CHAPTER 9.5. Audits of Pharmacy Benefits [4430. - 4441.]

Cal. Business and Professions Code - BPC 9.5.
in effect

Cal. Business and Professions Code - BPC § 4430. Section 4430.

For purposes of this chapter, the following definitions shall apply: (a) “Carrier” means a health care service plan, as defined in Section 1345 of the Health and Safety Code, or a health insurer that issues policies of health insurance, as defined in Section 106 of the Insurance Code. (b) “Clerical or recordkeeping error” includes a typographical error, scrivener’s error, or computer error in a required document or record. (c) “Extrapolation” means the practice of inferring a frequency or dollar amount of overpayments, underpayments, nonvalid claims, or other errors on any portion of claims submitted, based on the frequency or dollar amount of overpayments, underpayments, nonvalid claims, or other errors actually measured in a sample of claims. (d) “Health benefit plan” means any plan or program that provides, arranges, pays for, or reimburses the cost of health benefits. “Health benefit plan” includes, but is not limited to, a health care service plan contract issued by a health care service plan, as defined in Section 1345 of the Health and Safety Code, and a policy of health insurance, as defined in Section 106 of the Insurance Code, issued by a health insurer. (e) “Maximum allowable cost” means the maximum amount that a pharmacy benefit manager will reimburse a pharmacy for the cost of a drug. (f) “Maximum allowable cost list” means a list of drugs for which a maximum allowable cost has been established by a pharmacy benefit manager. (g) “Obsolete” means a drug that may be listed in national drug pricing compendia but is no longer available to be dispensed based on the expiration date of the last lot manufactured. (h) “Pharmacy” has the same meaning as provided in Section 4037. (i) “Pharmacy audit” means an audit, either onsite or remotely, of any records of a pharmacy conducted by or on behalf of a carrier or a pharmacy benefits manager, or a representative thereof, for prescription drugs that were dispensed by that pharmacy to beneficiaries of a health benefit plan pursuant to a contract with the health benefit plan or the issuer or administrator thereof. “Pharmacy audit” does not include a concurrent review or desk audit that occurs within three business days of transmission of a claim, or a concurrent review or desk audit if a chargeback or recoupment is not demanded. (j) “Pharmacy benefit manager” means a person, business, or other entity that, pursuant to a contract or under an employment relationship with a carrier, health benefit plan sponsor, or other third-party payer, either directly or through an intermediary, manages the prescription drug coverage provided by the carrier, plan sponsor, or other third-party payer, including, but not limited to, the processing and payment of claims for prescription drugs, the performance of drug utilization review, the processing of drug prior authorization requests, the adjudication of appeals or grievances related to prescription drug coverage, contracting with network pharmacies, and controlling the cost of covered prescription drugs.

Cal. Business and Professions Code - BPC § 4431. Section 4431.

(a) Nothing in this chapter shall apply to an audit conducted because a pharmacy benefit manager, carrier, health benefit plan sponsor, or other third-party payer has indications that support a reasonable suspicion that criminal wrongdoing, willful misrepresentation, fraud, or abuse has occurred. (b) Nothing in this chapter shall apply to an audit conducted by, or at the direction of, the California State Board of Pharmacy, the State Department of Health Care Services, the State Department of Public Health, or the Medicare program.

Cal. Business and Professions Code - BPC § 4432. Section 4432.

Notwithstanding any other law, a contract that is issued, amended, or renewed on or after January 1, 2013, between a pharmacy and a carrier or a pharmacy benefit manager to provide pharmacy services to beneficiaries of a health benefit plan shall comply with the provisions of this chapter. This chapter shall not apply to contracts authorized by Section 4600.2 of the Labor Code.

Cal. Business and Professions Code - BPC § 4433. Section 4433.

