Recent findings from the Office of Personnel Management’s (“OPM”) Office of Inspector General (“OIG”) have revealed alarming discrepancies in the management of pharmacy benefits that underline the need for rigorous oversight by employers and plan sponsors (collectively, “Plan Sponsors”). The audit report, released March 2024, scrutinized Express Scripts’ (“ESI”) handling of the American Postal Workers Union Health Plan’s (the “Carrier”) pharmacy benefits from 2016 through 2021, uncovering nearly $44.9 million in overcharges to the Federal Employee Health Benefits Program (“FEHBP”). This case exemplifies broader concerns that pervade the management of pharmacy benefits, especially in commercial and self-funded plans.
Audit Methodology
The OPM audit relied on the audit provision in the contract between the Carrier and ESI. That contract requires transparency standards and pass-through pricing of rebates and drug costs. Thus, the OPM audit focused on (1) whether the drug costs and fees were accurately reported to FEHBP; (2) whether the pricing for drug claims were transparent and priced correctly on a pass-through basis; and (3) whether drug manufacturer rebates and corresponding administrative fees were properly credited to the FEHBP. For the claims audit, OPM reviewed a random population of all retail, mail order and specialty drug claims; whereas on the rebate side, OPM limited their review to just ten (10) NDCs with the highest rebate amount over the audit period. Accordingly, it is likely that the unreported rebate amount retained by ESI and Ascent is in reality much greater than what the OPM audit uncovered.
Key Audit Findings
The OIG’s audit highlighted several critical issues:
Overstated Costs: The Carrier reported inflated pharmacy costs in its annual accounting statements from 2018 through 2021. Specifically, there was a discrepancy between the amount of annual drug claims paid reported by the Carrier and the actual paid claims data, by approximately $44.5 million. However, OPM concluded that the difference could be explained by an accounting error whereby certain medical claims were inappropriately classified as pharmacy claims. OPM further concluded that this finding could be “resolved” after new controls were implemented to correct the accounting error.
Lack of Pass-through Pricing: FEHBP did not benefit from pass-through pricing for retail pharmacy claims, resulting in approximately $14.4 million in overcharges. Specifically, OPM found that ESI had used its “own internal pricing with a higher reimbursement rate for FEHBP claims,” rather than the actual rates that ESI had negotiated with retail pharmacies. Applying the actual discount negotiated with each retail pharmacy, OPM calculated that there were more than $12.4 million in overcharges (plus $1.9 million in interest/investment income).
Unreturned Discounts and Credits: ESI did not pass on several drug purchasing discounts and credits, leading to a $6.8 million overcharge. Additionally, about $2.5 million in retail pharmacy claim transaction fees were not returned. According to ESI, these discounts and credits were not remitted as “pass-through” amounts to the FEHBP because they were calculated based on the overall drug purchases from drug manufacturers and wholesalers, not an individual drug. However, ESI’s contract specified that “Total Rebates” which must be remitted to FEHBP on a 100% pass-through basis includes “all concurrent, past, and future revenue/financial benefits and credits ESI receives from outside sources,” regardless of whether they are tied to an individual drug.
Unreported and Withheld Rebates: A significant portion of drug manufacturer rebates collected by ESI, and its Rebate Aggregator, Ascent Health Services, were not distributed, totaling approximately $21.1 million owed to the FEHBP. More specifically, Ascent Health Services withheld rebates totaling $15.8 million for calendar years 2019 and 2020. As relevant here, OPM discovered that the discrepancy in rebates received by the Carrier compared to those paid by the drug manufacturers was “due to lower rebate percentages agreed to internally between ESI and Ascent.” In other words, ESI and its vertically-integrated rebate aggregator Ascent has a secret agreement to retain some of the manufacturer rebates that should be remitted in full to the Carrier. It is also likely that this secret agreement applies to ESI’s entire book of business, including commercial and self-funded plans. This has potential implications for all plan sponsors that do business with ESI as their PBM.
These findings are particularly concerning as they suggest systemic issues within the management of pharmacy benefits by PBMs. It’s crucial to recognize that the OIG’s audit was limited in scope and period, hinting that similar, if not more egregious, practices are likely occurring in the commercial and self-funded plan sectors. This revelation calls for a proactive approach by all plan sponsors to conduct thorough audits of their PBMs to prevent potential financial discrepancies and fulfill their fiduciary duties.
Broader Context and Recent Legal Challenges
The OIG’s audit implications resonate deeply with recent legal challenges, including a significant class action lawsuit filed by an employee of Johnson and Johnson on February 5, 2024. The plaintiff alleges that Johnson and Johnson (“JnJ”) failed to manage employee prescription drug benefits properly, leading to overpayments and breaches of fiduciary duties. Similar to the issues uncovered in the OIG’s audit, the JnJ lawsuit highlights critical oversight failures and the potential financial hazards of inadequate PBM management.
In light of such developments, auditing PBMs has become a critical safeguard against financial inefficiencies and legal liabilities. In fact, audits reveal discrepancies in billing, conflicts of interest, and non-compliance with contract terms. The repercussions of not auditing PBMs are not confined to just financial detriment. They also encompass legal consequences such as class action suits and claims of breaching fiduciary duty, which can tarnish a company’s image, diminish trust among employees, and lead to substantial legal expenses. The situation with Johnson and Johnson serves as a stark reminder of the significant risks employers face, highlighting that unawareness does not excuse them from liability.
Conclusion
The findings of the OIG’s audit serve as a stark reminder of the complexities and potential pitfalls in managing pharmacy benefits. For employers and plan sponsors, these revelations are a clarion call to rigorously audit their PBMs to ensure transparency, compliance, and financial prudence. As demonstrated by the OIG’s audit and reinforced by ongoing legal challenges, such as the JnJ lawsuit, the risks of neglecting these responsibilities are too significant to ignore. By prioritizing comprehensive PBM audits, employers can safeguard against overcharges, fulfill their fiduciary duties, and protect the financial and health interests of their beneficiaries.
How Frier Levitt Can Help
Frier Levitt represents self-funded employers in their dealings with PBMs. Our deep understanding of the legal landscape and PBM practices uniquely positions us to conduct comprehensive audits. We assess contract compliance, financial accuracy, and performance metrics to ensure that your PBM arrangements align with fiduciary standards and your company’s financial interests.
Don’t wait for a lawsuit to uncover deficiencies in your PBM management. Contact Frier Levitt today to learn how our PBM audit services can fortify your defense against fiduciary breach claims and secure the financial health of your employee benefits plan.
