Existing law requires a pharmacy benefit manager that reimburses a contracting pharmacy for a drug on a maximum allowable cost basis to provide the contracting pharmacy with specified information regarding the data used to determine the maximum allowable cost of a drug.

This bill would require, except as provided, a pharmacy benefit manager to disclose certain information to a purchaser, including, among other things, the aggregate amount of rebates, retrospective utilization discounts, and other income that the pharmacy benefit manager would receive from a pharmaceutical manufacturer or labeler in connection with drug benefits related to the purchaser. The bill would excuse a pharmacy benefit manager from making these disclosures unless the purchaser agrees to keep any proprietary information disclosed to it pursuant to these provisions confidential, as specified.

Existing law requires a pharmacy benefit manager that reimburses a contracting pharmacy for a drug on a maximum allowable cost basis to provide the contracting pharmacy with specified information regarding the data used to determine the maximum allowable cost of a drug.

This bill would require, except as provided, a pharmacy benefit manager to disclose certain information to a purchaser or prospective purchaser, including, among other things, the aggregate amount of rebates, retrospective utilization discounts, and other income that the pharmacy benefit manager would receive from a pharmaceutical manufacturer or labeler in connection with drug benefits related to the purchaser or prospective purchaser. The bill would excuse a pharmacy benefit manager from making these disclosures unless the purchaser or prospective purchaser agrees to keep any proprietary information disclosed to it pursuant to these provisions confidential, as specified.

Existing law imposes specified requirements on an audit of pharmacy services provided to beneficiaries of a health benefit plan and defines a pharmacy benefit manager for those purposes 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 3rd-party payer, either directly or through an intermediary, manages the prescription drug coverage provided by the carrier, plan sponsor, or other 3rd-party payer.

This bill would state the intent of the Legislature to enact legislation relating to pharmacy benefit managers.

Date of Hearing: May 24, 2017

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

ABPCA Bill Id:AB 29

Author:(Nazarian) – As Amended Ver:May 11, 2017

Urgency: No State Mandated Local Program: Yes Reimbursable: No

SUMMARY:

This bill establishes licensure for pharmacy benefit managers (PBMs). Specifically, this bill:

1. Requires PBMs to be licensed by the Department of Managed Health Care (DMHC).
2. Requires a PBM to periodically disclose to a purchaser certain information such aggregate rebates received; the nature, type, and amount of all other revenue; administrative fees, arrangements with other entities to encourage formulary compliance or otherwise manage prescription drug benefits, and prescription drug utilization information, unless the purchaser does not agree in writing to maintain confidentiality.
3. Excludes health care service plans or other entities that provide services only to the health plan's enrollees or subscribers.
4. Requires DMHC to develop standards for determining eligibility for a pharmacy benefit manager license, requires DMHC to set a licensure fee, in an amount not to exceed the actual DMHC administrative costs, and allows DMHC to issue penalties.

FISCAL EFFECT:

One-time costs to DMHC likely in excess of $300,000 to develop a licensure program and perform related activities, and ongoing costs likely in the hundreds of thousands or more (Managed Care Fund).

COMMENTS:

1. Purpose. This bill is intended to improve transparency and accountability in an important aspect of the health care system: the management of prescription drug benefits.
2. Background. According to the Pharmaceutical Care Management Association, the national association of PBMs, PBMs administer prescription drug plans for more than 266 million Americans who have health insurance from a variety of sponsors, including commercial health plans, self-insured employer plans, union plans, and state and federal employee and public health insurance plans. PBMs process prescriptions on behalf of plan sponsors that pay for drugs, and use their scale to negotiate with drug manufacturers and pharmacies. The PBM market is dominated by three large players: CVS Health, ExpressScripts, and OptumRx, which control nearly 80% of the market.

In recent years, there has been more attention to the role PBMs play. Market participants have complained about various issues. First, given the size of the market players, many pharmacies and smaller plan sponsors indicate PBM contracts are often take- it-or-leave it, leaving little room to negotiate beneficial terms. Second, observers have noted potential conflicts of interest related to a PBMs ownership and operation of pharmacies and pharmacy services, as well as financial partnerships with drug manufacturers, which may lead to limited consumer choice and higher out-of-pocket costs in some instances. Third, unlike many other parts of the health care system, PBMs are subject to very little regulation and their business operations, including potential conflicts of interest, are not transparent. Finally, a high degree of market concentration has raised questions about the competitiveness of the PBM industry.

On the other hand, it should be noted that PBMs are subcontractors of licensed or regulated entities, and the provision of drug benefits is ultimately the responsibility of those entities, whether or not they choose to subcontract with a PBM for delivery of drug benefits. The ability of adequately-sized plans or groups to negotiate their own prescription drug benefits provides a meaningful backstop to the PBMs' market power. Competition among large players appears fierce despite high levels of market concentration, and economies of scale appear to assist PBMs to negotiate with drug-makers and pharmacies. In addition, the Federal Trade Commission has raised concerns with mandating transparency in this market, as certain types of information could encourage less aggressive pricing, or collusion, by drug-makers. The bill includes confidentiality protections to deal with this latter concern.

