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CHAIRPERSON MATHUR: I'm going to call the open session of the Pension and Health
Benefits Committee to order. And the first order of
business is roll call.
COMMITTEE SECRETARY JIMENEZ: Priya Mathur? CHAIRPERSON MATHUR: Good morning -- or
afternoon. COMMITTEE SECRETARY JIMENEZ: George Diehr?
VICE CHAIRPERSON DIEHR: Here. COMMITTEE SECRETARY JIMENEZ: Michael Bilbrey?
COMMITTEE MEMBER BILBREY: Here. COMMITTEE SECRETARY JIMENEZ: Ralph Cobb for
Julie Chapman? ACTING COMMITTEE MEMBER COBB: Here.
COMMITTEE SECRETARY JIMENEZ: Ruth Holton-Hodson for John Chiang?
ACTING COMMITTEE MEMBER HOLTON-HODSON: Here. COMMITTEE SECRETARY JIMENEZ: Rob Feckner?
CHAIRPERSON MATHUR: He's here. COMMITTEE SECRETARY JIMENEZ: J.J. Jelincic?
COMMITTEE MEMBER JELINCIC: Here. COMMITTEE SECRETARY JIMENEZ: Henry Jones?
CHAIRPERSON MATHUR: He's also here somewhere. COMMITTEE SECRETARY JIMENEZ: Grant Boyken
for Bill Lockyer?
ACTING COMMITTEE MEMBER BOYKEN: Here. CHAIRPERSON MATHUR: All right. We have a
quorum. Just one note on the agenda, we are going to move
Agenda Item 8 up, so it will be immediately following
Agenda Item 5. And with that, we'll move on to the
Executive Reports. DEPUTY EXECUTIVE OFFICER BOYNTON: Good morning.
Ann Boynton, CalPERS staff. Just a couple of our ongoing
projects that I wanted to bring you up to date on. The
Dependent Eligibility Verification Project continues in
the verification phase. Cycles 1 through 5 are related to
State employees and retirees, active and retireds. One
through 5. Cycle 1 was State actives, excuse me. That
project -- section officially closed on November 15th. At
this point, cycle 1 members are providing supporting
documentation directly to their employers for
re-enrollment or to sustained enrollment of a dependent.
Cycle 2, which was also State active employees ends on December 31st. Earlier this month,
we launched Cycle 3, which is the first of the State retiree
cycles. This includes about 40,000 subscribers and
about 55,000 dependents.
The Cycle 3 retirees have until January 21st of
next year, which is not that far away, to submit their
documents. The second group of retirees will
receive their letters -- their initial letters around
February rd. And they will have until March 21st to
submit their retirements. We are -- their documentation.
We are working with constituent groups to spread
the word about the project to reassure our retirees that
this is a CalPERS sponsored project, and that it is
something that we are pursuing based on our statute. We
are a little -- we are concerned -- a little bit
concerned. The response rate on the retiree side is lower
than we had expected. We are sending the usual letters,
as I think I've mentioned previously. In addition, we are
providing a special automated outbound telephone message
to retirees to remind them of key dates, and the HMS
contact numbers if they have questions. We will also be sending out postcards as we
near the end of the cycle to further encourage
people to contact us. So we are doing all that we can
to encourage our retirees comply, and we will to keep you
updated as we go through the end of this process.
CHAIRPERSON MATHUR: Can I interrupt you for a
question from the Committee? DEPUTY EXECUTIVE OFFICER BOYNTON: Yes.
CHAIRPERSON MATHUR: Mr. Boyken. ACTING COMMITTEE MEMBER BOYKEN: Thank you.
What's the end date for the entire, once we
get done with the State cycles and public agencies?
DEPUTY EXECUTIVE OFFICER BOYNTON: It's about --
it's an 18 to 20 month project, and we started in July, so
end of next year-ish, with a little bit of cleanup. We're
going to go back through and clean up some after the end
of next -- at the end of 2014. ACTING COMMITTEE MEMBER BOYKEN: Thank you.
CHAIRPERSON MATHUR: Thank you. DEPUTY EXECUTIVE OFFICER BOYNTON: One of the
items -- one of our agenda items today mentions a
Castlight Health Project -- a Castlight Health Pilot
Project. I just wanted to give you a couple highlights of
what Castlight is. We're currently developing a two-year
pilot project in partnership with Castlight Health and
Anthem Blue Cross to provide a web-based tool that
integrates our PPO product data to -- the goal of the
pilot is to assist members in understanding health care
service options, along with cost information for various
health care providers, so that as they go -- in the PPO
world, as they go to search for services, they will have
the ability to see what those pricings -- what the pricing
of those services looks like. The goal of the pilot is to help our PPO members
make informed choices when selecting medical and
pharmaceutical services through quality and
cost information. And I do want to emphasize it's
both quality and cost. By providing this type of transparency,
we believe it will empower members and their
dependents to take greater accountability for their health
care. The pilot aligns with the 21 Health Benefit
Initiatives, that is to begin to get our members more
engaged as health care consumers, and supporting our
current CalPERS projects and initiatives. A full presentation of Castlight project details,
along with a demonstration of the tool, will be brought
back to you in February of 2014. The project is scheduled
to launch in July -- June/July of 2014. So you're not
missing anything by not getting the tour until February.
We are launching, at this point, a new project, also part of our 21 initiatives, around public
agency flexibility for growth. What we want to look
at there are the areas and issues that are of concern to
our contracting agencies and their employees.
We expect, among other issues, that we will look at questions
of benefit designs and offerings, vesting reciprocity,
and contribution requirements.
I want to state, at this point, we have drawn no
conclusion about any necessary changes. We have heard
both employees and employers of our contracting agencies
raising concerns and asking us if we can make
some modifications. We are embarking on this project
to understand what those modifications might
be, and what the impacts of those changes could be, both to
the employers and the employees. So it's, at this point,
a fact finding project that we are embarking on.
Three surveys will be conducted in January of
, one for PEMHCA contracting agencies, one for
non-PEMHCA, that is retirement only contracting agencies,
and one for member organizations. Following the analysis of the survey data,
we will conduct employer and member organization
focus groups and we will report back to you beginning in
June of 2014 with our findings, and if appropriate, any
possible recommendations or alternatives for consideration.
Finally, we are approaching the end of December, and we are closing in on the launch of the
new application period for our long-term care program. We
are very excited about being able to open enrollment
again. Staff has been working incredibly diligently over
the -- and frenetically sometimes over the past several
months to ensure that the explanation of coverage, the
outline of benefits, a customer shopping guide, participant
and employer application kits are all already
to go for LTC4, for both the comprehensive and the partnership
open
enrollment, which will start at the end of this month.
We currently have over 5,000 -- 4,000 application inquiries in the Univita database. That started
since the announcement of the program reopening in February
of this year. So we know there's a lot of interest,
and we look forward to being able to respond to people's
interests. I would like to express my gratitude to the
staff of public affairs and Edelman Consulting who
worked very closely with Univita and with our staff on
developing the messaging and marketing strategy for the open
application. Both teams were instrumental in supporting
the development of co-branding, multiple messaging,
channels, graphic layout, and design. We, as I noted,
will be opening this before the end of the year. We
will issue a press release and -- so that people know when
the materials are available for download. They
will initially be available obviously through download from
our website immediately. And we will update the Committee
in April on enrollment opportunities and challenges as
we go forward. That concludes my remarks.
CHAIRPERSON MATHUR: Thank you. Let's move on
then to Agenda Item number 3, the Action Consent Items.
We have the minutes. COMMITTEE MEMBER JELINCIC: I'll move.
CHAIRPERSON MATHUR: So it was moved by Mr.
Jelincic. COMMITTEE MEMBER JONES: Second.
CHAIRPERSON MATHUR: Seconded by Mr. Jones. All those in favor say aye?
(Ayes.) CHAIRPERSON MATHUR: Action passes.
Motion passes. Agenda Item number 4, the consent items.
