At a time of worrisome increases in drug prices, Minnesota is joining a growing number of states that regulate a set of powerful but little-known companies that critics say are contributing to the problem.

Known as pharmacy benefit managers, or PBMs, these companies are hired by health insurers to manage their drug benefits, and they influence what drugs are available, where consumers can buy them, and ultimately the price consumers pay at the drugstore counter.

Most crucially, PBMs are the middlemen that negotiate the prices that health plans pay drug manufacturers — deals that often involve rebates or administrative fees. But consumers, regulators and even some health plans don't know how much the PBM keeps for itself.

"How much money are they profiting off these decisions and where is it going?" asked Rep. Alice Mann, DFL-Lake­ville, a physician and a sponsor of Minnesota's bill. "It opens the books of the PBM dealings, and we will know what the rebates are."

The new law won't regulate the size of rebates directly, but it will require PBMs to disclose rebates and other financial arrangements to the Minnesota Commerce Department and health plans. It also contains some provisions that protect pharmacies — especially independents that don't have bargaining leverage — and bans "gag clauses" that forbid pharmacists from telling customers about cheaper drug options.

"I think there will be a direct benefit for the patient because 85% of drugs are generic," said Sen. Scott Jensen, R-Chaska, another physician and bill sponsor. "In those generic purchases a lot of times people are being asked to pay more [using insurance] than they would if they paid cash."

Many factors contribute to high drug prices, including patent protections for some drugs that prohibit lower-cost generics as well as market consolidation. Health plans continue to ask enrollees to shoulder more of the costs in the form of co-payments and high deductibles.

Supporters of the new law say transparency is the first step to understanding how the market works, or doesn't work, for consumers and plan sponsors, such as employers.

"The transparency will help the employers hold down their drug costs," said Jensen, who said the PBM practices have "been veiled in secrecy with smoke and mirrors."

To Eagan-based Prime Therapeutics, a PBM that serves 22 "Blue" health insurance plans, including Blue Cross and Blue Shield of Minnesota, the new law goes beyond basic licensure.

"This bill is more than it was characterized to be," said David Root, vice president of government affairs for the company. "It may not lower the cost of drugs for Minnesotans — in fact it may increase the cost of health insurance in the state."

Root said the law might hamper Prime Therapeutics' ability to ensure quality and safety through its contracts with independent pharmacies. The company is also concerned that too much transparency could weaken its negotiating position with drugmakers.

"Due to the required disclosure of proprietary drug price negotiation data, drug manufacturers may be able to understand what their competitors' discount price is," Root said.

The Commerce Department will be required to post information about costs and rebates on its website each year, using information submitted by the PBMs. But it is unclear how detailed that information will be. PBMs will not be identified by name, according to department officials.

Bipartisan bill

Fewer than 20 states have enacted PBM licensure, and most of the laws have taken effect just recently. Many of them focus on prohibiting gag clauses, according to Jen Middleton, a health care attorney at Minneapolis-based Nilan Johnson Lewis, which has been tracking PBM regulations.

"Many of them that do require licensure aren't going that extra step and requiring disclosure to the state," Middleton said. "And most don't have the robust enforcement mechanism that Minnesota is putting into place."

Commerce will receive about $700,000 to enforce the new law over the next two years and is required to have two full-time PBM "enforcement investigators."

The bill gained bipartisan support in both chambers and was one of the few health care measures that passed during the Legislature's regular session; most other medical legislation got held over for the large health omnibus bill that was hammered out in the special session.

PBMs will need to become licensed by the start of next year, paying an $8,500 fee. The Commerce Department is drafting the regulations that will govern the licensure and enforcement provisions. Those regulations will be put up for public comment later this year.

"The Legislature enacted this law with the goal of increasing transparency and lowering cost for Minnesotans," said Grace Arnold, deputy commissioner of insurance. "We are hoping we can realize the Legislature's vision."

Glenn Howatt • 612-673-7192 Twitter: @GlennHowatt