Legislature(2009 - 2010)BELTZ 105 (TSBldg)

04/01/2010 01:30 PM Senate LABOR & COMMERCE

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Heard & Held
Moved SB 303 Out of Committee
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        SB  38-PHARMACY BENEFITS MANAGERS; MANAGED CARE                                                                     
1:39:25 PM                                                                                                                    
CHAIR PASKVAN announced SB 38 to be up for consideration.                                                                       
1:39:37 PM                                                                                                                    
SENATOR FRENCH, sponsor of SB 38, read the sponsor statement                                                                    
into the record as follows.                                                                                                     
     SB  38 would  regulate  and bring  transparency to  the                                                                    
     business practices  of pharmacy benefit  managers (PBM)                                                                    
     in Alaska.  Pharmacy benefit  managers are  the largely                                                                    
     unregulated   drug   middlemen  that   administer   the                                                                    
     prescription drug  benefit portion of  health insurance                                                                    
     plans for  governments, private companies,  and unions.                                                                    
     The three  major pharmacy  benefit managers  are Medco,                                                                    
     CVS   Caremark,  and   Express  Scripts.   Wells  Fargo                                                                    
     Insurance  Services,  the   State  of  Alaska's  health                                                                    
     insurance  provider,  has   a  contract  with  Envision                                                                    
     Pharmaceutical  Services   to  administer  prescription                                                                    
     drug benefits for state employees.                                                                                         
     PBMs negotiate  with drug manufacturers  and pharmacies                                                                    
     on   behalf   of    health   insurance   plans.   These                                                                    
     negotiations   include    cash   rebates    that   drug                                                                    
     manufacturers  pay   for  drugs  placed  on   lists  of                                                                    
     approved  drugs.   The  confidential   and  proprietary                                                                    
     nature  of these  contracts and  financial arrangements                                                                    
     with  drug  manufacturers  and pharmacies  creates  the                                                                    
     opportunity  for  PBMs  to engage  in  unfair  business                                                                    
     practices.   PBMs   increase   profits   by   accepting                                                                    
     incentives from drug manufacturers  that are not shared                                                                    
     with  health  plan  sponsors,  such  as  the  State  of                                                                    
     Alaska. SB 38 would  prohibit pharmacy benefit managers                                                                    
     from  intervening in  the delivery  or transmission  of                                                                    
     At  of  the  beginning  of  2009,  29  states  and  the                                                                    
     District  of Columbia  have  sued  Express Scripts  and                                                                    
     won,  resulting  in a  settlement  of  $9.3 million  to                                                                    
     states and  up to $200,000  to affected patients  as of                                                                    
     May  2008.  Twenty-eight  states and  the  District  of                                                                    
     Columbia have  sued CVS Caremark and  won, resulting in                                                                    
     a settlement  of $41 million  in February of  2008. The                                                                    
     federal government  and twenty  states have  sued Medco                                                                    
     and won, resulting  in a settlement of  $184 million in                                                                    
     2006. The  lawsuits were filed under  the federal False                                                                    
     Claims  Act  and/or  state  False  Claims  Acts  and/or                                                                    
     In  addition to  lawsuits  against PBMs,  16 states  as                                                                    
     well  as the  District  of Columbia  have enacted  laws                                                                    
     that  regulate the  business practices  of PBMs.  Other                                                                    
     states  have led  the way  with legislation  regulating                                                                    
     the business practices  of PBMs and it is  time for the                                                                    
     Alaska Legislature to do the same.                                                                                         
1:43:03 PM                                                                                                                    
BARRY CHRISTIANSON, pharmacist and co-Chair, Alaska Pharmacists                                                                 
Association, introduced himself.                                                                                                
DIRK WHITE, pharmacist, Sitka, introduced  himself and said he is                                                               
a member of the Alaska Pharmacists Association.                                                                                 
1:44:31 PM                                                                                                                    
MR.  CHRISTIANSON said  this bill  has  been a  priority for  the                                                               
Alaska  Pharmacists Association.  He said  their members  work in                                                               
community pharmacies,  hospitals, other  government institutions,                                                               
and places  like the Pioneer Homes.  He said there are  many good                                                               
reasons  to   support  SB  38.   He  described  PBMs   acting  as                                                               
intermediaries   between   individuals   (patients),   the   plan                                                               
sponsors, pharmaceutical manufacturers,  and pharmacies. PBMs use                                                               
their large purchasing  power to negotiate rates  for members who                                                               
ideally pass those  lower costs on to consumers. They  do this by                                                               
managing  formularies (obtaining  drugs  from manufacturers  with                                                               
the best price).                                                                                                                
He explained his  diagram of a pharmacy supply chain  in the U.S.                                                               
The pharmacy was in the middle  with the consumers at the top. He                                                               
said the pharmacy  has to procure its product  from somewhere and                                                               
in most instances  it's from the drug  wholesaler or distributer.                                                               
The distributor  or wholesaler  buys that  product from  the drug                                                               
manufacturer. The  PBM has contracts with  the drug manufacturers                                                               
to recoup  some rebate  money and, in  turn, they  have contracts                                                               
with  both  the  pharmacy  and the  employer  or  health  sponsor                                                               
regarding the payment of the prescription drugs.                                                                                
MR.  CHRISTIANSON said  the reason  pharmacists are  concerned is                                                               
because the industry  has been largely unregulated  and has grown                                                               
quite  a bit  in the  last 10-15  years. PBMs  have been  able to                                                               
charge more for their drugs  than the pharmacies actually receive                                                               
for payment from patients. One of  the other ways PBMs make money                                                               
is  by  operating  large  mail  order  operations  and  switching                                                               
patients  from  one  drug  to  another  that  is  sometimes  more                                                               
expensive for the  patient but with a larger rebate  on the other                                                               
He said that  there are three large PBMs operating  in the United                                                               
States; all  of them  operate in Alaska  and have  extremely nice                                                               
profits. The three PBMs are involved in lawsuits.                                                                               
MR. CHRISTIANSON  said transparency is important  because without                                                               
the plan's sponsor  knowing what the drugs cost it  would be hard                                                               
for them to negotiate a good contract.                                                                                          
MR. WHITE  continued saying that  some opponents  to transparency                                                               
say that would  allow the PBM or drug manufacturers  to have some                                                               
