BILL ANALYSIS SENATE HEALTH COMMITTEE ANALYSIS Senator Deborah V. Ortiz, Chair BILL NO: AB 2911 A AUTHOR: Nunez B AMENDED: August 28, 2006 HEARING DATE: Tuesday, August 29, 2006 2 FISCAL: N/A 9 1 CONSULTANT: 1 Hansel / ak ~PURSUANT TO SENATE RULE 29.10~ SUBJECT California Discount Prescription Drug Program SUMMARY This bill establishes the California Discount Prescription Drug Program within the Department of Health Services to provide prescription drug discounts for uninsured California residents with income up to 300 percent of the federal poverty level and other individuals, as specified. ABSTRACT Existing federal law: 1.Requires drug manufacturers, for the purposes of the federal Medicaid program, to enter into rebate agreements with the Secretary of the United States Department of Health and Human Services (HHS) and provide minimum rebates, as specified, to state Medicaid agencies for outpatient prescription drugs provided to Medicaid beneficiaries. Continued--- STAFF ANALYSIS OF ASSEMBLY BILL 2911 (Nunez) Page 2 2.Defines Medicaid "best price" as the lowest price paid to a manufacturer for a brand name drug, taking into account rebates, chargebacks, discounts or other pricing adjustments, excluding nominal prices. 3.Excludes the prices charged to certain governmental purchasers from "best price" provisions including prices charged to the Veterans Administration, Department of Defense, Indian tribes, Federal Supply Schedule, state pharmaceutical assistance programs (SPAPs), Medicaid, and 340B covered entities. 4.Permits a state, upon authorization from the Secretary of HHS, to enter directly into agreements with drug manufacturers to negotiate deeper (supplemental) discounts than "best price" for state Medicaid programs. 5.Specifies that a state may require, as a condition of coverage or payment for a covered outpatient drug, the approval of the drug before its dispensing if the system for providing such approval meets specified criteria. Existing state law: 1.Establishes California's Medicaid program (Medi-Cal) and authorizes the Department of Health Services (DHS) to be the purchaser of prescribed drugs. 2.Authorizes DHS to obtain discounts, rebates, or refunds based on the quantities purchased by the program, as permissible by federal law. 3.Authorizes DHS or the state's fiscal intermediary to impose prior authorization requirements on the drug products of manufacturers for which DHS has not received rebate or interest payments as specified. Authorizes DHS to use existing administrative mechanisms for any drug for which DHS does not obtain a rebate. 4.Exempts specified drugs from prior authorization requirements and authorizes the Director of DHS to exempt any drug from prior authorization if it is determined that an essential need exists for that drug and there are no other drugs available without prior authorization that meet that need. Continued--- STAFF ANALYSIS OF ASSEMBLY BILL 2911 (Nunez) Page 3 This bill: 1.Establishes the California Discount Prescription Drug Program (Program) with DHS. 2.Provides definitions for the Program and makes findings and declarations regarding the affordability of prescription drugs and intent of the Program. Eligibility for Program 3.Limits Program eligibility to residents who meet one or more of the following: a. Has total unreimbursed medical expenses equal to at least 10 percent family income and family income does not exceed 100 percent of the median family income in the state. b. To the extent allowed by federal law, is enrolled in the Medicare program, but whose prescription drugs are not covered by the Medicare program. c. Has a family income that does not exceed 300 percent of the federal poverty level (FPL) and does not have outpatient prescription drug coverage paid by the following: In whole by the Medi-Cal program. In whole or part by the Healthy Families program or other programs funded by the state. In whole or part by a third party payor, provided that the individual has not reached the annual limit on their prescription drug coverage. 1.Limits the scope of the Program to prescription drugs dispensed to eligible persons on an outpatient basis. Prescription drug discounts and rebate agreements 2.Limits the amount a Program enrollee pays for a drug to the lower of the participating pharmacy's usual and customary charge or a pharmacy contract rate, minus a program discount for the specific drug or an average discount for a group of drugs or all drugs covered by the Program. Continued--- STAFF ANALYSIS OF ASSEMBLY BILL 2911 (Nunez) Page 4 3.Requires DHS to negotiate drug discount agreements with drug manufacturers to provide for discounts for prescription drugs purchased through the Program. 4.Requires DHS to attempt to negotiate the maximum possible discount for Program participants; further requires DHS to attempt to negotiate, with each manufacturer, discounts to offer single source drugs at a volume weighted average discount that is equal to or below one of the following benchmarks: a. 85 percent of the average manufacturer price, as published by the Centers for Medicaid and Medicare Services. b. The lowest price provided to any nonpublic entity in California by a manufacturer to the extent Medicaid best price exists under federal law. c. The Medicaid best price, as defined, to the extent it exists under federal law. 5.Defines for purposes of the bill, "volume weighted average discount" as the average discount for the drugs of a manufacturer, weighted by each drug's percentage of the total prescription volume of that manufacturer's drugs, for drugs for which DHS contracts with the manufacturer. 