Audits of pharmacy benefit managers are becoming more popular among employers at a time when benefit costs are top-of-mind.

"The number of employers auditing pharmacy benefit claims has increased in recent years," notes Brian Bullock, president of The Burchfield Group, a St. Paul, Minn.-based firm that provides PBM audits and contract negotiations. "Much of this can be tied to employers' participation in the retiree drug subsidy program under Medicare Part D. Because federal funds are involved, there are significant compliance requirements that compel employers to make absolutely sure they are requesting no more than the subsidy due to them from the Centers for Medicare and Medicaid Services."

"As transparent or pass-through financial arrangements with PBMs have gained in popularity, so have employers' audit needs," he adds. "These pass-through arrangements typically require greater due diligence when assessing PBM performance with regard to financial guarantees. For instance, employers receiving 100% of rebates will need a more in-depth audit, compared to those receiving a flat per-prescription guarantee. Pre- and post-implementation audits seem to be more common these days, and employers are taking advantage of implementation credits to offset costs associated with these audits."

(See a related article that advises employers on how to follow the prescription benefit financial trail.)

Emil Kraft, principal and chief actuary for DeepView Solutions, a Seattle-based corporation that provides PBM procurement services and contract analysis, advocates "rigorous financial auditing consistent with comprehensive, dollar-for-dollar financial guarantees.

Many consultants help employers negotiate a contract with a PBM, then hope their negotiations end up benefiting the employer. In our experience, no one rigorously audits the financial experience, although some of the bigger consultancies have pharmacy teams that perform clinically-based audits."

A PBM audit could uncover mistakes like incorrectly applied network discounts, mail-order discounts, specialty discounts, rebate payments, administrative fees and other program fees.

Other potential findings include incorrect application of member or drug coverage eligibility rules, cost-sharing rules, prior authorization, step therapy and override rules. These mistakes might add up to be very costly for employers.

Bullock comments: "We've seen audits that have identified millions of dollars in recoveries, and others that have simply confirmed that everything is functioning as expected. When errors are found in benefit design, we have identified numerous issues.

Prior authorization and quantity limits have been set up incorrectly; usual and customary pricing is incorrectly applied, where the member or plan sponsor pays more than they should; or pharmacies enter the incorrect quantity for a kit, an inhaler, or non-oral product. We have also observed pricing discrepancies, where the pharmacy discount rates or dispensing fees have seen set up incorrectly. In some instances, rebates are applied at the point-of-sale, and this has been shown to produce errors."

Pitfalls in audits

Audits can be ineffective for plan sponsors if their PBM contract includes too many auditing restrictions. Here are some restrictions to watch out for:

• Preventing the recovery of funds due to the employer.
• Giving the PBM the power to veto an auditing firm selected by the employer.
• Limiting the types of information that the auditor can see.
• Limiting the time period for which claims can be audited.
• Banning the auditor from revealing certain proprietary information to the employer.
• Prohibiting the auditor from copying data that the PBM has (instead, requiring the auditor to take general notes on the data).
• Forcing the auditor to give the PBM a draft of the audit report before it goes to the employer.

Carefully review the contract language to determine whether it puts too much power in the PBM's corner.

"For an employer, it is difficult to know that their auditing process is working, since they rarely, if ever, actually receive a penalty check from their PBM," Kraft observes. "If the contract is well-constructed, the auditing process can be straightforward and productive. If the contract is not well-constructed, auditing can be compromised, ineffective or halted altogether."

Tim Watson, the principal and co-owner of the Pharmacy Benefit Management Institute, explains, "The agreement between the employer and the PBM often dictates what can be audited, by whom, over what period of time, and what issue resolution processes can entail. The finest audit protocol in the world won't help an employer if the audit language contained in the base agreement is weak or limited in scope."

The employer could be at a disadvantage if the PBM gets to influence the auditor selection.

"The contract should allow independent consultants to perform audits without granting the PBM veto power," Kraft says.

"We have seen contracts where only the PBM is allowed to perform contract audits. We have also seen situations where a PBM is granted unrestrained veto power of the independent auditor chosen, and then they veto every auditor chosen."

Likewise, Tim Watson of PBMI asserts, "PBMs are too restrictive in their standard contract language about whom they would consider to be acceptable audit firms - often restricted to large, national accounting firms. Firms that have demonstrated expertise and credibility, and are willing to negotiate mutually acceptable confidentiality agreements, should be acceptable to PBMs. The employer should have the ability to hire the firm they choose to conduct a PBM audit."

But, he adds, "here are some cases in which I believe a PBM should have the ability to veto a particular auditor. For example, if a PBM had entered into a confidentiality agreement with a specific audit firm in a previous engagement, and the audit firm deliberately and willfully violated the terms of that agreement, I can understand the PBM not being excited about working with that particular firm again."