1. Support and Opposition. Pharmacists, doctors, some pharmacies, and consumer groups supported a prior version of this bill. PBMs and health plans and insurers opposed a prior version of the bill.
2. Related Legislation. AB 315 (Wood), also being heard today in this committee, contains many similar provisions to this bill, including PBM licensure and disclosure requirements.

Analysis Prepared by: Lisa Murawski / APPR. / (916) 319-2081

Date of Hearing: May 9, 2017

ASSEMBLY COMMITTEE ON

, Chair

ABPCA Bill Id:

Author:() – As Ver:

SUBJECT: .

SUMMARY: Requires a pharmacy benefit manager (PBM) to disclose various information to a purchaser of the PBM’s services. Specifically, this bill:

1. Requires a PBM to disclose to a purchaser, in writing and no less frequently than on a quarterly basis, all of the following:
   1. The aggregate amount of all rebates and other retrospective utilization discounts that the PBM receives, directly or indirectly, from a pharmaceutical manufacturer or labeler in connection with prescription drug benefits specific to the purchaser. Requires this information also to be available for each therapeutic class, as specified;
   2. The nature, type, and amount of all other revenue that the PBM receives, directly or indirectly, from a pharmaceutical manufacturer or labeler in connection with prescription drug benefits related to the purchaser;
   3. Prescription drug utilization information related to utilization by the purchaser’s enrollees or insureds or the aggregate utilization data that is not specific to an individual consumer, prescriber, or purchaser;
   4. Administrative or other fees charged by the PBM to the purchaser; and,
   5. Arrangements with prescribing providers, medical groups, individual practice associations, pharmacists, or other entities that are associated with activities of the PBM to encourage formulary compliance or otherwise manage prescription drug benefits.
2. Permits a PBM, except for utilization information, to withhold required disclosures if the purchaser or prospective purchaser does not agree, in writing, to maintain as confidential any proprietary information, as specified.
3. Requires all disclosures made pursuant to this bill to comply with the privacy standards of the federal Health Insurance Portability and Accountability Act of 1996.
4. Defines terms, including:
   1. Labeler to mean a person who receives prescription drugs from a manufacturer or wholesaler and repackages those drugs for later retail sale and who has a labeler code from the federal Food and Drug Administration, as specified.
   2. Pharmacy benefit management to mean the administration or management of prescription drug benefits. Pharmacy benefit management includes 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; and,
   3. Purchaser to mean a person who enters into an agreement with a PBM for the provision of pharmacy benefit management services.
5. Defines a PBM in reference to existing law. Excludes from the definition of PBM a health plan or insurer that provides pharmacy benefit management services if those services are provided only to enrollees or insureds who are also covered by health benefits provided by that health plan or insurer. Extends this exclusion to an affiliate, subsidiary, or other related entity of the health plan or insurer.

EXISTING LAW:

1. Requires a contract 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. Prohibits the entity conducting the audit from receiving payment based on the amount claimed or recovered from the pharmacy.
   
2. Requires a PBM that reimburses a contracting pharmacy for a drug on a maximum allowable cost basis to provide the contracting pharmacy with specified information regarding the data used to determine the maximum allowable cost of a drug.
   
3. Defines PBM to mean a person, business, or other entity that, either directly or through an intermediary, manages the prescription drug coverage provided by a health plan or insurer, including 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.
   

FISCAL EFFECT: None

COMMENTS:

1. PURPOSE OF THIS BILL. According to the author, PBMs play a major role in negotiating the prices of prescription drugs, creating and managing formularies, and several other functions key to the management of pharmacy benefits for millions of Californians. However, despite a PBM’s interaction with most major players, including drug manufacturers, health plans and insurers, and pharmacies, very little is known about those relationships. The author states that this bill will ensure that all purchasers, regardless of their size, will receive standard information from the PBM that is specific to the purchaser. With this bill, purchasers will know information such as the amount of rebates, discounts, as well as the nature and type of all other revenue the PBM receives in connection with prescription drug benefits related to the purchaser. According to the author, with this information, purchasers will be able to properly evaluate whether the PBM’s services are in fact resulting in increased savings for consumers.
2. BACKGROUND. PBMs were formed in the late 1960s, initially to help with claims processing. As insurance plans started to offer prescription drug benefits, PBMs filled out paperwork, making sure reimbursements were passed along to pharmacies. Initially they did provide this limited unique service as one of the first health care players to fully computerize claims processing. However, in the last 50 years, PBMs have grown into a multi-billion dollar business involved at every level of the pharmacy distribution chain, except the actual manufacturing of drugs. PBMs are administrators of prescription drug programs, responsible for developing and maintaining formularies and other clinical management tools, processing prescription drug claims for insurance companies or corporations, and negotiating contracts with pharmacies and pharmaceutical manufacturers. Other responsibilities of PBMs include performing drug utilization reviews, managing clinical programs targeted to specific disease states, and operating mail order pharmacies and specialty pharmacies. PBM customers, who are called “plan sponsors” or “purchasers,” include commercial health plans, state programs such as the California Public Employees' Retirement System (CalPERS) and Medi-Cal managed care plans, federal government programs such as Medicare, and the Federal Employees Health Benefits Program, self- insured companies, unions, and other public health programs.
   
