Compliance News | October 5, 2023

NY's Proposed PBM Regulations Concern Some Plan Sponsors

State and federal legislators have recently launched an onslaught of regulations that would affect pharmacy benefit manager (PBM) practices. With those legislative and regulatory actions have come multiple lawsuits challenging the ability of states to regulate PBMs when used by ERISA-governed group health plans or Medicare Part D plans.

This insight looks at regulations recently proposed in New York that could have a significant impact on PBM practices and, consequently, employee benefit plan benefits and costs in the state. 

Senior Caucasian Woman In Taking Medicine Drugs At Her Home

The New York Department of Financial Services (DFS) has proposed regulations governing the conduct of PBMs operating in New York. PBMs are considered to be operating in New York if 50 percent or more of the beneficiaries of the plan work or reside in New York. The DFS announcement states that the proposed regulations would establish strong protections for consumers and small businesses, including prohibiting abusive contract terms that raise drug costs for consumers and strain small pharmacies, as well as establish network adequacy standards. However, some group health plan sponsors have expressed concern that the regulations could adversely affect plan prescription drug benefits and increase plan costs.

Comments on the proposed regulations are due October 16, 2023. If the regulations are adopted as proposed, the proposed effective date would be January 1, 2024.

Update: On October 31, 2023, New York withdrew the proposed regulations discussed in this insight.

The proposed regulations

There are several important aspects to these regulations. The proposed regulations would:

  • Limit the ability to offer preferred or specialty networks through a PBM
  • Limit the ability to use a PBM-owned pharmacy
  • Prohibit mandatory mail-order plans
  • Require payment of dispensing fees for network pharmacy reimbursement
  • Require changes to network adequacy based on new standards
  • Limit the ability to make changes to formularies
  • Restrict communications that can be made to participants about plan benefits

While the proposed regulations are wide-ranging, the following highlights are most noteworthy.

Pharmacy reimbursement

PBMs would be prohibited from reimbursing a pharmacy for a prescription drug or pharmacy service in an amount less than the national average drug acquisition cost (NADAC) for the prescription drug or pharmacy service at the time the drug is administered or dispensed, plus a professional dispensing fee of $10.18.

If the average drug acquisition cost is not available, PBMs would be prohibited from reimbursing in an amount that is less than the wholesale acquisition (WAC) cost of the drug plus a professional dispensing fee of $10.18. These dispensing fees could supplant the contractual dispensing fees negotiated and agreed to by pharmacies and could affect the cost of prescription drug claims.

Spread pricing

PBMs would be required to offer a health plan the option of paying the PBM the same price for a prescription drug as the PBM pays a pharmacy for the prescription drug.

Restrictions on preferred pharmacy arrangements

PBMs would be prohibited from restricting a pharmacy from dispensing drugs to covered individuals based on volume of claims, therapeutic categories or dispensing rates of other pharmacies. This provision would appear to prevent preferred pharmacy arrangements or exclusive specialty arrangements.

Maximum allowable cost

PBMs would be prohibited from requiring a covered individual purchasing a covered prescription drug to pay an amount greater than the lesser of the cost-sharing amount under the health plan, the maximum allowable cost (MAC) for the drug or the cash price for the drug. The regulations would also regulate how a PBM includes drugs on its MAC pricing list.

Network adequacy and mail order

The proposed regulations would restrict PBM communications with participants and would not permit a PBM to require that a participant purchase prescription drugs exclusively through a mail-order pharmacy. The regulations would also require PBMs to offer a pharmacy network that meets access requirements: 

  • There must be at least one in-network 24-hour pharmacy within 30 minutes travel time from a covered individual’s residence.
  • All covered individuals must have access to at least three pharmacies within a 30-minute travel time from their residence.

If there are no pharmacies in the network meeting this requirement, the PBM would be required to include the three closest pharmacies in its network. Mail-order pharmacies cannot be used to meet these access standards.

In addition, PBMs could not require individuals to use only pharmacies directly or indirectly owned by the PBM, including for regular, refill or specialty drugs. A waiver process would be available for network adequacy standards upon application to the superintendent by the PBM.

ERISA preemption

ERISA-governed plans are protected from excessive state regulation by ERISA’s preemption rules. The Tenth Circuit Court of Appeals recently held in PCMA v. Mulready, No. 22-6074 (10th Cir. 2023) that ERISA preempted all aspects of the Oklahoma Patient's Right to Pharmacy Choice Act that interfere with central matters of plan administration.

However, each state law is subject to review based on the particular statute. For example, in Rutledge v. Pharm. Care Mgmt. Ass’n, 141 S. Ct. 474 (2020) the U.S. Supreme Court reversed the Eighth Circuit Court of Appeals, holding that an Arkansas PBM law that required the PBM to reimburse a pharmacy for the invoice price stated by the pharmacy’s wholesaler without regard to the maximum allowable cost did not have an impermissible connection with ERISA plans.

Action items

Plan sponsors operating a prescription drug plan with a PBM may wish to submit comments to the DFS no later than October 16, 2023.

In addition, plan sponsors can contact their PBM to determine the projected impact on their plan. Segal can review the proposed regulations with plan sponsors to discuss the potential implications for the plan’s benefit design and pharmacy costs.

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This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.