BILL ANALYSIS Ó SB 1010 Page 1 Date of Hearing: June 28, 2016 ASSEMBLY COMMITTEE ON HEALTH Jim Wood, Chair SB 1010 (Hernandez) - As Amended May 31, 2016 SENATE VOTE: 25-10 SUBJECT: Health care: prescription drug costs. SUMMARY: Requires health care service plans (health plans) and health insurers (collectively carriers) that report rate information to also include information regarding covered prescription drugs, as specified. Requires the Department of Managed Health Care (DMHC) and the California Department of Insurance (CDI) to compile and report this data in an aggregated report to demonstrate the overall impact of drug costs on health care premiums. Requires any manufacturer of a prescription drug, who sells to or is reimbursed by a state purchaser, health plan, health insurer, or pharmacy benefit manager (PBM), to provide notice describing a price increase, as specified. Requires the Legislature to conduct an annual public hearing on aggregate trends in prescription drug pricing. Specifically, this bill: Health Plan and Insurer Requirements 1)Requires carriers that report rate information through SB 1010 Page 2 existing group and individual rate review process to also report to DMHC and CDI, on a date no later than it reports the rate information, the following information for all covered prescription drugs, including generic, brand name, and specialty drugs provided in an outpatient setting: a) The 25 most frequently prescribed drugs; b) The 25 most costly drugs by total plan spending; and, c) The 25 drugs with the highest year-over-year increase in spending. 2)Requires the DMHC and CDI to compile this information in a report for the public and the Legislature to demonstrate the overall impact of drug costs on health care premiums. Requires the data in the report to be aggregated and prohibits information specific to individual carriers. 3)Defines specialty drug as one that exceeds the threshold for a specialty drug under the Medicare Part D program. 4)Requires the DMHC and CDI to publish on its Internet Website the report by October 1 of each year. 5)Requires the information provided to the DMHC and CDI, except for the report in 2) above, to remain confidential and exempt from disclosure under the California Public Records Act (PRA). 6)Requires carriers, as part of large group rate review, to disclose the following information for covered drugs, including: a) generic drugs (except specialty generic drugs); b) brand name drugs (except specialty drugs); and, c) specialty drugs dispensed at a pharmacy, network pharmacy, or SB 1010 Page 3 mail order pharmacy for outpatient use: a) The percentage of the premium attributable to prescription drug costs for the prior year for each category of prescription drugs; b) The year-over-year increase, as a percentage, in total spending for each category of prescription drugs; c) The year-over-year increase in per member, per month costs for drug prices compared to other components of the health care premium; and, d) The specialty tier formulary list. 7)Requires the carrier to include the percentage of the premium attributable to prescription drugs administered in a doctor's office that are covered under the medical benefit as separate from the pharmacy benefit, if available. Prescription Drug Pricing for Purchasers 8)Applies to any manufacturer of a prescription drug that is purchased by or reimbursed by a state purchaser in California, as specified, a health plan, a health insurer, or PBM, as defined. 9)Requires a prescription drug manufacturer to provide notification to each state purchaser, health plan, health insurer, or PBM: a) If a brand name prescription drug manufacturer is increasing the wholesale acquisition cost (WAC) of a prescription drug by more than 10% or by more than $10,000 during any 12-month period; and, SB 1010 Page 4 b) For a generic prescription drug manufacturer with a generic drug of a WAC of $100 or more per month supply or if it is increasing the WAC of the generic prescription drug by more than 25% during a 12-month period. 10)Requires the price increase notification in 9) above to be provided in writing at least 60 days before the planned effective date of the increase. Requires a notice to be provided concurrently to the Chairs of the Senate Committee on Appropriations, the Senate Committee on Budget and Fiscal Review, the Assembly Committee on Appropriations, and the Assembly Committee on Budget. 11)Requires, within 30 days of the price increase notification in 9) above, the prescription drug manufacturer to report all of the following information to each state purchaser, health plan, health insurer, or PBM: a) A justification of the proposed price increase in which the manufacturer may limit the information in the justification to that which is publicly available; b) The previous year's marketing budget for the drug; c) The date and price of acquisition if the drug was not developed by the manufacturer; and, d) A schedule of price increases for the drug for the previous five years. 