BILL ANALYSIS                                                                                                                                                                                                    

                                                                     AB 627

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          Date of Hearing:  May 5, 2015


                                Susan Bonilla, Chair

          AB 627  
          (Gomez) - As Amended March 26, 2015

          SUBJECT:  Pharmacy benefit managers:  contracting pharmacies.

          SUMMARY:  Requires a pharmacy benefit manager (PBM) that  
          reimburses a contracting pharmacy for a drug on a maximum  
          allowable cost basis to: (1) include in a contract, renewed on  
          or after January 1, 2016, information identifying the data  
          sources used to determine the maximum allowable cost (MAC) for  
          the drugs on a MAC list, and (2) provide for an appeal process  
          for the contracting pharmacy, make available to a contracting  
          pharmacy, upon request, the most up-to-date MAC lists used by  
          the PBM for patients served by the pharmacy. This bill also  
          prohibits a drug from being included on a MAC list or from being  
          reimbursed on a MAC basis unless certain requirements are met.

          EXISTING LAW:

          1)Establishes requirements for audits of pharmacy benefits.   
            (Business and Professions Code (BPC)  4430 - 4439)

          2)Defines "Pharmacy audit" as 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  


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            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  
            thereof. "Pharmacy audit" does not include 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.  (BPC   

          3)Defines "pharmacy benefit manager" as 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 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.  (BPC  4430(g))

          4)Defines "carrier" as a health care service plan, as defined in  
            Section 1345 of the Health and Safety Code, or a health  
            insurer that issues policies of health insurance, as defined  
            in Section 106 of the Insurance Code.  (BPC  4430(a))

          5)Defines "health benefit plan" as 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, as defined in Section 1345 of the Health  
            and Safety Code, and a policy of health insurance, as defined  
            in Section 106 of the Insurance Code, issued by a health  
            insurer.  (BPC  4430(d))


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          THIS BILL:

          6)Defines "maximum allowable cost" as the maximum amount that a  
            pharmacy benefit manager will reimburse a pharmacy for the  
            cost of a drug.
          7)Defines "maximum allowable cost list" as a list of drugs for  
            which a MAC has been established by a PBM.

          8)Defines "obsolete" as a drug that may be listed in national  
            drug pricing compendia but is no longer available to be  
            dispensed based on the expiration date of the last lot  

          9)Applies to a PBM that reimburses a contracting pharmacy for a  
            drug on a maximum allowable cost basis.

          10)Requires that a PBM shall include in a contract, entered into  
            or renewed on or after January 1, 2016, with the contracting  
            pharmacy information identifying any national drug pricing  
            compendia or other data sources used to determine the MAC for  
            the drugs on a maximum allowable cost list.

          11)Requires a PBM to make available to a contracting pharmacy,  
            upon request, the most up-to-date MAC list or lists used by  
            the PBM for patients served by that pharmacy in a readily  
            accessible, secure, and usable Web-based format or other  
            comparable format.

          12)States that a drug shall not be included on a MAC list or  
            reimbursed on a MAC basis unless all of the following apply:


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             a)   The drug is listed as "A" or "B" rated in the most  
               recent version of the federal Food and Drug  
               Administration's (FDA) approved drug products with  
               therapeutic equivalent evaluations, also known as the  
               Orange Book or has an "NA" or "NR" rating or a similar  
               rating by a nationally recognized pricing reference, such  
               as Medi-Span or First DataBank;
             b)   The drug is generally available for purchase in the  
               state from a national or regional wholesaler; and,

             c)   The drug is not obsolete.

          13)Requires contracts entered into or renewed on or after  
            January 1, 2016, to state that a PBM shall review and shall  
            make necessary adjustments to the maximum allowable cost of  
            each drug on a MAC list using the most recent data sources  
            available at least once every seven days.
          14)Requires contracts entered into or renewed on or after  
            January 1, 2016, to state that a PBM shall have a clearly  
            defined process for a contracting pharmacy to appeal the MAC  
            for a drug on a MAC list that includes all of the following:

             a)   A contracting pharmacy may base its appeal on either of  
               the following:
               i)     The MAC for a drug is below the cost at which the  
                 drug is available for purchase by similarly situated  
                 pharmacies in the state from a national or regional  
                 wholesaler; or,
               ii)The drug does not meet the requirements of subdivision  

             b)   A contracting pharmacy shall be provided no less than 14  
               business days following receipt of payment for the claim  
               upon which the appeal is based to file an appeal with a  