Mr. Jelincic. COMMITTEE MEMBER JELINCIC: I had just a brief
question about the draft agenda, Item 6, Pension Reform
Act of 2014. What is that? DEPUTY EXECUTIVE OFFICER BOYNTON: Where are
you? Let me spin around this way. It's the -- it's
the ballot initiative that Mayor Chuck Reed has talked
about circulating for signature. COMMITTEE MEMBER JELINCIC: Okay. Thank you.
CHAIRPERSON MATHUR: Thank you. Okay. Seeing no further requests to speak,
we'll move on to Agenda Item number 5, state Legislative
Proposal. Mr. Brown. OFFICE OF GOVERNMENTAL AFFAIRS CHIEF BROWN:
Good afternoon, Madam Chair and Committee members.
Danny Brown, CalPERS staff.
This agenda item is the annual CalPERS
housekeeping bill. It is an action item and staff is
recommending the Board sponsor legislation that makes
minor policy and technical changes to the Government Codes
administered by this Board. This includes such things as the Public
Employees' Retirement Law, Judges' Retirement Law,
Legislators' Retirement Law and so on. Many of the
changes are technical in nature, so I will just highlight
a couple items for you. One of the policy changes we are recommending
deals with the employer contribution rate applied to
payroll reporting adjustments. Current law sets forth
that when an employer makes a payroll adjustment for a
prior fiscal year, we use the current year's fiscal year's
employer contribution rates. In this -- as you know, in this current
environment, employer rates are tinting up. So what
happens is, in some instances, the employer will have to
pay more and in some instances, the employer will get a
refund. So, for example, if they're making an adjustment
which adds payroll, they would have to pay more, because
they're paying at the current employer contribution rates.
If they're backing out payroll, then they would get a
larger refund than they would have if they had paid at the
time that compensation was really due.
So with my|CalPERS we now have the capability to
store historical rates. So what we are recommending is
that when these adjustments are made, we would charge the
employer contribution rate that would have been due at the
time that compensation would have been paid. Another minor amendment would allow members
to make a change to their option election, if
CalPERS receives their request within 30 days of the
issuance of the first retirement payment. Current law
allows members to change their option election prior to the
issuance of the first benefit payment or in the event
of a change of retirement status. A change in retirement
status is something like going from service retirement
to disability retirement, a change in marital status or
the death of a beneficiary.
Right now -- or I should say because of my|CalPERS weekly payment processing, staff
believes that members should be able to make a change, as
long as that request is received within 30 days of the
issuance of the first payment. So both of these changes are
really due to some flexibility we now have with my|CalPERS.
And then finally, I just want to point out that
this year's housekeeping bill will include any changes
that we want to forward to continue to conform with PEPRA.
As you recall last year, we had a separate PEPRA
conformity bill, but this year we will just
include it into our housekeeping bill.
A few of the items we're looking at this year around PEPRA conformity still have to do with
State Tier , working after retirement, and just some
cross-reference changes.
And that concludes my report and I'll answer any
questions you may have. CHAIRPERSON MATHUR: Thank you. We do have
a couple questions from the Committee.
Dr. Diehr. VICE CHAIRPERSON DIEHR: Oh, sorry.
CHAIRPERSON MATHUR: Don't hit it. Now, hit it again.
VICE CHAIRPERSON DIEHR: Move staff recommendation.
CHAIRPERSON MATHUR: A motion has been made by
Dr. Diehr. Is there a second to the motion? ACTING COMMITTEE MEMBER COBB: Second
CHAIRPERSON MATHUR: Seconded by Mr. Cobb. Any discussion on the motion?
Mr. Jelincic. COMMITTEE MEMBER JELINCIC: Danny, you raised
the issue of the employer backing out pay and
therefore being entitled to a refund. They really don't get
a refund, do
they? I mean, they get a credit. OFFICE OF GOVERNMENTAL AFFAIRS CHIEF BROWN:
They get a credit, yes.
COMMITTEE MEMBER JELINCIC: Because once we get
it, we don't give it back. OFFICE OF GOVERNMENTAL AFFAIRS CHIEF BROWN:
Right. They get a credit against future payments.
COMMITTEE MEMBER JELINCIC: Okay. And the -- on the change to the optional election, so they
would be able to do that within the first 30 days or in
the event of a change in retirement status. In either case,
they would still be able to do it?
OFFICE OF GOVERNMENTAL AFFAIRS CHIEF BROWN: Correct.
COMMITTEE MEMBER JELINCIC: Okay. Thank you. CHAIRPERSON MATHUR: All right I see no further
requests to speak. A motion is on the table.
All those in favor say aye? (Ayes.)
CHAIRPERSON MATHUR: All those opposed? Motion passes.
We'll move on to Agenda Item number 8, Considerations in Generic Step Therapy Programs.
DEPUTY EXECUTIVE OFFICER BOYNTON: Thank you.
As the team settles in, I don't know -- David
will correct me. I don't know if Dr. David Cowling has
presented to the Committee previously.
(Thereupon an overhead presentation was presented as follows.)
DEPUTY EXECUTIVE OFFICER BOYNTON: He is the Chief of our Center for Innovation, and we
-- you will be seeing him more frequently, but this could
be your first appearance in front of the Committee.
CENTER FOR INNOVATION CHIEF COWLING: I kicked off Jamie Robinson's reference pricing.
DEPUTY EXECUTIVE OFFICER BOYNTON: Oh, that's right.
CHAIRPERSON MATHUR: Well, welcome back. CENTER FOR INNOVATION CHIEF COWLING: Thank
you. Good afternoon, Madam Chair, Committee members.
David Cowling, CalPERS staff, bringing to you today Agenda
Item 8, which is an informational agenda item. Dr. Brenda
Motheral who is president of the Pharmacy Benefit
Management Institution and was scheduled to speak today
was unable to make it, due to a scheduling conflict. We
are excited instead to have Kathleen Fairman joining us
who is vice president of research and education for the
Pharmacy Benefit Management Institute and an Adjunct
Assistant Professor at the Midwestern University,
College of pharmacy.
She was associated editor and senior methodology reviewer for the Journal of Managed Care Pharmacy
from to 2012. She's authored and co-authored numerous
peer-reviewed articles including more than 50 Medline
indexed publications. In this agenda item, Kathleen will provide
an overview of generic step therapy, that includes
how frequently it is used, its effectiveness,
and some considerations about its implementation.
Please note that Blue Shield of California currently has a generic step therapy program.
Kathleen. MS. FAIRMAN: Good afternoon.
Where's the slide thing? There we go.
--o0o-- MS. FAIRMAN: PBMI is a research and education
firm. We basically do two things -- two types of studies.
One is we look at what employers are actually doing in the
marketplace, as far as pharmacy benefit management. The
other is we look at the research literature. In other
words, we look at what the best quality studies tell us
about what works in pharmacy benefit management, and we
try to drive change towards those practices.
--o0o-- MS. FAIRMAN: Okay. So what I'm going to do
today is just give you some basic information. Some of it
comes out of questions that David kindly provided in
advance. We're going to talk about step therapy outcomes,
implementation considerations, in other words how do you
successfully implement one of these programs and then
conclude with answering any questions you have.
--o0o-- MS. FAIRMAN: First of all, what is a generic
drug? A generic drug is a chemically equivalent
copy of what was previously a brand drug whose patent
expired. So, for example, two years ago we had brand
Lipitor. Today, we have generic atorvastatin, and they
are completely bioequivalent. In other words,
same purity, same chemical, same route of administration
through the body, same manufacturing standards.
Now, how do we know that? Because the U.S. Food and Drug Administration
oversees this. If you go on the FDA website, there's
actually some really good information about generic drugs.
Where we do see the big difference is in cost. This
example is from one large PBM, and it's about a 90 percent
cost difference on average. You can see cost
differences that are more like 80 percent, but it's substantial.
So what that tells you is that every time a plan
sponsor successfully encourages a member to take a generic
instead of a brand, it realizes about an 80 percent
savings on that prescription. And so not surprisingly, we see a big increase
in the generic fill rate, which is the percentage
of prescriptions that are filled with a generic,
instead of a brand drug.
It was about 58 percent five years ago. Today, it's about three-quarters of prescriptions.
