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FL DOC Medication Audit 2005-037
SEPTEMBER 2004 REPORT NO. 2005-037 AUDITOR GENERAL WILLIAM O. MONROE, CPA DEPARTMENT OF CORRECTIONS PHARMACEUTICAL CONTRACTS Operational Audit distributed, and order-limit maximums were not recognized. SUMMARY As part of our operational audit of the Department of Corrections for the period July 2002 through February 2004 and selected actions taken through June 30, 2004, we reviewed the contracts between the Department and Terry Yon & Associates, Inc. (d/b/a TYA Pharmaceuticals) for unit dosing of pharmaceuticals for the treatment of inmates. Our audit disclosed the following: Finding No. 1: Contrary to law, the Department did not seek competitive bids for the pharmaceutical contract with an expected value of $72 million over the term of the contract. Finding No. 2: The current contract between the Department and TYA Pharmaceuticals has several deficiencies, including omissions of certain items that are necessary for the cost-effective and efficient delivery of pharmaceuticals. Finding No. 3: The Department could not demonstrate that all contractor responsibilities specified in the contract were met. For example, copies of required licenses and registrations were not available, financial and compliance audits had not been obtained, a current procedure manual had not been Finding No. 4: The Department did not have written contract monitoring procedures. In addition, monitoring efforts did not include a verification of TYA Pharmaceuticals status with State and Federal oversight agencies. Also, evidence of monitoring efforts was not sufficient as the frequency of on-site monitoring and the actions taken by TYA Pharmaceuticals to correct any noted deficiencies were not documented. Finding No. 5: Pharmacy orders were not always filled by TYA Pharmaceuticals within the time periods required by the contracts. Finding No. 6: The method described in the contract for pricing pharmaceuticals provided to the Department was not being utilized. Finding No. 7: Invoices were not always adequately supported or approved prior to payment by the Department. Finding No. 8: Credits for returned pharmaceuticals were not issued in accordance with the contract. Page 1 of 20 SEPTEMBER 2004 REPORT NO. 2005-037 The Department’s Office of Health Services is responsible for the delivery of health services to inmates. To distribute prescribed pharmaceuticals, the Department operates four “cluster” pharmacies where health services’ staff, records, equipment, and pharmaceutical inventories are consolidated. These four pharmacies provide pharmacy support to neighboring institutions. Effective January 1, 2004, the Department entered into a three-year contract (No. C2116) with TYA Pharmaceuticals for the provision of unit dosing1 of pharmaceuticals pursuant to orders submitted by the four Department pharmacies for the treatment of inmates. Pursuant to the contract, the Department is to compensate TYA Pharmaceuticals for the vendor’s medication acquisition cost plus 1.45 percent plus a fixed rate for repackaging costs (e.g., $1.15 per bingo card). This contract was procured absent the receipt of any sealed competitive bids or proposals and is the third consecutive Department contract with TYA Pharmaceuticals for unit dosing of pharmaceuticals. The Department’s first contract (No. C1477) with TYA Pharmaceuticals was effective from January 1998 through December 2000 and was limited to the unit dosing of liquid psychotropic pharmaceuticals. (The term of this contract was one year, but the contract was subsequently renewed for two additional one-year terms.) A second three-year contract (No. C1841) was entered into in January 2001. The second contract was amended in 2002 to change from a fixed price for specific pharmaceuticals to the vendor’s medication acquisition cost plus a fixed rate for repackaging costs (e.g., $.68 per bingo card), to include the provision of unit dosing for all pharmaceuticals, and A unit dose is the prescribed amount of each medication dosage in a package such as a blister pack or bingo card (a blister pack sealed into a fold-over card). 1 to allow the Department to return appropriate unused pharmaceuticals to TYA Pharmaceuticals for credit toward future purchases. According to Department records, expenditures totaled $3.2 million over the term of the first contract (No. C1477) and $51.2 million over the three-year term of the second contract (No. C1841). The Department estimates the value of the current contract (No. C2116) to be approximately $72 million over the three-year contract term. Contract expenditures to TYA Pharmaceuticals by calendar year are shown in the following graph: Contract Expenditures by Calendar Year $25 $20 In Millions BACKGROUND $15 $10 $5 $0 -$5 1998 1999 2000 Contract No. C1477 Contract No. C2116 (1) 2001 2002 2003 2004 Contract No. C1841 Projected No. C2116 (2) Source: Department Florida Accounting Information Resource Subsystem (FLAIR) records. Notes: (1) Actual expenditures for Contract No. C2116 for the 2004 calendar year are through June 30. (2) Expenditures for Contract No. C2116 for July 1 through December 31, 2004, are projected based on the Department annual contract cost estimate. Our audit focused on the two contracts (Nos. C1841 and C2116) in effect during the period July 2002 through February 2004. FINDINGS AND RECOMMENDATIONS Finding No. 1: Procurement Lack of Competitive The Legislature recognizes, in Chapter 287, Florida Statutes, that fair and open competition is a basic tenet of public procurement; that such competition reduces the appearance and opportunity for favoritism and inspires public confidence that Page 2 of 20 SEPTEMBER 2004 REPORT NO. 2005-037 contracts are awarded equitably and economically; and that documentation of the acts taken and effective monitoring mechanisms are important means of curbing any improprieties and establishing public confidence in the process by which commodities and contractual services are procured. It is essential to the effective and ethical procurement of commodities and contractual services that there be a system of uniform procedures to be utilized by State agencies in managing and procuring commodities and contractual services; that detailed justification of agency decisions in the procurement of commodities and contractual services be maintained; and that adherence by the agency and the vendor to specific ethical considerations be required.2 The Statutes mandate that, unless otherwise authorized by law, all purchases of commodities or contractual services in excess of $25,000 be awarded by sealed competitive bidding.3 The TYA Pharmaceuticals contracts were entered into absent the use of competitive bidding. In the current and prior contracts, the Department indicated that the contract was for health services involving examination, diagnosis, treatment, prevention, medical consultation, or administration and, therefore, is not subject to the competitive-solicitation requirements of law.4 According to Department records, the Department paid TYA Pharmaceuticals $51.2 million over the term of the previous contract (No. C1841) and expects to pay TYA Pharmaceuticals approximately $72 million over the term of the current contract (No. C2116). Based upon our review of the scope of work described in the contracts and interviews with the Department’s Contract Manager and TYA Section 287.001, Florida Statutes, Legislative Intent. Section 287.057, Florida Statutes. 4 Section 287.057(5)(f)6., Florida Statutes. Pharmaceuticals staff, it does not appear that the TYA Pharmaceuticals contracts provide for the health services described in law. TYA Pharmaceuticals is licensed by the Department of Health as a prescription drug manufacturer and is registered with the United States Department of Health and Human Services, Food and Drug Administration, as a drug repackager. Pursuant to State law, drug manufacturers and repackagers are not required to have a licensed pharmacist or other health service professional on staff.5 The general service description or purpose specified in the contract is the provision of unit dosing of pharmaceuticals pursuant to orders submitted by Department pharmacies. As such, TYA Pharmaceuticals is providing commodities that are available from other vendors. Further, the repackaging of pharmaceuticals for unit dosing is not included in the statutory list of health services. Absent competitive procurement, the Department cannot demonstrate that the contract provides the best value for the State or that the contract was equitably awarded. Although competitive procurement procedures were not utilized, prior to entering into the current contract, Department staff prepared a comparison of TYA Pharmaceuticals prices with those of another pharmaceutical vendor. This comparison indicated that the other vendor’s repackaging prices were lower (approximately 30 percent less) than those of TYA Pharmaceuticals and that the prices for selected pharmaceuticals were lower for generic medications but higher for brand-name medications. Department staff concluded that TYA Pharmaceuticals offered greater cost savings to the Department because TYA Pharmaceuticals was willing to issue credits for returned pharmaceuticals and the other vendor “currently [did] not have a policy on returned medications.” However, the TYA Pharmaceuticals 2 3 5 Section 499.003(28) and (38), Florida Statutes. Page 3 of 20 SEPTEMBER 2004 REPORT NO. 2005-037 repackaging cost used in the comparison was $.90 rather than the current contract price of $1.15 and the comparison of pharmaceutical prices did not take into consideration any percentage markup on vendor medication costs. Recommendation: We recommend that the procurement of unit dosing of pharmaceuticals by the Department comply with the competitive bid process set forth in law. In response to Finding No. 1, the Department stated that the Department “reasonably interpreted the statute at face value” and