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Column: Pharmacy middlemen claim to keep prescription prices low. In fact, they've cost consumers billions

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Column: Pharmacy middlemen claim to keep prescription prices low. In fact, they've cost consumers billions

In 2022, an executive of a big pharmacy middleman firm acknowledged the noxious reality of its business model:

It was designed to massively overcharge customers by steering them to its affiliated or “preferred” pharmacies or its home delivery subsidiary.

Referring to a generic version of Gleevec, a leukemia drug taken by nearly 200,000 patients, the executive noted in an internal memo that “you can get the drug at a non-preferred pharmacy (Costco) for $97, at Walgreens (preferred) for $9000, and at preferred home delivery for $19,200…. We’ve created plan designs to aggressively steer customers to home delivery where the drug cost is ~200 times higher.”

PBMs are not lowering prices for drugs used by patients to treat severe diseases like prostate cancer and leukemia.

— Federal Trade Commission

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The executive concluded, “The optics are not good and must be addressed.”

What that memo described, according to a new report from the Federal Trade Commission, is standard operating procedure among the nation’s largest pharmacy benefit managers, or PBMs.

Originally devised in the 1960s as intermediaries helping health insurers process claims, steering doctors and hospitals to the cheapest drug alternatives and giving insurers greater leverage in negotiations with drug manufacturers, they soon became just another special interest in America’s fragmented healthcare system.

Thanks to a wave of consolidation and growth of healthcare conglomerates, the FTC says, the three largest PBMs manage nearly 80% of all prescriptions filled in the U.S. They have accumulated enough power to profit “by inflating drug costs and squeezing Main Street pharmacies,” driving the independents out of business.

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Once posed as an answer to high drug costs, they’re today at the hub of a system that drives up drug prices for consumers.

Starting in the 1990s, some of the biggest PBMs were acquired by drug companies, creating conflicts of interest that led to federal orders for divestment.

Then came a wave of mergers and acquisitions within the PBM universe, followed by acquisitions by insurers and pharmacy companies — CVS acquired Caremark, then the biggest PBM, in 2007 and UnitedHealth merged CatamaranRx, then the fourth-largest PBM, into OptumRx in 2015.

Between 2000 and 2021, 39 individual healthcare companies — drugstore chains, health insurers, managed care firms and PBMs — all coalesced into three healthcare behemoths, Cigna, CVS and UnitedHealth.

CVS Health Corp. owns not only the Caremark PBM, which controls 34% of the prescription market, but the insurance company Aetna and about 9,000 retail drugstores.

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Cigna Group, which has a prescription market share of 23%, owns the mail-order PBM Express Scripts and the Cigna insurance company. UnitedHealth Group is the largest U.S. health insurer and owns 1,000 walk-in health clinics as well as physician groups; through its OptumRx PBM, its prescription market share is 22%.

Between 2000 and 2021, mergers and acquisitions combined these 39 independent healthcare companies into three huge conglomerates.

(Federal Trade Commission)

Along with Humana, the fourth-ranked PBM with a market share of 7%, those conglomerates produced combined revenue of $456 billion in 2016, 14% of national health spending. Today, they collect more than $1 trillion in revenue, or 22% of U.S. healthcare spending.

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Despite the predictably anticompetitive effects of these mergers and acquisitions, not a single one was challenged by antitrust enforcement agencies, says the FTC — one of the antitrust regulators asleep at the switch.

Among the stratagems employed by PBMs to boost profits, the FTC says, is steering health plans and patients to their own affiliated pharmacy chains.

Some patients have discovered that their drugs won’t be covered by their insurers unless they buy them at specified pharmacies, the result of deals the PBMs have made with insurers, including those with which they share a parent. But the customers may have to pay more out of pocket at the affiliated pharmacies than they would at an independent.