Some of that is driven by a lot of patent expirations in
recent years. And for us, in the PBMI, and in the PBMI industry,
we call those generic savings opportunities. In other
words, a chance for plan sponsors to produce similar
outcomes at a lower cost. That's basically what we're about
to look at. --o0o--
MS. FAIRMAN: All right. Before I talk about step therapy adoption rates, in other words,
the percentage of employers who are using step
therapy, let me step back, no pun intended, for a minute,
and talk about how these programs typically work, because
this was a question that came up.
It depends on your system, in terms of how
prescriptions are ordered and filled. But if you
basically have a step therapy program in place, either the
physician or the pharmacist, or some times a patient,
would get a message that would say, this drug, Drug B, the
brand drug, is subject to a step therapy program, and this
program asks that you take instead drug GE or another
generic drug prior to coverage of Drug B. And then, at that point, a decision gets made
by the prescriber, and the patient about what's
going to happen next. We'll see those numbers in a
minute, but the plurality of time, the generic drug gets filled.
We'll look at those numbers in a minute.
At that point, it's basically business as usual.
In other words, that patient is managed just the same way
by the physician as any other patient starting a drug.
There's no difference. So with that in mind, now you can
maybe see why the step therapy adoption rates are pretty
high. And again, they're growing. About 56 percent of
plan sponsors were using a step therapy program for, at
least, one therapy class a couple of years ago. Today,
that is about two-thirds of plan sponsors and about
three-quarters of larger employers use step therapy. A
larger employer is defined as one with more than 5,000
members. So basically, what we see is it's essentially
mainstream practice. It's a common part of
pharmacy benefit management today.
--o0o-- MS. FAIRMAN: All right. So what does the
evidence show? Brenda Motheral who originally was scheduled
to present, two years ago did a review of the
literature on step therapy. This was a critical systematic
review. And the reason that term is important is systematic
means looking at all the studies, not just some,
you know, that support one point of view or another.
Systematic means you're looking at everything. Critical means that you're looking at the
quality of the studies and you're giving more attention to
ones that are at a higher quality. Now, these, at that point,
the studies covered five therapy classes, anti-depressants,
anti-hypertensives, so blood pressure, anti-psychotics, but only in Medicaid. Those weren't studied
in commercial populations, and NSAIDs which stands for non-steroidal
anti-inflammatory drugs like Aleve, Advil, and proton pump
inhibitors, like Nexium, Prilosec. Most of these studies
address both financial outcomes and at least one clinical
outcome. And here's what they found.
--o0o--
MS. FAIRMAN: All right. First, let's look at
the savings. Basically, all the studies, except for
anti-psychotics in Medicaid documented drug cost savings.
And this was driven primarily by use of generic drugs,
instead of brand drugs. Well, if you think back to the
slide I showed you with the 80 to 90 percent cost
shavings, you can see why, because when these prescriptions are filled using generics instead
of brand, of course there is a cost savings.
--o0o-- MS. FAIRMAN: Before I talk about the clinical
outcomes, let me explain that data that I described a few
minutes ago about what happens when somebody encounters a
step therapy message, which in our business we call it
step therapy edit. As I mentioned, a plurality of
patients end up filling the prescription with a generic
medication, but some, about 14 percent in this one study,
and there have been other similar studies, get what's
called a prior authorization, or a PA, for the brand.
Now, what that is, is basically a medical exception policy. It's sometimes built in
with a step therapy program. And so, for example, the
patient has an allergy to that drug -- to the generic drug,
or the patient previously used the generic drug,
and it did not work for that patient.
So that is a medical exception policy that
allows you to deal with that circumstance. So about
14 percent got a PA for the brand. A minority, about
11 percent in this study, paid full price for the brand.
Close to 20 percent, in the range of 18 or 19, will get
-- will do something else.
If there is a product available over the counter, for example, Prilosec is available over the
counter, they might do -- some will get samples, some will
use their spouse's insurance. And we know this from
survey data combined with claims data.
A minority will get no medication, but even that's a little bit misleading. I was working
for a PBM that did a follow-up telephone survey with
some of these patients that got no medication. We called
them and we said, you know, reminded them of the incident,
and we said, well, what happened?
About a third of them -- the count was small, but
it was about a third said that they didn't get medication,
because they had medications sitting in their medicine
cabinet at home, and they went back and they used what
they had. Some of them also told us that the problem
-- the medical problem that led them to need the
medication was no longer an issue for them. So the no medication
group
is a bit of a mixed bag, but it is always there, that --
in these studies, that a minority would get no medication.
--o0o-- MS. FAIRMAN: All right. So with that in mind,
let's talk about clinical outcomes. Basically, there are
two that we look at. One is long-term adherence to
medical therapy. The reason we look at that is you don't
want patients who are in one of these, or who get a step
therapy edit, and get a drug, other than the one that they
originally intended. What you do not want to see is those
patients dropping out of therapy earlier than the ones
that are not in a step therapy program. In fact, you do
not see that. What we see instead is no association between long-term adherence and being in a
plan that is using step therapy.
The other thing we look at is medical expenditures. And I understand that this question
came up from the Board. We look at medical expenditures
because that is a good way of telling us, giving us
a barometer of what happened clinically with that patient
after that step therapy edit. The reason is because if somebody
goes into the hospital, if they have an ER visit, if
they end up using a lot of physician visits, because of,
you know, getting this step therapy edit, we would see
that in the medical claims data. We would see it in increased
expenditures, because those things all cost
money. That's not what we see though. What we see
is when we look at disease-related expenditures,
in other words, the cost of providing care for hypertension
for a patient who has high blood pressure, we do
not see an increase in medical expenditures with a step
therapy program.
--o0o-- MS. FAIRMAN: All right. So then the last thing,
what about the member's experience? Because the last
thing any of us wants, and none of the PBMs want it
either, is to walk into their office on a Monday morning
and be flooded with calls from upset people. Nobody wants
this. So PBMs have looked at this. One PBM in
particular has put some science around it. What they have
found -- and this is unpublished data. What they have
found is that call volume increases for about three
months, but the increase is quite small. About one
percent of members who are affected by a step therapy edit
call the PBM. All right, so that would be the PBM
number's helpline or customer service line. Less than
that call HR. Now, it's important to remember that not every
person who makes a telephone call is unhappy. Some of
them just have questions. They don't know
what it is. They don't know what to do. So what this PBM
found is that about 0.1 percent of those affected members
are actually dissatisfied.
However, however, paying full price for the brand
drug, which remember I showed you some people do that, and
getting no medication are associated with increased
dissatisfaction. So then the question becomes, how do you
prevent that or mitigate that. You're never going to make
every person in every plan happy, but how do you mitigate
that possibility? And the answer is three things.
--o0o-- MS. FAIRMAN: Communication, communication,
and communication.
(Laughter.) MS. FAIRMAN: One thing that is very, very
important is prospective member communication. In other
words, a letter in advance that explains many of the same
things that I've just been discussing with you, the
generic equivalency, the difference in cost, the use of
step therapy in the marketplace. So any message. We
always recommend that any plan sponsor uses messaging that
resonates with their members. So it would be whatever
would resonate with your members, but those are the types
of things that you can talk about.
Another thing that is very important is for --
remember, I said that the PBM would get a small volume of
calls, but they would be getting calls, the HR Department.
Having talking points around those same things is very
important. This PBM also did a randomized control trial.
It was unpublished, but it was a around retrospective
outreach. What retrospective outreach does is the PBM, or
whoever monitors the data, watches the claims data for a
few days after that step therapy edit. If they do not see
a claim for medication, they send a letter to the member
putting in all the same information that I just talked
about. What they found -- what this PBM found is
that that reduces the number of failure to fills.
It increases the generic fill rate, and it reduces the
percentage who are paying out of pocket for the full price
of the brand drug. Interestingly, it also decreased the
rate of PA requests for the brand. And what I think is
probably happening is that it is the education effect.
It's like once you explain to people what this is, what
it's all about, where it comes from, then they get
a comfort level and they're less likely to say, oh, no, I've
got to have the PA for the brand.
