BILL ANALYSIS
SENATE HEALTH AND HUMAN SERVICES
COMMITTEE ANALYSIS
Senator Deborah V. Ortiz, Chair
BILL NO: AB 1960
A
AUTHOR: Pavley, et al.
B
AMENDED: June 9, 2004
HEARING DATE: June 16, 2004
1
FISCAL: Rules / Appropriations
9
6
CONSULTANT:
0
Machi/Hansel/ak
SUBJECT
Pharmacy benefits management
SUMMARY
This bill requires Pharmacy Benefits Managers (PBMs) to
disclose to purchasers or prospective purchasers
information pertaining to rebates, discounts and other
financial information; requires certain provisions to be
included in contracts between a PBM and a purchaser;
prohibits pharmacy and therapeutics committee members,
working for a PBM, from working for a pharmaceutical
company or having more than a nominal financial interest in
a pharmaceutical company; requires authorization be
obtained from a prescriber prior to a PBM switching a
patient from one drug to another and that certain
disclosures are made to the prescriber prior to
authorization being granted; and requires certain
disclosures be made to a patient when a drug is switched.
ABSTRACT
Existing state 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
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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.
4.Prohibits a provider of health care, a health care
service plan, contractor, or corporation and its
subsidiaries and affiliates from intentionally sharing,
selling, or otherwise using any medical information for
any purpose not necessary to provide health care services
to a patient except as expressly authorized by the
patient, enrollee, or subscriber, as specified, or as
otherwise required or authorized by law. AB 715 (Chan,
2003) expanded this prohibition to marketing uses.
Violations of these provisions are subject to a civil
action for compensatory and punitive damages, and, if a
violation results in economic loss or personal injury to
a patient, it is punishable as a misdemeanor.
Existing federal law:
Allows PBMs to administer drug benefits for Medicare
beneficiaries.
This bill:
1.Requires a PBM to disclose, in writing, to the purchaser
or perspective purchaser of its services, the following:
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a) The amount of rebates and other retrospective
utilization discounts that the PBM receives from
pharmaceutical manufacturers or labelers specific to
the purchaser's prescription drug benefits, in
aggregate and for specific therapeutic classes of
drugs;
b) The nature, type and amount of all other revenue
that the PBM receives from pharmaceutical
manufacturers or labelers specific to the purchaser's
prescription drug benefits;
c) Prescription drug utilization information, as
specified;
d) Any fees charged by a PBM to the purchaser;
e) Any arrangements with providers, medical groups,
individual practice associations, pharmacists, or
other entities that are associated with activities of
a PBM to encourage formulary compliance or otherwise
manage prescription drug benefits.
1.Provides that the PBM shall provide specified disclosures
within 30 days of receipt of request.
2.Permits a PBM to withhold the disclosures required by the
above if the purchaser or prospective purchaser does not
agree to maintain the confidentiality of the disclosed
information.
3.Prohibits a PBM from executing a contract that fails to
address the following items:
a) The amount of revenues, rebates and discounts
passed on to the purchaser;
b) The disclosure or sale of enrollee utilization data
to any person or entity other than the purchaser;
c) Fees charged by the PBM to the purchaser;
d) Conditions under which an audit will be conducted;
e) Any revenue, rebates or discounts received by the
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PBM directly or indirectly from entities other than
manufacturers or labelers;
f) The process for the development of formularies and
the approval process for any changes to that formulary
provided to the purchaser by the PBM.
1.Requires all members of a PBM pharmacy and therapeutics
(P&T) committee to be physicians, pharmacists, or other
health care professionals, and a majority of committee
members to be actively practicing and not employed by PBM
and have no more than a nominal interest in an
pharmaceutical company.
2.Requires a PBM to report not less than quarterly to the
P&T committee, which shall monitor the effects of
medication substitutions on the health of patients.
3.Prohibits PBMs from substituting a medication for another
currently prescribed medication without first obtaining
express verifiable authorization from the prescriber of
the currently prescribed drug except as specified.
Prohibits such substitutions unless the PBM provides the
patient or their representative specified information.
4.Requires PBMs to cancel and reverse a medication
substitution upon the instruction of the prescriber or
the individual, unless the prescribed drug is no longer
on the formulary or unless the individual is unwilling to
pay a higher copay or other associated cost.
