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California Senate passes drug pricing transparency, could slash health costs

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(The Center Square) – The California Senate passed a bill that could significantly reduce drug prices and potentially even health insurance for insured Californians by requiring greater drug pricing transparency from insurers, drug manufacturers, and pharmacy benefit managers.

Market-focused economists argue these groups engage in monopolistic practices that limit consumer information and choice while increasing prices for health insurance and drugs.

Pharmacy benefit managers, companies typically owned by insurance companies that manage what drugs are covered by insurance and how, get paid rebates from drug manufacturers that effectively operate as discounts off a drug’s list price. PBMs then charge insurance companies more for the drugs than they pay to pharmacies, a practice known as spread pricing.

If PBMs pass on rebates to insurers, they collect an administrative fee that captures much of the rebate; patients do not receive a portion of the rebates. Insurers base what patients pay in co-insurance or other forms of payment on the drug list price — which excludes the rebate — thus resulting in a relatively higher payment for the patient than if the price was based on what the insurer paid the PBM. Patients pay for PBM profits through higher health insurance premiums.

SB 866, by State Sen. Scott Wiener, D-San Francisco, bans spread pricing, mandates that insurance companies base co-insurance paid by patients be based on what the insurance company paid the PBM for the drug, not the drug’s list price, and requires PBMs to publish information on the rebates they receive from drug manufacturers. The bill does not require PBMs to pass on rebates to insurers or patients.

“Prohibiting spread pricing and the requirement to pass through all discounts will be particularly useful. Ideally, the legislation would have passed all discounts through to the patients rather than payers,” said Pacific Research Institute Senior Fellow for Business and Economics Wayne Winegarden to The Center Square. “Overall, while not a panacea, the legislation will have a positive impact on drug pricing.”

PBMs, meanwhile, argue their businesses create cost efficiencies for consumers.

“The current performance-based model incentivizes PBMs based on rebates and discounts, leading to lower prices for consumers,” wrote the Pharmaceutical Care Management Association in opposition to the bill. “By removing the existing incentive structure, this bill would likely lead to health plans paying significantly more to manufacturers and pharmacies due to the loss of rebates and discounts, causing a significant increase in health insurance premiums that are passed onto patients.”

Absent from this argument is the fact that most health plans own their PBMs and have their beneficiaries pay for PBM profits through insurance premiums.

“In addition to owning pharmacies, in many cases, health plans and PBMs are now one in the same,” wrote bill co-sponsor California Pharmacist Association in support. “While there may be some efficiencies, vertical integration can create conflicts of interest that prioritize the financial interests of the integrated company over patient care.”

Health care plans in California paid $12.1 billion for prescription drugs in 2022, the most recent year for which data is available. 2022 spending was up 12.3% from the prior year and 39% from 2017. Prescription drugs accounted for 14.2% of total health plan premiums in 2022, an increase from 13.3% in 2021, while manufacturer drug rebates to PBMs rose to $2.1 billion, equivalent to about 17.1% of drug spending.