BILL ANALYSIS                                                                                                                                                                                                    

                              Senator Jerry Hill, Chair
                                2015 - 2016  Regular 

          Bill No:            AB 627          Hearing Date:    June 15,  
          |Author:   |Gomez                                                 |
          |Version:  |May 27, 2015                                          |
          |Urgency:  |No                     |Fiscal:    |No               |
          |Consultant|Sarah Mason                                           |
          |:         |                                                      |
            Subject:  Pharmacy benefit managers: contracting pharmacies.

          SUMMARY:  Updates Pharmacy Law related to reimbursement to pharmacies by  
          pharmacy benefit managers for prescription medication dispensed  
          to patients.

          Existing law:
          1)Under the Pharmacy Law, provides for the licensure and  
            regulation of pharmacies, pharmacists and wholesalers of  
            dangerous drugs or devices by the Board within the Department  
            of Consumer Affairs (DCA).  (Business and Professions Code  
            (BPC)  4000 et seq.)  

          2)Establishes requirements for audits of pharmacy benefits.   
            (BPC  4430 - 4439)

          3)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 pharmacy benefit manager (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 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  4430(f))


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          4)Defines "pharmacy benefit manager" (PBM) 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))

          5)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))

          6)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))

          7)Provides that notwithstanding any other law, 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 shall  
            comply with the provisions of this chapter.  (BPC  4432)

          This bill:

          1) Adds the following definitions to Pharmacy Law related to  
             audits of pharmacy benefits:

             a)   "Maximum allowable cost" (MAC) means the maximum amount  
               that a PBM will reimburse a pharmacy for the cost of a  


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             b)   "Maximum allowable cost list" (MAC List) means a list of  
               drugs for which a maximum allowable cost has been  
               established by a PBM.

             c)   "Obsolete" means 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  

          2)Requires a PBM that reimburses a contracting pharmacy for a  
            drug on a MAC basis to comply with this section.

          3)Requires a PBM to include information identifying any national  
            drug pricing compendia or other data sources used to determine  
            the MAC for the drugs on a MAC List in a contract entered into  
            or renewed on or after January 1, 2016 with a contracting  

          4)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.

          5)Prohibits a drug from being included on a MAC list or  
            reimbursed on a MAC basis unless all of the following apply:

             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.

             c)   The drug is not obsolete.

          6)Requires a PBM, for contracts entered into or renewed on or  
            after January 1, 2016, to review and make necessary  
            adjustments to the MAC of each drug on a MAC List using the  
            most recent data sources available at least once every seven  


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            days and requires a PBM to have a clearly defined process for  
            a contracting pharmacy to appeal the MAC for a drug on a MAC  
            List.  Requires the appeal to be based on either the fact that  
            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 the drug did  
            not meet the requirements to be included on a MAC list.   
            Provides a contracting pharmacy 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 PBM.  Requires a PBM  
            to make a final determination regarding a contracting  
            pharmacy's appeal within seven business days of the PBM  
            receiving the appeal.

          7)Provides that if a PBM denies an appeal, the PBM must provide  
            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 to the contracting pharmacy.

          8)Provides that if an appeal is upheld by a PBM, the PBM must  
            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.  Requires the PBM to allow the appealing  
            pharmacy to reverse and resubmit the claim upon which the  
            appeal was based in order to receive the corrected  

          9)Prohibits a contracting pharmacy from disclosing the MAC list  
            and any information it receives from a PBM or through a  
            pharmacy services administrative organization to a third  

          FISCAL EFFECT:  None.  This bill has been keyed "nonfiscal" by  
          Legislative Counsel.  

          1. Purpose.  The  California Pharmacists Association  is the  
              Sponsor  of this measure.  According to the Author, pharmacies  
             generally purchase prescription drugs and pay for them up  


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             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 pharmacy benefit  
             manager (PBM)) reimburses the pharmacy for the cost of the  
             drug dispensed as well as a pre-set professional dispensing  
             fee.  According to the Author, most health plans and PBMs  
             reimburse pharmacies for name brand drugs based on national  
             pricing lists and for generic drugs based on proprietary  
             maximum allowable cost (MAC) lists which PBMs establish 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.

