SB 41 revises Section 1385.001 of the Health and Safety Code to sharpen who counts as a pharmacy benefit manager (PBM), broaden what counts as a rebate, define passthrough pricing, and constrain how PBM fees may be structured. The bill draws clearer lines between affiliated and nonaffiliated contract pharmacies, explicitly names group purchasing organizations (including out-of-state and international entities), and empowers the Department of Managed Health Care (DMHC) to define additional prohibited fee bases.
Those definitional changes matter because they alter the legal footing for common PBM business models: fees contingent on drug prices or rebate flows are barred from being characterized as bona fide PBM fees; passthrough arrangements get a precise statutory test; and spread pricing is defined. The revisions create new compliance questions for PBMs, payers, manufacturers, and pharmacies and hand regulators decision-making authority over unresolved valuation and scope issues.
At a Glance
What It Does
The bill amends statutory definitions to (1) define passthrough pricing and spread pricing, (2) expand the statutory list of what counts as rebates, and (3) require that any pharmacy benefit management fee be a flat, dollar amount not tied to drug prices, rebates, patient cost-sharing, formulary placement, referrals, or other director-defined metrics.
Who It Affects
Pharmacy benefit managers (including entities under common ownership with payers), health care service plans and health insurers, contract pharmacies (both affiliated and nonaffiliated), group purchasing organizations (including out-of-state and international ones), and drug manufacturers.
Why It Matters
By codifying what counts as a rebate and limiting fee structures, the law directly targets common PBM revenue flows and contracting methods. Compliance, contract renegotiation, and regulatory oversight will be required to align commercial practices with the statute's bright-line tests.
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What This Bill Actually Does
SB 41 is primarily a definitional rewrite that converts opaque industry practices into enforceable statutory categories. It tightens the statutory definition of a pharmacy benefit manager to explicitly include entities acting on a payer’s behalf and those under common ownership with a payer, while carving out several specific non-PBM entities (for example, certain ERISA-covered self-insured plans and insurer employees).
That change narrows the cloak under which some organizations previously avoided PBM rules, and it clarifies who will be treated as a regulated PBM for contracting and enforcement.
The bill also supplies statutory teeth to two pricing concepts that regulators and litigants often dispute. It defines a passthrough pricing model with a two-part test: the payer’s payments must equal what the PBM pays the dispensing pharmacy (including any contracted dispensing fee), and those payments must be passed through in full without offset by reconciliations.
Separately, the statute defines spread pricing as the practice of charging the payer one contracted price while paying the pharmacy a different (typically lower) amount.Crucially for revenue flows, SB 41 defines a “pharmacy benefit management fee” as a flat-dollar fee tied to the bona fide value of specific services and explicitly prohibits making that fee contingent on drug prices, rebates, patient cost-sharing, formulary placement, referral volume, or other director-defined methods. At the same time the bill broadens the statutory definition of “rebates” to capture nearly all forms of manufacturer remuneration to PBMs and affiliated entities, while excluding certain purchase discounts and the defined PBM fee.
Those two moves push the statute toward separating service fees from price- and rebate-based compensation.Finally, the measure names group purchasing organizations — including out-of-state and international ones — and defines affiliated versus nonaffiliated contract pharmacies, which matters for enforcement of passthrough and spread pricing rules. The Department of Managed Health Care and its director are given definitional authority (for example, to specify “other amounts” that cannot be the basis for a fee), which leaves several key implementation questions for administrative action rather than statute.
The Five Things You Need to Know
The bill requires a pharmacy benefit management fee to be a flat, defined dollar amount tied to the bona fide value of the actual services performed and prohibits basing that fee on drug prices, rebates, patient cost-sharing, formulary placement, referral volume, or any other director-defined methods.
SB 41 defines a passthrough pricing model by a two-part test: (1) payer payments must equal what the PBM pays the dispensing pharmacy (including contracted dispensing fees) and (2) those payments must be passed through in full without reconciliation offsets.
The statute expands “rebates” to include virtually all manufacturer remuneration to PBMs and their affiliates (incentive rebates, credits, market-share incentives, promotional allowances, administrative fees, and similar payments), while excluding pharmacy purchase discounts for stocking and dispensing and excluding PBM fees.
A pharmacy benefit manager explicitly includes entities under common ownership or control with a payer, and the bill lists several exclusions, including ERISA-covered fully self-insured plans and insurer employees.
Group purchasing organizations are defined to include out-of-state and international actors that negotiate or procure rebates for PBMs, bringing cross-border GPO activity into the statute’s scope.
Section-by-Section Breakdown
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Affiliated entity: who’s in the tent
This provision enumerates who counts as an affiliated entity for purposes of the article, including group purchasing organizations, manufacturers, wholesalers, rebate aggregators, and any third party used to aggregate rebates, plus subsidiaries, parents, affiliates, and subcontractors of plans, insurers, or PBMs. Practically, this means revenue-moving intermediaries — even those based out-of-state or internationally — are contractually visible to regulators and can be treated as part of the PBM/payer ecosystem for enforcement and reporting.
