Rebate Audits: Consider Auditing Manufacturer Rebates in Addition to Rebate Guarantees

By Sharon Moritz & Derek Frye
Thu, Jun, 01, 2017

Each year, billions of dollars in manufacturer rebates are at stake for health plans, their clients, and ultimately, members. Today, it’s more important than ever to make sure your plan is recouping the pharmacy manufacturer rebates it is entitled to. That’s because rebate potential has been growing rapidly – driven by the high costs and volume of specialty and high-price brand drugs. Capitalizing on these rebates – given the high dollars at stake – can mean the difference between your health plan meeting its margins or not.

And if you are a Medicare Advantage plan, auditing the rebate process is a must to ensure accurate reporting to CMS and regulatory compliance. Sometimes plans administer the rebate process themselves, but most of the time your PBM is administering the rebate process.

Given these rapidly-changing rebate dynamics, and the complexity of the ever-shifting calculations involved, the best way to know if your health plan is getting your fair share of rebates is by doing rebate audits. There are two broad types of rebate audits: PBM contractual rebate audits and drug manufacturer rebate audits.

PBM Contractual or Guarantee Rebate Audit: This is the most commonly-performed, and most economical type of rebate audit, with the majority of health plans with 50,000 lives or more doing these regularly. Smaller health plans can also benefit, given the dollars involved, and the fact that more than 60% of PBM rebate audits performed typically identify errors. The amounts in question can range from tens of thousands of dollars to millions of dollars per health plan.

One common problem identified during audits of rebates include PBM reporting that doesn’t align with health plan reporting, including whether the PBM rebate guarantee is calculated on a per claim basis. Claims processing and reporting cycles that get thrown off schedule also often lead to errors. Other problems typically identified during audits of rebate guarantees include timing issues between guarantee payments and your contract’s stipulations, or misallocation of rebates by product line or benefit code. Each of these issues typically result in fewer rebate dollars being passed back from the PBM to the health plan as they should be. And the more complex the PBM rebate guarantee contract language is, the more likely there will be errors.

A rebate audit of this type can generally be done without a team having to go on site, provided the right financial and other data is provided for analysis. If you hire an outside auditing team to conduct the audit of rebate guarantees, make sure they have the right experience and expertise. The auditor should preferably have worked previously in a PBM rebate department and have a very detailed understanding of PBM rebates and PBM financials, otherwise they're not likely to catch the errors made in the PBM’s reporting.

Drug manufacturer rebate audits: This audit involves a deeper analysis that closely examines the rebate agreements that exist between the PBM and drug manufacturers. A typical audit will involve the top five to ten manufacturers that contract with the PBM, based on dollar value of the rebates on the drugs. Specialty drug rebates often determine which manufacturers will be audited, because of the high dollar amounts involved.

Although only about 5% of health plans today do manufacturer rebates on an annual basis, that number is expected to grow given the high dollar amounts that can often be recovered for the health plan – again, ranging from the tens of thousands to millions of dollars per audit. Common problems identified during these audits include plans not getting the rebates they are entitled to due to formulary exclusivity provisions and other utilization management tool exclusions that may be in the contract, including Prior Authorizations.

Another problem is that competitor drugs may be on the formulary limiting PBM rebates, even if it's your own health plan’s formulary (which PBMs often try to design to maximize their rebates). Another scenario: price protection provisions, or market share goals, may have been under-or over-invoiced, resulting in incorrect PBM rebate payments to your plan. These often occur because certain contract language provisions between the PBM and manufacturers (or between your plan and the PBM) may not be clear, be subject to interpretation by the PBM, or simply be “missed” by the PBM financial analysts who invoice for and reconcile rebates the PBM is administering on your behalf.

There are also special circumstances when a health plan should strongly consider performing a manufacturer rebate audit. One is if there has been a recent pharmacy benefit design change, because PBM errors are common and may affect rebates. One health plan we worked with recovered more than $3 million in “lost” rebates: the audit showed that a PBM analyst who calculated the rebate misunderstood or overlooked a new code that had been added to the plan’s formulary following the benefit design change. Another red flag that should prompt an audit: if there has been a significant increase or decrease in PBM rebate payments your plan is receiving from the PBM, or if there has been a significant “reconciliation” payment made by the PBM to your plan.

For Medicare Advantage plans, it is advisable to do a manufacturer rebate audit if you report direct and indirect remuneration (DIR) to CMS (used by the agency to determine the accuracy of annual health plan bids). Almost every Medicare Advantage plan reports DIR to CMS, and CMS will expect plans to have done due diligence oversight when the agency comes knocking for a 1/3 financial audit. Plus, DIR reporting rules are constantly changing: we're aware of multiple clients receiving incorrect DIR reports from their large, name-brand PBMs for their upcoming DIR submissions.

A manufacturer rebate audit involves using a third party, independent auditor who must go on-site to the PBM and health plan. While the on-site time can take just a few days, the entire process often takes several months. Experience truly matters here. Before you hire an auditor, be sure to ask how many rebate audits the individual or firm has done. As with PBM contractual rebate audits, it is best to hire someone who has previously worked in a PBM rebate department. You should also ask what percentage of their audits have resulted in “lost” rebate dollars being identified and collected. Make sure it is at least 60% so you are not wasting money on a fishing expedition.

How your PBM contract defines rebates also determines how many rebate dollars your health plan will receive. So, having a trusted independent PBM consultant guide your PBM procurement and contract negotiation can also help you achieve maximum value.

In today’s market, the opportunity to recoup more of your drug benefit dollars through rebates (as administered by your PBM) has never been better. PBM rebate audits can help your plan recoup significant monies that may be owed to your organization.