considers that “preparation of accurate dosage of medications to be an integral part” of the medication administration process. While we agree that the accurate dosage of medications is integral to the medical treatment of inmates, TYA Pharmaceuticals does not prescribe or dispense pharmaceuticals to inmates. Pharmaceuticals are prescribed and dispensed to inmates by health services professionals at the Department. TYA Pharmaceuticals purchases pharmaceuticals, places the pharmaceuticals in different containers, and then resells the pharmaceuticals to the Department. We believe that this repackaging of medication does not constitute a health service as the term is utilized in Section 287.057(5)(f)6., Florida Statutes, which exempts health services from the normal competitive purchase requirements applicable to State agencies. Such exemptions must be narrowly construed so as to effectuate the legislative intent set forth in Section 287.001, Florida Statutes, of fostering “fair and open competition” in State procurements. Finding No. 2: Contract Deficiencies Our review of the terms and conditions for the current contract (No. C2116) between the Department and TYA Pharmaceuticals disclosed several deficiencies, including omissions of certain items that we believe are necessary for the cost-effective and efficient delivery of pharmaceuticals. These deficiencies are described below: Page 4 of 20 ¾ The contract indicates that TYA Pharmaceuticals will be paid according to the vendor’s medication cost plus 1.45 percent, plus a fee for the pharmaceutical package. The contract does not address any rebates or discounts that TYA Pharmaceuticals may be entitled to as a result of purchasing pharmaceuticals for resale to the Department. Such rebates and discounts are common in the pharmaceutical industry and can result in significant cost savings. Accordingly, the Department may not be receiving pricing related to TYA Pharmaceuticals actual medication cost. ¾ Federal and State laws regulate pharmaceutical suppliers, including repackagers, to safeguard the public health and promote public welfare. Federal and State oversight agencies perform inspections and investigations of pharmaceutical suppliers to determine compliance with regulations and good business practices and to resolve complaints. If violations are noted, warning letters, notices of violations, notices of inspection results, or inspections reports may be issued to the supplier. The contract between the Department and TYA Pharmaceuticals does not contain a provision requiring TYA Pharmaceuticals to notify the Department of any complaints filed, investigations made, warning letters or inspection reports issued, or any disciplinary actions imposed on the company by any Federal or State oversight agency. Absent such a provision, the Department may not be aware of serious complaints against or violations by TYA Pharmaceuticals. ¾ The contract requires that TYA Pharmaceuticals abide by all the pertinent requirements of specified chapters in the Florida Statutes and the Florida Administrative Code. However, as shown in the following table, the Florida Administrative Code rules cited in the contract were repealed or transferred prior to the effective date of the contract: SEPTEMBER 2004 Florida Administrative Code Cited in Contract No. C2116 Department of Health and Rehabilitative Services Rules, Chapter 10D-45, Regulations for Drugs, Devices and Cosmetics Agency for Health Care Administration Rule 59X-28.118, Unit Dose Returns by In-Patients REPORT NO. 2005-037 Status of Rules Repealed or Transferred to Department of Health Rules, Chapter 64F-12 (1997) Pharmaceuticals did not always fulfill the responsibilities and conditions in accordance with the contract terms. Specifically: Transferred to Department of Health Rule 64B16-28.118 (1997) By not appropriately addressing the issues discussed above, the Department has limited assurance that the contract for the unit dosing of pharmaceuticals provides Department pharmacies with pharmaceuticals in the most cost-effective and efficient manner. Recommendation: To ensure that unit-dosed pharmaceuticals are procured at the best available prices, we recommend that the Department consider the impact of any discounts or rebates earned by TYA Pharmaceuticals as a result of the pharmaceuticals purchased for resale to the Department. The terms and conditions of the pharmaceutical contract should address the effect of any such rebates and discounts on the prices paid by the Department. In addition, the contract language should be revised to require TYA Pharmaceuticals to timely notify the Department of any complaints filed, investigations made, warning letters or inspection reports issued, or any disciplinary actions imposed by Federal or State oversight agencies for the company or any of the company’s key employees. Also, the Department should communicate the correct Florida Administrative Code cites to TYA Pharmaceuticals and, in all future contracts, the Department