12)Requires a prescription drug manufacturer to notify in writing to each state purchaser, health plan, health insurer, or PBM if it is introducing a new prescription drug to market at a WAC of $10,000 or more annually or per course of treatment. Requires the notification to be provided in SB 1010 Page 5 writing within three days of the federal Food and Drug Administration (FDA) approval. Requires a notification to be provided concurrently to the Chairs of the Senate Committee on Appropriations, the Senate Committee on Budget and Fiscal Review, the Assembly Committee on Appropriations, and the Assembly Committee on Budget. a) Requires, within 30 days of the price notification of a new drug under 12) above, the prescription drug manufacturer to report all of the following information to each state purchaser, health plan, health insurer, or PBM: i) A justification for the introductory price in which the manufacturer may limit the information in the justification to that which is publicly available; ii) The expected marketing budget for the drug; and, iii) The date and price of acquisition if the drug was not developed by the manufacturer. b) States that failure to report required information pursuant to 11) and 12) above will result in a civil penalty of $1,000 per day for every day after the 30-day notification period. c) Requires the Legislature to conduct an annual public hearing on aggregate drugs in prescription drug pricing. Requires the hearing to provide for public discussion of overall price increases, emerging trends, decreases in drug spending, and the impact of prescription drug spending on health care affordability and premiums. Requires the Legislature, except for the hearing, to keep confidential SB 1010 Page 6 all of the information provided to the Legislature pursuant to this section and exempt from PRA. EXISTING LAW: 1)Establishes the DMHC to regulate health plans and the CDI to regulate health insurers. 2)Requires carriers to file specified rate information with DMHC or CDI, as applicable, for health plan contracts or health insurance policies in the individual or small group markets and in the large group market. 3)Requires, for large group health plan contracts and health insurance policies, carriers to file with DMHC or CDI the weighted average rate increase for all large group benefit designs during the 12-month period ending January 1 of the following calendar year, and to also disclose specified information for the aggregate rate information for the large group market. 4)Requires carriers, for the small group and individual markets, to file with DMHC and CDI, at least 60 days prior to implementing any rate change, specified rate information so that the DMHC and CDI can review the information for unreasonable rate increases. 5)Requires DMHC and CDI to accept and post to their Internet Websites any public comment on a rate increase submitted to the DMHC and CDI during the 60-day period. 6)Under federal law, requires drug manufacturers to obtain approval of new drugs from the FDA. 7)Establishes the Sherman Law, administered by the Department of Public Health (DPH), which, among other things, regulates the packaging, labeling, and advertising of drugs and medical SB 1010 Page 7 devices in California. 8)Prohibits, in the Sherman Law, the sale, delivery, or giving away of any new drug or new device unless it is either: a) A new drug, and a new drug application that has been approved by the FDA, pursuant to federal law, or it is a new device for which a premarket approval application has been approved, and that approval has not been withdrawn, terminated, or suspended under the FDA; or, b) A new drug or new device for which DPH has approved a new drug or device application, and has not withdrawn, terminated, or suspended that approval. 9)Requires DPH to adopt regulations to establish the application form and set the fee for licensure and renewal of a drug or device license. FISCAL EFFECT: According to the Senate Appropriations Committee: 1)One-time costs of $220,000 and ongoing costs of $250,000 per year for review of drug pricing information submitted by health plans and to report to the Legislature by DMHC (Managed Care Fund). These costs include contract costs to study the economic impact of drug prices on health care costs. 2)Likely ongoing costs in the low hundreds of thousands per year for review of drug pricing information submitted by health insurers and to report to the Legislature by CDI (Insurance Fund). 