BILL ANALYSIS                                                                                                                                                                                                    Ó



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          Date of Hearing:  July 3, 2012

                            ASSEMBLY COMMITTEE ON HEALTH
                              William W. Monning, Chair
                     SB 1195 (Price) - As Amended:  June 26, 2012

           SENATE VOTE :  23-10
           
          SUBJECT  :  Audits of pharmacy benefits.

           SUMMARY  :  Requires a contract that is issued, amended, or 
          renewed on or after January 1, 2013 between a pharmacy and a 
          carrier or a pharmacy benefit manager (PBM) to provide pharmacy 
          services to beneficiaries of a health benefit plan to comply 
          with standards and audit requirements as specified in this bill. 
           Includes provisions relating to the following: commissions or 
          financial incentives, recoupment of funds for clerical errors, 
          confidentiality of information, scheduling of audits, 
          permissible documents for purposes of audits, timeframes of 
          audits, standards for submission of preliminary and final 
          reports, validation of claims and orders, and, requirements for 
          audit appeals.  Specifically,  this bill  :  

          1)Requires a contract that is issued, amended, or renewed on or 
            after January 1, 2013, between a pharmacy and a carrier or a 
            PBM to provide pharmacy services to beneficiaries of a health 
            benefit plan to comply with this bill.

          2)Prohibits an entity conducting a pharmacy audit from receiving 
            payment or any other consideration on any basis that is tied 
            to the amount claimed or actual amount recovered from the 
            pharmacy that is the subject of the audit.  Indicates that 
            this shall not be construed to prevent the pharmacy from 
            charging or assessing the plan sponsor directly or indirectly, 
            based on amounts recouped if both of the following conditions 
            are met:

             a)   The plan sponsor and the PBM or health benefit plan have 
               a contract that explicitly states the percentage charge or 
               assessment to the plan sponsor; and,

             b)   No commission or financial incentive is paid to an agent 
               or employee of the entity conducting the pharmacy audit 
               based, directly or indirectly, on amounts recouped.









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          3)Provides that a pharmacy shall not be subject to recoupment of 
            funds for a clerical or recordkeeping error, unless the error 
            resulted in actual financial harm to the PBM, the carrier, or 
            the beneficiary of a health benefit plan.

          4)Requires, unless prohibited by state or federal law, an entity 
            conducting a pharmacy audit to keep confidential any 
            information collected during the course of the audit and not 
            share any information with any person other than the carrier, 
            PBM, or third-party payer for which the audit is being 
            performed.  Requires that an entity conducting a pharmacy 
            audit to have access only to previous audit reports relating 
            to a particular pharmacy conducted by or on behalf of the same 
            entity.  Provides that this shall not be construed to 
            authorize access to information that is otherwise prohibited 
            by law.  Indicates that these provisions shall not be 
            construed to prohibit any employer, trust fund, government 
            agency, or any other entity for which the audit is being 
            performed from disclosing its general opinions or conclusions 
            regarding the business practices of the pharmacy based on the 
            audit.

          5)Indicates that an entity that is not a carrier or PBM and that 
            is conducting a pharmacy audit on behalf of a carrier or PBM, 
            shall, prior to conducting the audit, notify the pharmacy in 
            writing that the entity and the carrier or PBM have executed a 
            business associate agreement or other agreement as required 
            under state and federal privacy laws.

          6)Requires an entity conducting a pharmacy audit, prior to 
            leaving a pharmacy at the end of an onsite portion of the 
            audit, to provide the pharmacist in charge with a complete 
            list of records reviewed to allow the pharmacy to account for 
            disclosures as required by state and federal privacy laws.

          7)Prohibits an entity conducting an onsite pharmacy audit from 
            initiating or scheduling a pharmacy audit during the first 
            five business days of any calendar month, unless it is 
            expressly agreed to by the pharmacy being audited.