--o0o--
MS. FAIRMAN: So what we see is that the gist of
the available evidence at this point in time suggests that
generic step therapy programs are mainstream, primarily
because they do provide savings without compromising quality of care.
However, an important however, is it is important to implement these programs in an intentional
way with an eye towards communication.
So that's the end of my prepared comments, but
I'm happy to take any questions. CHAIRPERSON MATHUR: Thank you. I actually
-- when I first saw slide -- I don't know -- I
don't have a slide number, but the one that showed the
percents of patients with step therapy edit, use of generic,
PA for brand, pay full price for brand, no medication.
When I first saw the no medication bar, I was a little
bit alarmed by that.
Have you done similar studies for -- around the
use of brand drugs? I mean, do you -- what is the
percentage of those who are prescribed the brand drug who
don't end up filling the medication? How does that
compare? MS. FAIRMAN: Yeah, that's a great question.
It's -- from the data that I've seen, it's going to depend
on the therapy class. There's data around
-- if you, if a copayment level is very, very high, say in
the range of $100 to $200, that can prompt, what is called,
prescription abandonment, meaning that the member -- the
drug is dispensed to the pharmacy, but then the patient
goes to the pharmacy and says yikes I don't want to pay,
you know, however much that is. In general, not around step therapy studies,
there was one major study done out of a group at Harvard
that found that, as a general rule, patients who begin
their therapy with generic medications actually are
somewhat more adherent. I could speculate about -- I mean, there are
a couple reasons about why that might be, but
in -- as a general rule, we're certainly not seeing anything
like big discontinuation rates for generics versus
brand drugs. And to your point, when you said you were
concerned, so was the PBM in question, which is why it did
that telephone survey and called those members to find out
what was going on, because we don't want, as a general
rule, people not taking their necessary medication. CHAIRPERSON MATHUR: Yeah. Okay. Thank you.
We do have a couple of other members who wish
to speak. MS. FAIRMAN: Sure.
CHAIRPERSON MATHUR: Mr. Slaton.
BOARD MEMBER SLATON: Thank you, Madam Chair. Very interesting presentation. When you started
at the start of your presentation, you talked about
generics being equivalent, being the same, and certified
by the FDA as being the same.
MS. FAIRMAN: Correct. BOARD MEMBER SLATON: But then later on, you
commented about people who might be allergic to the
generic. MS. FAIRMAN: Oh, great question.
BOARD MEMBER SLATON: So I don't understand how
you can be allergic to the chemically same device?
MS. FAIRMAN: Because -- Oh, sorry. Go ahead. I
apologize. BOARD MEMBER SLATON: Oh, that's all right.
MS. FAIRMAN: Okay. Thank you. That is a great question. It's because when any patient starts
any medication, brand or generic, there is a possibility
of an adverse effect. And there is a possibility
that that drug won't work. So that's true of a generic drug,
and it's true of a brand drug.
BOARD MEMBER SLATON: Okay, but what you're not
saying is you could be allergic to the generic and not
allergic to the brand drug that's the same drug.
MS. FAIRMAN: Oh, no. And --
BOARD MEMBER SLATON: Okay. I just wanted to clarify.
MS. FAIRMAN: And a step therapy program, you know, for the most -- so it might work. Now,
I don't know how any of the program -- the specific programs
in your -- you know, but it might be, for example, there's
data around equivalency of statin drugs, cholesterol
lowering drags in slowing the progression of coronary
artery disease. So what a plan might reasonably do
is say this brand drug for cholesterol lowering costs
$150. Generic simvastatin, which I don't even remember now
what that brand was, is about $5 a month. Generic atorvastatin,
which used to be Lipitor, is about $9 a month. So it would be more saying instead -- because
these drugs are basically equivalent in slowing the
progression of coronary artery disease, we're going to try
to direct patients to the less expensive drug. But with
the brand drug or the generic drug, there would be a
possibility of an allergy or a reaction or the drug
doesn't work. BOARD MEMBER SLATON: Okay. Thank you very
much. I understand.
MS. FAIRMAN: Does that help? BOARD MEMBER SLATON: Yeah.
CHAIRPERSON MATHUR: So just to amplify that,
what you're saying is that they might start with the least
expensive generic drug, which is equivalent in effect, but
not necessarily chemically equivalent to another generic
drug, and -- you know, they might be allergic to one
generic, but then the next generic drug they might not be
allergic too. MS. FAIRMAN: Correct. That's absolutely
correct. And those decisions should be based on the
research evidence. The example that I just gave you was
not hypothetical. It was a large clinical trial.
CHAIRPERSON MATHUR: Okay. Thank you. Ms. Holton-Hodson.
ACTING COMMITTEE MEMBER HOLTON-HODSON: I'm actually curious. On the anti-psychotics,
you say no savings were found, but generics are so much
less expensive, or are they not less expensive
in this particular case?
MS. FAIRMAN: That's a great question. Those studies were Medicaid studies. And basically,
three of the studies were actually the same implementation
in one state. And what they did is they compared
the expenditures to a nearby state, also in the
northeast, that did not have that type of program. And
that was the basis for the conclusion that there were no
savings. You would be absolutely right that on an individual
prescription basis, there -- it would be -- you
would see savings.
ACTING COMMITTEE MEMBER HOLTON-HODSON: Okay. Thank you.
CHAIRPERSON MATHUR: Okay. Well, thank you --
oh, Mr. Jelincic. COMMITTEE MEMBER JELINCIC: On that point,
so if you're not seeing savings that would -- my
reaction would be that means that there are medical complications
that are making up the -- you know, eating up what
would have been the savings?
MS. FAIRMAN: Those were actually based on prescription costs. And I'm not remembering
every detail of that study at this point in time. I mean,
I think one key takeaway is those were Medicaid studies.
And the reason that I emphasize that is Medicaid is
a very, very different population from a typical commercially
insured population.
For one thing, you have a lot of churn in and out
of the benefit, because you have people gaining and losing
eligibility. You also have demographically a very
different population, because of just the AFDC population
and the way that people are made eligible for Medicaid in
the first place. So, in general, I wouldn't look at a Medicaid
study and make too much of it. There was,
but I didn't talk about it, because -- for the same reason
that I wouldn't make too much of it, there was a
Medicaid step therapy program for anti-psychotics in another
state that did see drug cost savings, but most of the
studies didn't. COMMITTEE MEMBER JELINCIC: And I would assume
there have been studies for non-Medicaid. MS. FAIRMAN: Not anti-psychotics.
COMMITTEE MEMBER JELINCIC: Okay. So not in the
anti-psychotics. MR. FAIRMAN: That's correct.
COMMITTEE MEMBER JELINCIC: In the other categories, there have been presumably studies
in non-Medicaid groups. Do they show similar,
different, more varied results or...
MS. FAIRMAN: They all showed savings. The amount of the savings is going to -- and that's
true of both Medicaid and commercially insured populations.
The amount of the savings is going to vary, depending
on the makeup of the population, meaning how many
people are using that drug in that population. For example,
if your population is very young, then you wouldn't
see as many savings from a statin step therapy program,
because, you know, the young people aren't as likely to
have high cholesterol.
So the population, the percentage of people
in the population that are taking the drug, the
specific drugs that are selected would affect the cost
savings. So there are a lot of variables. And thank you
for reminding me -- or for asking the question. PBMI, in
general, recommends that plan sponsors analyze their
own data prior to implementation, rather than looking -- it
would not be probably a wise idea to look at a study and
say, hey, they got 10 percent savings, or whatever -- more
than 10 percent. They got, you know, 80 percent savings,
so that's what we're going to get too. You know,
you would want to run your own data.
COMMITTEE MEMBER JELINCIC: Thank you. CHAIRPERSON MATHUR: Well, thank you so much
for being with us this afternoon. And we really
appreciate your time.
