For employer-sponsored health plans, prescription drugs may represent one of the most expensive, fastest-growing, and least transparent areas of benefit costs. Pharmacy benefit managers (PBMs) play a central role in administering pharmacy benefits; establishing retail, mail order, and specialty pharmacy networks; negotiating pharmacy reimbursement terms; remitting rebates from drug manufacturers; managing formularies; and processing claims. Given the complexity of managing these benefits, even well-run plans can face issues such as pricing discrepancies, operational errors, or contract terms that no longer reflect current market standards. PBM audits play an important part in minimizing these risks.
PBM audits help plan sponsors manage drug cost expenditures by identifying operational or performance issues that inadvertently increase plan costs. Here are three major reasons routine PBM audits are recommended.
1. PBM audits help health plan sponsors perform fiduciary due diligence
Plan sponsors often have fiduciary or plan oversight responsibilities (e.g., duties imposed by ERISA) that require them to act prudently, monitor service providers, and make decisions in the best interest of the plan and its participants. In the context of pharmacy benefits, the PBM’s performance can materially affect plan liability, members’ out-of-pocket costs, participant access, and overall effectiveness of the pharmacy benefit.
Fiduciary due diligence is not limited to selecting a vendor during an RFP; it also includes ongoing monitoring of that vendor’s performance and compliance with the contract. An audit helps the plan sponsor evaluate whether the PBM is administering the plan in accordance with contractual terms, including applying pricing guarantees correctly, handling rebates and discounts appropriately, and operating in a manner consistent with the plan sponsor’s expectations.
2. With a PBM audit, employers can identify improvements to current contract terms
Audits can inform contract provisions that the plan sponsor may wish to renegotiate in future contract renewals or pursue in contractual “market checks” (benchmarking current PBM pricing against the market). PBM contracting is constantly evolving in response to the following:
- New drugs coming to market
- Changes in utilization, prescribing patterns, and treatment guidelines
- New regulations on drug prices and coverage requirements
- PBM and insurer consolidation, vertical integration, and changes in affiliated pharmacy relationships
- Brand drugs losing patent protection and generic alternatives becoming available
- New indications found for established drugs
PBM audits can reveal where gaps exist in current best practices in contracting. When timed strategically, audits can help guide contract renewal discussions and ensure best practices are implemented in future contract language.
3. A PBM audit can help group health plans quantify the impact of identified issues
Systemic issues often occur when a plan’s prescription drug benefits are not being administered in alignment with the plan sponsor’s intent. Feedback and complaints from members can reveal where there are issues with plan administration. For example, members may report being charged more than the intended copay or having drugs that are covered on the formulary rejected unnecessarily. When these issues stem from inaccurate benefit coding in the PBM’s system, an audit can then quantify the impact of the systemic error.
A focused audit of the plan design administration can uncover where the PBM’s administration system deviates from the intended benefit structure, reveal the root cause of those discrepancies, and quantify the expected financial impact of those errors. This allows the plan sponsor to understand not only what is going wrong but also how much it matters, and how to prioritize corrective actions accordingly.
How to perform a PBM audit: Health plan sponsor action items
Start with clear contract language
Confirm that your PBM contract includes meaningful audit rights, including access to claims, rebate, and administrative data; reasonable timeframes for conducting audits; and a clear process for resolving findings and recovering any identified amounts.
Align the PBM audit scope with your health plan’s priorities
- Financial audits: Review the PBM’s compliance with contracted pricing guarantees, including ingredient cost discounts, dispensing fees, administrative fees, trend guarantees, dispensing rate guarantees, and rebate minimums. Be mindful of whether drugs excluded from contractual protections have been accurately defined and reflected.
- Rebate audits: Review whether rebate amounts invoiced to manufacturers were accurately calculated and appropriately passed through to the plan sponsor. These reviews are typically done on site at the PBM, and only a limited number of firms, Milliman included, are approved to review these contracts.
- Plan design audits: Review whether benefit designs were applied correctly, including member copayments and coinsurance, as well as what drugs are covered and under what circumstances.
- Clinical audits: Review the PBM’s compliance with key clinical management protocols, such as quantity limits, step therapy requirements, and prior authorization rules, to confirm claims were administered consistently with the plan’s clinical rules.
Choose the right timing for a PBM audit
Consider whether an audit should be conducted before contract renewal, after a significant plan design change, after implementing with a new PBM, when member complaints suggest a recurring issue, or as part of routine vendor oversight.
We’re here to help
Milliman combines deep actuarial and clinical expertise with the latest regulatory intelligence to help plan sponsors evaluate their audit rights, identify the areas of greatest risk or opportunity, and determine the right timing and scope for a review. Milliman also has dedicated teams that perform PBM audits, allowing us to support group health plan sponsors both in assessing whether an audit is appropriate and in carrying out the work when a review is warranted.
This article is for informational purposes only and should not be construed as legal advice. Please consult professional counsel before taking any action based on this material. For more information, contact your Milliman consultant.