California Governor Thwarts Lawmakers’ Effort to Regulate Big Pharma’s Middlemen

Katherine Montgomery lives in Sacramento. For over two decades, she’s worked for the State of California. She also lives with severe diabetes. Right now, she’s gravely concerned for her health: Her dangerously high blood sugar is responsive to only a single medication, and for weeks — despite traveling to a dozen individual Walgreens locations — filling her prescription has been a total impossibility. At each store, the Walgreens pharmacists have sent her away empty-handed, citing shortages of the drug she needs.

Then she decided to try Pucci’s, a small independent pharmacy chain with locations in Sacramento and Los Angeles. Clint Hopkins, the owner of Pucci’s, was able to explain to her why pharmacies weren’t able to fill her prescription.

As for Walgreens’s insistence that shortages are hampering Montgomery’s access to medicine, as Hopkins later related to Truthout by phone, “That is actually a lie. It’s plentifully available. [Pucci’s] uses the exact same distributor. There is no reason they should not be able to get it. They’re just choosing not to, because they also know they’re losing money if they’re filling it. Whether it’s at the store level they know, or the district level, or it’s Walgreens corporate, somebody is blocking the purchase of that drug.”

Montgomery’s situation is only one of many across California, and the nation writ large, in which an individual’s health is in jeopardy as a result of the machinations of a little-known species of health care corporation: pharmacy benefit managers (PBMs).

Ostensibly, as their lobbyists contend, the role of PBMs is to bargain with drug manufacturers for discounts and rebates, then furnish the drugs to insurance plans and pharmacies while passing on the negotiated savings — and taking a cut for themselves. PBMs also determine an insurance plan’s “formulary,” i.e. the medications made available to people on a certain plan. The reality is that PBMs, far from mitigating drug costs, leverage their middleman position to dictate the price and availability of prescription medicines, extracting fees and engineering transactions to their advantage. At the end of the chain, adverse financial and health effects are inflicted on everyday people.

Hopkins went on to describe how PBMs, out of self-interest, will deny or make unaffordable any medications that are unprofitable for them, or just not profitable enough — even if patients’ lives are in the balance. By dictating impossible terms, PBM pressures render pharmacies, independents and chains alike, unable to fill certain prescriptions without taking a considerable loss. For this reason, Montgomery was also unable to update her medication through Pucci’s.

Hopkins, as a small pharmacy owner, is put in an impossible bind: Independent pharmacies can’t survive losing hundreds of dollars each time a prescription is filled. Many pharmacies will refuse to sell certain drugs, while claiming ignorance or furnishing excuses to patients. Hopkins says he tries to be up front about the situation, though it’s not easy.

“Having to have that conversation with patients — they’re just blindsided,” said Hopkins. “Like, ‘I can’t believe that I’m paying a thousand dollars a month for health insurance’.… It just doesn’t make sense to them. People don’t understand it — but they shouldn’t have to! You should be able to use whatever pharmacy you want!”

Weeks of elevated blood sugar put Montgomery in real danger of diabetic coma, stroke or other fatal consequences. Each day of additional delay amplified the terrifying risk. Speaking with Truthout, Montgomery reflected on the difficulties she faced. “My blood sugar is off the charts.… I can’t even express how angry it makes me. I’m flabbergasted. I know that it’s profit over people … but they just keep coming with new ways to do it, and new ways that are just so egregious. You think, ‘How could they possibly get away with this?’ But, they probably will!”

California has long been notable for its comparatively lax regulatory stance towards PBMs — a gap that state lawmakers had planned to address when, in late August, they passed Senate Bill 966. The bill was coauthored by Democratic State Senators Scott Wiener and Aisha Wahab and backed by a coalition of professional associations and patient rights advocates, including the California Pharmacists Association, the National Community Pharmacists Association and Unite for Safe Medications. SB 966 would have instituted the first medical licensing requirements on PBM operations in the state and bolstered transparency and accountability measures. Passed in the State Senate with resounding bipartisan assent, it then went to the desk of Gov. Gavin Newsom — who, just as advocates had feared, vetoed it.

SB 966 would have instituted the first medical licensing requirements on PBM operations in the state and bolstered transparency and accountability measures.

