New York push to rein in drug costs tests ERISA's reach

(Bloomberg) –New York is poised to become one of the first states to impose more stringent rules on pharmacy-benefit managers since the Supreme Court late last year swept away a longstanding federal legal barrier.

States including Texas and Tennessee have enacted fresh restrictions on PBMs. In New York, lawmakers this month revived a bill that would bring the industry under closer state oversight.

Governor Andrew Cuomo vetoed the measure two years ago, saying at the time it would be pre-empted by federal law. Pharmacists support it, while drug plans say it would raise costs for consumers.

Related: Supreme Court gives states a win in PBM regulation case

PBMs manage networks of pharmacies and negotiate with drug suppliers on behalf of health plans, influencing what people pay for medications at the pharmacy counter. The complexity of their operations has drawn scrutiny, but states seeking to change their practices have run up against legal hurdles.

​​Last year, the Supreme Court removed one of them. The high court ruled 8-0 that the Employee Retirement Income Security Act, which sets national rules for most large employer-benefit plans, doesn’t prevent states from regulating prescription plans for people who get health coverage through their employers.

The case involved an industry challenge to an Arkansas law that set rules for how much PBMs must pay pharmacies. It pit the attorney general of Arkansas against the Pharmaceutical Care Management Association, the national trade group for PBMs. The justices rejected an argument that the pharmacy-benefit management industry had used to challenge state laws regulating PBMs.

“ERISA does not pre-empt state rate regulations that merely increase costs or alter incentives for ERISA plans without forcing plans to adopt any particular scheme of substantive coverage,” Justice Sonia Sotomayor wrote in the decision.

New York’s pending bill will provide an early signal of how willing states are to take on PBMs and other health-care businesses since the Supreme Court ruling. Widening states’ power to regulate medical costs or incentives could embolden lawmakers to test new approaches that ERISA might have blocked before.

“This gives states a little bit more latitude and freedom to experiment and create novel reforms,” said Erin C. Fuse Brown, director of the Center for Law, Health & Society at the Georgia State University College of Law.

The case “was a huge win for states,” she said.

The New York bill is similar to legislation Cuomo vetoed in 2019 on the grounds that it would be pre-empted by federal laws, including ERISA.

New York lawmakers passed the legislation again in June with near-unanimous votes, putting it back in the governor’s hands. A Cuomo spokesman said the bill is under review.

Pharmacy charges

Spending on prescription drugs in Medicaid, the federal-state safety net insurance for low-income people, has increasingly been a focus of state governments. The country’s largest Medicaid insurer, Centene Corp., agreed to pay $143 million and reserved another $1.1 billion to settle disputes over pharmacy charges with its state clients.

In New York, an audit by the state comptroller published in September found $605 million in unnecessary pharmacy costs to its Medicaid program over four years. In Florida, a report published late last year examining pricing in Medicaid managed-care plans found that over 12 months, plans paid PBMs about $90 million more than PBMs reimbursed pharmacies.

“States are trying to get a handle on what’s happening across the supply chain, and definitely PBMs and rebates are part of the puzzle,” said Jennifer Reck, project director at the National Academy for State Health Policy.

Arkansas’s statute, passed in 2015, requires PBMs to reimburse pharmacies at least as much as the pharmacies’ cost to acquire the drug from a supplier. The Pharmaceutical Care Management Association, the industry’s trade group, argued that ERISA pre-empted the Arkansas law.

Disputes over the policies often pit influential state pharmacy groups against powerful national PBMs. Pharmacists’ associations assert that PBMs are squeezing reimbursements, favoring their in-house pharmacies and skimming profits by paying less for drugs than what they charge health plans, a practice known as spread pricing.

Pharmacy groups turned to states to curb what they call harmful practices by PBMs. “There’s been a tug of war in the states going on for years,” said Anne Cassity, vice president of federal and state government affairs for the National Community Pharmacists Association.

PBMs contend that regulations drive up prescription costs. The PCMA said the New York policy would raise costs by $28 billion over 10 years, citing an analysis it commissioned. The Pharmacists Society of the State of New York, which supported the law, called the policy “critical legislation that will protect independent pharmacists and their patients from out of control prescription drug middlemen” and called on Cuomo to sign it.

Industry influence

The PCMA downplayed the significance of its loss last year at the high court. The Supreme Court decision “does not give state legislatures new authority to restrict health plans’ ability to provide affordable prescription drug coverage,” spokesman Greg Lopes said in an email.

“The Court’s decision simply extends the existing case law upholding state rate regulations to Arkansas’ misguided guaranteed profit for pharmacies law,” he said.

The PBM industry is confident in its ability to influence state policy, even following the Supreme Court decision.

“We’ve actually had a pretty good year, in terms of what a legislator puts forward versus what actually gets turned into a bill, versus what actually gets voted on, and versus what the governor ultimately signs,” Tim Wentworth, chief executive officer of Cigna Corp.’s Evernorth unit, said at a conference June 9.

Some 48 states already regulate PBMs, and additional legislation is being considered in statehouses across the country, according to a tally by the National Academy for State Health Policy.

Read more: 

• Creating meaningful change in the PBM marketplace
• PBMs lose out to pharmacists in Ohio budget deal
• Senators call for investigation into PBM’s spread pricing

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