3)Unknown costs for enforcement of the reporting requirement on drug manufacturers by the Office of Statewide Health Planning SB 1010 Page 8 and Development (OSHPD) (California Health Data and Planning Fund). This bill places a requirement on drug manufacturers to report information on prices to state health care purchasers. This bill places this provision within the body of law overseen by the OSHPD. However, OSHPD indicates that this bill, as drafted, does not give the OSHPD legal authority to enforce this reporting requirement. COMMENTS: 1)PURPOSE OF THIS BILL. According to the author, the introduction of new and innovative drugs is vital to our health care system, but these often high-priced treatments come with a multitude of challenges. Drugs priced in excess of $10,000 are becoming common-place with little transparency for these astronomical price tags. This high-priced trend is a costly burden for patients, state programs, employers, and other payers, making it crucial that we understand what's behind the exploding prices. The public and policymakers need greater insight that will allow us to identify strategies to ensure prices do not threaten access to life-saving treatments. Additionally, data suggest that publically accessible price information in other sectors of the health care market encourage providers to offer more competitive pricing and thereby reduce excess health spending. Transparency-focused policies, like those implemented by the federal Patient Protection and Affordable Care Act, have led to rules requiring hospitals in California to provide information on pricing for common surgeries, health plans to submit detailed data regarding premium changes, and doctors to report more information to the federal government. But, drug makers have been granted an exception to this forward-thinking trend. This bill will bring prescription drugs in line with the rest of the health care sector by shedding light on those drugs that are having the greatest impact on our health care dollar. This change is absolutely necessary in an environment SB 1010 Page 9 where more than 900 drugs are sporting price-tags at or above $10,000 and new drugs with record-breaking prices are being released to address diseases that impact millions, including hundreds of thousands of patients in public programs like Medi-Cal. 2)BACKGROUND. a) The Rising Costs of Drugs. According to the Centers for Medicare and Medicaid Services (CMS), prescription drug spending increased 12.2% to $297.7 billion in 2014, faster than the 2.4% growth in 2013. A study published in Health Affairs in December 2015 found that drug spending is growing faster than other health care spending in the U.S. - increasing 12.2% between 2013 and 2014. A Kaiser Family Foundation (KFF) analysis of data from the CMS and Truven Health Analytics shows that while drugs account for 10% of U.S. health spending, it represents 19% of the cost of employer insurance benefits. Some speculate that this disparity exists because the $3 trillion in U.S. health spending is a broad catchall which includes hospital care, physician services, drugs, research, administrative costs, public health activities, and long-term care. Additionally, some of the people served by Medicare and Medicaid (whose spending is counted in the national totals) require many services not typically used by those covered by employer health plans. According to an analysis by the CEO of the KFF, even that 19% figure is understated because while it includes prescriptions that patients fill at pharmacies, it does not include many of the expensive drugs administered in physicians' offices or hospitals. In Medicare, for example, retail prescription drugs represent 13% of overall spending while drugs administered mainly by physicians add an additional 6%. According to the June 2016 California HealthCare Foundation's (CHCF) Issue Brief, in 2015, the total U.S. expenditure on prescription medicines was $425 billion, a 12.2% increase over 2014 total expenditure or an 8.5% increase when SB 1010 Page 10 adjusted for net expenditures. CHCF states that U.S. pharmaceutical prices are among the highest worldwide, and escalating costs have been a concern for many years, presenting challenges for federal, state, and private purchasers. CHCF reports California efforts to impact the drug pricing environment in Medi-Cal, proposed laws, Covered California, and the California Technology Assessment Forum (CTAF). CHCF states that the Department of Health Care Services (DHCS), administrator of the Medi-Cal program, reports the total savings from drug rebates, however, it cannot make public the individual rebates provided by manufacturers per federal and state law. While DHCS must make available nearly all FDA-approved drugs to its beneficiaries, its contract drug list helps direct providers to use more cost-effective alternatives by allowing them to forgo submission of Treatment Authorization Requests. Additionally, CHCF notes that Covered California, California's state based exchange, has drafted into contracts with its qualified health plans disclosure language about health plans' actions concerning drug assessments and pricing. This information is meant to set a baseline for future consideration of efforts to bring consistency, quality, and affordability to Covered California