California Gov. Gavin Newsom signed a bill Saturday that will revamp the laws governing pharmacy benefit managers operating in his state.
The bill “represents the most aggressive effort in the country to lower prescription drug costs,” Newsom said in a bill signing statement.
The new California PBM law appears to be broader than the PBM laws recently adopted in states like Illinois and Massachusetts.
What it means: Independent pharmacies and some employer groups predict that the new law will protect pharmacies from unfair efforts by health insurers and PBMs to rig the prescription drug market in their favor and to keep a big percentage of the discounts they negotiate for employers and other “payers.”
The Pharmaceutical Care Management Association, the PBMs’ trade group, has argued that the new law will do nothing to rein in drug manufacturers and that the new limits on PBM activities will end up increasing plan costs by about $1,800 per participant per year.
PBM law details: The new California PBM law, based on state Senate Bill 41:
◆ Sets a fiduciary standard on PBMs, meaning that PBMs will face a requirement to act in the best interest of self-insured employers that use PBMs and may be subject to new types of lawsuits if plaintiffs say the PBMs have failed to fulfill their fiduciary duty.
◆ Prohibits a PBM from shutting pharmacies with no corporate ties to the PBM out of its pharmacy network.
◆ Prohibits a PBM that has both affiliated pharmacies and outside pharmacies in its pharmacy network from steering the patients toward the affiliated networks.
◆ Requires PBMs to pass all manufacturer rebates on to plan sponsors or plan participants.
◆ Prohibits “spread pricing,” or moves by PBMs to charge plan sponsors or participants more for prescription drugs than they pay the pharmacies.
◆ Puts the California Department of Managed Health Care in charge of licensing and overseeing PBMs.
◆ Requires PBMs to submit quarterly and annual reports to state regulators.
California state Sen. Scott Wiener, D-San Francisco, introduced the bill that was signed Saturday and a seemingly similar PBM bill that Newsom vetoed in 2024.
Newsom did not say why he signed the new version of the bill.
Mark Kreidler reported in Capital & Main that Wiener might have won Newsom’s support by putting PBM oversight under the direction of the Department of Managed Health Care, which has a director appointed by the governor, rather than the California Department of Insurance, which has an elected commissioner.
The future: One question is whether the new California law will take effect as written and work as drafters expect.
In the past, business groups have succeeded at using lawsuits and ballot measures to block implementation of state health benefits laws, such as a 2003 law that could have required large California employers that provide no health benefits to pay a penalty.
Self-insured plans: The federal Employee Retirement Income Security Act of 1974 preempts state efforts to regulate large, multistate employer health plans. Traditionally, the courts have interpreted that to mean that states cannot regulate employers’ self-insured health plans.
The new California law does not include an exclusion for employers’ self-insured plans. It does include a provision that declares that the rest of the law can continue to apply if a court invalidates part of the law.
Reactions: The Pharmaceutical Research and Manufacturers of America said in a post on X.com that the new California law is a “landmark PBM reform.”
“PBMs have gained the system for far too long,” PhRMA said. “Those days are gone.”
Mike Guerra, the CEO of California Life Sciences, a group for California organizations with an interest in biotechnology and pharmaceutical research, also welcomed Newsom’s signing of the PBM bill.
The new law “sets a new national benchmark for transparency and fairness in health care, so patients are not left holding the bag with higher drug costs,” Guerra said.
PCMA — the PBMs’ group — said in a statement posted on X.com that the law will lead to higher costs for patients, consumers, employers, unions and plan sponsors in California.
“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 costs,” the group said.
Nothing in SB 41 will lower drug costs for Californians.”