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August 25, 2023

Will Federal Precedent and Newly Announced NYS PBM Reform Efforts Collide?

New York State proposes limits on pharmacy benefit managers (PBMs) as the Tenth Circuit describes limits on state authority over Medicare Part D and ERISA prescription drug plans.
Last week, the New York State Department of Financial Services (DFS) took a bold and sorely needed step toward implementing rules reining in pharmacy benefit managers (PBMs) with the publication of proposed regulations in the State Register. The regulations, proposed under DFS’ general authority, as well as DFS’ specific grant of authority under Article 29 of the Insurance Law and the 2021 amendment to Public Health Law § 280-a, address PBM licensing, contracting with pharmacies, and pharmacy audits. The proposed regulations would also implement new consumer protections against misleading and abusive practices by PBMs. Among the many new rules proposed, the DFS regulations would prohibit network enrollment fees, limit unilateral pharmacy contract changes, allow pharmacies terminated from networks to reapply under certain conditions, establish network adequacy standards, and require more transparency in pharmacy audits by PBMs.

The day before DFS’ proposed regulations were published, the United Stated Court of Appeals for the Tenth Circuit (with jurisdiction over the district courts in Colorado, Kansas, New Mexico, Oklahoma, Utah, and Wyoming) cast doubt on state authority to regulate PBMs with the docketing of a decision in PCMA v. Mulready. In Mulready, the Tenth Circuit struck down four provisions of an Oklahoma statute that: 

(1)    Established minimum network access standards for PBMs
(2)    Prohibited PBMs’ use of discounts to drive patients to one in-network pharmacy over another
(3)    Required PBMs to follow an “any willing provider” rule for network contracting
(4)    Prohibited PBMs from denying a contract to pharmacies based upon a pharmacy employee’s probation status with the State Board of Pharmacy

The Mulready court held that all four provisions were preempted by ERISA. The court held that the “any willing provider” rule was also preempted by the Medicare statute applicable to Part D prescription plans.

The Tenth Circuit’s decision comes nearly three years after the US Supreme Court decision in Rutledge v. PCMA, which upheld an Arkansas law requiring PBMs to reimburse pharmacies at a price at least as high as the price paid by pharmacies to acquire the drugs from wholesalers. The Tenth Circuit justified the different result in Mulready as owing to the fact that the Arkansas law in Rutledge merely increased costs for ERISA plans, whereas the provisions of the Oklahoma law in Mulready attempted to govern central matters of prescription drug plan administration.

The proposed DFS regulations specifically exempt PBM administration of Medicare prescription drug plans from certain provisions under the new rules. Such exemptions include provisions governing pharmacy audits, network adequacy, maximum payment cost, claims adjudication fees, certain discriminatory pricing practices, retroactive claim denials and reductions, and certain protected disclosures to customers of price and drug alternatives. The regulations also include a savings clause that will limit the applicability of the rules where they are preempted by federal law. Because Mulready is not mandatory authority in New York State, it remains to be seen whether other courts will follow Mulready, whether ERISA plans will escape all or part of DFS’ proposed regulations, and whether DFS will amend its proposed regulations to account for the Mulready decision or release its regulations on a collision course with the Tenth Circuit decision.

If you have any questions regarding the content of this alert, please contact Linda Clark, Health Care Controversies Team leader, at; Brad Gallagher, partner, at; Michael Scott-Kristansen, special counsel, at; or another member of the firm’s Health Care Controversies Team. 

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