California passes laws targeting PBMs and private equity

California Governor Gavin Newsom signed into law a series of bills last week that address some of the hottest topics in health care, including the practices of pharmacy benefit managers and private equity firms.

The legislation is the latest example of state lawmakers taking over health policy, following stalled efforts at the federal level.

Some laws in the package will reduce payers’ prior authorization requirements for commonly approved procedures or strengthen hospital charity care programs – which aims to help patients receive medically necessary care more quickly and at an appropriate cost.

However, the most significant reforms impose stricter safeguards on some of the health care industry’s most controversial players: pharmacy benefit managers and private equity firms.

“Radical reform” of pharmaceutical benefit managers

Senate Bill 41, signed into law Friday, will impose stricter regulations on PBMs operating in the state.

Critics accuse PBMs of driving up prescription drug prices and siphoning business away from small, independent pharmacies. The largest PBMs – CVS’s Caremark, Cigna’s Express Scripts and UnitedHealth’s Optum Rx – jointly control 80% of the U.S. prescription drug market.

Pharmaceutical middlemen negotiate discounts with pharmaceutical manufacturers in exchange for favorable placement on plan formularies and pay pharmacies for dispensing the drugs.

The Federal Trade Commission previously found that larger PBMs paid lower rates to independent pharmacies than their in-house pharmacies and channeled their business to their owned subsidiaries. PBMs have also been accused of pressuring independent pharmacies to accept coercive prices.

“PBM have developed a compensation system that creates perverse incentives to increase drug prices in certain circumstances, and the complete lack of oversight has also allowed some PBM to steer patients to pharmacies they own, pocket a large portion of the discounts they negotiate with drug manufacturers and make misleading statements to customers,” said the bill’s author, state Sen. Scott Wiener, D-San Francisco.

California law will ban tiered pricing, a practice in which PBMs charge insurers a higher price for a drug than they reimburse the pharmacy. It also prohibits PBMs from referring patients to pharmacies they own.

It will also require PBMs to pass all rebates on to the payer, prohibit PBMs from entering into exclusivity agreements with drug manufacturers, and require PBMs operating in the state to be licensed by the California Department of Insurance.

The law comes into force on January 1, 2026.

Other states have attempted to crack down on PBMs. Arkansas passed the most sweeping reform earlier this year by banning PBMs from owning pharmacies. However, the law was rejected by the PBM industry and a judge blocked the law from taking effect in July.

The Pharmaceutical Care Management Association, a PBM lobby, placed blame on drugmakers in a statement released over the weekend.

“The Newsom administration has failed by falling into the trap of Big Pharma’s scheme of blaming others for their high list prices and undermining the very mechanisms that actually reduce prescription drug costs,” PCMA said. “Nothing in SB 41 will reduce drug costs for Californians.”

Second draft law on private equity is signed into law

Newsom also signed Assembly Bill 1415 on Saturday, which will require private equity firms to notify the state’s Office of Health Care Affordability before executing major health care transactions, including mergers and acquisitions.

The new law only allows regulators to review transactions, but does not give them the power to veto transactions. There come days after Newsom signed SB 351, which prohibits private equity firms from interfering in medical decision-making.

Supporters of SB 351, including Sen. Christopher Cabaldon, say private equity investments in health care have “quintupled over the past decade” and that the new regulations are designed to ensure California has modern tools to oversee players, protect patients and guard against rising costs.

“Californians deserve a full picture of the billions spent each year on our health care system by large private equity firms. AB 1415 ensures that our Office of Health Care Affordability has the authority to monitor these transactions and protect patients from rising costs and reduced access to care,” California said. Assembly member Mia Bonta in a statement.