Newsom rejects health regulations for hedge funds and drug brokers – CalMatters

More than two dozen states regulate the pharmaceutical middlemen that advocates and economists say drive up prescription drug prices, but California won't join them. Gov. Gavin Newsom today vetoed legislation that would limit their influence.

The bill, authored by Sen. Scott Wiener, a San Francisco Democrat, would have required the state insurance department to license pharmacy benefit managers. It would also have required pharmacy benefit managers to disclose the prices paid to drug manufacturers and required 100% of any negotiated discounts to be passed on to consumers.

It was one of two bills aimed at cracking down on the health care industry that Newsom vetoed today.

He also rejected a hotly contested measure from Democratic Rep. Jim Wood of Ukiah that would have given the state more power to block the sale of health care companies to for-profit investors such as hedge funds and private equity firms.

In his veto messages, Newsom wrote that his administration was already taking steps to reduce health care costs through other programs and that an existing office was tasked with examining the market impact of health care consolidation.

He wrote that he wanted “more detailed information” about the influence of pharmaceutical benefit managers before signing a new law to regulate them.

“Without a doubt, the public and lawmakers need a clearer understanding of how much (pharmaceutical benefit managers’) practices drive up prescription drug costs,” he wrote.

Pharmacy benefit managers, also known as PBMs, act as intermediaries between insurance companies and drug manufacturers. They process claims and negotiate the price of medication using a complex discount system. They also check the list of medications covered by health insurance companies, also known as the drug list. They are regulated in many other states, including Florida and Texas.

This is the second time Newsom has spoken out against regulating pharmaceutical middlemen. In 2021, he vetoed a bill to prevent pharmacy benefit managers from forcing patients to only visit certain pharmacies, a practice known as “patient steering.” Pharmacy benefit managers say the practice helps keep costs down because they can negotiate better deals with certain pharmacy networks. Research shows that much of the time patients spend in pharmacies also belongs to middlemen.

This law would also have banned “patient steering.”

“PBMs are driving up healthcare costs, destroying neighborhood pharmacies, and preventing Californians from receiving health care at their local pharmacies. “Today’s veto is a major missed opportunity to control prescription drug costs and protect consumers from predatory behavior by PBMs,” Wiener said in a statement about Newsom’s veto.

Consolidation in the prescription drug industry

Pharmacy benefit managers argue that the practices Wiener's bill would have stopped would have actually saved patients and insurance plans money. Their ability to negotiate on behalf of millions of patients gives them greater leverage over drugmakers, and most contracts already include a requirement to pass on most of the rebates, they say.

Over time, three pharmacy benefit managers have dominated the industry through mergers and acquisitions. CVS Caremark, Express Scripts and OptumRx account for more than 80% of the market.

Research increasingly suggests that consolidation is driving up prescription drug prices. The largest player, CVS, grew through a merger with Aetna to include the well-known retail pharmacies, pharmacy benefit management services and health plans.

Their practices have drawn scrutiny from Congress and federal agencies. Earlier this month, the Federal Trade Commission announced a lawsuit against CVS Caremark, Express Scripts and OptumRx for allegedly artificially inflating the cost of insulin, a life-saving drug that approximately 3 million Californians and 37 million Americans rely on to regulate blood sugar.

The complaint alleges that pharmacy benefit managers demand higher rebates from drug manufacturers in order to include insulin in the list of covered drugs available to patients. A percentage of this discount is retained as profit. This strategy prevents lower-cost generic insulins from being included in the insurance plans of most commercially insured patients.

Hedge funds are buying states in California's healthcare system

The other health care bill Newsom vetoed would have imposed California's first regulations on private equity and hedge funds in health care.

Private equity and hedge funds can be a lifeline for a healthcare company teetering on the brink of bankruptcy, providing a cash boost to keep the doors open. They can also help open new facilities or fund research.

But those investments have a downside as shareholders cut services and healthcare organizations go into debt, consumer advocates say. At the national level, there is increasing evidence that private equity acquisitions are also making healthcare more expensive.

The defeated bill would have given the attorney general the authority to review transactions between those investors and healthcare companies such as surgery centers, nursing homes and large medical practices. The attorney general could have imposed conditions on the permit, such as prohibiting the new owners from discontinuing services. Similar rules have applied to nonprofit hospitals for decades.

Between 2005 and 2021, private equity deals in California increased from $1 billion to $20 billion per year, according to a recent policy paper from the California Health Care Foundation.

Corporate interests spent more than $583,000 lobbying against the bill, saying it would stifle investment in health care at a time when many facilities are still struggling to recover from the COVID-19 pandemic and the to recover from economic inflation.

In an unusual move, the Federal Trade Commission submitted a letter in support of the state's legislation. In the letter, Chairwoman Lina M. Khan wrote that the Federal Trade Commission and the U.S. Department of Justice are investigating healthcare mergers and acquisitions driven by private equity that violate antitrust laws. State regulations like California's can be “force multipliers for federal enforcement,” Khan said.

“I am writing to support California’s efforts to more closely monitor health care mergers and acquisitions and stop deals that undermine the availability and affordability of quality health care,” Khan said.

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