WSR 24-21-158

PROPOSED RULES

OFFICE OF THE

INSURANCE COMMISSIONER

[Insurance Commissioner Matter R 2024-02—Filed October 22, 2024, 7:33 p.m.]

Original Notice.

Preproposal statement of inquiry was filed as WSR 24-11-126.

Title of Rule and Other Identifying Information: Relating to health care benefit managers (HCBM) including, but not limited to, implementation of E2SSB 5213 (chapter 242, Laws of 2024).

Hearing Location(s): On November 26, 2024, at 11:00 a.m. PST, virtual meeting via Zoom. Detailed information for attending the Zoom meeting is posted on the office of the insurance commissioner (OIC) website https://www.insurance.wa.gov/relating-health-care-benefit-managers-r-2024-. Written comments are due to OIC by 2:00 p.m. on November 26, 2024. Written comments can be emailed to rulescoordinator@oic.wa.gov.

Date of Intended Adoption: November 27, 2024.

Submit Written Comments to: Jane Beyer, 302 Sid Snyder Avenue S.W., Olympia, WA 98504, email rulescoordinator@oic.wa.gov, fax 360-586-3109, beginning Wednesday, October 23, 2024, at 12:00 a.m. PST, by November 26, 2024, by 2:00 p.m. PST.

Assistance for Persons with Disabilities: Contact Katie Bennett, phone 360-725-7013, fax 360-586-2023, TTY 360-586-0241, email Katie.Bennett@oic.wa.gov, by November 25, 2024, by 12:00 p.m. PST.

Purpose of the Proposal and Its Anticipated Effects, Including Any Changes in Existing Rules: E2SSB 5213 (chapter 242, Laws of 2024) amends state law concerning the business practices of HCBMs and pharmacy benefit managers (PBMs, which are a type of HCBM). The law's provisions address, among other issues, PBM reimbursement to pharmacies for dispensing prescription drugs; consumer access to mail order and retail pharmacies; consumer out-of-pocket costs for prescription drugs; HCBM registration and reporting; and oversight authority of OIC regarding HCBM registration and operations. Rule making is necessary to revise existing HCBM rules at chapter 284-180 WAC and ensure that all affected entities understand their rights and obligations under the new law.

In addition, rule making related to HCBMs beyond the scope of E2SSB 5213 is necessary to ensure that OIC can effectively oversee HCBMs in light of recent health care industry developments like the Change Healthcare cyber attack in early 2024 and OIC's experience regulating HCBMs.

Reasons Supporting Proposal: Revisions to current rules are needed to implement E2SSB 5213 and ensure all affected entities understand their rights and obligations under chapter 48.200 RCW.

Statutory Authority for Adoption: RCW 48.200.900, 48.02.060.

Statute Being Implemented: E2SSB 5213 (chapter 242, Laws of 2024).

Rule is not necessitated by federal law, federal or state court decision.

Name of Proponent: Mike Kreidler, Insurance Commissioner, governmental.

Name of Agency Personnel Responsible for Drafting: Jane Beyer, P.O. Box 40255, Olympia, WA 98504-0255, 360-725-7043; Implementation: John Hayworth and Ned Gaines, P.O. Box 40255, Olympia, WA 98504-0255, 360-725-7000; and Enforcement: Charles Malone, P.O. Box 40255, Olympia, WA 98504-0255, 360-725-7000.

A school district fiscal impact statement is not required under RCW 28A.305.135.

A cost-benefit analysis is required under RCW 34.05.328. A preliminary cost-benefit analysis may be obtained by contacting Simon Casson, P.O. Box 40255, Olympia, WA 98504-0255, phone 360-725-7038, fax 360-586-3109, email rulescoordinator@oic.wa.gov.

This rule proposal, or portions of the proposal, is exempt from requirements of the Regulatory Fairness Act because the proposal:

Is exempt under RCW 19.85.025(3) as the rules only correct typographical errors, make address or name changes, or clarify language of a rule without changing its effect; and rule content is explicitly and specifically dictated by statute.

Is exempt under RCW 19.85.025(4).

Explanation of exemptions: OIC determined that both health carriers and HCBMs are impacted by the implementation of this rule. Based on 2022 WA Employment Security Department (ESD) Covered Employment data, health carriers are not considered small businesses, as they have on average 112 employees per firm (7,163 total employees in WA/64 average number of firms in Washington). Small business is defined as a business entity, including a sole proprietorship, corporation, partnership, or other legal entity, that is owned and operated independently from all other businesses, and that has 50 or fewer employees (RCW 19.85.020). Health carriers are not considered small businesses.