             According to the Author, drug prices fluctuate frequently and  
             if the price of a drug increases, the pharmacy pays that  
             higher price.  The Author adds that 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 Author states that 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.  While pharmacies can appeal these  
             rates to a health plan, insurer, or PBM, the Author notes  
             that they frequently receive no response for several months,  
             all the while receiving negative reimbursement for subsequent  
             dispensing of the drug in question.  Through this bill, the  
             Author wishes to prevent pharmacies from potentially stopping  
             purchasing a drug altogether in instances where the  
             acquisition cost of the drug and the MAC list rate is  
             significantly different, thus ensuring that patients can  
             obtain prescription drugs and pharmacies do not suffer  
             unnecessary financial losses.

          2. Pharmacy Benefit Managers (PBMs).  According to a 2005  
             Federal Trade Commission report on Pharmacy Benefit Managers  
             (PBMs) and mail-order pharmacies, many health plan sponsors  
             offer their members prescription drug insurance and hire PBMs  
             to manage these pharmacy benefits on their behalf. As part of  
             the management of these benefits, PBMs assemble networks of  
             retail and mail-order pharmacies so that the plan sponsor's  
             members can fill prescriptions easily and in multiple  
             locations.  When a consumer fills a prescription at a local  
             pharmacy, the pharmacist usually asks whether the consumer  
             has insurance to cover the prescription's cost.  If there is  


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             coverage, the consumer provides the insurance card to the  
             pharmacist.  While the pharmacist fills the prescription,  
             sophisticated computer interactions between the pharmacy and  
             the PBM ensure that the prescription is filled according to  
             the insurance coverage provided by the plan sponsor.    
             According to the report, the consumer usually is unaware of  
             these processing interactions, and the consumer's only  
             additional responsibility is to pick up the filled  
             prescription and pay the retail pharmacy the copayment that  
             is due.
             According to the Sponsor, legislation similar to this bill  
             has passed in seventeen states since 2013 and fifteen states  
             currently have pending legislation to address appeals and  
             transparency in MAC-based pharmacy reimbursement.  

          3. Arguments in Support.  The  California Pharmacists Association   
             (CPhA) notes that it will establish fair standards for  
             reimbursement to pharmacies and enacts important transparency  
             and accuracy requirements that will help independent  
             community pharmacies continue to provide care to California  
             patients.  CPhA writes that "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 reimbursement.

          4. Suggested Author's Amendment.  The provisions of this bill  
             and chapter in Pharmacy Law for audits of pharmacy benefits  
             apply to PBMs offering services as part of a Department of  
             Managed Health Care licensed health plan or Department of  
             Insurance licensed health insurer.  However, CompPharma (PBMs  
             who operate in the workers' compensation market) is concerned  
             that this bill lacks clarity about whether the provisions  
             would in fact apply to contract standards for pharmacy  
             networks set by the Division of Workers' Compensation (DWC),  
             and thus subject PBMs like CompPharma members to the  
             requirements set forth in the bill.  Under the Labor Code,  
             DWC has the authority to set contract standards for pharmacy  
             networks.  The Labor Code also establishes maximum  
             reimbursement fees for pharmacy services provided to injured  
             workers, and DWC has established an independent bill review  
             process for claim disputes.  


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             In order to remove any possible confusion about whether  
             workers' compensation PBMs would be subject to the  
             requirements of this bill, given the fact that DWC has  
             authority over their contracts, the Committee suggests that  
             the Author amend BPC Section 4432 to ensure contracts are not  
             those for workers' compensation PBMs. 

               On page 3, between lines 27 and 28, insert:

               SEC. 2. Section 4432 of the Business and Professions Code  
             is amended to read:
               4432.  Notwithstanding any other law, 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 to provide pharmacy services to beneficiaries of a  
               health benefit plan shall comply with the provisions of  
               this chapter.   This chapter shall not apply to contracts  
               authorized by Section 4600.2 of the Labor Code. 

                On page 3, in line 28, strike "SEC. 2." and replace with  



          California Pharmacists Association (Sponsor)


          None on file as of June 9, 2015.

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