The Texas Solution: State Auditor’s Report on PBM Contracts

1. The Texas Solution:State Auditor’s Report on PBM Contracts David A. Balto Prepared for National Legislative Association on Prescription Drug Prices Rx meeting 2008 Washington, DC December 8, 2008

2. Texas State PBM Contract Report • Objective: • Determine the similarities & differences among PBM contracts at TX state agencies & higher education institutions • Assess ways to provide better value by strengthening contracts: • Could new contract provisions provide better values? • Methodology: • Analyzed interviews, documents, contracts, & data from TX Teacher Retirement, Employee Retirement, University of Texas and Texas A& M University Systems’ PBM plans

3. Key findings • Texas and its agencies/institutions can strengthen contracts with PBMs and provide better value by: 1. Ensuring that contract provisions adequately cover the high-risk areas identified by auditors • Audit rights • Costs, discounts, and other fees associated with PBM services • Drug formulary management • Protection of confidential plan data • Conflicts of interest • Contract monitoring 2. Taking general steps to improve contract development activities • Creating more state guidance for contracting • Identifying proprietary information • Adopting measures to ensure that PBM contracts recognize and benefit members’ needs and interests

4. Addressing High-Risk Areas: audit rights Agencies should include contract provisions to ensure that: 1. Audit rights are not limited to certain types of audits: current provisions typically limit audit rights to audits that verify the accuracy of payments – rebate audits, audits to verify contractor compliance, and other important types of audits are not covered 2. PBMs are required to provide access to all relevant information, including financial records, contracts, medical records, and other information associated with the PBM and their subcontractors 3. Require audits to be performed in accordance with state standards 4. Define requirements for PBMs’ auditing of pharmacy networks 5. Require that PBM-run mail-order pharmacies are audited by independent auditors reporting to agencies.

5. Addressing High-Risk Areas: costs, discounts, and other fees associated with PBM service Agencies should include contract provisions that: • Require all documentation and data concerning PBM contractors’ agreements with manufacturers, wholesalers, and pharmacy networks be accessible to agency auditors • Specify the third-party entity that will bill agencies on PBMs’ behalf • Define the methodology the PBM will use to periodically calculate the rebates they receive and the rebate savings they pass on to their plans • Describe the documentation that will support these calculations • Identify the specialty drugs included in the formularies, along with costs and discounts • Define the MAC list prices that PBMs will use • Require PBMs to provide prior notification of all changes they make to the MAC list during the term of the contract • Ensure that contracts do not last more than three years • Define contract termination rights allowing the agency to terminate the contract at their discretion

6. Addressing high-risk areas:drug formulary management To regulate PBMs’ influence in therapeutic interchange decisions (in which providers substitute chemically different but therapeutically equivalent drugs), agencies should include contract provisions that: • Clearly state which types of therapeutic interchange are allowable or prohibited • Require PBMs to maintain and make available records on all instances in which therapeutic interchange is used • Require PBMs to provide prior notification and specific timeframes concerning changes to drug plans’ formularies • Require PBMs to provide documentation explaining the reason for those changes to formularies

7. Addressing High-Risk Areas: protecting confidential data To protect data regarding things like demographics and drug usage patterns, agencies should include contract provisions that: • Clearly state whether a plan’s data can be sold • Specify the conditions under which PBMs are allowed to sell a plan’s data, requiring disclosure of any sale of data and describing any revenue-sharing between agencies and PBMs through the sale of data

8. Addressing High-Risk Areas: Potential Conflicts of Interest Agencies should include contract provisions that require PBMs to disclose any policies, practices, or business relationship that may represent a conflict of interest with their obligations as a PBM -for example, a PBM that operates a mail-order pharmacy has a conflict of interest, since its role as a seller of prescription drugs conflicts with its reported mission of seeking lower prices for prescription drugs.

9. Addressing High Risk Areas: contract monitoring • Agencies should include all essential contract provisions required by the State of Texas Contract Management Guide, including: • Abandonment or default clause • Antitrust clause • Affirmation clause • Buy Texas clause • Funding out clause • Intellectual property indemnification clause • Technology access clause

10. Adopting other specific guidelines: In addition to the specific provisions addressing the aforementioned high-risk areas, the Auditors found that it is essential for TX agencies and higher education institutions to adopt a more careful and sophisticated method of creating and developing contracts with PBMs.

11. 1. The TX Health Care Policy Council should develop a best practices guide for all state contracts with PBMs • The Council should develop a standardized list of key performance guarantees to be included in contracts, such as: • Ensuring PBMs adhere to agreed-upon discounts • Ensuring PBMs conduct agreed-upon customer service activities like satisfaction surveys • The Council should standardize the length of time during which agencies can audit PBM contracts • Audit timeframes currently vary from six months to seven years • Excessively short time frames prohibit auditors from getting accurate information

12. 2. Contracts should identify PBMs’ proprietary information • PBMs have delayed release of their contracts with TX agencies to the public and to auditors by claiming that proprietary information contained in the contracts must be kept private. • To prevent PBMs from making such claims, agencies should clearly identify and label specific contract provisions that contain proprietary information, allowing them to quickly eclipse such information and speedily release contracts to auditors and the public.

13. 3. Agencies should generally strengthen contract development practices by: A. Refraining from using PBM-originated standard contract provisions or templates for contracts, which often lead to: • unwarranted limitations, such as limited audit rights • ambiguous language that limits contracts’ effectiveness • unintentional agreements to abide by unreasonable provisions B. incorporating key procurement documents – such as agreements, financial statements, and bids – into the final PBM contract to better ensure PBMs’ accountability to all agreements C. obtaining advice from outside consultants – such as actuaries, pharmacists, and attorneys – to ensure that contract provisions are sound

14. Questions? David A. Balto Attorney at Law 1350 Eye Street Suite 850 Washington, DC, USA 20005 (202) 789-5424 David.Balto@yahoo.com