          8)Requires an entity conducting an onsite pharmacy audit to 
            provide the pharmacy at least two weeks prior written notice 
            before conducting an initial audit.

          9)Requires a pharmacy audit that involves clinical judgment to 








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            be conducted by, or in consultation with, a licensed 
            pharmacist.  Requires an entity conducting a pharmacy audit to 
            make all determinations regarding the legal validity of a 
            prescription or other record, as specified.  Provides that 
            these provisions shall not be construed to prohibit a PBM from 
            denying a claim, either in whole or in part, for failure to 
            comply with the federal Food and Drug Administration or 
            manufacturer requirements, the prescription drug formulary, 
            prior authorization requirements, days' supply requirements, 
            or other coverage or plan design requirement, or for failure 
            to include a National Provider Identification number.

          10)Requires an entity conducting a pharmacy audit to accept 
            paper or electronic signature logs that document the delivery 
            of pharmacy services to a health plan beneficiary or his or 
            her agent. 

          11)States that the time period covered by a pharmacy audit shall 
            not exceed a 24-months from the date that the claim was 
            submitted to, or adjudicated by, the PBM, unless a longer 
            period is required under state or federal law or unless the 
            originating prescription is required.

          12)Requires an entity conducting a pharmacy audit to deliver a 
            preliminary audit report to the pharmacy before issuing a 
            final audit report.  Requires this report to be issued no 
            later than 60 days after conclusion of the audit.  Requires 
            that a pharmacy be provided a time period of at least 30 days 
            following receipt of the preliminary audit report to respond 
            to the findings in the report, including addressing any 
            alleged mistakes or discrepancies and producing documentation 
            to that effect.

          13)Authorizes a pharmacy, to validate the pharmacy record and 
            delivery, to use authentic and verifiable statements or 
            records, including medication administration records of a 
            nursing home, assisted living facility, hospital, physician 
            and surgeon, or other authorized prescriber, or additional 
            documentation parameters located in the provider manual.

          14)Authorizes any legal prescription to be used to validate 
            claims in connection with prescriptions, refills, or changes 
            in prescriptions, including medication administration records, 
            facsimiles, electronic prescriptions, electronically stored 
            images of prescriptions, electronically created annotations, 








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            or documented telephone calls from the prescriber or the 
            prescriber's agent.  Provides that unless specifically 
            addressed in the audit policies and procedures contained in 
            the contract or provider manual, documentation of an oral 
            prescription order that has been verified by the prescriber is 
            sufficient.

          15)Allows a pharmacy, if an entity conducting a pharmacy audit 
            uses extrapolation to calculate penalties or amounts to be 
            recouped, to present evidence to validate orders for dangerous 
            drugs or devices that are subject to invalidation due to 
            extrapolation.  

          16)Provides that prior to issuing a final audit report, an 
            entity conducting a pharmacy audit shall take into 
            consideration any response by the pharmacy to the preliminary 
            audit report provided within the timeframes, as specified.

          17)Requires an entity conducting a pharmacy audit to deliver a 
            final audit report to the pharmacy no later than 90 days after 
            the conclusion of the audit or 30 days after receipt of a 
            pharmacy's response to the preliminary audit report, as 
            applicable.

          18)Requires an entity conducting a pharmacy audit to establish, 
            in the contract between the pharmacy and the contracting 
            entity, a process for appealing the findings in a final audit 
            report that complies with the following requirements:

             a)   A pharmacy shall be provided a time period of at least 
               30 days following receipt of the final audit report to file 
               an appeal with the entity identified in the appeal process;

             b)   An entity conducting a pharmacy audit shall provide the 
               pharmacy with a written determination of appeal issued by 
               the entity identified in the appeal process, which shall be 
               appended to the final audit report, and a copy of the 
               determination shall be sent to the carrier, health benefit 
               plan sponsor, or other third-party payer; and,

             c)   If, following the appeal, either party is not satisfied 
               with the appeal, the party may seek relief under the terms 
               of the contract.

