Death of a PBM Reform Bill: Why Big Employers Helped Scuttle California’s SB 966

At the end of September, California Gov. Gavin Newsom (D) vetoed a bill that would have subjected PBMs to a variety of new requirements and restrictions, saying he wasn’t convinced that it would achieve its goal of making prescription drugs more affordable.  

But what was a major defeat for supporters of SB 966 was a “huge win” for the ERISA Industry Committee (ERIC), which lobbied against California’s PBM-regulating bill even though it also vocally backs PBM reform on the federal level. In fact, ERIC and other like-minded groups representing large employers have long been siding with big PBMs’ main trade group in a pair of legal battles against PBM-targeting laws in Arkansas and Oklahoma. 

“What we’re seeing play out in these state debates over PBMs is large employers’ general interest in being subject to a single set of national regulations,” says Matthew Fiedler, senior fellow at the USC Schaeffer Initiative on Health Policy. The Employee Retirement Income Security Act (ERISA) makes such uniform regulations possible for companies that self-fund their health plans — or assume risk for employees’ health care costs — as ERISA generally preempts state laws that interfere with how self-funded plans are administered.  

According to KFF, about 65% of covered U.S. workers were enrolled in self-funded employer health plans as of 2023, making those plans the largest source of coverage in the country. 

It is because of ERISA that organizations like ERIC find themselves in the seemingly contradictory position of supporting federal-level PBM reforms but opposing many of those same reforms at the state level. But according to Dillon Clair, ERIC’s director of state advocacy, there are some recent signs that state backers of PBM-regulating bills and large employers are finding a way to meet in the middle. 

Clair says that thanks in part to ERIC’s lobbying efforts, PBM-regulating bills in Washington and Pennsylvania have included language that explicitly exempts ERISA plans. “We think that’s a huge step in the right direction following Oklahoma, Tennessee, Florida, Kentucky, New York — these other states that didn’t include that language,” he tells AIS Health, a division of MMIT.  

California’s SB 966 did not include language excluding ERISA-regulated plans, but it also didn’t state outright that such plans are in fact subject to the PBM reforms it sought to implement, Clair adds. That “gray area” likely would have made it difficult to challenge SB 966 in court on ERISA-preemption grounds, Clair says, making it even more important for ERIC to ensure the bill didn’t become law.  

In fact, he says, states like Texas and Minnesota in recent months have started exploring whether ERISA plans should be subject to PBM- and health plan-regulating laws that are already in place. 

“We’re starting to see a lot of other states that have shards of these larger state PBM bills already on the books for years and are now starting to say, ‘Hey, instead of passing some large new PBM bill, how about we start putting the screws to employer plans through enforcement?’” he says. “That’s starting to be an emerging second front, if you will,” for ERIC in its fight to uphold ERISA preemption.  

ERIC counts approximately 100 national corporations among its members, including household names like Amazon.com, Inc., Walmart Stores, Inc, Comcast NBC Universal and Delta Air Lines, Inc.  

California Bill Would Require PBM Licensure 

Echoing provisions in other state laws aimed at reining in PBMs, California’s SB 966 would have required PBMs to apply for a license by 2027. Licensed PBMs also would have had to pass through to health plans 100% of rebates negotiated with drug manufacturers and be transparent about the fees they charge. And in a bid to address concerns raised by independent pharmacies, the bill would have prohibited PBMs from steering patients to their affiliated pharmacies and reimbursing independent pharmacies at lower rates than large chain pharmacies receive. 

To the California Pharmacists Association, which sponsored the bill, SB 966 was the culmination of a multiyear effort to get the California legislature to pass some form of PBM reform. That effort has faced numerous setbacks, including Newsom’s veto of a bill in 2021 that would have prevented PBMs or other entities from steering patients to their affiliated pharmacies, says Michelle Rivas, executive vice president of government relations and corporate affairs at the association. 

Drawing from that experience, SB 966 was “vetted in practically every possible way a bill could be vetted,” Susan Bonilla, CEO of the California Pharmacists Association, tells AIS Health. Additionally, Rivas notes that the bill was amended significantly during the last week of the legislative session to address concerns raised by stakeholders — including striking a ban on spread pricing, the practice in which PBMs charge payers more than what they pay pharmacies for prescription drugs.  

Still, Newsom vetoed the bill on Sept. 28 after it had passed the California Assembly and Senate. In his veto message, the governor wrote that “I believe that PBMs must be held accountable to ensure that prescription drugs remain accessible throughout pharmacies across California and available at the lowest price possible. However, I am not convinced that SB 966's expansive licensing scheme will achieve such results.”  

Instead, Newsom said he is directing the California Health and Human Services Agency to “propose a legislative approach to gather much needed data on PBMs next year.”  

Bonilla, however, says her organization supplied officials with rafts of data on the harms caused by PBMs — including the fact that over 400 pharmacies in the state have now closed amid struggles with low reimbursement. Given that reality, “we can’t just stop working on this issue,” she says. “We’ll be meeting with the administration to find out what the governor needs in order to support the legislation.”  

State Sen. Scott Wiener, a Democrat and the bill’s sponsor, called Newsom’s veto a “massive fail” and lamented the fact that California remains one of the few states not to pass a PBM reform measure.  

“This veto is nearly certain to kneecap the Governor’s own CalRx plan to have the state directly manufacture affordable generic insulin,” Wiener said in a statement. “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.” 

Indeed, the state’s CalRx initiative — which Newsom unveiled in March 2023 — will not launch this year after facing unanticipated delays, it has been reported. In the meantime, the Federal Trade Commission has filed an administrative complaint against the country’s three largest PBMs, accusing them of artificially inflating insulin prices.  

Supreme Court Has Stepped In 

To ERIC, Newsom’s veto of SB 966 was “definitely a huge win,” Clair says. “As goes California, so goes the country,” he adds, so it was important for the organization to prevent SB 966 from setting a precedent.  

Still, ERIC has vocally supported PBM reform at the federal level — most recently penning an issue brief that details how unregulated PBMs can “increase their own profitability at the expense of employer-sponsored health plans,” and which “calls on Congress to clarify that ERISA’s fiduciary duty standard to employer health benefit plans applies in full to PBMs performing services on behalf of the plan.”  

Fiedler tells AIS Health that he understands why self-insured companies oppose most state-level PBM regulations but push for change at the federal level. “If you’re a large national employer, the fact that ERISA allows you basically to only worry about federal law with respect to your health plan simplifies things considerably,” he says. He points out that PBM reform is not the only area in which self-insured employers have drawn a line in the sand on ERISA preemption, as they backed a successful Supreme Court challenge of a law mandating an all-payer claims database in Vermont. 

ERIC also has sided with the Pharmaceutical Care Management Association in two cases where the trade group challenged states’ PBM laws: PCMA v. Rutledge and PCMA v. Mulready. In Rutledge, the Supreme Court ruled in 2020 that ERISA did not preempt Arkansas’ PBM regulations, but in Mulready, the Tenth Circuit Court of Appeals ruled that key provisions of Oklahoma’s law setting strict access standards for pharmacy networks were preempted by ERISA. Given those dueling decisions, pharmacy groups and a group of state attorneys general have asked the Supreme Court to once again weigh in. 

The Supreme Court on Oct. 7 invited the Solicitor General to “file a brief in this case expressing the views of the United States” regarding PCMA v. Mulready, but the justices have not decided yet whether they will review the case.  

This story originally appeared in AIS Health's premium publication Radar on Drug Benefits.