New York Governor Kathy Hochul signed legislation amending subdivision five of Section 280-a of the New York Public Health Law (“PHL”) and announced new regulations that aim to protect New Yorkers from the rising cost of prescription medications. Both target the operations of Pharmacy Benefit Managers (“PBMs”) by prohibiting business practices that raise the cost of prescription drugs and by increasing opportunities for independent pharmacies to compete with large, PBM-affiliated pharmacies.
What are Pharmacy Benefit Managers?
PBMs are third-party ‘‘intermediaries’ that help negotiate costs and payment of prescription drugs between the major players in the prescription drug supply chain: health insurance providers, drug manufacturers, wholesalers, and pharmacies. PBMs determine which drugs are accessible to consumers, at what cost, and often by what pharmacies.
PBMs contract with health insurance providers to manage prescription drug benefits for insured beneficiaries. PBMs do this by creating and maintaining formularies, which are lists of prescription drugs covered by health insurance plans. Each insurance plan has a unique formulary. When creating a formulary, PBMs negotiate discounts and rebates with drug manufacturers. That determines the prices insurance plans pay for prescription drugs and payments pharmacies receive for distributing drugs to consumers insured by the plan.
When PBMs negotiate rebates with drug manufacturers, they typically retain a percentage of the rebate as profit, rather than passing the full amount to consumers. Because prescription drugs with higher prices often have higher rebates, PBMs are incentivized to include higher priced drugs on their formularies.
PBMs also play an administrative role for insurance providers by directly reimbursing pharmacies for dispensing drugs. PBMs receive administrative fees for these services from insurance providers and profit from ‘spread pricing.’ When a PBM receives a higher payment from an insurance provider than the amount the PBM pays to pharmacies, the PBM retains the difference. Legislators have identified spread pricing as a factor in increasing costs of prescription drugs for consumers.
The Federal Trade Commission reports that only three PBMs manage approximately 80% of all prescriptions filled in the U.S and that pharmacies affiliated with those PBMs account for nearly 70% of all specialty drug revenue. Critics argue that the tightly controlled marketplace has led to increased costs to patients and the closure or sale of independent pharmacies.
PBM Regulation in New York
In January 2022, Governor Hochul signed a first-of-its kind law in New York, providing for licensure and registration of PBMs. The law also set new standards that PBMs are required to comply with when operating in the State. In addition to reducing costs for consumers, Governor Hochul cited increased transparency regarding PBMs’ operations as a chief goal of the law.
The State Department of Financial Services is empowered to enforce the law and can receive complaints of violations of the law by PMBs from New Yorkers, pharmacies, and health care providers.
Impact of Amended PHL and New Regulations
On September 27, 2024, the Governor signed legislation that eliminated the ‘gag clause’ that had prohibited pharmacists from telling consumers about negative reimbursements charged to pharmacies for prescription drugs. Negative reimbursements cause pharmacies not to stock certain drugs, limiting access to essential prescription drugs for consumers. By lifting the gag clause, pharmacists can explain why they cannot stock certain drugs, and consumers can use that information to petition their health insurance provider to increase access.
The Governor recently announced new regulations governing market conduct for PBMs that:
• allow home delivery of prescription drugs by in network pharmacies;
• mandate PBMs to publish formularies and pharmacy directories;
• require PBMs to establish customer service lines;
• prohibit PBMs from steering patients to affiliated pharmacies;
• prevent PBMs from passing losses onto pharmacies when the PBM mistakenly approves a dispensed drug;
• permit small pharmacies to submit and receive electronic communications from PBMs; and
• require PBMs to apply the same audit standards to all in network pharmacies, helping small pharmacies compete with PBM affiliate pharmacies.
The regulations, supported by the Pharmacist Society of the State of New York, are anticipated to empower consumers, increase access to prescription drugs, level the playing field for small pharmacies and lower costs of prescription drugs across the State.
For questions, contact Lippes Mathias attorney Sarah E. Steinmann by phone at 315-477-6232 or by email at ssteinmann@lippes.com.
