California bill aims to curb rising drug costs by targeting PBMs

The bill now awaits the signature of California Gov. Gavin Newsom.

Newsom, a Democrat, vetoed a similar PBM bill in 2024.

Related: California governor vetoes PBM bill and private equity deal review bill

The bill now under consideration was introduced by Sen. Scott Wiener, D-San Francisco.

Pharmacy benefit managers: PBMs help health insurers, government health plans, employers' self-insured health plans and other "payers" provide prescription drug benefits.

PBMs and their defenders argue that PBMS are responsible for holding down overall prescription drug price increases in recent years and slashing costs for generic drugs to below the levels seen in many other high-income countries.

Critics, including pharmacists and drug manufacturers, have accused the PBMs of using complicated, opaque pricing strategies and ownership of pharmacies to keep the prices health plans pay for drugs relatively high, reduce the amount of revenue flowing to drug manufacturers and pharmacies, and increase their own profit margins.

The bill: Wiener's bill would address the critics' concerns by putting the California Department of Insurance, which is run by an elected insurance commissioner, in charge of licensing and overseeing PBMs.

The bill would ban "spread pricing," or the practice of a PBM charging a health plan more for a drug than the PBM pays the pharmacy.

The bill also would:

◆ Limit PBM fees.

◆ Prohibit PBMs from steering patients toward affiliated pharmacies.

◆ Prevent PBMs from negotiating exclusive arrangements with makers of drugs or medical devices.

◆ Require PBMs to pass all drug price rebates to the payers or the patients.

◆ Require PBM to provide reports on fees.

The bill would not apply to the self-insured employer health plans that are governed by the Employee Retirement Income Security Act.

Federal law leaves most regulation of the business of insurance to the states, but ERISA is supposed to hold down the cost of large, multistate employers' benefit plans by "preempting," or blocking, state efforts to regulate employee benefits.

Newsom's PBM move: Newsom included a different PBM provision in a state budget bill that he signed into law in June.

The PBM provision in the budget law gives the California Department of Managed Health Care, which is run by a director appointed by the governor, responsibility for PBM oversight.

The new law imposes a fiduciary duty on PBMs, requires them to create audited financial statements, and requires PBMs to send state regulators drug price data.

Perspectives: The Pharmaceutical Care Management Association told state officials that the Wiener bill would increase health plan prescription spending dramatically by interfering with PBM pricing arrangements and eliminating payers' ability to choose the pricing strategy that appears to be the best fit, according to summaries of the PCMA's views posted by California legislative analysts.

The anti-steering provision could increase prescription drug costs and also cripple PBMs' efforts to set quality standards, according to the PCMA.

The California Chamber of Commerce worked with the California Association of Health Plans, the Association of California Life & Health Insurance Companies and the PCMA to oppose the bill.

The list of supporters includes Blue Shield of California as well as many pharmacy and patient advocacy groups.

Blue Shield of California originally used one of the big, traditional PBMs. In recent years, it has tried to move away from using a traditional PBM and come up with a new way to provide prescription benefits.