collusion  and  inflate  the  pharmaceutical  prices  even  more.                                                               
Manufacturers  would say  they  would be  reluctant  to give  the                                                               
discounts  if  the  dollar  amounts are  actually  out  there  in                                                               
public. Once  the drug pricing  is made available the  PBMs would                                                               
have far  less bargaining power.  However, that hasn't  proven to                                                               
be true in other states that have passed similar legislation.                                                                   
1:51:26 PM                                                                                                                    
MR. WHITE  explained that  PBMs make an  enormous amount  off the                                                               
rebates and the  plan sponsors aren't even aware of  it. They can                                                               
"up charge"  plan sponsors an  average of  $23 more for  a single                                                               
prescription. In other  words they can add another $23  to what a                                                               
customer paid for  a drug and charge the plan  sponsor - like the                                                               
State  of   Alaska  or  a   union  -  that  extra   $23.  Without                                                               
transparency PBMs  also have a  financial incentive  to encourage                                                               
the use  of more  expensive brand name  drugs because  they might                                                               
get a higher rebate or  other incentives to push those particular                                                               
drugs  rather   than  less   expensive  generic   drugs.  Without                                                               
transparency the rebates that PBMs  negotiate are not necessarily                                                               
passed on  to the plan  sponsor who  doesn't even know  what they                                                               
amount to.                                                                                                                      
He related  that New York has  seen $50 million in  savings, Lear                                                               
Corporation saved  $1.1 million in  a $3.6 million  budget, Sheet                                                               
Metal Workers  International Association saved up  to 30 percent,                                                               
and TRICARE  anticipates saving $1.67 billion  by negotiating its                                                               
own  drug prices.  Twenty-three  other states  have enacted  this                                                               
legislative so far;  South Dakota is one and  they saved $800,000                                                               
in a  single year. Wisconsin  saved $30 billion,  Texas estimated                                                               
$265  million, the  California Health  Care Coalition  found they                                                               
could  save $3-6  on every  prescription  with their  transparent                                                               
An Alaskan example  that they actually have the data  on showed a                                                               
person  filling  the  prescription  for 90-day  supply  of  blood                                                               
pressure medication and the  beneficiaries' (pharmacy) co-pay was                                                               
$37.50. The state  was billed $187.50 by the PBM.  So $37.50 went                                                               
to the  pharmacy and  $150 went  to the  PBM. In  over a  year of                                                               
filling this  prescription the state  paid the PBM $750  for just                                                               
this one  prescription; $150 went  to the pharmacy and  $600 went                                                               
to the  PBM. The  pharmacist filled  the prescription,  made sure                                                               
the  patient  was compliant  with  the  medication, followed  the                                                               
medication, knew what  the side effects were, and  dealt with the                                                               
patient on a regular basis, and  they got paid $150 over the year                                                               
and the PBM  got paid $600 for "flipping a  switch" and the state                                                               
was overcharged.                                                                                                                
MR. WHITE  said SB  38 will level  the competitive  playing field                                                               
for  local pharmacists  in dealing  with  PBMs, protect  patients                                                               
from unauthorized  drug substitutions  by the PBMs,  provide some                                                               
pricing transparency and would save  plan sponsors and patients a                                                               
lot of money.                                                                                                                   
1:55:17 PM                                                                                                                    
SENATOR THOMAS supposed  that the PBM never touches  the drug and                                                               
that they are  an entity that is supposedly  negotiating a better                                                               
price for pharmacists, but getting  an extremely good benefit for                                                               
themselves as  well.   He asked  if that is  what happens  in all                                                               
cases and if  transparency would give people the  ability to know                                                               
exactly  the entire  transaction -  the  bulk prices  maybe to  a                                                               
union or  to the  state versus an  arrangement with  them because                                                               
they say they are going to  do good things for you and ultimately                                                               
the  state ends  up  paying all  of the  bills  without any  real                                                               
knowledge of exactly how the money is being parceled out.                                                                       
1:56:26 PM                                                                                                                    
MR. WHITE  answered yes  that is correct.  PBMs own  no inventory                                                               
and  have no  stock  whatsoever in  the  pharmaceuticals that  he                                                               
dispenses.  He explained  that he  purchases his  pharmaceuticals                                                               
from  his   drug  wholesaler,  he   pays  the  bills   for  those                                                               
medications, and then  he gets paid that  $37.50 (that particular                                                               
case was  a co-pay, so the  patient actually paid that).  In some                                                               
cases, there may  be that co-pay plus a little  bit of money that                                                               
is  sent to  him  through the  PBM's system  and  then they  turn                                                               
around and up charge a higher price to the state or whoever.                                                                    
SENATOR  THOMAS asked  if someone  could  explain the  difference                                                               
between  them and  a  third-party administrator  (TPA)  and if  a                                                               
third-party administrator is still involved.                                                                                    
MR. WHITE  answered that  this bill  would make  the PBM  at TPA;                                                               
currently  they are  not. Currently,  the plan  sponsor would  be                                                               
considered the TPA.                                                                                                             
1:58:11 PM                                                                                                                    
CHAIR PASKVAN  asked him  to explain the  pricing for  mail order                                                               
pharmacies   and  how   prices   can   become  inflated   through                                                               
MR. WHITE answered that every  prescription bottle has a national                                                               
drug  code (NDC).  The first  four or  five numbers  are who  the                                                               
manufacturer and/or  packager is; the  next two or  three numbers                                                               
are  specific to  the  product (penicillin  500  mg tablets,  for                                                               
instance), and the  last numbers signify the package  size. So if                                                               
he is buying  a package of 28 tablets from  his wholesaler, which                                                               
is a  unit of  use they  would dispense (if  you take  one tablet                                                               
4Xday for  7 days=28  tablets), that would  have a  specific NDC.                                                               
Every NDC  number has an  average wholesale price  (AWP) assigned                                                               
to it. The  person who packages or manufacturers it  gets the NDC                                                               
number and  then they put the  AWP on the product.  In mail order                                                               
houses  they  found that  the  NDC  numbers are  from  repackaged                                                               
drugs.  The PBM  could  buy a  train load  of  500 mg  penicillin                                                               
tablets from  the manufacturer and  then repackage it  into those                                                               
same small little  28-count bottles. The PBM would  apply for its                                                               
