February 24, 2020

February 24, 2020

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The New California Regulatory Scheme for Pharmacy Benefit Managers

California recently passed Assembly Bill 315 to create greater regulatory oversight of pharmacy benefit managers (“PBMs”). [1] The bill requires PBMs to provide more transparency regarding their operations. PBMs will have to register with the California Department of Managed Health Care (“DMHC”) and provide new disclosures to the purchasers of their services. The bill will also establish a new pilot project and task force run by the DMHC to analyze how PBMs are affecting the pharmaceutical market.

Impact on Pharmacy Benefit Managers

The bill defines a PBM as a person or entity that enters into a contractual agreement to manage the prescription drug coverage of a health care service plan. This management includes tasks such as processing and paying claims for prescription drugs, processing drug prior authorization requests, adjudicating appeals related to prescription drug coverage, contracting with network pharmacies, and controlling the cost of covered prescription drugs. However, the bill excludes licensed health care service plans, and their employees, who perform these services from this definition.

The bill imposes a new duty on PBMs to exercise “good faith and fair dealing”. This duty is engendered by new rules that will require PBMs to reveal direct and indirect conflicts of interest, and to provide quarterly reports upon request, to the purchasers of their services, such as health care plans. The reports include eight different financial disclosures that cover information ranging from the aggregate amount of the fees imposed on network pharmacies to any administrative fees the PBMs received from pharmaceutical manufacturers.

PBMs will also have to register with the DMHC and meet new contractual standards. The contractual standards cover both new requirements and prohibitions. For instance, PBMs will be prohibited from preventing providers from informing patients of less costly alternatives for prescribed medicines. This will affect contracts that are created on or after January 1, 2019.

Impact on Pharmacies

The bill requires pharmacies to either inform customers purchasing covered drugs if the retail price is lower than their cost-sharing amount, or just automatically charge them the lower amount. If the customer ends up paying the retail price, the pharmacy must still submit the claim to the health care service plan or insurer. The payment made by the customer will apply to their deductible and maximum out-of-pocket limit. This enforcement will be required for any contract that is created on or after January 1, 2019.

New Pilot Program and Task Force

The bill also creates a new pilot project that is designed to assess how permitting enrollees to access the same quantity of prescription drugs at a retail pharmacy as they would otherwise be able to access through a mail order pharmacy will impact network pharmacies. The project will take place in the northern county of Sonoma, and the southern county of Riverside from July 1, 2020 to July 1, 2023. During that time the designated plans will be required to make annual reports to the DMHC concerning how the project is changing the cost and utilization of prescription drugs.

The bill also requires the DMHC to create a task force that will convene by July 1, 2019 and will determine reporting criteria for PBMs related to pharmaceutical costs. The reporting criteria might include data related to drug rebates, payments made to network pharmacies, exclusivity arrangements, and the wholesale cost of pharmaceuticals. The task force is to report its determinations to the State Legislature by February 1, 2020.

*John Tilton is a Law Clerk in Sheppard Mullin’s Century City office.

[1] The bill is available at: https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180AB315.

Copyright © 2020, Sheppard Mullin Richter & Hampton LLP.


About this Author

Eric Klein, Legal Specialist, Sheppard Mullin, national healthcare practice

Eric Klein leads the 95 attorney national healthcare practice, and is a partner in the Century City office, of Sheppard Mullin Richter & Hampton LLP, a full service AmLaw Global 100 law firm with offices throughout California, New York, Chicago, Washington, D.C., London, Brussels, Beijing, Seoul and Shanghai. With over thirty years of practical legal and business experience, his practice focuses on the healthcare, technology and related industries. Known in the business community for his creative solutions and deal-making ability, Eric uses deep industry knowledge, entrepreneurial...

Lynsey Mitchel, Attorney, Sheppard Mullin, Corporate Practice

Lynsey Mitchel is an associate in the Corporate Practice Group in the firm's Century City office and is a member of the firm's healthcare practice team.

Areas of Practice

Lynsey represents hospitals, managed care organizations, medical groups, pharmacies, home health providers, medical device retailers and other health care entities and providers. 

Lynsey has deep expertise in HMO regulatory matters and has assisted numerous clients to obtain HMO licensure as health care service plans under California’s Knox-Keene Health Care Service Plan Act. Lynsey has represented approximately half of all currently licensed restricted Knox-Keene HMO license holders in California in their licensure process. Lynsey has worked on HMO licensure and other matters for Medicare Advantage, commercial and Medicaid health plans.  Lynsey also assists health plans with regulatory compliance matters, material modifications, growth strategies, acquisitions and training.