BILL ANALYSIS �
SENATE COMMITTEE ON HEALTH
Senator Ed Hernandez, O.D., Chair
BILL NO: SB 1195
AUTHOR: Price
AMENDED: March 26, 2012
HEARING DATE: April 25, 2012
CONSULTANT: Moreno
SUBJECT : Audits of pharmacy benefits.
SUMMARY : Requires a contract entered into between a pharmacy
and a health insurer, health care service plan, or pharmacy
benefit manager (PBM), as defined, to include policies and
procedures for any audits under the contract. Imposes specified
requirements on those audits, including prohibiting the entity
conducting the audit (auditing entity) from receiving payment on
any basis tied to the amount claimed or recovered from the
pharmacy and from using extrapolation, as defined, in
calculating penalties or amounts to be recouped from a pharmacy
and prohibits a pharmacy from being subject to recoupment of
funds for a clerical or recordkeeping error. Requires the
auditing entity to deliver a preliminary audit report to the
pharmacy and to give the pharmacy an opportunity to respond to
the report. Requires the auditing entity to deliver a final
audit report to the pharmacy and to establish a process for
appealing the findings of that report, as specified.
Existing law:
1.Requires, under the Pharmacy Law, the licensure and regulation
of pharmacies by the California State Board of Pharmacy.
2.Requires health care service plans to be regulated by the
Department of Managed Health Care and health insurers to be
regulated by the Department of Insurance.
3.Requires health care service plan contracts and health
insurance policies to provide coverage for specified benefits
and requires contracts between plans or insurers and providers
to contain provisions requiring a fast, fair, and
cost-effective dispute resolution mechanism.
This bill:
1.Requires 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
Continued---
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benefit plan to include policies and procedures for any audits
performed under the contract. Requires the policies and
procedures to be consistent with generally accepted auditing
practices and to comply with the provisions of this bill.
2.Prohibits an auditing entity from receiving payment or any
other consideration on any basis that is tied to the amount
claimed or actual amount recovered from the pharmacy that is
the subject of the audit.
3.Prohibits an auditing entity from using extrapolation in
calculating penalties or amounts to be recouped from a
pharmacy. Requires any findings of overpayment or underpayment
to a pharmacy to be based solely on documented instances of
overpayment or underpayment to the pharmacy and not be based
on an estimate or projection based on the number of patients
served having a similar diagnosis or on the number of similar
orders or refills for similar drugs.
4.Prohibits any calculation of overpayment to a pharmacy
determined pursuant to a pharmacy audit from including the
portion of any payment that constitutes dispensing fees.
5.Prohibits a pharmacy from being subject to recoupment of funds
for a clerical or recordkeeping error, unless there is proof
of intent to commit fraud or that the error resulted in actual
financial harm to the PBM, the carrier, or the beneficiary of
a health benefit plan.
6.Requires, except as otherwise prohibited by state or federal
law, an entity conducting a pharmacy audit to keep
confidential any information collected during the course of
the audit, and prohibits an entity from sharing any
information with any person other than the carrier, PBM, or
third-party payer for which the audit is being performed.
7.Requires an auditing entity to have access only to previous
audit reports relating to a particular pharmacy conducted by
or on behalf of the same entity. Prohibits this provision from
being construed to authorize access to information that is
otherwise prohibited by law.
8.Requires an auditing entity that is not a carrier or PBM,
prior to conducting the audit, to provide the pharmacy with an
attestation that the entity and the carrier or PBM have
executed a business associate agreement or other agreement as
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required under state and federal privacy laws.
9.Requires an auditing entity, prior to leaving a pharmacy at
the end of an onsite portion of the audit, to provide the
pharmacist in charge with a complete list of records reviewed
to allow the pharmacy to account for disclosures as required
by state and federal privacy laws.
10.Prohibits an auditing entity from initiating or scheduling a
pharmacy audit during the first five business days of any
calendar month, unless it is expressly agreed to by the
pharmacy being audited.
11.Requires an auditing entity to provide the pharmacy at least
one week's prior written notice before conducting an initial
audit.
12.Requires a pharmacy audit that involves clinical judgment to
be conducted by a pharmacist licensed under California law.
13.Requires an auditing entity to make all determinations
regarding the legal validity of a prescription or other record
consistent with determinations made under specified provisions
of existing law, and requires the auditing entity to accept as
valid electronically stored images of prescriptions,
electronically created annotations, and other related
supporting documentation.
