At Machinify, we’re always looking for new ways to bring clarity to complex payment integrity challenges—and pharmacy is no exception. I sat down with Derek McMahan, Senior Vice President of Pharmacy to answer the industry’s most pressing questions.
With three years as a practicing attorney focused on pharmacy payment integrity and five more leading Pharmacy Payment Solutions (PPS) operations, Derek brings a rare depth of insight to the often-overlooked world of pharmacy payment integrity. When it comes to the payer view on pharmacy coverage, there is no one better than Derek to give us a breakdown.
Let’s dive into the Q&A.
Setting the Stage
During our Q&A, we first wanted to understand Derek’s motivation in the pharmacy space. Why is this area interesting to him? Where does he see it going?
1. Chris: Before we dive into pharmacy payment integrity (PI), tell us a bit about your journey—what drives your work in this space?
Derek: Competitive spirit!
Pharmacy has been regarded as a kind of wilderness frontier in payment integrity. Even today, I hear questions like “is that even a thing?” or “are there real savings there?” Not only is the answer to both of those questions “yes,” but I see the pharmacy industry as actually being ahead of the curve on certain variables of the payment integrity continuum, such as processing speed and interoperability.
It’s my goal and belief that pharmacy PI can be every bit as impactful, satisfying, and stakeholder-friendly as the medical PI programs established by every health plan.
2. Chris: You’ve seen pharmacy operations evolve dramatically over the years. What lessons stand out when it comes to helping payers stay ahead of complexity?
Derek: As a starting point, I’d refer them back to National Council for Prescription Drug Programs (NCPDP). Many of these complex issues (new transaction standards, new regulations, errors in external data sets, etc.) are discussed for years before they become a regulation or change in policy.
I’d also advise finding partners in the space that bring their own expertise with them as opposed to simply implementing payers’ specifications. There is a lot of complexity in the industry, and even the largest Pharmacy Benefit Managers (PBMs) and health payers are individual collaborators in the ecosystem.
Having a true partner introduces the knowledge and perspective to build towards even better outcomes.
Pharmacy Solutions
Pharmacy payment integrity spans a wide range of challenges, each with its own impact on cost containment and compliance. We asked Derek to unpack them all, including, coordination of benefits, retro termination, Medicare Part D safeguards, and the management of high-cost drugs.
Coordination of Benefits (COB)
Pharmacy Coordination of Benefits (COB) is the process of determining which health plan is responsible for paying a member’s prescription drug claims when they have coverage under multiple plans. It ensures that the correct payer is billed first and that the member receives the full benefits they’re entitled to without overpaying. By identifying primary and secondary coverage, pharmacy COB helps reduce duplicate payments and lowers out-of-pocket costs for members.
3. Chris: How does advanced technology combine with expert analysis to create more precise recovery opportunities than traditional models?
Derek: Great COB requires both.
Technology is certainly the foundation of everything we do in pharmacy COB. Advanced algorithms help us find the “needle in the haystack” with aliasing (reconciling records that might look different but refer to the same person) and scoring models to identify members who might have other coverage.
Additionally, the pharmacy recovery process relies on proprietary technology—like Machinify’s batch file regeneration tool—which helps assimilate recoverable claims into machine-readable files and compile payer responses for further action.
However, human experts still play a key role in obtaining information we need to verify the order of benefits and ultimately recover. For example, cases dealing with multiple commercial plans often require payers to obtain and interpret a group’s summary plan description to determine the order of benefits rules.
4. Chris: Pharmacy Coordination of Benefits may be treated as a back-office necessity—but what are payers missing by not seeing it as a lever for clinical and financial precision?
Derek: Payment integrity benefits the entire system, not just the financials for the secondary payer in a specific dual-coverage scenario.
For example, in typical COB scenarios, claim copays that would ordinarily be incurred as out-of-pocket costs for the member are paid by the secondary health plan.
If copays are not covered by the secondary plan, COB still frequently results in savings to the policyholder through correct accumulation, ensuring that the patient’s full claims experience is credited towards a single deductible.
Pharmacy Retro Termination
Pharmacy Retroactive Termination (Retro Term) occurs when a member’s insurance coverage is canceled after a prescription has already been filled and paid for. This creates a situation where the payer has to recover funds for claims that were originally approved but are now ineligible. It can lead to financial and administrative burdens for pharmacies, payers, and members, especially if repayment or reprocessing is required.
5. Chris: How do retroactive terminations in pharmacy coverage impact payer reimbursement accuracy? What are the downstream effects of not implementing a solution?
Derek: Payers spend a lot of money on claims paid outside of the policy coverage span.
This is an actuarial problem for payers because they are not receiving premiums commensurate to the coverage duration, and it’s a competitive risk. Payers that mitigate this risk have an edge over those that don’t.
6. Chris: Why are retro terminations still draining payer resources when the data to prevent them already exists?
Derek: There are often good reasons (if not a requirement) that a payer cover a claim after it normally would have terminated a policy. As an example, let’s look at subsidized individual health plans on the exchange. Federal law requires the insurer to allow the beneficiary up to 90 days for payment of overdue premiums before they can terminate the policy. For this reason, some volume of retro termination overpayments is unavoidable and having an effective recovery strategy is a must.
There are also limitations in the quality of the data received from the payer processor’s customer.
It’s less common, but we do also see old-fashioned human or technological lapses leading to these issues – for example, a term date not getting loaded for an entire employer that migrated to a different carrier. These issues are rarer, but you can imagine the significant overpayment situation that unfolds when one happens.
