California governor vetoes PBM bill and private equity deal review bill

California Gov. Gavin Newsom has signed a bill that will regulate use of artificial intelligence systems in health care utilization review programs.

He vetoed a tough, broad pharmacy benefit manager bill and a bill that would give given the state attorney general more authority to review and block health care deals involving private equity firms.

California is the most populous state in the country, and Newsom is a Democratic governor in a state where Democrats have majorities in both the state Assembly and the state Senate.

His moves on health benefits bills could provide hints of what health policy might look like if Kamala Harris became president and Democrats were able to get health benefits legislation through Congress.

AI bill: The big health bill Newsom signed affects state-regulated health plans and disability insurers that use artificial intelligence systems and similar types of software tools in care utilization review and utilization management programs.

The new law requires the plans and insurers to meet state fairness and personalization standards.

The new law prohibits plans or insurers from letting an AI system or other software system make decisions about whether care is medically necessary. The law requires that any decisions about medical necessity be made by a licensed physician or another licensed health care professional.

Although Newsom signed the AI utilization management bill, he vetoed a separate, better-known AI bill. That bill dealt with general AI safety regulation.

Newsom argued in the veto message for the general AI regulation bill that the requirements might have been appropriate for AI systems dealing with sensitive data and important issues but would have been too tough on ordinary AI systems dealing with routine matters.

PBM bill: Governors in several other states, including Alaska and Pennsylvania, have signed PBM bills.

Related: Pennsylvania governor signs pharmacy benefit manager bill

Newsom vetoed his state’s PBM bill, which would have required the California Department of Insurance to set up a PBM regulation program.

The bill also would have required PBMs and health plans to provide more data on their activities.

PBMs argue that they are succeeding at holding down what patients and plans pay for prescription drugs and that their critics are angry about their impact on drugmakers’ and pharmacies’ revenue.

Critics contend that the PBMs drive up drugs’ full list prices, hurt independent pharmacies, increase out-of-pocket spending for sick patients and do little to reduce employer health plan sponsors’ net spending on pharmacy benefits.

California set up an Office of Health Care Affordability to address health care affordability issues in 2022, Newsom noted.

“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,” Newsom said in a veto message. “However, I am not convinced that SB 966′s expansive licensing scheme will achieve such results.”

Newsom said he’ll move forward by having the California Health and Human Services Agency come up with a strategy for getting more detailed information about prescription cost drivers and PBMs’ role in prescription pricing.

“California should collect comprehensive information from the pharmacy delivery system about the total cost of care for providing individual prescription drug products, including but not limited to wholesale acquisition costs, fees , payments, discounts, and rebates paid to and received by PBMs,” Newsom said.

Private equity in health care: Private equity firms give financial institutions and wealthy, sophisticated individuals and families a chance to invest in stocks and bonds that are not registered with the U.S. Securities and Exchange Commission for sale to the public.

The firms contend that they can be more patient than companies that sell stock to the public and that studies have shown that hospitals, group health practices and other companies owned by private equity firms are no different from other health care organizations.

Critics say the private equity-owned firms tend to extract too much cash from acquired firms and skimp on quality.

California’s private equity bill would have given the California attorney general the authority to slow or reject health care deals involving private equity firms and provider groups.

The final version of the bill would have affected deals involving most types of health care facilities and provider groups, but it was amended to exclude hospitals and dermatology medical groups.

California Attorney General Rob Bonta sponsored the bill.

Newsom noted that the California Office of Health Care Affordability can already review health care deals and work with the attorney general’s office to take action.

“This bill would exempt transaction involving [private equity groups] or hedge funds that would be subject to review by the [attorney general] from OHCA’s existing review,” Newsom said in a veto message.

Letting the Office of Health Care Affordability review deals would be more appropriate than having the attorney general oversee consolidation issues, because the affordability office is already doing much of the work involved with analyzing consolidation issues, Newsom said.