(a) An entity conducting a pharmacy audit shall not receive payment or any other consideration on any basis that is tied to the amount claimed or actual amount recovered from the pharmacy that is the subject of the audit. Nothing in this subdivision shall be construed to prevent the pharmacy benefit manager or health benefit plan from charging or assessing the plan sponsor, directly or indirectly, based on amounts recouped if both of the following conditions are met: (1) The plan sponsor and the pharmacy benefit manager or health benefit plan have a contract that explicitly states the percentage charge or assessment to the plan sponsor. (2) No commission or financial incentive is paid to an agent or employee of the entity conducting the pharmacy audit based, directly or indirectly, on amounts recouped. (b) A pharmacy shall not be subject to recoupment of funds for a clerical or recordkeeping error, unless the error resulted in actual financial harm to the pharmacy benefit manager, the carrier, or the beneficiary of a health benefit plan.

Cal. Business and Professions Code - BPC § 4434. Section 4434.

(a) Except as otherwise prohibited by state or federal law, an entity conducting a pharmacy audit shall keep confidential any information collected during the course of the audit and shall not share any information with any person other than the carrier, pharmacy benefit manager, or third-party payer for which the audit is being performed. An entity conducting a pharmacy audit shall have access only to previous audit reports relating to a particular pharmacy conducted by or on behalf of the same entity. Nothing in this subdivision shall be construed to authorize access to information that is otherwise prohibited by law. Nothing in this subdivision shall be construed to prohibit any employer, trust fund, government agency, or any other entity for which the audit is being performed from disclosing its general opinions or conclusions regarding the business practices of the pharmacy based on the audit. (b) An entity that is not a carrier or pharmacy benefit manager and that is conducting a pharmacy audit on behalf of a carrier or pharmacy benefit manager shall, prior to conducting the audit, notify the pharmacy in writing that the entity and the carrier or pharmacy benefit manager have executed a business associate agreement or other agreement as required under state and federal privacy laws. (c) An entity conducting a pharmacy audit shall, prior to leaving a pharmacy at the end of an onsite portion of the audit, provide the pharmacist in charge with a complete list of records reviewed to allow the pharmacy to account for disclosures as required by state and federal privacy laws.

Cal. Business and Professions Code - BPC § 4435. Section 4435.

(a) An entity conducting an onsite pharmacy audit shall not initiate or schedule a pharmacy audit during the first five business days of any calendar month, unless it is expressly agreed to by the pharmacy being audited. (b) An entity conducting an onsite pharmacy audit shall provide the pharmacy at least two weeks’ prior written notice before conducting an initial audit.

Cal. Business and Professions Code - BPC § 4436. Section 4436.

(a) A pharmacy audit that involves clinical judgment shall be conducted by, or in consultation with, a licensed pharmacist. (b) An entity conducting a pharmacy audit shall make all determinations regarding the legal validity of a prescription or other record consistent with determinations made pursuant to Article 4 (commencing with Section 4070) of Chapter 9. (c) Nothing in this section shall be construed to prohibit a pharmacy benefits manager from denying a claim, either in whole or in part, for failure to comply with federal Food and Drug Administration or manufacturer requirements, the prescription drug formulary, prior authorization requirements, days’ supply requirements, or other coverage or plan design requirement, or for failure to include a National Provider Identification number. (d) An entity conducting a pharmacy audit shall accept paper or electronic signature logs that document the delivery of pharmacy services to a health plan beneficiary or his or her agent.

Cal. Business and Professions Code - BPC § 4437. Section 4437.

The time period covered by a pharmacy audit shall not exceed 24 months from the date that the claim was submitted to, or adjudicated by, the pharmacy benefits manager, unless a longer period is required under state or federal law or unless the originating prescription is required.

Cal. Business and Professions Code - BPC § 4438. Section 4438.