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               pharmacy benefit manager. The PBM shall make a final  
               determination regarding a contracting pharmacy's appeal  
               within seven business days of PBM's receipt of the appeal;
             c)   If an appeal is denied by a PBM, the PBM shall provide  
               to the contracting pharmacy the reason for the denial and  
               the national drug code (NDC) of an equivalent drug that may  
               be purchased by a similarly situated pharmacy at the price  
               that is equal to or less than the MAC of the appealed drug;

             d)   If an appeal is upheld by a PBM, the PBM shall adjust  
               the MAC of the appealed drug for the appealing contracting  
               pharmacy and all similarly situated contracting pharmacies  
               in the state within one calendar day of the date of  
               determination. The PBM shall permit the appealing pharmacy  
               to reverse and resubmit the claim upon which the appeal was  
               based in order to receive the corrected reimbursement; and,

             e)   A contracting pharmacy shall not disclose to any third  
               party the MAC list and any related information it receives  
               either directly from a PBM or through a pharmacy services  
               administrative organization or similar entity with which  
               the contracting pharmacy has a contract to provide  
               administrative services for that pharmacy.

          FISCAL EFFECT:  None. This bill is keyed non-fiscal by the  
          Legislative Counsel.  


          Purpose.  This bill is sponsored by the  California Pharmacists  
          Association  . According to the author, "[This bill] will bring  
          fair standards and transparency to [MAC] pharmacy  
          reimbursements.  The bill requires MAC lists to be transparent,  
          accessible, and updated weekly to the current market price for  


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          pharmacies.  It also establishes standards for appeals of MAC  
          prices, ensuring that these appeals are resolved quickly.  This  
          will both enable pharmacists to spend more time helping their  
          patients and help thousands of independent pharmacies across  

          Background.  According to a 2005 Federal Trade Commission (FTC)  
          report on PBMs, private sector entities that offer medical  
          insurance (plan sponsors), such as employers, labor unions, and  
          managed care companies, also offer prescription drug insurance  
          coverage. Plan sponsors often hire PBMs to manage the  
          prescription drug insurance benefits. 

          PBMs engage in many activities to manage their clients'  
          prescription drug insurance coverage. PBMs assemble networks of  
          retail pharmacies so that a plan sponsor's members can fill  
          prescriptions easily and in multiple locations by just paying a  
          copayment amount. PBMs consult with plan sponsors to decide for  
          which drugs a plan sponsor will provide insurance coverage to  
          treat each medical condition (e.g., hypertension, high  
          cholesterol, etc.). The PBM manages this list of preferred drug  
          products (the "formulary") for each of its plan sponsor clients.

          Consumers with insurance coverage are then provided incentives,  
          such as low copayments, to use formulary drugs. Because  
          formulary listing will affect a drug's sales, pharmaceutical  
          manufacturers compete to ensure that their products are included  
          on these formularies. They do so by paying PBMs "formulary  
          payments" to obtain formulary status and "market-share payments"  
          to encourage PBMs to dispense their drugs. The payments are  
          based on the quantity of drugs dispensed under the plans  
          administered by the PBM.

          Drug Pricing and Mac Lists.  According to the author,  
          "Pharmacies generally purchase prescription drugs and pay for  


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          them up front. When a patient with health coverage is prescribed  
          a covered drug that is dispensed by a contracted pharmacy, the  
          health plan or insurer (or a contracted PBM) reimburses the  
          pharmacy for (1) the cost of the drug dispensed and (2) a preset  
          professional dispensing fee. Most health plans and PBMs  
          reimburse pharmacies for name brand drugs based on national  
          pricing lists (i.e., Average Wholesale Price) and for generic  
          drugs based on proprietary MAC lists. PBMs establish these MAC  
          lists based on national and regional drug pricing data in an  
          attempt to reimburse pharmacies as close as possible to the  
          current market rate for drugs."

          The author also notes, "Drug prices fluctuate frequently; if the  
          price of a drug increases, the pharmacy pays that higher price.  
          However, if a PBM does not update its MAC list regularly, the  
          pharmacy may be reimbursed far less for a drug than they paid to  
          acquire it, incurring a financial loss. The percentage of  
          generic drugs dispensed at a loss to pharmacies has increased  
          significantly in recent years due to frequent price increases in  
          generic drug prices. Pharmacies that appeal these rates to a  
          health plan, insurer, or PBM frequently receive no response for  
          several months all the while receiving negative reimbursement  
          for subsequent dispensing of the drug in question."

          "When the discrepancy between the acquisition cost of a drug and  
          the MAC list rate is significant enough, pharmacies have in some  
          instances stopped purchasing the drug altogether. This protects  
          the pharmacy from suffering financial losses but makes it  
          difficult for patients to obtain certain prescription drugs."