own AWP and get  a price of $100, but his AWP  for the product he                                                               
buys from his wholesaler, AmerisourceBergen,  may be $10. So, you                                                               
can have two of the same  bottles with the same tablets, but they                                                               
can have  two totally  different prices. When  the PBM  says they                                                               
are  going to  "discount  the  price" by  50  percent; that's  50                                                               
percent of  $100 and  they still  make a lot  more money  than he                                                               
would  dispensing the  same tablets  at his  usual and  customary                                                               
2:00:36 PM                                                                                                                    
SENATOR DAVIS joined the committee.                                                                                             
2:01:18 PM                                                                                                                    
CHAIR PASKVAN asked if there  is an ownership overlap between any                                                               
of the mail order pharmacies and the PBMs.                                                                                      
MR. WHITE answered that usually PBMs do own a mail order house.                                                                 
CHAIR PASKVAN  asked if there is  the potential at that  level to                                                               
provide  discounting to  the mail  order pharmacy  (buying volume                                                               
essentially from themselves) that he never has access to.                                                                       
MR. WHITE  answered "yes"  would be the  simple answer.  He added                                                               
Medco  that was  once owned  by Merck  would have  access to  raw                                                               
materials from  Merck to make  the tablets, capsules  or whatever                                                               
the dosage  form is and  then move it  to their mail  order house                                                               
and from the mail order house  it would move to the consumer. So,                                                               
they  would  have a  direct  line  from  raw materials  to  final                                                               
consumer;  then they  would have  the control  loop for  the cash                                                               
flow as well.                                                                                                                   
CHAIR PASKVAN said he wanted to  focus on the potential for price                                                               
manipulation  because Mr.  White's  business  can't buy  directly                                                               
from any of  the pharmaceutical companies; he has  to buy through                                                               
intermediaries. What kind of price disadvantage would he have?                                                                  
MR. CHRISITIANSON  responded that there are  two separate pricing                                                               
issues. There would  be the acquisition or what it  costs for the                                                               
drug and then there is the  AWP. It's the manipulation of the AWP                                                               
that is the biggest problem.                                                                                                    
MR. WHITE  added that  up until 1995  or so he  and his  wife had                                                               
contracts to buy directly from Lily  and Merck and they were able                                                               
to save.  The reason  they were doing  those direct  purchases is                                                               
because they  were paying  the freight which  saved them  about 2                                                               
percent.  But  he  didn't  know of  a  single  drug  manufacturer                                                               
anymore that will  sell to an independent pharmacy;  so they have                                                               
to  go  through  one  of the  three  national  drug  wholesalers:                                                               
AmerisourceBergen, McKesson and Cardinal.                                                                                       
CHAIR  PASKVAN  said  now  the business  structure  is  that  the                                                               
pharmacies have to go through the PBMs.                                                                                         
MR.  CHRISTIANSON answered  that since  the early  90s they  have                                                               
seen more and more prescriptions  being processed through the PBM                                                               
networks. Nationally it's 85-90 percent.                                                                                        
2:06:18 PM                                                                                                                    
CHAIR  PASKVAN  asked   what  the  risk  is   to  the  individual                                                               
pharmacist  if they  complain about  the  PBM pricing  structure,                                                               
because  he  has  heard  stories   about  them  exercising  their                                                               
superior economic resources.                                                                                                    
MR. CHRISTIANSON  answered that  PBMs carry a  lot of  weight; he                                                               
and Mr.  White are  just small  pharmacies. Pharmacies  in Alaska                                                               
and  the Lower  48 have  been subject  to "heavy-handed"  audits,                                                               
which SB 38 addresses.                                                                                                          
2:07:31 PM                                                                                                                    
GERRY PURCELL, Pharmacy Partners,  Atlanta, Georgia, supported SB
38. He said  he is testifying without any  compensation. This has                                                               
been his area of expertise nationally  for the last 15 years, the                                                               
first five  years of  which he  was working  as a  national sales                                                               
director  for a  PBM that  conducted a  number of  contracts with                                                               
state and  taxpayer entities. For the  last 10 years he  has been                                                               
recognized as a national functional  area expert on PBM practices                                                               
and  has personally  briefed over  a dozen  attorneys general  in                                                               
both  blue and  red states.  He usually  testifies three  to five                                                               
times annually before committees such as this.                                                                                  
MR. PURCELL  said he had  done extensive work in  reviewing state                                                               
contracts and, in  particular, a great deal of work  in the state                                                               
of  Texas  (that  was  mentioned   as  having  the  $265  million                                                               
savings). He has a unique  understand of the various transparency                                                               
triggers  that  they  put  into  place  through  legislation  and                                                               
contracting. He  noted that $265  million in savings is  only one                                                               
of  four  Texas  state  plans.   By  the  time  they  have  fully                                                               
implemented  their  transparency  bill the  savings  will  likely                                                               
exceed a half billion dollars.                                                                                                  
He said  historically the problem  has been in  understanding the                                                               
complex  mystery of  PBM practices.  In  the late  90s, PBMs  had                                                               
literally 30-40  different ways of  making money and only  a very                                                               
few of  those ways were  actually disclosed to the  clients. PBMs                                                               
call themselves managers,  but they actually make  money when the                                                               
clients' costs  go up in  sort of a  reverse incentive -  and not                                                               
because they are managing the cost of the plan.                                                                                 
MR. PURCELL said  his efforts have been  in creating environments                                                               
where transparency is required. It  would be very unusual for him                                                               
to go  into any situation where  there is a lack  of transparency                                                               
and  not be  able to  save that  taxpayer entity  somewhere 10-25                                                               
percent  of their  first year  drug  expenditures. Those  savings                                                               
become increasingly  significant to  state budgets and  are often                                                               
in the millions and billions of dollars.                                                                                        
2:11:06 PM                                                                                                                    
He  liked four  areas  especially of  SB 38.  The  first one  was                                                               
registering PBMs. The idea is not  to punish PBMs but to put them                                                               
on a level playing field  with everyone else. Every other medical                                                               