   1. PBMs Today. As noted in a 2015 report entitled, “Concerns Regarding the PBM Industry” that was prepared by Applied Policy, a health policy and reimbursement consulting company on behalf of the National Community Pharmacists Association, PBMs generate revenue from pharmaceutical manufacturers through two main types of payments: formulary payments to obtain preferred formulary status, and market-share payments to encourage utilization of their drugs relative to competitors. These payments are typically referred to as “rebates.” PBMs negotiate rebates directly with pharmaceutical manufacturers, and they can be based on preferred placement on a formulary tier (e.g. placement on a “preferred brand” tier with more favorable cost-sharing amounts relative to products on a higher tier) or based on utilization (e.g. if the manufacturer is able to achieve a certain percentage of the PBM’s utilization for a particular therapeutic class of drugs). In addition, PBMs generate revenue through administration and service fees charged to plan sponsors for processing prescriptions; through operation of their own mail-order and specialty pharmacies; and, on the margin between the amount charged to customers and the amount paid out to pharmacies for a prescription (also referred to as “spread pricing”).
      
   2. The PBM Industry. According to the Pharmaceutical Care Management Association, the trade group that represents the PBM industry, as of 2017, PBMs manage pharmacy benefits for over 266 million Americans. Three large companies lead the PBM market: Express Scripts^®, CVSHealth^®, and OptumRx^®. In 2014, they covered more than 78% of Americans whose pharmacy benefits are managed by a PBM. Express Scripts, the largest with 33.8% of market share in 2014, had annual revenues of $100.5 billion and net incomes of $3.5 billion in 2016. Express Scripts processes more than one billion prescriptions each year and covers approximately 85 million lives. Express Scripts maintains network contracts with more than 69,000 retail pharmacies, as well as offering its own mail order pharmacy and specialty drug pharmacies.
   3. Accuracy and Transparency. PBMs generate revenues through rebates, or payments negotiated directly with pharmaceutical manufacturers, and from the margin, or difference, between what a PBM charges a customer for a prescription and what the PBM pays a pharmacy to fill that prescription. PBM contracts with customers often include revenue sharing provisions. However, PBM customers and pharmacy owners have complained that there is a lack of transparency in these revenue streams that make it difficult to know exactly how much revenue a PBM is generating, and whether or not that revenue is being shared in accordance with contract terms. PBMs maintain that efforts to regulate disclosure and transparency requirements will lead to increased prices through reduced competition (between PBMs and drug manufacturers and PBMs and pharmacies) and increased administrative costs due to calculating and analyzing data that are not currently required.

However, according to Applied Policy, experience with the Medicare Part D benefit indicates concerns that increased transparency would lead to reduced competition and prevent PBMs from negotiating the largest rebates possible, may be unfounded. Since the inception of the Medicare Part D benefit in 2006, all Part D plan sponsors have been required to disclose rebates and other price concessions to the Centers for Medicare and Medicaid Services (CMS). This, in turn, impacts the payments CMS makes to sponsors for providing the benefit. An analysis of reported rebate amounts by plan sponsors, expressed as a percentage of overall Part D drug costs, shows rebates have increased or held steady each year, and are estimated to grow from 8.6% of overall Part D drug costs in 2006 to 16.8% of overall Part D drug costs in 2016. This indicates that disclosure requirements, when properly protected with confidentiality clauses, do not necessarily hinder a PBM’s ability to negotiate competitive rebates with manufacturers.

• 1. Department of Managed Health Care (DMHC) and Department of Insurance (CDI) Regulatory Jurisdiction. In California health insurers and health plans, with which some PBMs contract, are regulated by CDI and DMHC. Currently, DMHC regulates the majority of the commercial health insurance market. Health insurers and plans regulated by CDI and DMHC have mechanisms by which insureds and enrollees can report problems with their drug benefits. DMHC also has a Help Center hotline that patients can utilize to report complaints, and there is a process in place for DMHC to review patient appeals to the Independent Medical Review panel if, for example, coverage is denied for specific drugs. Data from DMHC indicate that 15% of the total complaints received by the DMHC’s Help Center involve outpatient prescription drugs. These complaints include a variety of issues, including complaints related to coverage of medically necessary drugs, cost and coverage disputes related to generic versus brand name drugs, and customer service complaints. In addition, DMHC receives some indirect information about PBMs. For example, whenever a health plan contracts with a PBM, DMHC reviews the contract to ensure there is compliance with the Knox Keene Health Care Service Act of 1975. DMHC also examines how health plans delegate functions to PBMs.
     
