The objectives of our review were to determine whether McKesson Health Solutions (McKesson) complied with Federal requirements to ensure that beneficiaries did not exceed their transitional assistance (TA) limits; applied TA funds only to covered drugs; passed on negotiated prices to beneficiaries and offered the lower of the negotiated prices or the usual and customary prices; and supported the expenditures and withdrawals it reported to CMS. We found that McKesson properly supported the expenditures it made on behalf of beneficiaries and the withdrawals from the payment management system. However, McKesson did not have proper procedures in place to ensure that it always complied with Federal requirements to ensure that beneficiaries did not exceed their TA fund limits, applied TA funds only to covered drugs, and passed on negotiated prices to beneficiaries. As a result, CMS overpaid McKesson $176,032 for beneficiaries who exceeded their TA limits and $135,494 for excluded drugs for the period July 12, 2004, through July 31, 2005. In September 2005, McKesson reimbursed CMS $44 for excluded drugs for the period January through August 2005. We recommended that McKesson reimburse CMS $176,032; determine whether the amount McKesson reimbursed CMS for excluded drugs included any of the $135,494 in TA funds identified in the audit and reimburse the difference; and implement policies and procedures to ensure that it (1) does not pay for statutorily excluded drugs with CMS funds and (2) offers negotiated prices to the beneficiaries. In written comments, McKesson stated that it would work with IntegriGuard on an audit of the TA fund expenditures and will reimburse CMS for any amount it determines exceeded beneficiaries’ TA fund limits, but will not reimburse CMS for the excluded drugs for which OIG believes it paid. We continue to believe that McKesson should reimburse CMS $135,494 for the TA funds it used to pay for excluded drugs.