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March 9, 2017

Governor Cuomo's Salvo to Combat Soaring Prescription Drug Prices

Drug manufacturers and pharmacy benefit managers continue to be fodder for politicians looking to make splashy headlines on the issue surrounding responsibility for soaring prescription drug prices. The issue is gripping the nation, and politicians from the President to governors are circling the wagons. New York Governor Andrew Cuomo is no exception.

On January 12, 2017, Governor Cuomo announced a new proposal aimed at curbing "skyrocketing costs of prescription drugs" in the Medicaid program. The broad scope of the proposed reform was justified by the impact drug costs are having on our New York Medicaid program, which has incurred a $1.7 billion drug-related cost increase over the past 3 years. More troubling is that 77% of Americans are foregoing medications because of cost, according to the Governor.

The Governor's initiative outlined a three-pronged approach that proposes to:

  • Protect taxpayers by preventing prescription drug price gouging in the Medicaid Program through the implementation of a price ceiling on "high cost prescription drugs" that will require a 100% rebate of amounts paid over a "benchmark" price to be set by the Drug Utilization Review Board.
  • Impose a surcharge on drug manufacturers that charge exorbitant prices on these "high cost prescription drugs" that will be placed in a dedicated fund to be reallocated to insurers to lower premiums for businesses the following year.
  • Protect consumers from abusive business practices by pharmacy benefit managers (PBMs) that drive up drug prices in an industry "rife with conflicts of interests and undisclosed arrangements entered into at the customers' expense." To bring an end to these practices, the Governor proposes:
    • Mandated disclosure of financial incentives, benefits for promoting the use of certain drugs or other financial arrangements affecting customers; and
    • Increased State oversight requiring PBMs to register with the State Department of Financial Services ("DFS"). DFS would have authority to suspend or revoke a PBM's license for deceptive, unfair, or abusive business practices or any other conduct that violates the standards set by the Department.

The Governor termed the proposal "ground-breaking" and although he called for an "immediate" stop to this "unconscionable" behavior, he is not seeking implementation of the regulations on PBMs, which are the teeth of the proposal, until 2019. Moreover, the proposal is only for unspecified "high cost prescription drugs" in the Medicaid program, which will leave many New Yorkers continuing to feel the effects of the increasing burden of drug costs both at the pharmacy counter and in the premiums paid for coverage.

Even if Governor Cuomo follows through and his proposal becomes law, a challenge by PBMs could lead to it being found pre-empted by the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. §§ 1001, et seq. Indeed, less than one month ago, the U.S. Court of Appeals for the Eighth Circuit, in a suit brought by the Pharmaceutical Care Management Association, a national trade association representing PBMs, struck down a similar law in Iowa. The Iowa law, like Governor Cuomo's proposal, established generic drug pricing standards and required certain disclosures of drug pricing to Iowa's insurance commissioner. The Court of Appeals held the Iowa law explicitly and implicitly affected employee benefit plans covered by ERISA, which is impermissible. Significantly, the Court also held the Iowa law's requirement that PBMs disclose the economic basis for a plan's coverage of prescription drug benefits improperly "intrudes upon a matter central to plan administration and interferes with nationally uniform plan administration" in violation of ERISA. See Pharm. Care Mgmt. Ass'n v. Gerhart, 2017 U.S. App. LEXIS 476 (8th Cir. Jan. 11, 2017). It is uncertain how this ruling may impact the proposed New York reforms.

It appears any curbing of the "sky-rocketing" drug prices in New York is still a long way off, and may be subject to further delays caused by legal challenges by PBMs.

If you have questions or require further assistance regarding the information contained in this Legal Alert and the impact on your organization, please contact Brad M. Gallagher at, or Linda J. Clark, Chair of the Barclay Damon Health Care Controversies Practice Area at

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