US Pharm. 2022;47(8):21-25.
Pharmacy benefit managers (PBMs) are companies that are paid to manage prescription drug benefits on behalf of payors (health insurers, Medicare Part D and Medicaid Managed Care drug plans, large employers, managed care plans, and other payors). Key PBM functions include administration and/or management of prescription drug benefits, developing and maintaining formularies, providing access to a contracted pharmacy network, real-time pharmacy claims processing, clinical programs (utilization management, retroactive claims review, prior authorization, and other medication management programs), and using their purchasing power to negotiate discounts and rebates between payors and pharmaceutical manufacturers.1
PBMs play a significant role in determining prescription drug costs for payors, pharmacy reimbursement, and patient cost-sharing requirements, through their negotiations with pharmaceutical manufacturers and pharmacies to manage pharmacy benefits.2 PBMs manage the drug benefits for more than 90% of Americans with prescription drug coverage, with the goal and objective to lower drug costs for their clients.3 Centers for Medicare and Medicaid Services (CMS) studies have noted that PBMs’ ability to negotiate larger rebates from manufacturers has helped lower drug prices and slow the growth of drug spending.4
PBMs have faced state regulatory scrutiny and pharmacy lawsuits because, as a result of their position in the market, they have the opportunity to retain rebates or discounts rather than passing savings on to consumers, which creates a conflict of interest for pharmacies and pharmacy patients and may lead to higher drug prices for patients and lower reimbursement for pharmacies.5 In addition, spread pricing, rebates, and discounts may provide an incentive for PBMs to develop formularies that favor high-priced drugs over drugs that are more cost-effective.6
Oklahoma Patient’s Right to Pharmacy Choice Act
In 2019, the Oklahoma legislature passed the Oklahoma Patient’s Right to Pharmacy Choice Act (the Act) to establish minimum and uniform access by patients to pharmacy providers.7 The Act regulates the PBM industry and contains numerous provisions that protect patient access and choice, increase transparency, and prohibit anticompetitive practices, including:
Any Willing Provider: Prevents PBMs from arbitrarily discriminating against pharmacies willing to accept the PBM’s standard terms and conditions.8
Preferred Pharmacy Network: Prevents a PBM from denying a pharmacy the opportunity to participate in the pharmacy network at preferred participation status if the pharmacy is willing to accept the terms and conditions that the PBM has established for preferred network participation status.9
Retail-Only Pharmacy Access Standards: Sets the percentage of beneficiaries that must live within an established geographic distance from a network pharmacy.10
Cost-Sharing Discount: Prohibits PBMs from penalizing a pharmacy for informing a covered individual of any differential between the individual’s out-of-pocket cost utilizing their insurance and the amount an individual would pay without utilizing their insurance.11
Affiliated Pharmacies: Prohibits insurers and PBMs from compelling beneficiaries to use pharmacies directly or indirectly owned by those entities and from paying network pharmacies less than affiliated pharmacies).12,13
Probation-Based Pharmacy Limitation Prohibition: Prohibits a PBM from denying, limiting, or terminating a pharmacy’s contract based on the employment status of an employee who has an active license to dispense, despite being placed on “probation.”14
Contract Approval Rule: Prohibits PBMs from requiring payors of PBMs to approve all contracts between the PBM and its retail pharmacy network.15
Network Provider Restriction Prohibition: Prohibits insurers or PBMs from limiting beneficiaries’ choice of in-network providers.16
Promotional Materials Provision: Regulates how PBMs can advertise to their providers.17
Post-Sale Reduction Prohibition: Prohibits PBMs from retroactively denying or reducing reimbursement for a claim after authorizing the payment of the claim.18
Terminated Payment Requirement: Prohibits PBMs from refusing to pay a pharmacy in the event the PBM terminates that pharmacy from the network.19
Service Fee Prohibition: Prohibits a PBM from charging a pharmacist or pharmacy a fee related to the adjudication of a claim.20
Health Insurer Monitoring Requirement: Makes health insurer responsible for monitoring all PBM activities for ensuring compliance with the Act.21
The Oklahoma Insurance Department (OID) PBM Compliance and Enforcement Division is responsible for enforcing compliance with the Act, which includes the following functions: (1) examines license applications to ensure applicants meet all state requirements; (2) ensures that licensees meet the requirements in the Oklahoma Insurance Code; (3) receives complaints and investigates allegations of PBM regulatory violations; (4) requires and audits pharmacy network access reports from PBMs and health insurers; (5) initiates and takes formal administrative actions against PBMs; and (6) provides continuing education on the Act.22