          19)Provides that an entity conducting a pharmacy audit, a 








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            carrier, a health benefit plan sponsor, or other third-party 
            payer, or any person acting on behalf of those entities shall 
            not attempt to make chargebacks or seek recoupment from a 
            pharmacy, or assess, or collect penalties from a pharmacy, 
            until the time period for filing an appeal to a final audit 
            report has passed, or until the appeal process has been 
            exhausted, whichever is later.  Specifies that should the 
            identified discrepancy for a single audit exceed $30,000, 
            future payments may be withheld pending adjudication of an 
            appeal.

          20)Prohibits interest from accruing during the audit period for 
            either party, beginning with the notice of the audit and 
            ending with the conclusion of the appeal process.

          21)Provides, if, following final disposition of a pharmacy audit 
            pursuant, an entity conducting a pharmacy audit, a carrier, a 
            health benefit plan sponsor, or other third-party payer, or 
            any person acting on behalf of those entities, finds that an 
            audit report or any portion thereof is unsubstantiated, the 
            entity shall dismiss the audit report or the unsubstantiated 
            portion thereof without the necessity of any further 
            proceedings

          22)Provides that this bill does not apply to the following:

             a)   An audit conducted because a PBM, carrier, health 
               benefit plan sponsor, or other third-party payer has 
               indications that support a reasonable suspicion that 
               criminal wrongdoing, willful misrepresentation, fraud, or 
               abuse has occurred; or,

             b)   An audit conducted by the California State Board of 
               Pharmacy, the State Department of Health Care Services, or 
               the Department of Public Health or the Medicare Program.

          23)Defines various terms including the following:

             a)   Carrier means a health care service plan, as defined or 
               a health insurer that issues policies of health insurance, 
               as specified.

             b)   Clerical or recordkeeping error includes, a 
               typographical error, scrivener's error, or computer error 
               in a required document or record.








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             c)   Extrapolation means the practice of inferring a 
               frequency or dollar amount of overpayments, underpayments, 
               nonvalid claims, or other errors on any portion of claims 
               submitted, based on the frequency or dollar amount of 
               overpayments, underpayments, nonvalid claims, or other 
               errors actually measured in a sample of claims.

             d)   Health benefit plan means any plan or program that 
               provides, arranges, pays for, or reimburses the cost of 
               health benefits.  Health benefit plan includes, but is not 
               limited to, a health care service plan contract issued by a 
               health care service plan, and a policy of health insurance, 
               as specified.

             e)   Pharmacy audit means an audit, either onsite or 
               remotely, of any records of a pharmacy conducted by or on 
               behalf of a carrier or a PBM, or a representative thereof, 
               for prescription drugs that were dispensed by that pharmacy 
               to beneficiaries of a health benefit plan pursuant to a 
               contract with the health benefit plan or the issuer or 
               administrator.  Excludes from this definition a concurrent 
               review or desk audit that occurs within three business days 
               of transmission of a claim, or a concurrent review or desk 
               audit where no chargeback or recoupment is demanded.

             f)   Pharmacy benefit manager means a person, business, or 
               other entity that, pursuant to a contract or under an 
               employment relationship with a carrier, health benefit plan 
               sponsor, or other third-party payer, either directly or 
               through an intermediary, manages the prescription drug 
               coverage provided by the carrier, plan sponsor, or other 
               third-party payer, including, but not limited to, the 
               processing and payment of claims for prescription drugs, 
               the performance of drug utilization review, the processing 
               of drug prior authorization requests, the adjudication of 
               appeals or grievances related to prescription drug 
               coverage, contracting with network pharmacies, and 
               controlling the cost of covered prescription drugs

           EXISTING LAW  :  

          1)Establishes the California State Board of Pharmacy to regulate 
            the pharmacists.









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          2)Requires health care service plans to be regulated by the 
            Department of Managed Health Care and health insurers to be 
            regulated by the California Department of Insurance.