The FTC staff found that for “specialty prescriptions” — a designation the PBMs place on certain drugs, often without explanation — 55% were filled at affiliated pharmacies. The same ratio didn’t occur with prescriptions under Medicare’s Part D prescription coverage, because federal law requires that those prescriptions can be filled at almost any licensed pharmacy. Only 22% of Part D prescriptions were filled at PBM-affiliated pharmacies. That suggests that PBMs may be steering patients to their pharmacies where that’s not forbidden by law.

The statistics were drawn from submissions by two of the three top PBMs, which are unidentified. The third didn’t submit the necessary data.

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The FTC also touches on a relatively new wrinkle in drug pricing — rebates by drugmakers to PBMs in order to gain preferential positions in drug formularies.

The agency says its review of contracts between manufacturers and PBMs shows that some drug companies promise PBMs higher rebates if the latter exclude competing drugs from their formularies — including generic versions that are chemically identical to the brand-name products — or require prior authorization before covering the rival drugs.

Predictably, the big PBMs and their lobbyists find much to dislike in the FTC report, which the agency describes as an interim staff report, part of an investigation launched in 2022.

A spokesperson for Cigna’s Express Scripts criticized the report for “blatant inaccuracies” (but didn’t offer specifics in an email to me). A spokesman for CVS blamed drugmakers for high prescription prices, stating that an FTC effort to “limit the use of PBM negotiating tools would instead reward the pharmaceutical industry.” Optum didn’t reply to my request for comment.

J.C. Scott, president of the Pharmaceutical Care Management Assn., the PBM lobbying arm, accused the FTC of advancing “pre-determined conclusions … irrespective of the facts or the data.”

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Drawing from more than 1,200 comments submitted by stakeholders in healthcare and by other members of the public, the agency outlined a host of methods PBMs are accused of using to benefit their affiliated services, block patient access to inexpensive generics and pocket discounts that should properly go to customers.

The FTC also mined lawsuits, including a 2023 case the state of Ohio filed against Express Scripts, charging that the PBM exploits its knowledge that “Ohioans in need of medication, particularly life-saving medication, will pay the asking price. The choice is binary — pay or suffer.”

Drug manufacturers capitulate to the PBMs’ rebate demands, the lawsuit says, to avoid being dropped from the PBMs’ formularies, the rosters of drugs that they’ll cover. “Patients pay more, manufacturers get less, and the PBMs profit. Handsomely.”

PBMs have been the targets of drug industry participants for years — sometimes fingered by drugmakers or insurers to deflect accusations that they’re responsible for prescription drug inflation.

It may be true that all those entities share the blame for high prices. Over the last couple of decades, however, all have become tentacles of the same octopus. The consolidation of drug chains, physician groups, insurers and PBMs into conglomerates has made it much harder to identify responsibility for drug inflation.

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Contracts between PBMs and unaffiliated pharmacies, the FTC says, are “opaque, complex, and conditional, making it challenging to understand what pharmacies will ultimately be paid for any given drug.” The result is that smaller, nonchain pharmacies may get pushed out of the market, “leading to higher costs and lower quality services for people around the country.”

The FTC report offers two case studies involving generic cancer drugs in which the agency says PBMs reimbursed their affiliated pharmacies more for prescriptions than unaffiliated pharmacies, yielding nearly $1.6 billion in gross profits from 2020 through mid-2022 for those affiliated pharmacies over the national average of those drug costs.

The drugs are a generic version of Zytiga, a treatment for prostate cancer, and a generic for Gleevec, a drug for leukemia. The high reimbursement rates for druggists dispensing those drugs may “translate into high out-of-pocket costs for patients,” the FTC says. In other words, “PBMs are not lowering prices for drugs used by patients to treat severe diseases like prostate cancer and leukemia.”

Magnify the gains on those two drugs by the potential profits the PBMs may be extracting from the entire spectrum of prescription pharmaceuticals, and the toll becomes breathtaking.

reimbursement rates

Prices that PBMs paid affiliated pharmacies for the generic version of prostate cancer drug Zytiga were much higher than they paid independent pharmacies, and much higher than the national average cost. As a result, patients may have been charged much higher co-pays at the affiliates — but may not have had any other option.

