California is poised to tighten regulations on pharmacy benefit managers, bringing the state in line with a nationwide effort to address the high costs of prescription drugs.
Pharmacy benefit managers, the companies that manage drug benefits for insurers and employers, have in recent years come under fire from state and federal lawmakers who say their obscure business practices and market consolidation have artificially inflated prescription drug prices.
They have gone “virtually unregulated” in California, according to Sen. Scott Wiener (D), thanks in part to the way the state has historically structured the industry’s oversight.
“This is an overdue piece of legislation,” Wiener said at a hearing last month. “This is an issue whose time has come.”
Wiener’s bill aims to establish a new licensing framework for pharmacy benefit managers, also known as PBMs, and it addresses some of their more controversial pricing practices. The Senate passed the bill 39-1 in May, and there was little resistance in a series of House committee votes. The full chamber is likely to vote on the bill before the legislature adjourns on Aug. 31.
A pharmacy benefit manager is a third-party company that functions as an intermediary between insurance providers and pharmaceutical manufacturers. They negotiate discounts and rebates with drug manufacturers, contract with pharmacies, and develop and maintain drug formularies, or lists of covered drugs.
Because a pharmacy benefit manager ultimately decides which drugs it covers, it can bargain for rebates from drug manufacturers who want to get their products on its “formularies,” or lists of covered drugs.
Pharmacy benefit manager companies say they use their market power to reduce the costs of prescription medication for their clients. Critics say they use their leverage to force drug manufacturers to raise list prices to provide ever-growing rebates.
After 20 years of market consolidation, the three largest pharmacy benefit managers — CVS Caremark, OptumRx and Express Scripts — now control an estimated 80% of the market.
Each of those companies have affiliated with health insurers, specialty and mail order pharmacies, provider groups, and additional administrative entities such as pharmacy benefit manager group purchasing organizations and rebate aggregators.
Policymakers and regulators say the horizontal consolidation and vertical integration has allowed pharmacy benefit managers to drive out competition and given them too much control over setting prices.
A bipartisan coalition of lawmakers in Washington, D.C., has targeted pharmacy benefit managers in hearings on health spending, but Congress left for the August recess without passing an overhaul. It’s unclear if an effort will be made to do so during the lame duck period after the November elections.
States have proven more proactive. All 50 have laws that are often more stringent than federal laws, with Michigan and Florida enacting recent landmark packages.
The California bill would create a new regulator housed within the California Department of Insurance to require that all pharmacy benefit managers be licensed and disclose basic information regarding their business practices to the licensing entity.
The bill would also prohibit steering patients to affiliated pharmacies, instead allowing patients to choose which in-network pharmacy they want to use; prohibit spread pricing — when a pharmacy benefit manager charges health insurers, drug plans or large employers more for a drug than the benefit managers reimburse the pharmacy and pocket the difference; require that the pharmacy benefit manager pass through all negotiated drug rebates to the payers or patients; prohibit pharmacy benefit managers from negotiating exclusive arrangements with manufacturers for drugs, devices, or other products; limit how fees may be charged and require transparency in fees.
Many of those provisions are already in place in other states. Fifteen states ban spread pricing, for example, and 25 states require pharmacy benefit managers to be licensed by state boards.
Opponents include Pharmaceutical Care Management Association, the leading trade association representing pharmacy benefit managers.
“We do not oppose being licensed or having transparency requirements and reporting data to the state that can be analyzed and reported back to the legislature,” Bill Head, PCMA assistant vice president for state affairs, said at the July hearing. “However this legislation goes far beyond oversight and imposes restrictions on the very tools that plans contract PBMs to provide. PBMs are the only entity in the drug supply chain that exert any downward pressure on the drug price.”
PhRMA, a major pharmaceutical industry trade association that has championed pharmacy benefit manager reforms, applauded the California bill.
“Bills like SB 966 can make the system work better for patients by holding PBMs accountable when their financial interests conflict with what’s best for patients,” PhRMA spokesman Reid Porter said in a statement. “California can join 25 other states in reforming the PBM and stop abuses leading to unnecessarily higher costs for patients.”