should ensure that applicable laws and rules are appropriately cited. Finding No. 3: Contractor Responsibilities and Contract Conditions The current contract (No. C2116) with TYA Pharmaceuticals describes various Contractor’s Responsibilities and conditions. Our review of the contract management file and inquiries of Department staff indicated that TYA Page 5 of 20 ¾ The contract requires that TYA Pharmaceuticals provide a copy of all required State and Federal licenses including, but not limited to, a current Department of Health Pharmacy license and Federal Drug Enforcement Agency (DEA) registration. However, the Department did not obtain a copy of the Board of Pharmacy license in effect for the period July 1, 2002, through January 29, 2003, for any TYA Pharmaceuticals employee. In response to audit inquiries, Department staff indicated that a copy of the license was not obtained because “a Pharmacy License is not needed to provide the contracted services.” In addition, the Department did not obtain a copy of a DEA Registration from TYA Pharmaceuticals. The DEA Registration is required for the sale of pharmaceuticals included in the DEA’s schedules of controlled substances. According to Department staff, during the audit period, TYA Pharmaceuticals did not have a DEA Registration. In response to audit inquiry, Department staff indicated that the Department purchases needed controlled substances from the State’s Prime Vendor contract. ¾ Although the contract requires TYA Pharmaceuticals to provide a financial and compliance audit to the Department or to the Auditor General and ensure that all related-party transactions are disclosed to the auditor, the Department has not obtained financial and compliance audit reports from TYA Pharmaceuticals and TYA Pharmaceuticals has not provided copies of any audit reports to the Auditor General. ¾ TYA Pharmaceuticals is required by the contract to provide, by January 30, 2004, a procedure manual to all four participating SEPTEMBER 2004 REPORT NO. 2005-037 Department pharmacies and the Pharmaceutical Services Director (Contract Manager). The procedure manual is to include, among other things, a description of the process to resolve problems and issues between TYA Pharmaceuticals and the pharmacy or Department, and provide the name of a contact person, address, telephone number, and facsimile number. The procedure manual is to be updated expeditiously as changes occur and copies of changed procedures or other updates are to be provided. At the time of our initial inquiries, two of the four pharmacies did not have a TYA Pharmaceuticals procedure manual and the other two pharmacies had an outdated manual. The Contract Manager had a copy of a procedure manual that was purported to be the current, up-to-date manual. This manual addresses most of the required items identified in the contract. However, as the manual was not dated, we could not determine whether it had been timely provided. In addition, the TYA Pharmaceuticals procedure manual provided for our review by the Contract Manager did not include the name of a contact person and related data for use in the resolution of problems and issues between TYA Pharmaceuticals and the Department. ¾ TYA Pharmaceuticals is required by the contract to recognize the order-limit maximums set by the Department. TYA Pharmaceuticals is to notify the Contract Manager of any orders that exceed the order-limit maximum on the same date that the order is received. The Contract Manager indicated that authorized pharmacy staff set order limits in the pharmacy computer system so that pharmacy stock levels do not exceed a 14-day supply. In response to audit inquiries, the Contract Manager also indicated that the order-limit maximum is not provided to TYA Pharmaceuticals for each order placed because “this would restrict a pharmacy’s ability to adjust to ordering trends.” Obtaining and reviewing applicable licenses, registrations, and audit reports would provide assurances that TYA Pharmaceuticals is in compliance with the regulations of the pharmaceutical manufacturing and repackaging industry and is in sound financial condition. Reliance on TYA Pharmaceuticals for ensuring that order-limit maximums are not exceeded, as contemplated in the contract, does not appear practicable, especially as the Department does not inform TYA Pharmaceuticals of the order-limit maximums. To better monitor the order-limit maximums, the Department should review existing practices or consider the use of a pharmacy computer system with appropriate order-limit maximums that cannot be exceeded (or changed inappropriately), thus restricting the orders to only those pharmaceuticals needed. To ensure Department pharmacy staff are aware of proper ordering, delivery, return-of-goods, and credit procedures, pharmacy staff should have access to an up-to-date TYA Pharmaceuticals procedure manual. Recommendation: We recommend that the Department’s Contract Manager ensure that copies of all TYA Pharmaceuticals