BILL ANALYSIS
AB 1960
Page 1
Date of Hearing: April 20, 2004
ASSEMBLY COMMITTEE ON BUSINESS AND PROFESSIONS
Lou Correa, Chair
AB 1960 (Pavley) - As Amended: April 15, 2004
SUBJECT : Pharmacy benefits management.
SUMMARY : Requires pharmacy benefit managers (PBMs) to make
various disclosures to purchasers and the public. Requires PBM
contracts to include specified provisions. Prohibits PBMs from
limiting or excluding specified drug coverage. Specifically,
this bill :
1)Requires PBMs to register with the Board of Pharmacy (Board).
Requires the annual registration application for PBMs to
include, but not be limited to, the name, address and contact
information for the PBM and the number of individuals in
California who receive services from the PBM. Also requires
an applicant to submit the documents required by the Board and
authorizes the Board to set a fee for registration.
2)Requires a PBM to disclose, in writing and within 30 days of
the request, to a purchaser or prospective purchaser the
following:
a) The aggregate amount, and for a specified list of drugs,
the specific amount, of all rebates and other retrospective
utilization discounts received (either directly or
indirectly), from each pharmaceutical manager or labeler
that are earned in connection with prescription drugs
managed by the PBM related to the purchaser or prospective
purchaser.
b) The nature, type and amount of all other revenue
received by the PBM from each pharmaceutical manager or
labeler related to the purchaser or prospective purchaser.
c) Any prescription drug utilization information specific
to the purchaser's enrollees or aggregate utilization data
that is not specific to an individual consumer, prescriber
or purchaser.
d) Records developed by the pharmacy and therapeutic (P&T)
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committee, or others responsible for developing formularies
that fully describe the reasoning behind formulary
decisions.
e) Any arrangements with prescribing providers or other
outside entities that are associated with activities of the
PBM to encourage formulary compliance.
3)Provides that, except for utilization information, a PBM is
not required to make the specified disclosures until the
purchaser or prospective purchaser has signed a
confidentiality agreement.
4)Prohibits a PBM from executing a contract that fails to
address specific items.
5)Requires a PBM to disclose to the public, upon request, a copy
of the most current list of drugs on the formulary by major
therapeutic category and the membership of any P&T committee,
including the credentials of the members and any direct or
indirect financial relationships between members and drug
manufacturers.
6)Prohibits a PBM from limiting or excluding coverage for a drug
for an enrollee if the drug previously had been approved for
coverage by the PBM for a medical condition of the individual
consumer and the provider continues to prescribe the drug for
the medical condition, provided that the drug is appropriately
prescribed and is considered safe and effective for treating
the consumer's medical condition, except that this prohibition
does not prohibit generic drug substitutions.
7)Requires a PBM to maintain an expeditious process for
providers to obtain authorization for medically necessary
nonformulary prescription drugs and, on request, to publicly
disclose that process.
8)States that nonformulary prescription drugs include any drug
for which an individual's copayment or out-of-pocket costs are
different than the copayment for a formulary prescription
drug, except as otherwise provided by law or regulation.
9)Defines "pharmacy benefits manager" for purposes of this bill,
but exempts from this definition a health care service plan or
health insurer if they offer or provide PBM services only to
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enrollees or subscribers covered by health benefits provided
by that plan or insurer. Further exempts from this definition
an affiliate, subsidiary or other related entity of a health
care service plan or health insurer that would otherwise
qualify as a PBM, so long as the services are only offered to
enrollees, subscribers or those insured by that plan or
insurer.
10)Defines for purposes of this bill the following terms:
"labeler," "purchaser," and "pharmacy benefits management."
EXISTING LAW :
1)Requires every health plan that provides prescription drug
benefits and maintains one or more drug formularies to provide
to members of the public, on request, a copy of the most
current list of prescription drugs on the formulary, noting
whether any drugs on the list are preferred over other listed
drugs. Also requires the health plan to state that a choice
of formulary lists is available if the health plan maintains
more than one formulary.
2)Prohibits a health plan that provides prescription drug
coverage from limiting or excluding coverage for a drug for an
enrollee if the drug previously had been approved for coverage
by the health plan for a medical condition of the individual
consumer and the provider continues to prescribe the drug for
the medical condition, provided that the drug is appropriately
prescribed and is considered safe and effective for treating
the consumer's medical condition, except that this prohibition
does not prohibit generic drug substitutions.
3)Requires health plans that provide prescription drug coverage
to maintain an expeditious process by which providers may
obtain authorization for a medically necessary nonformulary
prescription drug.
FISCAL EFFECT : Unknown
COMMENTS :
PURPOSE OF THIS BILL . According to the author, this bill is
needed to create consumer protection guidelines that PBMs must
meet when doing business with California clients such as
CalPERS, large employers, health plans, and union trust funds.
