manufacturer's remittances.

(Summary of Follow-up results continued on other side)

DEPARTMENT OF AUDITS

Follow-Up Review Department of Community Health

Drug Rebate Program As directed by the Budgetary Responsibility Oversight Committee, personnel from the Department of Audits conducted a Program Evaluation of the Drug Rebate Program in 1996. At the time of the Program Evaluation, the program was operated by the Department of Medical Assistance. The purpose of the Drug Rebate Program is to collect federally mandated drug rebates from drug manufacturers whose prescription drugs are purchased with state and federal Medicaid funds. The Evaluation found that the Department of Medical Assistance had difficulty managing the complexities of the Drug Rebate Program caused in part by assertive drug companies, certain federal regulations, and incorrect drug purchase and rebate data. A follow-up review conducted in 1999 found that the Department has addressed all the problems identified in the Program Evaluation. As a result, average quarterly collections of drug rebates have risen over 41% or $5.6 million (from a FY97 average of $13,750,000 to a $19,430,000 average for the first two quarters of a new drug rebate processing contract). The Department reported that Georgia is now considered a leader in the drug rebate area and that many of the improvements made in the Program might not have occurred were it not for the Evaluation. The highlights of our follow-up review are presented below. As recommended in the Program Evaluation: Mission, Goals, and Objectives

Management has developed a goal (and objectives) for the Program to ensure that its staff focuses on efforts to maximize collection of the drug rebates in accordance with the Medicaid Federal Rebate Program requirements.”

Contract Management

In response to problems identified in the Evaluation regarding the contract with a vendor to perform the drug rebate function, the following corrective actions have been taken:

A cost/benefit analysis justifying the outsourcing of the drug rebate function was developed. After a competitive bid process, a new vendor was engaged to perform the drug rebate

function.

A new contract was developed that holds the vendor accountable for performance of obligated duties.

Comprehensive contract monitoring procedures were developed and implemented to

monitor the vendor’s performance. Billing

A new invoice billing system has been developed to address problems identified in the Program Evaluation. The new system requires the vendor to manually review invoices to identify large, obvious, and preventable errors before the invoices are sent to drug manufacturers. The vendor has also developed a Quality Assurance procedure to monitor and prevent such errors.

Accounting

A new accounting system for handling drug rebates has been implemented that adheres to generally accepted accounting principles and provides management with the necessary information to make informed decisions. The accounting system is capable of producing a complete, accurate, and auditable history of the Program’s financial transactions and includes standard internal controls such as separation of incompatible functions and monthly account reconciliations.

Dispute Resolution

The Program has instituted new dispute resolution procedures that have resulted in the collection of over $6.8 million in disputed rebates. The two clerks who were overwhelmed with disputes at the time of the original Evaluation, have been replaced with a contractor that specializes in drug rebate disputes. In addition, the amount that the contractor can write-off without management’s approval has been reduced from $10,000 to $50 and interest is now charged on all disputed balances.

Department of Audits (For additional information, contact Paul Bernard at 404-651-8855) 7/99