The California Senate has approved SB 41, a bill now under consideration in the Assembly, that would impose new licensing, transparency, and pricing regulations on pharmacy benefit managers (PBMs). Proponents argue the legislation would curb anti-competitive practices, enhance transparency, and ensure fairer pricing in the administration of prescription drug benefits by health insurers and health care service plans. Opponents of the legislation argue that, among other things, the bill would result in significant premium increases and that banning so-called performance-based contracts would not lower costs to patients.
Licensing and Oversight
SB 41 would require all PBMs operating in California to obtain a license from the Department of Insurance by January 1, 2027. The licensing process would include disclosure of ownership, management structure, financial stability, and business practices. PBMs would also be subject to initial and renewal fees, set by the Department. The Department of Insurance would be granted broad enforcement authority, including the ability to investigate complaints, conduct audits, impose civil penalties, and revoke licenses for noncompliance.
Pricing Reforms and Transparency
A key provision of SB 41 is the prohibition of “spread pricing” in contracts between PBMs and health plans or insurers, effective for agreements executed, amended, or renewed on or after January 1, 2026. Any spread pricing terms in a preexisting contract would be void after January 1, 2029. Spread pricing occurs when a PBM charges a health plan more than it reimburses the pharmacy. The bill mandates a shift to a passthrough pricing model, requiring PBMs to forward 100% of manufacturer rebates and price concessions to the health plan or insurer. These funds must then be used to reduce enrollee premiums and out-of-pocket costs. Additionally, the bill requires that enrollee cost sharing for prescription drugs be based on the actual amount paid by the plan or insurer, rather than a benchmarked or inflated price.
Reimbursement Standards
PBMs would be required to reimburse pharmacies at no less than the National Average Drug Acquisition Cost (NADAC), or if unavailable, the pharmacy’s wholesale acquisition cost. Dispensing fees must be at least equal to those paid by Medi-Cal, California’s Medicaid program.
Reporting and Public Disclosure
SB 41 imposes extensive annual reporting requirements on PBMs, health plans, and insurers. Disclosures must include the 25 most frequently prescribed and most expensive drugs and the 25 drugs with the highest year-over-year increase in total annual plan spending, For these drugs, health plans and insurers must report the aggregate wholesale acquisition costs, aggregate rebate amounts, administrative fees and payments to affiliated and nonaffiliated pharmacies.
The Department of Insurance and the Department of Managed Health Care would aggregate and publish non-confidential data to inform the public and lawmakers about the impact of drug costs on health care premiums. Proprietary information would remain protected under confidentiality provisions.
Network Access and Anti-Discrimination Protections
The bill prohibits PBMs from discriminating against nonaffiliated pharmacies in terms of network participation, reimbursement rates, or contract terms. PBMs would be barred from requiring enrollees to use only affiliated pharmacies if nonaffiliated options are available. Nonaffiliated pharmacies must also be allowed to offer delivery services and participate in preferred networks if they agree to the same terms as affiliated pharmacies.
Restrictions on Exclusive Contracts
Violations of the law would be subject to civil penalties, injunctive relief, and restitution. The Department of Insurance also would be required to publish on its website a record of consumer complaints against PBMs that the Department of Insurance determines to be justified. The bill includes a severability clause, ensuring that if any provision is invalidated, the remainder of the law remains in effect.
Outlook and Industry Response
If enacted, SB 41 would require significant changes to how PBMs, insurers, and health plans operate in California. These include overhauls to contracting, reimbursement, and reporting practices. While the bill has faced minimal opposition in the legislature so far, industry stakeholders are likely to become more involved in the legislative process over the course of the summer. Most California legislation is finalized in August, presented to the governor in late September. If signed into law, SB 41 would take effect on January 1, 2026.
Reed Smith will continue to follow developments in California and across the nation impacting the regulation of PBMs. If you have any questions about this bill or about state laws impacting the health industry, please do not hesitate to reach out to the author or to the health law attorneys at Reed Smith.