licenses and registrations required by law or specifically referred to in the contract are timely obtained and reviewed. In addition, the Department should also obtain and review audit reports for any reportable conditions or instances of noncompliance and utilize the information in the audit reports when monitoring TYA Pharmaceuticals or negotiating contract amendments. Also, the Department should ensure that the current TYA Pharmaceuticals procedure manual is provided to pharmacy staff and that future updates to the manual are timely distributed. Requiring that the manual be dated would help ensure that the current version of the manual is being used by the pharmacies. Further, as the Department requires TYA Pharmaceuticals to recognize the order-limit maximums set by the Department, Page 6 of 20 SEPTEMBER 2004 REPORT NO. 2005-037 the Department should provide reasonably established order limits to TYA Pharmaceuticals, or amend the contract to exclude that requirement. Finding No. 4: Contract Monitoring Throughout the duration of a contract, contract monitoring is necessary to ensure that the contractor provides high quality products and services in accordance with the contract terms and applicable laws and rules. To ensure that contract monitoring is performed in a comprehensive and consistent manner, it is essential that written policies, procedures, and standards be developed and communicated to contract managers. The Contract Manager for the contract between the Department and TYA Pharmaceuticals has developed a monitoring process that utilizes a checklist that includes all the items described in the section of the contract titled Contractor’s Responsibilities. However, the Department does not have written monitoring procedures and had not provided the Contract Manager with any recent contract monitoring training. Although the Contract Manager utilized a checklist to document the monitoring of TYA Pharmaceuticals, the completed checklists were not signed or dated. As such, the frequency of the monitoring visits is not documented. According to the Contract Manager, when deficiencies are noted during a monitoring visit, a follow-up site visit will be conducted to specifically address the deficiencies. However, the follow-up site visits are not documented and TYA Pharmaceuticals is not required to prepare a written corrective action plan or otherwise document corrective actions taken. As discussed in Finding No. 2 above, the contract does not require TYA Pharmaceuticals to notify the Department of any complaints filed, investigations made, warning letters or inspection reports issued, or any disciplinary actions imposed for the company by any Federal or State oversight agency. Whether or not such notification is provided, the Contract Manager should periodically check TYA Pharmaceuticals status with oversight agencies. For example, the FDA has a Web site where warning letters are posted. Our review of this Web site disclosed that the FDA issued a warning letter to TYA Pharmaceuticals on August 6, 2002. However, the Department’s contract file did not contain a copy of the warning letter or any indication that the FDA inspection results were considered during monitoring of the prior contract (No. C1841) or when entering into the current contract (No. C2116). Absent effective monitoring procedures, Department management has limited assurance that the terms and conditions of the contract are being met. Recommendation: We recommend that the Department develop written monitoring procedures and provide the Contract Manager with applicable training. Such training should include proper monitoring procedures (e.g., conduct of site visits, verification of TYA Pharmaceuticals status with applicable oversight agencies, evaluation of overall TYA Pharmaceuticals performance, etc.) and requirements for documenting monitoring results and any resulting corrective actions. To demonstrate that monitoring is performed timely and at proper intervals, we also recommend that monitoring instruments be dated and signed. In future contracts, the Department should consider including provisions relating to contractor corrective action requirements. Finding No. 5: Timeliness of Pharmaceutical Orders Department pharmacy staff submit pharmaceutical orders directly to TYA Pharmaceuticals. According to the terms of the respective contracts and Page 7 of 20 SEPTEMBER 2004 REPORT NO. 2005-037 applicable amendments, TYA Pharmaceuticals is to ensure that all orders are timely filled as follows: Contract Period Contractor's Responsibility to Fill Orders January 1, 2001, through Two (2) calendar days from time of order to time December 19, 2002 of receipt by Department pharmacies. December 20, 2002, to Present Forty-eight (48) hours, excluding holidays and weekends, from time of order to time of receipt by Department pharmacies. All orders placed after 1:00 PM will be considered as received on the following day. Eight of the 40 orders we reviewed were not timely filled