and  health care  industry in  Alaska and  most states  including                                                               
insurance  companies third  party  administrators who  administer                                                               
both   medical,   dentists,    optometrists,   pharmacists,   and                                                               
physicians  are  all required to register. The  only exception in                                                               
many states,  however, is the  PBM. So, requiring them  to simply                                                               
register just  levels the  playing field  - and  they do  fit the                                                               
classic definition of a third-party  administrator. While TPAs do                                                               
different things, some of them  process dental and vision claims;                                                               
their  core  function   is  that  they  do   process  claims  and                                                               
administer  payment  of  them.  In  that sense  the  PBM  is  not                                                               
different   from  any   other   TPA  that   provides  that   core                                                               
2:12:37 PM                                                                                                                    
The challenge is  that in many cases experts don't  know how many                                                               
PBMs are  even operating within  a state. Some have  estimated as                                                               
low as 80  and a most recent estimate of  over 230 different PBMs                                                               
are  operating in  the United  States. He  said settlements  have                                                               
been very  favorable to  the consumers in  most states  and which                                                               
ones are operating in Alaska should be known.                                                                                   
Secondly, he said  the area of disclosure  needs changing. Before                                                               
the 27-state attorneys general settlement  occurred in 2003, they                                                               
had no idea  how much money the  PBMs were keeping in  the way of                                                               
rebates.  After that  settlement it  was learned  that they  were                                                               
retaining  over 55  percent of  the rebate  dollars. The  classic                                                               
Black's Law Dictionary  definition of a rebate  is something that                                                               
is  to the  benefit  of the  payer, but  in  this scenario  those                                                               
benefits were  primarily to the  middle man, a  classic arbitrage                                                               
scheme where they  were taking they payers'  money and leveraging                                                               
it  (without great  expenses or  infrastructure  costs) for  high                                                               
margins and then retaining the  majority of those margins without                                                               
disclosing  in some  cases  even  the nature  of  the margin  and                                                               
certainly not the amount.                                                                                                       
MR. PURCELL said  SB 38 makes sure that the  State of Alaska will                                                               
continue to  benefit from total  disclosure, not only  of rebates                                                               
but of things  like spread pricing using AWPs  that was described                                                               
earlier. Spreads  also occur in  retail pharmacies where  the PBM                                                               
may be charging you a  number but reimbursing your local pharmacy                                                               
a different number and keeping  the difference. He thinks because                                                               
that is your  money that you ought  to at least be  aware that it                                                               
is occurring and how much it is.                                                                                                
MR.  PURCELL said  New Jersey  that will  save $500  million over                                                               
five  years is  a recent  good example  of what  can happen  when                                                               
transparency requirements  are put out  to bid in  contracts that                                                               
were no bid previously.                                                                                                         
2:15:40 PM                                                                                                                    
The  third area  of SB  38  he liked  is  the way  it deals  with                                                               
pharmacy audits. He explained that  the practice of extrapolation                                                               
occurs  if   a  PBM  audits   a  pharmacy  and  finds   a  single                                                               
prescription  that was  administered  wrong (often  it  is not  a                                                               
prescribing  error;  it  could  just be  one  wrong  number).  He                                                               
related how  a pharmacy  was charged for  years for  an ibuprofen                                                               
prescription (actually  prepared by a  Texan physician who  was a                                                               
Senator)  that  was  incorrectly  dispensed. It  was  an  800  mg                                                               
prescription for ibuprofen.  The PBM in this case  went back five                                                               
years  and identified  every ibuprofen  prescription and  charged                                                               
that incorrect but  highest amount back to the  pharmacist on the                                                               
next invoice  without any appeal process  in place at all  and no                                                               
statute  of limitations.  It came  to $8000!  He said  it is  not                                                               
uncommon for these audits to go  back anywhere from four to seven                                                               
years. They  are often done  without notice, and they  are almost                                                               
always done  without any meaningful  appeals process,  meaning if                                                               
the pharmacist  objects to it, there  is no time frame  for which                                                               
they have to respond before the  PBM takes the money out of their                                                               
account - and it's usually on  the next cycle. This bill corrects                                                               
that problem.                                                                                                                   
In his  judgment, Mr. Purcell  said, extrapolation should  not be                                                               
allowed. "Every  claim should stand  on its own merit  and should                                                               
be audited  as such on a  by-claim basis." He said  nobody argues                                                               
that, but  there is a  problem when  the PBM makes  an assumption                                                               
that affects five to seven  years of business for every identical                                                               
or similar  type prescription.  Sometimes the  word "retaliation"                                                               
was  used as  it  relates  to pharmacy  audits.  He could  share,                                                               
probably for  several hours, anecdotal  examples of  exactly that                                                               
type of practice  or what would appear to be  at the surface some                                                               
type of  retaliation where local pharmacists  testify or complain                                                               
and  they show  up on  an  audit list.  In this  economy he  said                                                               
audits  are on  the increase  and the  local pharmacist  has very                                                               
little  of  the   protection  that  would  be   normal  in  other                                                               
2:18:37 PM                                                                                                                    
The fourth thing  he liked about SB  38 is how it  deals with the                                                               
timing of  prices. He explained  that prices are very  dynamic in                                                               
the  drug manufacturing  marketplace and  typically PBMs  receive                                                               
nightly  downloads from  data sources  that update  those prices.                                                               
The problem  over the last  decade is  that they will  often make                                                               
the change in the price to  affect the payer, but they won't make                                                               
the change  at the same time  to affect the pharmacies  - thereby                                                               
creating arbitrage or a spread that  is hidden. The net effect of                                                               
this over a  year, even though they may be  talking about pennies                                                               
worth  of  difference  for  each script,  literally  adds  up  to                                                               
millions of dollars of arbitrage  activity. All he is saying here                                                               
is that the  timing should be close to identical;  the bill calls                                                               
for  24 hours.  This just  eliminates one  of those  40 different                                                               
spread   practices   PBMs   use   to  enjoy   high   margins   of                                                               