6.Allows DHS to require drug manufacturers to provide information that is reasonably necessary for the department to carry out its duties. 7.Requires DHS to pursue manufacturer discount agreements to ensure that the number and type of drugs available through the Program is sufficient to give Program participants a formulary comparable to the Medi-Cal list of contract drugs, or if the information is available to the department, a formulary that is comparable to that provided to CalPERS enrollees. 8.Allows DHS to limit the number of drugs available to the Program to obtain the most favorable discounts. Continued--- STAFF ANALYSIS OF ASSEMBLY BILL 2911 (Nunez) Page 5 9.Requires all drug discount agreements negotiated pursuant to this bill to be used to reduce the cost of drugs purchased by Program participants. 10. Provides that all information provided by drug manufacturers shall be considered confidential and proprietary information and shall not be subject to disclosure under the Public Records Act; provides that the Bureau of State Audits and the Controller shall have access to pricing information in a manner consistent with their access to such information under the Medi-Cal program and existing law. 11. Allows any licensed pharmacy and manufacturer, as defined, to participate in the Program. Requires DHS to establish a single, basic pharmacy rate, but allows it to contract at different rates with pharmacies in order to provide access throughout the state. 12. Requires DHS, on August 1, 2010 and annually thereafter, to determine whether manufacturer participation in the Program has been sufficient to meet both of the following benchmarks: a. The number and type of drugs available through the Program are sufficient to give participants a formulary comparable to the Medi-Cal list of contract drugs or, if the information is available to the department, a formulary comparable to that provided to CalPERS enrollees. b. The volume weighted average discount of single source prescription drugs is equal to or below any of the benchmark prices in (7). 13. Effective on August 1, 2010, allows DHS to require prior authorization in the Medi-Cal program for any drug of a manufacturer if the manufacturer fails to agree to a volume weighted average discount for single source drugs that is equal to or lower than any of the benchmark prices described in (7), but only to the extent such authorization does not increase costs to the Medi-Cal program, as specified. Continued--- STAFF ANALYSIS OF ASSEMBLY BILL 2911 (Nunez) Page 6 14. Conditions the authority in (16) on a determination that manufacturer participation has been insufficient to meet both of the benchmarks described in (15). 15. Provides that prior authorization of any drug shall be implemented only to the extent permitted by federal law, and in a manner consistent with state and federal law. 16. Provides that prior authorization of a manufacturers' drugs may be applied to any manufacturer that has not negotiated with DHS. 17. Requires DHS to notify the Speaker and President Pro Tempore that the department is requiring prior authorization no later than five days after making a determination to do so. 18. Provides that if prior authorization is required for a drug, a Medi-Cal beneficiary shall not be denied the continued use of a drug that is part of a prescribed therapy until that drug is no longer prescribed for that beneficiary's therapy. 19. Requires the names of manufacturers of single source drugs that do and do not enter into discount agreements to be posted on the DHS Internet Web site. 20. Requires participating manufacturers to calculate and pay interest on late or unpaid rebates, as specified. 21. Requires participating manufacturers to clearly identify all rebates, interest, and other payments for the Program in a manner designated by DHS. 22. Requires DHS to generate a monthly report, as specified, as well as an annual report that reports on the number of individuals enrolled, individuals receiving prescriptions under the program, participating pharmacies, and participating manufacturers. Application, enrollment, and outreach 23. Specifies that the application fee is $10 annually and allows an application to be completed at any Continued--- STAFF ANALYSIS OF ASSEMBLY BILL 2911 (Nunez) Page 7 pharmacy, physician office, or clinic participating in the Program. 24. Allows the pharmacy, physician office, clinic, or nonprofit community organization that completes the application to keep the fee as reimbursement for its processing costs, unless the applicant is already enrolled in the Program. 25. Requires DHS to utilize a secure electronic application process or a third-party vendor to enroll applicants. 26. Requires DHS to make an eligibility determination within 24 hours of receipt of a completed application, using the income information reported on the application and without requiring additional documentation. 27. Requires applicants to attest that the information provided on the application is accurate to the best knowledge and belief of the applicant or applicant's guardian or custodian. 28. Requires DHS to conduct an outreach program, as specified. 