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Why prescription benefit plan sponsors should audit

Roy Wilkinson, Senior Consultant, TRICAST

Many sponsors of prescription drug benefit programs have operated on blind faith for too long. They have depended on their pharmacy benefit manager (PBM) to deliver safe and effective prescription drug coverage to their plan members while helping to reduce costs. The problem occurs when the plan sponsor relies on their PBM to tell them how they are doing! This is something akin to the fox guarding the hen house.

To make matters worse, prescription benefit programs and PBM business practices remain some of the most opaque operations in health care. It is almost impossible for a plan sponsor to fulfill their fiduciary obligations without some type of independent, third-party oversight. This is where outside auditing and monitoring comes into play.

Let’s take a look at the reasons why:

  • Difficult to validate on your own. Evaluation of a prescription benefit program should begin with an examination of the plan’s PBM services agreement. The services agreement is filled with plan definitions that dictate how terms are identified and opens up the possibility for varied interpretations.
  • Wiggle-room. Many PBMs prefer language that is vague and provides wiggle-room, meaning that a definition can be molded to comply with the business practice being deployed, usually benefitting the PBM. Much to the surprise of many benefit professionals and plan sponsors, the terms called into question are ones that should not be that difficult to define. Things like “What is a generic drug?” or “How is a brand name drug designated?” Imagine how confused they are when they learn that drugs that should qualify as a generic (thus obtaining a greater discount) can be re-characterized as a brand (receiving a smaller discount), all at the discretion of the PBM. Moreover, the same drug can be counted as a generic when the PBM is tallying their Generic Fill Rate percentage and also be identified as a brand for purposes of adjudicating the claim at a lower discount. An audit will determine if a PBM is compliant or not.
  • Maximize savings to the plan. The above-mentioned wiggle-room also gives the PBM the flexibility to define pricing and rebates. Some cost-reduction may be lost when the PBM re-classifies manufacturers’ incentives into something other than a rebate or pricing discount. These lost savings accrue to the PBM’s shareholders rather than to the plan!
  • Specialty drugs. Specialty is the fastest growing cost component in a plan sponsor’s drug spend. Specialty drugs are unusually high-cost drugs that may require special handling and storage. They are sometimes referred to as biologics because of the manufacturing process required to create them. We expect specialty to hit 50% of drug spend by 2020, even though the utilization is driven by approximately 1 percent of the member population. Even with these huge cost increases to the plan, specialty is often ignored when it comes to attempting cost containment. From a contracting perspective, many consultants and plan sponsors simply accept what the PBM presents as their specialty offering. Discounts, guarantees, risk-sharing and rebates are generally whatever the PBM suggests. An audit can help define what is happening with your pharmacy drug spend.
  • ERISA requirements. While auditing a plan’s PBM directly is not required under ERISA (Employment Retirement Income Security Act), the health and welfare plan that includes the pharmacy benefit, may require an independent audit as part of the financial reporting to the Department of Labor. Depending on the number of participants and the funding status, a financial audit conducted by a qualified CPA may be needed. It’s difficult for the plan’s financial audit to be completed accurately if the PBM’s performance is not also validated.
  • Fiduciary obligation. A fiduciary to a benefit plan has the legal responsibility to provide adequate attention and oversight to the ongoing operation of the plan in order to safeguard the plan’s assets for the benefit of plan participants. This includes administrators, trustees and certain advisors. PBMs fight furiously to exclude themselves from being identified as a fiduciary in the vast majority of PBM contracts. As a result, the designated fiduciaries have an extra burden to make sure that the plan is performing.

The best contract in the world is useless unless the plan sponsor retains and utilizes some means of validating the terms and provisions. This is where an independent audit is invaluable. The experienced auditor is able to confirm if the terms are being met, where the errors reside, and whether the plan sponsor is receiving what it contracted. Additionally, an audit can identify whether plan members are paying the correct copays and whether drugs are being adjudicated properly (pricing, exclusions, prior-authorization, etc.).

Some auditing firms still rely on statistical sampling as a means to test a plan’s performance. With the advent of sophisticated software tools, most firms have the capacity to review 100 percent of the claims processed by the plan’s PBM. Claim volume is no longer an obstacle since the set-up and benchmark testing is the same whether the auditor is reviewing a 1,000-member group or a 100,000-member group.

A more recent software development enables plan sponsors to monitor their prescription drug plan’s performance in near-real time, greatly reducing or eliminating the need for retrospective auditing. The software can replicate the PBM’s claims adjudication engine and identify variances immediately, giving a plan a new level of financial and operational oversight. Additionally, these new tools enable the plan sponsor to identify incidents of fraud, waste and abuse and then execute a corrective action without the dependence on a traditional audit to uncover a problem well after it occurred.

Providing adequate review and oversight is both a good business practice and fiduciary requirement for management responsible for decision-making on behalf of their plan’s members. Recent software advancements make the tasks associated with such a review both affordable and efficient.