by Andrew Kiefer, vice president of State Government Affairs, Blue Shield of California
California State Capitol, Sacramento
California just took a monumental step toward lowering prescription drug costs for millions. With overwhelming bipartisan support, the state legislature passed Senate Bill 41 (SB 41), the most comprehensive pharmacy benefit manager (PBM) reform bill in the nation, to date. The bill, signed into law by Governor Gavin Newsom over the weekend, curbs pharmacy benefit manager practices that have driven up drug costs and undermined transparency for decades.
This is a victory for Californians, creating a more transparent prescription drug system that will make medications more affordable over time. The bill’s bipartisan support also signals what’s to come on a national level.
How we got here
Pharmacy benefit managers were created to lower drug costs for employers, health plans and consumers. Instead, they’ve morphed into just another cost driver within the system, leveraging the opaque drug purchasing model for their own financial gain at consumer, employer and taxpayer expense.
Today, only three pharmacy benefit managers control about 80% of the prescription drug market, managing drug benefits for more than 200 million Americans. Instead of lowering costs by applying economies of scale to what previously were health plan administrative functions, they created a convoluted scheme of fees and rebates that generally favor higher-cost drugs rather than cheaper alternatives.
Rebates are the best example of how pharmacy benefit managers distort the system. Pharmacy benefit managers negotiate discounts in the form of rebates with drug manufacturers in exchange for placing certain drugs on their list of preferred medications, or formularies. But instead of passing those savings to consumers, pharmacy benefit managers or their affiliates often keep a portion of the rebate, which gives them a direct incentive to purchase higher-cost drugs.
Pharmacy benefit managers have significant leverage because of how rebate agreements are structured. These incentives can limit health plans’ ability to prioritize lower-cost or generic medications, even when those options would ultimately reduce costs for consumers.
The result: consumers pay more out-of-pocket while pharmacy benefit managers profit. According to the Leonard D. Schaeffer Institute for Public Policy and Government Service, every $1 increase in rebates raises a drug’s list price by an average of $1.17 — meaning rebates actually drive drug prices up.
By retaining formulary strategy and decision-making, Blue Shield has been able to prioritize formulary inclusion of lower cost drugs through direct contracting and transparent drug pricing models, despite the pharmacy benefit managers drug pricing models — one of our first steps towards reducing dependency on pharmacy benefit managers.
Humira, a drug for rheumatoid arthritis and other inflammatory conditions, highlights just how broken the system has become. Despite lower-cost biosimilars entering the market, Humira kept 96% of its market share even a year later — thanks to pharmacy benefit managers prioritizing it on formularies, incentivized by billions of dollars in rebates. This drives up costs for consumers, employers, payers and the healthcare system overall.
Why this policy change matters for Californians
SB 41 tackles these problems head-on with reforms that put consumers first:
These reforms mirror bipartisan federal proposals that have stalled in Washington, D.C., but now stand as law in the world’s fourth-largest economy. California is showing the nation what it looks like to take on entrenched interests and prioritize consumers.
A bold, bipartisan commitment
At Blue Shield of California, we’ve long believed affordable medications shouldn’t be undermined by hidden fees or backroom deals. That’s why we launched a first-of-its-kind Pharmacy Care Reimagined model designed to move away from rebates and toward transparency and fairness. By working directly with partners across the supply chain, we’re cutting out unnecessary middlemen, reducing costs, and restoring trust between patients and their pharmacists.
SB 41 advances this vision by shifting the system toward patient-centered transparency and away from profiteering. Its overwhelming bipartisan support in Sacramento — 79-1 in the Assembly and 40-0 in the Senate — shows this is common-sense reform.
Prescription drugs save lives, but only if people can afford them. With SB 41, California is taking a bold step toward a healthcare system that is more transparent, fair and sustainable.
This law is only the beginning. At Blue Shield of California, we’ll continue working with policymakers, providers, employers and partners to ensure that every Californian has access to the care and medications they need, at prices they can afford.
Andrew Kiefer is vice president of State Government Affairs at Blue Shield of California. Blue Shield’s parent company, Ascendiun, has provided additional content and perspective regarding SB 41 for the Sacramento Bee, found here.