California Legislature Appears Poised to Pass Anti-Pharmacy Benefit Manager Legislation

California legislators appear poised to sweep through the legislature anti-Pharmacy Benefit Manager (PBM) legislation following unanimous passage by the Senate.

PBM companies were created in the 1960s to help employers and insurers select and purchase medications for their health plans, NPR explained last year. “The industry mushroomed as prescription drug spending grew about 200-fold between 1967 and 2021. In addition to negotiating discounts with manufacturers, PBMs set payment terms for the pharmacies that buy and dispense the drugs to patients. In effect, they are the dominant middlemen among drugmakers, drugstores, insurers, employers, and patients.”

As is so often the case in California, only after a bill has progressed pretty far down the road to passage are problems with the legislation becoming apparent.

The Globe spoke with an expert in the health care sector about PBM and spread pricing.

This is what the expert, who asked not to be named, explained to the Globe about SB 966:

SB 966 purports to ban spread pricing, under which your PBM—almost certainly your regular old health insurer—drive down the cost for medication that they pay to pharmacies and charge insured patients more than they pay the pharmacy for the prescription in question. The differential in cost—the “spread”—is where they make their money. There is concern that some insurers have been making too much off of the spread especially where generic drugs are concerned.

According to the health care sector expert, “the bill would not just prohibit spread pricing. Notably, while it allows for ‘performance bonuses,’ it contains limitations on how a PBM can derive income that are more restrictive than what other states have done– specifically, prohibiting payments based on savings achieved. This means any income can only be derived from a management fee, but that management fee cannot incorporate rewards for savings. The problem with this is, it eliminates the best and biggest incentive for PBMs to ramp down drug costs for the people they’re covering– principally employer plans. This means that very likely, employer plans are going to see costs go UP if this passes. That, in turn, means smaller take-home pay rises for employees because more of what would have been allocated to take home pay needs to be allocated to spending on benefits and insurance, specifically. It could also mean employers just looking to increase employee numbers by a smaller amount.”

Backing this bill is a broad coalition, which includes Big Pharma – “not an  obvious alliance for California Democrats to make in the current political climate. PhRMA itself is backing the bill, but so too are Biocom California and California Life Sciences,” the expert said.

“But a bigger worry appears to come from pharmacists who feel they are being financially cramped as insurers look to tamp down the cost of health care in all forms—including prescriptions. This is a concern that is easier to feel sympathy for when one thinks about small, local, standalone community pharmacies in more rural parts of California than the big Walgreens in downtown Los Angeles. Walgreen’s is the second-biggest chain in the country, and controls close to 15 percent of the pharmacy market).”

“Who else supports anti-PBM legislation? In the case of SB 966, it’s Big Pharma, which directly includes PhRMA, the trade association for the industry. But it also includes Biocom California and California Life Sciences, which also tie into the pharmaceutical as opposed to pharmacy industry. That is an interesting choice of ally for California Democrats, especially, to be making when virtually the entire focus of President Biden’s supposed “spending cuts” has been targeting Big Pharma via the Medicare drug price negotiation component of the so-called Inflation Reduction Act.”

“It’s also a political trade that could really anger employers in the state. An analysis of the bill shows that it would not merely prohibit spread pricing. This bill would actually ban any form of performance bonus that is based on savings achieved for PBM plan members. That is a massive disincentive for PBMs to save money for the people they insure—which probably means every average Californian.”

“With regard to employer plans in particular, it could well have consequences in terms of take-home pay, employment numbers, or both. Whenever more money is spent on insurance for employees—and here, that would almost certainly be the case because the incentive to save money on drug costs is wiped out—it means that take-home pay either fails to rise to the extent it otherwise could, or in some cases doesn’t rise at all. It is doubtful that with ongoing inflation woes, employees will be happy about this. The alternative is that employers who need to hire more simply do not because they are trying to contain insurance costs that could be lower. That’s bad if a public policy goal is maintaining low unemployment, and it’s also bad if you’re an already-overworked employee at a business that really needs to hire.”

It’s looking unlikely at this point that SB 966 will be halted by the Assembly, let alone vetoed by Gov. Newsom, but opponents hope the bill may at least be modified before it passes in final form, perhaps to address the “spread pricing” provision in a manner opponents say would make the bill more employer-friendly.