profitability.  However, he  hastened  to add  that his  argument                                                               
doesn't  have anything  to do  with  their profitability.  Health                                                               
care has  high operating margins,  disproportionate to  any other                                                               
industry, at  40-65 percent, but  the problem is how  they arrive                                                               
at  it -  and they  arrive at  it typically  with your  money. He                                                               
fully supported SB 38.                                                                                                          
2:20:30 PM                                                                                                                    
SENATOR THOMAS  said he thought pharmaceutical  manufacturers had                                                               
the highest operating margins.                                                                                                  
MR.  PURCELL  responded  that pharmaceutical  manufacturers  will                                                               
typically make  14-18 percent, and  that would be a  very healthy                                                               
year for  them. A  typical Blue Cross/Blue  Shield plan  would be                                                               
happy with  4-6 percent. But  PBMs operate with  adjusted margins                                                               
of somewhere  between 40-65 percent  and much of that  comes from                                                               
mail  order (about  55 percent  of their  total margin).  You can                                                               
begin to see a pattern  of inherent conflict. Obviously they want                                                               
to  try to  drive traffic  away from  retail businesses  by using                                                               
different  average   wholesale  price  mechanisms   or  different                                                               
packaging mechanisms  that would disadvantage the  local pharmacy                                                               
and highly advantage  them. Every time they move  a retail script                                                               
over to  a mail  order script, there  is a  ten-times exponential                                                               
factor in terms  of their margin. Specialty drugs  is another big                                                               
area of concern of his  lawsuit, because it's the fastest growing                                                               
business. PBMs not only have  their own mail order facilities but                                                               
they  also own  their  own specialty  mail  order facilities  and                                                               
those  drug margins  are even  higher  with a  typical retail  of                                                               
$2000 per drug and a margin of $400-500 per prescription.                                                                       
2:22:36 PM                                                                                                                    
SENATOR THOMAS  asked if the new  US health care plan  curbs some                                                               
of this activity and what kind  of impact would state action have                                                               
on pharmaceutical costs to consumers across the United States.                                                                  
MR. PURCELL answered  the long term impacts on  PBM practices are                                                               
unclear  in the  health care  reform  that was  just passed,  but                                                               
greater transparency  will be required.  The problem is  with the                                                               
effective  date of  2014 and  beyond  and the  uniformity of  the                                                               
application.  The  exchange model  that  they  foresee for  every                                                               
region, depending on how the compacts  are set up, will have some                                                               
discretion  as to  how the  vendors are  selected and  how prices                                                               
will  be  regulated.  But  they are  talking  about  millions  of                                                               
dollars of savings  a year; so states should put  things in place                                                               
that will  protect people in  the interim. If  the reconciliation                                                               
bill goes  into effect fully,  you haven't lost  anything; you've                                                               
just  protected  yourself  in  the interim  years  as  its  being                                                               
2:25:07 PM                                                                                                                    
PAT SHIER, Director, Division of  Retirement and Benefits, Alaska                                                               
Department of Administration (DOA), introduced himself.                                                                         
CHAIR PASKVAN  asked him  to comment  on where  the state  was on                                                               
this issue and where it best be going.                                                                                          
MR.  SHIER  responded  that  last year  the  state  talked  about                                                               
transitioning  to its  new third-party  administrator with  Wells                                                               
Fargo Insurance  Services. Some questions  raised by some  of the                                                               
people in this room in  2008 actually helped the department write                                                               
a much better  RFP. One change they demanded was  not scoring the                                                               
programs based  on shared drug  and medical discounts  which used                                                               
to  be common  practice in  the medical  community. He  explained                                                               
that both the  state's active and retiree plans  are self insured                                                               
under Alaska Care  that currently has an arrangement  with a pure                                                               
TPA (not an insurance company) to  pay claims on a per member/per                                                               
month basis.  He said  the state has  a similar  partnership with                                                               
Envision/Costco. There is no spread  pricing, no rebate, which is                                                               
hidden and  kept by the PBM,  he assured. Any rebates  that arise                                                               
during  the tenure  of their  relationship flow  directly to  the                                                               
state. The state pays the TPA  on a per member/per month basis to                                                               
manage its  PBM and is  in a much better  place now than  back in                                                               
2:27:32 PM                                                                                                                    
CHAIR PASKVAN thanked him and said  the state plan covers a large                                                               
percentage of Alaskans, but what  percentage is not covered under                                                               
this new system.                                                                                                                
MR.   SHIER  answered   that  the   state  serves   72,000-74,000                                                               
individuals  including members  and  dependents;  of those  about                                                               
52,000 are retirees. About 40  percent of those folks are outside                                                               
the  State of  Alaska. The  state has  a total  of 15,000  active                                                               
CHAIR PASKVAN asked him for  suggestions on what statewide policy                                                               
could be more broadly applied to protect all Alaskans.                                                                          
MR. SHIER answered  that the legislature is the  policy maker and                                                               
he  would bring  them any  information  they would  need. He  had                                                               
provided  materials   and  met  with  some   of  the  independent                                                               
pharmacists in the  room and had very  good discussions yesterday                                                               
afternoon.  He said  he would  look into  their concerns  and had                                                               
asked Buck  Consultants to also refresh  their analysis. Overall,                                                               
when they  look at  19.6 percent increase  in medical  plan spend                                                               
for the coming fiscal year  and anticipating another 19.6 percent                                                               
after that,  they want to  provide the best information  they can                                                               
and be as helpful as possible in the future.                                                                                    
2:29:35 PM                                                                                                                    
SENATOR THOMAS asked after today if  he thinks the state needs to                                                               
go back and revisit their last RFP.                                                                                             
MR. SHIER answered the state is  in very good shape now. Envision                                                               
Costco, under  the leadership of Wells  Fargo Insurance Services,                                                               
is directed  to negotiate  those contracts.  He was  very pleased                                                               
when  their initial  efforts expanded  the  number of  in-network                                                               
pharmacies. That  is the  long way  of saying the  state is  in a                                                               