(FTC)

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“It appears that PBMs are having the commercial health plans and Medicare Part D prescription drug plans they manage pay their affiliated pharmacies rates that are grossly in excess” of national average prices or prices paid to unaffiliated pharmacies.

No one escapes the consequences of this sort of market manipulation. The internal transactions, largely hidden from the public and regulators, may distort the statistics that health plans submit to the government to show they meet the coverage standards required by the Affordable Care Act, allowing the conglomerates to “game” the rules, the FTC says.

They may drive up healthcare costs for self-insured clients such as large companies, which may pare back health coverage for their employees as a result.

They can raise co-pays for patients, lead to cutbacks in the availability of coverage for some drugs, or prompt patients to ration their prescriptions, risking their health to save money. To the extent they affect Part D, they may drive up government spending.

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To quote the Ohio lawsuit, PBMs were created as a counterweight to perceived profiteering by Big Pharma. But once they “grew powerful enough to themselves extract exorbitant fees … the solution became the problem.”

The FTC says it issued its interim report because several PBMs haven’t provided the agency with the information they’re required to submit, hindering its ability to complete its investigation.

At the very top of the report, the FTC warns that the firms better come across “promptly,” or they’ll be taken to court. The FTC should start suing now, because the PBMs’ apparent code of silence raises a familiar question: What must they be hiding?

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Elon Musk revived L.A. aerospace with SpaceX. Will it thrive without him?

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Elon Musk revived L.A. aerospace with SpaceX. Will it thrive without him?

When Elon Musk decided to start a rocket company two decades ago, he headed down Interstate 5 and the 405 and didn’t stop until he reached the South Bay, the center of the region’s aerospace industry, hard hit by a drop in defense spending after the Cold War.

There, the Silicon Valley entrepreneur, flush with cash from the sale of PayPal, founded Space Exploration Technologies in 2002 and defied skeptics, building his startup into a $210-billion giant and fueling a revitalization of the shrunken industry.

This week, the Hawthorne company’s future in the region was thrown into doubt when Musk posted on X that he planned to move SpaceX’s headquarters to the outskirts of Brownsville, Texas, where it is developing its massive Starship rocket for planned trips to the moon and, someday, Mars.

It’s unclear what the fallout will be locally.

SpaceX hasn’t commented on how many jobs will be affected by the relocation, and industry observers say it’s likely the company will maintain significant manufacturing operations in Los Angeles County, where it employed about 6,000 people in 2023, according to an annual survey by the Los Angeles Business Journal.

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But the relocation is undoubtedly a loss to the region’s revived space industry.

A leader in the space economy

“SpaceX has been one of the pillars of the Southern California new space economy,” said Kevin Klowden, the Milken Institute’s executive director of MI Finance. The move “is significant symbolically in that it shows Southern California isn’t indispensable in an industry where it clearly is a leader.”

The aerospace industry was pioneered in L.A. County, with the first rockets set off in the Arroyo Seco near Caltech in the 1930s — the humble origins of what was to become the Jet Propulsion Laboratory, a leader first in rocket and satellite development and later in interplanetary spacecraft.

Douglas Aircraft, Lockheed, Northrop and other companies built hundreds of thousands of planes during World War II and maintained defense work here. In Downey, North American Aviation built the command module of the Apollo 11 spacecraft that landed astronauts on the moon. Rockwell International built the space shuttles in Downey and Palmdale.

The massive defense spending cuts after the collapse of the Soviet Union devastated the industry, dropping employment in the county from about 130,000 in 1990 to less than half that a decade later — but with its heritage, talent pool and world-class universities, the region was a logical place for SpaceX to set up shop.

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A new, smaller, Southern California aerospace economy has since developed, building on the remaining operations of legacy companies and technological advancements — even as other centers have emerged, such as Kent, Wash., where Jeff Bezos’ Blue Origin space company is located.

Virgin Galactic, the space tourism company founded by British billionaire Richard Branson in 2004, is based in Tustin and has its design and manufacturing operations in Mojave, where it also performs test flights. Its commercial operations are in New Mexico.

