Governor Newsom signed into law Senate Bill 41 materially reshaping the regulation of pharmacy benefit management, reimbursement, contracting, and patient cost sharing in California, with significant implications for pharmacy benefit managers (PBMs), payers, pharmacies, manufacturers, and plan participants. At its core, SB 41 prohibits spread-pricing and rebate-retention models in favor of fee-for-service and pass-through costs, curbs PBM preferences for affiliated pharmacies, and aligns patient cost sharing at the pharmacy counter with the amount paid by plans and insurers.

The law also requires PBMs to be licensed and subject to regular financial reporting and oversight by the Department of Managed Health Care (DMHC), establishes enforceable fiduciary obligations to self-insured employer plans, and provides the Attorney General with enforcement tools, including injunctions, specific performance, equitable relief, and civil penalties. The statute phases in key requirements beginning January 1, 2026, with certain contract provisions rendered void by January 1, 2029, and expressly preserves broader state enforcement authority while providing for confidentiality of PBM financial information.

Pricing and Compensation Reforms for PBMs

SB 41 imposes direct, operational changes on PBMs that ripple across the prescription drug supply chain. PBMs must move to a “passthrough pricing model” under which the amounts paid by a plan or insurer for a covered drug are passed through in full to the dispensing pharmacy, inclusive of any contracted professional dispensing fee, without reconciliation offsets. Spread pricing is barred in contracts executed, amended, or renewed on or after January 1, 2026; any preexisting spread-pricing authorizations cannot persist into future amendments or renewals, and such terms become void on and after January 1, 2029.

PBMs, their affiliated or contracted group purchasing organizations, and related entities must direct 100% of all manufacturer rebates and fees they receive to the payer/client, exclusively to reduce plan participants’ cost sharing, deductibles, coinsurance, and premiums. After January 1, 2026 a PBM may not enter into, amend or renew a contract with a manufacturer that implements implicit or express exclusivity for the manufacturer’s drug unless the PBM can demonstrate the extent to which such exclusivity results in the lowest cost for the payer and the lowest cost sharing for plan participants. 

PBMs are prohibited from deriving income from pharmacy benefit management services other than a flat, bona fide “pharmacy benefit management fee” paid by the applicable payer and set forth in the payer-PBM agreement, which must reflect the value of itemized services provided and cannot be directly or indirectly tied to drug prices or patient cost sharing. However, PBM performance bonuses based upon savings to the payer that result in reduced premiums or participant cost sharing are permitted, subject to certain other requirements.

Network Parity and Anti-Steering Rules

The statute also institutes broad parity requirements between pharmacies affiliated with the PBM and  nonaffiliated pharmacies, thereby affecting both PBM network design and plan steering practices. These include prohibiting PBMs from reimbursing unaffiliated pharmacies less than an affiliated pharmacy for providing a prescription. PBMs may not require plan participants to use only PBM-affiliated pharmacies where there are nonaffiliated in-network pharmacies. PBMs cannot refuse to contract with or terminate a contract with a nonaffiliated pharmacy solely because they are unaffiliated or for reasons that apply equally to affiliated pharmacies, and they must offer nonaffiliated pharmacies the opportunity to participate in networks as preferred pharmacies on the same terms that apply to affiliated pharmacies. Contracting restrictions that implicitly or explicitly limit nonaffiliated pharmacies’ ability to work with employers or payers are prohibited.

The statute permits nonaffiliated pharmacies, under contracts issued, amended, or renewed on or after January 1, 2026, to offer delivery as an ancillary service—by mail, common carrier or pharmacy employee or contractor—without PBM-imposed prohibitions, although pharmacies generally cannot bill PBMs for the delivery service unless otherwise agreed. These provisions are intended to address practices that California legislators viewed as creating unequal terms between affiliated and nonaffiliated pharmacies within PBM networks.

Claims Integrity and Pharmacy Protections

Beyond network parity, SB 41 prohibits PBMs from charging pharmacies fees to process electronic claims or retroactively reducing reimbursement through post-adjudication reconciliations to an “effective rate,” including generic or brand effective rates and direct and indirect remuneration-type adjustments, subject to narrow exceptions such as fraud, duplicate payment, or services not properly rendered. Retroactive denials or reductions of paid claims are restricted and must occur within 90 days after affirmative adjudication, again subject to limited exceptions.

PBMs also face guardrails against retaliatory conduct toward pharmacies, including termination without cause, escalated audit activity, or delayed payment for adjudicated claims, and must provide at least 30 days’ advance notice of material contract changes affecting reimbursement, eligibility, formulary verification, dispute resolution, or termination procedures, with termination notices provided to pharmacies before notifying plan participants. These measures aim to stabilize pharmacy revenue streams and reduce administrative friction while preserving pathways to address fraud or nonperformance.