by TYA Pharmaceuticals. These 8 orders were filled 1 to 10 days late. The order forms utilized by the Department varied from pharmacy to pharmacy and did not always contain the time and date of the order or the name of the person approving the order. (Two order forms we reviewed did not include the pharmacy location placing the order.) In addition, the date stamped on the receiving reports did not always agree with the date stamped on the invoice as the date the goods were received. Accordingly, for another 22 orders, the timeliness of the order could not be determined. While the contracts do not specify any penalties should TYA Pharmaceuticals fail to timely fill pharmaceutical orders, proper contract monitoring includes an evaluation of the contractor’s performance and compliance with all contract terms. Failing to properly record the time and date the order was placed and the date the order was received hinders the contract monitoring process. On the three monitoring checklists provided for our review, the Contract Manager indicated that the contractor responsibility related to timely filling orders was “Met.” One of the checklists included a notation that there had been “no complaints from pharmacies.” Recommendation: We recommend that the Department ensure that the time and date for all orders are appropriately noted on the order forms and that the receiving reports and invoices both reflect the proper date the pharmaceuticals are received. To improve the quality of the documentation needed to evaluate TYA Pharmaceuticals performance in timely filling the pharmacies’ orders and help ensure the accuracy of the orders, we recommend that the Department implement the use of properly designed standard order documents at all four pharmacies. We also recommend that the Department amend the contract to allow the Department to impose penalties should TYA Pharmaceuticals fail to timely fill pharmaceutical orders. Finding No. 6: Pharmaceutical Pricing The contracts between the Department and TYA Pharmaceuticals establish the method for pricing pharmaceuticals. As shown in the following table, over the terms of the two most recent contracts, the pricing methods and amounts have been revised: Contract Number C1841: Pricing Effective Dates Type of Package 01/01/2001 All Types: 01/09/2002 Amendment 01/10/2002 Bingo Card: No. 2 12/19/2002 Unit dosed tablets/capsules: Unit dosed liquids: (1) Pricing Fixed Price Per Contract Attachment A with an annual increase not to exceed 3 percent. Medication Cost plus $.68 per card. Medication Cost plus $6 per one hundred. Medication Cost plus $18 per one hundred. Medication Cost plus $.90 per card, 30 count or less. Medication Cost plus $1.04 per card, 60 count. Unit dosed Medication Cost plus $6 per tablets/capsules: one hundred. Unit dosed Medication Cost plus $18 liquids: per one hundred. Amendment 12/20/2002 Bingo Card: No. 4 12/31/2003 C2116: Medication Cost plus 1.45 percent plus $1.15 per card. Medication Cost plus 1.45 Unit dosed percent plus $6 per one tablets/capsules: hundred. 01/01/2004 Bingo Card: Present Unit dosed liquids: Medication Cost plus 1.45 percent plus $18 per one hundred. Note: (1) Medication Cost is defined in the contracts as the vendor's Medication Acquisition Cost. According to the contracts and amendments, this cost can be verified using invoices from the vendor's suppliers. We examined 40 invoices that were paid by the Department during the audit period (July 2002 through February 2004) to determine whether the pricing agreed with the method described in the Page 8 of 20 SEPTEMBER 2004 REPORT NO. 2005-037 respective contract or contract amendment. Based upon our review of the invoices and inquiries of Department personnel, we determined that the Department uses a method whereby “Item Listings” support the prices billed by and paid to TYA Pharmaceuticals. These Item Listings are prepared by TYA Pharmaceuticals and are generally updated weekly for price changes. TYA Pharmaceuticals provides copies of invoices from suppliers to support Item Listing price changes. The Contract Manager reviews and approves the Item Listings. Once the Item Listing is approved, the Listing is dated and is in effect for orders placed on or after that date and until a new Item Listing is approved. Utilizing this method, the Department cannot be assured that the prices on the Item Listing correspond with the actual vendor acquisition cost for the pharmaceuticals purchased by the Department. For example, a Department order may be filled from existing TYA Pharmaceuticals inventory, but the price on an Item Listing may relate to a recent acquisition of the same pharmaceutical. As the Item Listings are only periodically updated, the Listings may not accurately reflect pharmaceutical price fluctuations. In addition, small quantity purchases of pharmaceuticals may have a higher acquisition cost than those acquired through bulk purchase. Although a supplier’s invoice accompanies the changes to the Item Listings, as