Governor Newsom Signs Nation-Leading Bill To Crack Down on Prescription Drug Price Gouging By Megacorporations

Senator Wiener’s SB 41, part of the Prescription Drug Affordability Package, which prohibits predatory behavior by pharmacy benefit managers (PBMs) that is driving up the cost of prescription drugs for families and shuttering neighborhood pharmacies.

SACRAMENTO – Governor Newsom signed Senator Scott Wiener’s (D-San Francisco) Senate Bill 41 — reining in abusive behavior by pharmacy benefit managers (PBMs) that raise drug prices and kill neighborhood pharmacies. Prescription drugs are a major driver of high costs: three in ten adults ration or skip medications they are prescribed to take due to cost, and California previously had no regulation on PBM conduct despite their massive role in setting drug prices. SB 41 restores California’s leadership on prescription drug affordability by enacting the nation’s strongest safeguards against PBM abuse. 

“With SB 41, California is standing up for consumers against giant mega corporations trying to rip them off on essential medications,” said Senator Wiener. “This new law builds on the licensing framework we established earlier this year to begin holding PBMs accountable for abusive behavior. I’m grateful for Governor Newsom’s leadership in fighting to ensure neighborhood pharmacies get a fair shot and that no family is ever forced to choose between lifesaving medications and putting food on the table.”

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.

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.

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 University of Southern California 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 Going Unregulated in California

PBMs have become a major focus of regulation in recent years, with the Federal Trade Commission 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. 

SB 41 Reins In PBM Abuses

SB 41 requires that all PBMs be licensed and disclose basic information regarding their business practices to the licensing entity. In addition, SB 41 enacts other pro-consumer requirements and prohibitions:

• Requires all PBMs to be licensed through the California Department of Insurance
• 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 41 is sponsored by the California Pharmacists Association, the San Francisco AIDS Foundation, the Los Angeles LGBT Center, and the California Chronic Care Coalition.

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