States Start to Take Advantage of New Legislative Authority Over PBMs

State governments have begun to pursue aggressive policies to make PBMs more transparent, accountable to plan sponsors and less expensive to contract with — efforts that are bolstered by Rutledge v. Pharmaceutical Care Management Association (PCMA), a lawsuit decided by the Supreme Court at the end of 2020 in which the justices held that states were not in violation of the Employee Retirement Income Security Act of 1974 (ERISA) in attempting to regulate the rates at which PBMs reimburse pharmacies.

According to the National Academy for State Health Policy (NASHP), a think tank and policy advocacy group, so far this year 42 states have considered 108 bills relating to PBM regulation. That wave of legislation is in part driven by Rutledge, which, as a March Milliman Inc. report put it, “creates a clear pathway for states to impose minimum thresholds on pharmacy…prices affecting reimbursement levels paid by plan sponsors,” which “means PBMs could be forced to pay pharmacies a minimum price for drugs.”

The lawsuit originated with a PCMA-led challenge of an Arkansas law, Act 900, which requires PBMs to reimburse pharmacies at no less than what pharmacies pay to acquire drugs.

The Milliman report concludes that “PBMs in Arkansas will have to manage their MAC [maximum allowable cost] prices in accordance with the state requirements, which could increase pharmacy costs for phan sponsors operating in Arkansas.” In rough terms, the report estimated that a 10% increase in pharmacy costs “would only increase total plan pharmacy costs by 2%, which equates to less than 0.5% of medical costs.”

The Milliman report observed that the Rutledge ruling “is likely to bolster state action to regulate PBMs, as it explicitly permits states to engage in reimbursement regulation that may raise costs to plan sponsors. As pharmacy costs continue to be a focus for federal and state policy makers seeking to address rising health costs for payers and members, the regulatory permission provided may only embolden legislative efforts.”

Jennifer Laudano, senior director of communications at NASHP, tells AIS Health, a division of MMIT, that this has indeed begun to happen — albeit slowly, partly because of the COVID-19 pandemic.

“I think that even though we saw somewhat [less] of a response this session, going into the next session we will really see more of an impact,” Laudano says. “I think what we’re seeing is just the beginning of a trend, and so I wouldn’t want to overstate it at this point. But there were a number of states that passed laws that made it clear that their existing PBM regulations did also extend to self-funded plans. I think that was specifically Arkansas and Wisconsin. That, in my mind, is the most obvious response [to Rutledge] that we’ve seen to date.”

Sarah Lanford, a policy associate at NASHP, tells AIS Health that she expects more ambitious legislation to follow.

‘Decline to Dispense’ Could Gain Steam

“I’d say we’re definitely anticipating more action,” she says, particularly around “decline to dispense” policy, which allows pharmacies to not dispense a prescribed drug to a patient if the acquisition cost for the drug is higher than the reimbursement amount paid by a PBM. “It looks like five states introduced legislation with very similar language [to Arkansas’ law] this session. Other states have introduced legislation to establish a minimum amount that PBMs must pay pharmacies. West Virginia this year enacted a law, just as one example, that requires PBMs to reimburse pharmacies…to ensure that pharmacies are not losing money on a transaction.”

States Want More Transparency

Laudano says that the push to regulate PBMs is part of a larger effort by states to contain health care costs.

“I think there’s a direct relationship in terms of states feeling like they’re going to have more oversight and control over those PBM contracts by carving them out. I think part of it is this question around PBM transparency and whether or not the state is losing money because of spread pricing and that sort of thing. But I do think that there’s another issue related to that, in terms of states also wanting to better leverage their purchasing power by carving Rx out of Medicaid programs as well, instead of having it divided over multiple MCOs,” Laudano says.

Ge Bai, Ph.D., an associate professor at Johns Hopkins University’s Carey Business School and Bloomberg School of Public Health, tells AIS Health that the space created by Rutledge opens a new front in a long-running conflict between PBMs and pharmacies.

“Many of the bills are the result of a battle across different groups, not necessarily always about rebates. If you look carefully, there are many disputes between pharmacies and the PBMs. Many interest groups are fighting hard,” she explains. “PBMs are very powerful politically — having these bills [introduced] is not the same as having the law. I think it’s still early stages.”

“The green light is there, and the states are ramping up efforts to curb the PBMs, but the results are yet to be seen,” she says. She observes that the largest PBMs are now owned by some of the largest carriers — and Cigna Corp., CVS Health Corp. and UnitedHealth Group all have formidable lobbying resources.

All that said, “I think it’s undeniable that the effort to curb PBMs and address their secretive transactions is flourishing, or will be increasing. PBMs have become an issue that calls public attention and calls policymakers’ attention. So in the short term,” because of PBMs’ lobbying resources, “things won’t happen — but in the long run, it definitely creates a brand new risk for PBMs.”

West Virginia Blazes a Trail

Daniel Nam, Pharm.D., an attorney and an associate principal at Avalere Health, tells AIS Health that Arkansas’ and West Virginia’s laws contain policies that are likely to spread across the country.

The West Virginia law is “essentially the first state law, post-Rutledge, that takes a stronger approach with PBM regulation. They do things like requiring pass-through of rebates to health plans, and then health plans applying that amount towards out-of-pocket costs, lowering [prices] at the pharmacy counter. It also requires a slew of reporting and transparency requirements that really reflect the rebates. And they also defined rebates [to] be very, very broad so that PBMs can’t just shift money from one lane to another and avoid detection. It’s a really interesting approach that West Virginia is taking, and they’re applying this law to both ERISA and non-ERISA plans.

“If you had talked to me a few weeks ago, I probably would have said that I’d feel a little hesitant that there would be a flood of state laws, because the Supreme Court decision is pretty broad,” Nam adds.

“It hasn’t played out in the courts yet and hasn’t been applied yet,” he explains. “So I could see states being a little bit more careful in approaching this area. And I think that that will still continue, but depending on how this West Virginia law turns out, the application of Rutledge could be very, very broad.”

Nam predicts other policies that could be popular at the state level include minimum reimbursement rates to pharmacies, bans on spread pricing and changes to drug procurement for states’ Medicaid and civil service employee plans. He also expects that many states will force PBMs to have a fiduciary duty to their clients.

“There’s something that popped up a few years ago about states creating a fiduciary duty for PBMs,” he says. “I wouldn’t be surprised if something like that pops up again, though that is arguably a little bit more outside the scope of Rutledge. But states feel empowered — they can really try and go pretty broad and pretty deep on the commercial market [for PBMs] now.”

That said, Nam agrees with Lanford and Laudano that passing new laws will take time.

“It’s still in the early stages. There’s still a lot to be seen in how this decision plays out in both the market and in the courts. I think that you’re going to see states being a little bit more proactive, and perhaps aggressive, in managing PBMs. But perhaps that will take a little bit of time, given that we’re pretty close to the decision.”

Learn more about MMIT’s Landscape solution to gain a single source of truth for your payer strategies.

Peter Johnson

Peter has been a reporter for nearly a decade. Before joining AIS Health, Peter covered a wide variety of topics in his hometown of Seattle, where he continues to live. Peter’s work has appeared in publications including The Atlantic and The Stranger. Peter attended Colby College.

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