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
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
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
skills, sending patients to Canterbury Pharmacy. Compounding grew
to 20% of Canterbury's prescriptions and the lion's share of the
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
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,
was reviewing compounded prescriptions that Steve had not billed
to the PBM. What started as a bad day turned in to a bad audit.
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
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.
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
At this point Steve's anxiety level was quite high and he
contacted his attorney. They decided that Steve had three options
the audit. He could refuse the audit. He could allow the third
party to audit only the claims he billed to them, excluding the
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
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.
surmised it to be more likely that the third party would enact
the breach provision and immediately terminate the contract.
probably withhold payment of any outstanding claims owed to
Canterbury. Could Steve survive without a third party that represents
prescription volume? Could your pharmacy survive under this
Option two was to allow the third party to conduct the audit,
but only for claims billed directly to them by Canterbury Pharmacy.
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
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.
might then be compelled to allow those records to be audited.
third option was to allow the third party to return to the pharmacy
and audit all of the records in question. The
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
of compounding. The third party would attempt to penalize
Canterbury Pharmacy on prescriptions they never paid for. And, the
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
damages they can decide on how to proceed. If the compounding
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
their position arguing that the third party had no right
to claim repayments on those prescriptions for which they
What would you do if faced with such circumstances?
Which option would be right for you? Have you contemplated such
The scenario involving
audits and compounding pharmacies is striking with an
ever-increasing frequency. This a problem to ponder today, before