(a) (1) An entity conducting a pharmacy audit shall deliver a preliminary audit report to the pharmacy before issuing a final audit report. This preliminary report shall be issued no later than 60 days after conclusion of the audit. (2) A pharmacy shall be provided a time period of at least 30 days following receipt of the preliminary audit report under paragraph (1) to respond to the findings in the report, including addressing any alleged mistakes or discrepancies and producing documentation to that effect. (3) To validate the pharmacy record and delivery, the pharmacy may use authentic and verifiable statements or records, including medication administration records of a nursing home, assisted living facility, hospital, physician and surgeon, or other authorized prescriber, or additional documentation parameters located in the provider manual. (4) Any legal prescription may be used to validate claims in connection with prescriptions, refills, or changes in prescriptions, including medication administration records, facsimiles, electronic prescriptions, electronically stored images of prescriptions, electronically created annotations, or documented telephone calls from the prescriber or the prescriber’s agent. Unless specifically addressed in the audit policies and procedures contained in the contract or provider manual, documentation of an oral prescription order that has been verified by the prescriber shall meet the requirements of this subdivision. (5) If an entity conducting a pharmacy audit uses extrapolation to calculate penalties or amounts to be recouped, the pharmacy may present evidence to validate orders for dangerous drugs or devices that are subject to invalidation due to extrapolation. (6) Prior to issuing a final audit report, an entity conducting a pharmacy audit shall take into consideration any response by the pharmacy to the preliminary audit report provided within the timeframes allowed under this section, unless otherwise agreed to by the entity conducting the audit. (b) (1) An entity conducting a pharmacy audit shall deliver a final audit report to the pharmacy no later than 120 days after receipt of a pharmacy’s response to the preliminary audit report. (2) An entity conducting a pharmacy audit shall establish, in the contract between the pharmacy and the contracting entity, a process for appealing the findings in a final audit report that complies with the following requirements: (A) A pharmacy shall be provided a time period of at least 30 days following receipt of the final audit report to file an appeal with the entity identified in the appeal process. (B) An entity conducting a pharmacy audit shall provide the pharmacy with a written determination of appeal issued by the entity identified in the appeal process, which shall be appended to the final audit report, and a copy of the determination shall be sent to the carrier, health benefit plan sponsor, or other third-party payer. (C) If, following the appeal, either party is not satisfied with the appeal, the party may seek relief under the terms of the contract. (c) An entity conducting a pharmacy audit, a carrier, a health benefit plan sponsor, or other third-party payer, or any person acting on behalf of those entities, shall not attempt to make chargebacks or seek recoupment from a pharmacy, or assess or collect penalties from a pharmacy, until the time period for filing an appeal to a final audit report has passed, or until the appeal process has been exhausted, whichever is later. Should the identified discrepancy for a single audit exceed thirty thousand dollars ($30,000), future payments to the pharmacy in excess of thirty thousand dollars ($30,000) may be withheld pending adjudication of an appeal. (d) Interest shall not accrue during the audit period for either party, beginning with the notice of the audit and ending with the conclusion of the appeal process. (e) If, following final disposition of a pharmacy audit pursuant to this section, an entity conducting a pharmacy audit, a carrier, a health benefit plan sponsor, or other third-party payer, or any person acting on behalf of those entities, finds that an audit report or any portion thereof is unsubstantiated, the entity shall dismiss the audit report or the unsubstantiated portion thereof without the necessity of any further proceedings.

Cal. Business and Professions Code - BPC § 4439. Section 4439.

This chapter shall not be construed to suggest or imply that the Department of Consumer Affairs or the California State Board of Pharmacy has any jurisdiction or authority over the provisions of this chapter.

Cal. Business and Professions Code - BPC § 4440. Section 4440.