MS. FAIRMAN: Thanks. DEPUTY EXECUTIVE OFFICER BOYNTON: So this
is one of the others -- items we'll talk about as
well, concepts
that we are considering for the upcoming rate negotiations
and rate year of 2015. I would suggest that the staff go
back and do additional evaluation, specifically as she's
noted, with CVS about what the potential could be for a
step therapy program like this and what the potential
savings could be, and that we present that back to you
during our rate discussions and benefit design
discussions. And if that is the direction of the
Committee, we will proceed that way. CHAIRPERSON MATHUR: I think that is the
direction of the Committee. DEPUTY EXECUTIVE OFFICER BOYNTON: Great. Thank
you very much. CHAIRPERSON MATHUR: Thank you very much.
Okay. So let's move on to Agenda Item number --
oh, I'm sorry, Mr. Jelincic. COMMITTEE MEMBER JELINCIC: Clearly, we should
have the staff do this. But one of the things I think we
should have them also consider is any medical outcomes
that we're -- it might create additional medical procedures that would offset some of the savings,
and just sort of at least attempt to navigate that.
CHAIRPERSON MATHUR: Certainly. Yeah, so to look
at both the financial and the clinical components. DEPUTY EXECUTIVE OFFICER BOYNTON: Yes.
COMMITTEE MEMBER JELINCIC: Thank you. CHAIRPERSON MATHUR: Thank you. All right.
So we'll move on to Agenda Item number 6, 2014
Pharmacy Management Changes.
OFFICE OF HEALTH PLAN ADMINISTRATION CHIEF DONNESON: Madam Chairman, members of the Committee,
good
afternoon. Agenda Item number 6 is a report on pharmacy
benefit management changes for 2014. It includes a report
on patient safety and monitoring programs that target high
risk drug classes. And joining me today to make this presentation
is Melissa Mantong, our CalPERS staff pharmacist.
DR. MANTONG: Good afternoon, Madam Chair, members of the Committee. Melissa Mantong,
CalPERS pharmacist. This is an informational item.
This agenda item covers two areas, pharmacy patient safety programs for our Preferred
Provider Organization health plans, and new patient
safety utilization management programs for Medicare
Part D prescription drug plans or Employer Group
Waiver Plan. Utilization management programs are an important
tool used to promote safe and effective use of
medications. Prescription drug abuse has become an
epidemic in the United States with *** overdose now
being the second leading cause of unintentional death,
following motor vehicle accidents. Utilization management
of potential drugs of abuse improves patient and public
safety while controlling costs. Let's begin with an overview of current CVS
Caremark safety programs for all CalPERS PPO members. The
first one is the safety and monitoring solution program.
It targets high risk drug classes, including
controlled substances, and inappropriate use and misuse
indicators. For example, polypharmacy provider shopping,
and high total control substance claim volume.
Clinical pharmacists evaluate controlled substance
claims and supporting medical data on a quarterly basis.
Situations identified as being potentially inappropriate may be referred to CalPERS along
with recommended action. Examples of recommended
actions are member or prescriber notification to recommend
coordination of care using one provider and/or one
pharmacy, pharmacy lock-in, medication therapy counseling,
and peer-to-peer prescriber consultation. The second one is the enhanced safety and
monitoring solution program. It is the next step to the
safety and monitoring solution program described earlier.
It provides continued monitoring, intervention, and
investigation as appropriate. The enhanced solution also
provides case management, and consultative course of
action as recommended by CVS Caremark clinical and
investigative staff. As a result of these safety programs and the
ongoing collaboration between CVS Caremark and CalPERS,
CalPERS learned that we have high OxyContin utilization.
OxyContin is potent opioid. Members who are obtaining
quantities exceeding the normal recommend
dosage. CalPERS staff researched the current literature and
surveyed other health plans to assess our utilization pattern
and determine course of action.
All health plans surveyed have quantity limits for OxyContin and were similar. CalPERS implemented
quantity limit of four tablets per day for OxyContin on
September 1st of this year. All utilizers received a
notification letter. Utilizers using a quantity above the
limit were given 90 days override to allow members time to
work with his or her provider to obtain prior authorization for medical necessity. Staff
will report back next year on the impact of the OxyContin
quantity limit.
Certain populations, such as those older than 65
years old, have greater risk of adverse events. Members
in the Medicare Part D prescription drug plan have
additional safety programs to minimize the risks of
adverse events. The following utilization management will
be implemented for the 2014 plan year. First is the reimplementation of the 2013
utilization management. In March of this year, Center for
Medicare and Medicaid Services required CVS Caremark to
remove utilization management edits due to volume spikes
in coverage determinations and appeals. CMS has allowed
these edits to be reinstated in 2014.
These utilization management edits include quantity limits, prior authorization, and
high risk medications in the elderly.
Next, there are three new safety programs for
. The first is acetaminophen dose limit. Doses greater than four grams per day of acetaminophen
increase risks of liver failure or damage. The second
and the third are quantity limits for benzodiazepines
and hypnotic and sleep agents. Both cause increased risks
of altered mental status, confusion, falls, and potential
for dependency.
Lastly, the communication plan for implementation of these utilization management programs includes
proactive member notifications, including annual notice of
changes, evidence of coverage, and CalPERS-specific formulary documents by mail to members and
posted to the CVS Caremark CalPERS website.
Members who were approved for the medication prior to the utilization management removed
early this year will have their override reinstated.
Members who received a drug that required utilization
management, with the exception of acetaminophen, will be eligible
for a 30 day transition of fill supplies, along with
a transition fill letter sent to member and prescriber.
This concludes my presentation, and I'm available
to answer any questions you may have. CHAIRPERSON MATHUR: Thank you. I actually
have a couple of questions.
One -- the first is with respect to the high risk
drug classes. And I absolutely recognize that there's a
problem with overuse of these drugs and inappropriate use
of these drugs, but there's also appropriate use,
particularly for pain management first for some
individuals. And some of them might be high users,
because they have chronic pain that really does need to be
managed. So how -- in implementing these safety mechanisms, how do you ensure that those who
really need the drug are getting the appropriate level
of that drug? DR. MANTONG: The members do have the opportunity
to request a prior authorization, which is a medically
necessary exception. So even though the member may hit
the safety edits because of the drug and their age, they
can -- the provider can contact CVS Caremark to request
exception. CHAIRPERSON MATHUR: Okay. And then with respect
to acetaminophen, I'm really glad to see us taking some
action there. I've been reading reports recently about
just how small a dose can actually -- or overdose -- how
small an overdose can actually trigger, you know,
life-threatening events. I'm wondering why
you're limiting it to the 65 and older population,
because it doesn't -- it actually can happen no matter
what your age. DR. MANTONG: Correct. Actually, we are actually
looking at expanding it to the commercial program as well.
The reason why we only started off with the Medicare
population, because Caremark already have the program in
place. And there is the plan for the staff to look at
commercial members as well. CHAIRPERSON MATHUR: Okay. Good, because what
I -- from what I've seen, really there's not that much
correlation with age. It's really -- and you don't know
whether you're going to be somebody who is going to be
particularly sensitive. I think I mentioned this to you before, Ms.
Boynton, but the FDA has had a sort of advisory committee
looking at this for decades. And I'm not sure that
they've taken as strong an action as they should have, in
terms of warning labels. And I would like us to take a
look at what role we could play in either, you know,
providing our opinion or urging the FDA to take some
action. DEPUTY EXECUTIVE OFFICER BOYNTON: Yes,
absolutely. CHAIRPERSON MATHUR: Thank you. Any requests
from the Committee to speak?
I see none, so thank you very much for your report.
We'll move on to Agenda Item number 7, Specialty Drug Cost Management.
DEPUTY EXECUTIVE OFFICER BOYNTON: Item 7 is another of those that we would propose to
come back to you early next year as part of our benefit design
and rate negotiation process. So we want to obtain
your perspective on this.
OFFICE OF HEALTH PLAN ADMINISTRATION CHIEF DONNESON: This is jointly presented by Doug
McKeever and myself, Kathy Donneson.
In anticipation of the 2015 rate renewal, we will
examine methods to improve clinical management, benefit
designs, and increased cost transparency for specialty
drugs for our PPO members. As you are aware, we expect that there will
be an increase in the cost of specialty drugs having
looked at our trends, in which between 2009 and 2012
our spend rose from $146 million to $254 million. And we
expect this cost will continue to grow as new specialty
drugs are presented to the market.