The Office of the Governor released a statement on the veto, in which Newsom said, “Without a doubt, the public and the Legislature need a clearer understanding of how much PBM practices are driving up prescription drug costs.… However, I am not convinced that SB 966’s expansive licensing scheme will achieve such results.… For these reasons, I cannot sign this bill.” Newsom, who was elected after making (long-since broken) promises to spearhead a single-payer system, has turned out to be quite a good friend to the health care lobby; this veto, which major PBMs had hoped and lobbied for, is a bitter result for advocates, but not a surprising one.

Still, PBMs in California and elsewhere are facing an intensifying backlash, with heightened scrutiny of this often opaque industry’s practices fueled by grassroots advocates, various government inquiries, investigative reporting and multiple lawsuits, including one filed on September 20 by the Federal Trade Commission (FTC) against the three largest PBMs for their role in hiking insulin prices. Earlier this year, an FTC inquiry into PBM practices also produced damning findings, which were naturally disputed by industry lackeys.

It’s all too clear that, for Katherine Montgomery and many other patients, the consequences of this crisis, and of the decisions made by PBMs in the interest of profit, include grave threats to health. Advocates had cheered Senate Bill 966 for the considerable progress it represented towards reining in PBM excesses and bringing California up to speed with other states. Its veto by Newsom represents a major setback in those efforts — but nevertheless, their work will continue.

Parasitic Entities

In a recent report for Truthout, Katie Rose Quandt reported on the structural function of PBMs and the pressures they apply to manipulate prescription availability and patients’ pharmacy options. As Quandt summarized, “PBMs claim they keep about 10 percent” of the rebates they negotiate. But they also “rake in other unregulated fees and costs from pharmaceutical companies in exchange for favoring their drugs in the formulary…. PBMs push drug manufacturers to set exorbitant sticker prices, offering spots on the formulary to those with the most profitable rebates.” PBMs insist their efforts save on costs to patients; a wealth of evidence indicates that the opposite is true. In many cases, any savings that they win are largely illusory, gained by marginally reducing the exorbitant prices that they artificially inflated in the first place.

“PBMs often limit patients’ ability to buy cheaper generic drugs, instead prioritizing name-brand drugs on the formulary, in order to maximize their own rebates,” Quandt continued. “They have also been found to routinely charge insurers far above retail price for drugs.” One of the central charges in the recent FTC lawsuit, for instance, is that PBMs have knowingly forced out less expensive insulin products, rigging the formulary and price schemes to favor their own much more expensive and profitable versions. Their control over the formulary, as Quandt notes, even allows them to influence the medications that doctors are able to prescribe to patients, with the result that the most profitable drugs are often prescribed first, even if they’re suboptimal treatments.

These are only a sampling of the manipulations and financial sleights-of-hand that PBMs employ. Because of their position along the pipeline that runs from drug production to insurance coverage and distribution at pharmacies, PBMs are able to manipulate dealings and finances to their extraordinary advantage. By design, they obscure their operations through complex and unaccountable bureaucracies, shielding from public view the fact that, contrary to their claims of lowering prices for consumers, they are instead levying fees, forcing advantageous terms for themselves and raking in profits at every turn, on an enormous scale. The three top PBMs, in fact, handle 80 percent of the nation’s prescriptions.

And not only are the largest PBMs operating as extractive middlemen — they’re also playing out a high-level monopolization strategy. Their domination of pharmaceutical markets also extends upwards, into their owning conglomerates, which are vertically integrated health care juggernauts. Those three major PBM players are CVS Caremark, Express Scripts and OptumRx. All three are owned by sprawling corporate health care titans — CVS Health, Cigna and UnitedHealth Group, respectively — and all three also happen to operate major chain pharmacies. Using their control over drug prices and availability, they systematically steer people away from independent pharmacies and chain competitors and shunt them towards either their own chain locations or their mail-order plans; the latter are often more expensive for patients and insurers, and cheaper for the PBMs.

Not only are the largest PBMs operating as extractive middlemen — they’re also playing out a high-level monopolization strategy.

