SACRAMENTO, CALIF. — California Gov. Gavin Newsom is reviving efforts to regulate the powerful and often opaque intermediaries at the center of the prescription drug supply chain. In a proposal unveiled as part of his revised May budget, Newsom calls for stringent oversight of pharmacy benefit managers (PBMs), companies he says are driving up patient costs.
“Prescription drug prices are out of control,” Newsom said in a May 13 statement. “We’re shining a light on hidden costs.”
PBMs like CVS Caremark, OptumRx, and Express Scripts act as middlemen between drug manufacturers, pharmacies, and insurers.
As IVN recently reported, PBMs are among American healthcare's least transparent but most powerful actors. While they claim to negotiate discounts and control costs for health plans, critics argue PBMs inflate prices by pocketing manufacturer rebates and restrict patient access to medications.
As IVN has reported for almost a decade, including in its January 2025 report, “The Hidden Power of PBMs: A System Under Scrutiny,” their influence over U.S. drug pricing is vast and largely unchecked.
Newsom’s new proposal would:
- Require PBMs to be licensed and regulated by the Department of Managed Health Care (DMHC).
- Impose a fiduciary duty to act in the best interest of clients.
- Mandate operational and financial reporting, including audited statements.
- Require drug pricing transparency, with PBMs reporting detailed price data to the Department of Health Care Access and Information (HCAI).
- Give DMHC authority to review contracts, perform audits, and penalize violations.
The proposal marks a pivot for Newsom, who vetoed PBM legislation last year, saying he was unconvinced it would lower drug prices.
“I believe that PBMs must be held accountable to ensure that prescription drugs remain accessible throughout pharmacies across California and available at the lowest price possible. However, I am not convinced that SB 966's expansive licensing scheme will achieve such results,” the Governor wrote in his veto message.
Newsom’s office has not said why his position changed, but the new proposal arrived as national scrutiny of PBMs intensified.
The governor’s announcement came less than one month after President Donald Trump signed an executive order targeting PBMs’ “opaque” practices. Trump’s executive order directs the Department of Labor to require employer-sponsored health plans to disclose all PBM compensation and calls on HHS, the FTC, the DOJ, and the Department of Commerce to investigate anti-competitive behavior in the drug supply chain.
In California, the pressure to act is urgent. State data shows prescription drug spending rose 56% from 2017 to 2023, increasing by nearly $4.9 billion. In 2023, the state’s health plans paid about $13.6 billion for prescription drugs, according to the California Department of Managed Health Care (DMHC) Prescription Drug Cost Transparency Report for Measurement Year 2023.
Newsom is asking the legislature to pass the PBM reforms as part of the budget process this summer. If enacted, California could become one of the first states to impose comprehensive oversight of PBMs, potentially setting a national precedent.