pretty  good   place  and  very  transparent.   They  prefer  per                                                               
member/per month  model, both for  the medical plan and  the drug                                                               
plan.  The  department is  always  looking  for ways  to  improve                                                               
services  to its  members, but  they  have no  incentive to  even                                                               
approach a renegotiation.                                                                                                       
SENATOR THOMAS asked  if a PBM is involved anywhere  in the chain                                                               
with the state's prescription plan.                                                                                             
MR. SHIER  answered the state's partnership  with Envision Costco                                                               
is taking the role of a PBM. Envision  is the PBM and is a fairly                                                               
unique  model  in the  industry  that  charges  only a  flat  per                                                               
member/per month fee  to manage. They provide a  24/7 call center                                                               
for members which  has been very popular.  The Costco partnership                                                               
portion delivers the mail order  pharmacy piece, which is about a                                                               
third or less of the total  number of scripts that are filled for                                                               
the Alaska plan.                                                                                                                
SENATOR MEYER  remembered that  under the  new Wells  Fargo plan,                                                               
you can both go to your pharmacy or do mail order.                                                                              
MR. SHIER answered absolutely.                                                                                                  
SENATOR MEYER asked if mail order is where the problems occur.                                                                  
MR. SHIER  replied that under  the old  PBM process he  had heard                                                               
complaints  from pharmacists,  in  particular,  about mail  order                                                               
pricing,  but Buck  Consultants have  consistently told  him that                                                               
the mail  order option can  be very  valuable on average  is very                                                               
valuable to a lot of state  employees even though it might not be                                                               
the cheapest  alternative in every  case. He was asking  for that                                                               
to be reviewed again.                                                                                                           
2:33:51 PM                                                                                                                    
SENATOR MEYER  asked if  going non generic  could save  the state                                                               
MR. SHIER  answered that the  plan has steerage to  generic drugs                                                               
and retirees  have done a  great job of increasing  their generic                                                               
substitution rate.  The active employee  plan has a  lower co-pay                                                               
incentive for generics if it is okay with the doctor.                                                                           
2:35:28 PM                                                                                                                    
LINDA HALL,  Director, Division  of Insurance,  Alaska Department                                                               
of Commerce, Community and  Economic Development (DCCED), quipped                                                               
this is  one of the few  hearings she didn't bring  her pie chart                                                               
to.  She explained  that that  she  regulates 23  percent of  the                                                               
industry; a  large chunk of  the chart represents  self insurers,                                                               
the  un-insureds, the  Medicaid/Medicare  populations. The  total                                                               
self  insured population  is probably  40 percent,  significantly                                                               
higher than the regulated piece of the private insurance market.                                                                
She said  SB 38 is in  her title and her  division would regulate                                                               
and enforce  it if it is  enacted. The first 12  pages, which she                                                               
worked on with  the bill's sponsor, Senator Elton,  merely make a                                                               
terminology  change by  substituting  "health  care insurer"  for                                                               
"managed care  entity" -  making it consistent  with the  rest of                                                               
the state's  health insurance regulations. It  doesn't change any                                                               
provision.  So  they  should start  their  concentration  on  the                                                               
bottom of page 12.                                                                                                              
MS. HALL said it's appropriate to  do "some oversight" of PBMs. A                                                               
registration  system is  they way  that  should be  done and  not                                                               
through a licensing  process that they do  with certain regulated                                                               
entities.  Much   of  the  bill  is   modeled  using  third-party                                                               
administrators. She was  able to say that there  are several PBMs                                                               
who  are actually  registered  as  TPAs in  Alaska;  so some  are                                                               
following that model already.                                                                                                   
2:39:11 PM                                                                                                                    
A number of  provisions in the bill need work  Ms. Hall said. The                                                               
reporting requirements,  for instance, go beyond  what is useful.                                                               
She  didn't want  to have  to approve  the contracts  between the                                                               
PBMs and  whoever it may be,  and she said she  thought they were                                                               
missing  a  big  segment  of  who the  PBMs  serve  and  she  was                                                               
referring  to  health insurers.  The  focus  of most  of  today's                                                               
presentation   has  actually   been   on   self  insured   plans,                                                               
governmental agencies.  But PBMs  also work  on behalf  of health                                                               
insurers, which is probably what she is more familiar with.                                                                     
MS. HALL  said she didn't  think it appropriate for  the division                                                               
to approve contracts  between the PBM and the entity  when in all                                                               
other cases the state only sets  the standards for what can be in                                                               
agreements between  health insurers and providers  - between TPAs                                                               
and  those for  whom they  may facilitate  claims payments.  TPAs                                                               
have standards  now. If she  had to approve contracts,  she would                                                               
need to prepare a fiscal note.                                                                                                  
She agreed  that disclosure forms  particularly to the  end user,                                                               
the consumer who gets a  prescription, are fine. The consumer has                                                               
a  right  to know  there  is  another  person in  this  equation;                                                               
however, the bill  provides that each of  those signed disclosure                                                               
forms come to the Division of  Insurance - and she really doesn't                                                               
want all that paper. A copy  of the generic disclosure form would                                                               
be adequate or  maybe an approved disclosure form.  She said they                                                               
have actually  done that for  prescription forms,  because nobody                                                               
else seemed to want to - so it fell to her.                                                                                     
SB 38  has an amount of  record-keeping that is not  efficient or                                                               
cost effective, she  said. Some of the pieces  in the legislation                                                               
duplicate  processes  that  already  exist,  like  the  complaint                                                               
process.  The division  actually  has a  whole complaint  section                                                               
that deals  with consumer complaints. They  have formal processes                                                               
by which  complaints can be  filed and heard. Fees  and penalties                                                               
are already in statute.                                                                                                         
MS. HALL  said she didn't think  it was efficient for  any agency                                                               
to set up  a whole new way to regulate  any individual piece. The                                                               
division  regulates  thousands  of individuals  and  already  has                                                               
