In response to a request by Congress, the Government Accountability Office (GAO) recently released a report focusing on state regulation of PBMs serving private health plans. Among other things, the report describes actions selected states have taken to regulate PBMs and the views of various stakeholders regarding such state regulation.

As cited in the report, retail prescription drug spending by private health plans in the US totaled nearly $152 billion in 2021 — almost 13% of total private healthcare spending and an almost 18% increase over 2016. This increase in spending was driven by increased drug prices, including specialty drug prices, as opposed to increased drug utilization (i.e., the number of prescriptions filled).

Many health plans contract with PBMs to administer their prescription drug benefits and help contain rising costs. PBMs may negotiate drug prices and rebates with manufacturers, develop formularies, process claims, and perform other plan services. The significant role and market power of PBMs and the opaqueness of certain PBM compensation arrangements have led some industry stakeholders to call for greater transparency and other changes in PBM practices. State legislatures have responded by enacting laws to regulate PBMs. According to the report, all 50 states have enacted at least one PBM-related law since 2017.

The GAO report focuses on five states that have enacted a wide range of PBM laws — Arkansas, California, Louisiana, Maine, and New York. The GAO examined these states’ laws with respect to whether a fiduciary or other “duty of care” was imposed upon PBMs and requirements regarding transparency (including licensure and reporting), drug pricing and pharmacy reimbursements, and pharmacy network and access. The GAO also interviewed stakeholders, including regulators, pharmacy associations, and health plan associations in each of the five states and four national organizations representing the interests of PBMs, patients, employers, and drug manufacturers, respectively.

According to the report, four of the five selected states (California, Louisiana, Maine, and New York) have enacted laws to impose a duty of care on PBMs. However, only Maine’s law states that PBMs owe a fiduciary duty to the health plans with which they contract. The other state laws impose a “lesser” standard on PBMs, such as a requirement to act in “good faith and fair dealing.” Regulators in states that do not impose a fiduciary requirement cited political opposition from the PBM trade association or concerns about ERISA preemption as factors. 

With respect to efforts to increase the transparency of PBMs’ operations, the report explains that all five states require PBMs to be licensed and/or registered and provide certain information, such as rebate and fee data, to the state or the health plans with which they contract. Additionally, each of the five states has enacted some type of legislation regulating drug pricing and pharmacy payments, such as a law limiting a PBM’s use of manufacturer rebates or “spread pricing” (i.e., paying pharmacies less than they charge health plans for drugs). For example, Arkansas requires that PBMs and health plans set cost-sharing amounts for prescription drugs based on post-rebate prices and prohibits spread pricing. Furthermore, all five states have enacted legislation to expand patient access to affordable drugs (e.g., by ensuring pharmacies are not prohibited in their contracts from informing enrollees when a less costly alternative to paying for a prescription through their insurance is available).

According to the report, all stakeholders interviewed expressed support for PBM transparency requirements such as licensure, registration, and annual reporting on rebates and revenue sources. However, most health plan associations and the PBM trade association opposed state laws regulating pharmacy reimbursements and network design. Additionally, some believed the laws may conflict with ERISA by preventing large employers from designing uniform plans across multiple states.

Regarding enforcement, regulators sought broad authority to respond to emerging PBM-related issues and robust enforcement measures to achieve better compliance. The regulators indicated they rely primarily on complaints to ensure PBM compliance and, in some states, had taken actions such as audits to address complaints. However, regulators also expressed concerns regarding ERISA preemption affecting their enforcement of state PBM laws with respect to self-insured plans.

Employers that sponsor prescription drug plans should be aware of the GAO report requested by Congress, although it is unclear whether any federal PBM legislation will be enacted soon. The report provides a helpful sample of various types of state PBM laws and stakeholder opinions regarding such measures. However, it is difficult to draw broad conclusions from the report, especially since much is unsettled in this area of the law. But additional regulatory action is anticipated, so employers should monitor for further developments.

GAO-24-106898, PRESCRIPTION DRUGS: Selected States’ Regulation of Pharmacy Benefit Managers »