Senator Wiener Introduces Nation’s Strongest Regulations For Pharmacy Benefit Managers (PBMs) to Address Rising Healthcare Costs

January 25, 2024

SACRAMENTO – Today, Senator Scott Wiener (D-San Francisco) announced Senate Bill 966 (SB 966), legislation to rein in anticompetitive practices by pharmacy benefit managers (PBMs), which are a significant contributor to rising drug costs. By cracking down on abuses, requiring that PBMs be licensed by the California Board of Pharmacy, and bringing heightened scrutiny to the role PBMs play in rising drug prices, SB 966 will lower healthcare costs for millions of Californians. The bill is the most comprehensive regulation of PBMs yet attempted by any state since a bipartisan effort in Florida last year set the standard for the nation.

Virtually unregulated in California, PBMs have grown to provide drugs to nearly all insured Americans. As the middlemen of the pharmaceutical industry, they buy prescription drugs from manufacturers and wholesalers and then sell them to pharmacies and health plans. In recent years, PBMs have increasingly taken advantage of their position as essential go-betweens to steer patients to higher-cost drugs and pharmacies, charge high administrative fees, and charge pharmacies more – sometimes much more – for drugs than they paid for them. The result is that PBMs – which play no role in producing prescription drugs – are capturing a larger and larger share of total prescription drug spending at a time when prices are rising precipitously.

The result is that the share of total spending on prescription drugs that goes to drug manufacturers has declined, while over half of every dollar spent on brand medicines goes to pharmaceutical industry middlemen like PBMs.

Families in California are struggling to afford the swiftly rising cost of medications. In 2022, drug spending in California grew by 12%–much faster than the overall rate of inflation–while total health premiums rose by just 4%. Last year, more than half of Californians either skipped or postponed mental and physical healthcare due to cost, putting their safety and wellbeing at risk. One in three reported holding medical debt, including half of low-income Californians.

“We cannot allow these middlemen to continue charging exorbitant and unfair prices while Californians are forced to ration life saving medication,” said Senator Wiener. “By reining in the worst PBM abuses, SB 966 helps control health care costs in order to deliver savings to Californians. I look forward to continuing California’s leadership in tackling the skyrocketing cost of prescription drugs.”

Unregulated PBMs Have Become Big Business

The PBM industry is highly concentrated, with the three largest PBMs – CVS Caremark, Express Scripts, and OptumRx controlling 79% of the PBM market. They operate under the umbrellas of large insurers Aetna CVS Health, Cigna, and UnitedHealth Group, creating a conflict of interest.

Cost-Raising Practices

Because they buy medications in bulk, PBMs negotiate large rebates with drug manufacturers. However, instead of passing the cost savings on to consumers, PBMs keep part of the rebate as profit. It appears that they often keep a large portion of the rebates as profit, but patients and regulators have very little visibility into the practice because the deals are negotiated behind closed doors.

PBMs frequently charge insurance companies more for prescription drugs than they pay to reimburse pharmacies, a practice known as spread pricing.

Researchers at USC found that PBMs often steer patients away from low-cost generic drugs and towards higher-priced branded medications that the PBMs have negotiated profitable deals with. As a result,“[g]enerics accounted for 90% of U.S. prescriptions but only 18% of drug expenditures—and about 3% of all U.S. healthcare spending in 2020.

Some PBMs own and operate pharmacies and specialty pharmacies that allow them to steer patients to pharmacies that will further increase their profits, a practice known as patient steering. For example, PBMs offer to purchase a pharmacy, and then deny the pharmacy’s credentials and declare them out of network when they refuse. The PBM then notifies patients their pharmacies are no longer in-network, and offers them alternatives that are owned by the PBM. Such practices deny patients the right to choose their providers and are blatantly anti competitive.

PBMs Are Crushing Small And Independent Pharmacies

PBMs also engage in anticompetitive practices that make it exceedingly difficult to operate independent chains and community pharmacies, undermining access to medication in the communities they serve. In San Francisco, Mission Wellness Center, a small woman-owned HIV pharmacy located in a predominantly Latino district, recently won a $3.6 million settlement from CVS-affiliated PBM, CVS Caremark, after the PBM underpaid them.

PBMs frequently underpay small pharmacies to the point where the pharmacies lose money by filling a prescription. For example, an anti-rejection medication needed for transplant patients is being reimbursed at $140.85 below the cost of acquisition. An antipsychotic monthly injectable medication is being reimbursed at a $219.37 loss. These losses don’t include the pharmacists’ time and other costs associated with filling a prescription. No pharmacy can dispense medication if it means losing money.

PBMs’ administrative fee collection and vendor contracting entity fees have increased exponentially — from nearly zero in 2018 to greater than 1.7 billion in 2022. These fees are becoming a greater and greater share of profits for the PBM industry, and they choke small and independent pharmacies that are already operating at lower margins.

PBMs Are Going Unregulated in California

PBMs have become a major focus of regulation in recent years, with the FTC investigating anticompetitive practices in the industry and multiple bipartisan efforts moving through Congress. PBMs are staffing up their teams of lobbyists to navigate the heightened scrutiny.

States across the country have taken action to combat the growing challenge presented by PBMs, with Michigan and Florida enacting recent landmark packages. Fifteen states ban spread pricing, while California does not. 

One challenge is the lack of a clear regulator for PBMs. 25 states PBMs to be licensed by state boards, but California requires a less stringent form of registration. 

SB 966 Reins In PBM Abuses

SB 966 requires that all PBMs be licensed and disclose basic information regarding their business practices to the licensing entity. In addition, SB 966 enacts other pro-consumer requirements and prohibitions:

  • Requires all PBMs to be licensed through the State Board of Pharmacy
  • Prohibits steering patients to affiliated pharmacies and instead allows patients to choose which in-network pharmacy best meets their needs.
  • Prohibits spread pricing, where PBMs charge a plan more for a drug than it pays a pharmacy.
  • Requires that the PBM pass through all negotiated drug rebates to the payers or patients.
  • Outlaws making any untrue, deceptive, or misleading statements.
  • Prohibits PBMs from negotiating exclusive arrangements with manufacturers for drugs, devices, or other products.
  • Limits how fees may be charged and requires transparency in fees.

SB 966 is sponsored by the California Pharmacist Association.