methods in place to regulate and it  doesn't need to set up a new                                                               
one just for  PBMs. She planned to work with  the bill sponsor on                                                               
those issues.                                                                                                                   
2:43:37 PM                                                                                                                    
ROSE  KALAMARIDES,  Administrator,  Alaska Teamster  Trust  Fund,                                                               
said she  had worked in this  capacity since 1996 and  opposed SB
38. She had submitted a  letter outlining some of their concerns.                                                               
She  explained that  the Teamsters  was  one of  the first  large                                                               
groups in  the state  to hire a  PBM in 1994;  so they  have been                                                               
through all the "gyrations."                                                                                                    
All the things  that the pharmacists have described  today have a                                                               
lot of truth  in them, Ms. Kalamarides said. In  2006 they put an                                                               
RFP out  for a  transparent contract.  They had  five respondents                                                               
and  two runner  ups. Envision  Costco was  the second  runner up                                                               
only because  their network  hadn't been  expanded enough  in the                                                               
state.  Their current  transparent contract  is working  well she                                                               
reported, and they  don't see the need for  this legislation that                                                               
would only increase costs for their participants.                                                                               
SENATOR  THOMAS  asked  how  it  would  increase  costs  for  her                                                               
MS.  KALAMARIDES answered  that it  looks like  the "any  willing                                                               
provider" legislation  that was  introduced a  few years  ago for                                                               
medical services.  She said 10  percent of  their pharmaceuticals                                                               
go through their mail order service  and they save a lot of money                                                               
because  of  that.  Their  retirees who  live  outside  love  the                                                               
service and it looks like they  wouldn't have any kind of control                                                               
if  a participant  wanted to  go to  a pharmacy  to get  the same                                                               
pricing. It looks  like it would just shift money  into the local                                                               
pharmacies' pockets. She related that  the Teamster Trust Fund is                                                               
pays its PBM not on a per  member/per month, but a per script fee                                                               
and then pays  the acquisition prices. SB 38 would  force them to                                                               
do  business  differently and  it  looks  like  it is  trying  to                                                               
regulate some  of the programs  they already have in  place, like                                                               
their step therapy and formularies.  It messes with their private                                                               
business and she didn't think that was the state's job.                                                                         
2:47:03 PM                                                                                                                    
DAVE DEDERICHS,  Express Scripts, said  they are a PBM  based out                                                               
of St.  Louis, MI and  they manage the prescription  drug benefit                                                               
for  750  million Americans  across  the  country. Their  clients                                                               
include  health insurers,  Fortune 500  companies, labor  unions,                                                               
state  governments, and  the federal  government. In  fact, their                                                               
largest  contract  is  with  the US  Department  of  Defense.  He                                                               
explained  that  they  "drive  out   waste  in  the  health  care                                                               
industry."  They  actually make  money  when  their clients  save                                                               
money and that stands in  direct contradiction to most of today's                                                               
First  and  foremost  they  try to  promote  generics,  he  said.                                                               
Express Scripts is FDA approved and  it is AMA endorsed. They are                                                               
significantly cheaper than brand  name pharmaceuticals. In fact a                                                               
few years ago a study said the  average cost of a brand name drug                                                               
was $120 and for the same generic the average cost was $34.                                                                     
He  said it's  "absolutely  false" that  they  switch brand  name                                                               
drugs into peoples'  prescriptions so they can get  money back on                                                               
the rebates. In fact, of  the 750 million prescriptions they will                                                               
process this year,  over 68 percent of them will  be with generic                                                               
drugs.  Mr.  Dederichs  said  Express  Scripts  is  a  for-profit                                                               
company and it makes more money by using generic drugs.                                                                         
He  said it  was  also  important to  understand  that they  also                                                               
negotiate discounts  with brand  manufacturers and  this function                                                               
goes in  direct contradiction to  the disclosure  requirements in                                                               
this bill. When a pharmacy  and therapeutics committee determines                                                               
which drugs should possibly be  included on their formulary, they                                                               
will give them a  list with no financials on it. It  is a list of                                                               
drugs  to be  evaluated for  efficacy and  efficiency. The  whole                                                               
list is sent  to all the different brand  name drug manufacturers                                                               
to  get  their best  price  for  their formulary.  Since  Express                                                               
Scripts supplies 750 million Americans,  there is a pretty strong                                                               
incentive to get their best  price. Disclosing all this financial                                                               
information  will destroy  incentives  to get  better prices.  It                                                               
doesn't  allow the  free  market to  help  dictate what  contract                                                               
terms are.                                                                                                                      
MR. DEDERICHS  said he had  five separate letters written  by the                                                               
Federal Trade Commission on disclosure  legislation that has been                                                               
heard  in  New  Jersey,  California, the  District  of  Columbia,                                                               
Virginia,  and  Albany,  New  York.   They  say  that  disclosure                                                               
requirements destroy competition; they  allow for collusion among                                                               
brand name manufacturers  to increase their prices  and will hurt                                                               
He  said   Express  Scripts  also  creates   networks  of  retail                                                               
pharmacies and  manages formularies  for their clients.  About 10                                                               
percent of  the scripts they  dispense are  mail order and  it is                                                               
only for  maintenance medications.  Mail order is  a good  way to                                                               
save money on drugs, because you  can get a 90-day supply for two                                                               
co-payments  instead of  paying three  co-payments for  three 30-                                                               
days supply  at the retail  pharmacy. So, they  are incentivizing                                                               
people to  pay less  to get  a bigger  supply. Studies  also show                                                               
that  when  a  customer  gets  a  90-day  supply  of  mail  order                                                               
medications  his  adherence  rate  goes  up;  so  overall  health                                                               
2:52:48 PM                                                                                                                    
MR.  DEDERICHS  said  it's categorically  untrue  that  PBMs  are                                                               
unregulated. They  are regulated  by the  Alaska State  agency in                                                               
charge of  Medicaid; they  are registered  with the  Alaska State                                                               
Board of  Pharmacy and regulated  by them. They are  also subject                                                               
to regulation from  the State Division of  Insurance, the Federal                                                               
Trade Commission,  the US  Department of  Labor, the  Centers for                                                               