(a) A pharmacy benefit manager that reimburses a contracting pharmacy for a drug on a maximum allowable cost basis shall comply with this section. (b) A pharmacy benefit manager shall include in a contract, initially entered into, or renewed on its scheduled renewal date, on or after January 1, 2016, with the contracting pharmacy information identifying any national drug pricing compendia or other data sources used to determine the maximum allowable cost for the drugs on a maximum allowable cost list. (c) A pharmacy benefit manager shall make available to a contracting pharmacy, upon request, the most up-to-date maximum allowable cost list or lists used by the pharmacy benefit manager for patients served by that pharmacy in a readily accessible, secure, and usable Web-based format or other comparable format. (d) A drug shall not be included on a maximum allowable cost list or reimbursed on a maximum allowable cost basis unless all of the following apply: (1) The drug is listed as “A” or “B” rated in the most recent version of the federal Food and Drug Administration’s approved drug products with therapeutic equivalent evaluations, also known as the Orange Book, or has an “NA,” “NR,” or “Z” rating or a similar rating by a nationally recognized pricing reference, such as Medi-Span or First DataBank. (2) The drug is generally available for purchase in the state from a national or regional wholesaler. (3) The drug is not obsolete. (e) For contracts initially entered into, or renewed on the scheduled renewal date, on or after January 1, 2016, a pharmacy benefit manager shall review and shall make necessary adjustments to the maximum allowable cost of each drug on a maximum allowable cost list using the most recent data sources available at least once every seven days. (f) For contracts initially entered into, or renewed on the scheduled renewal date, on or after January 1, 2016, a pharmacy benefit manager shall have a clearly defined process for a contracting pharmacy to appeal the maximum allowable cost for a drug on a maximum allowable cost list that includes all of the following: (1) A contracting pharmacy may base its appeal on either of the following: (A) The maximum allowable cost for a drug is below the cost at which the drug is available for purchase by similarly situated pharmacies in the state from a national or regional wholesaler. (B) The drug does not meet the requirements of subdivision (d). (2) A contracting pharmacy shall be provided no less than 14 business days following receipt of payment for the claim upon which the appeal is based to file an appeal with a pharmacy benefit manager. The pharmacy benefit manager shall make a final determination regarding a contracting pharmacy’s appeal within seven business days of the pharmacy benefit manager’s receipt of the appeal. (3) If an appeal is denied by a pharmacy benefit manager, the pharmacy benefit manager shall provide to the contracting pharmacy the reason for the denial and the national drug code (NDC) of an equivalent drug that may be purchased by a similarly situated pharmacy at the price that is equal to or less than the maximum allowable cost of the appealed drug. (4) If an appeal is upheld by a pharmacy benefit manager, the pharmacy benefit manager shall adjust the maximum allowable cost of the appealed drug for the appealing contracting pharmacy and all similarly situated contracting pharmacies in the state within one calendar day of the date of determination. The pharmacy benefit manager shall permit the appealing pharmacy to reverse and resubmit the claim upon which the appeal was based in order to receive the corrected reimbursement. (g) A contracting pharmacy shall not disclose to any third party the maximum allowable cost list and any related information it receives either directly from a pharmacy benefit manager or through a pharmacy services administrative organization or similar entity with which the contracting pharmacy has a contract to provide administrative services for that pharmacy.

Cal. Business and Professions Code - BPC § 4441. Section 4441.