  2. Other States. Currently 17 states and the District of Columbia regulate PBMs, generally to a limited extent. While the majority of laws relate to standardizing audit practices (including California’s), others focus on regulating other aspects of PBM business practices. These include attesting to any conflicts of interest, disclosing all relevant financial arrangements to insurers, and prohibiting a PBM from contacting a covered individual without express written permission of the covered entity. In addition, some states are requiring PBMs to license or register with their departments of insurance or boards of pharmacy.
     
  3. Report of the Advisory Council on Employee Welfare and Pension Benefit Plans (ERISA Advisory Council). The 2014 ERISA Advisory Council, which advises the federal Department of Labor (DOL), examined whether PBMs should be required to disclose fees and compensation to sponsors of ERISA health plans in order for sponsors to satisfy their obligation to pay only reasonable compensation to entities that provide goods and services to ERISA plans. After receiving testimony and information from multiple sources, including representatives of PBMs, plan sponsors, plan consultants, plan auditors, pharmacy groups, governmental agencies, and other interested persons, in November 2014, the ERISA Advisory Council recommended that the DOL should consider adopting regulations that deem arrangements between PBMs and plan sponsors reasonable only if PBMs disclose direct and indirect compensation, including compensation paid among related parties such as subcontractors. The ERISA Advisory Council’s recommendations were based on testimony suggesting that plan sponsors face considerable obstacles in conducting meaningful and cost-effective audits to determine compliance with PBM contracts including direct and indirect PBM compensation contract terms, which can result in PBM audits being expensive, lengthy, and often not meaningful for plan sponsors because of the lack of transparency.
     
  4. Federal Trade Commission (FTC). In August 2014, in response to questions from the ERISA Advisory Council, FTC wrote that its staff had analyzed a number of state legislative proposals involving mandatory transparency requirements and their likely effect on competition. FTC reports that staff comments highlighted two particular types of concerns: i) mandatory disclosure requirements may hinder the ability of plans to negotiate an efficient level of disclosure with PBMs; and, ii) if such disclosures publicly reveal previously proprietary and private information about discounts negotiated with PBMs, disclosure may result in less aggressive pricing by, or even collusion among, pharmaceutical manufacturers. In sum, FTC states that it encourages “the ERISA Advisory Council to consider whether harm may result if plan sponsors are denied the ability to choose the level of transparency that best suits them, within the context of their overall plan design. If the ERISA Advisory Council determines that additional transparency may be desirable, we urge the ERISA Advisory Council to consider whether and how mandatory disclosure requirements might be tailored narrowly to present useful and meaningful information to plan administrators while mitigating the risk of competitive harm.” Of note, concerns have been raised in Congressional testimony by David Balto, former policy director of the FTC Bureau of Competition, that the FTC, in allowing mergers and discouraging transparency, has effectively abandoned its enforcement authority over PBMs.
     
  5. U.S. Senate Report. In December 2016, the U.S. Senate Special Committee on Aging (U.S. Senate Committee), after multiple hearings on the subject, released a report entitled “Sudden Price Spikes in Off-Patent Prescription Drugs: The Monopoly Business Model that Harms Patients, Taxpayers, and the U.S. Health Care System.” The U.S. Senate Committee report noted that: “PBMs, for example are tasked with negotiating back and forth between hospitals, employers, and pharmaceutical companies, to reportedly get the best deal. But it is unclear who the parties are that are getting the best deal as well as how much PBMs charge for these negotiations. There is good reason to suspect that the patient may not be getting the best deal.”
     
  6. Informational Hearings. In October 2016 and February 2017 the Assembly Health Committee held informational hearings on the high price of prescription drugs looking specifically at the pharmaceutical supply chain, including PBMs, and the impact of rising drug costs on public and private payers. In March 2017, the Senate Committee on Business, Professions, and Economic Development held a hearing entitled “PBMs 101.”
     