The OID reported receipt of more than 20,000 PBM complaints as of February 15, 2021, with the majority of the complaints regarding postadjudication transaction fees, pharmacies denied contracts with PBMs, patient choice of pharmacy restrictions, and inaccurate pharmacy network directories.23
On January 20, 2022, the OID entered into a Settlement Agreement with CVS Caremark, a PBM, regarding its collection of transaction fees from pharmacies for Medicare Part D and Employment Retirement Income Security Act (ERISA) plan claims in violation of the Patient’s Right to Pharmacy Choice Act. Under the terms of the Settlement Agreement, CVS Caremark will pay the state of Oklahoma $4.8 million to settle the violations (of which $2.3 million will be distributed to Oklahoma pharmacies).24
Pharmaceutical Care Management Association v. Mulready
The Pharmaceutical Care Management Association (PCMA) is the national trade association for PBMs and represents PBMs in litigation challenging State regulation of PBMs. In PCMA v. Mulready, the PCMA challenged the Act and the related regulations, alleging that ERISA and Medicare Part D preempt the Act and related regulations and that the regulations were adopted in violation of the Oklahoma Administrative Procedures Act.25
ERISA preempts “any and all State laws insofar as they may now or hereafter relate to any employee benefit plan” covered by ERISA.26 In Rutledge v. PCMA, the Court noted that a state law has an impermissible “connection with” an ERISA plan if it “governs . . . a central matter of plan administration” or “interferes with nationally uniform plan administration.”27 A state law has a “reference to” an ERISA plan if it acts “immediately and exclusively” on ERISA plans, or if the existence of such a plan is essential to the law’s operations.28
The PCMA asserted that ERISA preempted provisions of the Act regulating the Any Willing Provider; Retail-Only Pharmacy Access Standards; Affiliated Pharmacy Prohibitions; Probation-Based Pharmacy Limitation Network Provider Restrictions; Cost-Sharing Discount Provisions; Promotional Materials Provisions; Post-Sale Price Reduction Prohibition; and the Affiliated Pharmacy Price Match, because the referenced provisions allegedly have a connection with ERISA because they impact ERISA plans by dictating plan benefit design, network composition, cost-sharing differentials, and patient communications with beneficiaries. The Mulready court held that the referenced provisions did not have a connection with an ERISA plan, and therefore the Act is not preempted by ERISA.29
Medicare Part D Preemption
Medicare Part D incorporates the preemption provisions of Medicare Part C, which provides: “(t)he standards established under this part shall supersede any State law or regulation (other than State licensing laws or State laws relating to plan solvency) with respect to MA plans which are offered by MA organizations under this part.”30 Medicare preemption has generally been found where “(1) Congress or the Centers for Medicare and Medicaid Services (CMS) has established ‘standards’ in the area regulated by state law; and (2) the state law acts ‘with respect to those standards.’”31
The PCMA asserted that Medicare Part D preempted most of the above-referenced provisions and an additional provision that prohibited charging pharmacies a service fee. After considering Medicare preemption, the Mulready court held that the Service Fee Prohibition, Affiliated Pharmacy Price Match, and Post-Sale Price Reduction Prohibition were preempted by the Medicare Part D “non-interference” law, which prohibits interference with the negotiations between Part D sponsors and pharmacies and prohibits third-party control over a drug formulary or control pricing and/or reimbursement methodologies.32 The Mulready court also preempted the Retail-Only Pharmacy Access Standards because CMS has established pharmacy network standards. The Mulready court did not preempt the Any Willing Provider restrictions, Affiliated Pharmacy and Network Provider restrictions, and Probation-Based Pharmacy limitations on the basis that there were no Medicare Part D standards to act “with respect to.”33
State PBM Regulation Options/Practices
PBMs have challenged state authority to regulate PBMs by arguing that federal (ERISA and Medicare) preemption restricted state PBM regulatory activities for most healthcare payors; however, in Rutledge v. PCMA the U.S. Supreme Court ruled that an Arkansas law regulating PBMs was not subject to federal preemption. The Rutledge decision provided a roadmap to states as to how PBMs may and may not be regulated and has resulted in more state laws that regulate PBMs. States are now able to rely on the Rutledge precedent to withstand PCMA ERISA–based preemption challenges. State laws regulating PBMs will likely be interpreted to view PBM pricing regulations as presumptively beyond ERISA’s preemptive scope.34
Rutledge narrows the range of state regulations preempted by ERISA while broadening those that are not. Justice Sotomayor’s Rutledge opinion notes that ERISA will only prohibit the following types of PBM regulation: (1) laws that require plans to cover specific benefits; (2) laws that bind plan administrators to specific rules for determining beneficiary status; and (3) laws that create acute, indirect, economic effects that force a plan to adopt a certain scheme of coverage.
