It鈥檚 no secret that prescription drugs are unaffordable for many Californians. In just five years, spending on prescription drugs ballooned from $8.7 billion to $12.1 billion, an increase of 39%, according to the most recent .
Consumer advocates and health economists are placing some of the blame on pharmaceutical middlemen, which they say needlessly drive up costs by tacking on fees and withholding discounts as profit. It鈥檚 a problem that has plagued regulators across the country. This week, California lawmakers are set to vote on first-time regulations aimed at curtailing their tactics.
Pharmacy benefit managers, also known as PBMs, most often serve as intermediaries between insurance companies and drug manufacturers. They process claims, negotiate the price of drugs using a , and control the list of drugs that health insurance plans cover, also known as a formulary.
They鈥檙e already regulated to some degree in most other states, including Texas and Florida. The California proposal would require the state insurance department to license pharmacy benefit managers, and would require pharmacy benefit managers to disclose prices paid and discounts negotiated with drug manufacturers. It would also mandate that 100% of the discounts from drug manufacturers be passed onto health insurance plans.
鈥�(Pharmacy benefit managers) have insinuated themselves into the nerve center of the health system where they exercise enormous leverage over the health plans, over the pharmaceutical manufacturers, over the consumers,鈥� bill author Sen. Scott Wiener said. 鈥淭hey鈥檙e making enormous amounts of money at the expense of consumers.鈥�
The companies argue that they save money for patients and insurance plans 鈥� the more patients they represent, the more leverage pharmacy benefit managers have to negotiate lower drug prices, for example. They are fiercely opposed to the legislation and warn that the proposed regulations will increase health premiums for Californians by $1.7 billion in the first year and $20 billion over a decade.
鈥淭he bottom line is does nothing to reduce prescription drug costs or improve patient access and safety,鈥� said Greg Lopes, a spokesperson for Pharmaceutical Care Management Association, an industry lobby for pharmacy benefit managers
Three pharmacy benefit managers dominate the industry: CVS Caremark, Express Scripts and OptumRx represent of the market.
Increasingly, research suggests consolidation . The biggest player, CVS, has grown to encompass the familiar retail pharmacy stores, pharmacy benefit management services, and health insurance through a merger with Aetna.
鈥淭hey鈥檙e way overdue for regulation,鈥� Wiener, a Democrat from San Francisco, said.
Previous attempts to regulate pharmacy benefit managers have failed in California. In 2021, Gov. Gavin Newsom vetoed legislation that would have prevented from 鈥減atient steering,鈥� a practice that forces patients to use only specified pharmacies that are also often owned by the pharmacy benefit managers.
鈥淚n California we鈥檙e really behind. They have been far more aggressive in other states regulating (pharmacy benefit managers),鈥� said Michelle Rivas, executive vice president of government relations at the California Pharmacists Association, which co-sponsored the bill. 鈥淭he ideal would be comprehensive federal legislation. Unfortunately, we don鈥檛 have the luxury of time to wait for Congress to move on this issue.鈥�
While more than a dozen proposals have been introduced in Congress, to date none has passed. A recent , which is investigating pharmacy benefit managers, suggests that the largest organizations may be engaging in practices specifically to evade regulation, such as moving portions of their operations out of the country.
鈥淭hese guys are smart and historically we鈥檝e seen them evolve and we鈥檝e seen them find ways to make more money,鈥� said Geoffrey Joyce, director of health policy at the who studies pharmaceutical markets.
California鈥檚 effort to regulate pharmacy benefit managers is commendable, Joyce said, but he鈥檚 pessimistic that regulators can adapt as quickly as the market changes.
Concessions to pharmacy benefit managers
Wiener鈥檚 bill would break new ground in California, but it won鈥檛 go as far as he intended.
