Legislative Update: California Governor Signs PBM Reform Bill

Gov. Newsom Signs Law Implementing Major Changes to PBM Business Practices

On Saturday, October 11, Governor Gavin Newsom signed SB 41, a bill that limits certain business practices employed by pharmacy benefit managers (PBMs) in California. This bill follows previous attempts by the governor to regulate PBMs, including changes implemented in the budget that require PBMs to obtain a license, submit detailed operational and financial statements annually to the Department of Managed Health Care, and act in the best interests of health plans and covered individuals. 

SB 41 significantly impacts how pharmacy benefits are designed in the state, placing restrictions on PBM contracts with health plans and network pharmacies in the state. Most notably, the bill prohibits health care service plan contracts from permitting PBMs to conduct spread pricing and requires that PBM contracts that are initiated or renewed after January 1, 2026, limit PBM income to flat-dollar fees that are not tied to the price of prescription drugs or the value of formulary or coverage decisions. The bill contains several protections for contract pharmacies and covered individuals, including placing limits on pharmacy reimbursement based on effective rates, prohibiting patient steering to PBM-affiliated pharmacies, and ensuring that enrollees’ cost-sharing requirement does not exceed the actual rate paid by the plan for a covered drug. Below is a summary of the key provisions in SB 41:

Fiduciary duty: Section 1 of the bill establishes that PBMs have a fiduciary duty to a self-insured employer plan that includes being fair and truthful toward the client, acting in the client’s best interest, avoiding conflicts of interest, and performing its duties with care, skill, prudence, and diligence. This section builds on a similar proposal that was included in the FY 2026 budget.

Enrollee cost-sharing limits: Existing law limits the maximum amount an enrollee may be required to pay at the point of sale for a covered prescription drug to the lower of the applicable cost-sharing amount under the plan or the retail price. Sections 2 and 16 of the bill require that plan contracts issued after January 1, 2026, provide that an enrollee’s cost-sharing, including deductibles and copayments, may not exceed the actual rate paid by the plan for a covered prescription drug. The bill extends this requirement to the net price paid by the PBM or group purchasing organization (GPO) if the health care service plan contract requires them to disclose net prices to the health plan.

PBM income: Multiple sections of the bill limit PBMs' ability to generate revenue by conducting spread pricing or retaining a portion of rebates tied to prescription drug utilization. 

• Prohibit spread pricing: Section 2 and Section 12 require that, starting January 1, 2026, no contract that is established or renewed between a health care service plan and a licensed PBM may authorize spread pricing.
• Pass-through pricing model: Sections 3 and 11 of the bill amend the PBM regulations established earlier this year in the omnibus health trailer bill (AB 116) to require PBMs to implement a pass-through pricing model. Section 3 establishes several new definitions, while Section 11 requires that PBMs shall not derive income from pharmacy benefit management services except for income derived from a pharmacy benefit management fee. This fee must be established in the agreement between the PBM and the payer. Section 11 further requires PBMs to use a pass-through pricing model and direct 100% of all manufacturer rebates to the payer for the sole purpose of offsetting defined cost-sharing, deductibles, coinsurance, and reducing premiums of plan participants. Payers may establish performance bonuses that are not based on the acquisition or ingredient cost of a drug. 
  • “Passthrough pricing model” is defined as a model where payments made by the health care service plan or health insurer client to the PBM for covered outpatient drugs are both 1) equivalent to the payments the PBM makes to a pharmacy or provider for those drugs, including any professional dispensing fee, and 2) passed through in their entirety by the PBM to the pharmacy or provider, in a manner that is not offset by any reconciliation.
  • “Pharmacy benefit management fee” is defined as a flat dollar-amount fee that covers the cost of providing one or more pharmacy benefit management services and does not exceed the bona fide value of the services performed by the PBM. The pharmacy benefit management fee may not be based on the price of prescription drugs, including rebates or other price concessions; the amount of rebates or other price concessions retained by the PBM or its affiliated entities; or the amount of premiums, deductibles, or other cost-sharing retained by the PBM or its affiliated entities; coverage or formulary placement decisions or the value of any referrals or business generated between the parties to the arrangement. 
• Pharmacy reimbursement: Section 11 of the bill also establishes numerous protections for network pharmacies. The most important protection in this section is that PBMs are prohibited from reducing payment for pharmacist services using an effective rate of reimbursement, including generic effective rates, brand effective rates, direct and indirect remuneration fees, or any other reduction or aggregate reduction of payment. 
• Formulary exclusions: The bill prohibits PBMs from granting a manufacturer’s drug exclusivity unless the PBM can demonstrate that this results in the lowest cost to the payer and lowest cost-sharing to plan participants. 