OIC also considered the impact of this rule on small pharmacies. The NAIC's system classifies pharmacies as having an average of 38 employees under code 456110 - pharmacies and drug retailers. Provisions of the rule (WAC 284-180-505 and 284-180-507) make changes to the process that small pharmacies must use to appeal reimbursements from PBMs. However, the small pharmacy appeals process is voluntary on the part of pharmacies. Therefore, OIC concluded that the rule provisions related to pharmacies do not constitute a cost to small businesses.

Portions of the proposal are exempt from requirements of the Regulatory Fairness Act. The following table identifies rule sections or portions of rule sections that have been determined exempt based on the exemptions provided in RCW 34.05.310.

Scope of exemption for rule proposal:

Is partially exempt:

Explanation of partial exemptions: Section 1 above details the identified exemptions and for which sections they apply to. Portions of the proposed rule are not exempt. Those sections are described in detail in section 3 below.

The proposed rule does impose more-than-minor costs on businesses.

Small Business Economic Impact Statement (SBEIS)

A brief description of the proposed rule including the current situation/rule, followed by the history of the issue and why the proposed rule is needed. A description of the probable compliance requirements and the kinds of professional services that a small business is likely to need in order to comply with the proposed rule: E2SSB 5213 (chapter 242, Laws of 2024) amends state law concerning the business practices of HCBMs and PBMs. The law's provisions address, among other issues, PBM reimbursement to pharmacies for dispensing prescription drugs; consumer access to mail order and retail pharmacies; consumer out-of-pocket costs for prescription drugs; HCBM registration and reporting; and oversight authority of OIC regarding HCBM registration and operations. Rule making is necessary to revise existing HCBM rules at chapter 284-180 WAC and to ensure that all affected entities understand their rights and obligations under the new law.

In addition, rule making related to HCBMs is necessary to ensure that OIC can effectively oversee HCBMs in light of recent developments in the health care industry.

OIC was unable to definitively determine whether HCBMs should be classified as large businesses (more than 50 employees). OIC used the North American Industry Classification System (NAICS) code 524292, "Pharmacy benefit management and other third-party administration of insurance and pension funds," to estimate the number of employees per firm. However, this NAICS code includes entities in addition to HCBMs and PBMs, as it captures third-party administrators of insurance and pension funds; accordingly, the code could misrepresent the true average firm sizes of HCBMs and PBMs.

Additionally, OIC reviewed evidence suggesting that a small number of large PBM firms dominate the PBM market in Washington state and nationally. The Washington state health care authority's (HCA) Drug Price Transparency Program Annual Report 20231 found that "the top four PBMs in Washington account for approximately 99 percent of the total dollar value of prescription drug claims, with the top two accounting for 68 percent of statewide dollars." This report also found that the bottom 10 PBMs account for just one percent of Washington's PBM market. The Federal Trade Commission (FTC)'s 2024 report titled Pharmacy Benefit Managers: The Powerful Middlemen Inflating Drug Costs and Squeezing Main Street Pharmacies2 found that a few large, integrated firms dominate the pharmacy benefit management market in the United States. The FTC report stated: "Over the past two decades, the PBM industry has undergone substantial change as a result of horizontal consolidation and vertical integration. The top three PBMs processed nearly 80 percent of the approximately 6.6 billion prescriptions dispensed by United States pharmacies in 2023, while the top six PBMs processed more than 90 percent. All of the top six PBMs are vertically integrated downstream, operating their own mail order and specialty pharmacies, while one PBM owns and operates the largest chain of retail pharmacies in the nation. Pharmacies affiliated with the three largest PBMs now account for nearly 70 percent of all specialty drug revenue."

There is evidence to suggest that, in addition to PBMs specifically, many HCBMs are large and vertically integrated businesses. For example, the United States House of Representatives' Committee on Energy and Commerce found that Change Healthcare, a subsidiary of UnitedHealth Group that performs HCBM functions nationally and in Washington state, "acts as a clearing house for 15 billion medical claims each year - accounting for nearly 40 percent of all claims."3

Although these findings indicate that many HCBMs and PBMs are indeed large businesses, OIC acknowledges that there may also be a subset of firms providing HCBM and PBM services who are small businesses. Because of this, OIC assumed that HCBMs are classified as small businesses for purposes of this analysis.