29. Allows DHS to accept on behalf of the state any gift, bequest, or donation of outreach services or materials to inform residents about the Program, as specified. Patient assistance programs 30. Requires DHS to encourage participating manufacturers to maintain their private discount drug programs at a level comparable to which they were offered prior to the enactment of the Program and, to the extent possible, simplify the application and eligibility processes for those programs. 31. Allows DHS, to the extent permitted by state and federal law, to execute agreements with drug manufacturers to provide a single point of entry for eligibility determination and claims processing for drugs available through their patient assistance programs. Continued--- STAFF ANALYSIS OF ASSEMBLY BILL 2911 (Nunez) Page 8 32. Requires DHS to develop a system, as specified, to provide a Program participant with the best discounts on prescription drugs that are available to the participant through the Program or through a drug manufacturer patient assistance program. 33. Requires drug manufacturers to report annually to DHS regarding the utilization of and total value of drugs provided through manufacturer patient assistance programs. 34. Requires the participant's Program card to meet all the legal requirements for a health benefit card and serve as a single point of entry for drugs available through patient assistance programs. Administration 35. Provides that contracts, contract amendments, change orders under the Program are subject to the same exemptions provided for in the Medi-Cal drug program and are exempt from competitive bidding requirements, as specified. 36. Authorizes DHS to contract with a third-party vendor or utilize existing health care service provider enrollment and payment mechanisms, as specified. 37. Requires DHS to deposit all payments received under the Program into the California Prescription Drug Program Fund to be established in the State Treasury. Requires moneys in this fund be made available to DHS upon appropriation by the Legislature and prohibits expenditure for any other purpose, loan or transfer to any other fund including the General Fund. 38. Exempts Program contracts from the Public Records Act. 39. Provides that the Director of DHS may adopt regulations as are necessary to implement and administer the program. 40. Permits the Director to implement the Program in whole or in part by means of provider bulletin or other Continued--- STAFF ANALYSIS OF ASSEMBLY BILL 2911 (Nunez) Page 9 similar instructions, without taking regulatory action, provided that no bulletin shall remain in effect after August 1, 2011. 41. Expresses intent that any regulations necessary to implement the Program be adopted on or before August 1, 2011. 42. Contains a finding establishing the state's interest in exempting drug trade secrets and pricing information from public disclosure, as provided for in Article I, Section 3 of the California Constitution, as amended by Proposition 59 in November, 2004. FISCAL IMPACT According to the Senate Appropriations Committee analysis of a previous version of the bill, General Fund costs in the range of $3 million annually for administration, staffing, and information technology related costs. Unknown one-time General Fund costs to advance funds to pharmacies for manufacturer discounts for rebates during first quarter of implementation of the program. BACKGROUND AND DISCUSSION Prices for prescription drugs have risen sharply in recent years, resulting in access problems for many Californians. A 2004 study by Families USA found that the prices of the top 30 brand-name drugs dispensed to seniors have increased by nearly 22 percent in just three years. Between 2001 and 2004 the prices of these 30 drugs rose by 3.6 times the rate of inflation. A recent AARP study showed that prices for the 197 brand-name drugs most commonly used by seniors continued to rise at a rate more than three times greater than inflation in 2004. As a result of these trends, the amount that United States (U.S.) residents spend out-of-pocket on prescription drugs has risen dramatically in recent years: in 2002, U.S. consumers paid $48.6 billion in out-of-pocket costs for prescription drugs, an increase of 15.3 percent over the previous year. In 2002, the annual increase in out-of-pocket spending for U.S. residents was greater than the total increase in out-of-pocket spending for all other Continued--- STAFF ANALYSIS OF ASSEMBLY BILL 2911 (Nunez) Page 10 kinds of health care combined. A recent survey found that 37 percent of the uninsured said they did not fill a prescription because of cost, compared to 13 percent of the insured. A study by the RAND Corporation found that when out-of-pocket payments for prescription drugs doubled, patients with diabetes and asthma cut back on their use of drugs by over 20 percent and experienced higher rates of emergency room visits and hospital stays. Nationally, the percentage of cash payers (versus Medi-Cal and third party payors) of prescription drugs have significantly decreased over the last decade, but one out of every four prescriptions is still paid out-of-pocket. The Medicare Part D drug benefit, enacted in 2003 and which commenced drug coverage under competing plans in January, 2006, provides drug coverage to Medicare beneficiaries. However, a recent analysis by the California Health Care Foundation in March, 2006 found that the competing plans differ considerably in their coverage of drugs. In addition, many plans pay no share of costs for drug expenditures between $2,250 and $5,100 (the so-called "donut hole"). Other states A number of states have responded to these trends