Patient steering/affiliates:

• Discrimination: Section 8 of the bill prohibits PBMs from imposing requirements, conditions, or exclusions that discriminate against nonaffiliated pharmacies. Discrimination under this section includes reimbursing a nonaffiliated pharmacy less for a pharmacist service than the PBM would reimburse an affiliated pharmacy, applying special terms and conditions to nonaffiliated pharmacies, refusing to contract with or terminating a contract with a nonaffiliated pharmacy, violating the state’s protections for covered entities under the 340B program, or retaliating against a nonaffiliated pharmacy for exercising their rights. 
• Patient steering: Section 9 of the bill prohibits conduct that is described as patient steering. PBMs may not require a plan participant to use only an affiliated pharmacy if there are nonaffiliated pharmacies in the network; financially induce a plan participant to transfer a prescription to an affiliated pharmacy—this does not prevent a purchaser or PBM from offering financial incentives such as lower copays or coinsurance for a prescription when the prescription is dispensed; unreasonably restrict a plan participant from using a particular network pharmacy; communicate to or mislead a plan participant to believe that they are required to have a prescription dispensed at a particular affiliated pharmacy if there are nonaffiliates in the network; or deny a nonaffiliated pharmacy from being preferred under the network if the pharmacy is willing to accept the same terms and conditions that the PBM has established for affiliated pharmacies as a condition of preferred network participation status. 
• Additional protections: Sections 10 and 13 of the bill establish additional protections for nonaffiliated pharmacies. Section 10 holds that PBMs may not prohibit a pharmacy from offering certain ancillary services, including delivery of a drug on the request of a patient or patient representative, provided the pharmacy does not charge the PBM for such services. Section 13 prohibits PBMs from restricting nonaffiliated pharmacies’ ability to contract with employers and payers.

Licensure: The health omnibus trailer bill (AB 116) established that PBMs must obtain a license with the Department of Managed Health Care in order to operate in the state, starting January 1, 2027. Section 17 of the bill requires that contracts between a health insurer and a PBM issued, amended, or renewed on or after January 1, 2027, shall require the PBM to be licensed and in good standing with the Department of Managed Health Care; contracts that violate these terms shall be void on and after January 1, 2029.  

Transparency: Section 4 of the bill makes minor amendments to the transparency requirements established under the health omnibus trailer bill (AB 116). Under AB 116, PBMs are required to submit audited financial statements within 120 days of the close of the fiscal year and unaudited financial statements within 45 days of the close of the fiscal quarter.

Oversight/Civil Penalties: Section 7 grants the Department of Managed Health Care the authority to periodically inspect PBMs and directs the department to consider any complaint made by an enrollee. Section 14 of the bill gives the Attorney General the authority to bring civil actions against parties that violate the rules governing pharmacy benefit management services and establishes that violations shall be subject to an injunction and liable for a civil penalty of not less than $1,000 or more than $7,500 for each violation.

Labor Unions Exempted: Section 15 specifies that the PBM regulations established in the bill do not apply to collectively bargained Taft-Hartley prescription drug plans offered pursuant to ERISA or PBMs providing pharmacy benefit management services to a Taft-Hartley plan.