Newsom Rejects Health Care Rules for Hedge Funds, Drug Dealers – CalMatters

More than two dozen states regulate drug intermediaries that economists say drive up prescription drug prices, but California will not join their ranks. Governor Gavin Newsom today vetoed legislation to limit their influence.

The bill, authored by Sen. Scott Wiener, a Democrat from San Francisco, would require the state insurance department to license pharmacy benefit managers. It would also require pharmacy benefit managers to disclose prices paid to drug manufacturers and require 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 Assemblyman Jim Wood of Ukiah that would have given the state more power to block sales of health care companies to for-profit investors such as hedge funds and private equity firms.

In the veto messages, Newsom wrote that his administration is already taking steps to lower health care costs under other programs and that the existing office has a mandate to review the market effects of health care consolidation.

He wrote that he wanted to get more “detailed information” about the impact of pharmacy benefit managers before signing a new law regulating them.

“There is no doubt that the public and the Legislature need a better understanding of the extent to which (pharmacy benefit manager) practices increase prescription drug costs,” he wrote.

Pharmacy benefit managers, also known as PBMs, serve as intermediaries between insurance companies and drug manufacturers. They process claims and negotiate drug prices using a complex system of discounts. They also control the list of drugs covered by health insurance plans, also known as prescriptions. They are regulated in many other states, including Florida and Texas.

This is the second time Newsom has opposed regulating pharmaceutical intermediaries. In 2021, he vetoed a bill that would prevent pharmacy benefit managers from forcing patients to use only specific pharmacies, a practice known as “patient steering.” Pharmacy benefits managers say the practice helps reduce costs because they can negotiate better deals with some pharmacy chains. Research shows that most of the pharmacies that patients have to use are also owned by intermediaries.

This law would also prohibit “patient steering.”

“PBMs increase health care costs, destroy neighborhood pharmacies, and prevent Californians from receiving health care from local pharmacies. “Today’s veto is a huge missed opportunity to control prescription drug costs and protect consumers from aggressive behavior by PBMs,” Wiener said in a statement on Newsom’s veto.

Consolidation in the prescription drug industry

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

Over time, three pharmacy benefit managers dominated the industry through mergers and acquisitions. CVS Caremark, Express Scripts and OptumRx represent over 80% of the market.

Increasingly, research suggests that consolidation is driving up prescription drug prices. The largest player, CVS, expanded through its merger with Aetna to include well-known retail stores, pharmacy benefit management services and health insurance.

Their practices have drawn attention 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 prices for insulin, a lifesaving drug used by approximately 3 million Californians and 37 million Americans to regulate their blood sugar levels.

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

Hedge funds are buying California’s health care businesses

Another health care bill that Newsom vetoed would have established California’s first regulation of private equity and hedge funds in health care.

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

But consumer advocates say these investments will have downsides if shareholders cut services and put health care organizations in debt. A growing body of evidence nationally shows that private equity acquisitions are also driving up health care costs.

The rejected bill would have given the attorney general the power to review transactions between these investors and health care companies such as surgery centers, nursing homes and large medical offices. The attorney general could impose stipulations on the approval, such as prohibiting new owners from eliminating services. Nonprofit hospitals have been subject to similar rules for decades.

According to the latest policy document of the California Health Care Foundation, in California between 2005 and 2021, the value of private equity transactions increased from $1 billion to $20 billion annually.

Businesses spent more than $583,000 lobbying against the legislation, saying it would reduce health care investment at a time when many facilities are still struggling to recover from the Covid-19 pandemic and economic inflation.

In an unusual move, the Federal Trade Commission sent a letter supporting the state legislation. In her letter, Chairwoman Lina M. Khan wrote that the Federal Trade Commission and the U.S. Department of Justice are investigating private equity-driven mergers and acquisitions in health care that violate antitrust laws. State laws like California’s could “force increased enforcement at the federal level,” Khan said.

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

Supported by the California Health Care Foundation (CHCF), dedicated to ensuring people have access to the care they need, when they need it, at a price they can afford. To learn more, visit www.chcf.org.