BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  SB 1195
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          (  Without Reference to File  )

          SENATE THIRD READING
          SB 1195 (Price)
          As Amended August 30, 2012
          Majority vote

           SENATE VOTE  :37-0  
           
           HEALTH              18-0                                        
           
           -------------------------------- 
          |Ayes:|Pan, Logue, Ammiano,      |
          |     |Atkins, Bonilla, Eng,     |
          |     |Gordon, Hayashi,          |
          |     |Roger Hernández, Bonnie   |
          |     |Lowenthal, Mansoor,       |
          |     |Mitchell, Monning,        |
          |     |Nestande, V. Manuel       |
          |     |Pérez, Silva, Smyth,      |
          |     |Williams                  |
          |     |                          |
           -------------------------------- 
           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 








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            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.

          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 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 








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            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 
            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 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 








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            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, 
            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:








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             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 
            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, 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 








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               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 or at the direction of the 
               California State Board of Pharmacy (BOP), the State 
               Department of Health Care Services, or the Department of 
               Public Health or the Medicare Program.

          23)Indicates that this bill shall not be construed to suggest or 
            imply that the Department of Consumer Affairs or the BOP has 
            any jurisdiction or authority over the provisions of this 
            measure.

          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.

             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 








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               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.

           FISCAL EFFECT  :  None

           COMMENTS  :  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 








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          environment in which PBMs operate, will prohibit unreasonable 
          audits, and forbid the practice of extrapolation and bounty 
          hunting.


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


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