          3)Requires health care service plan contracts and health 
            insurance policies to provide coverage for specified benefits 
            and requires contracts between plans or insurers and providers 
            to contain provisions requiring a fast, fair, and 
            cost-effective dispute resolution mechanism.

           FISCAL EFFECT  :  None

           COMMENTS  :

           1)PURPOSE OF THIS BILL  .  The California Pharmacists Association 
            is the sponsor of this bill.  According to the author, this 
            bill will reform the PBM industry by requiring uniform 
            auditing procedures and standards. Currently there are three 
            major PBMs that audit pharmacies throughout the country. These 
            three PBMs operate unchecked and unregulated, earning billions 
            of dollars each year while hurting local pharmacies. 
            Additionally, PBMs recoup a percentage based on the errors 
            they uncover.  This practice has led to an incentive to 
            penalize pharmacies for minor infractions.  Exacerbating the 
            bounty hunting problem caused by PBMs is the practice of 
            extrapolation by PBMs.  Most audits are conducted using a 
            sample of all claims submitted by the pharmacy.  Using the 
            practice of extrapolation, an auditor who finds a claim for a 
            particular prescription within that sample to be invalid will 
            extrapolate that all claims for that prescription or patient 
            are also invalid, even though the audit firm did not review 
            each claim to make an actual determination whether subsequent 
            or prior prescriptions did in fact contain errors at the level 
            of rendering it invalid.  Utilizing the extrapolation 
            technique, PBMs incorrectly recoup funds from pharmacies that 
            did not commit an error in dispensing a prescription. The 
            author states that this bill will reform the environment in 
            which PBMs operate, will prohibit unreasonable audits, and 
            forbid the practice of extrapolation and bounty hunting.

           2)BACKGROUND  .  

              a)   PBMs  .  According to the Federal Trade Commission, many 
               health plan sponsors offer their members prescription drug 
               insurance and hire PBMs to manage these pharmacy benefits 








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               on their behalf.  As part of the management of these 
               benefits, PBMs assemble networks of retail and mail-order 
               pharmacies so that the plan's sponsor's members can fill 
               prescriptions easily and in multiple locations.   PBMs 
               contract with employers, labor unions, insurance companies, 
               the state, Medicaid and Medicare managed care plans, and 
               managed care companies (collectively, "plan sponsors") to 
               manage pharmacy benefits.  There are large PBMs (Express 
               Scripts/Medco, and Caremark), small and insurer-owned PBMs 
               (Aenta, Cigna Corporation, Wellpoint Health Networks), 
               retailer-owned (Eckerd Health Systems, PharmaCare 
               Management Services (subsidiary of CVS Corp), Walgreens 
               Health Initiative or stand-alone retail pharmacies (CVS 
               Corp, Rite Aid Corporation, Walgreen and Wal-Mart Stores, 
               Inc).


             According to a September 2011 report commissioned by the 
               Pharmaceutical Care Management Association to estimate the 
               savings that these PBMs generate for plan sponsors and 
               consumers, PBMs implement prescription drug benefits for 
               more than 215 million Americans who have health insurance 
               from a variety of plan sponsors.  Working under contract 
               with plan sponsors, PBMs manage drug benefit programs that 
               give consumers more efficient and affordable access to 
               medications.  The report's major findings included: 

               i)     From 2012 to 2021, PBMs will save plan sponsors and 
                 consumers almost $2 trillion, or about 35%, compared with 
                 drug expenditures made without pharmacy benefit 
                 management;

               ii)    Available PBM savings for individual plan sponsors 
                 can range from 20% for those that make limited use of PBM 
                 tools to 50% for those that adopt best practices 
                 recommended by PBMs. 

               iii)   If all plan sponsors adopt PBM-recommended best 
                 practices, projected prescription drug expenditures could 
                 fall by an additional $550 billion over the next decade;

               iv)    Limiting the tools that PBMs use to manage costs 
                 could increase projected prescription drug costs by more 
                 than $550 billion over the next decade. 