TYA Pharmaceuticals has numerous other customers, the Department cannot be assured that the price on the invoice provided specifically relates to the price for the quantity purchased by the Department. We also noted that, for 4 of the 40 invoices we examined, an incorrect Item Listing was used to price at least one item on the invoice. For another 8 invoices, the correct prices could not be determined because the Department order was not dated and, therefore, could not be correlated to the appropriate Item Listing. Recommendation: We recommend that the Department require TYA Pharmaceuticals to bill the Department in accordance with the contract terms. Alternatively, the Department could revise the contract terms to reflect an agreed-upon procedure for establishing the pharmaceutical prices. We also recommend that the Department take more care to verify pricing when approving invoices for payment. In response to Finding No. 6, the Department stated that it believes that TYA Pharmaceuticals is billing the Department in accordance with contract terms. However, use of Item Listings to support the prices billed by and paid to TYA Pharmaceuticals may not ensure that the prices specifically relate to the vendor’s medication acquisition costs for the pharmaceuticals purchased by the Department. The contract amendments described in the Department’s response that will incorporate references to the use and approval of Item Listings will more accurately portray the actual method employed by TYA Pharmaceuticals and the Department for the pricing of pharmaceuticals. Finding No. 7: Invoice Support and Approval Thirty-four of the 40 invoices from TYA Pharmaceuticals that we reviewed were not supported by adequate documentation. Specifically, the order forms or receiving reports for these 34 invoices were not available; did not identify the pharmacy placing the order; or were not properly signed to indicate the person who placed the order, authorized the order, accepted the order, or approved the order as received. In addition, the duties of Department employees were not always properly separated in that, at one pharmacy, the persons placing and approving the orders also accepted and approved the orders received. We also noted that 37 of the 40 invoices were not approved in accordance with the contract terms. The contract specifies that a Department Lead Pharmacist (or designee) is to review and approve the invoices prior to payment. These 37 invoices Page 9 of 20 SEPTEMBER 2004 REPORT NO. 2005-037 were not approved by a Lead Pharmacist nor was there a formal document evidencing the delegation of this responsibility to a designee. Contract Number C1841: Finding No. 8: Credits for Returned Pharmaceuticals Prior to the second amendment to contract No. C1841, a return for credit policy was not addressed in the contracts between the Department and TYA Pharmaceuticals. As shown in the following table, the credit policy has been revised over the terms of the two most recent contracts: Credit Policy and Amendments Thereto 01/01/2001 Credit policy not addressed. 01/09/2002 Added that all appropriate unused medications Amendment 01/10/2002 - will be returned for credit against future invoices. No. 2 03/31/2002 Each credit will be issued at the Medication Acquisition Cost. Absent adequate documentation, the Department cannot demonstrate that the payments made were properly authorized and in the correct amounts. In addition, lack of appropriate separation of duties may allow the misappropriation of pharmacy supplies to occur and not be timely detected. Recommendation: We recommend that the Department ensure that adequate documentation is retained to support the accuracy and approval of the pharmaceutical invoices paid. As recommended in Finding No. 5 above, use of properly designed standard order documents at all four pharmacies would improve the quality of the supporting documentation. In addition, the Department should ensure that responsibilities for placing, authorizing, and accepting orders and approving orders as received are adequately separated to the extent possible. Effective Dates Added a reference to Section 465.016(1)(l), Amendment 04/01/2002 Florida Statutes, for the definition of No. 3 12/19/2002 "appropriate unused medications." Added that Bingo Card Credits will be $0 if medication cost does not exceed $.50. Cards Amendment 12/20/2002 returned, due to vendor error, will be credited No. 4 12/31/2003 the Medication Acquisition Cost and packaging cost, with no return fee. C2116: All appropriate unused medications, as defined in 01/01/2004 Section 465.016(1)(l), Florida Statutes, will be Present returned for a credit against future invoices. Each credit will be issued at the Medication Acquisition Cost. Bingo Card credits will be 100 percent of Medication Acquisition Cost, less $1 per card for medication that can be credited pursuant to State and Federal laws. Cards returned, due to vendor error, will be credited the Medication Acquisition Cost, plus 1.45 percent, and packaging cost, with no return fee. The Department will attempt to notify vendor, in writing, 20 days in advance of any formulary action.