patients. According to the CHCF, CTAF is now under the auspices of the nonprofit Institute for Clinical and Economic Review (ICER) and uses the ICER Evidence Rating Matrix for rating Comparable Clinical Effectiveness, a multistep assessment for calculating the net health benefit for patients of new or existing drugs or other medical interventions. ICER then applies a method for assessing cost-effectiveness as well as an evaluation of the impact on state or national budgets. ICER recently received a five-year grant to expand its work on prescription drugs, and while these results do not carry the authority to set formulary or pricing limits, this process has been lauded by others working on the drug pricing issue. SB 1010 Page 11 b) Drug pricing. Federal regulations prohibit the U.S. government from setting the price of pharmaceuticals, and patents on drugs, in effect, prohibiting competition, at least initially. Countries without these restrictions generally buy drugs for a fraction of the U.S. price. Pharmaceutical companies argue that high drug prices are justified because of the enormous cost and risk associated with bringing a drug to market and that payment for current drugs fund future innovation. Developing a new drug costs an average of $1.2 billion and takes 10 to 15 years. When a new drug provides a cure for a disease, as opposed to only treating symptoms, drug companies claim that a high upfront cost is mitigated by not having to treat symptoms indefinitely. However, critics point to numerous examples of drug companies charging high prices for drugs with only marginal improvements over cheaper alternatives, or astounding increases in pricing for drugs that have been on the market for years. c) Price Benchmarks. Knowing how much a drug costs is difficult; there are many different prices for each drug and different ways of expressing those prices. In the U.S., the two most common ways of stating drug prices are the WAC and average wholesale price (AWP). Neither one, though, is the actual price paid by a payer. Rather, they are standardized ways of expressing a price, thus allowing comparisons to be made from one drug to another. AWP is a benchmark that has been used for over 40 years for pricing and reimbursement of prescription drugs for both government and private payers. Initially, the AWP was intended to represent the average price that wholesalers used to sell medications to providers, such as physicians, pharmacies, and other customers. However, the AWP is not a true representation of actual market prices for either generic or brand drug products. AWP has often been compared to the "list price" or "sticker price," meaning it is an elevated SB 1010 Page 12 drug price that is rarely what is actually paid. AWP is not a government-regulated figure, does not include buyer volume discounts or rebates often involved in prescription drug sales. As such, the AWP, while used throughout the industry, can be a controversial pricing benchmark. The WAC price of a drug on the market, as originally announced by the company is also rarely the price paid by a payer. The actual price paid by any one payer is proprietary information, complicating discussions of value and cost to consumers. Drug companies negotiate with payers - Medicare, Medicaid, carriers, and PBMs - to set an initial gross sales price. Drug manufacturers pay rebates back to government entities, creating a difference between gross sales for a drug and net sales. The rebates are not publicly available, and vary highly among payers and for different drugs. Estimates put them between 2% for innovative new drugs all the way to 60% for drugs that have several competitors or generics on the market. The Medicaid Drug Rebate Program ensures that Medicaid receives a net price lower than the "best price" paid to manufacturers by any private-sector purchaser for a particular drug. This "best price" amount is used to calculate the federal Medicaid basic rebate required of manufacturers. In exchange, state Medicaid programs must generally cover a participating manufacturer's drugs. In addition to the federal basis rebate, states may also receive supplemental rebates for drugs placed on their Medicaid preferred drug list. Private purchasers are precluded from negotiating a price that is lower than the Medicaid "best price," which includes all rebates, discounts, or other adjustments. According to DHCS, drug manufacturers are required to pay a Medi-Cal rebate for all outpatient drugs that are dispensed and paid for by the Medi-Cal program. In addition, some manufacturers have agreed to pay supplemental Medi-Cal rebates above the SB 1010 Page 13 standard rebate. Federal law requires rebates for prescriptions offered through the AIDS Drug Assistance Program (ADAP), in part because of the high cost of HIV/AIDS medications. According to the KFF, drug manufacturer rebates account for 40% of the annual ADAP budget. d) Impact on state finances. Medi-Cal