1. SUPPORT. The California Labor Federation (CLF), in support, argues that over the past decade consolidation in the PBM market has led to limited competition among the major PBMs at the same time that drug prices have soared. Although pharmaceutical manufacturers ultimately decide the list price of a drug, the role of PBMs is to balance the power of drug companies and help control costs for purchasers. The lack of transparency in the drug supply chain makes it close to impossible to know if PBMs are doing their jobs. CLF notes that PBMs have been the subject of numerous federal and multi-state lawsuits over allegations of fraud, misrepresentation, kickback schemes, and failure to meet ethical standards. Purchasers’ ability to oversee PBMs is hampered by a lack of transparency and limited leverage in negotiations with major PBMs. CLF argues that this bill brings more PBM transparency and accountability. The disclosure requirements, which are not public and only go to the purchaser, will ensure that every purchaser will have data to make sure that their health care spending is fully expended in the interest of plan members. Purchasers cannot effectively oversee and enforce contracts with PBMs if they do not have sufficient information.
2. SUPPORT IF AMENDED. Health Access California (Health Access) has a support if amended position on this bill. Health Access suggests three amendments. First, Health Access believes this bill would be improved if it included a regulator that could enforce the transparency provisions and suggests that DMHC may be an appropriate regulator, as DMHC already regulates other entities that contract with health plans, specifically medical groups that accept delegated risk. Second, Health Access believes the definition of “proprietary language” could be improved by amending the bill as follows: on page 5, line 1, delete “trade secrets” and after “information” insert “provided by the pharmacy benefit manager to the purchaser.” Third, Health Access believes this bill would be strengthened if information on price concessions was shared with other state agencies that provide information on health care costs, including DMHC and CDI, as well as public purchasers such as the Medi-Cal program and CalPERS, and perhaps the Office of Statewide Health Planning and Development.
3. OPPOSITION. Opponents argue that negotiated discounts in pharmaceuticals are predicated on the confidentiality of contract terms, as discounts are in most complex contracting relationships. Opponents state that the FTC has recognized that the disclosure of even aggregate price-related data could lead to increased prices for drugs and for PBM services. Furthermore, while this bill’s mandatory disclosures risk damaging competition by giving drug companies insight into their competitors’ rebate strategies, opponents claim that this bill provides no benefit or protection that is not already available to purchasers, because transparency already exists for those purchasers that have elected to put such provisions into their contracts, and purchasers always have audit rights to verify that PBMs are complying with contract terms. Finally, opponents argue that the disclosures required by this bill are an unconstitutional taking of PBM trade secrets.
4. OPPOSE UNLESS AMENDED. America’s Health Insurance Plans (AHIP) has an oppose unless amended position on a prior version of this bill. AHIP is concerned that the disclosure requirements, particularly as they apply to prospective purchasers, are overly broad and vague, which may lead to divulgence of confidential information and increase drug prices. AHIP asks that this bill be amended to delete the provisions requiring disclosure to prospective purchasers and include protections that allow PBMs to withhold information that would impede their ability in future negotiations with manufacturers to secure additional rebates and discounts for its purchasers.
   
5. RELATED LEGISLATION. AB 315 (Wood) requires PBMs to be licensed by the state Board of Pharmacy (Board) and states that a PBM has a fiduciary duty to a purchaser. AB 315 also requires a PBM to notify a purchaser of any PBM practice that represents a conflict of interest that interferes with the discharge of the PBM’s fiduciary duty and requires a PBM to periodically disclose to a purchaser certain information such as drug acquisition cost, rebates and administrative fees received, and utilization information. AB 315 is pending in the Assembly Appropriations Committee.
   
6. PREVIOUS LEGISLATION. AB 1960 (Pavley) 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 indicated that AB 1960 would have the unintended consequence of increasing drug costs to health plans, the Medi-Cal Program and other purchasers, without providing any real consumer benefit.
   
7. COMMENT. As previously noted in the Assembly Business and Professions Committee analysis, to ensure implementation and further the transparency goals of this bill, the Committee recommends that its provisions, which are currently proposed to be placed in new sections of the Health and Safety Code with no oversight, be moved to code sections within the Knox-Keene Health Care Service Plan Act of 1975 (Knox-Keene Act) and require oversight by DMHC. DMHC has existing oversight of health plans. To achieve this, the following amendments should be taken:
   
   1. Move the provisions of this bill to the Knox-Keene Act;
      
   2. PBMs shall be licensed by DMHC and pay a license fee as determined by DMHC;
      
   3. PBMs shall report quarterly to DMHC on compliance with the standards in this bill in a manner specified by DMHC; and,
      
   4. DMHC has the authority to enforce the provisions of this bill, including the authority to adopt, amend, or repeal any rules and regulations, not inconsistent with the laws of this state, as may be necessary for the protection of the public and to implement this bill.
      
8. DOUBLE REFERRAL. This bill is double-referred. It passed out of the Assembly Business and Professions Committee on May 2, 2017, with a 10-0 vote.
   