Currently, specialty drugs can be obtained either
through the pharmacy benefit side or the medical benefit.
So both Anthem, Blue Cross, and CVS Caremark
administer medical specialty benefit designs. Specialty
drugs that are administered by the pharmacy are paid
by CVS. But for those that are administered by a physician,
an infusion center or in an outpatient hospital setting,
that benefit is paid for by Anthem Blue Cross.
For 2015, we want to look at both clinical strategies, as well as potential benefit design
strategies for managing the cost and quality of our member's
care in using specialty drugs.
In looking at potential clinical strategies, we
will look at the prior authorization method for drugs paid
under the medical benefit. You heard already that we have
prior auth under the pharmacy benefit. We also want to
examine ways to provide proactive whole person support for
individuals with selected chronic conditions, through a
specialty pharmacy program that provides both clinical
management, patient counseling, and dispensing of medical
drugs -- or medical specialty drugs. We want to look at
both sides of the benefit, whether it's administered under
Anthem or CVS. In speaking to benefit designs, we will be
discussing with both Anthem Blue Cross and Caremark those
specialty drugs paid under the medical benefit that could
be dispensed through the pharmacy benefit. We will also
examine approaches that redirect members requiring
clinician-infused medicines to various sites of care. For
home infusion, it is the least costly, when administered
at home under the supervision of RNs. In the physician's
office and the outpatient hospital, the same infused
medications are more expensive. Finally, we want to look at a fourth tier
benefit design which might vary by site of care, which
may incentivize members to seek the care in the
most appropriate setting, considering both cost
and quality. Going forward, we also want to look at the
industry practice for how specialty drugs are being
managed and solicit our constituent feedback in order to
provide an informed set of options for you to consider
during the 2015 rate negotiation process. As Ann spoke in her speaking points, we have
the Castlight tool, which we're very excited about
piloting. And I'll turn this over to Doug and he'll
talk about how that perhaps could help in presenting both
clinical and benefit design options for specialty drugs.
Doug. HEALTH POLICY RESEARCH DIVISION CHIEF McKEEVER:
Thank you, Kathy. Doug McKeever, CalPERS staff. Good afternoon.
So the Castlight tool. In any engagement that
we're going to have in changing over to asking our members
to be more engaged in their participation in the program,
especially on the drug side. If we're going to ask to
look to go into a different tier or some approach that
would cost that member less money, the availability of a
tool that's going to allow that member to understand what
those costs are versus what they could be, is going to be
essential for us. So we only want to emphasize that the partnership
between Anthem and Castlight in our pilot project moving
forward is going to uniquely prepare us to implement any
of the approaches that you all ask staff to pursue for the
rate year. And then finally, I just want to echo one
thing that Kathy mentioned, which is really important
for us, is to ongoing continued engagement of our constituent
groups. Last year, as you may recall, there were some
pharmacy benefit design changes that we actually pulled
back on, because of some of the input. So we know how
important it is to our constituents to get this in front
of them sooner than later. We are going to be continuing
to engage them as we move this forward, so that when we bring
it back to you all for consideration, we will also provide
to you what the input is from the constituents.
CHAIRPERSON MATHUR: Thank you. Well, I think
this is a really important program for us to continue to
try to manage the cost of health care for all of our
members. But this is particularly sensitive, I imagine,
so I -- and I know you all will pay particular attention
to how we communicate with our members to ensure that
there's as little confusion, and as much understanding of
why we're doing the program and how the program works with
our members. Ms. Holton-Hodson.
ACTING COMMITTEE MEMBER HOLTON-HODSON: Thank you. Since this is initially presented at
the constituent meeting, I'm curious what was the reaction
thus far so that we can prepare ourselves?
HEALTH POLICY RESEARCH DIVISION CHIEF McKEEVER: I think it was one of apprehension, not
understanding fully what these approaches are yet. And so
the discussion that we had was that these are some of the
approaches that staff is going to look at, and with your
direction, we will continue to do so, scope them out
further, so that we can provide details on each one of
these to the constituents. So I don't think they were at a point where
they could give us a lot of reaction, just because
there isn't any meat on the bone yet.
CHAIRPERSON MATHUR: Thank you.
Mr. Jelincic. COMMITTEE MEMBER JELINCIC: Yeah, I would not
want to cutoff the line of research. But I will tell you,
I have a aversion towards moving to co-insurance rather
than copays. You know, that being said, I think it's
something that, you know, perhaps needs looking at. But I
want to make real clear, saying look at it, does not mean
go for it. There was a article in the Washington post
last week I believe, maybe the week before, that
was dealing with some of the biosimilars, which, you know,
falls into this general category. And they were talking
about two drugs that were actually made by Genentech
that were for macular degeneration. One is 50 bucks and
one is 2,000 bucks per injection.
It turns out that they are the same drug. It
turns out that the big difference is dosage. But I
thought it was a really good article in laying out some of
the issues that goes into that whole biosimilar. And I
would certainly encourage staff to dig that out and
perhaps share it with the Committee. And, in fact, you
may want to put a link up on the website and share it with
some of the constituent groups. But I thought it was a
really good article. Thank you.
CHAIRPERSON MATHUR: Thank you.
Mr. Cobb. ACTING COMMITTEE MEMBER COBB: Are you
envisioning for the 2015, would that be rolling out
strategies just for the PPO or would that include the PPO
and the network model HMO that are under Caremark? OFFICE OF HEALTH PLAN ADMINISTRATION CHIEF
DONNESON: Generally, when we look at a benefit design or
a clinical design, this particular presentation is geared
to the PPO as we rollout the Castlight pilot. Much of
what is here presented is also being -- is dealt with in
the HMOs. And I know Blue Shield in prior years has
looked at both the medical side and the pharmacy side for
managing costs, that is really transparent to the member.
So some of these are around clinical design efforts that are not a benefit design, but
more of a clinical design that will you give cost savings
without impacting the members.
DEPUTY EXECUTIVE OFFICER BOYNTON: So as we
evaluate the feasibility of implementation of these
different strategies, we'll bucket them into the is it
sort of just a PBM change, in which case the HMOs who are
using CVS as their PBM would likely be wrapped into
this -- into the proposal. ACTING COMMITTEE MEMBER COBB: Yeah, it's been
a
challenge trying to get the drugs out of the medical
channel and into the PBM channel. So to the extent we can
crack that nut a little further, the better. CHAIRPERSON MATHUR: Thank you. Mr. Boyken.
ACTING COMMITTEE MEMBER BOYKEN: Thank you. And
on that note of that last point, it would be interesting,
I think for us and probably for constituents to hear what
Blue Shield and Kaiser are already doing in their pharmacy
benefit management, and how that compares to some of the
innovations you're talking about for the Caremark. DEPUTY EXECUTIVE OFFICER BOYNTON: Absolutely.
CHAIRPERSON MATHUR: Thank you. Well, I see no
further requests from the Committee to speak. We do have
one member of the public who wishes to speak. Mr. Neal
Johnson, if you could make your way to the front, take a
seat, turn on your mic, identify yourself and your
affiliation for the record, and you'll have three minutes.
MR. JOHNSON: Thank you. Members of the Committee, Neal Johnson, SEIU 1000.
To answer a little of Ms. Holton-Hodson's question, while I wasn't at the constituent
meeting because of an obligation to be in San Diego
last week, I'm going to make a comment about Castlight. And
it's not specifically with respect to that product,
but a -- one of its competitors approached us early in 2013
about a
project being run in New Hampshire where the vendor
would -- people could call up the vendor and get first --
about 30 medical procedures, where it would be less cost
and the -- all we're on the network, so the quality was
supposedly the same between vendors. Out of that, I had several discussions with
Anthem Blue Cross and Rob Honaker. And it turned out they
were actually looking at the Castlight product. And while
I say -- not particularly endorsing that or any other
product, we found the concept from what we were told would
happen I believe in New Hampshire was very interesting,
and it really did get engagement with the membership, and
the membership seemed to like it. Now, there's clearly
some problems of did people really -- because there was a
financial incentive in that program, did people, in fact,
already had made the decision, and then went through the
process to reap the financial reward for something they
would have already done. But it looks like a -- were interested the
product and I think would really be very interested to see
how this plays out in the pilot project. Thank you.
