Testimony of Rep. Sharon Treat
Sponsor

LD 1339, “An Act to Improve Oversight of Pharmaceutical Purchasing”
Before the Health & Human Services Committee

April 13, 2009

Senator Brannigan, Representative Perry, and members of the Joint Standing Committee on Health & Human Services. I am Rep. Sharon Treat, and I represent House District 79, which encompasses the communities of Hallowell, Farmingdale and West Gardiner. I am here today to present LD 1339, “An Act to Improve Oversight of Pharmaceutical Purchasing.”

Back in 2003, I sponsored and saw enacted into law the first comprehensive state legislation to require transparency and pass-through of rebates negotiated by pharmacy benefit managers (PBMs). This law was challenged in the courts but ultimately upheld on November 8, 2005 in a sweeping decision issued by the First Circuit Court of Appeals. The U.S. Supreme Court declined to review the decision, so after several years in limbo, the law finally went into effect.

First, a little background on PBMs. I have attached a fact sheet on these middlemen, which goes into great detail about what they are and why Maine regulated them in 2003. In the past 20 years, PBMs have become a prominent part of the American health care system, managing pharmacy benefits for nearly 95% of all Americans with medical coverage. PBMs are active in all aspects of prescription drug coverage, including:

• processing claims to pharmacies
• drug utilization review (DUR)
• developing and managing formularies
• negotiating with prescription drug manufacturers for rebates
• operating mail-order pharmacies to fill prescriptions directly
• therapeutic interchange, and
• reimbursement of providers and patients.

In their performance of these administrative duties, PBMs independently negotiate with three separate entities: pharmaceutical manufacturers, pharmacies, and health coverage providers, including agencies and programs administered by the State of Maine. Consequently, the terms of all of the contracts PBMs negotiate are known only by the PBMs, resulting in incomplete information for the State and other employers and health care provider. The result has been a sorry history of gaming transactions to the advantage of the PBM, with those who contract with the PBM in the dark about what is really going on. Examples of this gaming, which are well documented in various legal consent decrees, including consent agreements with the Maine Attorney General, (which are detailed in the attachments), include:

• Accepting rebates from manufacturers in return for placing higher priced medications on the formulary. By not disclosing these rebates to the clients, PBM can retain some or all of the rebates while charging clients higher prices.
  
• “Playing the spread” between the prices paid by clients and the price paid at the pharmacy. Since PBMs negotiate contracts with employers and pharmacies separately, asymmetric information permits them to charge their employers more than the PBM actually pays to the pharmacy. For example, one investigation found that a PBM charged an employer $215 for a generic prescription but paid the pharmacy only $15. The PBM pocketed the $200 spread at the expense of the employer.
  
• Favoring higher priced drugs that provide PBMs with greater incentives and switching customers from low-cost to the higher-cost medication. PBMs may ask a health professional to permit them to switch medications, knowing that the switch serves the sole purpose of earning a higher rebate for the PBM. Drug-switching became the cause of action in the 20-state lawsuit (to which Maine was a party) against Medco when the PBM persuaded more than 71,000 doctors to switch patients from lower priced Lipitor, made by Pfizer, to more expensive Zocor, made by Merck. Similar allegations of drug-switching were made against Advance PCS, for encouraging doctors to switch patients from a generic ulcer drugs to Celebrex, which cost over ten times more. A drug-switching lawsuit also commenced against Express Scripts for accepting $500,000 from AstraZeneca to call 22,000 doctors to switch patients from Prilosec to Nexium. These lawsuits illustrate the prevalence of drug-switching when PBMs are left unmonitored.

Maine’s PBM law. Our law requires full transparency of PBM practices and is intended to give PBM clients the tools to monitor self-interested PBM practices or to confidently choose a competing PBM that offers better terms. The law imposes a fiduciary duty onto PBMs, requiring them to act in the best interest of clients for the purpose of defraying costs for covered individuals, and requires PBMs to disclose possible conflicts of interest. Of great importance, our law requires PBMs to pass through to their clients (including the State of Maine) the full monetary value of the rebates they negotiate.

State agency compliance with Maine’s PBM law. Last year, I introduced legislation to identify savings in our state and county corrections and jail spending on pharmacy. In the course of working on that legislation I discovered that the state Corrections Department contract for pharmacy services, which is with a PBM, did not comply with the terms of Maine’s PBM law. As a result, my bill was amended by the Appropriations Committee to require the Corrections Department to renegotiate its contract and add a rider that was in conformity with the PBM law, which it did. That legislation also set up a task force to look into State and County pharmaceutical purchasing practices; that task force has been meeting since last June on a monthly basis.

