Gavin Newsom says these middlemen drive up drug prices. He’s got a new plan to fix it

Gov. Gavin Newsom announced that he will seek to regulate prescription drug managers that he blames for driving up costs for patients, less than a year after he vetoed similar oversight of these companies.

The plan — part of a revised state budget proposal that Newsom will unveil in full on Wednesday — calls for licensing pharmacy benefit managers through California's Department of Managed Health Care and requiring them to report their operational and financial details.

"Prescription drug prices are out of control and we're shining a light on hidden costs," Newsom said in a statement.

California has long sought to more closely monitor pharmacy benefit managers, which serve as intermediaries between insurance companies and pharmaceutical drug manufacturers, controlling the list of drugs covered by health insurance plans, negotiating their prices and processing claims. Critics say these companies needlessly raise costs by tacking on fees and withholding manufacturer discounts as profit. They can also restrict access for patients to some higher priced name-brand drugs.

But legislative efforts to rein them in have repeatedly withered in the face of the powerful industry lobby, which contends that more stringent regulations would drive up health insurance premiums by billions of dollars annually.

Bill Head, assistant vice president for the Pharmaceutical Care Management Association, the industry group that represents pharmacy benefit managers, said the organization supports Newsom's goal to lower prescription drug prices, but blamed pharmaceutical manufacturers for rising costs.

"Drug companies alone set and raise drug prices, and the price is the problem. We look forward to working with the Administration to ensure transparency across the drug supply chain and to ensure consumers benefit," Head's statement said.

According to the association, its members are projected to save Californians $108 billion over the next 10 years in drug costs.

Last year, a measure made it all the way to Newsom's desk that would have required pharmacy benefit managers to get licensed through the state insurance department, disclose the prices they pay and the discounts they negotiate with drug manufacturers, and then pass on 100% of those discounts to insurance plans.

Newsom vetoed it in September, writing in a message that he was not convinced that the bill's "expansive licensing scheme" would achieve the desired result of bringing down prescription drug prices.

"We need more granular information to fully understand the cost drivers in the prescription drug market and the role that (pharmacy benefit managers) play in pricing," the governor said at the time.

The governor's office would not explain why Newsom's perspective on regulations had shifted in the eight months since, only saying that they "will continue to collaborate with legislative leaders."

His proposal, according to a summary provided by his office, would allow the state to review pharmacy benefit managers' contracts, perform financial audits and issue penalties, and require the companies to report detailed drug pricing data to California's Department of Health Care Access and Information.

Newsom's proposal also would require benefit managers to act in the best interest of health plans and clients, something known as fiduciary duty.

Geoffrey Joyce, director of health policy at the USC Schaeffer Center and an expert on drug pricing, said health economists have argued for years that establishing a fiduciary duty for pharmacy benefit managers would solve many of the perceived problems caused by the business model.

"If they have to act as a fiduciary by law, that changes everything," Joyce said. "Right now, the incentives are to make money for the (pharmacy benefit manager)…but if they have to act in the best interest of the clients they would be legally liable for the things that they do."

Pharmacy benefit managers have come under fire in Congress for engaging in opaque business tactics that artificially drive up the cost of some drugs. The Federal Trade Commission, which was investigating their practices last year, published a report stating that pharmacy benefit managers actively tried to avoid regulation by moving portions of their business overseas.

Consolidation has also led to practices like patient steering, Joyce said. Three pharmacy benefit managers dominate the industry: CVS Caremark, Express Scripts and OptumRx represent more than 80% of the market.

Drug spending has risen 56% since 2017

Pressure has been growing on politicians nationally in recent years to take action on drug prices, which are one of the primary drivers of increased medical costs. In just one year, between 2022 and 2023, drug spending in the U.S. increased 13.6%, according to a study on national pharmaceutical trends. Other studies indicate that Americans pay nearly three times as much as people in other countries for the same drugs.

In California, prescription drug spending has increased 56% since the state first began tracking data in 2017. Spending between 2017 and 2023, the most recent year data is available, jumped by nearly $9 billion, according to a state report on drug costs.

President Donald Trump this week also signed an executive order demanding that manufacturers lower the price of prescription drugs in the next 30 days or face new limits on what the federal government will pay, though it's unclear how it would work.

Sen. Scott Wiener, a San Francisco Democrat, authored the vetoed measure last year and has continued to push forward bills aiming to bring down drug costs. Wiener said in a statement today that Newsom's announcement is a "solid step" toward improving prescription drug affordability but that more needs to be done.

Wiener reintroduced the bill from last year as Senate Bill 41, which outlines clear prohibitions for pharmacy benefit managers, including forbidding them from requiring patients to fill prescriptions at specific pharmacies. That bill is moving through the Legislature and passed its first committee last month.

Pharmacy benefit mangers "should not pocket rebates they negotiate on behalf of consumers, they shouldn't steer patients toward more expensive drugs and their affiliated pharmacies in pursuit of profit, and they should compensate pharmacies and doctors fairly," Wiener said in a statement.

Newsom's announcement also included an effort to expand the role of CalRx, a $100-million state effort to procure and manufacture certain highly used drugs like insulin and naloxone, the opioid reversal medication.

Currently, CalRx is tasked with securing lower prices for generic drugs, but the new proposal would allow the state to pursue cost savings on name-brand drugs. This would give California more flexibility to respond to supply chain issues or "politically motivated" federal restrictions placed on drugs like mifepristone, the abortion pill, according to a statement from Newsom's office.

In 2023, Newsom ordered state agencies to stockpile 250,000 abortion pills after a federal court ruling in Texas temporarily overturned FDA approval of the drug. That stockpile was depleted in 2024, but the fate of the pill's usage remains in question as conservative groups continue to pursue legal action to block its use.