CHAIRPERSON MATHUR: Thank you very much. Okay. So we'll move on to Agenda Item 9, Revised
Regions for Health Benefits for Public Agencies and
Schools.
HEALTH POLICY RESEARCH DIVISION CHIEF McKEEVER: Madam Chair, Doug McKeever. Members of the
Committee, good afternoon. This will be a very quick update for you on
this particular item. Many years ago, there was
the revision to regions for contracting agencies, which
include our public agencies and our schools. It is our
intent now to revisit the regions. A lot has changed in
our program over the last five to seven years, including
the fact now that we have new carriers. We've had enrollment
shifts. There's different demographics out there relative
to those members in our program, and certainly the
marketplace in health care has changed dramatically as well.
So for those factors, we thought it was a good
time to reevaluate the current regions. We've also
received input from many of the contracting agencies to
also do the same, especially for those who happen to be in
a northern California urban area that are now in the Bay
Area region. So it is time for us to look at it, so today
we're just letting you know that staff is undertaking a
deep dive on this. We're going to bring back to you in
February some approaches for your consideration. And if
you direct staff to pursue those, then we'll build that
into the 2015 rate year.
CHAIRPERSON MATHUR: Okay. Well, thank you. So
you're not looking for direction today. You're going to
bring it back. HEALTH POLICY RESEARCH DIVISION CHIEF McKEEVER:
We're going to bring it back in February with alternative approaches and potential recommendations.
CHAIRPERSON MATHUR: Perfect. Okay. Thank you. Move on to Agenda Item number 10, Implementation
of IRS Governmental Plan Guidance. DEPUTY EXECUTIVE OFFICER LUM: Good afternoon,
Madam Chair, members of the Committee. Donna Lum, CalPERS
staff. Agenda Item 10 is an information item. And
it's to provide the Committee with an update on
staff's activities related to the implementation of
the Internal Revenue Service Governmental Plan Guidance.
Back in February of this year, we provided the
Committee with an informational update on the IRS Advanced
Notice of Proposed Rule-Making, which included proposed
draft regulations by the IRS. The draft regulations included guidance related to the definition
of a governmental plan under 414(d) of the IRC
-- the Internal Revenue Code or IRC.
At the same time in February, we also informed
you that staff would be modifying its contracting process
to incorporate the guidance of the IRS -- that the IRS
provided, which was set forth in the draft regulations for
new prospective applications and agencies that were
seeking to participate in the CalPERS plan. Just by way of background, in November of
2011, the IRS and the Treasury Department issued
advanced notice of proposed rule-making, which we often refer
to as the ANPRM to solicit feedback regarding the draft
proposed regulation that would provide a comprehensive
set of facts and circumstances to test for a governmental
plan -- to test a governmental plan to determine whether
an entity is eligible to participate in the plan.
The test, the facts and circumstance test, provides guidance on determining whether the
entity is an agency or an instrumentality of a state or
political subdivision of the state for the purposes
of IRC section (d).
Now, since there has been a lack of comprehensive guidance in this area, the IRS drew upon its
earlier governmental entity rulings to create these
facts and circumstances test. And they were created
into two different categories, one being main factors
and other factors. And in the agenda item, Attachment
A, or page 55 on your iPad, we list what those factors are.
And so just to very briefly go over them,
the main factors are used in determining whether
the entity is an agency again of an instrumentality of the
state -- of a state or political subdivision of the state.
These factors include consideration such as the
composition of the entity's governing board, for example,
who controls the Board and how the members are nominated
and/or elected; who bears fiscal responsibility for the
debts and other obligations of the entity; whether the
entity's employees are treated in the same manner as civil
service employees, for the purposes other than for
providing benefits -- employee benefits; and, the entity's
authority to exercise sovereign powers of the state, such
as the powers of taxation and eminent domain. In addition to the main factors, the guidance
also provided other factors. Those other factors include
such items as to whether or not there's public or private
sources that fund the entity; whether the entity is
established by the State pursuant to a specific enabling
statute; whether it is treated as a governmental entity
for the purposes of federal taxes; and, whether the entity
has a private interest or whether the entity services as a
governmental purpose. So again, these factors compromise -- or put
together are, what we call, the facts and circumstance
test, which we have implemented.
Now, although the guidance includes the evaluation of these factors, no factors are
determinative, nor is there any specific number of the factors
in each of these categories that must be met in order
for an entity to be eligible to participate in a governmental
plan. The proposed regulations are not final, and
we anticipate that final adoption of these regulations
could take several years. However, it's important
to note that the IRS has indicated that it does not believe
that the facts and circumstances test presents a new
rule. Rather, it is a clarification of what the IRS viewed
as the rules to be all along.
Now, because of the magnitude of the risk to the
System, CalPERS, its current members and employers, of
allowing entities that do not qualify as an agency or an
instrumentality of the state or a political subdivision of
the state, we have modified our contract review process,
as we indicated that we would in February, and we are
currently using the guidance by the IRS to evaluate all
prospective applications against the facts and
circumstance tests. In addition to modifying our contract review
process, we also developed a set of new application -- a
new application questionnaire, and that's Attachment B in
the agenda item. And it's on page 60 of your
iPad. The questionnaire, along with the revised review
process, is intended to help elicit the information that
is necessary for staff that are reviewing these potential
contracting agencies to make these determinations. And
we included the information in the changes in our review
process in a circular letter, which is also attached in
the agenda item.
So I want to give you a prospective of the implementation, what we've seen in terms of
the number of requests that we've received and the disposition
of those requests. To date, since we've implemented
the changes, we've received 98 requests from a variety
of public agencies and charter schools, which have either
been reviewed or are currently being reviewed through
our new contract process.
We have approved 15 agencies for participation in
CalPERS plans, 10 of them have been public agencies, and
five have been charter schools. We have also denied 16
agencies, seven being public agencies, and nine charter
schools, who have not sufficiently demonstrated that they
are an agency or instrumentality of the state or a
political subdivision of the state within the meaning of
IRC 414(d). In addition, we had 22 agencies that submitted
applications, but either canceled their application
or were nonresponsive after multiple attempts
by staff to obtain additional information.
So one of the common reasons that applications for these potential contracting agencies have
been denied are really centered around the main factors.
And in all cases, where we have had denials, essentially
in many of these cases, the main factor -- not even one
of the main factors has been satisfied. And again, the
main factors are used in determining whether the entity
is an agency or an instrumentality of a state or political
subdivision of the state.
We have received six appeals from agencies, and
who have -- who we have denied. One public agency
submitted an appeal, and then subsequently withdrew the
appeal. And we currently have five charter schools that
have appealed and are going through our appeal process.
I think it's important for us to share with you
that we implemented the IRS guidelines to mitigate the
potential risk to the CalPERS plan, its members, its
employers, and to protect the tax qualification status
of -- and governmental plan status of CalPERS plans.
CalPERS must comply with federal law, including IRC section 414. And it can only -- and it
may only allow entities that qualify as political subdivisions
or again
agencies or instrumentalities of the state within the code
section to participate in the plan. Not doing so could
jeopardize the tax qualification status of the plan and
create additional risk for current participating employers
and members and retirees. Now, we do recognize that the denial of some
of the requests have raised concerns. And so
prior -- just to give you some background in our communications.
Prior to and after implementation, CalPERS staff
met with a variety of stakeholders to explain the issue,
what the situation was with the IRS town halls, and
public comment -- and the public comment period,
and what CalPERS was doing and why.
And, at that time, many national and state organizations were concerned about the IRS
activities and, like CalPERS, weighed in during the public
comment period. After CalPERS decided how it would implement
the new clarification from the IRS with their
main factors and the other factors, we again discussed with
stakeholders why we were doing what we're doing, and why
we felt it was necessary to comply with the clarifications
to the existing law.
