On October 11th, California's Governor Newsom signed SB-41, a sweeping bill aimed to reduce prescription drug prices by regulating the practices of pharmacy benefit managers ("PBMs").  SB-41 includes many requirements that mirror those of other state PBM laws, such as requiring the use of pass-through pricing and prohibiting both spread pricing and steerage to affiliated pharmacies.  However, in many respects, the bill goes a step beyond other state PBM laws and imposes a new fiduciary duty on PBMs of a self-insured group health plan that includes “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 its duties with care, skill, prudence, and diligence” (it appears that “client” means the self-insured group health plan, based on the Senate Floor Analysis).  The bill also prohibits PBMs from entering into, renewing, or enforcing exclusivity deals with drug and medical device manufacturers that do business in California and from “unreasonably” obstructing or interfering with a patient’s right to timely access a prescription drug or device that an in-network pharmacy legally prescribed.  Note that the bill specifically exempts PBM services provided to self-insured Taft-Hartley plans.  

Most of SB-41 provisions are effective on or after January 1, 2026.  Plan sponsors should review their existing PBM agreements to determine the impact of the new bill and may consider consulting with their PBMs about any amendments required to comply with the bill.  

• Spread Pricing – SB-41 prohibits spread pricing in any new PBM contract executed on or after January 1, 2026. Any spread pricing terms in existing contracts must be removed when the agreement is amended or renewed on or after January 1, 2026 and will be rendered completely null and void on or after January 1, 2029. 

• Pass-Through Pricing – SB-41 requires PBM contracts to use pass-through pricing. 

• No Steerage to Affiliated Pharmacies – SB-41 prohibits a PBM from, among other things, requiring the use of affiliated pharmacies and discriminating against nonaffiliated pharmacies in connection with dispensing drugs. It also prohibits requiring enrollees or insureds to use affiliated pharmacies and prohibits financially inducing enrollees, insured, or prescribers to transfer a prescription to affiliated pharmacies if there are nonaffiliated pharmacies in the network. 

• PBM Income – SB-41 limits a PBM’s income to that derived from a pharmacy benefit management fee for pharmacy benefit management services provided.

• No discrimination against nonaffiliated pharmacies – SB-41 generally prohibits discrimination against nonaffiliated pharmacies – including reimbursing nonaffiliated pharmacies less than affiliated pharmacies for the same pharmacist services. SB-41 prohibits denying a nonaffiliated contract pharmacy the opportunity to participate in a PBM's network with preferred participation status if the pharmacy is willing to accept the same terms and conditions that the PBM has established for affiliated pharmacies as a condition of preferred network participation status.

ERISA's broad preemption language has historically prevented states from regulating ERISA-covered plans if the state law included an impermissible reference to or had an impermissible connection with the ERISA-covered plan.  Recent case law developments around the scope of ERISA preemption, such as the recent decision upholding Arkansas Rule 128 (see, Federal Judge Holds Arkansas' Pharmacy Reporting Law Is Not Preempted Under ERISA) have made it less clear how the courts will apply ERISA's preemption to state regulations.  SB-41 can be found here.

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