5.Requires a PBM to maintain a toll-free telephone number
that is known to prescribers and patients.
6.Defines for purposes of this bill the following terms:
"labeler," "pharmacy benefits management," "pharmacy
benefit manager," "prospective purchaser," and
"purchaser."
7.Prohibits a PBM from charging an individual any
additional copay or fee related to a replacement
medication.
FISCAL IMPACT
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Unknown
BACKGROUND AND DISCUSSION
Purpose of the 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. The
author states that there are two main deficiencies in
current law, the first 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.
The second deficiency identified is the lack of
consumer/client protection regarding disclosure related to
PBMs.
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, which 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.
Background
Pharmacy Benefits Managers (PBMs) are independent specialty
administrators; they focus on administering pharmacy
benefits, and managing the purchasing, dispensing, and
reimbursing of prescription drugs. About 200 million
American consumers have 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
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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.
Three PBMs--Medco, Caremark and Express Script-currently
control approximately 80 percent of the national market.
CalPERS currently contracts with a PBM to manage its
prescription drug benefit to enrollees in its self-funded
plans (PERSCare and PERS Choice) and the Department of
Health Services (DHS) contracts with Ramsell Corporation to
administer the drug benefit provided in the AIDS Drug
Assistance Program.
Litigation
Over the past several years, allegations have been made
that PBMs have not been acting in the best interest of
their clients, failing to pass on to their clients the
savings and rebates they negotiate from drug companies, and
pushing their clients toward more expensive drugs to secure
greater fiscal benefits for the PBM from pharmaceutical
companies. The US Department of Justice as well as state
Attorneys General have engaged in investigations of PBM
trade practices.
In April 2004, Medco Health agreed to settle with 20 state
Attorneys General and the US Justice Department, including
California, paying $29.3 million. Medco was accused of
switching patients' prescription drugs to get larger
rebates from pharmaceutical companies. This is the fourth
time that Medco has settled charges of illegal trade
practices.
The settlement specifies the following:
1.The settlement prohibits Medco from soliciting drug
switches when:
The net drug cost of the proposed drug exceeds the
cost of the prescribed drug;
The prescribed drug has a generic equivalent and
the proposed drug does not;
The switch is made to avoid competition from
generic drugs; or
It is made more often than once in two years within
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a therapeutic class of drugs for any patient.
1.The settlement requires Medco to:
Disclose to prescribers and patients the minimum or
actual cost savings for health plans and the
difference in co-payments made by patients;
Disclose to prescribers and patients Medco's
financial incentives for certain drug switches;
Disclose to prescribers material differences in
side effects between prescribed drugs and proposed
drugs;
Reimburse patients for out-of-pocket costs for drug
switch-related health care costs and notify patients
and prescribers that such reimbursement is available;
Obtain express, verifiable authorization from the
prescriber for all drug switches;
Inform patients that they may decline the drug
switch and receive the initially prescribed drug;
Monitor the effects of drug switches on the health
of patients; and
Adopt a certain code of ethics and professional
standards.
1.In addition, Medco will pay $20.2 million to the states,
$6.6 million to the states in fees and costs, and about
$2.5 million to patients who incurred expenses related to
a certain switch between cholesterol controlling drugs.
GAO report
In January 2003, the federal General Accounting Office
examined how PBMs participating in the federal employees
health program affect health plans, enrollees, and
pharmacies. The GAO report stated that 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 leaves some retail pharmacies with little leverage in
negotiating with PBMs. In written responses to the report,
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one pharmacy association complained that the report did not
address more broadly the economic relationships that exist
in the PBM industry.
Congressional Budget Office report
A study conducted by the Congressional Budget Office (CBO)
states that mandated disclosure may lead to higher drug
costs. CBO has suggested that transparency provisions
would increase costs 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 other purchasers."
Food and Drug Law Institute
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 can lead to
discrimination that ultimately may harm purchasers and the
ultimate consumer. 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 three largest firms holding a
combined 80 percent market share. Substantial costs have
prevented any successful entry into the PBM market for some
time and the cost to plan sponsors of switching PBMs deters
such switching.
Board of Pharmacy
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.
