Illinois Enacts New PBM Law

Highlights

• Overview: Illinois HB 1697 was signed into law on July 1, 2025. The law affects PBM contracts with group health plans and may impact plan costs and administration. The provisions affecting group health plans take effect for policies or contracts issued, amended, delivered or renewed on or after January 1, 2026.For self-insured plans, this refers to the PBM contract. This Alert is relevant for any employers sponsoring group health coverage providing prescription drug benefits to individuals in Illinois.
• Key Provisions: The most significant requirements affecting group health plans include:
  • Spread pricing;
  • Limits on steering to specificPBM-affiliated pharmacies;
  • Required pass-through formanufacturer rebates; and
  • Mandatory use of PBM- affiliated mail-order andspecialty pharmacy.
• Employer Action Items: Employers sponsoring medical plans providing prescription drug benefits to Illinois residents and employees should seek the assistance of appropriate advisors to determine whether and how HB 1697 may affect their prescription drug coverage and what steps their insurer and/or PBM intend to take.

Illinois has joined the list of states that enacted legislation aimed at regulating pharmacy benefit managers (PBMs) with the Prescription Drug Affordability Act (HB 1697) signed into law by Governor Pritzker on July 1, 2025. Certain provisions of the law related to PBM registration and reporting are effective in 2025, but most provisions take effect on January 1, 2026, and will have at least some impact on group health plans that provide prescription drug coverage to Illinois residents.

This Alert summarizes HB 1697, with a focus on those provisions most likely to affect employer-sponsored health plans. We will also address ERISA preemption in the aftermath of the June 2025 decision by the U.S. Supreme Court (Supreme Court) not to review the 2023 U.S. Court of Appeals for the Tenth Circuit (10th Circuit) ruling in Pharmaceutical Care Management Association v. Mulready (Mulready)¹.

This Alert is relevant for any employers sponsoring group health coverage providing prescription drug benefits administered by a PBM subject to Illinois law.

Summary of the law

HB 1697 regulates PBMs doing business in the state of Illinois that contract with pharmacies on behalf of an insurer, third-party administrator, or managed care organization to administer prescription drug benefits. This will impact employer-sponsored prescription drug coverage offered to Illinois employees and residents.

The changes include:

• Price transparency and reporting requirements
• PBM regulation on operations and billing transparency
• Contractual restrictions and requirements for agreements between PBMs, group health plans, and pharmacies.

Key Provisions Affecting Group Health Plans

Although many of the provisions of HB 1697 are limited to internal PBM operations and interactions with pharmacies, there will be some effect on employer-sponsored prescription drug benefits. Key provisions affecting group health plans include the following:

• Direct and indirect “spread pricing” limited: A PBM cannot charge a plan more than the amount it pays the pharmacy for a prescription drug and keep the “spread” or difference as profit.
• Limits on steering: Health insurers and PBMs are prohibited from certain activities limiting consumer choice of pharmacies, including the following:
  • Requiring participants to obtain prescription drugs exclusively through a mail-order pharmacy or specialty pharmacy that is owned by or affiliated with the PBM,
  • Designating drugs as specialty drugs (unless it meets the definition of a specialty drug under HB 1697) for the purpose of limiting participant access to certain drugs, and/or
  • Requiring covered individuals to use a PBM-affiliated retail pharmacy if doing so increases the cost for participants.
• 100% pass through of Rx manufacturer rebates: For contracts delegating the negotiation of rebates to the PBM, PBMs must pass 100% of all Rx manufacturer rebates, including non-resident Rx rebates, through to the plan. PBMs must disclose records of rebates and fees to the Illinois Department of Insurance (Department) annually. The Department will specify the format at a later date.
• Inclusion of annual audit language in PBM contracts: To satisfy the annual disclosure of rebates and fees to the Illinois Department of Insurance, contracts between a PBM and an insurance carrier or health benefit plan sponsor must allow and provide for the review of the PBM’s compliance through an audit of the rebate and fee records remitted from a PBM to a health benefit plan at least once per calendar year.
• Required fees to be paid by PBMs: Beginning September 1, 2025, PBMs must submit an annual fee of$15 per covered individual enrolled in a plan administered by the PBM in the state of Illinois.² While the fees for covered individuals are payable by the PBM, these costs will likely be passed on to plan sponsor(s).
• Guaranteed contractual rights for employers and plan sponsors: PBM contracts must grant plan sponsors certain rights:
  • The ability to audit compliance with the terms of the PBM contract annually. The cost of that audit must be paid for exclusively by the PBM;
  • The option to request that the PBM disclose actual amounts paid to pharmacies; and
  • Notice to the plan sponsor of any consideration the PBM receives from the manufacturer prescription drugs prescribed on a dispense as written basis (i.e., without substitutions), once a generic or biologically similar product becomes available.