Amendments to the proposal significantly curtailed its reach in the final days of the legislative session. Industry groups requested the changes, but Wiener said the remainder still leaves 鈥渁 very strong bill.鈥�
Previous versions of the proposal would have prohibited pharmacy benefit managers from paying pharmacies less for a drug than they charge insurers and keeping the difference as profit. It would have also prohibited insurers from paying out bonuses based on drug cost savings.
The Assembly Appropriations Committee, which is chaired by Buffy Wicks, a Democrat from Oakland, struck those provisions.
Wiener said neither he nor the industry opponents got everything they wanted. Wicks鈥� office did not respond by deadline to a call asking why the amendments were added when the bill had previously made it through all committees and the Senate without a single no vote.
Lopes, with the pharmacy benefit manager lobby, said the group remains opposed to the bill even after the amendments.
鈥淲hile we are taking a close look at the new language and its implications, it鈥檚 evident the bill still benefits Big Pharma at the expense of California patients,鈥� Lopes said.
and criticism of their business practices are flawed and misguided. As middlemen, pharmacy benefit managers are able to negotiate prices with pharmacy chains, health insurers and drug manufacturers on behalf of their clients. Designing preferred pharmacy networks, formularies and discounts are all strategies that allow pharmacy benefit managers to keep prices reasonable, said Ed Devaney, president of the employer division at CVS Caremark.
鈥淭his bill would not allow employers to continue to leverage those cost containment solutions that they have enjoyed over the last 10 to 20 years,鈥� Devaney said. The proposal is also opposed by health insurers, some unions, and a coalition of business associations.
CVS Caremark is the largest pharmacy benefit manager in the country, representing more than 100 million members. Devaney said CVS passes 99% of rebates to consumers and that it has no issue with increased transparency.
Instead, the benefit managers blame pharmaceutical companies for skyrocketing drug prices.
鈥楴o saints鈥� in pharmaceutical industry
Reid Porter, a spokesperson for Pharmaceutical Research and Manufacturers of America, said Wiener鈥檚 proposal is a 鈥渟tep in the right direction鈥� but that California legislators have more work to do to address 鈥渢he perverse incentives and harmful practices of PBMs that lead to higher costs, including higher premiums, that patients face.鈥� The trade organization representing drug companies supports Wiener鈥檚 measure.
Drug manufacturers have long accused pharmacy benefit managers of holding prescription drugs hostage in order to get bigger rebates that patients never see. Rebates made up just 17% of the $12.1 billion spent on pharmaceuticals in 2022, according to the Department of Managed Health Care鈥檚 most recent drug cost report.
Joyce of USC said both players are at fault.
鈥淭here are no saints. Everyone is trying to make a buck,鈥� Joyce said.
Pharmacy benefit managers representing tens of millions of patients have enough leverage to negotiate lower drug prices, he said, but the problem is that their business practices are so opaque no one really knows how much in savings is being passed down to patients and how much benefit managers are keeping in profits.
Joyce said he has also witnessed negotiations where manufacturers withhold price discounts if the benefit manager includes coverage of competitors鈥� drugs.
鈥淭hey run an opaque, non-transparent business, and that is never good,鈥� Joyce said.
The Federal Trade Commission report suggests that pharmacy benefit managers increasingly make money through administrative fees and other payments tacked onto services.
Despite the leverage pharmacy benefit managers may have, Kevin Schulman, a professor of medicine at Stanford University, research shows they have only ever driven drug prices up 鈥� not down.
For example, although have been available for years, patient use of the cheaper alternatives has remained low because pharmacy benefit managers exclude the generics from covered benefits in lieu of higher-profit, name-brand insulins. Newsom鈥檚 , will face a similar challenge, Schulman said. Schulman was an advisor to Civica Rx, the company tapped by Newsom to run its insulin project.
鈥淭his strategy results in them being able to pocket billions of dollars,鈥� Schulman said.
Supported by the California Health Care Foundation (CHCF), which works to ensure that people have access to the care they need, when they need it, at a price they can afford. Visit www.chcf.org to learn more.
is a nonprofit, nonpartisan media venture explaining California policies and politics.