Working with pharmacy benefit managers (PBMs) can be a frustrating experience for pharmacies. The PBM possesses the pharmacy’s money. If the PBM does not pay the pharmacy, the pharmacy is harmed, regardless of whether the PBM has the right to withhold money. This falls under the adage “Possession is 9/10ths of the law.”
Superior Negotiating Position
PBMs have the upper hand in negotiations, a result of the following factors:
- Few legal restrictions. Under federal law, PBMs have a great deal of authority, with little accountability. The scenario is substantially the same with state law. However, some states are enacting laws designed to protect pharmacies and to rein in the more egregious activities of PBMs. PBMs are challenging these state laws in the courts.
- Financial disparity. PBMs have a great deal of money. When a pharmacy challenges a PBM, the PBM can easily “lawyer up” and fight the pharmacy.
- Inertia. The existing PBM model has been around for many years. Elected officials, government regulators, and even pharmacies are so accustomed to the existing PBM model that they have difficulty pushing for changes to the model.
- Possession. As PBMs possess the pharmacies’ money, whether PBMs are right or wrong does not matter from a practical standpoint. If they refuse to pay pharmacies, the pharmacies are forced into a precarious position.
Forms That an Audit Can Take
The most common audit is one in which the PBM requests that the pharmacy produce documents supporting the claims that the pharmacy previously submitted to the PBM. If the PBM concludes that the documents do not support the claim, the pharmacy may face a clawback. Other types of audits can more closely resemble investigations. With these types of audits, the PBM may require documentation or other information from the pharmacy that addresses 1 or more of the following areas:
- Co-pays. Federal law, state law, and most PBM contracts require pharmacies to make a reasonable attempt to collect co-pays. These laws and contracts generally allow a pharmacy to waive or reduce a co-pay only if the patient properly establishes a financial inability to pay the co-pay. If a PBM concludes that a pharmacy is routinely waiving co-pays, then the PBM will likely terminate its contract with the pharmacy.
- Marketing. Generally speaking, federal and state laws prohibit health care providers from paying commissions to 1099 independent contractor marketing reps (individuals and marketing companies). If a PBM concludes that a pharmacy is paying commissions to 1099 independent contractor marketing reps, the PBM will likely terminate its contract with the pharmacy.
- Mail order. Most pharmacies are in the PBM’s retail network. PBMs restrict how much their retail network pharmacies can engage in mail order. If a PBM concludes that a retail network pharmacy is engaging in mail order beyond the guidelines imposed by the PBM, the PBM will, again, likely terminate its contract with the pharmacy.
With these factors in mind, the pharmacy’s mind-set should be “Let’s solve the problem” rather than being defensive and attempting to “win the argument.” This approach can create an opportunity to reach a settlement with the PBM that both sides can live with.
Hiring an Attorney
An important first step for the pharmacy is to hire a health care attorney with experience in working with PBMs, to guide the pharmacy in responding to the audit. The attorney is the objective outsider who can see both sides of the argument. If a pharmacy responds to an audit on its own, by human nature, the pharmacy will be on the defensive and be combative. An experienced attorney can help the pharmacy avoid these pitfalls.
Once the pharmacy has adopted the proper mind-set and has hired a health care attorney, it should take the following steps:
- Determine the deadline to respond. If the pharmacy is not careful, it can be tripped up by the deadline to respond. The initial letter from the PBM may contain a specific date by which the pharmacy is to respond. This is straightforward. However, the letter might present a deadline that is “30 days from the date of this letter” or “30 days from the date of your receipt of this letter.” This is ambiguous. The pharmacy needs to carefully calculate the date by which it must respond.
- Request a response extension, if necessary. It is reasonable for the pharmacy to ask for a 1-time extension (usually 10-14 days). If the PBM does grant an extension, the pharmacy must obtain confirmation in writing.
- Determine the PBM's focus. With hope, the letter from the PBM notifying the pharmacy of the audit will clarify what the PBM is focusing on. If the letter is unclear, the pharmacy should contact the PBM and ask for clarity. In the past, the PBM’s primary focus was on whether the pharmacy received a valid prescription, dispensed the drug in accordance with the prescription, and submitted the claim for exactly what was dispensed. However, in recent years, PBM audits have been resembling investigations rather than documentation audits. The latter asks for documentation or information designed to allow the PBM to determine whether the pharmacy is in compliance with the PBM’s contract and collateral documents and is engaged in fraudulent activities.
