On January 15, 2019, Governor Cuomo released the 2019-2020 Executive Budget, which proposes substantial legislative changes that would affect pharmacy benefit managers (PBMs).  Among other things, the law would require PBMs to be licensed and places limitations on how they can be compensated. This week, the State Senate released its own Budget that, while joining the Governor's efforts to regulate PBMs, purports to create additional safeguards around PBM business activities, including increased financial penalties on PBMs that violate the law.

Licensure of PBMs

Currently, PBMs are treated like Independent Practice Associations (IPAs): intermediaries that contract with managed care organizations (MCOs) to negotiate drug prices on their behalf, and make their network of providers (in the case of PBMs, the pharmacies) available to the MCOs’ members.  Unlike pharmacies, wholesalers, manufacturers and health plans, IPAs are not licensed by the state. Although an IPA’s organizational documents, as well its upstream and downstream contracts, are filed with, reviewed and approved by the Department of Health (DOH) (and, where appropriate, the Department of Financial Services (DFS)), they are not regulated entities. 

The Executive Budget proposes legislation that would require PBMs to register with DFS prior to January 1, 2020, and become licensed by 2021.  A registered and licensed PBM will be required to submit annual reports to DFS, including disclosures of any financial incentives or benefits it receives for promoting the use of certain drugs and other financial arrangements that impact plans or their members. If enacted, DFS will be authorized, through adopted regulations, to establish minimum standards for:

• Maintaining, suspending and revoking a PBM’s license, or alternatively, issuing financial penalties for any violations of law;
• Addressing conflicts of interest between PBMs and health plans;
• Deceptive and anti-competitive practices; and
• Consumer protections.

Business Oversight

The Executive Budget also includes legislation that would require contracts between PBMs and Medicaid MCOs to ensure that:

• Payment from the MCO to the PBM is limited to actual ingredient costs, a dispensing fee, and an administrative fee, which DOH is authorized to cap;
• PBMs identify all sources of income related to the provision of PBM services, including any discounts or supplemental rebates, and that any portion of such income is passed through to the plan in full to reduce the reportable ingredient cost; and
• Prohibit “spread pricing” arrangements, whereby PBMs retain the excess between the amount they charge plans and the amount they pay to pharmacies, less the administrative fee.  Instead, any excess amounts must be remitted to the plan on a quarterly basis.

Meanwhile, the Senate Budget, released this week, while generally supportive of the Governor’s efforts, calls for changes that would increase the financial penalties on PBMs for violations of law, create additional fiduciary duties and greater transparency with regard to conflicts of interest, and prohibit PBMs from requiring the substitution of a dispensed drug without the approval of the prescriber.

Opponents of the legislation argue that the legislation fails to address the real problem – high drug costs that only manufacturers control – and that PBMs actually play a critical role in keeping patient and payor costs down by leveraging the competition among manufacturers and pharmacies.  And yet its supporters say the legislation could have gone further, for example, by actually setting or capping prescription drug rates.

While similar attempts at regulation in New York have failed, PBMs are now facing greater scrutiny than ever before, including from the federal government (the Trump administration has taken aim at the pharmaceutical supply chain and made lowering drug costs a top priority).  Whether that has any impact on what New York is attempting to accomplish remains to be seen.  We will continue to monitor and report on the proposed legislation as they develop.