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How the Pharmacy Audit Appeals Process Works

Like other healthcare providers, pharmacies that receive payments through Medicare or Medicaid are subjected to several different types of audits. Each of these audit procedures can inflict significant financial harm on a pharmacy if they uncover discrepancies between what the pharmacy received in government funding and the services that it provided to patients. In some cases, failed pharmacy audits can even lead to civil or criminal investigations into alleged healthcare fraud. 

How Pharmacies Fail Audits

Each pharmacy is audited with the same standards and parameters as other similarly situated pharmacies. Pharmacies fail audits when discrepancies are found between the bills for care provided and the services that the pharmacy provided to the patient. This can happen when:

  • Care was not medically necessary

  • Incorrect billing codes were used

  • Pharmaceutical services were not provided

Unfortunately, in some cases, these errors can come from mistakes that happened upstream in the healthcare service industry, like if a doctor prescribed medication that was not medically necessary for a Medicare patient. If the pharmacy then fills the prescription and bills Medicare, the lack of medical necessity can lead to this honest action getting flagged as improper.

Overpayments and Other Penalties of a Failed Audit

When a pharmacy fails an audit, the penalties can be substantial. Even if the error was unintentional, the pharmacy will still be charged for the overpayment from Medicare. If there are indications that the errors were intentional, there may be civil or even criminal repercussions for potential fraud or alleged healthcare fraud. 

The financial penalties for mistakes are bad enough. If the audit finds that the pharmacy’s billing errors resulted in a windfall for the business, the pharmacy will have to pay the money back. In some cases, this is not a serious problem. If the audit uncovered a few isolated times where medication was disbursed without sufficient documentation of its medical necessity, the overpayment that the pharmacy will have to pay back maybe only be a few hundred dollars. However, if the audit finds that the pharmacy has been using an incorrect billing code for months or even years, the overpayment can run into hundreds of thousands of dollars. 

Even though the pharmacy is technically only paying back money that it has received, that does not mean that the money is on hand or readily available. In many cases, it has been invested in the company or was disbursed to shareholders. While arrangements are often made to deduct the overpayment amount from future claims against Medicare, the decrease in profit can hinder the pharmacy’s growth or even threaten its solvency. 

But reimbursing overpayments is not the only penalty that pharmacies can face after failing an audit. 

If the audit involves clinical or professional judgment and uncovers any evidence of fraud or wrongdoing, that evidence will likely get passed on to the Centers for Medicare and Medicaid Services (CMS) and to the other private companies that are responsible for paying out Medicare funding to healthcare providers. CMS will likely conduct an investigation and, if it finds anything suspicious, will inform other law enforcement agencies of potential healthcare fraud. Even the private companies are likely to take action to insulate themselves from a potential investigation by, for example, requiring prepayment reviews of all subsequent Medicare claims made by the pharmacy.

Appealing a Failed Audit Can Be in a Pharmacy’s Best Interests

Because of these high penalties, appealing the audit process findings is frequently in the pharmacy’s best interests. In many cases, the appeal gives the pharmacy the second chance that it needs to show that its billing practices were accurate and that sanctions and further investigation are unnecessary. 

The pharmacy audit appeals process is a matter of state law. Unfortunately, there are huge differences between states, with many of the details being left to the contract between the pharmacy and the auditing entity.

Some states, like South Carolina, are extremely hands-off in regulating this procedure, delegating the details of the process to the auditing entity and only guaranteeing the pharmacy’s right to an appeal (S.C. Code Ann. § 38-71-1820). In these states, the contract between the auditing company and the pharmacy carries great weight. Small details in the agreement can stack the cards against the pharmacy until it is very difficult to get a failed audit overturned.

Other states, like Louisiana, have a law that provides slightly more protection to pharmacies that have been subjected to an audit, while still leaving a lot of discretion to the contract between the parties. In Louisiana, for example, auditors are forbidden from:

  • Charging interest to the pharmacy during the appeals period

  • Extrapolating overpayments or penalties, unless the pharmacy agreed to the practice or a government agency requires it

Additionally, pharmacies have the right to take their appeal to mediation if they are not satisfied (La. Rev. Stat. Ann. § 22:1856.1(E)).

Still, other states have laws in place that give pharmacies far more legal protection. Under California law (California Business and Professions Code 4438), auditors have to provide a preliminary report within 60 days of the audit’s completion. Pharmacies then have the right to respond to the findings set out in the preliminary audit report. That response has to be made within 30 days of receiving the preliminary report. The auditor has to consider the pharmacy’s response before issuing its final report, which has to be released no later than 120 days after receiving the response to the preliminary report. 

While this serves as a built-in appeals process, California law goes on to require another appeals procedure in the contract between the auditing company and the pharmacy. That second appeals process must:

  • Give the pharmacy 30 days to appeal the final report with the auditing company or with another company identified in the contract

  • Provide the pharmacy with the outcome of the appeal in writing

  • Allow the auditing company or the pharmacy to seek further relief under the terms of the contract if it is not satisfied with the outcome of the appeal

No interest can accrue and the pharmacy cannot be required to recoup payments until the appeals process is over or the time to file an appeal has passed.

Each Appeal is Unique: Hiring a Lawyer is Essential

Because there is such a wide differential between state laws regarding the appeals process, and because the contract between the auditing company and the pharmacy will determine many of its details, hiring a pharmacy audit appeals lawyer is essential. As Dr. Nick Oberheiden, founding member of the healthcare defense law firm Oberheiden, P.C., says, “While navigating the appeals process often takes the legal experience of a lawyer, many pharmacies would do well to get an audit appeals lawyer involved when they are negotiating the terms of the auditing contract with their pharmacy benefit manager. This can level the playing field in the future, should the pharmacy fail an audit and want to contest the results.”

Oberheiden P.C. © 2022 National Law Review, Volume XII, Number 181

About this Author

Nick Oberheiden Criminal Defense Attorney Oberheiden PC
Federal Criminal Defense Attorney

Dr. Nick Oberheiden focuses his litigation practice on white-collar criminal defense, government investigations, SEC & FCPA enforcement, and commercial litigation. He has defended clients in PPP Loan Fraud cases and COVID-19 investigations. Nick also directs internal corporate investigations and he leads defense teams in whistleblower actions, corporate defense cases, as well as cases involving national security and elected officials.

Clients from more than 45 U.S. states have hired Nick to seek effective protection against government...