provides health care coverage for nearly one-third of Californians. Combined with the California Public Employees' Retirement System (CalPERS), ADAP, state hospitals, and corrections, taxpayer liability for increasing drug costs is significant. According to a December 2015 report published by the U.S. Senate Committee on Finance, Medi-Cal's fee-for-service (FFS) system alone spent nearly $25 million treating roughly 340 patients with Sovaldi and Harvoni in 2014. However, Medi-Cal FFS is only a fraction of the Medi-Cal population. According to DHCS, private health plans invoiced the state an additional $387.5 million for Sovaldi and Harvoni treatments for Medi-Cal managed care enrollees between July 2014 and November 2015 (for 3,624 patients). Additionally, as a direct result of Sovaldi and Harvoni pricing, the 2015-16 California State Budget allocated $228 million just for high cost drugs to DHCS and the California Department of Corrections and Rehabilitation. In December 2015, it was reported that CalPERS spent $438 million on specialty drugs, an increase of 32% from the previous year. This represents one quarter of the total drug costs paid by CalPERS, while only 1% of the prescriptions filled. 3)STATE INITIATIVE. The California Drug Price Relief Act Initiative (Initiative) prohibits the State of California or any state entity from entering into any agreement with a drug manufacturer for the purchase of a prescribed drug unless the net cost of the drug is the same as or less than the lowest price paid for the same drug by the U.S. Department of Veterans Affairs. The Initiative may be on the California ballot this Fall. SB 1010 Page 14 4)SUPPORT. California Labor Federation, AFL-CIO (CLF), a cosponsor of this bill, states this bill requires transparency from pharmaceutical companies and from health plans and insurers that purchase prescription drugs for consumers. CLF writes that this two-prong approach will push purchasers to negotiate for better prices and will give policy makers better data on price increases that impact consumers, employers, and taxpayers. Health Access California, a cosponsor of this bill, states that notice and disclosure are important tools to provide transparency in health care and there is a strong public policy interest to get basic information on prescription drug prices. AARP believes that increased transparency in the marketplace will empower consumers and could provide much-needed clarity and a better understanding of the pharmaceutical industry's pricing methods. The California Teamsters Public Affairs Council (Teamsters) states that prescription drug costs for outpatient drugs are almost 20% of the premium dollar so these price increases are directly driving increases in health care costs for their trust funds. The Teamsters state that this bill provides transparency of prescription drug costs by giving notice to public and private purchasers, including the PBMs, such as those their trust funds use to manage the pharmacy benefit. Anthem Blue Cross states that there needs to be accountability on all stakeholders in the industry to ensure drugs are priced appropriately. Molina Healthcare of California notes that by focusing on high priced medication and price increases, this bill would take a step toward more understanding of the drugs driving the rapid escalation in costs, and whether price increases are justified. 5)OPPOSITION. The Pharmaceutical Research and Manufacturers of America (PhRMA) contends that the 60 day notice requirement of a price increase on an existing drug will lead to stockpiling and will put patient access to medicine at risk. PhRMA also states that this bill does not present a complete picture of drug costs since there is no provision to disclose - even in the aggregate - the significant discounts and rebates SB 1010 Page 15 pharmaceutical manufacturers agree to for both public and private purchasers nor is there any reporting attributable to the downstream savings from health care cost avoidance. Additionally, PhRMA notes that branded drug manufacturers and generic manufacturers are not treated equally under this bill due to the different reporting percentage. According to PhRMA, nearly 90% of all drugs dispensed are generic. Finally, PhRMA contends that PBMs have been added as recipients of drug manufacturers' information; however, this bill does not require PBMs to disclose discounts and whether they are passing those discounts to patients and payers. The Biotechnology Innovation Organization (BIO) contends that this bill does not address the value that an innovative therapy can have to an individual patient, especially one who may have no other recourse. Additionally, BIO notes that this bill requires manufacturers to publicly report a compilation of individual proprietary data points on the costs to market an innovative therapy when certain criteria is triggered. 