SB 41: getting deep in the weeds on pharmacy benefit managers

For years, pharmacy benefit managers – prescription drug middlemen often referred to by the shorthand term PBMs – have gone virtually unregulated in California. With Gov. Gavin Newsom’s signature on October 11^th of a PBM regulation bill (SB 41) authored by Sen. Scott Wiener (D-San Francisco), that is going to change significantly.

For the uninitiated, PBMs are companies that contract with health insurers and employers to manage the prescription drug benefits for millions of Americans. They’re responsible for a variety of tasks, including maintaining formularies and processing claims, but their biggest job is arguably negotiating with both manufacturers and pharmacies.

PBMs, for example, will offer to put a manufacturer’s drug on a list of covered prescriptions in exchange for an agreement to pay less than the manufacturer’s list price. PBMs also will offer to include pharmacies within their network if the pharmacy accepts its prices for drugs.

Critics contend this gives PBMs not only enormous power within the healthcare system but also leverage to pad their own pockets through drug rebates that they sometimes keep for themselves. Aetna, Cigna, United Healthcare and many Blue Cross Blue Shield plans own PBMs or are part of companies that own them.

State lawmakers across the country have been looking at PBMs more and more in the absence of federal healthcare reform, especially after a New York Times investigation last year blamed them for contributing to the rising cost of prescription drugs.

This year, state legislators around the country introduced a variety of bills to regulate PBMs, including those that would prevent them from steering covered individuals to a particular mail-order pharmacy or a pharmacy in which the PBM has an ownership interest and others that would regulate cost sharing at PBMs.

But the biggest legislative trend concerning PBMs identified by the National Conference of State Legislatures were bills to ban a practice known as “spread pricing.” Spread pricing is a traditional PBM business model in which an insurer or employer pays more for a prescription drug than the PBM’s reimbursement to the pharmacy and the PBM keeps a portion of the spread.

State lawmakers across the country have been looking at PBMs more and more in the absence of federal healthcare reform, especially after a New York Times investigation last year blamed them for contributing to the rising cost of prescription drugs.

According to NCSL, at least 17 states considered bills to prohibit spread pricing for some state-regulated insurance plans. Among those bills was SB 41, which targeted spread pricing as well as imposing several governance and transparency requirements upon PBMs operating in California. It represents the state’s first regulation of PBMs.

Beginning in 2027, SB 41 requires PBMs to be licensed with the Department of Managed Health Care and imposes a fiduciary duty on PBMs serving self-insured employers and health plans to “be fair and truthful” and to act in their “best interests, to avoid conflicts of interest, and to perform its duties with care, skill, prudence, and diligence.”

The bill authorizes the department to conduct “periodic routine and nonroutine surveys” of PBMs, including “nonroutine examinations” of their “fiscal and administrative affairs.”

PBMs are required to disclose quarterly both unaudited financial statements and drug pricing and rebate data. The bill mandates that 100 percent of rebates must pass through to payers or programs and not be pocketed by PBMs.

It also bars PBMs from steering customers to certain pharmacies or from entering in exclusive contracts with manufacturers unless the PBM can show the exclusive agreement results in the lowest cost and lowest cost sharing to health plans and members, respectively.

Violations of any standards set out by the bill carry civil penalties of $1,000 to $7,500.

“Across the country, independent pharmacies are being squeezed out, bought up, or forced to shut down due to large PBMs’ hold on the market.”

“The passage of Senate Bill 41 by Senator Scott Weiner will help patients and pharmacies alike by removing PBMs’ ability to interfere in patient care and providing much-needed oversight and transparency to an opaque system,” said Ivy Rooney, a pharmacy owner in Chula Vista. “Across the country, independent pharmacies are being squeezed out, bought up, or forced to shut down due to large PBMs’ hold on the market. Bad actors within the PBM space are creating pharmacy deserts and leaving entire communities without access to essential medications and resources.”

The bill’s opponents disagree.

The Pharmaceutical Care Management Association, the national association representing PBMs, told the Legislature that SB 41 would benefit drug manufacturers and some pharmacies but wouldn’t help consumers and will result in premium increases of at least $150 per member per month.

