SCOTUS Ruling on States’ Ability to Regulate PBMs Raises Questions for Employers

Last week the US Supreme Court ruled that ERISA doesn’t preempt a state law that regulates how pharmacy benefits managers (PBMs) reimburse pharmacies. While this decision specifically applies to the Arkansas law’s pharmacy reimbursement provisions, it may lead to other states taking similar or even more aggressive actions. As we mentioned in our recent GRIST article, plan sponsors will need to work with their PBMs to determine to what extent, if any, a given state’s PBM standards may apply to a self-insured plan. Here’s a closer look at what plan sponsors need to know about the ruling.

As background, PBMs serve as intermediaries between prescription-drug plans and the pharmacies that members use. When plan member goes to a pharmacy to fill a prescription, the PBM reimburses the pharmacy for the prescription, then the plan sponsor reimburses the PBM. The reason this case was brought to the courts is because the amount a PBM reimburses a pharmacy is not necessarily tied to the amount the pharmacy paid to purchase that drug from a wholesaler. Instead, PBMs’ contracts with pharmacies set reimbursement rates according to a list specifying the maximum allowable cost (MAC) for the majority of generic drugs. The intent of setting these reimbursement amounts is to keep drug cost down by incenting the pharmacies to negotiate the price of generics with their suppliers. However, this also is a means by which PBMs make some of their profits, as the amount they reimburse the pharmacies is often less than what the plan reimburses the PBM.

The challenge to this model mainly results from independent and rural pharmacies that maintain they are unable to negotiate prices from wholesalers down to the levels of the PBMs’ MAC requirements and thus must dispense some medications at a loss, cutting into profits.

With this new court ruling, the PBMs must work with the pharmacies to ensure their MAC lists remain up to date to reflect the latest pricing. Further, PBMS must provide pharmacies with an avenue to appeal the reimbursement, and – most significantly for plan sponsors -- network pharmacies have the right to refuse to fill a prescription if the PBM reimbursement does not cover their cost.

The immediate action for plan sponsors is to confirm that their PBMs are working with Arkansas pharmacies to address these requirements and ensure that pharmacies are not refusing services to plan members. Longer term, plan sponsors will need to take steps to protect themselves if generic reimbursement rates start rising and these higher costs are passed along to them.

Finally, employers and their vendor partners should consider the broader implications of the Arkansas law. While it’s too soon to say if many states will pursue this approach, even the possibility could have an impact. For starters, PBMs may become less aggressive in quoting on new business and renewals for fear of future price regulation. Additionally, they could invoke a little-known, but highly important, clause (known as “Reservation of Rights”) which allows the PBM to revise pricing mid-contract in the event of “unforeseen marketplace events” that change the economic value of the contract.

The upshot is that, while these state-led moves may have positive intent, there could be short-term repercussions. Plan sponsors and their advisors will need to communicate early and often with their PBMs to avoid surprises.

David Dross
by David Dross

National Practice Leader for Managed Pharmacy Consulting

Raymond Brown
by Raymond Brown

Partner, Mercer Health

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