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Our attorneys stay on top of changes in legislation, agency regulations, case law, and industry trends—then craft timely legal alerts to keep clients up to date on legal developments important to their business.

January 3, 2022

New York Creates New Framework for Regulating PBMs: What Does It Mean for Pharmacies and Consumers?

New York State Governor Kathy Hochul delivered on landmark pharmacy reform by signing two bills on New Year’s Eve. After years of being permitted to operate with impunity in New York, pharmacy benefit managers (PBMs) will now have a legal duty and obligation in New York to act in the best interests of patients and the health plans that they administer. Governor Hochul proclaimed the laws “the most comprehensive regulatory framework in the country for Pharmacy Benefit Managers, increasing transparency for consumers and shedding light on the cost of prescription drugs.”    

By signing S.3762/A.1396, Governor Hochul is allowing New York to open the PBM “black box.”  PBMs will be required to be registered and licensed in New York. More importantly, PBMs will be required to disclose the terms and conditions that are required for network pharmacies and revenue streams. “Spread pricing” is specifically targeted by the new law. This law will hopefully end the hidden revenue streams that benefit only PBMs, including opaque “administrative fees” and “rebates” that increase drug prices for patients. We view this as one of the biggest wins of the new law, as patients, providers, and New York will now see for the first time the massive profit steams of the PBMs. We are hopeful that this will lead to more fair contracting with pharmacies and health plans and, ultimately, lower drug prices for patients.

The law also requires a disclosure of conflicts of interest to health plans, providers, and patients.  This should include disclosures related to PBMs forcing patients to PBM-affiliated pharmacies.  Unfortunately, in recent years, PBMs have affiliated with the same health plans and many providers to whom they will now be disclosing their conflicts of interest.        

The new law requires the superintendent of financial services and the commissioner of health to immediately make regulations and take other actions to enforce the new law. The regulations will be critical to this law having teeth. In Governor Hochul’s press release, Acting Superintendent Adrienne A. Harris stated that this is an “important step” in regulating PBMs, and the Department of Financial Services (DFS) now has the ability to “bring needed reforms to this previously unregulated industry.” Patients and providers have also been provided with an ability to pursue legal action against PBMs for violations of all duties, obligations, and requirements under the new law.  

A critical aspect of the law also prohibits PBMs from substituting or causing the substitution or altering of one prescription drug for another without the approval of the prescriber or as permitted by law. This provision of the law appears to provide an avenue for patients and pharmacies to fight back on the increasingly common tactic of PBMs forcing patients to utilize mediations of the PBMs’ choice. Perhaps this provision will bring an end to Caremark and other PBMs’ “aberrant” drug lists that, at times, target manufacturers rather than actual medications.

Under the new law, PBMs will be permitted to require a pharmacy to meet any pharmacy accreditation standard or recertification requirement that is not consistent with, more stringent than, or in addition to any federal or state requirements for licensure. This provision should result in additional access to pharmacy networks for independent pharmacies, including specialty pharmacies.  

PBMs are also being required to provide a “reasonable” process for dispute resolution with pharmacies and pharmacy services administrative organizations (PSAOs) relating to multisource generic drug pricing. We are hopeful that this might bring some relief to independent pharmacies that are unable to seek to enforce their contractual and legal rights as a result of increasing expensive arbitrations, unfair fee-shifting provisions, and confidential decisions and settlements.

PBMs are savvy and employ teams of lawyers and lobbyists to find loopholes to avoid regulations. New York State’s regulators must stand up for patients and small independent pharmacies that treat patients as patients rather than commodities. The law has finally empowered the regulators to enact regulations relating to (1) conflicts of interest, (2) deceptive practices, (3) anticompetitive practices, (4) unfair claims practices, and (5) to protect patients.  We are hopeful that New York State will seize this opportunity to bring transparency and fair competition back to an industry that has become shrouded in secrecy.  

Governor Hochul also signed S3566/A5854. This law was designed close loopholes used by PBMs that allowed them to force patients to use mail-order pharmacies or other “non-retail” pharmacies at a local pharmacy, as long as that pharmacy is participating in the PBM’s network.  The local pharmacy is entitled to the same reimbursement as the mail-order or “non-retail” pharmacy. This was an important clarification on the existing law, which had allowed PBMs to circumvent the original intent of the law and continue to force patients to use a pharmacy of the PBM’s choice—which was often times affiliated with the PBM. Notably, this law does not apply to union employees. This law takes effect immediately.    

Disappointingly, Governor Hochul vetoed S6603/A7598, a bill that addressed the issues caused by the delay in the implementation of the planned carve-out of the pharmacy benefit from Medicaid managed care to fee for service. The bill would have allowed Medicaid patients to receive their medications in person or by mail from their community pharmacy. This bill would have stopped Medicaid patients from being forced into mail-order networks that do not provide the same services or convenience as a local community pharmacy. The bill also would have ensured that community pharmacies were paid fairly for dispensing medications to Medicaid patients. Critically, the veto did not restrict the rights currently provided by Social Services Law Section 364-j or Public Health Law Section 280-a, which this bill would have amended to provide additional rights. Governor Hochul has not stated why she vetoed the bill, but it is still possible that these issues could be addressed in the 2022 State budget.   

We expect the Pharmaceutical Care Management Association (PCMA), a trade association that represents PBMs, and the PBMs themselves to fight these reforms and any regulations through legal action and lobbying efforts.  

Barclay Damon represents independent pharmacies and other stakeholders across the United States. Its attorneys actively monitor the changing landscape and are experienced in handling issues on behalf of those stakeholders, including their relationships with PBMs.

If you have any questions regarding the content of this alert, please contact Linda Clark, Health Care Controversies Team leader, at lclark@barclaydamon.com; Brad Gallagher, partner, at bgallagher@barclaydamon.com; or another member of the firm’s Health Care Controversies Team.
 

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