Ben Franklin on a bill, peering out through a lot of pills
It is widely understood – perhaps especially by benefits professionals, who see the direct impact on their medical and prescription drug plan offerings – that the cost of prescription drugs is on the rise. There seems to be less consensus, however, on what (or who) is causing the rise in prescription drug costs, but pharmacy benefit managers (PBMs) seem to have become a regular target lately for both litigation and regulation.
As their name implies, PBMs are third-party companies whose main role is to help manage the cost and delivery of pharmacy benefits. They generally serve as an intermediary between prescription drug manufacturers and insurance or benefits providers with the idea that PBMs are able to use their size and scale to deliver cost savings to their clients on prescription drugs.
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As the influence and size of some PBMs have grown in the market, there has been increased scrutiny and regulatory action at the federal level. In addition, state legislatures have taken action by passing both new and amended laws aimed at regulating various aspects of PBMs’ business models and reimbursement mechanisms in an effort to slow both the increase in prescription drug costs and the bargaining power of the PBMs. This article provides a brief overview of some of the more common types of PBM legislation recently passed in the states. The discussion of particular states is intended to be illustrative rather than exhaustive.
Regulations on pricing methodology and/or PBM fee
Some of the state laws relate to PBM drug pricing and pharmacy payments. Some of the laws set a specific amount or a specific minimum amount that PBMs are required to use in reimbursing pharmacies. For example, Kentucky passed a PBM law this spring that provides that beginning January 1, 2025, PBMs are required to reimburse a pharmacy no less than the national average drug acquisition cost for each drug. If the national average is unknown, the PBM must base the reimbursement on the wholesale acquisition cost. A similar Maine statue, which became effective January 1, 2020, requires PBMs to reimburse pharmacies at ingredient cost plus a dispensing fee, minus any enrollee cost-sharing.
Other laws provide for or require “pass-through” pricing, where the amount paid by the PBM to the pharmacy is passed through to the plan sponsor without markups, and/or prohibit “spread pricing,” where PBMs charge a plan a different amount for pharmacy services than the PBM pays the pharmacy for such services. Recent PBM laws passed in Idaho and Florida do both. The Florida and Idaho laws use nearly identical language to require that all contractual arrangements between a PBM and a pharmacy benefits plan or program contain language providing for a pass-through pricing model and exclude terms that allow for directly or indirectly using spread pricing. However, Florida will allow spread pricing when the PBM passes along the entire amount of any spread to the pharmacy benefits plan or program as permitted in a pass-through pricing model. As an extra precaution, Idaho’s law contains a specific prohibition against spread pricing and requires the use of pass-through pricing models.
By way of another example, Vermont’s recently passed law also prohibits PBMs from conducting or participating in spread pricing, which its law clarifies “means that a pharmacy benefit manager must ensure that the total amount required to be paid by a health benefit plan and a covered person for a prescription drug covered under the plan does not exceed the amount paid to the pharmacy for dispensing the drug.”
PBM license and registration requirements
A majority of states now have laws on the books that require PBMs to be licensed, registered or to have obtained a certificate with the state before operating or conducting business as a PBM. Presumably, the intent of these laws is for states to better understand which PBMs are operating in their states and to provide for some means to have explicit authority over them through the license or registration process. For example, Vermont’s PBM law provides that the insurance commissioner may refuse to issue or renew a PBM license for bad acts or violation of Vermont state insurance laws. New Jersey’s law provides that the Department of Banking and Insurance may set standards for the issuance of a PBM license that address pricing models, standards and practices in creating pharmacy networks, as well as deceptive practices. Further, a PBM licensed in New Jersey may have its license suspended, revoked or placed on probation for violations of state or federal law or similar wrongdoing.
Related: Federal pharmacy benefit manager regulation may be inevitable, but will push drug prices higher
PBM reporting or disclosure requirements
Another popular area of legislation is with respect to reporting or disclosure requirements for PBMs to provide states with more transparency into PBM practices, pricing and related matters. In Idaho, PBMs must report to the director of the department of insurance full and complete disclosure of differences between the amounts PBMs pay to each pharmacy on behalf of insurance plans, reasons drugs are moved or reassigned formulary tiers that are more costly to consumers or less beneficial to pharmacies, and differences in reimbursement rates or practices and other remuneration between PBM-owned pharmacies and any other pharmacy. By May 1, 2025, and annually thereafter, New Mexico will require that PBMs report to the superintendent of insurance certain information “attributable to patient utilization of prescription drug products,” such as the “aggregate rebates and fees collected from manufacturers” and the “aggregate dollar amount of rebates and fees collected from manufacturers that were passed on to…health insurers;…consumers;…or retained by the [PBM].” Beginning February 1, 2025, and annually thereafter, Connecticut will require PBMs to file a report with the state insurance commissioner that contains information relating to rebates and drug formularies.
As noted above, this is a sampling of the state statutes that have been passed recently regulating PBMs. We are likely to see further shifts in the PBM regulatory landscape at both the federal and state level. Earlier this year, the National Association of Attorneys General sent a letter to members of Congress urging PBM reform at the federal level. The Federal Trade Commission recently released a staff report on PBMs as well. It is hard to predict what the incoming federal administration will do with respect to PBM laws, but it seems that the states will continue to make this a focus. What remains to be seen is what impact these reforms will actually have. Benefits professionals should stay apprised of industry developments, particularly in the state(s) in which benefits are being provided.
Susie Bilbro is a member at Bass, Berry & Sims PLC, where she advises clients across a range of industries on all aspects of employee welfare benefit and retirement plans, including design, structure, implementation, day-to-day administration, and termination of retirement and health and welfare benefit plans.
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