Let’s turn our attention to the contract between the PBM and the pharmacy.
- Collateral documents. The contract contains a number of obligations that the pharmacy must meet. In addition, the contract will likely contain a clause that says something like “Pharmacy agrees to abide by the provisions of PBM’s policies and procedures, including PBM’s coverage policies.” Pharmacies must be aware of all applicable rules.
- Mail order. The contract between the PBM and a retail network pharmacy will likely contain a restrictive provision such as “Not more than X% of pharmacy’s dispensed drugs will be via mail order.”
- Compounding. Several years ago, PBMs were burned by a cadre of compounding pharmacies that were dispensing only expensive pain and scar creams and submitting exorbitant claims to PBMs. PBMs put a stop to this practice. But as a result, most PBM contracts do not allow compounding at all or allow it in only a limited capacity.
- Co-pays. Many PBM contracts have a provision that requires the pharmacy to exert a reasonable effort to collect co-pays and allows the pharmacy to reduce or waive a co-pay only if the patient establishes an inability to pay.
- Marketing. The contract may specifically address how the pharmacy can and cannot market. Or the contract may generally say that the pharmacy will comply with all applicable laws. In an audit, to determine whether the pharmacy is engaged in improper marketing practices, the PBM may ask the following questions: Does your pharmacy use individual marketing reps to market your pharmacy’s products? If the answer to that question is yes, are the marketing reps W2 employees or 1099 independent contractors? If your pharmacy uses individual 1099 independent contractor marketing reps, how are the reps compensated? Does your pharmacy contract with marketing companies? If so, list their names, and explain how the marketing companies are compensated.
Responding to the Audit
After the pharmacy determines the audit's focus, the pharmacy should take the following steps:
- Review, organize, and rehabilitate. The pharmacy needs to carefully review each document to be submitted. In doing so, the pharmacy needs to determine whether the document complies with PBM coverage guidelines. When the pharmacy submits the requested documents to the PBM, the documents need to be organized so they tell a clear, concise story. In reviewing the documents requested by the PBM, the pharmacy may conclude that some of them are deficient. If possible, the pharmacy should take steps to rehabilitate the deficient documents. Rehabilitation entails securing contemporaneous documents that fill in the gaps. In rehabilitating documents, the pharmacy must be honest and transparent (eg, no backdating).
- Submission of documents. Pharmacies should organize submitted documents so they tell a story. The story that the pharmacy wants to tell is that each product delivered to a patient was in response to a valid prescription, the pharmacy dispensed the exact product that was prescribed, the pharmacy billed only for the product that was dispensed, and the pharmacy is in compliance with both the contract and applicable laws.
- Copies and explanatory letter. When the pharmacy submits the requested documents to the PBM, the pharmacy needs to retain 2 sets of copies: 1 set for the pharmacy and 1 set for the pharmacy’s attorney. In some but not all instances, it is wise for the pharmacy to include an explanatory letter with the submitted documents.
- Follow up with the PBM. After it submits its documents to the PBM, the pharmacy should follow up with the it to confirm that the PBM has received the documents in a timely manner.
The authors presented their legal expertise in PBM audits during a session at the National Association of Specialty Pharmacy 2020 Annual Meeting & Expo Virtual Experience, held September 14 to 18, 2020
JEFFREY S. BAIRD, JD, ESQ, is chairman of the Health Care Group at Brown & Fortunato, PC, a law firm with a national health care practice based in Texas. He represents pharmacies, infusion companies, home medical equipment companies, and other health care providers throughout the United States. Baird is board certified in health law by the Texas Board of Legal Specialization and can be reached at (806) 345-6320 and jbaird@ bf-law.com.BRADLEY W. HOWARD, JD, ESQ, is chairman of the Labor and Employment Law Group and a senior health care attorney at Brown & Fortunato, PC, handling governmental investigations, business disputes, and litigation involving health care providers including pharmacies, durable medical equipment companies, manufacturers, home health agencies, and hospitals. Howard is board certified in labor and employment law by the Texas Board of Legal Specialization and can be reached at (806) 345-6310 and bhoward@ bf-law.com.