California Enacts Sweeping PBM Reform
By Brian Gilmore | Published October 23, 2025
Executive Summary
Governor Newsom has signed into law California SB 41, making California the latest state to impose restrictions on pharmacy benefit manager (PBM) practices. This new state law comes in the wake of Congress’s failure to enact major federal PBM reform at the end of 2024, when it was stripped from annual funding bill at the last moment.
SB 41 regulates PBM business conducted in California with the goal of lowering prescription drug costs and increasing transparency. It bans spread pricing, requires pass-through pricing and rebate pass-through, curbs steering to affiliated pharmacies, imposes truth-in-dealing standards, restricts certain exclusivity deals with manufacturers, and establishes PBM licensure/oversight.
Key Provisions in SB 41
Spread Pricing Ban: PBMs cannot use spread pricing in California for new contracts as of January 1, 2026. Spread pricing allows the PBM to bill the plan a higher amount than it reimburses the dispensing pharmacy and keep the “spread”. This approach has been much-maligned as opaque because the plan sponsor does not have access to the true pharmacy cost or PBM margin, creating the potential for misaligned incentives.
Pass-Through Pricing Mandated: Instead, PBMs must use pass-through pricing where the plan pays exactly what the pharmacy is reimbursed (or the PBM’s acquisition/cost basis) plus an explicit administrative/dispensing fee. This provides better visibility to unit costs and fees and better incentive alignment among the parties.
Rebates Returned to Plan: The PBM must direct 100% of all prescription drug rebates received to the plan for the sole purpose of offsetting cost-sharing or reducing premiums.
PBM Contract Terms: Any existing PBM contract language authorizing spread pricing must be removed at the next amendment/renewal starting in 2026. In all cases, such spread pricing terms are void by operation of law on and after January 1, 2029.
PBM Licensure: On or after January 1, 2027 (or when the licensure process is established, if later), a PBM must secure a state license to do PBM business in California.
Non-Affiliated Pharmacies: PBMs cannot discriminate against non-affiliated pharmacies (those not controlled by the PBM) in terms or conditions, including reimbursement rates, based on their non-affiliated status. PBMs are permitted to use financial incentives (e.g., reduced cost-sharing) for participants to utilize specific pharmacies.
Fiduciary Duty: PBMs must exercise good faith and fair dealing in their practices. Similar to the employer’s obligation under ERISA, PBMs have a fiduciary duty to their clients to be fair and truthful, act in the client’s best interests, avoid conflicts of interest, and act with prudence.
Non-Exclusive Contracting: As of January 1, 2026, PBMs cannot enter into contracts with drug manufacturers that impose exclusivity requirements for the manufacturer’s drugs unless the PBM can show it results in the lowest cost to the plan and participant. Likewise, PBMs cannot enter into contracts with pharmacies that restrict or impose exclusivity on non-affiliated pharmacies’ ability to contract with employers.
Fully Insured Plan Considerations
Employers with fully insured health plans have no specific action items, as the insurance carrier is responsible for ensuring PBM compliance with SB 41.
The insurance carrier must ensure its PBM arrangements comply with SB 41 in California. Employers may notice changes in PBM fee structures (shifting to flat or per-claims fees), claims pricing, rebate application, on contract terms.
The antisteering and patientchoice provisions may affect pharmacy network messaging and participant options.
Self-Insured Plan Considerations
ERISA preempts state laws that relate to employee benefits under its express preemption clause.
SB 41 specifically excludes a “self-insured employee welfare benefit plan” subject to ERISA from the definition of a PBM, but it is not clear as to how much the law intends to apply to PBMs working with self-insured plan.
The U.S. Supreme Court held in in Rutledge v. PCMA (2020) that Arkansas may regulate PBM reimbursement and related practices without ERISA preemption when the law doesn’t force plans to adopt particular structures or terms. However, there have been many state PBM laws since then with a variety of court opinions as to the status of ERISA preemption. For example, the Tenth Circuit later struck down portions of Oklahoma’s PBM law that dictated network composition/benefit design (PCMA v. Mulready, 2023). The case emphasized that provisions reaching into plan structure are different from the reimbursement rules approved in Rutledge. The U.S. Supreme Court recently declined to hear Oklahoma’s appeal upon the recommendation of the U.S. Solicitor General.
Provisions framed as PBM business conduct and payment rules are more likely to survive ERISA preemption, whereas provisions that effectively mandate network composition or benefit structure are more at risk of preemption.
The next step in this area will be for the Department of Insurance (DOI) and Department of Managed Health Care (DMHC) to issue guidance as to their intended scope for self-insured plans. The extent of this enforcement direction will drive how likely the new law is to be challenged in preemption-related lawsuits.
Summary: PBM Oversight Continues to Evolve
Governor Newsom signed SB 41 October 11, 2025, initiating an extended implementation phase that will roll out from 2026–2029 based on the applicable effective dates and agency rulemaking. There is also a significant chance that Congress will revisit federal PBM reform in the coming months and years, which may affect state restrictions such as California’s SB 41 and similar laws in other states such as Arkansas, Oklahoma, and Minnesota that have also enacted PBM legislation. For more details:
Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship. Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).
Brian Gilmore
Lead Benefits Counsel, VP, Newfront
Brian Gilmore is the Lead Benefits Counsel at Newfront. He assists clients on a wide variety of employee benefits compliance issues. The primary areas of his practice include ERISA, ACA, COBRA, HIPAA, Section 125 Cafeteria Plans, and 401(k) plans. Brian also presents regularly at trade events and in webinars on current hot topics in employee benefits law.
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