REGISTERED SUPPORT / OPPOSITION:

Support

California Labor Federation
Opposition

Association of California Health and Life Insurance Companies

Pharmaceutical Care Management Association

Express Scripts

Analysis Prepared by:

Date of Hearing: May 2, 2017

ASSEMBLY COMMITTEE ON BUSINESS AND PROFESSIONS

Evan Low, Chair

ABPCA Bill Id:AB 29

Author:(Nazarian) – As Amended Ver:March 28, 2017

NOTE: This bill is double referred and if passed by this committee, it will be heard in the Assembly Committee on Health.

SUBJECT: Pharmacy benefit managers.

SUMMARY: Requires a pharmacy benefit manager (PBM) to disclose certain information to a purchaser or prospective purchaser, including the aggregate amount of rebates, retrospective utilization discounts, and other income that the pharmacy benefit manager would receive from a pharmaceutical manufacturer or labeler in connection with drug benefits related to the purchaser or prospective purchaser. Excuses a PBM from making these disclosures unless the purchaser or prospective purchaser agrees to keep any proprietary information disclosed to it pursuant to these provisions confidential.

EXISTING LAW:

1. Provides for the licensure and regulation of pharmacists and pharmacies by the Board of Pharmacy (Board). (Business and Professions Code (BPC) § 4000 et seq.)
2. Imposes requirements on audits of pharmacy services provided to beneficiaries of a health benefit plan. (BPC § 4430)

THIS BILL:

1. Defines “labeler” as a person who receives prescription drugs from a manufacturer or wholesaler and repackages those drugs for later retail sale and who has a labeler code from the federal Food and Drug Administration.
2. Defines “pharmacy benefit management” as the administration or management of prescription drug benefits. PBMs shall include 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.
3. Further defines “pharmacy benefit manager” as a person, business, or other entity, except that it shall not include a health care service plan or health insurer if the health care service plan or health insurer offers or provides pharmacy benefit management services and if those services are offered or provided only to enrollees, subscribers, policyholders, or insureds who are also covered by health benefits offered or provided by that health care service plan or health insurer, nor shall it include an affiliate, subsidiary, or other related entity of the health care service plan or health insurer that would otherwise qualify as a pharmacy benefit manager as long as the services offered or provided by the related entity are offered or provided only to enrollees, subscribers, policyholders, or insureds who are also covered by the health benefits offered or provided by that health care service plan or health insurer.
4. Defines “prospective purchaser” as a person to whom a PBM offers to provide pharmacy benefit management services.
5. Defines “purchaser” as a person who enters into an agreement with a PBM for the provision of pharmacy benefit management services.
6. Requires a PBM to disclose to a purchaser, in writing and no less frequently than on a quarterly basis, all of the following:
   1. The aggregate amount of all rebates and other retrospective utilization discounts that the pharmacy benefit manager receives, directly or indirectly, from a pharmaceutical manufacturer or labeler in connection with prescription drug benefits specific to the purchaser.
   2. The aggregate amount for each therapeutic class of all rebates and other retrospective utilization discounts that the PBM receives, directly or indirectly, from a pharmaceutical manufacturer or labeler for each therapeutic class of drugs related to prescription drug benefits specific to the purchaser. A therapeutic class shall include at least two drugs.
   3. The nature, type, and amount of all other revenue that the PBM receives, directly or indirectly, from a pharmaceutical manufacturer or labeler in connection with prescription drug benefits related to the purchaser.
   4. Prescription drug utilization information related to utilization by the purchaser’s enrollees or insureds or the aggregate utilization data that is not specific to an individual consumer, prescriber, or purchaser.
   5. Administrative or other fees charged by the PBM to the purchaser.
   6. Arrangements with prescribing providers, medical groups, individual practice associations, pharmacists, or other entities that are associated with activities of the PBM to encourage formulary compliance or otherwise manage prescription drug benefits.
7. Requires a PBM to also disclose to a prospective purchaser, in writing, all of the following:
   1. The aggregate amount of all rebates and other retrospective utilization discounts that the pharmacy benefit manager estimates it would receive, directly or indirectly, from a pharmaceutical manufacturer or labeler in connection with prescription drug benefits related to the prospective purchaser, if that prospective purchaser were to contract with the PBM.
   2. The aggregate amount of all rebates and other retrospective utilization discounts that the PBM estimates it would receive, directly or indirectly, from a pharmaceutical manufacturer or labeler for each therapeutic class of drugs related to prescription drug benefits specific to the prospective purchaser, if that prospective purchaser were to contract with the pharmacy benefit manager. A therapeutic class shall include at least two drugs.
   3. The nature, type, and amount of all other revenue that the PBM estimates it would receive, directly or indirectly, from pharmaceutical manufacturers or labelers in connection with prescription drug benefits related to the prospective purchaser, if that prospective purchaser were to contract with the pharmacy benefit manager.
   4. Administrative or other fees charged by the PBM to the prospective purchaser.
   5. Arrangements with prescribing providers, medical groups, individual practice associations, pharmacists, or other entities that are associated with activities of the PBM to encourage formulary compliance or otherwise manage prescription drug benefits.
8. Specifies that except for utilization information, a PBM need not make the disclosures required unless and until the purchaser or prospective purchaser agrees, in writing, to maintain as confidential any proprietary information. That agreement may provide for equitable and legal remedies in the event of a violation of the agreement. That agreement may also include persons or entities with whom the purchaser or prospective purchaser contracts to provide consultation regarding pharmacy services. Proprietary information includes trade secrets, and information on pricing, costs, revenues, taxes, market share, negotiating strategies, customers, and personnel held by a pharmacy benefit manager and used for its business purposes.
9. Requires all disclosures to comply with the privacy standards of the federal Health Insurance Portability and Accountability Act of 1996.

