BILL ANALYSIS                                                                                                                                                                                                    Ó



          SENATE COMMITTEE ON
          BUSINESS, PROFESSIONS AND ECONOMIC DEVELOPMENT
                              Senator Jerry Hill, Chair
                                2015 - 2016  Regular 

          Bill No:            SB 1454         Hearing Date:    April 18,  
          2016
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          |Author:   |Stone                                                 |
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          |Version:  |March 31, 2016                                        |
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          |Urgency:  |No                     |Fiscal:    |No               |
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          |Consultant|Sarah Huchel                                          |
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                                 Subject:  Pharmacy


          SUMMARY:  Prohibits a pharmacy benefits manager (PBM) from requiring  
          reimbursement from pharmacists or pharmacies for certain  
          payments, as specified; authorizes reimbursement to a pharmacy  
          or pharmacist for prior year payments; and prohibits any future  
          contract provisions that conflict with this bill. 

          Existing law:
          
          1) Defines a "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 BPM, 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.  (Business and Professions Code (BPC) §  4430)

          2) Defines a "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,  







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             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.  (BPC § 4430)

          3) Specifies terms under which an entity may be compensated for  
             an audit.  
          (BPC § 4433)  

          4) Establishes requirements for an audit, including prior  
             notification, delegation of clinical judgment, appropriate  
             evidence, appeals procedures, and reimbursement parameters.   
             (BPC §§ 4434 - 4440)

          

          This bill:

          1) Defines "improper reimbursement" to means a PBM has requested  
             and received reimbursement from a pharmacist or pharmacy in  
             its network for the cost of a drug dispensed to a patient  
             that was previously authorized and properly adjudicated, as  
             specified.

          2) Defines a "PBM" as an entity that performs pharmacy benefits  
             management.

          3) Defines "pharmacy benefits management" to mean the  
             administration or management of prescription drug benefits,  
             including, but not limited to, the procurement of  
             prescription drugs at a negotiated rate for dispensation  
             within this state, the processing of prescription drug  
             claims, and the administration of payments related to  
             prescription drug claims.

          4) Defines "properly adjudicated" to mean that the pharmacist or  
             pharmacy was explicitly authorized by the PBM to dispense a  
             drug to a patient through its network, and the pharmacist or  
             pharmacy was entitled to the payment that was provided, at  
             that point in time, by the PBM, pursuant to that  
             authorization.








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          5) Prohibits, regardless of existing law, a PBM from requiring  
             that a pharmacist or pharmacy provide reimbursement to the  
             PBM for the cost of any drug dispensed to a patient that was  
             properly adjudicated, except upon a showing of fraud or  
             malfeasance.

          6) Prohibits a contract entered into on or after January 1,  
             2017, between a PBM and a pharmacist or pharmacy, from  
             including a provision that conflicts with the prohibition set  
             forth in Item # 5), above.

          7) Requires, regardless of existing law, a PBM to refund any  
             improper reimbursements received between January 1, 2012 and  
             January 1, 2017.  

          
          FISCAL  
          EFFECT:  This bill is keyed "nonfiscal" by the Legislative  
          Counsel. 

          
          COMMENTS:
          
          1.Purpose.  This bill is sponsored by the Author.  According to  
            the Author's office, "Currently, there is an audit system in  
            place between pharmacists and PBMs for certain types of  
            issues, ranging from clerical oversight to fraud and abuse.   
            Senator Stone does not believe that the audit system takes  
            into account situations where a pharmacist has dispensed a  
            drug that has been properly adjudicated through an online  
            process with a PBM.  SB 1454 would give pharmacists a far more  
            fair playing field with PBMs by stating that it would prohibit  
            a PBM from requiring that a pharmacist provide reimbursement  
            to the PBM for the cost of any drug dispensed to a patient  
            that was properly adjudicated, except upon a showing of fraud  
            or malfeasance." 

          2.Regulation of PBMs. PBMs are third-party administrators of  
            prescription drug programs.  PBMs work on behalf of payors to  
            control prescription drug costs by various means, including  
            managing formularies, processing authorizations and payments,  
            negotiating prices with drug manufacturers, and contracting  
            with pharmacies and pharmacists.  








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             While various federal laws govern PBM actions generally, such  
             as Medicare and Medicaid fraud and abuse statutes and  
             anti-kickback rules, there is no single federal entity  
             responsible for regulating the business as a whole.  State  
             regulation varies; some states do not regulate PBMs at all,  
             others broadly (Iowa requires that PBMs "shall perform the  
             pharmacy benefits manager's duties exercising good faith and  
             fair dealing in the performance of its contractual  
             obligations," Iowa Code Ann. § 510B.4), and others, such as  
             California, specify terms only for certain business  
             practices.      

