California’s new law “SB 41” has overhauled PBM regulation, effective January 1, 2026. ERISA Health Plan sponsors (self-funded or fully funded) should review whether the new law applies to them and whether the changes to PBM administration could create opportunities including cost savings, increased rebates and more.
On October 11, 2025, California Governor Gavin Newsom signed into law SB 41, which provides a major overhaul to the regulation of Pharmacy Benefit Managers (“PBMs”) mandating rebate transparency, rebate pass-through, outlawing spread pricing, and providing a fiduciary duty on PBMs to act in the best interest of the payers. The law becomes effective January 1, 2026. ERISA Health Plan sponsors (self-insured or fully insured) should determine if the new law applies to them.
Plan sponsors should be aware that the PBM does not have to be located or headquartered in California for the law to apply to the PBM. If it provides services to a California plan sponsor, health plan, payer or insurer then the PBM could be subject to SB 41, and the benefits of the law could apply to the California recipient of their services.
The focus of this law on PBMs follows objectives articulated in the current federal administration. A recent Department of Labor (“DOL”) news release provided that its aim in issuing regulations would be to further the administration’s goal to reduce drug prices by providing regulatory guidance to improve transparency and fee disclosure of PBMs. This tracks the President’s Executive Order: “Lowering Drug Prices by Once Again Putting Americans First” which directed the DOL to take action to implement this goal. The DOL has stated in its release that it will plan to increase transparency of PBMs’ direct and indirect compensation from employer sponsored medical plans.
This attention to PBMs at both the state and federal level is driven by the increasing costs of prescription drug prices and the concern that PBMs may not be transmitting the manufacturer’s drug rebates as contracted or may be utilizing price spreading to limit drug pricing benefits to the health plans.
An Overview of the Key Provisions of SB 41
Rebate and pass-through pricing and transparency required
SB 41 requires that rebates from drug manufacturers be passed through by the PBM to the applicable health plan payer provided by law.
Also, under the law, the price of the prescription drugs paid to the pharmacy by the PBM must be the same price the health plan carrier paid to the PBM for the drugs.
In addition, PBMs are required to provide quarterly data, including but not limited to the drug manufacturers’ acquisition cost, rebates received, and administrative fees from the manufacturer, and payments made by the PBM to affiliated and non-affiliated pharmacies.
Spread Pricing outlawed
Beginning January 1, 2026, any new PBM contracts will be prohibited from providing spread pricing. This is the practice of PBMs charging a higher price for the drug to the payor than what they actually paid the pharmacy for the prescription drug.
Any PBM contract reissued or amended after that date must eliminate price spreading from the agreement. By January 1, 2029, any agreement which still contains price spreading that provisions will not be valid.
Access to Non-PBM Affiliated Pharmacies
SB 41 provides “any willing provider” language which refers to the prohibition of PBMs from limiting access of patients to non-affiliated pharmacies if the pharmacy is willing to accept the same terms and conditions that the affiliated pharmacies of the PBM agreed to. The law allows plan participants to have wider access to non-affiliated PBM network pharmacies and will also include the requirement that the PBMs do not discriminate against these non-affiliated pharmacies, including not providing them with less reimbursement than affiliated pharmacies.
PBM Administrative Fee to Limit Income
Under the law, the PBM income will be limited to an administrative fee for management services.
PBM CA Licensing requirements
California SB 41 applies to PBMs that conduct business in California by providing PBM services to a health plan that covers California residents. For PBMs with such a health plan contract issued, renewed or amended on or after January 1, 2027, the contract must provide that the PBM has a California license and is in good standing. By 2029, SB 41 requires all PBMs operating and providing services to CA health plans and participants to be licensed in CA, and certain disclosures will apply.
PBM New State Fiduciary Duties
The law provides that PBMs have a “duty to be fair and truthful toward the client, to act in the client’s best interests, to avoid conflicts of interest, and to perform duties with the care, skill, prudence and diligence”.
Penalties for Non-Compliance
The law provides for penalties of between $1,000-$7,500 per violation, and further equitable relief may be sought by the CA Attorney General.
Carve Outs
The law contains several carve-outs including Taft Hartley self-funded plans.
Potential Challenges and Defenses
Several other states have looked to address these concerns with PBM administration and were confronted with federal law challenges, including allegations of ERISA preemption. Historically, the broad provisions of ERISA have limited states in providing laws in connection with an ERISA plan. However, ERISA preemption challenges regarding state laws addressing PBM administration are not settled, as seen in the Supreme Court case of Rutledge v. Pharmaceutical Care Management Association and a federal judge’s decision on an Arkansas law holding that self-funded health plans report dispensing fees was upheld against ERISA preemption challenges in Central States Southeast and Southwes Areas Health and Welfare Fund and Charles A. Whobrey v. Alan McClain.