FISCAL EFFECT: None. This bill is keyed non-fiscal by the Legislative Counsel.

COMMENTS:

Purpose. This bill is sponsored by the author. According to the author, “PBMs play a major role in negotiating the prices of prescription drugs, creating and managing formularies, and several other functions key to the management of pharmacy benefits for millions of Californians. However, despite a PBM’s interaction with most major players – drug manufacturers, health plans and insurers, pharmacies – very little is known about those relationships. AB 29 will ensure that all purchasers, regardless of their size, will receive standard information from the PBM that is specific to the purchaser. Purchasers will know information such as the amount of rebates, discounts, as well as the nature and type of all other revenue the PBM receives in connection with prescription drug benefits related to the purchaser. With this information, purchasers will be able to properly evaluate whether the PBM’s services are in fact resulting in increased savings for consumers.”

Background. PBMs. In the1960’s PBMs were utilized to assist insurance companies who were overwhelmed with processing claims. However, PBMs have evolved from basic claims administrators to more complex organizations offering a wide range of prescription drug managed tools, like drug utilization review, disease management, and consultative services. PBMs can also assist clients with establishing their benefit structure, including developing and maintaining a prescription drug formulary; developing a network of pharmacy providers; and, providing mail order fulfillment services.

According to the Pharmaceutical Care Management Association, PBMs administer prescription drug plans for more than 266 million Americans. PBMs may achieve savings for their customers by negotiating discounts and through cost containment programs, including use of formularies and cost sharing. In 2015, the three largest public PBMs were Express Scripts, CVS Health (formerly CVS Caremark), and United Health/OptumRx/Catamaran.

The Department of Managed Health Care (DMHC) and the Department of Insurance (DOI) Regulatory Jurisdiction. In California, the health plans, which PBMs contract with, are regulated by the Department of Insurance and the Department of Managed Health Care. Though originally the DOI regulated PPOs and the DMHC regulated Knox Keene health plans, the distinction has faded as a result of the standardized benefits provisions of the Affordable Care Act. Currently, the DMHC regulates the majority of the insurance market.

Health plans regulated by the DOI and the DMHC have mechanisms by which patients can contact the health plan if the patient has a problem with the PBM. The DMHC also has a Help Center hotline that patients can utilize to report complaints, and there is a process in place for DMHC to review patient appeals to the Independent Medical Review panel if, for example, coverage is denied for specific drugs. Data from the DMHC indicates that 15 percent of the total complaints received by the DMHC’s Help Center involve outpatient prescription drugs.  These complaints include a wide variety of issues, including complaints related to coverage of medically necessary drugs, cost and coverage disputes related to generic versus brand name drugs, and customer service complaints.  

The DMHC receives some indirect information about PBMs. For example, whenever a health plan contracts with a PBM, the DMHC reviews the contract to ensure there is compliance with the Knox Keene Act. The DMHC also examines how health plans delegate functions to PBMs.

Other States. Eighteen states have specific statutes or regulations requiring certain disclosures from PBMs. Twelve states have requirements for audits and disclosures between pharmacies and PBMs. Oversight in other states is typically handled by the insurance commissioner.

Scrutiny of PBMs. In recent years, there has been much attention focused on the role that PBMs play. Many have criticized PBMs accusing them of being middlemen that make profits as they deal with pharmacies, insurers and drug manufacturers.

In December of 2016, the United States Senate Special Committee on Aging held a hearing entitled: Sudden Price Spikes in Off-Patent Prescription Drugs: The Monopoly Business Model that Harms Patients, Taxpayers, and the U.S. Health Care System. In the Committee report they state “PBMs, for example are tasked with negotiating back and forth between hospitals, employers, and pharmaceutical companies, to reportedly get the best deal. But it is unclear who the parties are that are getting the best deal as well as how much PBMs charge for these negotiations. There is good reason to suspect that the patient may not be getting the best deal.” Subsequently, multiple lawsuits in Missouri and New York were filed against Express Scrips, CVS Health Corporation, Optum Rx, Inc., and Prime Therapeutics, LLC.

