California Gov. Gavin Newsom signed into law a series of bills last week that address some of the most hot button topics in healthcare, including the practices of pharmacy benefit managers and private equity firms.
The legislation is the latest example of state lawmakers taking healthcare policy into their hands, following stalled efforts at the federal level.
Some laws in the package will reduce payers’ prior authorization requirements for commonly approved procedures or strengthen hospitals’ charity care programs — which is intended to help patients receive medically necessary care faster and at an appropriate cost.
However, the most significant reforms impose stricter guardrails on some of healthcare’s most controversial players: pharmacy benefit managers and private equity firms.
‘Sweeping reform’ of pharmacy benefit managers
Senate Bill 41, signed into law Friday, will impose stronger regulations on PBMs operating in the state.
Critics accuse PBMs of driving up prices for prescription drugs and steering business away from small, independent pharmacies. The largest PBMs — CVS’ Caremark, Cigna’s Express Scripts and UnitedHealth’s Optum Rx — jointly control 80% of the U.S. prescription drug market.
The drug middlemen negotiate discounts with pharmaceutical manufacturers in return for favorable placement on plans’ formularies and pay pharmacies for dispensing medication.
The Federal Trade Commission previously found the largest PBMs paid independent pharmacies lower rates than their in-house pharmacies and funneled business to their owned subsidiaries. The PBMs have also been accused of pressuring independent pharmacies to accept coercive fees.
“PBMs have developed a compensation scheme that creates perverse incentives to raise drug prices in some circumstances, and the complete lack of oversight has also allowed some PBMs to steer patients toward pharmacies they own, pocket large portions of the rebates they negotiate with drug manufacturers, and make misleading statements to customers,” said the bill’s author, state Sen. Scott Wiener, D-San Francisco.
California’s law will prohibit spread pricing, a practice where PBMs charge insurers a higher price for a drug than what they reimburse to the pharmacy. It also prohibits PBMs from steering patients to owned pharmacies.
It also will require PBMs to pass all rebates through to the payer, ban PBMs from making exclusivity deals with drugmakers and require PBMs operating in the state to be licensed by the Califronia Department of Insurance.
The law takes effect Jan. 1, 2026.
Other states have attempted to crack down on PBMs. Arkansas passed the most sweeping reform earlier this year when it banned PBMs from owning pharmacies. However, the law received pushback from the PBM industry and a judge blocked the law from going into effect in July.
The Pharmaceutical Care Management Association, a PBM lobby, cast blame on drug makers in a statement over the weekend.
“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,” the PCMA said. “Nothing in SB 41 will lower drug costs for Californians.”
Second private equity bill signed into law
Newsom also signed Assembly Bill 1415 into law on Saturday, which will require private equity firms to notify the state’s Office of Health Care Affordability before executing major healthcare transactions, including mergers and acquisitions.
The new law only allows regulators to review transactions, but does not give them power to veto deals. It comes days after Newsom signed SB 351 into law, which bars private equity firms from interfering in medical decisionmaking.
Backers of SB 351, including state Sen. Christopher Cabaldon, say private equity investment in healthcare has “quintupled over the past decade,” and that the new regulations are designed to ensure California has modern tools to oversee the actors, protect patients and safeguard against rising costs.
“Californians deserve a full picture of the billions spent annually in our health care system by large private equity firms. AB 1415 ensures that our Office of Health Care Affordability has the authority to monitor these transactions and protect patients from rising costs and reduced access to care,” said California Assembly member Mia Bonta in a statement.
Newsom vetoed a similar bill last year that would have allowed the state’s attorney general to review and possibly axe healthcare transactions involving private equity firms. At the time, Newsom said the state’s Office of Health Care Affordability was better suited to review private equity deals. The office already analyzes how certain transactions might impact market competition, including the state’s ability to meet spending or affordability targets, for example.
The state’s focus on private equity comes as California has seen an explosion of private equity investment, according to a report from the California Health Care Foundation. Private equity-backed acquisitions accounted for about one-third of healthcare deals across the state between 2019 and 2023.