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              b)   Pharmacy audits  .  According to the Academy of Managed 
               Care Pharmacy (AMCP) "Model Audit Guidelines for Pharmacy 
               Claims," historically, health care services (including 
               prescription medications) were paid by the patient as an 
               out-of-pocket expense.  These payments may then have been 
               reimbursed by a third party or self-funded insurance plan.  
               Over the course of the twentieth century, health care 
               insurance evolved from indemnity pre-paid insurance to 
               managed care as a major mechanism of coverage. The growth 
               of plan design, administration and payment by third-party 
               entities, coupled with increases in the total costs of 
               care, have led to more oversight of plans and their 
               financial services. Audits of claims made by pharmacies, 
               and payments made to pharmacies, are included in the 
               oversight process. The auditing of pharmacy claims serves 
               two main purposes: i) detecting fraud, waste and abuse, 
               and, ii) validating data entry and documentation to ensure 
               they meet regulatory and contractual requirements.

              c)   AMCP Model Audit Guidelines for Pharmacy Claims  .  The 
               AMCP established the Community Pharmacy Outreach Advisory 
               Council to address issues that managed care pharmacy and 
               community pharmacy share and that would lead to an enhanced 
               relationship. The Council identified auditing of pharmacy 
               claims as a high priority issue largely because of the 
               friction it causes for both community and managed care 
               pharmacy. In January 2012, AMCP released model audit 
               guidelines for pharmacy claims.  According to the document, 
               the guidelines are the result of over a year-long effort by 
               a Task Force comprised of representatives of the 
               pharmacists (including those in managed care organizations 
               ÝMCOs], retailers, and PBMs).  These guidelines were meant 
               to assist MCOs in developing a pharmacy claims audit 
               program and to help pharmacy providers to better understand 
               the audit requirements and process.  The document states 
               that while the guidelines were developed as a way to 
               improve the relationship between the parties, the contract 
               between the MCO and the pharmacy should define the actual 
               audit process.

              d)   Other states  .  According to an April 2012 Pharmaceutical 
               Care Management Association summary of proposed and enacted 
               laws related to pharmacy audits, there are at least 12 
               states with legislation pending. Indiana, Kentucky, and 
               Utah have all enacted laws on the subject.  In March 2012, 








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               Utah's Governor signed H.B. 76, which contains provisions 
               similar to those contained in this bill, such as 
               prohibitions on: initiating or scheduling an audit during 
               the first five business days of a month, including 
               dispensing fees in the calculation of overpayments in 
               certain circumstances, and recouping funds for prescription 
               clerical or recordkeeping errors. Also similar to this 
               bill, H.B. 76 contains provisions allowing pharmacies to 
               respond to a preliminary audit.  With regard to an auditing 
               entity, the audit is required to disclose any money 
               recovered by the entity that conducted the audit.

           3)SUPPORT  .  The California Pharmacists Association states that 
            this bill would put an end to abusive PBM audits by 
            establishing common sense, fair standards for all audits and 
            prohibiting a number of unjust practices while allowing PBMs 
            the continued appropriate role of finding and penalizing true 
                  fraud, waste, and abuse against pharmacies.  The California 
            Society of Health-System Pharmacists state that this bill 
            establishes fair standards for all audits conducted by a 
            health insurer, health care service plan, or PBM of contracted 
            pharmacies. 

           REGISTERED SUPPORT / OPPOSITION  :

           Support 
           
          California Pharmacists Association (sponsor)
          California Society of Health-System Pharmacists
          National Community Pharmacists Association
          Raley's Family of Fine Stores
          Safeway
          Walgreens
          Individual pharmacists
           
            Opposition 
           
          None on file.

           Analysis Prepared by  :    Rosielyn Pulmano / HEALTH / (916) 
          319-2097 












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