Further, following enactment of the law, consideration should also be given regarding the ERISA Industry Committee (ERIC) issuance of a press release on California law, SB 41 and its support and involvement to limit the law’s interference with ERISA and ensure the law’s proper implementation does not interfere with the design and administration of self-funded plans governed by ERISA
What Action Steps Should ERISA Plan Sponsors Take to Ensure Implementation of the Benefits of the Law?
Review ERISA plan sponsors contracts with the PBMs that CA health plans contract with to provide to prescription drugs, to determine if SB 41 will apply to their agreement with the PBM.
To take advantage of the benefits of the law, if it does apply to your PBM agreement, review the contract provisions regarding rebates, price spreading structures, and other applicable provisions of the law to determine what will need to be addressed.
Possible Statutory Loopholes and Need for Regulations, Oversight and Enforcement
Plan sponsors must remain vigilant because PBMs may look to find ways to avoid these new obligations under SB 41. For example, PBMs could try to bypass the rebate pass-through provision by relying solely on a wholly-owned rebate aggregator or group purchasing organizations (GPOs) to negotiate and administer rebates with manufacturers. Sponsors may be unaware of this and why an enforcement mechanism is needed to ensure the legal provisions of SB 41 and its intent are fully complied with and not skirted.
It is well known in the healthcare community that PBMs utilize wholly-owned or affiliated group purchasing organizations (“GPOs”)to retain a portion of the rebates as a fee for their services, and PBMs may claim that any fees collected by the GPOs do not need to be “passed through” to the plans in contradiction to the new law. At this point, it is unclear whether SB 41’s requirements apply to GPOs. However, Section 7 of SB 41 requires the Department of Insurance to adopt “regulations regarding group purchasing organizations,” but the law itself remains silent as to what requirements, if any, will apply. Plan sponsors should be aware that PBMs may argue that the GPO fees constitute “bona fide” service fees, which are permissible under SB 41; however, that would appear to be in direct contradiction of the purpose of the new CA law (i.e., rebate and pricing pass-through). Also, the law follows the intent of President Trump’s executive order to lower drug prices and the DOL’s news release which provided its aim in issuing regulations would be to further the administration’s goal to reduce drug prices by providing regulatory guidance to improve transparency and fee disclosure of PBMs.
A concern regarding the reporting requirements of PBMs under the law is that unless further expanded by regulations, much of the data required to be provided to the California Department of Insurance (for public reporting) will likely be comprised of “summary” reports and not claims-level data. Without claim-level data, it is likely that the flow of funds between the PBMs and their affiliates, on the one hand, and plan sponsors, drug manufacturers, and network pharmacies, on the other, will continue to remain opaque and non-transparent. Thus, plan sponsors will need to stay alert and exercise their fiduciary duty to audit their PBMs’ services and level of compensation, including by demanding access to the plans’ claims data.
Finally, SB 41 does not contain a standalone private right of action allowing private entities, such as plan sponsors, to bring suit to enforce the statute. There is an exception for discrimination and patient steering against non-PBM-affiliated pharmacies, which will now be deemed per se violations of California’s Unfair Competition Law, Cal. Bus. & Prof. Code §§ 17200 et seq. For plan sponsors, however, obtaining legal redress for violations of SB 41 may call for a more creative legal theory.
In summary, SB 41 is a good step toward PBM reform in CA. However, we need to also look for Congress to provide stronger PBM federal regulations to ensure transparency and accountability in furtherance of the current administration’s goal to reduce prescription drug prices.
As we wait for SB 41 regulations, like most new laws, there are several questions and concerns about potential loopholes that could avoid the specific purposes of law and obscure transparency. Thus, it is critical that Plan sponsors should determine if the new law applies to them and how to effectively implement the benefits of the law including through fiduciary plan operational reviews, independent robust audits, steps to enforce contractual compliance clauses, review PBM contracts and prioritize claims-level transparency to mitigate ongoing risk and protect plan assets.
For Additional Information
To understand how SB 41 may impact your PBM contracts, ERISA obligations and understanding its application to your Sponsor provided health plans, reach out to Frier Levitt’s experienced PBM and ERISA attorneys. Our team has deep experience navigating complex state PBM reforms and can guide you through proactive steps to protect your plan, maximize value, identify cost savings and ensure compliance.
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