OIC also considered the impact of this rule on small pharmacies. The NAIC's system classifies pharmacies as having an average of 38 employees under code 456110 - pharmacies and drug retailers. Provisions of the rule (WAC 284-180-505 and 284-180-507) make changes to the process that small pharmacies must use to appeal reimbursements from PBMs. However, the small pharmacy appeals process is voluntary on the part of pharmacies. Therefore, OIC concluded that the rule provisions related to pharmacies do not constitute a cost to small businesses.

This analysis evaluates the cost of compliance and any potential impacts on revenue associated with the proposed rule. Impacts on small businesses are discussed in sections 4 and 5, and steps to reduce the impacts to small businesses are discussed in section 6.

Parts of this analysis refer to HCBMs where others reference PBMs. Under RCW 48.200.020, "health care benefit manager" includes, but is not limited to, HCBMs that specialize in specific types of health care benefit management such as PBMs. Chapter 48.200 RCW and E2SSB 5213 include provisions that are limited in application to PBMs.

Table 1. Summary of Businesses Required to comply to the Adopted Rule:

The number of HCBMs in Washington is determined from the list of entities that have registered with OIC. To conduct business in Washington, an HCBM must register with the commissioner and annually renew the registration (RCW 48.200.030). HCBMs are a subset of the businesses included in the NAICS code 524292, which includes third party administration of insurance and pension funds.

WAC 284-180-230 Health care benefit manager renewal.

Description: This section amends how HCBMs should report information related to Washington state annual gross income when completing the annual registration renewal. Under current regulation, HCBMs must submit their Washington state annual gross income for HCBM business for the previous calendar year. The proposed rule requires the renewing HCBM to submit their Washington state annual gross income broken down by Washington state annual gross income received from each entity with which the HCBM has contracted during the previous calendar year.

Cost(s): OIC calculated the cost associated with providing the Washington state annual gross income received from each contracted entity by assuming the number of hours it will take HCBM staff to compile and submit the information, and by relying upon legal and clerical worker labor rates as published by the United States Department of Labor Employee Benefits Security Administration.4 Using these components, OIC estimated the cost of submitting the annual gross income broken down by contracted entity for year one after the proposed rule would go into effect, and the cost in subsequent years.

Currently, OIC requires HCBMs to submit an annual report at renewal. The annual report asks HCBMs to enter the following information:

- The amount of Washington state annual gross HCBM income for the year.

- The number of entities that the registrant provides HCBM services to in the state of Washington.

- Whether the registrant has any new entities that they provide HCBM services to that were not previously reported.

- Whether the registrant has any new persons and entities with ownership or controlling interests.

- Whether there are any changes in ownership interests that have not been previously reported.

- Any updates to the contact persons.

- Any other material changes to report.

- Whether the registrant has committed any violations in Washington or any other state or has been the subject of an order from a department of insurance or other federal or state agency.

- Whether the HCBM committed any act not previously reported in the renewal application that would result in denial, suspension, or revocation of a registration.

OIC will develop an updated reporting template to capture Washington state annual gross income broken down by Washington state annual gross income received from each entity with which the HCBM has contracted during the previous calendar year. OIC estimates that each HCBM will file three to five contracts.5 Each reported income document is estimated to take 30 minutes for a lawyer to review, and an additional 30 minutes for a clerical worker to submit to OIC via the annual report. This equates to (five contracts) x (0.5 hours) x ($165.71) = $414.28 for a lawyer's services, and (five contracts) x (0.5 hours) x ($65.99) = $164.98 for a clerical worker's services, per submitting HCBM.

WAC 284-180-460 Health care benefit manager filings.

Description: Under the proposed rule, HCBMs would be required to file all contracts to directly or indirectly provide health care benefit management services on behalf of a carrier. This requirement is implementing RCW 48.200.040, which requires HCBMs to file with OIC "in the form and manner prescribed by the commissioner, every benefit management contract and contract amendment between the HCBM and a health carrier, provider, pharmacy, pharmacy services administration organization, or other HCBM, entered into directly or indirectly in support of a contract with a carrier or employee benefits programs, within 30 days following the effective date of the contract or contract amendment." The proposed rule restates the statutory requirement and adds an illustrative example of which contracts must be filed.

Cost(s): OIC currently receives all contract filings in the System for Electronic Rate and Form Filing (SERFF). This is a system developed and maintained by the National Association of Insurance Commissioners (NAIC). HCBMs currently each submit approximately three contract filings per year. OIC is unable to accurately determine how many contract filings this rule would require, given the current statutory obligation of HCBMs to file contracts entered into directly or indirectly in support of a contract with a carrier or employee benefits program. For this analysis, OIC assumes that the filing of the additional contracts will require a lawyer three hours to review and a clerical worker two hours to upload into SERFF.

