The financial connection between health plans and pharmacy benefit managers (PBMs) has historically been opaque; doctors write prescriptions, patients receive their prescription medication and the money trail is lost to an overly complicated PBM process. For many years, the "spread pricing" model was the primary reason that this black box existed.
That changes now.
As of January 1, 2026, a series of state and federal law changes have begun to dismantle the spread pricing model. These changes were initiated with the passage of California’s landmark Senate Bill 41, and include major federal legislation related to Medicaid. While there is currently no federal ban on the use of spread pricing in all commercial health insurance plans, the current changes represent a huge shift.
Here are the specifics about the change that occurred, the types of plans impacted, and how this will impact your practice's profit margin.
What Just Happened? (The 2026 Update)
The Headline: As of January 1, 2026; PBM’s (Pharmacy Benefit Managers) are prohibited to use “spread pricing” on behalf of PBMs negotiating for California-regulated health insurance plans as well as many State Medicaid Programs.
Requirement: The PBM's will have to switch over to a "pass through pricing model". This means that the PBM's can't charge the health plan more than they pay the pharmacy.
A major step in making financial honesty. For years, PBMs were able to operate without much oversight; the PBM's would bill a health plan more than it was paying to pharmacies, the difference, or the "spread", has been kept hidden for years. With the new 2026 regulations, this difference between what the PBM bills to the health plan and pays to the pharmacy, will be disclosed.
Spread Pricing vs. Pass-Through: The Breakdown
You need to look at the numbers to see how it impacts your revenue cycle.
1. The Older "Spread" Model
In this older model, the PBM acted as an intermediary with a hidden profit margin.
- Scenario: You prescribe a heart medication.
- PBM Bills Plan: $100.
- PBM Pays Pharmacy: $70.
- The Profit: The PBM keeps the $30 difference.
- The Problem: The health plan thinks the drug costs $100. The pharmacy only sees $70. No one sees the $30 profit except the PBM.
2. The New "Pass-Through" Model (2026 Mandate)
As mandated through rules like California's SB 41, the hidden profit will be prohibited for those types of plans.
- PBM Bills Plan: $70 (Must match the pharmacy payment).
- PBM Pays Pharmacy: $70.
- PBM Fee: They can charge a transparent, flat administrative fee (e.g., $5).
- Result: The total cost is clearer, and the "hidden tax" on healthcare is removed.
Creating greater clarity around patient costs creates a more equitable environment for both patients and providers alike, which is directly in line with the objectives of transparent healthcare revenue cycle management services. Clarity about costs = cleaner claims.
Scope of the Ban: Is it Everywhere?
The key here is the details. A total ban on all commercial plans in the United States has not occurred. The size of this issue, however, is massive.
1. California Senate Bill 41 (SB 41)
For those who see patients in California, this will be the law of the land when it goes into effect on Jan. 1, 2026. SB 41 prohibits PBM’s from keeping the spread on their contracts that are written, modified or renewed after that date.
2. Medicaid & Federal Programs
Federal agencies have aggressively sought to remove spread pricing in Medicaid managed care. Therefore, many states have enacted legislation which mirrors the federal requirements, so that Medicaid PBMs are required to utilize a “pass through” model.
3. Commercial Market Pressure
Even though there are no mandatory legislative requirements for plans to follow the above-mentioned statutes, the commercial market is changing. Large employers are requiring “pass through” language in their contracts to stop losing money. As such, we are starting to see a trickle down affect in commercial markets where payers are voluntarily adopting similar standards to remain competitive.
How This Impacts Your Medical Practice
You may ask, “I am a physician, not a pharmacist; why would I worry about this?”
The pharmacy benefits and medical benefits are two sides of the same coin when it comes to providing patient care. Pharmacy benefits cannot perform optimally if medical benefits are faltering, and vice versa. The impact of these regulatory changes will be felt directly in your day-to-day operation.
1. Reduced Patient Financial Burden
When Pharmacy Benefit Managers (PBMs) artificially inflate the cost of prescription medications, patients deductibles are depleted faster. Patients who are struggling to afford artificially inflated prices for insulins, blood thinners and other medications may find themselves unable to afford co-pay for your office visits.
In theory, by limiting the true pharmacy rate, the new regulations should reduce patients out-of-pocket expenditures for prescriptions covered under affected plans. When patients have more financial breathing room, your medical accounts receivable services team sees better collection rates on patient balances.
