CFO/Human Resources Pharmacy Benefits Audits Brief

April 28, 2010 by Mike Sammons

Most employers are unaware that a major portion of their Company’s health and welfare plan assets may not be subject to an auditable or enforceable contract. Furthermore, it is not unusual to find situations where no administration contract even exists. The matter of reference relates to pharmacy benefit claim administration.

For a pharmacy benefit administration agreement to be auditable, there are a number of minimum requirements:

1. The discount basis upon which claims will be adjudicated must be specifically disclosed (and guaranteed)
2. The administration fees paid to retail pharmacies must be specifically disclosed (and guaranteed).
3. A minimum dollar amount of manufacturer rebate sharing (per script) must be disclosed (and guaranteed).
4. The contract must be specific in terms of purchaser rights to audit ALL claims (versus a sampling of claims). There should be no charge here as the employer owns its claim data outright.
5. The plan sponsor must have the means to take possession of its detail electronic claims data in order to verify actual counts of brands vs. generic scripts (which drive the rebate guarantees noted in item three above).

While the casual observer would logically conclude that a pharmacy benefit administration contract would detail the above performance measures, this has proven to be universally untrue where the supplier is a health insurer who also adjudicates pharmacy claims. This is problematic on many levels and is akin to a purchaser buying a reinsurance contract from a health insurer but not defining the amount of the associated premium (while allowing the insurer to auto-draft premiums from their bank account). Obviously, no purchaser would make such a deal given the fact that reinsurance is a profit center for a health insurer (even a non-profit insurer).

The scenario outlined above is a particular problem for Chief Financial Officers of public companies, given the issues related to Sarbanes Oxley. Secondly, there are equally serious considerations for the person designated as the employer’s Plan Fiduciary. Specifically, Department of Labor (DOL) regulations specify that monies payroll deducted from employee wages become “plan assets” 90 days downstream from the deduction. That said, the Plan Fiduciary has a legal obligation to protect and conserve Plan Assets. Based on feedback from the international labor relations law firm Proskauer, the most basic definition of “protect and conserve” relates to auditability. We are happy to facilitate a dialogue with Proskauer should you have questions on the Department of Labor fiduciary requirements as noted.

Sarbanes and DOL aside, we find significant controllership issues as we audit individual pharmacy claim transactions…i.e., roughly 3-5% of claims are paid incorrectly (primarily overcharges). The reader should note that PBM performance guarantees exist on average. Any student of statistics and/or six sigma knows that significant defect rates can exist underneath an achieved “on average” performance level. The most common error found in individual claim transactions relate to incorrect billed charge amounts and mis-applied discount rates. Unlike the medical/surgical environment, the per employee claim transaction rate on Rx is typically greater than 20 claims per year. This reality creates a significant barrier for employers (and accountable officers) to achieve even basic controllership requirements. Without a doubt, no form of six-sigma supplier management protocol can be implemented without a 100% transaction audit.

Taking controllership a step further, we have the ability to create a pre-payment claim adjudication audit. Secondly, at no point in the audit or sourcing process do we send you the employer a bill….we accomplish this via an integrated approach to sourcing and audit.

RxQuest is a derived work product from ClaimsQuest…a financial analysis solution trademarked by the Blue Cross Consortium. The ClaimsQuest work product was introduced into the domestic marketplace in the summer of 2000, and drives more than 175 procurement studies per year. References on both ClaimsQuest and RxQuest are available upon request. Over the past three years, more that 80 RxQuest studies have been conducted for employers ranging from Fortune 27 to groups as small as 1,000 employees.

You can review the “Quest” product suite at www.questanalysticsgroup.com. Or contact Jim Chamberlin at 678-427-8551