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The author notes that under this bill PBMs will have to provide
the kind of information that health plans have been disclosing
for years about such matters as formulary development and name
brand and generic drug switching. The author believes that
creating a more transparent market will shine a light on an
industry that discloses an inadequate amount of pricing and
conflict of interest information and will enable clients to make
informed decisions about the type of prescriptions and benefits
they select on behalf of their enrollees. According to the
author, this will allow clients to take full advantage of the
free market by incentivizing PBMs to compete in a fair,
transparent environment for California business.
Since the late 1990s, Californians and American consumers have
seen prescription drug prices increase by about 15% annually,
and between 1998 and 2002, CalPERS prescription drug
expenditures increased by 42% ($227 million increase). There is
no question that prescription drug prices are increasing at an
alarming rate, which affects individual consumers as well as
state and local governments. The author's office and sponsors
believe that this bill will help to address the issue of rising
prescription drug prices.
BACKGROUND . PBMs are independent specialty administrators; they
focus on administering pharmacy benefits, and managing the
purchasing, dispensing, and reimbursing of prescription drugs.
According to the California Healthcare Foundation, about 45% of
the U.S. population has pharmacy coverage provided directly by a
PBM. PBMs offer health plans a variety of services including
negotiating price discounts with retail pharmacies, negotiating
rebates with manufacturers, and operating mail-order
prescription services and administrative claims processing
systems. PBMs also provide health plans with clinical services
such as formulary development and management, prior
authorization and drug utilization reviews to screen
prescriptions for such issues as adverse interactions or therapy
duplication, and substitution of generic drugs for
therapeutically equivalent brand-name drugs. In order to
provide these services, PBMs operate with multiple stakeholders
in a complex set of relationships involving health plans,
enrollees, pharmacies, and pharmaceutical manufacturers.
GAO REPORT ON PBMs . In January 2003, the federal General
Accounting Office examined how PBMs participating in the federal
employees health program affect health plans, enrollees, and
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pharmacies. GAO's findings were generally positive. The PBMs
produced savings for health plans by obtaining drug price
discounts from retail pharmacies and dispensing drugs at lower
costs through mail-order pharmacies, passing on certain
manufacturer rebates to the plans, and operating drug
utilization control programs. GAO found the average price PBMs
obtained from retail pharmacies for 14 brand name drugs was
about 18 percent below the average price paid by customers
without third-party coverage. Enrollees had wide access to
retail pharmacies, coverage of most drugs, and benefited from
cost savings generated by the PBMs. Pharmacy associations
reported that PBMs' large market share leave some retail
pharmacies with little leverage in negotiating with PBMs. In
written responses to the report, one pharmacy association
complained that the report did not address more broadly the
economic relationships that exist in the PBM industry.
COMPETITIVE CONCERNS AND PRICE TRANSPARENCY IN THE PBM MARKET .
In a September 2003 Food and Drug Law Institute Update, David
Balto, formerly Director of Policy with the Bureau of
Competition at the Federal Trade Commission, discussed concerns
about the lack of transparency in the PBM industry. Balto
stated that secret rebates could lead to discrimination that
ultimately may harm purchasers and consumers. Secret rebates
may encourage a PBM to choose a higher priced drug with a higher
rebate, instead of a lower priced drug, resulting in higher
costs to consumers. Balto noted that the PBM market is highly
concentrated with the four largest firms holding a combined 80%
market share (now just three firms because one was bought out by
another firm). Substantial costs have prevented any successful
entry into the PBM market for some time and the cost to plan
clients of switching PBMs deters such switching. Balto reports
that a group of 21 state attorneys general is investigating
anti-competitive conduct by the major PBMs. In California, the
American Federation of State, County and Municipal Employees
sued the nation's four largest PBMs alleging they violated
California's unfair competition law.
OTHER STATES . According to the author, a number of other state
Legislatures are considering bills that would require
disclosures of conflicts of interest and financial relationships
between PBMs and drug manufacturers. In June 2003, Maine
enacted the Unfair Prescription Drug Practices Act (UPDPA) which
requires PBMs to provide to plan clients all requested financial
and utilization information related to providing benefits and
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services to the covered entity and its enrollees. In September
2003, the Pharmaceutical Care Management Association (PCMA), a
PBM trade association, sought injunctive relief in the federal
district court. On March 4, 2004, the court issued a
preliminary injunction prohibiting Maine, at least temporarily,
from enforcing UPDPA. The court's holding was based on the
likelihood that PCMA would succeed in showing that UPDPA was in
violation of the law and and was preempted by ERISA. Although
the court's decision prevents Maine from enforcing their
legislation at this time, it is only a preliminary decision and
it could be many months before a final decision is reached based
on all of the merits of the case.