          3.PBM audits.  Payments from PBMs to pharmacies are determined  
            by contract, and audits are standard industry practice to  
            validate data entry and documentation to ensure pharmacies are  
            meeting regulatory and contractual requirements.  While a  
            pharmacist may get immediate authority from a PBM at the point  
            of sale for dispensing a drug (the term for this first  
            approval is "adjudication"), the typical process for  
            finalizing payments includes an audit and an appeals process.   
            One major PBM states in its standard contract that,  "All  
            claims are subject to audit regardless of whether or not a  
            claim successfully adjudicates, and PBM reserves the right to  
            review (i.e., audit) any claim."   

             PBMs perform automated concurrent reviews of drugs furnished,  
             less formal "desk audits," and the more formal audits covered  
             by California law.  California law requires that pharmacies  
             get prior written notice, establishes time periods for the  
             audit, sets reporting requirements, provides for an appeals  
             process, and states that reimbursements may not be compelled  
             until after the appeals process is completed.  
          
          4.Prior Legislation.   SB 1195  (Price, Chapter 705, Statutes of  
            2012) required 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 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  








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            audits, standards for submission of preliminary and final  
            reports, validation of claims and orders, and requirements for  
            audit appeals.  

          5.Arguments in Opposition.   CVS Health  ,  Express Scripts  , and the  
             Pharmaceutical Care Management Association  write, "The  
            auditing of payments to pharmacies is common both in public  
            and private pharmaceutical benefit programs to combat fraud,  
            waste and abuse.  These audits have uncovered tens of millions  
            of dollars in waste, fraud and abuse.  SB 1454 will  
            effectively destroy the value of audits.  More troubling, it  
            will require PBM clients to repay tens of millions back to  
            pharmacists for valid recoupments since 2012.  

             "As a practical matter, this bill will prevent PBM's from  
             recouping incorrect, but not fraudulent payments- a process  
             that in 2015 resulted in $98 million in savings in drug costs  
             for the clients of one PBM alone.

             "As the result of annual audits of all Medi-Cal providers,  
             the California Department of Health Care Services estimates  
             that there are payment errors 6.05% of the time at a cost of  
             $1.25 billion a year. Non-fraud payments account for over  
             half of those errors -- 3.77% of the payments for an  
             estimated cost of $780 million a year.  For the same reason,  
             clients demand that PBMs audit their payments to pharmacies  
             and seek recoupment of payment errors.  

             "Each year PBMs combined, process billions of pharmacy  
             claims.  Government and Commercial payors require, by  
             contract, that their PBM will have oversight and quality  
             assurance checks of claims adjudicating in the pharmacy  
             network.  Not surprisingly, some errors are missed.   
             After-the-fact audits are used to uncover those errors.  Here  
             are just two examples of non-fraud errors:

                       A pharmacy dispenses and is paid, the patient  
                  fails to pick up the prescription and then the pharmacy  
                  fails to reverse the billing.  The rate of primary  
                  non-adherence, that is, the percentage of first-time  
                  prescriptions abandoned by patients (and thus not picked  
                  up at pharmacies), can range as high as 30 percent among  
                  some classes of medication, according to recent  
                  research.








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                       A pharmacy dispenses a drug that is available  
                  over-the-counter at a cost much higher than available on  
                  the shelves.  
          
             "The author's office argues that it is simply not fair to  
             pharmacists to force them to pay back to the PBM for drugs  
             that they have already provided to a patient.  But this is  
             not a new issue.  Under legislation, sponsored by the  
             California Pharmacists Association, passed just four years  
             ago (  SB 1195  , Price), the auditing of payments to pharmacists  
             is strictly regulated.  Among other things, the bill creates  
             an appeals process to allow pharmacists to make the case that  
             the recoupment is unfair.  In fact, the law specifically  
             deals with the issue by not allowing a recoupment until the  
             appeal process had been completed:

                  B&P Sec 4438 (c) 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. 

          "For these reasons, the above referenced entities respectfully  
          urge a NO vote on SB 1454."   

           1.Policy Issues  .  This bill invalidates the audit process by  
            stating that payments are final at the point in which a claim  
            is initially approved, except in the case of fraud or  
            malfeasance.  "Malfeasance" is not defined and other  
            definitions in this bill conflict with existing definitions of  
            the same terms.  

             Although the Author states that this bill will present  
             pharmacists with "a far more fair playing field," there is no  
             indication of how the current audit process fails  
             pharmacists.  This bill could potentially impede countless  
             contracts with PBMs and nullify existing law absent evidence  
             of any specific harm caused by the current statutory scheme. 









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          SUPPORT AND OPPOSITION:
          
           Support:   None on file as of April 12, 2016. 

           Opposition:  

          CVS Health
          Express Scripts
          Pharmaceutical Care Management Association 



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