Keenan Briefings

Briefing

California Enacts SB 41: New Rules for Pharmacy Benefit Managers

On October 11, 2025, Governor Gavin Newsom signed into law SB 41, enacting a broad set of changes to the ways in which pharmacy benefit managers (PBMs) can do business in the State of California. Effective January 1, 2026, the bill will impose a number of new requirements on PBMs and the plans they work with.

SPREAD PRICING BAN

The new law prohibits the practice of “spread pricing,” in which a PBM charges the plan a price for prescription drugs that differs from the amount the PBM pays to the pharmacy filling the prescription. Beginning on January 1, 2026, PBMs will not be able to include spread pricing terms in their contracts. For existing contracts, spread pricing terms will be voided on or after January 1, 2029. As written in the bill, it appears that this term is intended to apply to PBM contracts with carriers and to PBMs more broadly (and likely impacting their contracts with self-funded plans).

NON-AFFILIATED PHARMACIES

SB 41 includes a number of restrictions on PBM practices in dealing with “non-affiliated pharmacies” that share no ownership or control with the PBM. These provisions are intended to prevent PBMs from favoring pharmacies with which the PBM does share common ownership or control. Under these provisions, PBMs are prohibited from discriminating against non-affiliated pharmacies, requiring plan participants to use only an affiliated pharmacy if there are non-affiliated pharmacies in the network, or financially inducing a plan participant to transfer prescriptions to an affiliated pharmacy. However, PBMs can still offer to plan participants financial incentives to use a particular pharmacy, such as lower copays, coinsurance, or any other cost sharing for a prescription when the prescription is dispensed.

These provisions are written in such a way as to regulate PBM practices regardless of whether they are contracting with self-funded or fully insured plans, which could become problematic if SB 41 is challenged in court. Similar provisions in an Oklahoma law were struck down by the U.S. Court of Appeals for the 10th Circuit on ERISA preemption grounds in Mulready v. PCMA. While California courts are not required to follow 10th Circuit precedent, Mulready has the added distinction of having been appealed to the Supreme Court, which declined to hear the appeal. The Court’s decision has been read by many to indicate that the Supreme Court would not change the

Mulready holding, lending some weight to the persuasive precedent of the case in federal courts outside the 10th Circuit.

EXCLUSIVITY LIMITED

SB 41 prohibits a PBM from entering, extending, or renew a contract on or after January 1, 2026, with manufacturers that do business in California that implements implicit or express exclusivity for those manufacturers’ drugs, unless the pharmacy benefit manager can demonstrate the extent to which exclusivity results in the lowest cost to the payer, and the lowest cost sharing for the plan participant.

The law also completely prohibits PBMs from contracting with pharmacies in such a way that restricts or imposes exclusivity on a non-affiliated pharmacy’s ability to contract with employers and carriers. Again, as this provision applies to the PBMs themselves, it appears that this provision was intended to apply regardless of the type of plan the PBM serves.

FIDUCIARY DUTY AND TRANSPARENCY PROVISION

The new law provides that PBMs have a fiduciary duty to both self-insured employer plan, and health insurance carrier clients, including 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 their duties with care, skill, prudence and diligence. A fiduciary duty is a heightened duty of care under the law, one usually applied to trustees or certain fund managers.

PBMs will be required to notify a plan in writing of any activity it engages in that directly or indirectly presents a conflict of interest that interferes with the PBM’s duty to exercise good faith and fair dealing

Additionally, the law provides a mechanism for a plan sponsor to obtain quarterly disclosures of rebates and fees received from drug manufacturers, fees and assessments charged to network pharmacies, and payments made to pharmacies, as well as de-identified utilization information for the plan. With the exception of the utilization information, these disclosures will be made available to requesting plan sponsors that agree in writing to keep proprietary information confidential. The Rx utilization information can be provided without such an agreement in place.

PROVISIONS ONLY IMPACTING FULLY INSURED PLANS

Several of the sections of SB 41 are written in such a way that indicates they will only apply to fully insured plans regulated by the state of California and not to self-funded ERISA plans. Those include the following:

• Member Cost-Sharing—SB 41 provides that health insurance policies issued, amended or renewed on or after January 1, 2026 cannot calculate an enrollee’s cost sharing for a prescription at an amount that exceeds the actual rate paid by the plan for the prescription drug.
• Passthrough Pricing—The bill requires PBMs to use a passthrough pricing model, defined as one in which payments made by the health carrier client to the PBM for outpatient drugs are equivalent to the payments made by the PBM to the dispensing pharmacy, including the dispensing fee.
• 100% Rebate Passthrough—For fully insured plans, SB 41 requires the PBM to direct 100% of all manufacturer rebates to the carrier, for the sole purpose of offsetting cost-sharing, deductibles, and coinsurance and reducing premiums for plan participants.

NEXT STEPS

The law’s authors, Senator Weiner and Senator Wahab have stated that the practices prohibited by this legislation have driven up the cost of prescription drugs. It remains to be seen if this legislation will lower costs for employer-provided health plans or their employee members.

Following the signing of SB 41, the Pharmaceutical Care Management Association (PCMA) released a statement criticizing the legislation. In recent years, PCMA has sued several states that have enacted similar legislation. Even if PCMA or other parties bring suit, it is likely that the law will go into effect on January 1, 2026.

At present, Keenan is asking the PBMs with which we work to detail how they will comply with the new law. We are also eager to see how the Department of Managed Health Care (DMHC) will interpret the law’s restrictions, especially as they impact self-funded ERISA plans. As we learn more, we will be sure to share that information.

Keenan is not a law firm and no opinion, suggestion, or recommendation of the firm or its employees shall constitute legal advice. Clients are advised to consult with their own attorney for a determination of their legal rights, responsibilities, and liabilities, including the interpretation of any statute or regulation, or its application to the clients’ business activities.