CALIFORNIA BOARD OF PHARMACY PBM TASK FORCE . In 2003 the Board
of Pharmacy established a task force to determine if there was a
need for the Board to license PBMs. The task force and Board
determined that there was no identifiable harm to consumers that
licensure by the Board of Pharmacy would remedy. They found
that the areas of greatest potential concern, as expressed by
participants, were related to the business and contractual
relationships between PBMs and their clients (health plans,
employers, trust funds, etc.) that would be best resolved by
those parties in their negotiations.
SUPPORT . The author's office states that there are two main
deficiencies in current law, one being a drug industry with a
lack of objective prescription drug pricing information that
creates an incentive system that can cause PBMs to favor the
interests of pharmaceutical companies over clients (such as
CalPERS, union trust funds, employers and health plans). The
other deficiency identified by the author is the lack of
consumer/client protection law regarding disclosure as it
related to PBMs and why PBMs are not held to the same protection
standards as HMOs.
Supporters argue that in the absence of regulation, it is
unclear whose interest PBMs represent. They point out that some
PBMs already provide full disclosure to clients and are able to
maintain competitive prices without drastic increases in drug
prices and while securing rebates from manufacturers. This bill
would reduce certain barriers to entry that are common in the
PBM industry.
Three major PBMs control about 80% of the market consisting of
over 200 million Americans. Supporters believe that significant
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costs have prevented any successful entry into the PBM market
for quite some time and that high costs to switch PBMs creates
obstacles for clients to change PBMs. A lack of transparency
about the compensation PBMs receive from pharmaceutical
manufacturers prevents plan sponsors from effectively securing
the lowest prices. Some believe that the current environment
for PBMs allows them to act "opportunistically-easily increasing
prices or decreasing services."
The author's office states that "Much of the concern over PBMs
focuses on whether the rebates and other payments received from
pharmaceutical manufacturers are passed on to plan sponsors in
lower prices; PBMs consistently decline to provide systematic
and complete payment information to their plan sponsors."
"Disclosures and price transparency enable buyers to determine
whether they are receiving the full benefit of the price
concessions received by PBMs from manufacturers. Armed with
information about rebates, buyers such as Medicare can more
effectively encourage PBMs to compete." "Price and service
transparency is a cornerstone to competition because when it
exists, purchasers can make fully informed choices."
Because P&T Committees, which are made up of industry experts,
ultimately decide which drugs are on a formulary, this bill
would require disclosure of who sits on these committees, their
credentials, and any financial (either direct or indirect)
connections they may have with drug companies or manufacturers.
Supporters believe that such disclosure will prevent certain
drugs from being placed on formularies for reasons other than
that they are truly the best choice.
The sponsors state, "At a time when the state is facing a budget
shortfall entailing cuts to social service and education
programs and prescription drug rates are rising at an alarming
rate affecting individual consumers as well as state and local
governments, it's imperative that we empower purchasers with
information they need to get a fair deal on prescription drugs."
Essentially, the author, sponsors, and supporters believe that
price transparency will lead to lower prices and increased
competition and will prevent discrimination in pricing and
contracts. This bill does not set price caps, but provides
tangible reform that attempts to ensure an even playing field
for PBMs, drug manufacturers, clients and consumers.
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OPPOSITION . Opponents argue that there is no need for this bill
and that it will significantly harm the ability of PBMs to seek
the lowest price for drugs. Opponents believe that providing
information to negotiators and competitors impairs the natural
forces of competition that protect consumers. Opponents claim
that drug manufacturers almost surely will not agree to
substantial discounts from "list" prices if they know that
information may be publicly available to other purchasers and
their competitors.
Opponents point out that, for two years, the Board considered
regulating PBMs, deciding in the end that consumers would not
benefit from regulation. Any type of regulation of an industry
should only be undertaken when there is clear evidence of the
need for government intervention. This bill not only requires
PBMs to register with the Board, but as Medco points out,
potentially provides the Board with "unfettered access to
'documents' which could include private contracts, confidential
and proprietary contracts between PBMs and manufacturers and
more."
The Board's staff analysis of this bill (the Board has no
official position yet) points out that "there is no clear
objective for the registration process," and that "[w]ithout a
specific purpose for the licensing program, it would be
difficult for the board to develop the grounds for denial. The
proposal is also incomplete in that it does not provide for the
expiration and/or renewal of a PBM registration."
There is fear that this bill could actually have the opposite
effect than it intends and, in fact, increase the prices of
prescription drugs, which would ultimately further harm the
consumer. If rebates and discounts are required to be
disclosed, manufacturers will not offer their best discounts to
any customer because they would then be pressured to give
similar price concessions to everyone. The Congressional Budget
Office (CBO) and other entities have suggested that transparency
and disclosure requirements will actually lead to higher prices
on prescription drugs. CBO has suggested that transparency
provisions at the federal level would cause prescription drug
prices to increase by over $40 billion, because PBMs "would find
it more difficult to obtain significant price concessions and
rebates from drug manufacturers, who would be concerned that the
terms of the favored deals could be determined by competitors or
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other purchasers." Economists that have studied this issue also
believe that PBM disclosure will increase drug costs and
short-circuit competition.
