California signs PBM law: Federal PBM regulations lag, states step up action

From FTC lawsuits to bills in Congress, many steps have been taken at the federal level to crack down on the opaque business practices of pharmacy benefit managers. But no clear action has been taken.

In the absence of progress from the federal government, states are stepping in to fill the void. Just recently, California Governor Gavin Newsom signed a law (SB 41) regulating PBMs. It has several provisions, including a ban on spread pricing. This is when the PBM charges the health plan more for the drug than it pays the pharmacy and keeps the difference as profit.

“I am pleased to sign SB 41, a bill that will lower health care costs for all Californians,” Newsom said in a statement. “This bill… represents the most aggressive effort in the country to lower prescription drug costs. California continues to lead the way in lowering costs, increasing transparency, and ensuring savings are passed on to payers and consumers.”

PBMs have come under a lot of scrutiny recently for their vertical integration with insurance companies and their practice of jacking up drug prices. The top three PBMs — CVS Caremark, Cigna's Express Scripts and UnitedHealth Group's Optum Rx — control about 80% of the prescription drug market.

Recently, Arkansas passed a law prohibiting PBMs from owning dispensaries. While supporters applauded the law, a federal judge blocked its enactment, finding it violated the Commerce Clause. This means states cannot pass laws that unfairly harm or discriminate against businesses in other states. Arkansas has appealed the decision, and some supporters remain hopeful the law will stay in place.

Several other states have taken steps to control PBMs, including:

• Massachusetts enacted a law in January requiring PBMs to submit detailed rebate and pricing data and obtain state licenses
• Missouri passed a law in March that prohibits PBMs and insurance companies from denying doctors payment for drugs and requires fair reimbursement based on contracted rates.
• North Dakota amended a law in March to require PBMs to obtain a license from the state commissioner's office instead of a certificate of authorization
• Utah enacted a law in March requiring PBMs to provide plan designs, pass manufacturer rebates directly to participants and ban spread pricing

Even as states move forward with prescription drug pricing reforms, at least one expert still hopes for federal support.

“We're seeing plans doing their thing. We're seeing a lot of disruptive PBMs emerging in the market. We're slowly seeing states take action. It would be great if the federal government was advocating for that as well,” said Kathy Chang, director of trade relations for Blue Shield of California, a nonprofit health insurance company that covers about 6 million Californians.

California law

California's new PBM law has several key provisions.

• it prohibits spread pricing
• It ensures that all rebates negotiated with manufacturers are passed on to patients
• It requires PBMs to obtain a license from the Department of Managed Healthcare
• It bans PBMs from directing patients to their own pharmacies and away from non-affiliated pharmacies
• It requires a pass-through pricing model in which PBMs pay only a clear, fixed fee for their services, rather than fees that vary based on the drug's list price or rebates.

“If you explain it in plain and simple English, it does end hidden fees and ensures that everyone in California can see fair and true prices at the pharmacy counter so they can make informed decisions about what's best for their health, but most importantly, their wallets,” Zhang said. “This is a major step forward in reforming PBM practices and bringing true price transparency to the system that has not been possible for quite some time.”

The National Community Pharmacists Association (NCPA) supports several of these provisions. This includes requiring PBMs to be licensed by the Department of Managed Healthcare (which would bring more state oversight) and preventing PBMs from directing patients to their own pharmacies instead of non-affiliated independent pharmacies.

A recent report by the Federal Trade Commission (FTC) found that three major PBMs are directing patients to their affiliated pharmacies instead of independent pharmacies. For example, CVS Caremark may direct patients to their local CVS pharmacy.

Joel Kurzman, NCPA's director of state government affairs, said California's law is a “great start” and will have a “meaningful impact.” However, the group would like to see additional reforms, including requiring PBMs to reimburse pharmacies in commercial markets at a rate based on the national average drug purchase cost plus professional dispensing fees. This was initially included in the legislative process at some stage, but was ultimately removed from SB 41.

Not surprisingly, a PBM lobby group came out against California's law.

“The Newsom Administration is not falling into Big Pharma's tactic of blaming others for their high sticker prices and undermining mechanisms to truly lower prescription drug costs,” the Pharmacy Care Managers Association said in a statement. “Nothing in SB 41 will lower drug costs for Californians. In fact, the legislation will increase drug costs for everyone in California.”

Federal action is needed

Asked what lessons she hopes Congress and other states learn from California's new law, Chang pointed to the need for broader drug pricing reform. She said state and federal policies are necessary to make a difference in this area, but health plans can also take action. In January, Blue Shield of California launched a new pharmacy management model that partners with five different companies (Amazon Pharmacy, Cost Plus Drugs, Abarca, Prime Therapeutics and CVS Caremark) to provide prescription drug benefits. Previously, CVS Caremark was its sole pharmacy benefit manager.

An executive at a health technology company focused on prescription drugs also believes national reform is needed.

“We will see more states conducting trials… but drug pricing cuts across state lines, so long-term stability requires federal coordination,” said Jeff Park, president of Waltz Health. “The focus should be on consistency, not 50 different definitions of transparency. We also need to move from static regulation to dynamic pricing transparency, using AI-driven platforms to send prescriptions in real time based on cost and coverage.”

In the meantime, Congress and other states can learn something from California's law, Kurtzman said. The law took about two years to pass and went through multiple iterations.

“I think everyone around the world can appreciate the resilience that California has shown. … I think the message is that you can be resilient, you can get back up, you can restrategize, you can rework, you can continue the dialogue, you can continue to educate, and you can ultimately make progress,” he said.

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