When seeking ways to keep expenses under control, health care plan sponsors may overlook the value of claims auditing. Auditing fees may not be inconsequential, but the fact is that an accurate audit including both pharmacy and medical claims has the potential to pay back the investment many times over.

The more members a plan has enrolled and the more complex the plan’s benefit setup, the more likely a plan is to have a greater amount of claims payment errors. Every plan will have claims paid in error. It is often tempting simply to assume claims have been paid with a certain degree of accuracy, and then move on without verifying whether the assumption is correct. Nevertheless, there will always be instances of duplicate billing, wrong or missing discounts and rebates, mistakes in member eligibility, incorrect plan setup, or other problems.

Regular audits of medical and pharmacy claims can find these discrepancies, leading to the recovery of overpayments. Even more importantly, audits can identify problems in the way a plan is set up and point the way to eradicating inaccuracies, reducing cost, and preventing waste in the future. Auditing can give plan sponsors vital information for revising and improving contracts with third-party administrators and pharmacy benefit managers, which can lead to significant reductions in costs.

Many engagements begin with auditing one plan year, and then extend to multiple plan years based on the results of the first audit. Some plans have implemented processes that include monthly oversight reporting, which provides ongoing auditing and trend metrics. The monthly reporting is set up as an online service so that the reports can be automatically emailed to the health plans and accessed via an encrypted web portal.

Auditing is applicable to all types of health care plans, including self-insured plans, Medicaid, Medicare, Taft-Hartley funds, and commercial plans. In our opinion, any organization that is at risk for paying medical or pharmacy claims must consider the value of claims auditing.

What happens during an audit?

Once all the initial preparation has been completed, the process of a good, cost-effective audit usually involves two steps. The first assesses all available claims and eligibility data, including claims adjustments and reversals, using sophisticated electronic testing techniques. Compared to audits done in previous years, it is now possible to examine the entirety of a plan’s data rather than only a sample.

The second involves a more hands-on stage with a close examination of the patterns of claims issues identified by the electronic audit. Individual claims are pinpointed for further investigation according to these patterns.

A comprehensive claims audit tests at least the following areas:

  • Eligibility: Is the member eligible for the claim at the time of service?
  • Financial:
    • Were the contracted pricing arrangements (or usual and customary limits) applied properly?
    • Were there any duplicate charges for a procedure or drug?
    • Have the administrative fee invoices been reconciled?
    • Have the claims invoices been reconciled?
  • Plan design:
    • Is the member cost sharing accurate?
    • Do the payments exceed plan limits and maximums?
    • Have other features of the plan design been properly applied?
    • Are there opportunities for coordination of benefits?
  • Performance guarantee review: Are the claims processing and other customer services compliant with established performance guarantees as defined in the contractual agreements with the TPA or PBM?

The audit should also test a number of factors that are specific to either medical or pharmacy claims.
For medical claims, they should include outlier physician charges (charges that are significantly higher than usual for a given procedure) and tests that are inconsistent with standards promulgated by the National Correct Coding Initiative of the Centers for Medicare and Medicaid Services, such as code pairs tests (procedures that, according to the NCCI, should not be reported together because one service inherently includes the other or because the two codes are mutually exclusive).

For pharmacy claims, an audit examines a number of elements, such as compliance with formulary and/or generic drug provisions, patterns of use including early refills and quantity limits, proper application of clinical edits (e.g., step therapy, prior authorization, drug utilization review, etc.), “reasonableness” of any rebates, and the value associated with the maximum allowable cost list.

Early detection

If feasible, it is a good idea to have claims audited every one or two years. At least as important, however, is the implementation audit. An implementation audit takes place shortly after a plan has been set up. A good time frame is 90 days after beginning work with a new vendor or any substantially new contract. Implementation audits are akin to taking off the training wheels. They help ensure that a plan has been set up correctly and that the plan sponsor is getting all of the benefits it contracted for during the implementation process. They happen after enough time has passed to gain a body of experience data but still soon enough to head off a major course change requiring extensive retroactive corrections.

Expect an audit to take three to six months. After that the recovery effort begins, in twofold fashion: recovering any money that the plan may have overpaid, and the equally important work of correcting errors in the system that were identified in the audit. Plan sponsors may engage an overpayment recovery vendor, or choose to handle it in-house.

The benefits of proactive auditing for the plan sponsor should be evident: to verify the integrity of vendor contracts and to meet fiduciary responsibilities. As with anything, there is no guarantee an audit will pay for itself every time. But it is not unusual for an audit to have findings about 3% to to 5% of paid claims costs, with recoveries of about 1% to 2%. Today, for many reasons, claims audits are more effective than ever. They can be relied on to uncover something in the working of a plan that can be improved, isolated issues as well as systemic and redundant errors, contractual compliance questions, or basic data entry problems.

Brian Anderson is a consultant and David Cusick is a health care technology consultant with Milliman, a consulting firm.

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