Rocket Lab, a maker of lightweight rockets that launch small satellites, moved its headquarters to Long Beach just three years ago.

People walk on a pier beneath the contrail from a SpaceX Falcon 9 rocket launched from Vandenberg Space Force Base on April 1 in San Clemente.

(Mario Tama / Getty Images)

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And former SpaceX employees have founded dozens of startups. Crunchbase, which tracks venture capital and startups, tallies more than 50. Local ones include Relativity Space, a Long Beach maker of reusable rockets; Varda Space Industries, an El Segundo company developing drugs in low-Earth orbit; and L.A. telemetry startup Sift, which raised $7.5 million in venture funding last year.

“SpaceX isn’t unique, but it’s the star,” said Klowden, noting the “ecosystem” that has sprung up around it.”

While Musk’s declaration Tuesday was prompted by a public policy dispute — Gov. Gavin Newsom’s decision to sign a bill prohibiting school districts from mandating that teachers notify parents about a student’s change in gender identity — Musk has long complained about the state’s regulatory environment and has a history of tangling with government officials.

He moved Tesla’s headquarters from Palo Alto to Austin, Texas, in 2021 after Alameda County ordered the company in 2020 to halt production amid the COVID pandemic. Separately, the billionaire noted crime concerns in also tweeting Tuesday that he plans to move X, the social media platform formerly known as Twitter, from San Francisco to Austin.

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Klowden said he believed Musk has been considering the idea of moving SpaceX, though it’s still unclear exactly whether Musk plans to transfer a handful of executives, additional employees or all of the operations, which is not seen as likely. Neither Musk nor SpaceX has offered clarification. The company did not respond to requests for comment.

City officials were also grappling with the announcement.

“We understand that business decisions are driven by a variety of factors, and we remain committed to fostering a thriving business environment in Hawthorne,” Alex Vargas, the city’s mayor, said in a statement. He added: “[W]e want to reassure our workforce and community that the city of Hawthorne is taking proactive steps to mitigate the impact of SpaceX’s potential relocation.”

Much of the skepticism regarding Musk’s SpaceX tweet revolves around how the Tesla move was carried out. The electric vehicle maker produces its Model Y SUV and new Cybertruck in Austin but still operates a factory in Fremont, where it makes multiple models. Last year, Tesla said it was opening a new global engineering headquarters in Palo Alto previously occupied by the headquarters of Hewlett-Packard.

A flight to Texas?

But some familiar with the company think the headquarters relocation announcement could presage a larger presence in Texas.

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Tim Buzza, a former SpaceX vice president, said that while the company builds its workhorse Falcon 9 rocket and Dragon capsules that service the International Space Station in Hawthorne, the company’s future is the massive Starship rocket being developed at the Brownsville facility called Starbase on the Gulf of Mexico.

“The center for the next level of execution for SpaceX is Starbase. The direction and the momentum of the company is already moving to Texas,” said Buzza, who was one of the first five employees at SpaceX, worked there for 12 years and remains in contact with many at the company.

SpaceX is seeking approval to launch 90 rockets from Vandenberg Space Force Base by 2026, a sharp increase from its previous plans for the Santa Barbara County military base. Buzza said the launches are important for the Starlink satellite broadband network SpaceX is building, since they put the satellites into a polar orbit, complementing Florida launches that put them in an equatorial orbit.

However, the Starship rocket — taller and more powerful than the Saturn 5 that launched Apollo astronauts to the moon — could launch many more satellites than the Falcon 9. SpaceX has opened a new Starlink factory outside Austin, and last month Starship completed its fourth test flight from Starbase, dubbed its “Gateway to Mars.”

The company has been building its operations at Starbase and this month asked the Federal Aviation Administration for permission for up to 25 annual launches of Starship and its Super Heavy rocket, a more powerful derivative of its Falcon 9. The company operates an engine testing facility in McGregor, Texas.

