How California is rewriting the PBM playbook

A new law in California and a new contract for the state’s retiree healthcare program highlight a shift in PBM accountability. Beginning Jan. 1, 2026, a California law, SB 41, went into effect, imposing fiduciary responsibilities on pharmacy benefit managers. At the same time, CalPERS, the California Public Employees' Retirement System, began the year with a new pharmacy benefit manager, CVS Caremark, that includes performance guarantees that hold the PBM accountable for meeting cost and quality targets.

Taken together, these two efforts could signal a change in the relationship of PBMs, health plans and payers. The state law is being challenged legally (more on that below), but industry leaders said it is an important step toward real transparency across the supply chain and specifically targets practices that have long obscured the true cost of medications.

The California law

The new law will reshape how these intermediaries now must operate within the state’s healthcare system, requiring PBMs to act in the best interests of health plans and their sponsors rather than prioritizing their own financial gains, said Dae Y. Lee, Pharm.D., Esq., an attorney at Buchanan Ingersoll & Rooney. “In California, it’s crystal clear, PBMs owe fiduciary duty to the plans or plan sponsor. If PBMs put their interest first, as they always do, they’re going to get sued,” he said.

SB 41 prohibits spread pricing, requires PBMs and group purchasing organizations to pass through 100% of manufacturer rebates to health plans. Signed into law by California Governor Gavin Newsom in October 2025, SB 41 also prohibits PBMs from marking up the prices of generic drugs and bans PBMs from steering patients to their own pharmacies.

Non-compliance with the California carries penalties of up to $7,500 per violation, providing enforcement mechanisms that could prove costly for major PBMs.

Lee said the goal of the legislation is to reduce drug spend, monthly premiums and out-of-pocket costs as employers leverage SB 41 to identify wasteful spending and hold PBMs accountable to genuine fiduciary standards.

This law is another attempt to create accountability for the largest PBM specifically, said Joe Shields, president of Transparency-Rx, a trade group representing smaller PBMs. “The standard of fiduciary duty or any reasonable standard is that it is supposed to reflect integrity, good faith negotiations and good faith arrangements. As a policy mechanism, I think that makes sense. But the devil's in the details, specifically as to how it gets framed and articulated.”

The California law also extends the rebate pass-through requirements to those received by PBM-owned group purchasing organizations (GPO) and rebate aggregators, such as Optum’s Emisar Pharma in Ireland, Express Scripts’ Ascent Health in Switzerland, and CVS’s Zinc Health Services.

This inclusion of the GPOs and rebate aggregators in the California signals a shift in people’s understanding of how PBMs operate and the complexity of drug pricing. “The actual language has been well-considered because the policymakers at the committee level, at the federal government, and at the state level realize that you can’t have this one-dimensional analysis associated with ‘PBM practices’ without understanding what's occurring around rebate aggregation, and specifically the practice of the GPOs,” Shields said.

The GPOs formed by the largest benefit managers leverage buying power to access rebates and better discounts. But over the last few years, concern has been raised about the transparency of the GPO transactions and whether the rebates and discounts GPOs receive are actually passed through to plans and employers. The concern has been that the traditional PBMs have leveraged these discounts for a new avenue for revenue.

Shields pointed to CVS Caremark’s settlement with the state of Illinois, where the company agreed to pay the state $45 million for failing to pass along rebates. “Illinois believed they had the right laws in place to assure that that the rebates from the GPO, which CVS held back from them, were legally obligated to be shared with the state through its state plan,” he said.

There is genuine skepticism about transparency announcements from the larger PBMs, Shields said. CVS’ Caremark’s settlement with Illinois was announced July 24, 2024, just one day after a congressional hearing on July 23, 2024, where leaders from CVS Caremark, Express Scripts and Optum Rx all said they passed on all rebates and discounts.

“The market is demanding true transparency and meaningful transparency across the board,” he said.

The CalPERS contract

In California’s contract with the CalPERS, the California Public Employees' Retirement System, effective Jan. 1, 2026, CVS made a commitment to performance guarantees in key areas, such as managing pharmacy cost trends and ensuring clinical quality. The contract also provides for increased transparency, audit, and oversight provisions throughout the five years of the contract.

The agreement requires CVS to put $250 million at risk if they do not meet goals for controlling pharmacy benefit costs and ensuring clinical quality outcomes for members. The clinical guarantees that apply to both Basic and Medicare HMO and PPO plans align with two clinical measures in CalPERS’ Quality Alignment Measure Set for improving care for high blood pressure and diabetes.

CVS Caremark will provide outpatient prescription drug benefits for approximately 587,000 members enrolled in Basic or Medicare HMO and PPO plans. This represents about 40% of the 1.5 million members who receive healthcare benefits through CalPERS.

Impact of SB 41

The state law faces hurdles, including legal challenges based on preemption by the federal Employee Retirement Income Security Act of 1974 (ERISA), which governs self-funded plans. The California law is written in a way to apply to PBMs whether they are contracting with fully insured or self-funded. Organizations such as the ERISA Industry Committee (ERIC) have advocated for applying fiduciary standards to PBMs.

Last week, the Pharmaceutical Care Management Association (PCMA), a trade organization for PBMs, filed suit in the U.S. District Court for the Central District of California saying ERISA preempts SB 41. In the lawsuit, PCMA claims “functions like the ones that PBMs perform — such as application of rules determining eligibility for participation or benefits, processing of claims, and making recommendations with respect to plan administration — do not give rise to fiduciary obligations” and the state law would “amend the carefully defined fiduciary rules established by ERISA and DOL regulations.”

PCMA argues that the California law would in fact increases costs for providing pharmacy benefits because PBMs would be required to review “each action” for state compliance.

Lee also expects that PBMs will seek alternative revenue streams, including increasing administrative fees, service fees and price protection charges. These fees, he said, fall outside SB 41’s scope and represent existing deductions from total rebates. “They’re in the business of making money,” he said. “But there’s got to be transparency.”