Cost-Sharing Rules and Plan Oversight

Health care service plans and health insurers issuing, amending, or renewing prescription drug coverage on or after January 1, 2026, may not calculate patient cost sharing at an amount that exceeds the “actual rate” (term not defined) that the plan or insurer pays for the drug. Where a contract includes disclosure of the “net price” (term not defined) paid by a PBM or group purchasing organization, patient cost sharing also cannot exceed that net price. This change is intended to prevent cost sharing from being calculated on inflated benchmarks disconnected from the amounts actually paid. Plans and insurers that delegate functions to PBMs remain responsible by statute for compliance with applicable law, must specify PBM responsibilities contractually, and must monitor PBM performance.

Contracts executed, amended, or renewed on or after January 1, 2027—or on the date DMHC establishes the licensure process, if later—must require that the PBM be licensed and in good standing with DMHC, and contract terms that violate the PBM article are void on and after January 1, 2029. The law also authorizes DMHC and, as applicable, the Department of Insurance to treat enrollee or insured complaints involving PBM violations as complaints against the plan or insurer, thereby integrating PBM oversight into the existing consumer protection framework.

Licensure, Reporting, and Enforcement

Licensure, reporting, and oversight provisions create a new compliance architecture for PBMs operating in California. PBMs must be licensed by DMHC and submit audited annual financial statements and quarterly unaudited financials, with content and verification standards established by the director. DMHC may conduct routine and nonroutine surveys and examinations of PBM fiscal and administrative affairs. The law requires that revenue reporting encompass manufacturer-derived income, payer fees, and affiliate flows, and that expenses include pharmacy payments and other operational costs, enabling regulators to discern the financial impact of PBM practices on drug costs in the state.

While PBM financial records submitted to DMHC are confidential and exempt from public disclosure under specified standards, the Attorney General may obtain these materials for enforcement purposes. In addition, the statute establishes a fiduciary duty owed by PBMs to their payer clients, including duties of fairness, truthfulness, avoidance of conflicts, and prudence, elevating PBM-client relations to a standard more akin to trusted agent relationships. The Attorney General is empowered to seek injunctions, specific performance, equitable remedies, and civil penalties ranging from $1,000 to $7,500 per violation, with recovery of attorneys’ fees and costs, reinforcing a strong enforcement posture.

Exceptions, Carve-Outs, and Implementation Guidance

SB 41 also includes targeted exceptions and clarifications relevant to particular stakeholders. A Taft–Hartley self-insured prescription drug plan under ERISA is excluded from the reach of this new California law, although a PBM serving other payers remains subject to the law for those other lines of business. Certain governmental programs and entities are similarly carved out. The statute states that it does not narrow the Attorney General’s broader antitrust and consumer protection authority and makes all provisions severable to preserve the statute’s functionality if any provision is invalidated. DMHC is authorized to issue implementation guidance, not subject to the Administrative Procedure Act until January 1, 2030, after consultation with stakeholders. These structural elements signal that the Legislature intends sustained regulatory engagement to ensure the law’s objectives—transparency, parity, and lower net costs for patients and payers—are achieved while maintaining flexibility to address market adjustments and compliance questions.

Practical Takeaways by Stakeholder

In practical terms, pharmacies should expect greater parity in contracting and reimbursement, fewer retroactive payment reductions, and more predictability around claim adjudication and payments. They should also ensure delivery policies and ancillary services align with the statute’s allowances in new or renewed PBM contracts.

PBMs may need to redesign their pricing, contracting, and revenue models around flat service fees, implement full manufacturer rebate and fee pass-through to payers, cease spread pricing, and prepare for DMHC licensure, financial reporting, and audits. PBMs should also revisit exclusivity arrangements with manufacturers to ensure they can comply with the statute’s requirements relating to substantiating their effect on payer costs and participant cost sharing.

Payers—including health plans and insurers—may need to update benefit designs and point-of-sale processing so patient cost sharing does not exceed the amounts actually paid; revise PBM administration agreements to require licensure, passthrough pricing, fee-only compensation, and compliance with parity and anti-discrimination rules; and strengthen oversight of delegated PBM functions given the potential for plan-level liability.

Manufacturers, PBMs and group purchasing entities should anticipate that rebates and fees paid by manufacturers will be directed entirely to payers—a potentially major change, to the extent PBMs and group purchasers currently rely upon all or a portion of such rebates and fees to fund their operations.   

It will remain to be seen whether plan participants will benefit from lower out-of-pocket costs, more choice among in-network pharmacies, or increased transparency within the supply chain, as the impact of SB 41 takes effect across the market.

Reed Smith will continue to track developments related to changes in PBM policy and regulation. If you have any questions about this law or topic, please do not hesitate to reach out to the authors of this article or to the health lawyers at Reed Smith.