California PBM Law is a Starting Point for Real Transparency

California’s new legislation enacting reform of pharmacy benefit managers is a comprehensive effort to address drug pricing transparency and specifically targets practices that have long obscured the true cost of medications, said Kathy Chang, head of trade relations at Blue Shield of California.

SB 41, which was recently signed earlier this week by California Governor Gavin Newsom, prohibits spread pricing, requires PBMs and group purchasing organizations to pass through manufacturer rebates to health plans, prohibits PBMs from marking up the prices of generic drugs, and bans PBMs from steering patients to their own pharmacies. The new law takes effect Jan. 1, 2026.

The legislation also addresses an issue that leads to higher patient costs: patients’ out-of-pocket costs that are based on list prices rather than the discounted prices their PBMs negotiate, Chang said in an interview. “If your PBM is negotiating a 50% rebate, the patient copay should be charged based on that lower price that the PBM has negotiated, not the full price,” she said.

In some cases, PBMs have based a patient’s coinsurance or copay on the manufacturer’s list price. In fact, every $1 increase in rebates raises a drug’s list price by an average of $1.17, according to a 2020 analysis from the Leonard D. Schaeffer Institute for Public Policy and Government Service.

Because of the new California law, PBMs who do business in the state must now disclose to payers the amount they actually pay the manufacturer for the drug. The bill also addresses transparency requirements for GPOs, which serve as the contracting entities between PBMs and drug manufacturers.

Chang said this law is a starting point, and she views it as an important step toward transparency across the entire pharmacy supply chain.

“The purpose of Senate Bill 41 was to create better transparency in the system so that patients can see the true cost of the medications that they are using. It is the most meaningful and comprehensive PBM reform bill in the country, and it is truly designed to reform PBM practices and, again, create more of that transparency in direct pricing,” she said.

This new law was needed because of the rising costs of healthcare and prescription drugs, said California Senator Scott Wiener, a Democrat from San Francisco and the sponsor of SB 41. In 2022, drug spending in California grew by 12%, and about 3 in 10 adults in the state rationed or skipped medications because of cost, according to a 2023 report.

Chang hopes other states, and maybe the federal government, may move forward with similar laws. “We’re seeing a lot of push in the current administration on just better visibility to the drug pricing,” she said. “With so much that we have seen from the current administration, we will continue to see drug pricing be on the front page of the news, and we will create more visibility on what that pricing needs to be.”

The California law does not apply to self-funded benefit plans that are governed by the federal Employee Retirement Income Security Act of 1974 (ERISA). Organizations such as the ERISA Industry Committee (ERIC) have advocated for applying fiduciary standards to PBMs in the same way such standards apply to employers.

“We welcome the application of fiduciary responsibilities to PBMs—employers have been expected to meet these same requirements for 50 years, and ERIC has long supported making this same policy change at the federal level,” Dillon Clair, director of state advocacy, ERIC, said in a statement.