State PBM laws can avoid preemption if they do not mandate what benefits ERISA plans must cover or who qualifies for such benefits, but merely regulate the cost of the items and services covered or the manner in which the benefits must be provided.
State Regulation of PBMs
More than 45 states have passed laws regulating PBMs.35 In 2021 alone, at least 18 states passed a PBM licensing/registration requirement or had one that became effective in 2021.36 Common themes related to PBM regulation include provisions relating to the following:
Auditing Standards: Fair pharmacy audit and appeals process requirement, which subjects PBMs to audit standards by placing guidelines on when and how pharmacy audits are conducted by PBMs. These standards may include: (1) providing a pharmacy at least 10 days’ notice of a PBM’s intent to audit; (2) allowing PBMs to recoup costs from pharmacies only if errors are substantive; and (3) limiting audit look-back periods.
Ban Clawbacks: Prohibits a PBM from denying or reducing the amount they reimburse to a pharmacy or pharmacist for a claim. Clawbacks occur when a patient’s copayment exceeds the total cost of the drug to their insurer, and the PBM “claws back” some, or all, of the overpayment from the pharmacy.
Ban Spread Pricing: Prohibits a PBM from utilizing a spread pricing model. Prevents price spreading. In a spread pricing model, the PBM keeps a portion of the amount, or spread, between what the payor pays the PBM and the amount that the PBM reimburses the pharmacy for a patient’s prescription.
Compliance Monitoring and Enforcement: State agency will monitor, audit, and investigate PBMs in response to complaints and assess fines, impose civil penalties, and suspend or revoke a license of a PBM that is found to be noncompliant.
Consumer Cost Disclosures: Bans gag clauses that prevent pharmacists from sharing lower cost options and permits or mandates disclosure of a drug’s out-of-pocket costs with and without insurance and availability of generic options.
Fiduciary: Imposition of fiduciary, good faith, and fair dealing requirements on PBMs.
Licensure/Registration: Requires PBMs to obtain a license or registration through a State regulatory agency.
Patient Steering: Prohibits PBMs from PBMs requiring patients to use PBM-affiliated pharmacies or pharmacies in which they have an ownership interest including retail, mail-order, or specialty.
Pharmacy Network Adequacy: Pharmacy accessibility standards measured by maximum distance from a patient’s home to a network pharmacy.
Pharmacy Reimbursement Price Transparency: Requires PBMs to disclose certain pricing and cost information, such as data on rebates, payments, and fees collected from drug manufacturers, insurers, and pharmacies, and mandates that PBMs update their cost schedules with pharmacies to reflect drug-price increases and disclose the maximum amount they will reimburse a pharmacy for a generic or multisource drug, disclosed annually, subject to notice before updating.
Rebate: Requires PBMs to pass through rebates to payers or to patients.37
The Outlook for PBM Regulation
PBMs and multistate pharmacies operating in all states should take notice of the recent legal developments and ensure that their operations and contracts are structured to comply with state PBM regulatory requirements. Community pharmacies should monitor changes in their state laws regulating PBMs and adopt their operational practices in a manner to optimize their statutory/regulatory rights.
The Court’s decisions in Rutledge and Mulready have clarified and expanded states’ authority to regulate PBMs, and numerous states have recently modified and/or expanded PBM regulatory activities. We expect the trend to continue, however, and multistate pharmacy operators will continue to be confronted with a patchwork quilt of state PBM laws that may vary significantly from state to state. Uniformity and standardization in PBM regulation are essential for efficient operation of multistate pharmacy operators.
Federal regulation of PBMs may occur in the near future, as Sens. Chuck Grassley (R-Iowa) and Maria Cantwell (D-Wash.) have introduced the Pharmacy Benefit Manager Transparency Act of 2022, which would incentivize fair and transparent PBM practices by providing exceptions to liability for PBMs that pass along 100% of rebates to health plans or payors and fully disclose prescription drug rebates, costs, prices, reimbursements, fees, and other information to healthcare plans, payors, pharmacies, and federal agencies.38 The Pharmacy Benefit Manager Transparency Act of 2022 would ban unfair or deceptive pricing practices, prohibit PBMs from unfairly or deceptively reducing clawing-back drug reimbursement payments to pharmacies, and require PBMs to report to the FTC the amount of money they make through spread pricing and pharmacy fees. The Act would authorize the FTC and state attorneys general to enforce the legislation and hold PBMs accountable.39
In addition, the FTC announced on June 7, 2022, that it would launch an investigation into contracting and other business practices in the PBM industry, requiring CVS Caremark, Express Scripts, Inc., OptumRx, Inc., Humana Inc., Prime Therapeutics LLC, and MedImpact Healthcare Systems, Inc. to provide information and records regarding their business practices.