6)RELATED LEGISLATION. a) AB 2436 (Roger Hernández) of 2016 would have required carriers to provide at the time that a prescription drug is delivered or within 30 days of purchase, specified information related to the cost of the prescription drug. AB 2436 died on the Assembly Floor. b) AB 2711 (Chiu) of 2016 would have reinstated a previously repealed requirement for the Department of General Services to report to the Legislature on its prescription drug bulk purchasing program. AB 2711 was held on the Assembly Appropriations Committee suspense file. c) AB 463 (Chiu) of 2015 would have required pharmaceutical companies to file an annual report with OSHPD containing specified information regarding the development and pricing of prescription drugs. The Assembly Health Committee SB 1010 Page 16 hearing was canceled at the request of the author. d) AB 339 (Gordon), Chapter 619, Statutes of 2015, requires carriers that provide coverage for outpatient prescription drugs to have formularies that do not discourage the enrollment of individuals with health conditions, and requires combination antiretroviral drug treatment coverage of a single-tablet that is as effective as a multitablet regimen for treatment of HIV/AIDS, as specified. AB 339 places in state law, federal requirements related to pharmacy and therapeutics committees, access to in-network retail pharmacies, standardized formulary requirements, formulary tier requirements similar to those required of health plans and insurers participating in Covered California and copayment caps of $250 and $500 for a supply of up to 30 days for an individual prescription, as specified. 7)PREVIOUS LEGISLATION. SB 1052 (Torres), Chapter 575, Statutes of 2014, requires health plans and insurers to use a standard drug formulary template to display their drug formularies and to post their formularies on their Internet Websites and requires Covered California to provide links to the formularies. REGISTERED SUPPORT / OPPOSITION: Support California Labor Federation, AFL-CIO (cosponsor) Health Access California (cosponsor) AIDS Healthcare Foundation SB 1010 Page 17 AARP America's Health Insurance Plans Anthem Blue Cross Association of California Life and Health Insurance Companies Association of California State Supervisors Blue Shield of California California Alliance for Retired Americans California Association of Health Plans California Conference Board of the Amalgamated Transit Union California Conference of Machinists California Medical Association California Nurses Association California Optometric Association SB 1010 Page 18 California Pan-Ethnic Health Network California Pharmacists Association California Professional Firefighters California School Employees Association, AFL-CIO California State Council of Service Employees International Union California State Retirees California Teachers Association California Teamsters Public Affairs Council CalPERS CALPIRG Carson Chamber of Commerce Central Labor Council of Contra Costa County SB 1010 Page 19 Cigna Congress of California Seniors Consumers Union Courage Campaign Engineers and Scientists of California, IFPTE Local 20, AFL-CIO Fresno Chamber of Commerce Greater Riverside Chamber of Commerce Hunger Action Los Angeles Industry Manufactures Council International Longshore and Warehouse Union Kaiser Permanente Kaiser Permanente Marin Sonoma Area League of California Cities SB 1010 Page 20 LIUNA Locals 777 & 792 Los Angeles Area Chamber of Commerce Molina Healthcare of California National Multiple Sclerosis Society - CA Action Network North Bay Labor Council, AFL-CIO Oakland Metropolitan Chamber of Commerce Ontario Chamber of Commerce Pacific Business Group on Health Pharmaceutical Care Management Association Professional and Technical Engineers, IFPTE Local 21, AFL-CIO Project Inform Redondo Chamber of Commerce Sacramento Metropolitan Chamber of Commerce SB 1010 Page 21 San Jose Silicon Valley Chamber of Commerce San Mateo County Central Labor Council San Ramon Chamber of Commerce School Employers Association of California Silicon Valley Employers Forum Small Business Majority Small School Districts Association South Bay Association of Chambers of Commerce State Building and Construction Trades Council United Nurses Association of California/Union of Health Care Professionals UNITE-HERE, AFL-CIO Utility Workers Union of America Valley Industry and Commerce Association Opposition SB 1010 Page 22 Biocom Biotechnology Innovation Organization California Life Sciences Association California Hepatitis C Task Force California Manufacturers and Technology Association (previous version) California Senior Advocates League California Taxpayers Association (previous version) Citizens Against Government Waste Council on State Taxation (previous version) Generic Pharmaceutical Association Lupus Foundation of Southern California Mylan Inc. Pharmaceutical Research and Manufacturers of America SB 1010 Page 23 Analysis Prepared by:Kristene Mapile / HEALTH / (916) 319-2097