States, not Federal Government, Are Moving to Tighten Regulation of PBMs

The politics and policies of high drug prices have been swirling around for years, but attention attention has shifted to pharmacy benefit managers (PBMs), which used to reside in an obscure corner of the U.S. healthcare system. At the federal level, Federal Trade Commission has launched a study of the industry and possible anticompetitive practices. A bipartisan bill has been introduced in the Senate that its sponsors say would force needed transparency and fairness on PBMs.

However, the much of the real action in PBM legislation and regulation is taking place in the Albanys, Topekas and Harrisburgs of the country, not in Washington. Last year alone, 12 states enacted 19 pieces of legislation that offered a variety of restrictions and requirements for PBMs, according to the National Academy for State Health Policy, a nonpartisan organization that tracks healthcare developments at the state level. The organization began keeping tabs on PBM legislation in 2017. The wave of new legislation includes new licensing and reporting requirements, prohibitions on spread pricing and rules that are aimed to make costs more transparent enrollees. (See table below.)

Jesse C. Dresser

“There is a greater effort and willingness to look into the conduct of PBMs and adopt legislation,” Jesse C. Dresser, an attorney with Frier Levitt, a law firm in New Jersey and New York that has filed lawsuit suits against PBMs, told Formulary Watch.

The appetite for regulating PBMs is part of an increased focus on curbing the high out-of-pocket costs that many patients are facing, observed Cynthia J. Borrelli, principal at Bressler Amery & Ross, a law firm in New York.

“We are more than 12 years past the Affordable Care Act (ACA), and the cost of healthcare has not come down, as was anticipated when the bill was put in place,” she said. “The ACA regulated carriers and the provision of care. But so much of care today is being provided not by carriers, but by other providers, including pharmacy benefit managers, and by intermediary entities. These entities have become an integral part in the delivery of the health and delivery of healthcare. It’s taken time for the government to realize that those entities need to be regulated as well.”

Cynthia J. Borrelli

PBMs used to be relatively small operations that processed claims. Now they have become important parts of the large, vertically integrated healthcare companies that dominate the flow of the trillions of dollars spent on American healthcare every year, including the hundreds of billions that spent on pharmaceuticals. The three largest PBMs — CVS Caremark, Express Scripts and Optum — are part of companies that own healthcare insurance companies, physician practices, pharmacies and specialty pharmacies. They have a say-so over which drugs get covered through lists called formularies and manage distribution through their own pharmacies. CVS Caremark, Express Scripts and Optum control about 80% of the PBM market and in that context are often referred to as the big 3.

The PBMs and their trade association, Pharmaceutical Care Management Association, say they use their buying power to combat high prices set by drug manufacturers and that the rebates and discounts they receive ultimately translate into lower premiums.

But PBMs have come under a torrent of criticism from drug manufacturers, patient groups, independent pharmacists, consumer groups and some lawmakers. Their critics say their business practices are opaque, anticompetitive and simply extract profits as middlemen.

At the federal level, Sens. Chuck Grassley (R-Iowa) and Maria Cantwell (D-Wash.) introduced legislation last year that would require PBMs to report to the Federal Trade Commission how much money they make through spread pricing and pharmacy fees. The senators have reintroduced two pieces of legislation, the Pharmacy Benefit Manager Transparency Act (S. 127) and the Prescription Pricing for the People Act (S. 113).

Related: Senators Reintroduce PBM Legislation

The action on PBMs has devolved to the states partly because a 2020 U.S. Supreme Court decision, according to the National Academy for State Health Policy. In Rutledge v Pharmaceutical Care Management Association, the court upheld an Arkansas law that required PBMs to pay pharmacies no less than their acquisition costs for prescription drugs. The court indicated the Arkansas law was not preempted by Employee Retirement Income Security Act (ERISA), a federal law that sets standards for retirement and health benefits. The decision in the case gives states the ability to regulate healthcare costs, including health plan contractors.

Chris Blackley

In 2022, 135 bills concerning PBMs were introduced in state legislatures, according to the National Academy for State Health Policy’s tracker. Most are still working their way through various committees, and some have failed to make any headway. The 19 bills that have been signed into law provide a starting point to address the undue influence that PBMs have over pharmacies and drug pricing, say the industry's critics.

Collaboration among the states can create model rules and regulations than can be adopted consistently, Chris Blackley, co-founder and chief executive officer of Prescryptive Health, a drug benefits technology company, said in an interview. “One of the most positive things coming out of the state level activity and engagement is the awareness and education of the market,” commented Blackley. “It's only recently within the last few years that people even know what a PBM is.”

New state laws

Licensing and registration of PBMs is not new. But a new batch of licensing and registration laws provide states with authority to penalize PBMs for noncompliance, Jessin Joseph, Pharm.D., senior director, PBA Services at Capital Rx, told Formulary Watch®.

Jessin Joseph, Pharm.D.

PBMs have been notorious for being difficult to work with for patients, pharmacies and states, said Joseph. “The industry is perceived in a negative light,” he added, “and in an attempt to control these practices, the licensing and registration of the PBM is something PBMs will be comfortable proceeding with as smaller or midsize PBMs often use larger PBMs as their back-end processor to meet such requirements.”

The removal of gag clauses has become another area of focus across the states. The gag clauses, which are written into pharmacy contracts with PBMs, prohibit pharmacists from telling a patient when paying by cash may be less expensive than using insurance. “Gag orders are another tactic to put the pharmacy in jeopardy when they’re not being reimbursed at a fair price,” said Blackley. “This is an important consideration that may not be immediately obvious. Pharmacies are dependent upon these major companies for as much as 25%, 30%, or 40% of their revenue. This is another way to put pressure on the pharmacies to continue to play ball and accept reimbursement rates that often don’t sustain their business.”

Dresser, the attorney with Frier Levitt, said that Michigan and New York have been trendsetters in the state-level efforts to regulate PBMs. In Michigan, several new laws were signed law year by Gov. Gretchen Whitmer, a Democrat. One required licensing of PBMs and prohibited spread pricing and pharmacist gag clauses. Another prohibits PBMs from requiring a patient to pay a copay that is higher than the selling cost of the drug dispensed or from discriminating against 340B program entities. A third law addressed pharmacists’ rights.

In New York, PBMs are now required to register with the state insurance department and pay a fee of $4,000. PBMs in New York must obtain licenses and adhere to state regulations. They will also have to report pricing discounts and rebates and are restricted from using spread pricing and prescription drug substitutions.

Keep an eye on three states

States that have passed PBM legislation are likely to continue to do so, Joseph said. He said lawmakers in Illinois, Massachusetts and Minnesota are moving ahead with laws targeting PBM practices.

Last year, for example, Illinois enacted a law that requires PBMs to update maximum allowable cost (MAC) — a payment model that PBMs use to control costs — pricing information weekly. The measure also prohibits PBMs from limiting a pharmacist from sharing with patients the availability of a more affordable alternative drug. Other bills introduced in Illinois would require a PBM to disclose any value provided by a pharmaceutical manufacturer to the PBM, as well as actual amounts paid by the PBM to a pharmacy, and require PBMs to publish MAC pricing information and set up appeal procedures.

In Massachusetts, several PBM-related bills that have been referred to state committees. One would establish a committee to study maximum allowable costs. Another would require PBMs to make available all sources used to determine the maximum allowable costs for drugs. A third would require PBMs to submit transparency reports detailing rebates and administrative fees.

Minnesota, home to Prime Therapeutics, a PBM owned by Blues plans, has several pieces of legislation that been referred to committees, including one that would require PBMs to make available their formulary and other information related to coverage.