14.Requires an auditing entity to accept paper or electronic
signature logs that indicate the delivery of pharmacy services
as valid proof of receipt of those services by a health
benefit plan beneficiary.
15.Prohibits the time period covered by a pharmacy audit from
exceeding a 24-month period beginning no more than 24 months
prior to the initial date of the onsite portion of the audit.
Requires the audit to encompass only claims that were
submitted to or adjudicated by the carrier or PBM during that
24-month period.
16.Requires an auditing entity to deliver a preliminary audit
report to the pharmacy before issuing a final audit report.
Requires this preliminary report to be issued no later than 60
days after conclusion of the audit.
17.Requires a pharmacy to be provided a time period of no less
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than 30 days following receipt of the preliminary audit report
to respond to the findings in the report, including addressing
any alleged mistakes or discrepancies and producing
documentation to that effect.
18.Permits a pharmacy to use the records of a health facility,
physician, or other authorized practitioner of the healing
arts involving drugs, medicinal supplies, or medical devices
written or transmitted by any means of communication for
purposes of validating the pharmacy record with respect to
orders or refills of a dangerous drug or device.
19.Requires, prior to issuing a final audit report, an auditing
entity to take into consideration any response by the pharmacy
to the preliminary audit report.
20.Requires an auditing entity to deliver a final audit report
to the pharmacy no later than 90 days after the conclusion of
the audit or 30 days after receipt of a pharmacy's response to
the preliminary audit report, as applicable.
21.Requires an auditing entity to establish a process for
appealing the findings in a final audit report that complies
with the following requirements:
a. Requires a pharmacy to be provided a time period of no
less than 60 days following receipt of the final audit
report to file an appeal with the entity identified in the
appeal process.
b. Permits a pharmacy to use the records of a hospital,
physician, or other authorized practitioner of the healing
arts involving drugs, medicinal supplies, or medical
devices written or transmitted by any means of
communication for purposes of validating the pharmacy
record with respect to orders or refills of a dangerous
drug or device.
c. Requires an auditing entity to provide the pharmacy with
a written determination of appeal issued by the entity
identified in the appeal process, which is required to be
appended to the final audit report, and requires a copy of
the determination to be sent to the carrier, health benefit
plan sponsor, or other third-party payer.
d. Permits the appeals process to include a dispute
resolution option as long as the pharmacy retains the right
to file a written appeal and obtain a written
determination.
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22.Prohibits an auditing entity, a carrier, a health benefit
plan sponsor, or other third-party payer, or any person acting
on behalf of those entities, from attempting 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.
23.Prohibits an auditing entity, a carrier, a health benefit
plan sponsor, or other third-party payer, or any person acting
on behalf of those entities, from charging interest during the
audit or appeal period.
24.Requires, following final disposition of a pharmacy audit, if
a carrier, a health benefit plan sponsor, or other third-party
payer, or any person acting on behalf of those entities, finds
that an audit report or any portion thereof is
unsubstantiated, an auditing entity conducting a pharmacy
audit to dismiss the audit report or the unsubstantiated
portion thereof without the necessity of any further
proceedings and to return any moneys recouped as a result of
the lack of substantiation, as applicable.
25.Prohibits anything in the bill from applying to an audit
conducted because a PBM, carrier, health benefit plan sponsor,
or other third-party payer has evidence or a significant
suspicion that criminal wrongdoing, willful misrepresentation,
or fraud has occurred.
FISCAL EFFECT : This bill is keyed non-fiscal.
COMMENTS :
1.Author's statement. According to the author, this bill will
reform the PBM industry by requiring uniform auditing
procedures and standards. Currently there are three major PBMs
that audit pharmacies throughout the country. These three PBMs
operate unchecked and unregulated, earning billions of dollars
each year while hurting local pharmacies. Additionally, PBMs
recoup a percentage based on the errors they uncover. This
practice has led to an incentive to penalize pharmacies for
minor infractions. Exacerbating the bounty hunting problem
caused by PBMs is the practice of extrapolation by PBMs. Most
audits are conducted using a sample of all claims submitted by
the pharmacy. Using the practice of extrapolation, an auditor
who finds a claim for a particular prescription within that
sample to be invalid will extrapolate that all claims for that
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prescription or patient are also invalid, even though the
audit firm did not review each claim to make an actual
determination whether subsequent or prior prescriptions did in
fact contain errors at the level of rendering it invalid.
