California Prohibits PBM Discriminatory Practices Against 340B Program Covered Entities and Contract Pharmacies

December 15, 2023
Health Care Alert

The 340B Drug Program requires pharmaceutical manufacturers participating in the Medicaid program to provide covered outpatient drugs at significantly reduced prices to certain health care organizations and programs, referred to as "Covered Entities" [42 United States Code (USC) §256b]. 

What are Covered Entities?

Covered Entities include:

The savings Covered Entities obtain through purchasing 340B Program outpatient drugs at a discount allow them to utilize the savings to provide a range of programs and services that benefit their patients.

What are Pharmacy Benefit Managers (PBM)?

California law defines a pharmacy benefit manager (PBM) as a person, business, or other entity that, under a contract or an employment relationship with a carrier, health benefit plan sponsor, or other third-party payer, either directly or through an intermediary, manages the prescription drug coverage provided by the carrier, plan sponsor, or other third-party payer, including, but not limited to:

What is a Contract Pharmacy?

Covered Entities may dispense 340B outpatient drugs through on-site or off-site contract pharmacies. A "Contract Pharmacy" is a pharmacy owned by or under contract with a Covered Entity registered with the 340B drug program to dispense covered drugs on behalf of the Covered Entity, whether in person or via mail.

Senate Bill 786

According to the sponsors of SB 786 (Senator Anthony Portantino and the AIDS Healthcare Foundation), PBMs have been increasingly demanding that Covered Entities accept less in payment for pharmacy services than other non-Covered Entity pharmacies.

Effective January 1, 2024, SB 786 (which has been codified at Health and Safety Code §127470) will prohibit PBMs from requiring Covered Entities to comply with any terms or conditions that either discriminate against 340B entities and/or their Contracted Pharmacies in connection with dispensing 340B-priced drugs or that prevent a Covered Entity from retaining the benefit of the 340B program discount pricing for covered drugs.  

PBM Discrimination

SB 786 specifies that prohibited discrimination includes, but is not limited to, all the following:

Scope of Application

SB 786 applies to any entity that meets the California definition of a PBM, including wholly and partially owned and controlled entities of a PBM, and applies to commercial payors and managed care plans that serve Medicare and Medicaid members. The fee-for-service California Medicaid Program ("Medi-Cal") and the fee-for-service federal Medicare Program are exempt from the new law.

Contract Waiver

The new law's provisions may not be waived, voided, or nullified by contract between the PBMs, Covered Entities, or Contract Pharmacies.

Common PBM 340B Discriminatory Practices Likely to be Prohibited by SB 786

SB 786 Enforcement Mechanisms

Health and Safety Code Section 127470 (SB 786) does not include any meaningful enforcement penalties for PBMs or plans that violate nondiscrimination prohibitions.

However, it is presumed that enforcement provisions will be included in future regulations promulgated by the California Department of Health Care Services, which enforces hospital and emergency physician fair pricing provisions codified in the same chapter as the new PBM nondiscrimination law.

PBMs operating in the State of California must register with the California Department of Managed Health Care ("DMHC") as required by California Health & Safety Code Section 1385.005. However, the DMHC is not expected to enforce the prohibition of the SB 786 340B program PBM discriminatory practices.

Hinshaw attorneys have significant experience advising health care organizations on pharmacy law matters. For further information, please contact Michael A. Dowell or your Hinshaw attorney.