Owning PBM companies has provided corporate pharmacies with a convenient fulcrum in their gambit to leverage their control over the market and drive their competition out of business. The result is that competitor pharmacies, both independents and any chains that lack their own influential PBM subsidiary, have been shuttering in record numbers across the country. Patients have faced stunning cost hikes, unavailable essential medicines and other barriers to access.

The Californian Exception

PBMs operate on a national scale, but circumstances in California have allowed them to operate with particular impunity. Many other states have mandated some form of licensing and accountability to curb the PBMs’ boundless appetite for profit. Still, regulation at the federal level has also been scant, though lately, in an indicator of the mounting backlash, that’s beginning to change; more than a dozen PBM reform bills were introduced in 2023, over the vehement protestations of the industry’s battalions of lobbyists.

But in California, in part due to the influence of the state’s formidable health care lobby, PBMs have been subject to only limited regulation, skirting key regulatory dictates like medical licensing and disclosure requirements. Only their mail-order pharmacy arms are regulated, in that case, by the California Board of Pharmacy. The veto of SB 966 promises to continue that unenviable state of affairs.

Tracking data compiled by the National Academy for State Health Policy underscores how California stands out. All 50 states have now regulated PBMs in some form, including California. But 29 states go much further to require licensing: Twenty-one forbid the PBM practice of charging pharmacies additional fees late after sale, 23 establish Maximum Allowable Cost list requirements and transparency disclosures, and another 23 prohibit PBMs from favoring their owning conglomerates’ locations over nonaffiliated pharmacies. California has none of those requirements.

A light framework of PBM regulations does exist in California, though it’s far from comprehensive, and much of it is quite recent: California Assembly Bill 315 only banned PBM “gag clauses” beginning January 1, 2019 — before then, PBMs enacted gag policies that actually prohibited pharmacists from even mentioning to patients that cheaper options for prescription payments were available.

In March 2024, the Government Accountability Office (GAO) reviewed PBM regulations across California and four other states. “Officials told [the GAO] their PBM laws do not apply to PBMs serving self-insured plans” — plans in which one’s insuring employer covers health care costs rather than purchasing insurance on their behalf. According to data from the Kaiser Family Foundation, this type of plan covers 64 percent of all insured workers, and 82 percent of insured workers in large companies. In other words, behind the scenes of the insurance plans that cover an enormous percentage of Californians, PBMs have been engineering deals and fee structures to their advantage while remaining subject to an absolute minimum of rules.

This leeway has had demonstrable consequences. For one, the National Community Pharmacists Association (NCPA) found that “Between 2015 and 2019, health insurance premiums increased at a nationwide average of 16.66%. The premium increase in states with licensing authority over PBMs during that period was .3% below the national average, while states without licensing authority saw their premiums increase .4% above the national average.” In other words, reining in PBMs has a remediating effect on statewide costs.

Another result for Californians has been that, as Kristen Hwang reported in CalMatters, within “just five years, [between 2017 and 2022], spending on prescription drugs [in the state] ballooned from $8.7 billion to $12.1 billion, an increase of 39%, according to the most recent state data.” For comparison, nationwide, the increase from 2016 to 2021 was just 18 percent. PBMs are a direct and significant cause of this leap in expenditures. Meanwhile, contrary to the claims of PBM lobbyists, a white paper assembled by the PhRMA Foundation determined that reforming PBMs does not increase patient expenses.

Driving Out the Competition

In addition, the ongoing efforts by the top three PBMs to elbow out competitors have produced waves of pharmacy closures, often delimiting health care access in vulnerable underserved areas. According to an analysis by pharmacist Benjamin Jolley, drawing on a National Council of Prescription Drug Programs (NCPDP) database, a staggering 2,275 pharmacies closed nationwide in 2024 alone. Per the same data, 231 of those closures occurred in California, making it one of the most affected states. Though this is, in part a function of population size, California has still been beset by a wave of closures, to the public detriment.

It’s for these reasons that patients’ rights advocates, professional associations, independent pharmacists and state regulatory officials had so warmly welcomed the arrival and initial passage of Senate Bill 966, hoping to finally begin to stem the multifaceted social harms that PBMs’ long-running excesses have inflicted on the state.

