BILL ANALYSIS Ó SB 1195 Page 1 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. SB 1195 Page 2 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 SB 1195 Page 3 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, SB 1195 Page 4 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 SB 1195 Page 5 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. SB 1195 Page 6 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. SB 1195 Page 7 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 SB 1195 Page 8 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. SB 1195 Page 9 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, SB 1195 Page 10 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 SB 1195 Page 11