by enacting prescription drug assistance programs. Most of the older programs provide subsidized drug coverage while newer programs focus on providing discounts to enrollees through negotiated discounts with drug manufacturers and pharmacies. Maine's Act to Establish Fairer Prices for Prescription Drugs was enacted in 2000 (known as the MaineRx program) is open to all residents who do not have prescription drug coverage. Under MaineRx, pharmacy participation is voluntary, but compulsory for manufacturers with Medicaid contracts in the state. MaineRx provides disincentives for nonparticipating manufacturers, such as subjecting their drugs to prior authorization requirements in the state Medicaid program and advertising their refusal to participate to health care providers and the public. MaineRx was immediately challenged by the pharmaceutical Continued--- STAFF ANALYSIS OF ASSEMBLY BILL 2911 (Nunez) Page 11 industry. On May 19, 2003, the U.S. Supreme Court ruled that the MaineRx Program was not preempted because the Medicaid Act "gives the states substantial discretion to choose the proper mix of amount, scope and duration limitations on coverage, as long as care and services are provided in the best interest of the recipients." The Court also ruled that the MaineRx statute on its face did not violate the Interstate Commerce Clause. The legislature revised MaineRx soon after the Supreme Court acted by creating the MaineRx Plus program. The new program requires participating pharmacies to provide drugs that are on Maine's Medicaid preferred drug list to state residents whose family income is 350 percent or less of the FPL or whose family incurs unreimbursed prescription drug expenses equal to 5 percent or more of family income or unreimbursed medical expenses of 15 percent or more of family income. In January 2005, the Federal District Court in Maine ruled that under the legal doctrine of "ripeness," it would be premature to conclude that the permissive prior authorization scheme in MaineRx Plus in any way violates federal Medicaid law. The court stated that since the Maine statute explicitly requires prior authorization be implemented only "as permitted by law" and "in a manner consistent with the goals of the MaineCare program and the requirements of the Social Security Act," it is possible for Maine to implement its prior authorization without violating the law. The court concluded that while the Maine program was not reviewable at this time, due to lack of ripeness, it remains subject to review by the Secretary of HHS at the appropriate time. A September 2005 evaluation by Prescription Policy Changes found that average savings off cash prices for pharmacy purchases under MaineRx were on the order of 25 percent for brand name drugs and 50 percent for generics. Ohio's Best Rx Ohio's Best Rx is a voluntarily program that has been in place since January 2005. There is no prior authorization provision. Ohio's income eligibility is 250 percent of FPL, which is waived for people age 60 and over. Continued--- STAFF ANALYSIS OF ASSEMBLY BILL 2911 (Nunez) Page 12 Prior efforts in California SB 19 (Ortiz), also known as the Governor's California Rx proposal, and AB 75 (Frommer) were introduced early in the 2005 - 06 Session to establish state pharmaceutical discount programs based on discounts from drug manufacturers that are passed on to individuals who did not have access to affordable prescription drugs. SB 19 as introduced relied on voluntary participation from manufacturers to provide discounts, while AB 75 sought to compel discounts from drug manufacturers by leveraging the state's large purchasing power through the Medi-Cal program. Under AB 75, drug manufacturers who did not provide discounts for specified drugs under the new program would have those drugs be subject to prior approval within Medi-Cal. Neither bill was successful and the issue moved to the ballot in November, when Propositions 78 and 79 (similar to SB 19 and AB 75, respectively) went before voters. Both initiatives were defeated. In a February 2005 evaluation of the Governor's CalRx program (SB 19), the Legislative Analyst Office (LAO) recommended that the Legislature try the SB 19 approach for voluntary rebates first, but direct DHS in advance to move forward with the type of approach included in AB 75 (leveraging the Medi-Cal program) if the Governor's program should fail to achieve its goals. AB 2911 embodies the LAO's recommendation. Arguments in support Supporters write that prescription drugs continue to rise, driving up the cost of medical care and placing needed medicine out of reach for too many Californians. Supporters state that hardest hit are millions of people who have no health insurance or inadequate coverage. Supporters state that when consumers cannot afford the drugs prescribed, this results in worse outcomes. Supporters write that experiences in other states, as well as that of the Golden Bear Pharmacy Assistance Program established by AB 696 in 2001, demonstrate that voluntary Continued--- STAFF ANALYSIS OF ASSEMBLY BILL 2911 (Nunez) Page 13 discount programs work poorly, if at all. Consumers Union points out that California has used prior authorization for years in Medi-Cal and is widely regarded as having lower Medicaid drug prices than states that do not use prior authorization to negotiate supplemental rebates from drug companies. The bill extends the benefit of these negotiations to uninsured and underinsured Californians. Supporters