(a) For purposes of this section, the following definitions shall apply: (1) “Labeler” means a person or entity that receives prescription drugs from a manufacturer or wholesaler and repackages those drugs for later retail sale and who has a labeler code from the federal Food and Drug Administration under Part 207 of Title 21 of the Code of Federal Regulations. (2) “Proprietary information” means information on pricing, costs, revenue, taxes, market share, negotiating strategies, customers, and personnel that is held by a pharmacy benefit manager and used for its business purposes. (3) “Purchaser” means a health benefit plan sponsor or other third-party payer with whom a pharmacy benefit manager contracts to provide the administration and management of prescription drug benefits, except for a health care service plan licensed pursuant to Chapter 2.2 (commencing with Section 1340) of Division 2 of the Health and Safety Code. (b) This section shall apply to pharmacy benefit manager contracts that are entered into, amended, or renewed on or after January 1, 2019. (c) (1) A pharmacy benefit manager shall exercise good faith and fair dealing. (2) A pharmacy benefit manager has a fiduciary duty to a self-insured employer plan that includes a duty to be fair and truthful toward the client, to act in the client’s best interests, to avoid conflicts of interest, and to perform its duties with care, skill, prudence, and diligence. (d) A pharmacy benefit manager shall notify a purchaser in writing of any activity, policy, or practice of the pharmacy benefit manager that directly or indirectly presents a conflict of interest that interferes with the discharge of the pharmacy benefit manager’s duty to the purchaser to exercise good faith and fair dealing pursuant to subdivision (c). (e) The pharmacy benefit manager shall, on a quarterly basis, disclose, upon the request of the purchaser, the following information with respect to prescription product benefits specific to the purchaser: (1) The aggregate wholesale acquisition costs from a pharmaceutical manufacturer or labeler for each therapeutic category of drugs containing three or more drugs, as outlined in the state’s essential health benefits benchmark plan pursuant to Section 1367.005 of the Health and Safety Code. (2) The aggregate amount of rebates received by the pharmacy benefit manager by therapeutic category of drugs containing three or more drugs, as outlined in the state’s essential health benefits benchmark plan pursuant to Section 1367.005 of the Health and Safety Code. The aggregate amount of rebates shall include any utilization discounts the pharmacy benefit manager receives from a pharmaceutical manufacturer or labeler. (3) Any administrative fees received from the pharmaceutical manufacturer or labeler. (4) Whether the pharmacy benefit manager has a contract, agreement, or other arrangement with a pharmaceutical manufacturer to exclusively dispense or provide a drug to a purchaser’s employees, insureds, or enrollees, and the application of all consideration or economic benefits collected or received pursuant to that arrangement. (5) Prescription drug utilization information for the purchaser’s enrollees or insureds that is not specific to any individual enrollee or insured. (6) The aggregate of payments, or the equivalent economic benefit, made by the pharmacy benefit manager to pharmacies owned or controlled by the pharmacy benefit manager. (7) The aggregate of payments made by the pharmacy benefit manager to pharmacies not owned or collected by the pharmacy benefit manager. (8) The aggregate amount of the fees imposed on, or collected from, network pharmacies or other assessments against network pharmacies, and the application of those amounts collected pursuant to the contract with the purchaser. (f) The information disclosed pursuant to subdivision (e) shall apply to all retail, mail order, specialty, and compounded prescription products. (g) Except for utilization information specified in paragraph (5) of subdivision (e), a pharmacy benefit manager is not required to make the disclosures required by subdivision (e) unless and until the purchaser agrees, in writing, to maintain as confidential any proprietary information. (h) A pharmacy benefit manager shall not impose a penalty or offer an inducement to a purchaser for the purpose of deterring the purchaser from requesting the information set forth in subdivision (e). (i) A pharmacy benefit manager shall disclose to a pharmacy network provider or its contracting agent any material change to a contract provision that affects the terms of reimbursement, the process for verifying benefits and eligibility, dispute resolution, procedures for verifying drugs included on the formulary, and contract termination at least 30 days before the date of the change to the provision. (j) A pharmacy benefit manager shall not notify an individual receiving benefits through the pharmacy benefit manager that a pharmacy has been terminated from the pharmacy benefit manager’s network until the notification of termination has been provided to that pharmacy pursuant to subdivision (i). (k) A pharmacy benefit manager shall not include in a contract with a pharmacy network provider or its contracting agent a provision that prohibits the provider from informing a patient of a less costly alternative to a prescribed medication. (l) This section shall not apply to the following: (1) A health care service plan or health insurer, if the health care service plan or health insurer offers, provides, or administers pharmacy benefit management services and if those services are offered, provided, or administered only to enrollees, subscribers, policyholders, or insureds who are also covered by health benefits offered, provided, or administered by that health care service plan or health insurer. (2) An affiliate, subsidiary, related entity, or contracted medical group of a health care service plan or health insurer that would otherwise qualify as a pharmacy benefit manager, but offers, provides, or administers services only to enrollees, subscribers, policyholders, or insureds who are also covered by health benefits offered, provided, or administered by the health care service plan or health insurer. (3) A contract authorized by Section 4600.2 of the Labor Code. (m) The provisions of this section are severable. If any provision of this section or its application is held invalid, that invalidity shall not affect other provisions or applications that can be given effect without the invalid provision or application.
Source: CA Legislative Counsel Bulk DataURL: https://downloads.leginfo.legislature.ca.gov/pubinfo_2025.zipFetched: 6/27/2026