REPORT HIGHLIGHTS ADMINISTRATION OF PHARMACY BENEFIT MANAGERS PERFORMANCE AUDIT Release Date: May 17, 2023 State of Illinois, Office of the Auditor General FRANK J. MAUTINO, AUDITOR GENERAL To obtain a copy of the Report contact: Office of the Auditor General, Iles Park Plaza, 740 E. Ash Street, Springfield, IL 62703 (217) 782-6046 or TTY (888) 261-2887 This Report Digest and Full Report are also available on the worldwide web at www.auditor.illinois.gov REPORT HIGHLIGHTS Background: On April 9, 2022, the Illinois Senate adopted Senate Resolution Number 792, which directed the Office of the Auditor General to conduct a performance audit of the Department of Healthcare and Family Services’ (HFS) administration of pharmacy benefit managers (PBMs) (See Appendix A). PBMs are contracted by Managed Care Organizations (MCOs) to be responsible for the purchasing and distribution of drugs under the plan. Subsequently, PBMs enter into contracts with individual pharmacies to provide prescription drugs and related products and services. Claims are generally filed at the point of sale at the pharmacy when the beneficiary fills the prescription, unlike the claims process for MCOs where claims are filed after the service occurs. PBMs are paid through the capitation rates given to MCOs, which are actuarially calculated; these payments cover pharmaceuticals as well as dispensing and administration fees. According to HFS, PBMs are under the dual oversight of the contracting MCO and HFS. Key Findings: • In calendar year 2021, HFS paid MCOs $16.2 billion in capitation payments, of which $2.64 billion was paid to PBMs. Of that, $2.55 billion went to individual pharmacies for covered drugs. HFS received $1.47 billion in drug rebates from pharmaceutical manufacturers. • There is little monitoring being done of the PBMs by HFS. HFS did not have complete copies of contracts between the MCOs and the PBMs necessary to conduct monitoring of the contract provisions. HFS also does not monitor contracts between the PBMs and the pharmacies and, as such, is unaware of the rates paid to the pharmacies by the PBMs. There is no verification being conducted to ensure that the reimbursements to PBMs by MCOs are accurate and reflect the actual payments paid to the pharmacies. In addition, HFS does not monitor actual reimbursement rates or rebates. The entire monitoring function of the rates paid to pharmacies by PBMs is limited and based on self-reported, unaudited encounter data. As a result, HFS was unable to provide support for adequate monitoring of the PBMs. • Illinois MCOs paid PBMs over $2.2 billion in calendar year 2020 for pharmacy services, and over $2.6 billion in calendar year 2021. The PBMs paid pharmacies $2.1 billion during calendar year 2020 and $2.5 billion during calendar year 2021. HFS’s contracted actuary, Milliman, reviews encounter data and reimbursements; however, it does not audit or test self-reported data. • MCOs were not in full compliance with all statutory requirements for their contracts with PBMs, and HFS does little to no monitoring to ensure that all requirements are met. Contracts between PBMs and pharmacies generally meet statutory requirements, but were missing many of the same provisions that were not in the MCO contracts. • HFS was not engaging in monitoring practices of PBMs as mandated by the Illinois Public Aid Code (305 ILCS 5/5-36(c) through (j)) which establishes several provisions for monitoring PBMs under MCOs. • Auditors also determined that HFS did not define “conflicts of interest” in administrative rule as required by 305 ILCS 5/5-36(d). • Contractually negotiated reimbursement rates and administrative fees between MCOs and PBMs differ for each contract, which resulted in varying reimbursement rates that were difficult to review. Because of the varying reimbursement rates and administrative fees, auditors could not verify the amounts reported by HFS for claims paid or administrative expenses for each MCO or adequately review reimbursement practices. • Auditors identified multiple affiliations between the MCOs, PBMs, and pharmacies that may impact the cost of the program and access to care for beneficiaries. Key Recommendations: The audit report contains five recommendations: • HFS should ensure that contracts between MCOs and PBMs include the contractual requirements outlined in 215 ILCS 5/513b1 and 305 ILCS 5/5-30(h). • HFS should provide more detailed monitoring of managed care organizations and their pharmacy benefit managers. Specifically, it should: – Report to the General Assembly on an annual basis as required by 305 ILCS 5/5-36(c); – Request and monitor PBM information as allowed and required by 305 ILCS 5/5-36(e),(g), and (h); and – Review and approve dispute resolution processes provided by PBMs as required by 305 ILCS 5/5-36(j). • HFS should define “conflict of interest” in administrative rules as required by 305 ILCS 5/5-36(d). • HFS should monitor reimbursement rates between managed care organizations and their pharmacy benefit managers, as required by the Illinois Public Aid Code. • HFS should address affiliations between MCOs, PBMs, and pharmacies when it defines conflict of interest in the Administrative Code as required by 305 ILCS 5/5-36(d). This performance audit was conducted by the staff of the Office of the Auditor General.