Medicare Part D Compliance
Medicare Part D compliance refers to the strict set of rules and regulations that health plans must follow to administer prescription drug benefits for Medicare beneficiaries. This includes accurate claims processing, proper formulary management, timely coverage determinations, and ensuring that beneficiaries are not overcharged. Non-compliance can result in audits, fines, or sanctions from the Centers for Medicare & Medicaid Services (CMS).
7. Chris: Where are Medicare Part D plans most at risk of compliance failure today, particularly when it comes to audit readiness or formulary management?
Derek: Medicare Secondary Payer (MSP) Group Health Plan rules—basically, COB for Medicare Part D—is the most pressing challenge. These rules determine who pays first when Medicare acts as a secondary payer to another health plan. Eligibility determinations and changing member circumstances make it difficult for payers to stay in compliance.
Further, Centers for Medicare & Medicaid Services (CMS) audits payers regularly. The supporting CMS data is of a high quality, the universe of claims requiring attention is large, and the work to effectively identify and recover the claims is high. In short, audits pose a high risk and a high cost.
8. Chris: How can payers better prepare for CMS audits or oversight in areas like MTM programs, transition fills, or coverage determination timeliness?
Derek: For the most part, payers are doing a good job. A lot of effort has been invested in building upstream edits and workflows.
If a payer is uncertain, I’d advise them to plug into the relevant task groups with the National Council of Prescription Drug Programs (NCPDP). A lot of these issues are continuously under review and in collaboration with CMS.
I would also recommend that they consult with an outside supplier for issues like MSP Group Health Plan, where a strong program means gathering external information (often after the point of sale) and negotiating reimbursement with other payers, which are not usually included in the traditional activities of a health plan.
High-Cost & Specialty Drug Management (Medical Rx)
High-Cost and Specialty Drug Management (Medical Rx), in this context, is when health plans look for billing and payment errors (for example, making sure the encounter was billed and paid correctly) and ensuring core payment policies of the insurer are observed (for example, using smallest vial size to minimize drug waste).
Effective management helps improve patient outcomes while reducing unnecessary costs for both payers and members.
9. Chris: How are payers currently managing high-cost drugs billed under the medical benefit, and where do you see the biggest visibility or utilization control gaps?
Derek: High-cost drug payments are typically monitored with the same adjudication edits, pricer software, and chart review processes used for other medical claims.
Manual review of medical records is a strong solution, but volume may be a pressure point for lots of areas—the reviewer, medical records costs, etc. Automated upstream solutions are able to capture most of the obvious errors, but wide ranges in medically appropriate treatments challenge the ruleset.
These challenges merge to create reliance on the provider to bill claims accurately and appropriately, which may not always happen.
10. Chris: What innovations or strategies are most promising when it comes to controlling the cost of specialty medications: prior auth reform, site-of-care optimization, or something else?
Derek: Prior authorization is a good strategy to ensure appropriate drug selection and billing, but it certainly feels like the industry has reached its tolerance limit for red tape.
Data science and other artificial intelligence (AI) appear to be breakthrough innovations—both for our products and the healthcare industry in general.
AI-powered tools can enable record review in a way that is both more scalable than human-only chart review and able to identify and learn from indicators that may be too subtle for a human to notice. Solutions like this enable a care continuum with fewer barriers, but the same or better payment accuracy.
Overall Strategic Questions
Finally, in addition to understanding each individual line of business, we wanted to get Derek’s thoughts on pharmacy payment integrity as a whole. What are some overarching strategic words of wisdom for payers?
11. Chris: In your view, where are the biggest opportunities for automation or AI to reduce administrative burden across pharmacy operations without compromising compliance?
Derek: High-Cost Drug and Medicare Part D Compliance are great examples.
With high-cost drug, for example, Machinify’s anomaly-based mining algorithms produce a huge volume of potential overpayments because of diverse patient needs and the wide range of what is medically appropriate.
Machine learning (ML) models point us towards the most likely overpayments, enabling us to prioritize level of effort alongside the dollar value of the claim. A human is still in the loop, but they are drastically more efficient than they would otherwise be.
Medicare Part D Compliance has also been a big success in this regard. Machinify’s approach to full validation is unique but necessary to ensure accuracy and compliance. A huge portion of the COB workflow is populating data, applying a fixed ruleset, and updating system indicators. We’ve automated these tasks to multiply the investigative power of our experts.
The best part? There are still plenty of opportunities like this remaining in the payment integrity industry.
12. Chris: If a leader of a health plan could take just one actionable step today to improve the financial and clinical performance of their pharmacy operations, what should it be—and why does it matter now more than ever?
Derek: Map out your pharmacy payment integrity portfolio and find the white space.
Figure out where you have solutions in place for medical that you don’t have for pharmacy. You might be surprised and there might be more potential savings there than you realize.
Pharmacy Payment Integrity Takeaways
Pharmacy shouldn’t be an afterthought when it comes to payment integrity programs. While medical claims may dominate the spotlight, the pharmacy domain holds untapped opportunities for meaningful savings and smarter oversight.
One thing’s for certain: whether it’s pharmacy COB, retro termination, Medicare Part D compliance, or high-cost drugs, technology is moving the needle and reducing friction across the entire payment integrity landscape.
To learn more about how Machinify’s pharmacy solutions can help save your health plan time, money, and frustration, contact us today.