Medicare and  Medicaid Services and  the US Department  of Health                                                               
and Human Services.                                                                                                             
It was  said that drug  spending has increased rapidly,  but that                                                               
isn't true  either, Mr. Dederichs said.  People's overall medical                                                               
spend has  increased in the past  couple of decades and  a lot of                                                               
it is  medical, but because  tools like drug  utilization review,                                                               
using generics,  and getting people  to take mail  order services                                                               
have been used drug spend has actually decreased.                                                                               
He said  they had heard  that transparency is important  for plan                                                               
sponsors  but  there  is  not one  single  plan  sponsor,  health                                                               
insurer or  employer in the room  today in support of  this bill;                                                               
only  the pharmacists.  This is  because their  clients are  very                                                               
sophisticated  purchasers.  Mr.  Shier,  the  labor  unions,  the                                                               
Fortune  500  companies  hire   consultants  to  negotiate  these                                                               
contracts. There are over 60 PBMs  in this country and it is very                                                               
competitive. If they don't meet  the terms and conditions set out                                                               
for them  by clients  in the  RFP process  they simply  won't get                                                               
their  business. Their  contracts are  for three  years, so  they                                                               
would  see a  higher turnover  if they  are not  meeting specific                                                               
demands. This  bill is riddled  with mandates for  contracts they                                                               
would rather see regulated by the  free market, he said. Each one                                                               
of  their clients  has  a unique  set of  people  with their  own                                                               
unique medication needs and they  would not necessarily be helped                                                               
by this type of legislation.                                                                                                    
2:55:50 PM                                                                                                                    
MR. DEDERICHS  submitted there was  no need for  legislation that                                                               
requires transparency if the market  is already dictating it, and                                                               
their  company and  ones like  it probably  wouldn't submit  RFPs                                                               
with those kinds of contract  demands. He also informed them that                                                               
they are  a non resident  mail order  pharmacy and do  ship drugs                                                               
into Alaska.                                                                                                                    
CYNDI  LAUBACHER,  Senior  Director,  State  Government  Affairs,                                                               
Medco Health Solutions,  said Medco is one of the  top three PBMs                                                               
and has approximately  60 million members across  the country and                                                               
approximately  155,000  in the  state  of  Alaska. She  said  Mr.                                                               
Dederichs covered most issues very  well, but she wanted to touch                                                               
on a few things based  on questions from committee members. First                                                               
of all Mr. Purcell  made her case on the phone  for why this bill                                                               
is unnecessary.  The state of  New Jersey recently  awarded Medco                                                               
the new PBM  contract. It is a transparent  contract. Mr. Purcell                                                               
said that  state would save  $500 million,  but the state  of New                                                               
Jersey  didn't pass  this legislation  to do  it. It  just wasn't                                                               
needed in  order to get  the kinds  of savings they  were looking                                                               
2:58:13 PM                                                                                                                    
It's also incorrect that 23  other states have transparency laws.                                                               
Only  two  states have  passed  it,  Maine  and the  District  of                                                               
Columbia where it is being  litigated. Maine's was upheld and the                                                               
large PBMs are  no longer writing in that state.  The bottom line                                                               
is that clients can ask for  anything they want; that is what the                                                               
RFP process is  for. No two clients want the  same thing. In that                                                               
regard this bill is unnecessary.                                                                                                
MS.  LAUBACHER said  she was  particularly  concerned about  what                                                               
some were  saying their  margins are  and that  the SEC  would be                                                               
interested in  their figures. Medco  is required to  report their                                                               
profits quarterly to  the SEC and their numbers  show profits are                                                               
2 percent or less.                                                                                                              
2:59:09 PM                                                                                                                    
Regarding federal  health care reform, Ms.  Laubacher said, Medco                                                               
prides  itself  on  being a  transparent  company.  They  support                                                               
transparency and supported the Senate  language that was recently                                                               
enacted and signed into law by the President.                                                                                   
CHAIR PASKVAN  asked her  to provide the  committee with  the SEC                                                               
filing she  talked about and  asked Mr. Dederichs to  provide the                                                               
letters he talked about.                                                                                                        
3:00:25 PM                                                                                                                    
GREG LOUDON, Employee Benefits Consultant,  Parker Smith & Veeck,                                                               
Anchorage,  Alaska, said  he was  here  on behalf  of the  Alaska                                                               
Association  of Health  Underwriters, a  consumer protection  and                                                               
trade group  for brokers and  agents. They opposed SB  38 because                                                               
they  think  it   is  an  unnecessary  restraint   to  trade.  It                                                               
eliminates  a  number  of  cost  containment  options  for  their                                                               
clients, both  insured and self  insured. He said PBMs  provide a                                                               
valuable service.                                                                                                               
3:01:31 PM                                                                                                                    
SALLIE STUVEK,  Director, Human  Resources, Fairbanks  North Star                                                               
Borough,  said she  has oversight  for both  the borough  and the                                                               
school district's  self insured health insurance  plans. She said                                                               
both the  borough and the  school district are active  members in                                                               
the Health  Care Cost Management Corporation  of Alaska (HCCMCA).                                                               
As a  result they have seen  strong savings in health  care costs                                                               
to  all of  their members  their negotiated  agreements and  they                                                               
would  like to  be able  to  continue those  arrangements. SB  38                                                               
appears  to  jeopardize  their ability  to  continue  those  cost                                                               
savings relationships that  they would need in  order to continue                                                               
managing the health claim costs.                                                                                                
She  said  they  are  especially   concerned  about  the  section                                                               
restricting the  ability of  employers or  group of  employers to                                                               
work  together  to  negotiate  discounts.   The  PBM  provides  a                                                               
valuable service  to their health  plans by reducing  those costs                                                               
not only to the employer-sponsored  health plans, but also to the                                                               
employees. They have estimated a savings of $3 million per year.                                                                
CHAIR PASKVAN closed public testimony and set SB 38 aside.                                                                      

Document Name Date/Time Subjects