WAC 284-180-505 Appeals by network pharmacies to health care benefit managers who provide pharmacy benefit management services.

Description: The rule language proposed by OIC would amend several subsections within WAC 284-180-505. The proposed rule requires:

Cost(s): The proposed rule sets a clear and uniform time frame or "lookback period" by allowing pharmacies to appeal a reimbursement if the claim was adjudicated by the PBM within 90 days of the claim's adjudication (and otherwise meets the requirements for appeals). To determine the marginal cost to PBMs resulting from this requirement, OIC would need to know the length of the lookback period that pharmacies generally use in appealing a reimbursement to a PBM. In other words, OIC would need to know whether, and how, the proposed 90-day lookback period is different from current practice in the absence of this provision. However, OIC understands that for this type of appeal (first tier appeal), the lookback period the pharmacy may use is determined by contractual arrangement between the PBM and the pharmacy. Because these contract terms are not well known, OIC could not estimate the cost of this proposed amendment to PBMs.

OIC did review a sample of final orders and decisions for "second tier" appeals from the office of administrative hearings (OAH) from 2019-2024. This sample suggested, but did not prove, that the "lookback period" used by pharmacies was approximately 30 days in 2024 and longer from 2019-2023. However, this review was not definitive and did not capture the "first tier" appeals, in which a pharmacy appeals directly to a PBM. Therefore, OIC did not have enough information to estimate the cost of this amendment on PBMs.

Currently, under WAC 284-180-505 (1)(a)(i), PBMs are required to have a telephone number by which the pharmacy may contact the PBM during "normal business hours" and speak with an individual responsible for processing appeals. OIC assumes that normal business hours include 9 a.m. - 5 p.m. Pacific Time. Therefore, there is no marginal cost associated with this provision.

OIC considers the cost to a PBM of providing a network pharmacy with the price of a drug that has been purchased by other network pharmacies located in Washington at a price less than or equal to the predetermined reimbursement cost for a drug to be minimal. RCW 48.200.280 (4)(b) already requires, for denied appeals, that the PBM provide "the national drug code of a drug that has been purchased by other network pharmacies located in Washington at a price that is equal to or less than the predetermined reimbursement cost …" Under the proposed rule, the PBM would be sharing the results of its research with the pharmacy. This change could potentially impact the market for PBM services by changing the relative leverage that pharmacies, their representatives, and PBMs have in negotiating contracts. However, OIC is unable to quantify the precise impact of this change.

The proposed language specifically defines what the reasonable adjustment must include if the PBM upholds the network pharmacy's appeal. RCW 48.200.280 (5)(a) already requires a PBM to make a reasonable adjustment; the proposed language stipulates that the reasonable adjustment must include, at a minimum, payment of the claim or claims at issue at the net amount paid by the pharmacy to the supplier of the drug. The proposed rule provides that OIC will presume that a reasonable adjustment applied prospectively for a period of at least 90 days from the date of an upheld appeal is not a knowing or willful violation of chapter 48.200 RCW under RCW 48.200.290. If a therapeutically equivalent interchangeable product becomes available during the period that a reasonable adjustment is in effect, the adjustment may reflect the cost of that product from the date it becomes available to the end of the prospective reasonable adjustment period.

According to public information released by HCA, as of 2020, a vast majority of pharmacy appeals to PBMs were denied (96 percent), meaning that this amended language would only apply to a small subset of upheld appeals, assuming the denial rate remains relatively stable.7 OIC is unable to establish the baseline for how the "reasonable adjustment" as described in WAC 284-280-505(6) is currently interpreted. For second tier appeals, OIC reviewed administrative law judge (ALJ) orders to determine how ALJs interpret reasonable adjustments. From the orders reviewed, the reasonable adjustment is the difference between the original payment by the PBM to the pharmacy and the price the pharmacy paid the wholesaler or supplier. The sample OIC reviewed does not indicate what "reasonable adjustment" a PBM is making as a part of the first tier appeals. However, OIC's review of these orders does indicate that the proposed rule's definition of reasonable adjustment is in line with current practice as seen in the OAH orders. Therefore, there is a cost associated with the provision explicitly defining reasonable adjustment, although OIC is unable to accurately estimate the cost. OIC assumes that the cost is not significant, considering that second tier appeal practices are already in line with the proposed language.

It is important to note that any cost associated with this provision is based on the number of appeals made to the PBMs. Between 2018 and 2020, 38 percent of appeals were made to only two PBMs.8 Smaller PBMs are less likely to receive as many appeals compared to larger PBMs and, therefore, the smaller PBMs are less likely to bear a significant cost due to this provision.

