A awaiting its first hearing would subject drug industry intermediaries known as pharmacy benefit managers, or PBMs, to licensing by the state Department of Insurance. And it would 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.
But the proposal, which would impose some of the toughest PBM regulations in the nation, faces at least one major hurdle: Newsom. He vetoed a last year, unconvinced it would lower consumer costs. He to offer an alternative but has yet to reveal it.
Any fight over PBM reform promises to be a pricey one. Interest groups on both sides spent at least $7 million combined lobbying California lawmakers and the Newsom administration on health care last year, according to records filed with the secretary of state.
鈥淭his bill directly threatens the profitability of PBMs going forward,鈥� said Ge Bai, a health policy professor at Johns Hopkins University who has tracked similar bills in other states. 鈥淭hese bills are really the result of an interindustry dog fight, and these are ridiculously fierce fights because PBMs control revenue for pharmacies, as well as for manufacturers.鈥�
The country鈥檚 top three PBMs 鈥擟VS Caremark, affiliated with Aetna; UnitedHealth Group鈥檚 Optum Rx; and Express Scripts, owned by Cigna 鈥� control roughly 80% of prescriptions in the United States, according to the Federal Trade Commission. In theory, they leverage their buying power to extract steep discounts from drug manufacturers and pass savings along to insurance companies and employers who provide health coverage.
But as prescription drug prices continue to spiral and federal efforts to control them stall, state lawmakers are focusing on PBMs, which help insurers decide which drugs their plans cover and how much patients will pay out-of-pocket to get them. However, they have been stymied by the drug industry鈥檚 secretive ecosystem of rebates, reimbursements, and obscure fees, thwarting efforts to lower drug costs.
In addition to California, PBM proposals have been introduced this legislative session in , , and as of Feb. 10, according to the National Academy for State Health Policy. All and Washington, D.C., have some sort of PBM regulation on the books.
And although President Donald Trump has criticized PBMs and vowed to 鈥�,鈥� his recent actions to lower prescription drug prices have left some that meaningful reform will come from Washington, D.C.
Meanwhile, 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.
Both Newsom and bill author Sen. Scott Wiener (D-San Francisco) have said PBMs play a role in high drug prices. While Wiener wants to ban some of their practices outright, Newsom has so far taken a more measured approach, calling for more disclosure and pointing to his plan for the state to manufacture its own generic drugs, which has yet to get off the ground.
In vetoing Wiener鈥檚 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 鈥減ropose a legislative approach鈥� to gather more data from PBMs. In a statement, Newsom spokesperson Elana Ross noted that 鈥淏ig Pharma backed the vetoed bill鈥� and said the Democratic governor, in partnership with the legislature, will take action to address PBMs this year. She declined to elaborate.
In his January , Newsom said his administration was 鈥渆xploring approaches to increase transparency鈥� in the entire drug supply chain, not just PBMs.
Industry representatives say they鈥檙e being unfairly targeted with transparency laws and regulations and blame pharmaceutical companies for setting high drug prices.
鈥淭he PBM is taking the risk on price variation, and it allows the client to have certainty on what they鈥檙e going to be paying,鈥� said Bill Head, an assistant vice president of state affairs for the Pharmaceutical Care Management Association, which represents PBMs. 鈥淲e鈥檙e hired because it works. It saves money at the end of the day.鈥�
He said PBMs pass on more than 95% of the rebates they receive from drugmakers 鈥� a number health policy researchers say is hard to verify.
Consumer advocates say drugmakers simply raise their prices to maintain profits and PBMs charge insurers far more for many medicines than pharmacies are paid to actually dispense them, a practice known as spread pricing.
A 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 serious lung conditions. Over a six-year period, the analysis found, 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鈥檚 latest bill, SB 41, would ban such markups, as well as spread pricing, and bar PBMs from receiving performance bonuses based on drug rebates. Similar provisions were stripped out of last year鈥檚 bill in the final days before its passage.
鈥淭hese are practices that only PBMs are engaging in and they鈥檙e causing harm, reducing consumer choice, increasing drug costs, and it鈥檚 time to address them,鈥� Wiener said. 鈥淚鈥檓 not going to let that idea just evaporate because of one veto.鈥�
Clint Hopkins, who has co-owned Pucci鈥檚 Pharmacy in Sacramento since 2016, said he often deals with complaints from frustrated patients who don鈥檛 understand drug pricing schemes and restrictions set by pharmacy benefit managers.
He鈥檚 had to turn away customers whose drugs can cost him hundreds of dollars in losses each time they鈥檙e filled and says spread pricing is helping drive independent pharmacies out of business.
鈥淚鈥檓 not asking to be paid more. I am asking to be paid fairly 鈥� at cost or above.鈥�
Under current law, California requires PBMs to disclose some information about drug rebates, and other information, to its clients. That data is often labeled as proprietary to the companies, leaving an incomplete picture of the supply chain, said Maureen Hensley-Quinn, a senior program director at the National Academy for State Health Policy.
PBM representatives say pharmacies, insurers, and other actors in the supply chain should have to disclose information about their profits and practices, too.
鈥淵ou want to look under the hood?鈥� Head said. 鈥淲e鈥檙e open to that, but let鈥檚 look under everybody鈥檚 hood.鈥�
Bai said lawmakers are likely going after PBMs because insurers are one portion of the supply chain that they have the power to regulate. But she warned 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 biggest revenue sources.
鈥淚n health care, there鈥檚 no saint and there鈥檚 no villain. Everybody鈥檚 trying to make money,鈥� Bai said. 鈥淭hese fights will bring no benefit to patients unless we go to the root.鈥�
is a service of the California Health Care Foundation, an independent, nonprofit philanthropy that works to improve the health care system so that all Californians have the care they need. We focus especially on making sure the system works for Californians with low incomes and for communities who have traditionally faced the greatest barriers to care.