          PBM Retail Networks.  According to a 2005 FTC letter to North  
          Dakota Senator Richard L. Brown, regarding HB 1332, which would  
          have regulated the contractual relationships between PBMs and  
          covered entities, such as health plans and pharmacies, "PBMs  
          also enter into contracts with retail pharmacies to create a  
          retail network.  The contract generally specifies the amount the  


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          PBM will reimburse the pharmacy for dispensing a prescribed  
          pharmaceutical, expressed as a discount from a reference price  
          plus a dispensing fee.  By forming an exclusive network, a PBM  
          is able to guide a covered entity's participants to certain  
          pharmacies.  The promise of increased customer volume creates an  
          incentive for pharmacies to bid aggressively with lower drug  
          prices in exchange for membership in a network.  Pharmacies will  
          be willing to compete more vigorously for inclusion in a network  
          as the exclusivity of the network and the number of pharmacies  
          in the relevant market increases."  At this time, it is unclear  
          what effect, if any, a transparent MAC list will have on market  
          competition and bidding for inclusion in PBM retail networks.   
          The sponsors note that the definitions in this bill exclude any  
          proprietary information.

          Pricing Transparency.  At the federal level, Medicare Part D has  
          a similar requirement for Part D plans (42 Code of Federal  
          Regulations (CFR)  423.505(21)).  In explaining the issue of  
          price transparency at the pharmacy level, the Centers for  
          Medicare and Medicare Services (CMS) noted, "When the source of  
          a prescription drug pricing standard is published publicly, such  
          as with [average wholesale price] or [wholesale acquisition  
          price], pharmacies can determine their reimbursement for all  
          drugs at any given time and can monitor these sources to ensure  
          they are being reimbursed correctly.  However, when a  
          prescription drug pricing standard is not published publicly,  
          network pharmacies are unable to promptly determine whether  
          their reimbursement is consistent with their contractual  
          arrangements. This, in turn, presents risks to the Medicare Part  
          D program in a number of ways. For example, disclosure of the  
          source used to determine drug prices is necessary for pharmacies  
          to ensure accurate payment of their claims, which is necessary  
          for accuracy in the costs submitted to CMS by Part D sponsors on  
          [prescription drug event records] without unnecessary later  
          adjustments that are disruptive to the operation of the Part D  


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          Other States.  At this time, 17 other states have passed similar  
          legislation. There are also 15 other states with pending  

          Prior Related Legislation. SB 1195 (Price), Chapter 706,  
          Statutes of 2012, imposed specified requirements on an audit of  
          pharmacy services provided to beneficiaries of a health benefit  
          plan. Among other things, it also prohibited the entity  
          conducting the audit from receiving payment on any basis tied to  
          the amount claimed or recovered from the pharmacy.

          AB 1960 (Pavley, Chu, Frommer, Ridley-Thomas, Cha, Koretz,  
          Kuehl), of 2004, would have required a PBM to make specified  
          disclosures to its purchasers and prospective purchasers,  
          including information about the pharmacy benefit manager's  
          revenues and its drug formularies, and to make disclosures to  
          the public upon request. The bill would have also established  
          standards and requirements with regard to pharmacy benefits  
          management contracts.  NOTE: This bill was vetoed by Governor  
          Schwarzenegger for being anti-competitive and possibly  
          increasing health care costs.


          The California Pharmacist Association (sponsor) writes in  
          support, "AB 627 brings reasonable standards to the pharmacy  
          reimbursement model known as Maximum Allowable Cost (MAC). Under  
          MAC-based reimbursement, pharmacies receive payment for generic  
          medications they dispense to patients based on proprietary price  
          lists managed by health plans and pharmacy benefit managers.  
          These price lists need frequent updates to ensure they reflect  
          the current market prices that pharmacies pay to acquire  
          medications. When the price lists are not appropriately updated,  
          pharmacies lose money by dispensing medications to patients.  
          Pharmacies also need a defined process for appealing MAC list  


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          prices that are below the current market price. 

          Like all healthcare providers, pharmacies cannot care for  
          patients when they are forced to continually do so at a loss.  
          This bill sets fair standards that ensure pharmacies can  
          continue serving patients while also allowing health plans and  
          PBMs to control costs through the use of fair MAC-based  


          None on file.


          California Pharmacist Association (sponsor)

          None on file. 

          Analysis Prepared by:Vincent Chee / B. & P. / (916) 319-3301


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