WAC 284-180-507 Appeals by network pharmacies to health care benefit managers who provide pharmacy benefit management services.

Description: This section goes into effect January 1, 2026, at which point WAC 284-180-505 is no longer effective.

This section allows a pharmacy services administrative organization (PSAO) to submit an appeal to a PBM on behalf of multiple pharmacies under certain conditions. Under RCW 48.200.280(3), as amended by E2SHB 5213, a pharmacy or its representative may submit an appeal. This proposed rule language clarifies how a representative of a pharmacy may submit an appeal. It is possible that allowing a PSAO to submit an appeal for multiple pharmacies would have the effect of increasing the overall number of appeals that PBMs receive, because they could be receiving appeals from multiple pharmacies instead of one.

Prior to a pharmacy filing an appeal, upon request by a pharmacy or pharmacist, a PBM must provide, within four business days of receiving the request, a current and accurate list of bank ID numbers, processor control numbers, and pharmacy group identifiers for health plans and for self-funded group health plans that have elected to participate. The language in the proposed rule is incorporated into the rule directly from RCW 48.200.280(4), as amended by E2SHB 5213, with the exception of the addition of a four-day time frame for the PBM to provide the information to the pharmacy. Because the requirement to provide the information upon request is statutory, the only possible additional cost to a PBM would be providing the information in four days, rather than a longer prior of time. OIC is unable to determine whether the four day standard creates any cost obligation that would be in addition to the costs associated with implementing the statutory requirement.

Cost(s): Because the enacting statute states that a pharmacy's representative may submit an appeal, and given the fact that cost associated with this provision on PBMs is likely minimal, OIC is unable to precisely determine the cost to PBMs. OIC assumes that any marginal cost above what is already dictated under statute is minimal.

The four-day timeline imposed by this rule could have cost impacts that include:

Because OIC is unable to determine the baseline cost, OIC could not quantify the cost associated with this section of the proposed rule. OIC does assume there is a cost associated with this requirement.

Summary of all Cost(s):

Analysis on if the proposed rule may impose more-than-minor costs for businesses in the industry. Includes a summary of how the costs were calculated: While some of the costs of the proposed rule can be estimated, there are some that are indeterminate and variable, given several unknown parameters. Because of the unknown costs, OIC assumes that the proposed rule imposes more-than-minor costs for businesses in the industry.

Determination on if the proposed rule may have a disproportionate impact on small businesses as compared to the 10 percent of businesses that are the largest businesses required to comply with the proposed rule: Explanation of the determination: OIC examined the potential cost on small and large businesses. Based on data from ESD, OIC used the average of 15 employees to represent employment at an average small business, and 195 employees to represent employment at an average large business (greater than 50 employees).

For the potential cost of providing a reasonable adjustment under the proposed language, OIC assumes that the cost is "per appeal." Larger PBMs that control a significant portion of the marketplace received many more appeals from pharmacies. Because of this, smaller businesses are more likely to have fewer or no appeals and, therefore, have a reduced or no cost associated with the reasonable adjustment language. Therefore, OIC determined that this cost element does not have a disproportionate impact on small businesses. The other cost elements, including the requirement to submit annual gross income broken out by each entity with which the HCBM has contracted during the previous calendar year, the requirement to file all contracts to provide HCBM services, and the requirement to have a pharmacy appeal phone available do have a disproportionate impact on smaller businesses.

Additional steps OIC has taken to lessen impacts: Several steps were taken during the preproposal period to reduce costs to comply with the proposed rule:

Description of how small businesses were involved in the development of the proposed rule: OIC engaged in fully transparent rule making, involving all interested parties. OIC developed and shared draft proposed rules and circulated them for interested party feedback. The feedback received was taken into consideration and incorporated where feasible. All businesses within an industry, including small businesses, were involved throughout these processes. Feedback was submitted by interested parties and trade associations representing interested parties.

The estimated number of jobs that will be created or lost in result of the compliance with the proposed rule: OIC does not anticipate that the compliance with the proposed rule will lead to a significant number of job creations or cuts. Employers will be able to meet the proposed requirements using existing staff without new hires. Similarly, it is unlikely that employers would need to dismiss employees as a direct result of the proposed rule amendments.

A copy of the statement may be obtained by contacting Simon Casson, P.O. Box 40255, Olympia, WA 98504-0255, phone 360-725-7038,fax 360-586-3109, email rulescoordinator@oic.wa.gov.

October 22, 2024

Mike Kreidler

Insurance Commissioner

OTS-5883.3