California Governor Gavin Newsom has joined the growing war on pharmacy benefit managers encouraging competition and accelerating price declines once patents expire. Politicians and lawmakers who oppose PBMs often portray them as predatory middlemen. When in fact, they are a necessary counterweight to the pharmaceutical industry’s pricing power. How SB-41 undermines cost controls SB-41 moves in the opposite direction. By banning spread pricing where a PBM charges a health plan slightly more than it reimburses the pharmacy and limiting vertical integration, the law strips flexibility and negotiating power from the only entities capable of reducing costs through coordination and scale. Spread pricing is a legitimate and essential contractual model. It allows PBMs to cover operating costs, offset market fluctuations and maintain price stability over time. It’s not like PBMs are getting rich from their models. PBMs operate on profit margins as low as 2%. Eliminating spread pricing forces PBMs to operate on even tighter razor-thin margins and reduces their incentive to negotiate aggressive discounts from drugmakers. Restrictions on vertical integration, which prevent the same group from owning both a PBM and a network of pharmacies, also end up hurting consumers. Integration reduces administrative costs, improves logistics and ensures drug delivery in rural areas where small independent pharmacies rarely survive. Without it, the system becomes fragmented and loses the collective bargaining power that helps keep prices under control. The likely result is the opposite of what lawmakers promise: less competition, less access and higher prices. SB-41 is a mistake. It is an intervention that weakens those who negotiate lower prices and empowers those who set them. Other states have already illustrated the risks of this approach. In Arkansas, a law barring PBMs from owning pharmacies was blocked by a federal court after warnings it would lead to store closures and higher plan costs. In Alabama, a new pharmacy reimbursement formula tied to Medicaid benchmarks has drawn warnings that it could raise drug costs for the consumer. These cases demonstrate that political intervention cannot override basic market logic. A better path forward Regulating abusive behavior is legitimate and necessary, but prohibiting or restricting efficient business models is not. Transparency should be achieved through audits and targeted sanctions, not through government interventions that strip flexibility from the market. When the state tries to “fix” a mechanism that already works, it ends up handing more power to manufacturers, the only players who truly determine the initial price of drugs. SB-41 does not solve the cost problem; it will likely make it worse. Instead of strengthening negotiation and competition, it weakens both. PBMs are an example of how a free and competitive market can generate savings and improve access in a difficult sector. If the goal is to make prescription drugs more affordable, California should invest in innovation and let the market work. After all, prices don’t fall when the government legislates. They fall when the market functions. That’s what laws like SB-41 seem to forget. [Kaitlyn Diana edited this piece.].
https://www.fairobserver.com/business/how-californias-crackdown-on-pbms-could-raise-not-lower-drug-costs/
How California’s Crackdown on PBMs Could Raise, Not Lower, Drug Costs
