In summary
Gov. Newsom in vetoing regulations for pharmacy benefit managers and hedge funds in health said his administration is working to protect consumers in different ways.
More than two dozen states regulate the pharmaceutical middlemen that advocates and economists say drive up the price of prescription drugs, but California will not be joining their ranks. Gov. Gavin Newsom today vetoed legislation designed to curb their influence.
The bill, authored by Sen. Scott Wiener, a Democrat from San Francisco, would have required the state insurance department to license pharmacy benefit managers. It would also have required pharmacy benefit managers to disclose prices paid to drug manufacturers and mandated 100% of any discounts negotiated be passed down to consumers.
It was one of two bills intended to crack down on the health care industry that Newsom vetoed today.
He also rejected a hotly contested measure by Democratic Assemblyman Jim Wood of Ukiah that would have given the state more power to block the sale of health care companies to for-profit investors, such as hedge funds and private equity firms.
In veto messages, Newsom wrote that his administration is already taking steps to bring down the cost of health care through other programs, and that an existing office has a mandate to review the market effects of health care consolidation.
He wrote that he wants more “granular information” about the influence of pharmaceutical benefit managers before signing a new law to regulate them.
“Without a doubt, the public and the Legislature need a clearer understanding of how much (pharmaceutical benefit manager) practices are driving up prescription drug costs,” he wrote.
Pharmacy benefit managers, also known as PBMs, serve as intermediaries between insurance companies and drug manufacturers. They process claims, negotiate the price of drugs using a complex system of rebates. They also control the list of drugs that health insurance plans cover, also known as a formulary. They are regulated in many other states including Florida and Texas.
“We share Gov. Newsom’s focus on improving access to and lowering the cost of prescription drugs, and appreciate his thoughtful approach to better understand the drug supply chain before implementing legislation that may have unintended consequences,” Phil Blando, a spokesperson for pharmacy benefit manager CVS Caremark, said in a written statement after the veto.
This is the second time Newsom has opposed regulating pharmaceutical middlemen. In 2021, he vetoed a law to prevent pharmacy benefit managers from forcing patients to use only specified pharmacies, a practice known as “patient steering.” Pharmacy benefit managers say the practice helps keep costs down because they can negotiate better deals with certain networks of pharmacies. Research shows that much of the time the pharmacies patients are required to use are also owned by the middlemen.
This law would have also prohibited “patient steering.”
“PBMs are driving up health care costs, destroying neighborhood pharmacies, and preventing Californians from receiving health care at their local pharmacies. Today’s veto is a huge missed opportunity to control prescription drug costs and protect consumers from predatory behavior by PBMs,” Wiener said in a statement on Newsom’s veto.
Consolidation in prescription drug industry
Pharmacy benefit managers argue that the practices Wiener’s bill would have stopped actually save money for patients and insurance plans. Their ability to negotiate on behalf of millions of patients gives them more leverage against drug manufacturers, and most contracts already include requirements to pass down the majority of discounts, they say.
Over time, three pharmacy benefit managers have come to dominate the industry through mergers and acquisitions. CVS Caremark, Express Scripts and OptumRx represent more than 80% of the market.
Increasingly, research suggests consolidation drives prescription drug prices higher. 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.
Their practices have drawn scrutiny from Congress and federal agencies. Earlier this month, the Federal Trade Commission announced a lawsuit against CVS Caremark, Express Scripts and OptumRx for allegedly artificially inflating the cost of insulin, a lifesaving drug that roughly 3 million Californians and 37 million Americans rely on to regulate blood sugar.
The complaint alleges that pharmacy benefit managers demand higher discounts from drug manufacturers in order to include insulin in the list of covered drugs available to patients. A percentage of that discount is kept as profit. This strategy keeps lower-cost generic insulins from being included in most commercially insured patients’ coverage plans.
Hedge funds buying states in California health care
The other health care bill Newsom vetoed would have established California’s first-ever regulations over private equity and hedge funds in health care.
Private equity and hedge funds can be a lifeline for a health care company teetering on the edge of bankruptcy, providing a rush of cash to keep the doors open. They can also help open new facilities or fund research.
But those investments have a downside if shareholders cut services and saddle health organizations with debt, consumer advocates say. Nationally, mounting evidence suggests private equity acquisitions also make health care more expensive.
Learn more about legislators mentioned in this story.
The rejected bill would have granted the attorney general the authority to review transactions between these investors and health businesses like surgery centers, nursing homes, and large physician practices. The attorney general would have been able to impose stipulations for approval, such as prohibiting the new owners from eliminating services. Nonprofit hospitals have been subject to similar rules for decades.
In California, Between 2005 and 2021, private equity deals grew from $1 billion to $20 billion annually, according to a recent policy paper from the California Health Care Foundation.
Business interests spent more than $583,000 lobbying against the legislation saying it would stifle investment in health care at a time when many facilities are still struggling to recover from the COVID-19 pandemic and economic inflation.
In an unusual move, the Federal Trade Commission submitted a letter in support of the state’s legislation. In the letter, Chair Lina M. Khan wrote that the Federal Trade Commission and U.S. Department of Justice are investigating mergers and acquisitions driven by private equity in health care that violate antitrust laws. State regulations, like California’s can be “force multipliers to federal enforcement,” Khan said.
“I write to support California’s efforts to more closely monitor mergers and acquisitions within healthcare and to halt deals that undermine the availability and affordability of quality healthcare,” Khan 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.
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