3 things to know about PBM pharmacy audits

In an environment shaped by regulatory reform and active litigation, employers can no longer afford to treat PBM audits as a peripheral administrative function.

PBM audit history

The first critical issue employers and benefits advisors must understand is how pharmacy audits now function as revenue-generating mechanisms rather than neutral compliance exercises.

Related: Warning signs: Are you working with a self-serving PBM?

Historically, audits focused on discrete documentation errors or inventory discrepancies.

In recent years, PBMs have dramatically expanded audit activity to examine purchasing sources, patient eligibility, prescriber relationships, rebate-eligible utilization and so-called network integrity concerns.

These audits frequently result in large alleged overpayments calculated through extrapolation rather than actual financial harm to the plan.

The alleged "discrepant amount"

What is often overlooked is that PBMs commonly impose audit fees calculated as a percentage of the alleged discrepant amount identified in the audit.

In many arrangements, the PBM retains a substantial portion of the recouped funds along with these percentage-based audit fees.

These fees and recoveries are frequently not passed back to the employer or plan sponsor whose plan ostensibly funded the benefit.

As a result, PBMs may financially benefit from aggressive audit findings even when the plan itself sees little or no direct savings.

This creates a structural conflict of interest: Audit activity may be driven by PBM revenue considerations rather than helping plans or the plans' participants hold down their costs.

The downstream consequences

When PBMs recoup funds from pharmacies or terminate pharmacies from their networks, employees may lose access to preferred providers and be forced to transition medications or pharmacies.

In many cases, the remaining network options are more expensive. That means pushing pharmacies out can increase the overall plan spend.

Yet employers are often unaware that these disruptions occurred, in part because the audit recoveries and fees were retained by the PBM rather than credited to the affected plans.

PBM audits and employers' fiduciary responsibility

Another issue is the growing intersection between PBM audit practices and fiduciary responsibility.

In California, the enactment of California state Senate Bill 41 represents a major inflection point in this discussion.

SB 41 imposes an explicit fiduciary duty on PBMs serving certain plans requiring them to act in the best interests of their clients to avoid conflicts of interest and to exercise care, skill, prudence and diligence.

The law also restricts spread pricing and mandates greater transparency around rebates and other pricing concessions.

Although SB 41 is a state law, its implications are national in scope.

Pharmacy audits involve discretionary decisions that directly affect plan assets, reimbursement structures and participant access to care.

By labeling PBMs as fiduciaries in defined contexts, SB 41 reinforces the concept that PBMs cannot pursue audit practices that primarily benefit themselves at the expense of the plan.

Employers who fail to understand or monitor these audit practices may face increased scrutiny regarding whether they exercised appropriate oversight over their PBM arrangements.

This fiduciary lens is especially relevant as prescription drug pricing continues to attract attention from regulators, plaintiffs' attorneys and plan participants.

Audit recoveries retained by PBMs and audit fees tied to alleged discrepancies may raise questions about whether plan assets are being prudently managed and whether service providers' incentives align with the interests of plan beneficiaries.

PBM audits, state laws and ERISA preemption

Still another PBM audit issue employers and benefits advisors must consider is the unsettled legal landscape surrounding PBM regulation and audit accountability.

The Pharmaceutical Care Management Association, a national trade association representing PBMs, has filed a lawsuit challenging SB 41.

The lawsuit argues that the fiduciary duty provisions imposed by the statute are preempted by the Employee Retirement Income Security Act and unlawfully interfere with plan administration governed by federal law.

This litigation underscores a broader conflict between state efforts to regulate PBM conduct and the PBM industry's reliance on ERISA preemption as a shield against oversight.

Regardless of how the court ultimately rules, the existence of the PCMA lawsuit highlights the increasing scrutiny placed on PBM business practices, including pharmacy audits.

Employers should not assume that a favorable outcome for PBMs would eliminate fiduciary risk.

Market expectations, regulatory pressure and litigation trends continue to move toward greater accountability, more transparency and closer alignment of incentives.

What to do now

For employers and benefits advisors, the practical implications are clear.

PBM contracts should be carefully reviewed to understand audit methodologies, audit fee structures and the allocation of audit recoveries.

Sponsors should confirm whether audit fees are calculated as a percentage of alleged discrepancies and whether recovered amounts are credited back to the plan or retained by the PBM.

Audit appeal rights, extrapolation limits and transparency obligations should be evaluated with the same rigor applied to pricing and rebate provisions.

Benefits advisors play a critical role in this process. Advisors who treat PBM audits as routine compliance matters risk overlooking a significant source of cost leakage and fiduciary exposure.

Those who proactively assess audit incentives, educate employers about financial flows and document oversight decisions will be better-positioned to protect their clients.

Dae Y. Lee is a shareholder at Buchanan Ingersoll & Rooney.