(1) Note: A formulary is a list of pharmaceuticals a physician may prescribe without prior permission. Pharmaceuticals are periodically added to or deleted from the Department formulary. (1) As similarly noted for the pharmaceutical pricing in Finding No. 7 above, we found that the 20 credits we reviewed were issued at the prices on the Item Listing in effect on the date the return items were received by TYA Pharmaceuticals. As the Department does not necessarily know the date that TYA Pharmaceuticals receives the returned pharmaceuticals, the Department cannot ensure that the applicable Item Listing is used. Utilizing the Item Listings provided for the 20 credits we reviewed, we still noted some minor errors in pricing and instances in which the number or type of items credited did not agree with Department records of the number or types of items returned. Recommendation: We recommend that the Department require TYA Pharmaceuticals to issue credits in accordance with the contract terms or revise the contract terms to state an agreed-upon procedure that would enable the Page 10 of 20 SEPTEMBER 2004 REPORT NO. 2005-037 Department to verify the pricing of credits. We also recommend that the Department more closely review the credits issued to ensure that credits are properly priced and issued for the appropriate quantities and types of returned pharmaceuticals. ¾ To determine whether the Department had adequate documentation to support the selection of the contractor and the contract payments made and to determine whether the contract was administered and goods and services were provided in accordance with contract terms. OBJECTIVES, SCOPE, AND METHODOLOGY The objectives of our audit of Department unit dosing of pharmaceuticals contracts were: ¾ To evaluate the effectiveness of established internal controls in achieving management's control objectives in the categories of compliance with controlling laws, administrative rules, and other guidelines; the economic, efficient, and effective operation of State government; the validity and reliability of records and reports; and the safeguarding of assets. ¾ To evaluate management’s performance in achieving compliance with controlling laws, administrative rules, and other guidelines; the economic, efficient, and effective operation of State government; the validity and reliability of records and reports; and the safeguarding of assets. ¾ To evaluate the Department process for monitoring contract compliance. The scope of our audit included various aspects related to the contract for unit dosing of pharmaceuticals including the negotiation and contracting processes, contractor responsibilities and contract deliverables, compensation, and monitoring. In conducting our audit, we interviewed Department personnel, tested selected Department records, visited the Contractor’s repackaging facility, and completed various analyses and other procedures. Our audit included examinations of various documents (as well as events and conditions) applicable to the period July 2002 through February 2004 and selected actions taken through June 30, 2004. Page 11 of 20 SEPTEMBER 2004 REPORT NO. 2005-037 AUTHORITY DEPARTMENT RESPONSE Pursuant to the provisions of Section 11.45, Florida Statutes, I have directed that this report be prepared to present the results of our operational audit. In a response letter dated September 24, 2004, the Secretary of the Department provided responses to our findings and recommendations. This letter is included in its entirety at the end of this report. William O. Monroe, CPA Auditor General To promote accountability in government and improvement in government operations, the Auditor General makes operational audits of selected programs, activities, and functions of State agencies. This operational audit was made in accordance with applicable Government Auditing Standards issued by the Comptroller General of the United States. This audit was conducted by Stanley E. Mitchell, CPA, and supervised by Sherrill F. Norman, CPA. Please address inquiries regarding this report to Dorothy R. Gilbert, CPA, Audit Manager, via E-mail (firstname.lastname@example.org) or by telephone (850-488-5444). This report and other audit reports prepared by the Auditor General can be obtained on our Web site (http://www.state.fl.us/audgen); by telephone (850-487-9024); or by mail (G74 Claude Pepper Building, 111 West Madison Street, Tallahassee, Florida 32399-1450). Page 12 of 20 SEPTEMBER 2004 REPORT NO. 2005-037 Page 13 of 20 SEPTEMBER 2004 REPORT NO. 2005-037 Page 14 of 20 SEPTEMBER 2004 REPORT NO. 2005-037 Page 15 of 20 SEPTEMBER 2004 REPORT NO. 2005-037 Page 16 of 20 SEPTEMBER 2004 REPORT NO. 2005-037 Page 17 of 20 SEPTEMBER 2004 REPORT NO. 2005-037 Page 18 of 20 SEPTEMBER 2004 REPORT NO. 2005-037 Page 19 of 20 SEPTEMBER 2004 REPORT NO. 2005-037 Page 20 of 20