Over the past six months, we have made many --
and as more decisions have been made to accept or deny
applications from potential contracting agencies, we heard
most often from the California Charter Schools
Association about their concerns of their members who
had been denied membership into CalPERS under the new guidelines.
And although CalPERS and the California Charter Schools do not see the issue from the same
perspective, staff and executives have talked and even
on occasion have met over the past three to four months to
discuss our differences, and to see if we can better understand
one other and the motivations for our particular
perspectives. We have shared with them our basis for -- our
belief that we have made the right decision by
implementing. And it was made on the basis of the IRS
guidance and our desire to protect our members who are
currently in our system and not with any intention to
exclude or deny any particular employer or potential
members. We have told the charter school officials
that if the IRS were willing to give further guidance
or clarification that would allow charter schools
employers
to automatically be considered as governmental agencies,
we would then have the ability to admit them into our
membership. In the meantime, however, we are talking to
charter schools officials, we are trying to find common
ground, and to better explain our appeal process and how
we work internally with the Office of Administrative
Law -- Hearings, so that the Charter School Association
can better serve and help its members understand what to
expect as they are applying for membership in CalPERS.
We are discussing options and possibilities for
how the IRS might be able to include changes that would
then enable us to be able to move forward. And so again, what I wanted to do is to provide
you with an update on where we are with the implementation, to give you an understanding
of the disposition of the applications, what we've
experienced in terms of our approvals and denials, as well
as to give you an update on discussions that we are having
again with charter schools that have expressed concerns
and have brought their issues to us.
So that completes my presentation, and I'm happy
to answer any questions that you may have. CHAIRPERSON MATHUR: Thank you. We do have
some questions from the Committee.
Mr. Jelincic. COMMITTEE MEMBER JELINCIC: Getting caught
on the wrong side of the IRS has some serious consequences.
If we were to lose our tax qualified status,
what does that mean to our employers, our members, our beneficiaries,
the System itself?
DEPUTY EXECUTIVE OFFICER LUM: I'm going to
let Gina respond to that legal question, or Jenni,
I'm sorry. STAFF COUNSEL KRENGEL: Good afternoon. Jenni
Krengel, CalPERS staff. Well, to answer your question directly, if
we were to lose our governmental status, and
that would cause us to lose our tax qualified status in all
likelihood, since we comply with the tax rules as a governmental
plan and not as a private plan, would really be
devastating to the plan. And the technical answer is that
the revenues in our plan would no longer be tax deferred,
meaning technically we would be -- we would have to
pay income tax on all of our earnings. And, as you know,
since the vast majority of our benefits are paid out of earnings
that have a tax deferred quality to them, this
would be devastating.
To answer the procedural side to your question, I
think there's a lot that would occur before that would
happen, and we would do everything we could to work with
the IRS to have something shy of disqualification, but it
would make it probably impossible -- if we were to
actually be disqualified, it would make it probably
impossible for us to continue the way we do. COMMITTEE MEMBER JELINCIC: And the employer
contributions would be taxable to the members?
STAFF COUNSEL KRENGEL: If the plan were disqualified, and --
COMMITTEE MEMBER JELINCIC: Yeah, assuming we get
hit by this nuclear bomb of losing our tax qualified
status, which we will do everything to avoid, I'm just
trying to really get the downside out there --
STAFF COUNSEL KRENGEL: I see. COMMITTEE MEMBER JELINCIC: -- so people
understand what the risks are. STAFF COUNSEL KRENGEL: Yeah. So in addition
to all of the earnings being taxable, money could
not come into the plan on a pre-tax basis, meaning
employees who make contributions to the plan do so with
pre-tax dollars. If the plan was not a qualified plan, they
couldn't do that. And so those contributions would be
made with after-tax dollars, meaning if the employee
put $100 in the plan, they would have a tax event immediately
on that $100 in that year, as opposed to the way it works
now, where the tax event for the member happens when
he or she draws the retirement check during retirement.
COMMITTEE MEMBER JELINCIC: And the employer contribution would also be a taxable event
to the -- STAFF COUNSEL KRENGEL: It would really depend
on the employer's individual tax status. So the
employer -- whether the employer pays taxes depends on
the employer's
status with the IRS. COMMITTEE MEMBER JELINCIC: But my understanding,
it would be -- the employer's contribution would also be
taxable to the employees STAFF COUNSEL KRENGEL: To the member.
COMMITTEE MEMBER JELINCIC: To the member at the
current -- you know, when it happened. STAFF COUNSEL KRENGEL: Yes, that's correct.
COMMITTEE MEMBER JELINCIC: Thank you. CHAIRPERSON MATHUR: Thank you.
Mr. Jones. COMMITTEE MEMBER JONES: Yeah. Thank you, Madam
Chair. Yeah, first of all, I just want to state that I
would not be supportive of any action that would put at
risk our tax status for our system. Having said that,
regarding the charter schools, I do think that it -- I
would suggest that you also look at the State Department
of Education's guidelines for independent charter schools
that are receiving state dollars to see if their
guidelines and their oversight responsibilities and
requirements would fall into this control factor to see if
that would make a difference with those charter schools in
that category. So I would suggest you take a look at
that. DEPUTY EXECUTIVE OFFICER LUM: Yes.
CHAIRPERSON MATHUR: Thank you. I see no further
requests from the Committee to speak. We do have one
member of the public who has requested to speak, and
that's Myrna Castrejon. If you're here, if you could
please make your way to the front, to on your -- take a
seat, turn on your mic, identify yourself and your
affiliation for the record, and you'll have three minutes.
MS. CASTREJON: Good afternoon. Members of the
Committee, my name is Myrna Castrejon. I am the senior
vice president for government affairs for the California
Charter Schools Association. Pleased to be here with you
today. On behalf of CCSA, the professional membership
organization supporting California's 1,130 charter schools
serving more than half a million students this year and
adding about 50,000 students every single year, I'm here
to make comment about the Item 10. In February, staff presented to you, as you
just heard, the item implementation of IRS proposed
draft regulations. Shortly after, staff released
the questionnaire to all entities applying for
participation in CalPERS based on that advanced notice from
the IRS. The IRS, I should note, even if it's -- and
it's noticed very explicitly stated that regulations
would not be effective until the entire process would
be approved,
and that states would have ample time and opportunity to
plan for implementation should any changes be forthcoming.
That process is still in motion as you just heard
started in 2011. By 2012, they had received thousands
upon thousands of public comments. As part of their town
hall meetings and requests for public comment about 95
percent of those came from charter schools across the
nation, as this is an issue that impacts everyone across
the United States. And more than two dozen congressional leaders
from both parties joined the charter schools community in
stating their concern about the fact that the advanced
notice seemed to have overlooked the fact that charter
schools, as authorized in federal statute and in 42 states
across the nation, are, in fact, hybrid entities. CHAIRPERSON MATHUR: One minute.
MS. CASTREJON: And still in February, CalPERS decided to revise its procedures, but it does
remain the only state retirement system in the entire
country to have done so. This now policy change has resulted
in several public charter schools being denied participation.
And, of course, this change is alarming and disruptive
to the new charter schools that are starting now
and going through the application process, but also
potentially to the 1,100 and more charter schools that are
operating
right now. We do believe, it is our position --
CHAIRPERSON MATHUR: 30 seconds. MS. CASTREJON: -- that it is contrary to IRS
guidance, more importantly, to California law, which
explicitly and in multiple citations five that I can think
of off the top of my head, assert that California charter
school employees are, in fact, eligible to participate in
CalPERS. So we urge your reconsideration of this policy,
and direct staff to reconsider and return to the prior
policy of admitting all public charter schools. CHAIRPERSON MATHUR: Thank you.
MS. CASTREJON: Thank you. CHAIRPERSON MATHUR: Okay. Well, that concludes
Agenda Item number 10. Agenda Item number 11 is public comment. We
have one member of the public who wishes to speak,
Mr. Johnson. Do you still want to speak?
MR. JOHNSON: No. CHAIRPERSON MATHUR: No. Okay. Any other
members of the public who wish to speak at this time?
Seeing none. That concludes the open session of
the Pension and Health Benefits Committee. Thanks,
everyone for being with us.