PBMs usually want to keep secret certain information that they feel is unique to their business model or operations. Otherwise, their competitors might try to copy what they do.

"What can be seen by the auditor during an audit process is governed by the base PBM agreement between the employer and the PBM," Watson says.

"If the audit language in the agreement is vague or restrictive, the employer will have little recourse other than abiding by the basic rules of engagement as identified in the audit rights section of the agreement. Most discussion around audit rights centers on the confidential nature of PBM agreements with manufacturers and network pharmacy providers. These issues can be overcome with appropriate audit protocols and confidentiality provisions. The PBM should not have the ability to restrict the type of information discussed in the findings, though they should receive a copy of the completed report for their files."

If possible, don't let the PBM block access to information that the auditor needs. "Every claim in the experience period should be audited- not just a sampling of claims and not just high-dollar claims," Kraft explains.

"Anything that restricts a full audit or sharing auditing results with the employer is unacceptable and indefensible. Provisions seeking that personal health information is properly secured and that results are not released to other parties are reasonable."

Bullock agrees: "The employer and auditor should have access to claims beyond the scope of the initial audit if findings warrant further historical research. The pharmacy invoice is not enough; they should have access to contracts between PBMs and network pharmacies in a pass-through arrangement and, in the case of a rebate pass-through, to rebate contracts between the PBMs and pharmaceutical manufacturers. The auditor should have access to all the parameters of the benefit design - prior authorization, quantity limits and so on."

What to do after the audit

So, you got a whole bunch of data in a big, thick audit report. What next?

When mistakes are uncovered, "first, root-cause analysis should be conducted to identify the source and extent of any variances. Discovery should be conducted by the PBM and the employer to validate the variance issues. Those issues finally determined to be errors should be corrected in the system to prevent future errors on the same issue. In addition, the employer should have the ability to recover funds if it is finally determined that the PBM is solely responsible for the error identified in the audit process," Watson states.

The audit report also might shine light on some ways you can improve your PBM contract and your relationship with the PBM.

"Employers should keep diligent and current records of all plan design changes to ensure that their intent is appropriately communicated to their PBM, and that an accurate documentation system is maintained," Watson suggests.

But do you really need the audit in the first place?

That depends, but often the answer is yes.

"Employers should not rely solely on a PBM's satisfactory completion of a SAS 70 audit, which is typically conducted annually," Watson advises.

"While PBMs that pass the SAS 70 audit have demonstrated that their processes are reasonable and sound, the result does not ensure that those processes have been accurately deployed for an individual employer. As pharmacy benefit costs continue to rise, employers should consider implementing an effective PBM audit solution as a matter of due diligence."

Preventing fumbles in your PBM audit

Employers can avoid some of the auditing pitfalls if they plan ahead.

"The best time to start preparing for a PBM audit is when you're initially entering a contract negotiation," advises Emil Kraft, principal and chief actuary for DeepView Solutions, a Seattle-based corporation that provides PBM procurement services and contract analysis. "During the PBM procurement process and contract negotiation, you should [shift] as much risk as possible to the PBM by securing guarantees related to everything that PBMs can do that affects employer cost. You should seek pricing-term guarantees (discounts, dispensing fees, rebates, administrative fees) and guarantees related to the influence a PBM can exert over filled drug mix through generic substitution, therapeutic interchange programs, etc."

He adds, "Guarantees should be dollar-for-dollar. So, if a PBM does not live up to their promises, and it costs an employer an additional $100,000, the PBM owes the employer $100,000. Guarantees should be enforceable. Often, guarantees are written in a way that renders them effectively unenforceable."

He recommends getting answers to these questions:

• Can the period during which audits are allowed be extended if the PBM does not supply data on time?
• Are employers restricted from reauditing a period of experience?
• Are the auditors allowed to share their results with the employer?
• Will the data supporting auditing be sourced from the PBM's native systems or their data warehouse?

To prevent mistakes, "100% of the claims should be electronically audited, using a flexible, rules-based system that can handle the complexities for today's various plan designs. It should take into account prescription deductibles, specialty copays, owned pharmacies, donut holes and the like," says Brian Bullock, president of The Burchfield Group, a St. Paul, Minn.-based firm that provides PBM audits and contract negotiations.

To contain pharmacy costs, consider what size PBM is right for your needs. "Transparent PBMs are smaller and drive much less script volume than the largest spread-model PBMs," Kraft says. "Basic economic principles suggest the more of something you buy, the better the price you can negotiate. [Thus], large spread-model PBMs are negotiating better terms with pharmacy chains and passing those terms on to employers in the form of better term guarantees."

He adds, "Smaller PBMs typically have smaller clinical research departments. This may account for the advantage large spread-model PBMs have enjoyed over their smaller, transparent PBM rivals in the financial value of their drug-mix management programs."