Utilizing the extrapolation technique, PBMs incorrectly recoup
funds from pharmacies that did not commit an error in
dispensing a prescription. The author states that this bill
will reform the environment in which PBMs operate and will
prohibit unreasonable audits, forbid the practice of
extrapolation and bounty hunting.
2.PBMs. Employers, labor unions, the state, and managed care
companies (collectively, "plan sponsors") that offer
prescription drug insurance coverage are increasingly hiring
PBMs to manage these benefits. According to a September 2011
report commissioned by the Pharmaceutical Care Management
Association to estimate the savings that these PBMs generate
for plan sponsors and consumers, PBMs implement prescription
drug benefits for more than 215 million Americans who have
health insurance from a variety of sponsors: commercial health
plans, self-insured employer plans, union plans, Medicare Part
D plans, the Federal Employees Health Benefits Program, state
government employee plans, and others. Working under contract
with plan sponsors, PBMs manage drug benefit programs that
give consumers more efficient and affordable access to
medications. The report's major findings included:
a. From 2012 to 2021, PBMs will save plan sponsors and
consumers almost $2 trillion, or about 35 percent, compared
with drug expenditures made without pharmacy benefit
management.
b. Available PBM savings for individual plan sponsors can
range from 20 percent for those that make limited use of
PBM tools to 50 percent for those that adopt best practices
recommended by PBMs.
c. If all plan sponsors adopt PBM-recommended best
practices, projected prescription drug expenditures could
fall by an additional $550 billion over the next decade.
d. Limiting the tools that PBMs use to manage costs could
increase projected prescription drug costs by more than
$550 billion over the next decade.
3.Pharmacy audits. According to the Academy of Managed Care
Pharmacy (AMCP) "Model Audit Guidelines for Pharmacy Claims,"
historically, health care services (including prescription
medications) were paid by the patient as an out-of-pocket
expense. These payments may then have been reimbursed by a
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third party or self-funded insurance plan. Over the course of
the twentieth century, health care insurance evolved from
indemnity pre-paid insurance to managed care as a major
mechanism of coverage. The growth of plan design,
administration and payment by third-party entities, coupled
with increases in the total costs of care, have led to more
oversight of plans and their financial services. Audits of
claims made by pharmacies, and payments made to pharmacies,
are included in the oversight process. The auditing of
pharmacy claims serves two main purposes: a) detecting fraud,
waste and abuse, and b) validating data entry and
documentation to ensure they meet regulatory and contractual
requirements.
4.AMCP Model Audit Guidelines for Pharmacy Claims. The AMCP
established the Community Pharmacy Outreach Advisory Council
to address issues that managed care pharmacy and community
pharmacy share and that would lead to an enhanced
relationship. The Council identified auditing of pharmacy
claims as a high priority issue largely because of the
friction it causes for both community and managed care
pharmacy. In January 2012, AMCP released model audit
guidelines for pharmacy claims. According to the document, the
guidelines are the result of over a year-long effort by a Task
Force comprised of representatives of the pharmacists
(including those in managed care organizations �MCOs],
retailers, and PBMs). These guidelines were meant to assist
MCOs in developing a pharmacy claims audit program and to help
pharmacy providers to better understand the audit requirements
and process. The document states that while the guidelines
were developed as a way to improve the relationship between
the parties, the contract between the MCO and the pharmacy
should define the actual audit process.
5.Other states. According to an April 2012 Pharmaceutical Care
Management Association summary of proposed and enacted laws
related to pharmacy audits, there are at least 12 states with
legislation pending. Indiana, Kentucky, and Utah have all
enacted laws on the subject. In March 2012, Utah's Governor
signed H.B. 76, which contains provisions similar to those
contained in this bill, such as prohibitions on: initiating or
scheduling an audit during the first five business days of a
month, including dispensing fees in the calculation of
overpayments in certain circumstances and recouping funds for
prescription clerical or recordkeeping errors. Also similar to
this bill, H.B. 76 contains provisions allowing pharmacies to
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respond to a preliminary audit. With regard to an auditing
entity, the audit is required to disclose any money recovered
by the entity that conducted the audit
6.Double referral. This bill is double referred. Should it pass
out of this committee, it will be referred to the Senate
Committee on Rules.