It objected to the bill’s ban on spread pricing, which it said allows health plans and employers to better manage their total spending on drugs. It also objected to a provision in the bill that allows pharmacies to participate in a PBM network without agreeing to the PBMs terms and conditions, which it said would allow pharmacies to charge whatever they wanted for drugs they dispensed.

The association said SB 41’s exclusivity provisions would undercut PBMs ability to leverage competition between rival brand drugs for deeper discounts, leading to higher profits for drug manufacturers as well as higher costs for patients.

Capitol Weekly reached out to PCMA to talk about what might happen next now that SB 41 has been signed into law. It referred to a statement it released when Newsom signed the bill:

“It is a failure of the Newsom administration to fall for Big Pharma’s ploy to blame their high list prices on others and to undermine the very mechanisms that actually lower prescription drug costs. Nothing in SB 41 will lower drug costs for Californians. In fact, the legislation will increase drug costs for everyone in California.

“This is Big Pharma politics and Californian patients, consumers, employers, unions and plan sponsors will be the ones who pay the higher prices delivered by this misguided legislation.”

As PBMs see it, SB 41 was nothing less than a full frontal assault on them by Big Pharma.

Among SB 41’s supporters was Biocom California, whose investor forum was sponsored by Big Pharma stalwarts Amgen, Merck and Lilly as well as Big Pharma-adjacent companies RxCelerate and Thermo Fisher Scientific.

But the bill also garnered support from others in the healthcare sector, including the California Medical Association, the California Life Sciences Association and the United Nurses Association of California/Union of Health Care Professionals.

This was a fight to protect patients and pharmacists, who both were suffering under the business practices of the previously unregulated PBMs, said Liz Helms, president & CEO of the California Chronic Care Coalition.

Indeed, Capitol Weekly spoke with two Sacramento-area supporters of SB 41 who described their hardships under PBMs: Colleen Henderson, whose daughter lives with a painful chronic skin condition called hidradenitis suppurativa and has been steered into using an increasingly expensive mail-order pharmacy under PBM policies, and independent pharmacist Sonya Frausto, who said she had to close her pharmacy Ten Acres in August after five years in business due to PBMs’ practice of offering her negative reimbursements.

“If Gov. Newsom would have signed that bill in 2024, we would have at least had the potential to fight,” Frausto said.

The bill Frausto referred to is SB 966, also by Wiener, which was similar to SB 41. One key difference: SB 966 required the California State Board of Pharmacy to license and regulate PBMs.

“This is Big Pharma politics and Californian patients, consumers, employers, unions and plan sponsors will be the ones who pay the higher prices delivered by this misguided legislation.”

Newsom vetoed SB 966 in September of last year, writing that while he agreed that “PBMs must be held accountable” to ensure prescriptions are affordable, but said “we need more granular information to fully understand the cost drivers in the prescription drug market and the role that PMBs play in pricing.”

“Specifically,” Newsom continued in his veto message, “California should collect comprehensive information from the pharmacy delivery system about the total cost of care for providing individual prescription drug products, including but not limited to wholesale acquisition costs, fees, payments, discounts, and rebates paid to and received by PBMs.”

Newsom also vetoed SB 524 by former Sen. Nancy Skinner (D-Oakland), which would have banned health plans or insurers from steering patients to a particular pharmacy, a practice now prohibited under SB 41.

What changed for the governor? Susan Bonilla, CEO of the California Pharmacists Association, said she thinks new studies on the harmful practices of PBMs combined with the growing bipartisan support for regulating them led to Newsom’s signature this year.

“We reached a point where these really exploitative business practices can’t be ignored anymore,” she said.

Several prohibitions in SB 41 will go into effect on Jan 1. 2026, opening the door for Department of Justice enforcement. Bonilla said she also understands the Department of Managed Health Care will be aggressive in standing up its licensing process for PBMs next year and expects the Department of Health Care Access and Information to maintain and analyze PBM data.

That enforcement, she said, cannot come soon enough.

Bonilla said hundreds of pharmacies have closed in California this year – 344 Rite Aids alone – due at least in part to PBM practices. She’s optimistic SB 41 will mark the beginning of a new era of stability for the state’s health care system.

“It’s a very hopeful day,” Bonilla said.