Affiliated vs. nonaffiliated contract pharmacies
The bill distinguishes contract pharmacies that are under PBM control (affiliated) from those that are not (nonaffiliated). That binary matters because enforcement of passthrough and spread-pricing rules depends on whether a dispensing pharmacy is economically linked to the PBM. It reduces ambiguity in audits and contract reviews: regulators and payers can look through intermediary layers to determine control relationships rather than relying solely on nominal contract language.
Passthrough pricing: the statutory test
This section supplies a precise two-part statutory test for a passthrough pricing model — equivalence between payer payments and PBM payments to pharmacies (including dispensing fees) and a requirement that those monies be passed through intact without reconciliation offsets. That creates a clear compliance standard: if a PBM reconciles or offsets payments after the fact, it fails the passthrough test even if gross receipts appear aligned.
Pharmacy benefit management fee: flat fee, no contingencies
Subdivision (s) defines a PBM fee as a flat dollar amount that cannot be based, directly or indirectly, on drug prices, retained rebates, patient cost-sharing, formulary decisions, referral volume, or any other bases the director defines. It also requires the fee to reflect the ‘bona fide value’ of services to the payer. The provision shifts the legal focus from percentage or rebate-linked fees to service-based, itemized valuation, creating the need for documentation of services and a defensible methodology for valuing them.
Who is (and isn’t) a PBM
This subdivision provides the operative definition of ‘pharmacy benefit manager,’ explicitly including entities that act as price negotiators or manage drug coverage and including entities under common ownership with a payer. It lists exclusions — ERISA-covered fully self-insured plans, insurer employees, certain public or narrowly scoped programs, and others — which narrows the net and reduces duplicative regulation. For contracting teams, the list changes who has to meet PBM-specific statutory obligations.
Rebates and spread pricing: broad capture and a named abuse
The bill defines ‘rebates’ to encompass most forms of manufacturer remuneration to PBMs and affiliated entities (incentives, credits, allowances, administrative fees), while carving out pharmacy purchase discounts for stocking and dispensing and excluding PBM fees. It also defines spread pricing as charging the payer a different contracted price than what the PBM pays the pharmacy. Together these definitions enable regulators to trace and potentially recharacterize revenue flows previously treated as proprietary or off-ledger.
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Explore Healthcare in Codify Search →Who Benefits and Who Bears the Cost
Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- Health plan compliance officers: They gain clearer statutory tests (passthrough and fee definitions) to identify noncompliant PBM practices and to renegotiate contracts to align with a service-fee model.
- Nonaffiliated community pharmacies: Clear definitions of affiliated versus nonaffiliated status and an explicit passthrough test reduce opportunities for undisclosed spread pricing and make reimbursement practices more auditable.
- State regulators (DMHC): The statute gives the department explicit definitional authority and tools to pursue mischaracterized revenue flows, improving its ability to supervise PBM-plan relationships and enforce consumer-protection objectives.
Who Bears the Cost
- Pharmacy benefit managers: PBMs face constraints on common revenue models (rebate-retention, percentage fees, or reconciliation-based passthroughs) and will need to rework contracts, accounting, and valuation methods.
- Health insurers and health care service plans: Plans may incur transition costs as PBM contracts are renegotiated or replaced, and some plan sponsors may face higher gross premiums if rebate-capture models are impaired.
- Manufacturers and group purchasing organizations: Broader rebate definitions and the inclusion of out-of-state/international GPOs mean manufacturers must track a wider set of payments subject to scrutiny and reporting, complicating pricing strategies and agreements.
Key Issues
The Core Tension
The central tension is between achieving transparent, service-based PBM compensation (to prevent hidden revenue capture and protect plan/patient interests) and preserving commercial contract flexibility that parties argue can lower net drug costs; tightening definitions reduces opaque practices but risks prompting workarounds, shifting costs to premiums, or creating enforcement burdens that fall on regulators and payers.
The statute moves important policy choices into definitions, but it leaves several operational questions unresolved and places weight on administrative interpretation. ‘Bona fide value’ is the anchor for permissible PBM fees, yet the bill does not supply a valuation methodology; that will fall to the director and invite disputes over what services justify which fees. Likewise, the director’s authority to designate ‘any other amounts or methodologies’ that cannot form the basis of a PBM fee is broad and could be applied unevenly without transparent rulemaking.
Enforcement will hinge on auditability: passthrough pricing compliance requires line-item tracking of payments and reconciliation activity, and spread-pricing claims require visibility into PBM-pharmacy settlement data that may be commercially guarded. Cross-border elements — out-of-state and international GPOs — raise practical jurisdictional and evidence-collection hurdles.
Finally, because the bill covers entities under common ownership with payers and excludes ERISA plans, there is a risk of regulatory arbitrage where certain arrangements migrate to excluded structures or federal preemption questions arise, creating litigation and compliance uncertainty.
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