Blue Cross of California also believes that this bill will
increase prescription drug prices, stating: "Specifically, PBMs
require drug manufacturers to compete for preferred drug status
through negotiations. No manufacturer knows what pricing
concessions other manufacturers in that class may be offering a
PBM. As a result, manufacturers offer larger rebates to reduce
their net price in order to prevent being underbid by
competitors. Such rebates help PBM achieve savings for
enrollees. If manufacturers knew how much each company was
giving as rebates, then there would be little incentive to
provide larger rebates to a PBM."
Opponents are also adamantly opposed to this bill's provision
requiring disclosure of the names of the P&T committees. These
committees are composed of physicians and pharmacists and
"consider only the clinical safety and efficacy of the drugs -
not the financial implications of adding a drug to a formulary."
Opponents believe that disclosing the names of these members to
the public would open them up to intense lobbying by drug
manufacturers and others seeking to add or replace drugs on the
formulary. Opponents believe that "disclosure of the names of
the P&T Committee serves no purpose and will only serve to
destroy the integrity of the P&T process."
Opponents also believe that PBM registration and regulation is
duplicative and unnecessary. According to a myriad of
information provided to this Committee, PBMs are already
regulated in many ways, ranging from licensing as pharmacies,
third party administrators, preferred provider organizations,
and/or utilization review organizations. They are also subject
to comprehensive state and federal rules that govern every
aspect of their activities, including Department of Labor rules
on claim appeals, state and federal anti-kickback laws, and
HIPAA and other privacy laws that ensure strict privacy and
protection of medical records.
This bill also may set dangerous precedents. First, it would
require the disclosure of details regarding confidential
business negotiations and transactions; such disclosure is
hostile to a free market economy. Second, it may lead to
increased litigation if any of this confidential information is
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leaked. Opponents have stated that there may be an increased
threat of 17200 lawsuits and private rights of action if the
actions of PBMs and the identities of P&T committees are
disclosed.
UNDEFINED "DOCUMENTS" CREATES BLANK CHECK . On page 4, line 3,
this bill requires a PBM applicant for registration with the
Board of Pharmacy to "submit the documents that the board
requires." There is no definition of the "documents" that could
be required. This could be construed to allow the Board to
request any number of confidential documents, thereby
compromising the integrity of a PBM's negotiations and
contracts. In addition, it is not clear if the Board is even
equipped to handle such documents, as they do not have attorneys
on staff to address such confidentiality issues.
REGISTERED SUPPORT / OPPOSITION :
Support
California Labor Federation (sponsor)
California Alliance for Retired Americans (sponsor)
AARP
AIDS Healthcare Foundation
American Federation of State, County and Municipal Employees
(AFSCME) (prior version)
Butcher's Union Local 120 (prior version)
California Public Employees Retirement System (prior version)
California Public Interest Research Group
California School Employees Association (prior version)
California Seniors Coalition (prior version)
Communications Workers of America Local 9423(prior version)
Communications Workers of America Local 9575 (prior version)
Congress of California Seniors (prior version)
Consumer Federation of California
Consumers Union
Graphic Communications Union Local No. 583 (prior version)
Greenlining Institute
Health Access California
Health Care for All - California
Hotel Employees and Restaurant Employees Local No. 49 (prior
version)
IBEW Local 340 (prior version)
IBEW Local 551 (prior version)
Laborers' International Union of North America (LIUNA) (prior
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version)
Older Women's League of California
Plumbers & Steamfitters Local 484 (prior version)
Riverside Sheriff's Association (prior version)
Sacramento-Sierra Building & Construction Trades Council (prior
version)
San Mateo County Central Labor Council (prior version)
Service Employees International Union
Southern California Pipe Trades District Council 16 (prior
version)
Sprinkler Fitters and Apprentices Local 483 (prior version)
Teamsters Local 481 (prior version)
UFCW Butchers Union Local 120
UFCW Local 839 (prior version)
UFCW Local 1179 (prior version)
United Teachers Los Angeles (prior version)
Warehouse Processing & Distribution Workers' Union Local 26
(prior version)
Western Center on Law and Poverty
Opposition
Blue Cross of California
California Association of Health Plans
Caremark Rx, Inc.
Health Net, Pharmaceutical Services
Medco Health Solutions, Inc.
PacifiCare Health Systems
Analysis Prepared by : Renee' L. Brooks / B. & P. / (916)
319-3301