Reform Refill: Has Scott Wiener Convinced Gov. Newsom to Rein in Prescription Middlemen?

Ten months ago, California Gov. Gavin Newsom vetoed a bill that would have forced prescription drug middlemen to be licensed and regulated through a state agency. Now, Newsom appears to be working in concert with the legislator who wrote that bill to do just that — and push back on a business that critics say is significantly responsible for the state’s soaring drug costs.

What happens next, through both a Newsom budget measure and a legislative bill proposed by state Sen. Scott Wiener (D-San Francisco), will determine whether California finally gets into gear and joins more than two dozen other states in licensing pharmacy benefit managers, known broadly as PBMs.
 

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Newsom’s budget includes a provision for PBMs to be licensed through the state — something Wiener has been trying to get done for two years and had included in this legislative session’s bill. With that aspect of the problem now covered by the governor’s plan, Wiener’s proposal, Senate Bill 41, slaps other important guardrails on the industry that could drive down drug prices for Californians.

It can’t happen too soon. For years, the cost of prescription drugs has been running away from individuals and health plans alike. Between 2017 and 2023, health plan spending on drug costs in California skyrocketed by 56% to $13.6 billion, according to the state’s Department of Managed Health Care.

A major culprit: pharmacy benefit managers, who are part of the great food chain of profit made off of drug sales. The PBMs buy prescription drugs from manufacturers and wholesalers, and sell them to pharmacies and health plans, often setting the price in the process. But it’s nowhere near that simple.

These middle operators charge fees for the service and often withhold for themselves the rebates that pharmaceutical companies offer for certain drugs, sometimes pushing more expensive brands in order to get them. And they’ve become powerfully consolidated, with just three industry giants — CVS, UnitedHealthcare and Cigna — controlling about 80% of all prescription claims. They’ve leveraged that power by favoring their own pharmacies — often the mail-order variety — over local drugstores, and squeezing the latter via blisteringly low reimbursement rates.

“PBMs’ negative impacts on prescription drug affordability and competition are widespread and well documented,” declared a state budget request earlier this year. “California is already behind other states in collecting and analyzing information about PBMs’ role in the prescription drug marketplace.”

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Into this breach came a 2024 legislative bill by Wiener, who has made health policy a cornerstone of his years in office. Senate Bill 966 would have required the pharmacy benefit managers to be licensed by the California Department of Insurance, disclose the prices they paid to drug manufacturers and pass on to consumers the rebates or discounts they received from the drug companies. The measure sailed through the state Legislature with near unanimous bipartisan support.

When it hit Newsom’s desk, though, the ride ended. The governor rejected the law, writing that he was not persuaded the bill’s “expansive licensing scheme” would achieve the objective of holding pharmacy benefit managers accountable. It was the second time in four years that Newsom declined to approve legislative guidelines on PBMs. In vetoing Wiener’s bill, Newsom said that the state needed more “granular information” to understand how all parts of the drug industry, not just PBMs, were driving rapidly rising drug costs.

“Obviously, we disagreed with the veto, and we decided to take another run at it and make the case to the governor,” Wiener told Capital & Main this week. “And the good news is that the governor came to us with the proposal to take the licensing piece that was in the bill and put that in the budget.” The senator said that by doing so, Newsom was ensuring that the licensing program could be put in place more quickly than via state legislation.

The reason for Newsom’s change of heart isn’t clear. His PBM licensing plan is precisely what Wiener’s bill last year would have created, albeit under a different department. When asked by Capital & Main if Newsom had received the drug pricing information that he said last fall he needed, the governor’s office did not respond.

UnitedHealthcare has made several contributions to Newsom’s campaigns in past years. Newsom’s PBM budget plan, though, imposes a fiduciary duty on PBMs in California, meaning they’d have to act in the interests of consumers and health plans in order to operate legally in the state.

“The Governor’s revised budget led efforts to license and regulate PBMs for the first time, increasing transparency and accountability in the pharmacy supply chain,” said Elana Ross, a spokesperson for Newsom.

Licensing the benefit managers is important, Wiener said, “but it’s not enough.” His new bill goes several steps further. It prohibits the practice of “steering,” by which PBMs direct patients to pharmacies they own and drugs from which they may profit the most, and it bans spread pricing, through which PBMs charge a health plan more for a drug than they pay the pharmacy. Like last year’s measure, it forces the managers to pass along to consumers any rebates or discounts they receive.

“The two main harms that PBMs are causing are inflating prescription drug prices and destroying neighborhood pharmacies,” Wiener said. “The bill focuses on banning [those] abusive practices.”

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The industry itself applauds Newsom’s move toward licensure, but opposes Wiener’s more specific constraints on the PBMs’ lucrative way of doing business.

“We agree with Gov. Newsom’s [budget item]. Unfortunately, all SB 41 does is help Big Pharma keep prices high,” said Greg Lopes, a spokesman for the Pharmaceutical Care Management Association, a powerful national lobbying group. “The bill would not lower prices for patients. Instead, it would take away tools that employers use to manage the costs for the prescription drug benefits they provide employees.”

Lopes also reiterated a long-held contention by PBMs that high drug prices are set by the pharmaceutical companies themselves. “We urge the governor and Legislature to expand transparency and reporting to the entire drug supply chain,” he said. “At the end of the day, Big Pharma sets the price — and everything starts with that.”

A report earlier this year by the Federal Trade Commission, though, found that PBMs impose markups of “hundreds and thousands of percent” on specialty generic drugs dispensed at their own pharmacies, that the problem is growing at an alarming rate, and that there is “an urgent need for policymakers to address it.”

Wiener acknowledged that last year’s bill received fierce pushback from Lopes’ group, as well as from the California Chamber of Commerce. In fact, some key provisions of that bill were deleted en route to its final passage, including a prohibition on spread pricing.

This summer will be no different in terms of opposition. “It’s not surprising that when you’re trying to regulate an industry that used to be almost totally unregulated, the industry is going to fight you,” Wiener said. Between his bill and Newsom’s budget, though, there’s a real chance for the state to place some checks on the power of pharmacy benefit managers to drive up drug prices on Californians.

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