All eyes are on Sacramento this month to see if Governor Gavin Newsom signs or vetoes SB 966, a bipartisan bill designed to clamp down hard on pharmacy benefit managers (PBMs). The California State Assembly and State Senate passed SB 966 in August and the bill was officially enrolled and presented to the governor on September 9. He has 30 days to either sign or veto the bill, which would impact nearly all employers in the state since most of them work with a PBM.
It’s unclear what the governor will do, but a recent ruling in Oklahoma may sway him to veto due to the legislation’s possible conflict with federal law. Dillon Clair, director of state advocacy at the ERISA Industry Committee (ERIC), says SB 966 is the latest in a series of expansive state bills (there are others in Oklahoma, Tennessee, and Florida) that are broadly aimed at curtailing PBM network practices.
Dillon Clair
Where it may conflict with federal law is when state-level regulations on PBMs would impose a new set of rules on self-insured ERISA (Employee Retirement Income Security Act) plans, which were established under federal law and date back to 1974. ERISA prohibits states from stepping in and augmenting or regulating those federally-governed ERISA plans.
The text of SB 966 surrounding ERISA is vague; it does not directly state whether it applies to ERISA plans, but it also doesn’t provide a clear exclusion.
“If these laws apply to ERISA plans, and the PBMs administering those ERISA plans, you would essentially be stripping plan design options from those ERISA plans,” Clair states. “By stripping those options, you’re essentially controlling the design of that plan.” He says that in the ruling PCMA v. Mulready, No. 22-6074 in Oklahoma, a Tenth Circuit judge ruled that the state’s PBM’s law did conflict with ERISA because it applied to the self-insured ERISA plans. They found that Oklahoma’s Patient’s Right to Pharmacy Choice Act (the Act) is preempted by ERISA because it interfered with plan administration and prevented ERISA plans from structuring their pharmacy networks in certain ways.
Put simply, large employers are concerned that if Newsom does not veto the bill, and California therefore makes this bill hard law, it could result in lawsuits, which businesses of all sizes would need to fund with higher taxes.
Julian Cañete, President and CEO of the California Hispanic Chambers of Commerce
Smaller businesses fear that in addition to higher taxes, new legislation will mean higher healthcare premiums and a much higher cost of retaining the best employees. Julian Cañete, President and CEO of the California Hispanic Chambers of Commerce, is working to mobilize over 80 Hispanic chambers and similar organizations to send letters and use social media to voice their objections. “I hope that the governor will do what is right for small business,” he says. “I think he’s worked hard to grow small business and business in general in California with the investments he made.”
Cañete says that the state’s Department of Finance has advised Newson that the bill would be too costly, not just in implementing the law, but also in possibly defending it in court. SB 966 is expected to cost upwards of $1 billion in excess drug spending over the next year alone and $13 billion over the next 10 years.
Small businesses and labor unions, Cañete says, are doing everything they can to bring healthcare costs down, so they worry that new legislation is going to drive costs even higher. “The concern is that employers are going to say, ‘Hey, I’m just going to stop covering people because the costs are too prohibitive.’”
“California has a huge deficit that we’re trying to recover from,” Cañete says. “The last thing we need to be doing is spending millions upon millions of dollars to defend a law that will most likely be negated and raise healthcare costs for all Californians.”
“This is about keeping businesses competitive and keeping those healthcare costs down. If you take the PBMs out of the market, these local pharmacies will be at the whim of Big Pharma. When we see our healthcare premiums going up, by say 5 or 10%, it becomes costly. We want to continue to insure our employees but how do we do that? We’re doing a lot to reduce those costs, but we do not need regulations or unfriendly laws that raise those costs, not just by a few dollars, but billions of dollars overall.”
He says that elaborate bills like SB 966 often succeed because they are presented as bills to boost competition, in this case between smaller pharmacies and large, network pharmacies.
“I think it’s Big Pharma just really trying to control the costs over patients’ medications,’” Cañete says. “PBMs work to get drug costs down and pass the savings down to the end user, but none of the policies in SB 966 will lower any drug costs; only the drug companies can lower those prices. The PBM is the middle man trying to bring the cost down.” Of note, several trade associations representing drugmakers are backing the bill.
Clair says the larger companies he represents have a similar concern. “All of our large employers deal with PBMs at some point,” he says. “And there are definitely PBM practices that our members have issues with and the general system has issues with.” Some of those were initially addressed in SB 966 but were removed in the conference phase. “All that’s left are restrictions on mail-order pharmacies and restrictions on network expansion.”
If the bill is signed, employers, business organizations, and watchdogs will wait to see how regulators will enforce it and whether it will be applied to ERISA plans, which is not clear in the bill’s text. “As goes California – sometimes goes the nation,” Clair muses. “This is sure to be a big battleground for the PBM – ERISA preemption issue.”
Clair penned a letter to the governor in mid-September asking him to veto SB 996, as have numerous employers. The Hispanic Chamber says they are partnering with other ethnic chambers to voice their united opposition as well. When it comes to healthcare costs, employers all of sizes hope that Newsom vetoes the bill. “The impact on the state and society in general is going to be enormous,” Cañete says. “I’d rather he help California grow its economy and focus on making the state more business-friendly from a regulatory standpoint.”
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