California’s New Pharmacy Benefit Management Company Registration Requirements – A Sign of Things to Come?
By Melissa Borrelli
In the absence of meaningful federal action to curb prescription drug costs, many states are taking matters into their own hands.
While not the first or only state to require Pharmacy Benefit Managers (PBMs) to either register with or be licensed by the state, new legislation in California requiring the registration of certain PBMs likely represents a monumental shift toward increasing PBM regulation at the state level throughout the country. PBMs, for the unfamiliar, are the go-between among health insurers and providers of pharmaceuticals.
AB 315—The First Step Toward Full Regulation?
Assembly Bill 315 (2018) (AB 315)[i] is one of several initiatives the California legislature has undertaken to promote transparency in the complicated, opaque world of pharmaceutical manufacturing, sales, and coverage.[ii] AB 315 was passed, according to the legislature, in order to “ensure that purchasers will receive standard information from [a] PBM”[iii] and “with this information, purchasers will be provided tools to enhance their negotiating ability and assist them in properly evaluating whether the PBM’s services are delivering the anticipated savings promised.”[iv]
Specifically, AB 315 added multiple new statutory requirements, including but not limited to:
- Business and Professions Code (B&P Code) Section 4441, which requires, in part, that PBMs notify a purchaser in writing of any of its activities, policies, or practices that present a conflict of interest with that purchaser, creating a “good faith and fair dealing” duty.[v]
- Upon the request of purchasers, PBMs must provide reports of the eight datapoints below, which, are mainly financial in nature, including but not limited to:
- The aggregate wholesale acquisition costs from a pharmaceutical manufacturer or labeler for certain therapeutic drugs;
- The aggregate amount of rebates received by the PBM; and
- Any administrative fees received from a pharmaceutical manufacturer or labeler.[vi]
- Health and Safety Code (H&S Code) Sections 1385.004 and 1385.005 require PBMs that contract with health plans (see definition below) to register with (but not yet become licensed by) the California Department of Managed Health Care (DMHC) (curiously, the same is not required of PBMs that contract with health insurers licensed by the California Department of Insurance (CDI)).[vii] AB 315 imposes other requirements, including (1) a two county pilot project designed to assess how permitting certain enrollees to obtain their prescriptions at a retail pharmacy rather than through a mail order pharmacy will impact network pharmacies, and (2) requiring the DMHC to create a Task Force on PBM Reporting (Task Force), which must provide a report to the legislature regarding additional information that health plans and/or PBMs should report to the Department. The legislature included the following as examples of additional reporting that the Task Force should consider:
- Wholesale acquisition costs of pharmaceuticals,
- Rebates from pharmaceutical manufacturers,
- Payments to network pharmacies, and
- Exclusivity arrangements between health plans or PBMs with pharmaceutical manufacturers.[viii]
The Task Force report is due in 2020 and will likely result in further legislative attempts to increase PBMs’ reporting requirements, thereby increasing transparency, and taking one more step toward full regulation.
Inexplicably, AB 315 also put into place B&P Code Sections 4079.5 and 4441(k) and H&S Code Section 1385.003(b), which require pharmacies to inform customers if the retail price of their prescription is lower than the applicable cost-sharing amount and disallows both PBMs and health plans from including contract clauses that prohibit a pharmacist from informing a customer of the lower price. Notably, the prohibition of so-called contractual “gag clauses” on pharmacists that prevent them from sharing this information with their customers has already been California law for years.[ix]
Full regulation and mandatory licensure of PBMs was likely deferred by the legislature, in part, due to industry opposition. Unsurprisingly, the Pharmaceutical Care Management Association opposed earlier legislative language that would have required greater regulation; however, even the state advocacy organization for California health plans, whose health plan members are afforded the “good faith and fair dealing” duty of PBMs under the legislation, opposed AB 315 in part because it puts health plans in the position of regulating PBMs, as the registration requirements were imposed on plans to impose on their contracting PBMs, not directly on PBMs.[x]
The pharmaceutical industry also strongly objects to not only fledgling efforts to regulate PBMs but also undertakes litigation to stifle the same. The Pharmaceutical Research and Manufacturers of America (PhRMA) is currently utilizing the courts to attempt to block implementation and enforcement of legislation in California that, among other things, requires prescription drug manufacturers to provide at least 60-days written notice to specified purchasers of certain prescription price increases.[xi] The legislation, SB 17 (2017),[xii] also requires drug manufacturers to report to purchasers and the state prescription price increases that are over 16% in a two-year period.
California’s Registration Requirement—Eerily Similar to a Health Plan License Application
The DMHC published guidance regarding how to comply with AB 315’s registration requirement, including a template Application Form for PBM Registration (Application Form).[xiii] Existing PBMs subject to AB 315 must have registered with the DMHC no later than January 1, 2020. In theory, new PBMs to the state or those that were not originally required to register but whose circumstances have changed must also register, although neither the legislation nor the DMHC’s guidance state by what point that must occur, e.g., prior to conducting business in the state, within 30 days of the same, etc.
The Application Form mirrors the legislative requirements but also requests information similar to what the DMHC requires of health plan license applicants, including information on the “administrative capacity” of the PBM, such as the names and contact information for persons and entities that are “beneficially interested”[xiv] in the PBM; the names and contact information for key management personnel; the organization’s entity type; and the name, contact information, occupation, and professional qualifications of those with the five largest interests in the PBM, e.g., stockholders. The Application Form also has a series of affirmations, again mirroring the legislation.