7.Prior legislation. AB 1960 of 2004 would have required PBMs
to make various disclosures to purchasers and prospective
purchasers of PBM services, required PBM contracts to include
certain provisions, and prohibited PBMs from substituting
medications in specified situations. AB 1960 was vetoed by the
Governor, who cited concerns about increased costs to health
plans, Medi-Cal, and other purchasers in his veto message.
AB 78 of 2006 would have required a contract between a PBM and
a purchaser to disclose any fees to be charged for drug
utilization reports requested by the purchaser and to
additionally specify the terms of confidentiality for
specified proprietary information received by the purchaser
upon annual disclosure by the PBM or at the request of the
purchaser. AB 78 was vetoed by the Governor, who again cited
cost concerns.
8.Support. The California Pharmacists Association (CPA), the
sponsor of this bill, states that they do not dispute that, as
claims adjudicators, PBMs have a necessary role in auditing
pharmacy claims, and they support responsible auditing and a
strict adherence to legal and ethical standards for everyone
who provides medications to California consumers. CPA asserts
that PBM pharmacy audits have in many instances evolved away
from their legitimate purpose and embraced a profit-seeking
game of "gotcha" against pharmacies. CPA writes that
pharmacists are being driven from the workplace or placed
unnecessarily in precarious financial corners due to
aggressive PBM audits that retroactively deny pharmacy claims
based on trivial issues and non-substantive technicalities
where no fraud exists, there are no questions that the right
drug was provided to the right patient, and the plan was
billed the correct amount. PBMs often contract with auditing
firms on a contingency fee basis for the amount the audit firm
recoups, thereby creating an enormous incentive for auditors
to aggressively err on the side of the PBM and harshly punish
minor clerical issues that no objective individual would
consider "fraud." The National Community Pharmacists
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Association states that rather than legitimately using the
audit process to guard and protect against fraud, many PBMs
now view the pharmacy audit process as a profitable revenue
stream and that audits can claim hundreds of thousands of
dollars for nothing more than basic administrative or
typographical mistakes, many not even being the fault of the
pharmacist or staff.
Raley's Family of Fine Stores writes that community pharmacies
and chain drug stores have a limited ability to respond to
abusive audits because most PBMs do not have appeal procedures
and when pharmacies dispute any part of an audit, they are
often ignored until they hire an attorney. Raley's states that
PBMs use their market share and sheer size to force pharmacies
into one-sided contracts and pharmacies lack equal power to
negotiate these "take it or leave it" contracts. Finally,
Raley's states that they cannot walk away from those contracts
because PBMs will drop their stores from the network, thereby
cutting off their ability to serve patients with health
insurance.
Walgreens writes that in the recent past, the audits conducted
by PBMs have evolved in a manner that is increasingly
disruptive to pharmacy operations and acceptable business
standards. Walgreens states that while supportive of
acceptable audit processes, it has experienced nationwide
increasing events in which PBMs focused on small technical
errors and other excuses in order to recoup money already paid
to pharmacy providers by the PBMs, which became apparent as
auditors for the PBMs began to employ ever-increasingly
difficult standards during audits. Walgreens asserts that this
bill is an important step in stabilizing the practice of
pharmacy in California by providing a mutually fair process
for audits by PBMs and their auditing agents. Walgreens writes
that this bill will standardize the manner in which pharmacies
may be audited and will allow for appeal in the case of
disagreement and it appropriately excludes fraud or willful
misrepresentation from its provisions.
A number of individual pharmacists write that nothing in this
bill is about protecting fraud and that the pharmacy community
wants the bad actors out of the system more than anyone.
Supporters assert that this bill maintains a PBM's right to
audit the claims of pharmacies but eliminates their ability to
structure contracts with auditing companies that are classic
examples of conflicts of interest. Supporters contend that
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these contracts pay auditing companies based on a commission
structure that incentivizes them to invalidate prescriptions
for technical, non-substantive, and typographical errors.
Supporters write that when this happens, the prescription
becomes an uncovered benefit to the patient and patients are
charged for their medication, which results in higher health
care costs for patients even when their medication should be
covered by their insurance.