Other states
Twenty-four other state Legislatures have introduced 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 sponsors all requested financial and
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utilization information related to providing benefits and
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 the
UPDPA, The court's holding was based on the likelihood
that PCMA would succeed in showing that the UPDPA violated
the takings clause and was preempted by federal law.
In 2003, South Dakota adopted legislation that put in place
PBM disclosure provisions. South Dakota estimates they
will save 7-8 percent on their state employee health plan
and that they have reviewed the 11 proposals submitted by a
PBM willing to provide the disclosure mandated under the
new state law.
Arguments in support
This bill is jointly sponsored by the California Labor
Federation and the California Alliance for Retired
Americans. Supporters argue that in the absence of
regulation, it is unclear whose interest PBMs represent.
Additionally, supporters 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.
According to the supporters, in recent years, allegations
haven arisen that PBMs have not acted in the best interests
of their clients. For example, PBMs have been accused of
failing to pass on to clients the savings or rebates they
negotiate from drug companies and pharmacies. Much of the
problem is caused because PBMs are not required, and
routinely do not, disclose to clients their financial
arrangements with drug companies, claiming that such
information is confidential.
This bill provides a simple remedy to address this problem.
It would allow PBM clients to get better information from
PBMs about their financial dealings. By providing greater
sunshine on PBMs, this bill would help ensure PBMs
accomplish what they promise to accomplish for their
clients. This is a consumer issue as well as one for PBM
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clients because ultimately the cost of prescription drugs
is paid by consumers. By ensuring greater accountability
by PBMs, this bill would help in the fight to contain
rising prescription drug prices.
Arguments in 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 this information may be publicly
available to other purchasers and their competitors.
Opponents state 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.
Opponents also state that providing information concerning
rebates, discounts and revenues, even in the aggregate,
specific to the purchaser may not be possible as they do
not maintain information in this form. PBMs would be able
to provide aggregate information but not specific to each
purchaser.
Opponents argue that the prescriptive nature of this bill
will hamper the ability of PBMs to provide services in
California. Caremark suggests that these disclosure issues
should be addressed as part of contract negotiations rather
the mandated.
This bill also may set dangerous precedents. First, it
would require the disclosure of details regarding
confidential business negotiations and transactions; such
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disclosure is hostile to a free market economy. Second, it
may lead to increased litigation if any of this
confidential information is leaked. Opponents have stated
that there may be an increased threat of lawsuits and
private rights of action if the actions of PBMs and the
identities of pharmacy and therapeutics committees are
disclosed.
Related legislation - 2003-2004 session
SB 1765 (Sher) would require pharmaceutical companies to
adopt and update a Comprehensive Compliance Program (CCP)
for interactions with health care professionals. This
bill requires pharmaceutical companies to establish
explicitly in its CCP an annual dollar limit on gifts,
promotional materials or other items or activities, with
exceptions, in accordance with existing guidelines, as
specified. Requires such companies to annually certify
in writing that they are in compliance with their CCPs
and with the limits on gifts established by the bill.
AB 262 would regulate the sale, release to a 3rd-party,
or exchange for remuneration by a pharmacist or by a 3rd-
party recipient, of physician prescribing data regarding
a prescription written by a physician combined with
personal information about the physician or his or her
prescribing practices. The bill would also require the
Medical Board of California to maintain a Do Not Use list
in which physicians licensed in this state may register,
as specified, and would require data vendors, as defined,
to register with the Attorney General and the Medical
Board of California in order to lawfully receive
prescribing physician data.
COMMENTS AND QUESTIONS
1.While this bill requires increased disclosure about
rebates and discounts PBMs receive, it does not currently
require disclosure of information regarding the profit
spread between what PBMs charge clients and what they are
paying pharmacies. The "spread" is defined as, "the
difference between the drug ingredient cost billed to the
employer by the PBM and the drug ingredient cost the PBM
pays to the dispensing pharmacy for that line item." The
author may wish to consider an amendment to require that
disclosure of the "spread" be addressed in the
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negotiations of the contract.
2.Existing state and federal laws provide protections of
personal health information. However, depending on the
contractual relationship between a PBM and the client, a
PBM may or may not be a "covered entity" under these
laws. Additionally, information that is provided in the
aggregate and cannot be used to identify an individual is
not protected under medical privacy laws. Section 4131
(c) would require a PBM to provide drug utilization
information related to the client's enrollees. However,
PBM's are not required to get authorization from the
enrollees to share this information with the client,
which is, in many cases the employer of the enrollees.