Again, interestingly, the DMHC requests more detailed information about the five largest interests, e.g., stockholders, in the PBM but not the same information regarding key management personnel, arguably those that have the most impact on how a PBM is run and that are responsible for its day-to-day compliance obligations.
Registered PBMs must also file amendments to their original registration application within 30 days of the change (the guidance does not specify whether this is in advance of or following the change). An initial registration application fee of $3,500 will be charged, with a cap of $4,000 for additional review fees. Fees for amendments to the Application Form are not capped at any amount and the PBM can expect to be billed at an hourly rate, which will depend on the level of the DMHC reviewer, e.g., an attorney versus an analyst.
PBMs that have or will register are advised to understand their options regarding the confidentiality of the information they file with the DMHC and to ensure appropriate staff are responsible for knowing what amendments must be filed and when. Noncompliance with the requirements subjects at least health plans, and possibly PBMs, to enforcement actions and fines.
Conclusion, or What to Expect When You’re Expecting Increased Government Regulation
While the political will for full PBM-licensure and regulation similar to other health care sector entities, including hospitals, health plans, and the like, may not yet be ripe, the steps California is taking will likely ultimately lead to additional regulation of PBMs. As the adage states, as California goes, so will go much of the rest of the country. Already, legislative and executive efforts in Maryland, Ohio, and Nevada, among others, are pushing the boundaries with bold policy approaches to PBM regulation. Circumstances as they are, it is not improbable that before long health plans will roll out the “Welcome to the highly regulated entity club!” sign to PBMs.
Melissa Borrelli is a Director of Health Care Consulting and Assistant General Counsel at the consulting firm Mazars USA LLP. She can be reached at Melissa.Borrelli@mazarsusa.com.
- AB 315 (2018), https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180AB315, last accessed Oct. 25,
- See also SB 17 (2017), which requires pharmaceutical manufacturer disclosures of price increases (the constitutionality of which is currently being debated through litigation), https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml? bill_id=201720180SB17, last accessed 25, 2019; Governor Gavin Newsom’s first Executive Order regarding creating a state- wide prescription drug purchasing pool, https://www.gov.ca.gov/wp-content/uploads/2019/01/EO-N-01-19-Attested- 01.07.19.pdf, last accessed Oct. 25, 2019.
- AB 315 Assembly Floor Analysis, 08/28/2019, https://leginfo.legislature.ca.gov/faces/billAnalysisClient.xhtml? bill_id=201720180AB315, last accessed 31, 2019.
- AB 315 Senate Floor Analysis, 08/27/2018, https://leginfo.legislature.ca.gov/faces/billAnalysisClient.xhtml? bill_id=201720180AB315, last accessed 31, 2019.
- See Bus. & Prof. Code § 4441(c) and (d).
- See Bus. & Prof. Code § 4441(e).
- California is unique in its health care coverage regulation as there are two government agencies that regulate health plans/insurance. The constitutionally created CDI, headed by an elected Insurance Commissioner, regulates traditional fee-for- service, indemnity health insurance, and some preferred provider organizations (PPOs) in the state under the Insurance Code (these licensed entities are referred to as “health insurers” and their products “health insurance”). The DMHC, on the other hand, is part of the executive branch, headed by an appointed Director reporting ultimately to the Governor. The DMHC regulates health maintenance organizations (HMOs) and some PPOs under the Knox-Keene Health Care Service Plan Act of 1975, or the H&S Code (these licensed entities and their products are referred to as “health plans”). In the past, the health coverage provisions in the Insurance and the H&S Codes differed markedly, particularly with respect to financial reserve minimums, quality of care requirements, benefits, consumer protections, and other areas; however, since the passage of the Affordable Care Act (“ACA”) in 2010, the bulk of California legislation implementing the ACA has had mirror provisions in the Insurance and H&S Codes such that there are very few differences anymore. However, AB 315 was notably not written in this same manner. Its provisions apply only to the H&S Code and de facto to the DMHC and health plans, not to the CDI and health insurers. In fact, the definition of a PBM in AB 315 specifically includes the term “health plan” and not “health insurer”. No public explanation has been provided as to why these entities were treated differently with respect to PBM registration.
- See Health & Safety Code § 1385.007.
- [ix] See Cal. Health & Safety Code §§ 1342.71(f )(3); 1367.42; and 1367.47 and Cal. Code Regs. Tit. 28 Rule 1300.67.24(c)(1).
- See Cal. Ass’n of Health Plans, https://www.calhealthplans.org/legislation/, last accessed on Oct. 21, 2019.
- See PhRmA David (formerly PhRMA v. Brown). Docket No. 2:17-cv-02573 (E.D. Cal. Dec 08, 2017).
- SB 17 (2017), https://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB17, last accessed Jan. 20,
- See DMHC APL 19-017 (OPL) Requirements Pursuant to AB 315: Pharmacy Benefit Management, dated Oct. 11, 2019, http://www.dmhc.ca.gov/Portals/0/Docs/OPL/APL%2019- 017%20(OPL)%20Requirements%20Pursuant%20to%20AB%20315%20Pharmacy%20Benefit%20Management%20(10_11_19).pdf? ver=2019-10-11-121638-763, last accessed 29, 2019.
- See Health & Safety Code § 1385.005(h): (1) If the PBM is a partnership or other unincorporated association, each partner or member (Section 1385.005(h)(1)); (2) If the PBM is a corporation, each of its officers, directors, and stockholders, provided that a natural person shall not be deemed to be beneficially interested in a nonprofit corporation (Section 1385.005(h) (2)); and (3) If the PBM is a limited liability company, each officer, manager, or member (Section 1385.005(h)(3)).