believe that this bill reflects a thoughtful compromise between the initiatives on the ballot last year. Arguments in opposition The Western Center on Law and Poverty (Western Center) and National Health Law Program oppose provisions of the bill authorizing DHS to use prior authorization in the Medi-Cal program to impede access to care for the state's poorest and sickest population. The groups state that while they support efforts to find a solution to provide discount prescription drugs for the uninsured, they cannot support an effort that would deny health coverage to one class of individuals for the benefit of another class of individuals. Western Center further states that obtaining prior authorization is not a simple process and beneficiaries frequently face a lengthy and cumbersome process obtaining drugs subject to prior authorization. The Western Center contends that while provisions of this bill providing for continuity of care seek to lessen the blow of the Medi-Cal hammer, there is no escaping the basic premise of the bill which renders one population's access to drugs more important than the other population's access. The Pharmaceutical Research and Manufacturers of America (PhRMA) and a number of biotechnology companies state concerns about the system of price controls that would be created by the bill. These groups write that while government intervention in the market for prescription drugs may produce some short-term savings for patients, the long-term effects of price regulation on the biomedical industry would be substantial. Limiting the returns that manufacturers receive on their investments has a direct effect on new investments into the research and development of innovative therapies. The groups note that California voters defeated a measure similar to AB 2911 in last year's special election and that, like Maine Rx, the hammer Continued--- STAFF ANALYSIS OF ASSEMBLY BILL 2911 (Nunez) Page 14 provisions in AB 2911 will be subject to extensive litigation. Aside from their fundamental concerns about the hammer provisions of AB 2911, opponents have proposed a number of changes to the bill: Lengthening the time period before DHS must consider whether to impose the Medi-Cal hammer to three full years from the time the program is implemented; Requiring DHS to issue regulations before they must consider whether to impose the hammer, to allow further public participation in the implementation of the program (the bill currently allows implementation through provider bulletins and do not require regulations to be issued until August, 2011); Providing greater assistance to Medi-Cal beneficiaries who lose access to drugs through implementation of the hammer. Related legislation SB 1702 (Perata, 2006) is an identical measure to AB 2911. This measure is on the Assembly floor. SB 19 (Ortiz, 2005) would have established the California State Pharmacy Assistance Program (Cal Rx), a state pharmacy assistance program under the authority of DHS, to provide prescription drug discounts for California residents with income up to 300 percent of FPL. This measure failed in the Senate Health Committee. AB 75 (Frommer, 2005) establishes a state pharmacy assistance program for Californians with income up to 400 percent of FPL. This measure is in the Senate Health Committee. Prior legislation SB 393 (Speier, Chapter 946, Statutes of 1999) requires retail pharmacies that participate in the Medi-Cal program to sell drugs to elderly and disabled persons on Medicare at a discount price that is just above the Medi-Cal price. Continued--- STAFF ANALYSIS OF ASSEMBLY BILL 2911 (Nunez) Page 15 SB 696 (Speier, Chapter 693, Statutes of 2001) establishes the Golden Bear Pharmacy Assistance Program to provide deeper discounts to Medicare recipients through negotiated voluntary rebates with drug manufacturers. However, in 2004 DHS ended its efforts to implement the program because of administrative problems passing rebates along to consumers and because few manufacturers had been willing to provide these rebates. Continued--- PRIOR ACTIONS Senate Appropriations: 8 - 5 Do Pass Senate Health: 5 - 4 Do Pass Assembly Floor: 48 - 32 Pass Assembly Appropriations:12 - 5 Do Pass Assembly Health: 8 - 4 Do Pass as Amended POSITIONS Support: (Verified 8/18/06) (prior version except where indicated) OuRx Coalition (source) AARP California AIDS Healthcare Foundation American Federation of State, County and Municipal Employees California Alliance for Retired Americans California Consumers United California Labor Federation, AFL-CIO California Mental Health directors Association (current version) California National Organization for Women California Pharmacists Association (if amended) California Public Interest Research Group Congress of California Seniors Consumers Union Health Access California Greenlining Institute Insurance Commissioner John Garamendi Latino Coalition for a Healthy California Mexican American Legal Defense and Educational Fund Senior Action Network Service Employees International Union Oppose: Alpha Behavioral Health Services (unless amended) California Council of Community Mental Health Agencies California Healthcare Institute (unless amended) (prior version) Mental Health Association in California Continued--- STAFF ANALYSIS OF ASSEMBLY BILL 2911 (Nunez) Page 17 National Health Law Program Pharmaceutical Research and Manufacturers of America Protection and Advocacy, Inc. (unless amended) Western Center on Law and Poverty -- END --