PAAS National Articles

An Audit Nightmare

H. Edward Heckman

As lightning is attracted to high places, so too are third party audits to compounding pharmacies. In the case of compounding pharmacies, an audit can turn a bad day into a nightmare.
One compounding pharmacist recently had such an audit strike him. This story and the events are real, the names and places are changed to maintain confidentiality.

Pharmacist Steve Canterbury owns a successful community pharmacy in a small midwestern town. A few years ago Steve affiliated himself with PCCA and began developing a strong compounding practice. Like many other independent pharmacists Steve carved a specialty niche with compounding. Physicians from all over the county were taking advantage of Steve's skills, sending patients to Canterbury Pharmacy. Compounding grew to 20% of Canterbury's prescriptions and the lion's share of the store's pharmacy profits. Things were going great until the day the audit lightning bolt struck.

A national pharmacy benefits manager (PBM) which represents 50% of Canterburyís prescription volume decided it was time to conduct an onsite audit. Like many other pharmacists, Steven wasnít overly concerned stating "I don't do anything wrong, I don't cheat the third parties," and besides, "I don't bill compounded prescriptions online."

Upon arrival, the auditor began inspecting prescriptions for compounded preparations. It was Canterbury Pharmacy's policy to charge customers the full amount for compounded prescriptions and then allow the patient to collect through their major medical programs. Obviously, the auditor was reviewing compounded prescriptions that Steve had not billed to the PBM. What started as a bad day turned in to a bad audit.

Steve knew there was something wrong with the auditor looking at prescriptions not billed to the third party. Steve challenged the auditor and would not allow the audit to continue. The auditor called his supervisor. The supervisor insisted that his auditor should be allowed to review the compounded prescriptions or Steve and Canterbury Pharmacy were going to have big problems. Steve returned the supervisor's volley by stating, "the third party's help desk stated that the PBM's policy on compounded prescriptions was to bill the NDC number of the most expensive ingredient. His compounds contain ingredients that did not have NDC numbers. Therefore he cannot bill them directly to the third party." Steven then kicked the auditor out of his store. Now a bad audit was about to get worse.

The supervisor's next move was to fax correspondence to the store stating that his "Field Representative is required to review all claims including direct claims reimbursed to the member." The supervisor also included pages from the pharmacy provider manual relating to the PBM's audit policies. The supervisor's ultimatum was to allow the audit or the pharmacy would be held liable for all the claims in the audit.

At this point Steve's anxiety level was quite high and he contacted his attorney. They decided that Steve had three options in addressing the audit. He could refuse the audit. He could allow the third party to audit only the claims he billed to them, excluding the compounded prescriptions. Or, he could give in and allow the third party to audit of all the claims.

Many compounding pharmacy practices will be faced with similar circumstances in the future. What was Steve's next move? If this happened to you what would be your next move?

The first option to consider was to refuse the audit. The provider agreement that Steve signed on behalf of Canterbury Pharmacy contained clauses allowing the third party to conduct audits to verify covered services. By refusing the audit, Steve would be breaching his contract. The third party would then have to litigate the audit issue in court to obtain an order to enforce the audit provision upon Canterbury. Steve felt that it was unlikely that the third party would enter into expensive litigation just to conduct an onsite audit. His attorney surmised it to be more likely that the third party would enact the breach provision and immediately terminate the contract. They would probably withhold payment of any outstanding claims owed to Canterbury. Could Steve survive without a third party that represents 50% of his prescription volume? Could your pharmacy survive under this scenario?

Option two was to allow the third party to conduct the audit, but only for claims billed directly to them by Canterbury Pharmacy. The Canterbury attorney's argument here is that prescription records are confidential. The only prescriptions that would have the appropriate patient waiver to release information were those billed to the third party. Cash transactions involve strictly the patient and the pharmacy, not the third party. The attorney could also make a strong argument that under these circumstances the pharmacy was in full compliance of the audit language in the contract. This sounds like a viable option. Would the third party buy it? The PBM obviously wanted access to Canterbury's compounded prescriptions. They might have access if the third party were to produce the appropriate patient releases on the compounded prescriptions. The pharmacy might then be compelled to allow those records to be audited.

The third option was to allow the third party to return to the pharmacy and audit all of the records in question. The risk here is that the usual and customary prices charged to cash customers on compounded prescriptions far exceed paltry third party reimbursement formulas. In fact, payments from third parties do not recognize the value of compounding. The third party would attempt to penalize Canterbury Pharmacy on prescriptions they never paid for. And, the audit response reports that compounding pharmacies must draft to defend "discrepancies" are very laborious. While this option might not appear to be the most desirable it does have some merits.

By allowing the audit, the pharmacy could postpone spending money to defend themselves. Once they find out the magnitude of the damages they can decide on how to proceed. If the compounding aspect resulted in only minor challenges, then this explosive situation could be resolved at minimal expense. If the compounding aspect of the audit would result in a large recoupment demand, Canterbury could then aggressively defend their position arguing that the third party had no right to claim repayments on those prescriptions for which they never paid the pharmacy.

What would you do if faced with such circumstances? Which option would be right for you? Have you contemplated such a risk? The scenario involving audits and compounding pharmacies is striking with an ever-increasing frequency. This a problem to ponder today, before lightning strikes you.