California May Regulate and Restrict Pharmaceutical Brokers

SACRAMENTO — California Gov. Gavin Newsom will soon decide whether the most populous U.S. state will join 25 others in regulating the middlemen known as pharmacy benefit managers, or PBMs, whom many policymakers blame for the soaring cost of prescription drugs.

PBMs have been under fire for years for alleged profiteering and anticompetitive conduct, but efforts to regulate the industry at the federal level have stalled in Congress.

The three largest PBMs are owned by insurers and retail pharmacy chains, and about 80% of prescription drug sales in the United States are controlled by them: OptumRx, owned by UnitedHealth Group; CVS Caremark, owned by CVS Health, which also owns the insurer Aetna; and Express Scripts, owned by The Cigna Group.

The proposed law, spearheaded by state Sen. Scott Wiener of San Francisco, a Democrat, would require PBMs to apply for a license by 2027 and would mandate that licensed PBMs pass along 100% of pharmaceutical manufacturers’ rebates to health plans or insurers. Drug companies often offer substantial discounts on medications to boost demand, and one of the major criticisms of PBMs is that they pocket rebates rather than pass savings along to customers.

The law would also mostly bar PBMs from steering patients to pharmacies they own, which includes the major mail-order pharmacies. And it would prohibit them from giving independent pharmacies lower insurance reimbursements than they offer the big chains — a major issue for the dwindling number of independents around the country.

Wiener said the law aimed to rein in what he called “the worst abuses by PBMs.” Proponents of the legislation say the experiences in the 25 states that require PBM licensing and the 16 that ban steering of patients to preferred vendors show that regulations reduce costs for consumers.

“When they’re licensed like we’re looking at, the cost goes down. States without licensing saw costs go up,” said Assembly member Devon Mathis, one of two Republicans to co-author the bill, citing the National Community Pharmacists Association.

Health insurance premiums increased an average of 16.7% nationwide from 2015 to 2019, the association calculated, with premiums in states that license PBMs increasing 0.3 of a percentage point below the national average and those without, 0.4 above. The association claimed similar benefits from several other reforms affecting pharmacies.

The Pharmaceutical Care Management Association, which represents pharmacy benefit managers, said Wiener’s bill “blatantly” favors independent retail pharmacies over chains.

“This legislation does nothing to lower costs for patients; it simply seeks to financially promote one industry over another with no consumer benefit,” the group said.

Insurance companies argue that the California bill would reduce the PBMs’ ability to negotiate lower drug prices, resulting in higher coverage premiums for everyone. But drugmakers argue that reforms don’t raise premiums.

Supreme Court Decision Looms

States have stepped in to regulate PBMs in the absence of any federal action; Congress has been holding oversight hearings on PBMs, and the Federal Trade Commission in July said PBMs “may be profiting by inflating drug costs and squeezing Main Street pharmacies,” but there has been no new legislation or efforts to crack down based on existing laws barring anticompetitive conduct.

The U.S. Supreme Court could soon weigh in on whether states have the authority to regulate PBMs. A federal appellate court blocked Oklahoma regulations on PBMs on the grounds that federal law held sway, and a group of 35 state attorneys general, including California’s Rob Bonta, have asked the Supreme Court to overturn the ruling.

A central complaint about PBMs is that they take money from pharmaceutical companies, in the form of “rebates,” to give their drugs preferential treatment on health plans’ lists of medications that are covered by insurance, known as formularies. Those rebates may play a role in raising drug prices, found a 2020 paper by the University of Southern California’s Schaeffer Center for Health Policy & Economics.

Under the California bill, those rebates are to be used “for the sole purpose of lowering deductibles and out-of-pocket cost for consumers,” said Assembly member Jim Wood, a Democrat. “There is a perverse incentive by PBMs to choose for their formulary the drugs that will give them the biggest rebate, the largest rebate, even if there are other drugs just as effective and lower-cost. That alone should send shivers down your spine.”

Crackdown in California

California collected more than $215 million last year from the nation’s largest Medicaid insurer, Centene, after it failed to disclose or pass along drug discounts negotiated by its PBM to the state Medicaid agency.

Independent pharmacies say provisions in the proposed California law requiring PBMs to offer them the same pricing as the chains could be a lifeline.

Clint Hopkins, who has co-owned Pucci’s Pharmacy in Sacramento for eight years, said he’s forced to regularly turn away customers rather than lose hundreds of dollars each time he fills their high-cost prescriptions.

For instance, he said his cost for a monthly dose of Biktarvy, used to treat HIV, is $3,881.68. But he said pharmacy benefit managers short him up to $360 on the reimbursement.

“They dictate the rates to us, and they will not negotiate,” said Hopkins, who testified for the bill on behalf of the California Pharmacists Association. “Sometimes I have to say, ‘I’m sorry, I want to help you, but I can’t lose this much money on your prescription.’”

While the bill passed with unusual legislative support, it faces an uncertain future with the Democratic governor, who has until Sept. 30 to sign or veto it.

Newsom vetoed a 2021 bill that would have barred PBMs from steering patients to their own pharmacies, citing potential unintended consequences.

And his Department of Finance said administering the licensing and collecting the data required by the law would cost several million dollars. In vetoing other legislation, Newsom has repeatedly cited costs, as the state struggles with a massive budget deficit.

KFF Health News is a national newsroom that produces in-depth journalism about health issues and is one of the core operating programs at KFF—an independent source of health policy research, polling, and journalism. Learn more about KFF.

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KFF Health News is a national newsroom that produces in-depth journalism about health issues and is one of the core operating programs at KFF—an independent source of health policy research, polling, and journalism. Learn more about KFF.