1. Pharmacy Benefit Managers and Their Role in Drug Spending. The Commonwealth Fund, April 22, 2019.
2. Health Policy Brief Series: Prescription Drug Pricing (Health Affairs, Sept. 2017).
3. .See U.S. CENSUS BUREAU, HEALTH INSURANCE COVERAGE IN THE UNITED STATES: 2018, at 3 (Nov. 2019), Health Insurance Coverage in the United States: 2018 Current Population Reports. Berchick ER, Barnett JC, Rachel D. Upton Issued November 2019, (showing approximately 297 million Americans to have health insurance); Our Industry, Pharmaceutical Care Management Association. www.pcmanet.org/our-industry/(reporting that PBMs administer drug prescription plans for more 270 million Americans).
4. Notes 1 and 2, supra.
5. Yale Law & Policy Review. Pharmacy Benefit Managers, Rebates, and Drug Prices: Conflicts of Interest in the Market for Prescription Drugs Joanna Shepherd.
6. Seeley E, Kesselheim AS. Pharmaceutical Benefit Managers: Practices, Controversies, and What Lies Ahead (Commonwealth Fund, March 2019).
7. Okla. Stat. tit. 36, § 6958, et seq.
8. Okla. Stat. tit. 36, § 6962(B)(2)-(3), (6)-(7).
9. Okla. Stat. tit. 36, § 6962(B)(4).
10. Okla. Stat. tit. 36, § 6961(A), (B).
11. Okla. Stat. tit. 36, § 6963(E).
12. Okla. Stat. tit. 36, § 6961(C).
13. Okla. Stat. tit. 36, § 6962(B)(3).
14. Okla. Stat. tit. 36, § 6962(B)(5).
15. Okla. Admin. Code 365:25-29-9(c)(1).
16. Okla. Stat. tit. 36, § 6963(D).
17. Okla. Stat. tit. 36, § 6961(D).
18. Okla. Stat. tit. 36, § 6962(B)(6).
19. Okla. Stat. tit. 36, § 6962(B)(7).
20. Okla. Stat. tit. 36, § 6962(B)(2).
21. Oklahoma Patient Right to Pharmacy Act Statute and Regulations.
22. Oklahoma Insurance Department Pharmacy Benefits Manager, https://www.oid.ok.gov/regulated-entities/pbm/
23. THE OKLAHOMA PATIENT’S RIGHT TO PHARMACY CHOICE ACT ADVISORY COMMITTEE MEETING February 18, 2021, Oklahoma Insurance Department.
24. OID Reaches $4.8M Settlement Agreement with CVS Caremark for Alleged Violations of the Patient’s Right to Pharmacy Choice Act, Dependent On Federal Court Decision, January 20, 2022.
25. Pharm. Care Mgmt. Ass’n v. Mulready, W.D. Okla., No. 5:19-cv-00977, 4/4/22.
26. 29 U.S.C. § 1144(a).
27. Rutledge v. Pharm. Care Mgmt. Ass’n, 141 S. Ct. 474, 479 (2020).
28. Rutledge v. Pharm. Care Mgmt. Ass’n, 141 S. Ct. 474, 479 (2020).
29. Note 24, supra.
30. 42 U.S.C. § 1395w-26(b)(3).
31. Pharm. Care Mgmt. Ass’n v. Rutledge, 891 F.3d 1109, 1113 (8th Cir. 2018).
32. See 42 U.S.C. § 1395w-111(i).
33. Note 24, supra.
34. Rutledge v. Pharm. Care Mgmt. Ass’n, 141 S. Ct. 474, 479 (2020).
35. National Academy for State Health Policy State Drug Pricing Laws: 2017-2022. Updated June 3, 2022, www.nashp.org/rx-laws/.
36. State Regulation of Pharmacy Benefit Managers is on the Rise Cynthia Borrelli Bressler, Amery & Ross, P.C. May 26, 2022, www.bressler.com/news-state-regulation-of-pharmacy-benefit-managers-is-on-the-rise; State regulations of PBMs https://ncpa.org/sites/default/files/2022-04/pbm-laws-by-state-with-cites.pdf.
37. State Policy Options and Pharmacy Benefit Managers (PBMs), National Conference of State Legislatures, March 23, 2022.
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