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Klowden questioned the company’s ability to move or attract large numbers of workers to the Brownsville area, at least in the immediate future, given the lack of housing and other infrastructure. But Buzza said SpaceX overcame many of the same issues in McGregor. He doesn’t think Musk would move Falcon 9 production or the Dragon capsule program from Hawthorne, because both may be phased out over time.

Still, even the loss of SpaceX’s executive operations to Texas would be a blow to Los Angeles and the Golden State, which have suffered a humiliating series of corporate defections over the last few decades. L.A.-area companies that have moved headquarters elsewhere include Lockheed, Northrop Grumman and more recently Aecom, a global engineering firm. Software giant Oracle left Redwood City in Silicon Valley for Austin in 2020 (and has since announced a move to Nashville).

“Whenever any company announces that they might or they will leave the region, it is not good for us. We definitely need to do a much better job in terms of business retention,” said Stephen Cheung, chief executive of the Los Angeles County Economic Development Corp.

However, he said the region’s aerospace economy is still robust and has shown an ability to evolve. After the bankruptcy last year of Branson’s separate Virgin Orbit rocket company, Rocket Lab acquired the defunct company’s former Long Beach headquarters, he noted.

That move mirrors SpaceX’s evolution. Its first location in L.A. County was in El Segundo, but as it grew it moved in 2007 into an old Northrop site in Hawthorne that had been converted into a factory for the production of Boeing 747 fuselages.

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Aerospace Corp., an El Segundo federally funded nonprofit that provides scientific and technical support to the aerospace industry, announced in March that it was moving its executive offices to Virginia but simultaneously announced it was investing $100 million in its local campus.

The region is still home too for major defense work.

Northrop Grumman is building the new B-21 digital bomber in Palmdale, which is slated to replace the B-2 stealth bomber it built decades ago in Pico Rivera. The high desert city also is home to Lockheed Martin’s famed “Skunk Works,” a secretive, cutting-edge military research and development facility.

Klowden said that for some SpaceX workers a move to South Texas could be a no-go, and he expects other aerospace companies will attempt poach its workers. Indeed, Orange County asteroid mining company Astroforge Inc. said it was hiring in a reply to Musk’s SpaceX tweet.

Earlier this week, workers streaming in and out of SpaceX’s Hawthorne complex declined to speak to a Times reporter. However, a salesman for SpaceX vendor GF Machining Solutions who asked his name not be used, said he hopes Musk was not serious about relocating the headquarters to Texas.

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“Well, I wouldn’t want that to happen, because I’ve lived in California all my life and I would lose that account if SpaceX moved,” the Corona resident said. “I’m not moving to Texas.”

Times staff writer Ashley Ahn and Bloomberg News contributed to this report.

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In a win for street vendors, L.A. agrees to lift restrictions and cancel fines

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In a win for street vendors, L.A. agrees to lift restrictions and cancel fines

The city of Los Angeles has settled a lawsuit brought on behalf of street vendors by agreeing to repeal bans on vending near schools and farmers markets and canceling citations issued to vendors for selling in restricted areas, attorneys representing vendors announced Friday.

The lawsuit, which was filed in late 2022, alleged city ordinances that established no-vending zones and banned street vendors from working within 500 feet of schools, farmers markets, swap meets and temporary events violated state laws.

“The bans are gone and the vendors have been vindicated,” said Merlín Alvarado, a street vendor and plaintiff in the lawsuit who has been selling fruit and hot dogs on Hollywood Boulevard for 17 years. Alvarado, other vendors and community advocates gathered Friday morning on Hollywood Boulevard with pro bono attorneys who filed the lawsuit to celebrate the settlement.

“Street vending is one of our city’s great traditions and resources and we look forward to being fully recognized for our role as community contributors,” she said.

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In February, the Los Angeles City Council voted to eliminate the no-vending zones, which included high-congestion areas such as the Hollywood Bowl, Crypto.com Arena and Universal Studios.

The settlement agreement builds on that decision by opening more spaces for vendors and guaranteeing a refund for vendors who were ticketed in the no-vending zones, said Doug Smith with Inclusive Action for the City, a plaintiff in the lawsuit.

