Colorado Legislative Council Staff



General and Federal Fund Expenditure Impact

(Replaces Fiscal Note dated February 23, 1998)

Drafting Number:

Prime Sponsor(s):

LLS 98-450

Sen. Matsunaka

Rep. Entz


Bill Status:

Fiscal Analyst:

March 12, 1998

House 2nd Reading

Will Meyer (866-4976)



Summary of Legislation

            The provisions of this re-engrossed bill, as amended in the House Business Affairs and Labor Committee, would require insurers, that provide coverage for prescription drugs and have negotiated the contract pricing and terms with a pharmacy benefit management firm or intermediary, to offer to contract for similar “reasonable contract terms and prices” with each pharmacy provider in the same geographic area”.

            The bill would become effective at 12:01 a.m. on the day following the ninety-day period after adjournment sine die of the General Assembly, or on the date of the official declaration of the vote of the people as proclaimed by the Governor, if a referendum petition is filed pursuant to Article V, Section 1 (3) of the State Constitution. Upon further review, it believed that this bill would have a conditional fiscal impact on the state.  


FY 1998/99

FY 1999/2000

State Revenues

General Fund

Other Fund



State Expenditures

General Fund

Federal Fund

$0 - $55,644

$0 - $57,915

$0 - $55,644

$0 - $57,915

FTE Position Change



Local Government Impact — None.

            This bill would regulate the ability of health insurers to engage in competitive bidding and the selection of service providers. The provisions of the bill would apply to some health insurers regulated by the Division of Insurance, Department of Regulatory Agencies in that it would apply to those health insurers that use pharmacy benefit managers (PBM’s) or intermediaries to manage their drug plans. Self-insurance health plans are not regulated by the division and would not be impacted by the provisions of this bill.

            Current Practice. The use of PBM’s by health insurers varies widely. Some HMO’s contract directly with pharmacies. Some HMO’s contract with one PBM, which in turn creates a network of pharmacies and contracts with them. Some insurers do some of both, contracting directly with pharmacies in some cases, and contracting with PBM’s in others. This bill would differentially impact health insurers, impacting only those that use PBM’s or intermediaries. The provisions of the bill would impact individual PBM’s differentially, as follows: PBM’s that utilize an open network of pharmacies would not be directly impacted (because they already contract with any willing pharmacy), while PBM’s that use a restricted network would be impacted. The benefit of a restricted network to a PBM is the ability to negotiate a competitive contract, offering greater volume in exchange for reduced payment. The bill would eliminate much of the competitive advantage for a restricted network by requiring an insurer, after it has negotiated the contract pricing and terms with the PBM, to offer to contract with each pharmacy in the geographic area that agrees to “reasonable contract terms and prices as set by” the insurer and the PBM.

            The following agencies of the State contract with HMO’s to provide managed care to their constituent population; the Department of Personnel for the state’s employees, the Department of Health Care Policy and Financing (HCPF) for some of it’s Medicaid clients; and PERA for its member retirees. Only HCPF would be impacted by the provisions of this bill.


State Expenditures

            Background. The provisions of this bill would affect health care coverages provided by health insurance carriers and HMO’s, but not self-funded health care plans. Self-funded health plans currently cover more than 40 percent of the private and public work force in Colorado, and more than 60 percent of state employees. Consequently, the provisions of this bill would not apply to a large percentage of the state’s workforce. In the case of the state, the provisions of the bill would apply only to HMO contract costs and any increases in these costs would be reflected in premiums paid by participating state employees. Over time, any increases in these costs may be incorporated in the annual Total Compensation Survey. Any subsequent recommended increases to maintain parity with the private sector would impact the costs to the state, subject to adopting legislation.

            Department of Personnel. The State Benefits Fund, which is used to provide medical health care coverage for state employees, is administered by the Department of Personnel. The fund consists of both state contributions and employee premiums. The state contribution amount is limited by statute. Consequently, any changes in health care coverages, or changes to contracts with HMO’s or other providers that affect the fund balance must be covered by corresponding changes to the premiums charged to state employees, unless the state’s contribution is amended by legislation. The bill would not affect the state’s contribution. This bill would nave no fiscal impact to the Department of Personnel.

            Department of Health Care Policy and Financing. HCPF currently contracts with six HMO’s that provide medical insurance to approximately 67,500 (January 1998) Medicaid recipients. Of the total number of Medicaid recipients in HMO’s, approximately 5,700 are in HMO’s that use PBM’s that use restricted networks. By eliminating such PBM’s ability to restrict the pharmacies in their network, their costs could increase. Increases in their cost could ultimately be passed on to the HMO’s and be reflected in the costs of future Medicaid contracts. This revised conditional fiscal note is based on the potential to increase the costs to Medicaid.

            According to HCPF, approximately $30 (20 percent of the capitated contract rate of $150 per month per recipient) is related to pharmacy costs. The total pharmacy costs of Medicaid recipients in HMO’s with restricted networks are approximately $2,052,000 ($30 per month x 12 months x 5,700 recipients=$2,052,000). If pharmacy costs of HMO’s did not increase there would be no fiscal impact. However, if HMO’s contracts were to increase by 1% in cost as the result of increased pharmacy costs, Medicaid costs would increase $20,520.

            Currently, HCPF has estimated savings from using HMO’s of $7,097,416 (5 percent of the total funds spent on HMO’s contracts) in FY 1996/97. Of the total amount of savings, $1,419,483 (approximately 20 percent of the total savings) result from savings related to pharmacy costs. Assuming that 5,700 recipients out of a total of 65,700 (5,700/65,700 = 8 percent) Medicaid recipients are enrolled in HMO’s that use restricted networks, the potential lost savings are estimated to be as much as $113,559 (8 percent x $1,419,483= $113,559) a year. These costs would be $55,644 General Fund (49 percent) and $57,915 federal funds (51 percent).

            PERA. PERA provides health care benefits to retires, survivors, and dependents enrolled in the PERA Health Care Program. According to PERA, contributions toward the cost of health care premiums is fixed by law at a maximum of $115 per month. Any increases in costs would paid by the recipients and would not have any impact on the state’s contribution.

            The provisions of this bill would not impact any other agency of the state, or unit of local government.

Spending Authority

            This fiscal note implies that the Department of Health Care Policy and Financing would require additional General Fund spending authority ranging from $0 - $55,644 General Fund and $0 - $57,915 federal funds in FY 1998/99.

Departments Contacted

            Health Care Policy and Financing

            Labor and Employment 

            Regulatory Agencies