California Gov. Gavin Newsom and state legislators in Sacramento agree that prescription drug prices are too high. However, lawmakers and the second-term governor are at odds over what to do about it, and a recent proposal could trigger one of the biggest healthcare battles in Sacramento this year.
A California bill awaiting its first hearing would subject drug industry intermediaries known as pharmacy benefit managers, or PBMs, to licensing by the state Department of Insurance. It would also require them to pass along 100% of the rebates they get from drug companies to the health plans and insurers that hire them to oversee prescription drug benefits.
However, the proposal, which would impose some of the most burdensome PBM regulations in the nation, faces at least one major hurdle: Newsom. He vetoed a similar measure last year, unconvinced it would lower consumer costs. He signaled his intent to offer an alternative but has yet to reveal it.
Any fight over PBM reform promises to be pricey. According to records filed with the secretary of state, interest groups on both sides spent at least $7 million combined lobbying California lawmakers and the Newsom administration on health care last year.
“This bill directly threatens the profitability of PBMs going forward,” said Ge Bai, a health policy professor at Johns Hopkins University who has tracked similar bills in other states. “These bills are really the result of an interindustry dog fight, and these are ridiculously fierce fights because PBMs control revenue for pharmacies and manufacturers.”
According to the Federal Trade Commission, the country’s top three PBMs—CVS Caremark, affiliated with Aetna; UnitedHealth Group’s Optum Rx; and Express Scripts, owned by Cigna—control roughly 80% of prescriptions in the United States. Theoretically, they leverage their buying power to extract steep discounts from drug manufacturers and pass savings on to insurance companies and employers providing health coverage.
However, as prescription drug prices continue to spiral and federal efforts to control them stall, state lawmakers are focusing on PBMs. These companies help insurers decide which drugs their plans cover and how much patients will pay out-of-pocket to get them. However, regulators and legislatures are stymied by the drug industry’s secretive ecosystem of rebates, reimbursements, and obscure fees, thwarting efforts to lower drug costs.
In addition to California, PBM proposals were introduced in this legislative session in Arkansas, Iowa, and at least 20 other states as of Feb. 10, according to the National Academy for State Health Policy. All 50 states and Washington, D.C., have some sort of PBM regulation on the books.
Although President Donald Trump has criticized PBMs and vowed to “knock out the middleman,” his recent actions of undoing moves to lower prescription drug prices have left some healthcare experts skeptical that meaningful reform will come from Washington, D.C.
Meanwhile, state data shows California health plan drug costs have grown by more than 50% since 2017. California insurers spent 11% more on pharmaceuticals in 2023 than in 2022, with specialty and brand-name drugs driving the increase.
Newsom and bill author Sen. Scott Wiener (D-San Francisco) have said PBMs contribute to high drug prices. While Wiener wants to outright ban some of their practices, Newsom has taken a more measured approach. He has called for more disclosure and pointed to his plan for the state to manufacture its own generic drugs, which has yet to get off the ground.
In vetoing Wiener’s 2024 bill, which passed in a near-unanimous bipartisan vote, Newsom said he was unconvinced that licensing PBMs would improve affordability for patients and instead directed his administration to “propose a legislative approach” to gather more data from PBMs. In a statement, Newsom spokesperson Elana Ross noted that “Big Pharma backed the vetoed bill.” She said the Democratic governor, in partnership with the legislature, will take action to address PBMs this year. She declined to elaborate.
In his January budget proposal, Newsom said his administration was “exploring approaches to increase transparency” in the entire drug supply chain, not just PBMs.
Industry representatives say they’re being unfairly targeted with transparency laws and regulations and blame pharmaceutical companies for setting high drug prices.
“The PBM is taking the risk on price variation, and it allows the client to have certainty on what they’re going to be paying,” said Bill Head, an assistant vice president of state affairs for the Pharmaceutical Care Management Association, representing PBMs. “We’re hired because it works. It saves money at the end of the day.”
He said PBMs pass on more than 95% of the rebates they receive from drugmakers — a number health policy researchers say is hard to verify.
Consumer advocates say drugmakers simply raise their prices to maintain profits. PBMs charge insurers far more for many medicines than pharmacies are paid to dispense them, a practice known as spread pricing.
A January report by the Federal Trade Commission found the three biggest PBMs appeared to steer the most profitable prescriptions away from competitors and to their affiliated pharmacies, which they reimbursed at markups exceeding 1,000% for some drugs, including some used to treat cancer, multiple sclerosis, and severe lung conditions. Over six years, the analysis found that those PBMs and their affiliated pharmacies made roughly $8.7 billion in additional revenue by marking up prices on a sample of 51 specialty drugs.
Wiener’s latest bill, SB 41, would ban such markups, spread pricing, and bar PBMs from receiving performance bonuses based on drug rebates. Similar provisions were stripped out of last year’s bill in the final days before its passage.
“These are practices that only PBMs are engaging in and causing harm, reducing consumer choice, increasing drug costs, and it’s time to address them,” Wiener said. “I’m not going to let that idea just evaporate because of one veto.”
Clint Hopkins, who has co-owned Pucci’s Pharmacy in Sacramento since 2016, said he often deals with complaints from frustrated patients who don’t understand drug pricing schemes and restrictions set by pharmacy benefit managers.
Hopkins turns away customers whose drugs can cost him hundreds of dollars in losses each time they’re filled and says spread pricing is helping drive independent pharmacies out of business.
“I’m not asking to be paid more. I am asking to be paid fairly — at cost or above.”
Under current law, California requires PBMs to disclose some information about drug rebates and other information to their clients. Maureen Hensley-Quinn, a senior program director at the National Academy for State Health Policy, said that data is often proprietary to the companies, leaving an incomplete picture of the supply chain.
PBM representatives say pharmacies, insurers, and other actors in the supply chain should have to disclose information about their profits and practices, too.
“You want to look under the hood?” Head said. “We’re open to that, but let’s look under everybody’s hood.”
Bai said lawmakers are likely going after PBMs because insurers are one portion of the supply chain they can regulate. However, she warned that such legislation could cost consumers more if drugmakers and pharmacies remain unchecked. A better approach, Bai suggested, would be to bar PBMs entirely from managing benefits for generic drugs, one of their most significant revenue sources.
“In health care, there’s no saint, and there’s no villain. Everybody’s trying to make money,” Bai said. “These fights will bring no benefit to patients unless we go to the root.”
SOURCE: California Healthline