“Los Angeles loves street vendors, but historically, our laws have not shown that love,” Smith said. “That’s why this is a really important victory.”

Although the settlement has been signed by representatives from both sides and filed in court, the City Council and mayor must still formally approve it, according to Public Counsel, one of the firms representing the plaintiffs. In a news release, the plaintiffs said they expect those approvals when the City Council returns from a recess in August.

Requests for comment from Mayor Karen Bass were not returned. A representative for City Councilmember Hugo Soto Martinez, who has been an outspoken supporter of vendors, said the council member was unavailable to comment on the settlement.

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Under the terms of the settlement, vendors who paid no-vending zone citations within the last five years will be refunded and any unpaid citations will be canceled.

Many street vendors took the risk of receiving a citation in order to sell in high-traffic areas such as Hollywood Boulevard, said Ruth Monroy, a street vendor of seven years and a plaintiff in the lawsuit.

The vendors can now set up in customer-heavy areas without having to worry about violating city law or being fined, she said.

The settlement also sends a message to other cities in the state that may have vending restrictions, Smith said.

“The days of redlining vendors are over and old tools of exclusion are no longer legal,” he said. “Now other cities in California are on notice that arbitrary vending bans are illegal and they can and will be challenged.”

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Vending “within the immediate vicinity” of swap meets and farmers markets is still prohibited according to state law, the settlement said. Smith said there is more to be done to create specific policies that will allow street vendors to work while complying with city regulations.

“We’re excited to roll up our sleeves and showcase that policies are better when they’re created with the expertise of the communities that are most impacted,” he said. “The lawsuit doesn’t end the work, but it sets us up.”

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Food truck explosion in Whittier injures five people; authorities are investigating

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Food truck explosion in Whittier injures five people; authorities are investigating

Five people were injured, two critically, in an explosion Saturday morning at a food truck in a popular dining and shopping area of Whittier, according to authorities.

Eleven units of firefighters and paramedics were dispatched at 9:17 a.m. to the 6700 block of Greenleaf Avenue, said Martin Rangel, supervising fire dispatcher at the Los Angeles County Fire Department.

“There was an explosion of some kind” but no fire when first responders arrived at the scene at 9:21, he said.

Whittier Police Department is investigating the circumstances around the incident and were expected to report the case to Cal/OSHA.

Rangel said it was most likely a propane tank explosion. Whittier police officials weren’t immediately available for comment.

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Five people were injured, two critically, in an explosion at a food truck in Whittier on Saturday, authorities said. Whittier police were at the scene investigating the cause of the explosion.

(Onscene.tv)

The National Fire Protection Assn. says that 68% of food truck fires are related to leaks or structural failures in propane tanks. As the food truck business has grown over the years, there have been periodic occurrences of propane-related accidents, the most notorious in the summer of 2014 when an explosion and ensuing fire of a food truck in Philadelphia claimed the lives of the truck owner and her daughter and injured 11 others.

Food truck explosions and fires are rare in California, which has some of the strictest regulations governing the safety of mobile food operations, according to experts.

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More than 2,700 food trucks and trailers operate in Los Angeles County, said Matt Geller, head of the Southern California Mobile Food Vendors Assn. Geller wasn’t aware of the Whittier food truck explosion. He said it didn’t appear that the truck operator was a member of his association.

“It’s a pretty rare event,” Geller said, noting that the last food truck fire that he could recall was 10 years ago in Venice. At the same time, he said, “we have a lot of old trucks.”

The five who were injured Saturday in Whittier were apparently crew members of the food truck, said Rangel. They were treated on site and transported to a hospital, with two having suffered critical injuries, two with moderate injuries and one with a minor injury, Rangel said.

He didn’t have details of the food business or the owner of the truck, but some working in neighboring shops said it was related to a coffee business where the truck was parked, in the part of the town known as Uptown Whittier.

Video images showed a small section of Greenleaf Avenue was cordoned off Saturday, but by midday, the street was clear, said people in nearby businesses.

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