Failure to comply with HB 1697 may result in administrative fines of up to $10,000 per day, per violation against the PBM. HB 1697 does not appear to provide for any direct penalties against the employers sponsoring the group health plans administered by the PBMs.

ERISA Preemption

As written, it appears that Illinois intends the HB 1697 provisions described in this Alert to apply to almost all self-insured coverage, including self-insured ERISA plans.³ In general, ERISA preempts (i.e., blocks enforcement of) state laws that regulate self-insured ERISA plans.⁴ However, over the last few years, there have been several legal challenges to state PBM laws in the federal courts regarding the applicability of ERISA preemption.

The 10th Circuit held in Mulready that ERISA does not preempt state rate regulations that merely affect costs or incentives,⁵ but it does preempt state laws forcing ERISA plans to comply with certain network restrictions, benefit design requirements, or substantive coverage requirements. We wanted the Supreme Court to review the 10th Circuit’s Mulready opinion and provide clear guidance addressing when ERISA preempts state PBM laws, but the Supreme Court declined to hear the appeal and let the 10th Circuit’s decision stand.

The Supreme Court’s action suggests: (i) it generally supports the 10th Circuit’s Mulready opinion; and/or (ii) it did not feel the need to correct anything in the 10th Circuit’s ruling. If correct, the limits on steering described above appear vulnerable to a claim of ERISA preemption by a self-insured ERISA plan, but the other provisions are more likely to survive a challenge.

While the Mulready decision is only binding on states in the 10th Circuit (Colorado, Kansas, New Mexico, Oklahoma, Utah, and Wyoming), it should influence other states that have passed or plan to adopt similar PBM laws.

Employer Action Items

In communications to MMA and its clients, many of the major PBMs take the broad position that ERISA preempts most or all state PBM law provisions when the PBM is servicing a self-insured ERISA plan and choose not to comply with them. We agree that ERISA preempts provisions affecting plan design and administration, but this does not appear to include provisions affecting reimbursement rate regulations, spread pricing, or requiring the pass-through of rebates. PBMs have reviewed and begun adapting to the 2023 Mulready decision, particularly those within the 10th Circuit’s jurisdiction, but this does not mean their responses are consistent.

In general, the PBM should be the party liable for compliance with a particular state’s PBM law and not the employer/plan sponsor. HB 1697 does not appear to provide for any direct penalties against the employers sponsoring the group health plans administered by the PBMs, although an enforcement action by Illinois against a PBM could cause disruption to group health plans it administers. A plan sponsor may have plan fiduciary risk for knowingly engaging with a PBM that refuses to comply with state PBM law provisions not preempted by ERISA.

The HB 1697 provisions affecting group health plans apply to policies and contracts issued, amended, delivered, or renewed on or after January 1, 2026. For self-insured plans, this refers to the PBM contract. We recommend employers sponsoring medical plans providing prescription drug benefits to Illinois residents and employees seek the assistance of appropriate advisors to assist with the action items described below, which may include broker and/or consulting firm pharmacy benefit subject matter experts and legal counsel.

1. If necessary, review current and upcoming PBM contracts for compliance with HB 1697.
2. Insurance carriers will determine whether HB 1697 applies and likely make any necessary changes with no input from employers.
3. If sponsoring a self-insured ERISA plan, determine whether to make any prescription drug benefit amendments and timely disclose these changes to plan participants. If sponsoring a self-insured, non-ERISA plan, determine whether and how HB 1697 applies. PBMs will likely make recommendations.

When reviewing PBM contracts, please pay close attention to the following: (i) pricing models, (ii) delegation of manufacturer Rx rebate negotiation, (iii) mail order opt-ins, specialty drug designations and associated requirements, and (iv) restrictions, penalties, or incentives related to participant choice of certain pharmacies.

PBM Holdouts: We expect many PBMs will take the position that Illinois’ PBM law does not apply when they service self-insured ERISA plans. Employers may wish to discuss the matter with their own legal counsel. We realize an employer may have limited options if the PBM refuses to comply.

1 Pharmaceutical Care Management Association v. Mulready, 78 F.4th 1183 (10th Cir. 2023).

2 This fee amount per covered individual is subject to change if an alternate amount is determined by rule by the Illinois Director of Insurance.

3 SB 1697 does not apply to self-insured multiemployer plans that are not nonfederal government plans.

4 29 USC §1144(a)(2)

5 This position draws from an earlier Supreme Court decision involving an Arkansas PBM law: Rutledge v. Pharmaceutical Care Management Association, 141 S.Ct. 474 (2020).