Michelle Rivas is the executive vice president of government relations and corporate affairs at the California Pharmacists Association (CPhA), a major professional organization in the state and a co-sponsor of Senate Bill 966. “Due to the unfair business practices of PBMs, hundreds of pharmacies have closed in California the last couple of years, 300 last year alone and more this year,” she told Truthout by email. “Every time a pharmacy closes, patients lose access to care. In many communities, the only health care provider in the community is their pharmacist. Pharmacies not only dispense medications but help patients manage chronic illnesses and work closely with primary care providers. When those relationships are severed, the patient suffers.”

Rivas also pointed out that the fact that the top three PBMs’ cover 80 percent of prescriptions across the U.S. means that these corporate entities are, on the national scale, making decisions that impact “more than 180 million lives.”

The ongoing efforts by the top three PBMs to elbow out competitors have produced waves of pharmacy closures.

Joel Kurzman is the director of state government affairs at the National Community Pharmacists Association (NCPA), a leading professional association of independent pharmacies. On a call with Truthout, he commented, “We identified that about 22 percent of neighborhoods in California are what we call pharmacy shortage areas. Seventy-five percent are in urban areas. We tend to find that they line up with vulnerable populations. There’s a California-specific impact, in that it’s the most vulnerable residents who are often the losers in this environment where there isn’t adequate PBM oversight, and it puts pharmacies out of business.”

A Stymied Intervention

Senate Bill 966 was designed to seek urgently needed redress on these issues. Its key tenets included the mending of a longstanding failure: Finally, the state insurance department would have required licensing for PBMs, as has been mandated for effectively every other arm of the health care system, and which is already a prerequisite for PBMs in other states. Licensing would allow for oversight, investigatory measures, and other accountability standards to be enforced.

Had the bill not been torpedoed at the final stage, increased transparency would have also been made mandatory: PBMs would have been made to disclose the prices they’ve paid and the discounts they’re negotiating with drug manufacturers. And, crucially, the bill would have required that the full amounts of the discounts negotiated with drug manufacturers translate into actual savings for patients and their insurers — forcing PBMs to actually fulfill the role they purport to play. These stipulations would have had at least some weight behind them; companies would be subject to civil penalties if they didn’t comply.

All of these reforms were desperately needed, as the widespread bipartisan backing of the bill attested. California Insurance Commissioner Ricardo Lara released a statement lauding the bill, commenting that, “For too long, [PBMs] have operated in the shadows, impacting drug prices and patient access with little oversight. SB 966 will bring much-needed transparency and accountability to this critical part of our healthcare system.”

Certain aspects of SB 966 were neutered by amendments — including the removal of a proposed ban on “spread pricing,” in which PBMs charge insurance plans more for a medication than they reimburse to the pharmacy, keeping the difference for themselves.

Michelle Rivas described the removal of spread pricing limitations as “disappointing, and the bill is now silent on how PBMs are compensated.” But, she continued, “Despite these amendments, this is still a very strong piece of legislation.… The opposition that we faced from the PBMs and CVS was intense and well-funded. This is the best bill we could get; we don’t think we could have gotten a stronger bill. [The CPhA is] a nonprofit as are the other sponsors, and we were fighting for this bill with very limited resources.”

Although SB 966 was shot down, there has been a wave of lawsuits targeting PBMs. Some, as Rivas highlighted in her comments to Truthout, are on civil rights and discrimination grounds, include those filed by the AIDS Healthcare Foundation against Express Scripts, and suits against CVS Caremark by a group of HIV-positive individuals in one case, and another by an independent HIV specialist pharmacy in San Francisco. The State of California has also filed suit against all three major PBMs for their exploitation of insulin prices.

SB 966 coauthor Sen. Scott Wiener released a statement commenting on Newsom’s veto of the bill, in which he stated, “This veto is nearly certain to kneecap the Governor’s own CalRx plan to have the state directly manufacture affordable generic insulin. As long as PBMs remain virtually unregulated, and as long as they have an incentive to push expensive name brand drugs, the health plans they control will not cover CalRx’s insulin and most patients won’t access it. Californians will continue to suffer from skyrocketing drug prices, including the 3 million Californians living with diabetes. This veto is a massive fail.”