Should employers have access to information concerning
the medical behaviors of their employees, even if it is
in the aggregate form? For what purpose would an
employer need this information?
3.Previous versions of this bill would have created a
licensure and regulatory structure for PBMs under the
Board of Pharmacy. Because those provisions have been
removed from the bill, it is no longer appropriate for
the bill to be placed in the pharmacy code sections. It
may be more appropriate for these provisions to be placed
elsewhere in the Business and Professions Code or in the
Health and Safety Code.
PRIOR ACTIONS
Assembly Floor: 50 - 26Do Pass
Assembly Appropriations: 16 - 0Do Pass as amended
Assembly Business and Prof.: 8 - 3Do Pass
Assembly Human Services: 13 - 5 Do Pass
POSITIONS
Support: California Labor Federation, AFL-CIO (co-sponsor)
California Alliance for Retired Americans
(co-sponsor)
AARP
AIDS Healthcare Foundation
American Federation of State, County and
Municipal Employees
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Automotive and Allied Industries Employees of San
Diego
County, Teamsters Local No. 481
California Conference Board of Amalgamated
Transit Union
California Conference of Machinists
California Commission on Aging
California Faculty Association
California Health Advocates
California Nurses Association
California Pharmacists Association
California Professional Firefighters
California Public Employees Retirement System
(CalPERS)
California Public Interest Research Group
California School Employees Association
California Seniors Coalition
California State Employees Association
California Teamsters Public Affairs Council
Communications Workers of America, Local 9423,
District 1 & 2,
Santa Clara, San Mateo, Santa Cruz, San
Benito, Monterey,
San Luis Obispo
Communications Workers of America, Local 9575,
Camarillo
Communications Workers of America, Local 9586,
Norwalk
Congress of California Seniors
Consumer Federation of California
Consumers Union
Engineers and Scientists of California, IFPTE
Local 20
Foundation for Taxpayer and Consumer Rights
Graphic Communications Union Local No. 583, San
Francisco
Gray Panthers California
Health Access California
Health Care for All - California
Hotel Employees and Restaurant Employees Local
No. 49, Sacramento
International Association of Bridge, Structural,
Ornamental and
Reinforcing Iron Workers, Local 155
International Brotherhood of Electrical Workers,
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Local 340
International Brotherhood of Electrical Workers,
Local 551
Laborers' International Union of North America
Motion Picture Costumers, Local 705
Office and Professional Employees International
Union, Local 29
Older Women's League of California
Plumbers and Steamfitters, Local 484
Professional & Technical Engineers, IFPTE Local
21
Riverside Sheriff's Association
Sacramento-Sierra Building and Construction
Trades Council
San Mateo County Central Labor Council
Santa Clara and San Benito Counties Building and
Construction
Trades Council
Senior Action Network
Service Employees International Union (SEIU)
Service Employees International Union (SEIU),
Local 660
Southern California District Council of Laborers
Southern California Pipe Trades, District Council
16, Los Angeles
Sprinkler Fitters and Apprentices, Local 483
Teamsters, Local 481
Teamsters, Local 853
Teamsters Warehouse Union, Local 853, San
Francisco, San Mateo,
Alameda, Marin, and Contra Costa Counties
United Association of Plumbers, Pipe Fitters and
Sprinkler Fitters of
the U.S. Sprinkler Fitters and Apprentices
Local 483, Hayward
United Food and Commercial Workers International
Union,
Butchers' Union Local 120, Oakland
United Food and Commercial Workers International,
Local 1179, Martinez
United Food and Commercial Workers Union, Local
839, Salinas
United Steelworkers of America, District 12,
Covina
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United Steelworkers of America, Local 7600,
Fontana, Riverside
United Teachers of Los Angeles
Warehouse, Processing & Distribution Workers'
Union, Local 26
Western Center on Law and Poverty
18 individuals
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Oppose:Academy of Managed Care Pharmacy
Aetna, Inc.
Blue Cross of California
California Association of Health Plans
Caremark Rx, Inc.
California Chamber of Commerce
Ford Motor Company
PacifiCare
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