Pharmacy Audits: Removing the Ambiguity Between Health Plan and PBM

By Margaret Berlack & Derek Frye
Thu, May, 25, 2017

Average Wholesale Prices (AWPs), Maximum Allowable Charges (MACs), generics versus brands, dispensing and administrative fees: the terms form an alphabet soup of acronyms against which various percentage discount formulas are then applied in your PBM contract. Then the formulas are applied against literally millions of individual pharmacy transactions.

No wonder, then, that pharmacy audits are the most common discretionary PBM audit conducted by or on behalf of health plans. A pharmacy audit involves a thorough review and analysis of the discounts applied from AWP (or whatever pricing source is negotiated in the contract), as well as pharmacy dispensing fees (charged to you by the pharmacy, and paid first by your PBM) on a per claim or aggregate basis. This is done to determine if all drug pricing and discount guarantees as stated in the PBM contract have been achieved for the health plan.

The constantly changing drug prices, high volume of transactions, and potential for calculation errors make pharmacy audits a necessary option for most health plans. Pharmacy spending is the second-highest line item financial outlay health plans make each month – exceeded only by medical claims. And pharmacy as a percentage of total medical spend has increased because of costly specialty drugs. So, health plans have a fiduciary duty to conduct these audits to make sure they are not leaving money on the table.

Also, there can be a lot of ambiguity in PBM contracts that can result in different interpretations of certain terms. That can lead to the wrong discounts and pricing being applied. Even terms as seemingly straightforward as brand-name versus generic discounts, or pharmacy network performance guarantees, or compound claims, may not always be clear cut. If you are not an expert in writing PBM contracts, then you have probably unknowingly negotiated terms that work in the PBM’s favor – not yours.

To recap, the benefits of doing pharmacy audits include:

  • Identifying mistakes that often result in monetary recoveries for the health plan. These can range from between tens of thousands to millions of dollars per audit.
  • Discovering whether your current PBM contract language contains ambiguities that allow the PBM to apply interpretations during their calculations that work to their financial advantage, not yours.
  • Giving you more negotiating leverage the next time your PBM contract is up for renewal, based on what you discover based on the audit.

Here are some additional insights and tips for health plans concerning pharmacy audits:

  • Most large health plans already conduct pharmacy audits. But even if your plan is as small as 5,000 lives, the potential monies you may be losing can be significant. Audits are a worthwhile investment. This is true even if your PBM pharmacy pricing performance guarantees appear to be met – or even exceeded -- on paper.
  • If your plan does pharmacy audits on its own, make sure to review the PBMs performance or reconciliation report showing results based on individual or aggregate claim counts, per the terms of your contract. If you don’t already get the data in this format from your PBM, contact your PBM account representative. Then, spot check this data against your own in-house data to make sure they align. It's possible that the PBM is “bucketing” claims in a channel (retail brands, for example) incorrectly, and an individual claim count comparison between their report and your in-house data could quickly catch that.
  • Consider using an outside, third-party audit firm with expertise in PBM contracting and financial analysis. An auditing firm that has worked extensively with PBMs over the years will know each PBM’s typical problem areas or weak spots, and be on the lookout for these during the pharmacy audit; health plans doing their own pharmacy audits may tend to overlook these areas. Other benefits of using an outside firm include:
  1. They have experts who have long-term, well- established relationships with key people at multiple PBMs. This helps the health plan get quicker answers to questions that come up, and faster resolution of problems or discrepancies.
  2. They will have seen financial and other data from many different health plans and PBMs – making it more likely the outside auditors will be able to spot incorrect or miscalculated financial values.
  3. They will also have more experience in working with more complex PBM guarantee arrangements, such as different guarantee amounts based on unique channel definitions, or “hidden” offset language buried in what appears to be benign contractual language. As a result, they will be more likely during the pharmacy audit to identify discrepancies and errors.

Pharmacy audits are about more than collecting monies health plans may be owed by your PBM. These also identify contractual deficiencies and performance problems so plans can correct them. So they play an important role in helping plans control costs and improve member service.

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