The Americans pay more for prescription drugs than almost anyone else in the world, and finding ways to lower those prices is a worthy and urgent goal, but California’s Senate Bill 41 (SB 41) risks doing the opposite. Rather than taking on the real source of high costs—the power of drug manufacturers to set prices with little competition—it would weaken one of the few groups holding prices down: Pharmacy Benefit Managers, or PBMs.
PBMs are often misunderstood for their role in drug pricing. They negotiate prices with pharmaceutical companies on behalf of large employers, health plans, and government programs. They also help decide which drugs are covered by insurance, steering patients toward more affordable medications. These negotiations yield significant savings to patients in the form of lower health insurance costs.
SB 41 would take away the tools that allow PBMs to drive those savings. The bill would ban exclusive contracts between PBMs and drug manufacturers, which PBMs use to negotiate lower prices by promising manufacturers more volume in return. Another provision would prevent PBMs from being paid based on the amount of money they save payers. Banning commissions removes the industry’s economic incentive to resist high drug prices: Without this, employers and insurers would return to older models where fees are paid regardless of results, leading to higher costs for consumers.
The problems with SB 41 go even deeper. By creating a new licensing and regulatory structure under the California Department of Insurance, the bill adds more bureaucracy on top of the existing system. The added administrative costs would likely be passed down to consumers as well in the form of higher premiums, making healthcare less affordable.
Removing the very tools PBMs use to take on drug manufacturers would do little to address the root cause of high drug prices, which is the lack of competitive pressure on pharmaceutical companies that enables them to set and maintain high prices. By removing the only real counterbalance to that power, SB 41 will exacerbate the high price of pharmaceutical drugs.
To understand the underlying interests behind SB 41 it helps to look at its primary advocates, one of which is the Pharmaceutical Research and Manufacturers of America (PhRMA). The drug manufacturers’ lobby group understandably wants to weaken a force that pressures them to lower prices on their products. Pharmacists are also supporting the bill, in part because it would increase reimbursement rates for dispensing prescriptions. SB 41 might benefit the business models of Big Pharma and pharmacists, but it does not serve Californians.
My research has shown that PBMs are effective at reducing drug prices. A 2021 paper that I co-authored with Anthony Lo Sasso examined how the states of Illinois and Michigan managed the purchase of expensive Hepatitis C drugs through their Medicaid programs. Illinois used PBMs, while Michigan did not. When low-cost generic versions of these drugs became available in 2019, Illinois, with its PBMs, quickly made the switch while Michigan continued to pay for the expensive brand-name drugs. As a result, Illinois paid just over $8,000 per prescription, while Michigan continued to pay more than $20,000 per prescription. If Michigan had matched Illinois for just the final six months of 2019, it could have saved nearly $36 million.
The State of California understands the benefits of PBMs. Like every single state employee program, the California Public Employees' Retirement System (CalPERS), which provides health coverage to over 1.5 million public workers, contracts with a PBM to manage its prescription benefits. This arrangement helps control drug costs while maintaining access to needed medications. CalPERS is not compelled to use PBMs: Its managers choose to do so because it saves the state and its participants money.
California lawmakers are right to focus on reducing prescription costs. But they should be wary of a bill that claims to protect consumers while making it harder to challenge drugmakers on their prices. Californians deserve solutions that hold drugmakers accountable, not more bureaucracy that passes higher medication costs on to patients.
Ike Brannon is a senior fellow at the Jack Kemp Foundation.
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