Numerous efforts have been made at the federal level to crack down on the opaque business practices of pharmacy benefit managers, from a lawsuit by the Federal Trade Commission to bills in Congress. But no definitive action has been taken yet.
In the absence of federal progress, states are stepping in to fill the gap. Just recently, California Governor Gavin Newsom signed a law (SB 41) that will regulate PBMs. It has several provisions, including banning spread pricing. This is when a PBM charges a health plan more for a 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. 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 that the savings are passed on to payers and consumers,” Newsom said in a statement.
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PBMs have come under a lot of scrutiny recently due to their vertical integration with insurers and practices that inflate 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 that would ban PBMs from owning pharmacies. Although advocates applauded this law, a federal judge blocked it from being enacted, arguing that it violates the Commerce Clause. This says that states cannot pass laws that unfairly hurt or discriminate against businesses from other states. Arkansas has appealed this decision, and some advocates are still hopeful the law will stand.
Several other states have also taken steps to rein in PBMs.
- Massachusetts enacted a law in January that requires PBMs to submit detailed rebate and pricing data and obtain a state license.
- Missouri passed a law in March that bans PBMs and insurers from refusing to pay providers for physician-administered drugs and requires fair reimbursement based on contractually-specified rates.
- North Dakota amended a law in March that requires PBMs to receive a license from the state commissioner’s office instead of a certificate of authority.
- Utah enacted a law in March that requires PBMs to offer plan designs that pass manufacturer rebates directly to enrollees and bans spread pricing.
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While states are moving prescription drug pricing reform along, at least one expert still hopes to see federal support.
“We’re seeing plans do their own thing. We’re seeing a lot of disruptive PBMs out in the market. We’re slowly seeing the states taking actions. It would really be great to see the federal government advocating for this as well,” declared Kathy Chang, head of trade relations at Blue Shield of California, a nonprofit health insurance company covering about 6 million Californians.
The California law
The new PBM law in California has several key provisions.
- It bans spread pricing.
- It ensures all rebates being negotiated with the manufacturer are passed on to the patient.
- It requires PBMs to be licensed by the Department of Managed Health Care.
- It prohibits PBMs from steering patients to their own pharmacies and away from non-affiliated pharmacies.
- It requires a pass-through pricing model, in which PBMs can only be paid a clear, flat fee for their services — not a fee that changes based on the list price of drugs or rebates.
“If you break it down in plain and simple English, it really ends the hidden fees and ensures that everybody in the state of California is able to see the fair and true price at the pharmacy counter so they can make informed decisions on what is best for their health, but most importantly, their wallet,” Chang said. “It’s a huge step in reforming PBM practice, and it brings a genuine price transparency to the system that really was not available for quite some time.”
The National Community Pharmacists Association (NCPA) is in favor of several of the provisions. This includes requiring PBMs to be licensed by the Department of Managed Health Care (which brings more state oversight) and preventing PBMs from steering patients to their own pharmacies versus non-affiliated independent pharmacies.
A recent report by the FTC found that the big three PBMs are directing patients to their affiliated pharmacies over independent pharmacies. For example, CVS Caremark may steer patients to a local CVS pharmacy.
NCPA’s director of state government affairs, Joel Kurzman, said California’s law is a “great first start” and will have a “meaningful impact.” However, there is additional reform the organization hopes to see, including requiring PBMs to reimburse pharmacies in the commercial market at the rate of National Average Drug Acquisition Cost plus a professional dispensing fee. This was initially included at some point in the legislative process, but was eventually removed from SB 41.
Unsurprisingly, a lobbying group for PBMs came out against California’s law.
“It is a failure of the Newsom administration to fall for Big Pharma’s ploy to blame their high list prices on others and to undermine the very mechanisms that actually lower prescription drug costs,” the Pharmaceutical Care Management 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 needed
When asked what she hopes Congress and other states take away from California’s new law, Chang pointed to the need for broader drug pricing reform. State and federal policy is necessary to make a difference in this space, but health plans can also take action, she said. In January, Blue Shield of California launched its new pharmacy management model, in which it teamed up with five different companies — Amazon Pharmacy, Cost Plus Drugs, Abarca, Prime Therapeutics and CVS Caremark — for its prescription drug benefit. Previously, CVS Caremark was its sole pharmacy benefit manager.
An executive at a health tech company focused on prescription drugs also argued that national reform is needed.
“We’ll see more states experiment, … but drug pricing crosses state lines — so long-term stability will require federal harmonization. The focus should be consistency, not 50 different definitions of transparency. We also need to move from static regulation to dynamic pricing transparency — using AI-driven platforms that route prescriptions based on cost and coverage in real time,” said Jeff Park, president of Waltz Health.
In the meantime, Congress and other states have something to learn from California’s law, Kurzman said. This law took about two years to come through and went through several iterations.
“I like to think that everyone everywhere can appreciate the resilience that was shown in California. … The message, I think, can be of resilience, that you can get back up and restrategize, rework, keep the conversations going, keep educating, and you can eventually progress,” he said.
Photo: megaflopp, Getty Images