In January of 2017, the Centers for Medicare & Medicaid Services reported that rebates that drug companies and pharmacies pay are growing, but PBMs are benefiting as the rebates are not lowering costs for patients or government health care programs. In March of 2017, Anthem announced that it was suing Express Scripts Holding Company for $15 billion dollars in damages, alleging that the PBM violated their contract through excessive charges and failures in its operations.

CalPERS and PBM Disclosure Requirements. According to information obtained from the CalPERS, for more than eight decades, CalPERS has built retirement and health security for state, school, and public agency members. The pension fund serves more than 1.8 million members in the CalPERS retirement system and administers benefits for more than 1.4 million members and their families in the health program, making CalPERS the largest defined-benefit public pension in the United States.

In March of 2016, CalPERS selected a new PBM- OptumRx. Contract terms require that the PBM provide drugs of the highest quality and value, based on sound clinical evidence. It also requires transparency and full disclosure of the financial relationships between the PBM and drug manufacturers. The Chair of the CalPERS Pension and Health Benefits Committee stated,

We placed a lot of emphasis in this solicitation on the company's ability to deal with the increasingly high cost of prescription drugs, and OptumRx presented a very strong proposal. "In addition to being concerned about the health and safety of our members, we wanted to ensure the company we selected would be as committed as we are to continually develop strategies to mitigate the impact of those rapidly rising costs on our members.

In August of 2014, the FTC staff wrote a letter to Larry Good, the Executive Secretary of the Employee Retirement and Income Security Act (ERISA) Advisory Council. In the letter the FTC staff writes:

The Council asked whether the FTC has conducted further study of the PBM industry since 2005. FTC staff has analyzed a number of state legislative proposals involving mandatory transparency requirements and their likely effect on competition. These FTC staff comments have highlighted two particular types of concerns:

• • • 1. Mandatory disclosure requirements may hinder the ability of plans to negotiate an efficient level of disclosure with PBMs; and
      2. If such disclosures publicly reveal previously proprietary and private information about discounts negotiated with PBMs, disclosure may result in less aggressive pricing by, or even collusion among, pharmaceutical manufacturers.

We encourage the ERISA Advisory Council to consider whether harm may result if plan sponsors are denied the ability to choose the level of transparency that best suits them within the context of their overall plan design…we encourage the council to consider whether and how mandatory disclosure requirements might be tailored narrowly to present useful and meaningful information.

Current Related Legislation. AB 315 (Wood) of the current Legislative Session requires pharmacy benefit managers (PBMs) to be licensed by the state Board of Pharmacy (Board); require a PBM to periodically disclose to a purchaser certain information such as drug acquisition cost, rebates received from pharmaceutical manufacturers, and rates negotiated with pharmacies; and applies these provisions to a contract or contractual relationship between a PBM and a purchaser that is entered into, issued, amended, renewed, or delivered on or after January 1, 2018. STATUS: This bill is currently pending in the Assembly Committee on Appropriations.

Prior Related Legislation. AB 1960 (Pavley) 2004 would have required a PBM to make specified disclosures to its purchasers and prospective purchasers, including specified information about the pharmacy benefit manager’s revenues and its drug formularies, and to make specified disclosures to the public upon request. The bill would have established certain standards and requirements with regard to PBM contracts and the provision of certain drugs. The bill would have imposed certain requirements on the membership of a pharmacy and therapeutics committee for a PBM. The bill would have required a PBM to meet certain conditions before substituting a prescribed medication. NOTE: this bill was vetoed by Governor Schwarzenegger. In his veto message he stated, “I share the authors concerns with the rising cost of prescription drugs and generally, her interest in disclosure of information to consumers. However, this measure would have the unintended consequence of increasing drug costs to health plans, the Medi-Cal Program and other purchasers, without providing any real consumer benefit. Studies, including one from the Federal Trade Commission, have shown that enactment of this legislation will limit competition and significantly increase the cost of prescription drugs.”

IMPLEMENTATION CONCERN:

The goal of this bill is to provide greater transparency by requiring PBMs to disclose information to health insurers and labor trusts. In support of this goal, and the consumer protection aims of this Committee, the author should consider an added consumer protection measure to require the health insurers to provide the information they receive from PBMs to the DMHC which has existing oversight of health insurers.

AMENDMENT:

This bill would mandate that a PBM disclose information to a prospective purchaser. Due to concerns about disclosing sensitive information to a prospective purchaser that does not have a guaranteed contract with a PBM, the bill should be amended to strike any reference to disclosing information to prospective purchasers.

REGISTERED SUPPORT:

California Labor Federation

REGISTERED OPPOSITION:

Americas Health Insurance Plans

Association of California Health and Life Insurance Companies

Pharmaceutical Care Management Association

Express Scripts

Analysis Prepared by: Le Ondra Clark Harvey, Ph.D. / B. & P. / (916) 319-3301