As a result of my participation in the task force, it has become abundantly clear to me that there is inadequate knowledge of pharmaceutical pricing and contracting practices, including rebates and PBM activities, in both the Corrections Department and County government, resulting in both the state and counties being overcharged for pharmaceuticals. I began to suspect that this lack of knowledge and experience with the extremely specialized and convoluted world of pharmaceutical purchasing might not be limited to the world of prisons and jails.

In August 2008, the Texas State Auditor’s Department issued a report, “An Audit report on Pharmacy Benefit Manager Contracts at Selected State Agencies and Higher Education Institutions.” I have attached the executive summary of this extremely useful and thorough 68-page report, which can be accessed online here: http://www.sao.state.tx.us/reports/main/08-042.pdf . The Texas report found that various state agencies and the university system lacked expertise to negotiate cost-effective contracts and had failed to exercise appropriate audit rights, adequately protect the personal data of plan members in accordance with federal and state laws, prevent drug-switching and other activities, and procure the best prices available. The report made a series of recommendations to address this situation, including that state agency pharmaceutical contracts be amended to include many of the transparency and audit provisions already enumerated in Maine’s PBM law, and that pharmaceutical procurement assistance and expertise be provided to these agencies to insure that future contracts were properly drafted.

This report prompted me to request Maine’s State Auditor to conduct a review of our own state agencies’ compliance or lack thereof with Maine’s PBM transparency law, which was designed to address many of the issues raised in the Texas report. Although the Auditor’s report (attached) is fairly cursory and did not go into the level of detail of the Texas report, what it did find is disturbing, because it raises the likelihood that in essence, the state is being ripped off financially and that patients may be at risk of drug switching and having their personal data improperly handled. The report concluded that:

• Most of the agencies covered by our PBM law did not even know about it.
• The State employees’ contract with Anthem and its PBM Wellpoint NextRx was not complying with the PBM law because Anthem claims the law does not apply to it (not the position of the state).
• The county jails contracts that are not part of the Corrections contract do not comply.
• Dirigo Choice does not comply.
• State agencies lack expertise needed to negotiate the best contracts and to comply with the law

The report stated:

“ State agency personnel are not pharmacy or prescription drug specialists and do not have the understanding necessary to be able to secure the best prices. State agency requirements do not facilitate a one-size-fits all contract.

We recommend that the State employ a specialist to negotiate agreements to acquire prescription drugs. We recommend revision of the statute to accommodate Medicaid and group purchasing organizations. We recommend that there be improved communication of legislative actions to enable compliance. We also recommend that agency personnel ensure consistency of accounting coding and compliance with purchasing regulations.”

About the time I received a draft of the State Auditor’s report to review, an alarming investigative report on the activities of CVS Caremark, one of the three large PBMs that control most of the PBM business in the country, was issued by Change to Win (see attached executive summary). This report raised many concerns about CVS Caremark’s practices, including repeated accusations of drug switching, selling patient data or improperly handling patient medical and other private information, and fraud including improperly selling returned drugs. Although I am not aware of any contracts between CVS and state agencies, the company does operate in the State of Maine.

As a result of this confluence of events and reports, I developed LD 1339 to accomplish the following:

1. Provide greater state oversight of PBMs by requiring registration with the Department of Professional and Financial Regulation, Bureau of Insurance. The current law does not have any enforcement mechanism except to the extent that the parties to the contract seek redress under the Unfair Trade Practices Act. This provision of LD 1339 will at least provide for basic tracking of the PBMs operating in the state.
2. Require the State Auditor to work with state agencies to insure that they comply with the provisions of the PBM law and have appropriate audit procedures and contracts. This provision carries out the recommendations of the State Auditor to insure that state agencies have sufficient expertise to draft contracts that comply with the terms of the PBM law and help insure that the best rebates and discounts are achieved. Potentially millions of dollars in state savings are achievable through better contracting in compliance with existing state law.
3. Close a gap in our PBM law which does not adequately address the need to protect patient medical and other personal data from sale for marketing purposes or from improper disclosure. CVS Caremark is not the only company that has been accused of improperly handling patient data, and it is routine to sell or trade such data for use by other in marketing pharmaceuticals. This provision will protect that data.