2. Volatility in Drug Formularies
Since the PBM's main source of income (the rebate spread) is being removed, they will seek alternative sources of income to replace the loss.
- Prediction: We expect PBMs to aggressively update their formularies. They may drop drugs that no longer offer them rebates or backend incentives.
- Result: Your clinical team could see a spike in prescription rejections.
- Solution: You need a robust strategy for denial management services. If a patient’s stable medication is suddenly "non-covered," your staff must be ready to file appeals quickly.
3. Scrutiny on "Buy and Bill"
Physicians who administer medications in-office (i.e., oncology, rheumatology, ophthalmology), need to be particularly vigilant as PBMs continue to lose their ability to regulate the spread between the pharmacy and medical benefits.
- Action: Ensure your medical coding services are flawless. This will allow you to establish medical necessity for continuing to administer these medications in-office and receive reimbursement.
Data Visualization: The Financial Shift
Here is a look at how a transaction changes under the new rules for a compliant plan.
| Feature | Old Spread Model | New Pass-Through Model |
|---|---|---|
| Pharmacy Payment | $50 | $50 |
| PBM Markup | $40 (Hidden) | $0 (Banned) |
| Admin Fee | $0 | $6 (Transparent) |
| Total Plan Cost | $90 | $56 |
| Transparency | Low | High |
Note: This table represents a hypothetical transaction under a regulated plan like CA SB 41.
What Your Practice Needs to Do Now
You will be walking through changing regulations in the future. There is a threat of passive management.
1. Step 1: Audit Your Contracts
Review the contract of your PBM if you have an in-house pharmacy or dispensary. If you have older rates of reimbursement then you should make sure you are not stuck with those rates as the PBM changes to newer reimbursement rate structures.
2. Step 2: Prepare for Prior Authorizations
Front office staff need to be supported when formularies get shuffled. You don't want your front office staff drowning in paperwork. Outsourcing to experts in medical credentialing services and prior authorizations can help keep your patients moving through your practice.
3. Step 3: Communicate with Patients
When patients hear "lower drug costs" on the news they think all pills cost less money. Educate your staff so they know how to tell patients that these laws apply to certain insurance plans. Patient expectation is important to your patients overall satisfaction with their care.
The Role of Technology in Compliance
Tracking down which plans are covered by California law, which are medicaid and which are exempt commercial plans is a very difficult task to do manually when it comes to billing.
That's where artificial intelligence (AI) medical billing becomes important. The advanced algorithms used in AI can instantly flag claims from specific payer types and jurisdictions.
- Automated Verification: Automated verification using AI can verify whether a patient falls under the new protection in real time.
- Prediction Analysis: Predictive analysis systems will identify potential claim audits triggered by changes in payer rules due to the new regulations.
At Human medical billing, we blend this cutting-edge tech with human insight. We don't just process claims; we navigate the laws that govern them.
Frequently Asked Questions
No. It is currently illegal for most CA regulated plans (SB 41) as well as several State Medicaid programs and a few Federal contracts, but is still allowed for numerous self funded and commercial plans outside of CA, although usage is declining due to market pressures.
No. The bill focuses on pharmacy payment methodologies and does not address or modify physician fee schedules. Cleaner patient data and lower costs will generally result in less "bad debt" write offs for your practice.
Your billing system may not have changed; however, you need to update your workflow processes. Your billing staff needs to understand how payers are behaving differently now. If you find this overwhelming, you can also look into hiring professional medical billing services.
Final Verdict
The steps taken during the first week of 2026 clearly indicate that the age of stealthy, concealed health care price mark-ups will be over.
Although the "spread pricing" prohibition is still a mix of both federal and state laws instead of one comprehensive national rule, there is no doubt about which way transparency is headed. Transparency is on its way.
For medical offices this represents an opportunity; a transparent system is an efficient one. To take advantage of the transparent system, however, you have to stay aware of, and responsive to the changing environment.
Do not allow the complexity of the regulations impede your progress. Whether you require assistance with medical coding, credentialing, or complete revenue cycle management, you need a group that is familiar with the legal aspects of the regulations as well as the financial aspects (the ledger).
Human medical billing is that team. We manage the weighty responsibility of compliance and collections for your practice so that you can continue to focus on healing your patients.
Contact us today to learn how we may assist you to maximize your revenue cycle in 2026.