9. Opposition. The California Conference Board of the
Amalgamated Transit Union, California Conference of
Machinists, UNITE-HERE, AFL-CIO, International Longshoremen
and Warehouse Union, Engineers and Scientists of CA, IFPTE
Local 20, Professional and Technical Engineers, IFPTE Local
21, the California Teamsters Public Affairs Council, and the
American Federation of State, County and Municipal Employees,
AFL-CIO object to several provisions of this bill, such as
permitting a pharmacy that has overcharged or committed fraud
to keep the dispensing fee, which they state simply makes
crime pay and is an incentive to overcharge or commit fraud.
These unions also object to only recouping lost funds if they
prove "intent" to defraud where there are recordkeeping errors
and state that they should be able to recover for actions,
such as keeping poor or no records, which impede the ability
to track how their money is spent. These unions assert that if
paying auditors a portion of the funds that are recouped helps
recover overpayments, then they should be allowed to do that
as they should have the right to spend their money in the way
they think is best to protect members from people who are
defrauding them. These unions assert that provisions that
require an auditor to accept logs as proof of actual delivery
of the prescription is an invitation to fraud because computer
or paper logs can be altered or counterfeited, and there
should be no barrier to insuring that prescriptions we pay for
are delivered to their members. Finally, these unions are
opposed to requiring confidentiality of audit results as they
have multiple trust funds and should be able to tell the other
trust funds when vendor fraud has been uncovered, and have a
fiduciary duty to do so. The California Labor Federation
states that while this bill attempts to protect pharmacies
from abusive auditing practices by PBMs, it would in fact
drive up costs for their trust funds and make it even more
difficult to crack down on fraud. Health Access California
writes that this bill penalizes responsible entities that
provide comprehensive health benefits for California workers
and are working to control costs and avoid fraud.
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Health Net states that this bill will undermine their ability
to protect their policyholders and insureds by placing
unreasonable limits on pharmacy limits in state law because it
includes several provisions that hamper an auditor's ability
to detect such fraud and recover overpayments. Health Net
states that this bill places unnecessary limitations on the
disclosure and sharing of audit results and makes it difficult
for an auditing entity to discover a trend or compile evidence
of fraud among a group of commonly owned pharmacies, creating
an incentive for those would seek to commit fraud. CVS
Caremark states that this bill would severely restrict its
ability to conduct all manner of pharmacy audits, which are a
necessary and effective tool used to, among other things:
assist pharmacies in proper billing; detect fraud; recoup
overpayment of claims due to errors and to identify and stop
abusive practices. The California Association of Health Plans
(CAHP) states that this bill includes a myriad of problems
that would make it more difficult to detect fraud and recover
overpayments. CAHP asserts that this bill places unreasonable
limitations on the disclosure of audit results, which is
problematic as health plans, PBMs, and labor trusts seek the
right pharmacies to serve their beneficiaries.
Express Scripts, Inc. writes that it is critical to their
clients that they have an effective pharmacy audit program in
place, which is designed to detect fraud (such as false
claims), waste (such as unplanned errors), and abuse (such as
unsound practices), and to recover overpayments paid by
clients to pharmacies. Express Scripts states that each
pharmacy in their network is given a provider manual that
details the audit process (which is part of the contract with
a pharmacy) and the pharmacy's rights and responsibilities
under it. Express Scripts asserts that this bill has a myriad
of problematic provisions that would make it more difficult to
detect fraud and recover overpayments, including provisions
that would allow a pharmacy that has overcharged or committed
fraud to keep its dispensing fee, prevent the auditor from
receiving compensation tied to the amounts recovered, and
require a California-licensed pharmacist to conduct an audit
that involves clinical judgment.
SUPPORT AND OPPOSITION :
Support: California Pharmacists Association (sponsor)
National Community Pharmacists Association
Raley's Family of Fine Stores
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Walgreens
71 individuals
Oppose: American Federation of State, County and Municipal
Employees, AFL-CIO
California Association of Health Plans
California Conference Board of the Amalgamated Transit
Union
California Conference of Machinists
California Labor Federation
California Teamsters Public Affairs
Council Engineers and Scientists of CA, IFPTE Local 20
CVS Caremark
Express Scripts, Inc.
Health Access California
Health Net
International Longshoremen and Warehouse Union
Jockeys' Guild
Professional and Technical Engineers, IFPTE Local 21
UNITE-HERE, AFL-CIO
Utility Workers Union of America
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