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An Academic Looks at Problems with Pharmacy Board Regulation of PBMs

In an earlier piece, we looked at the questionable expansion of state pharmacy board regulatory activities including into such areas as regulation of pharmacy benefit managers (PBMs).  Now there is a new, in-depth article by Professor Joanna Shepherd of the Emory University School of Law, “The Fox Guarding The Henhouse: The Regulation of Pharmacy Benefit Managers By A Market Adversary” adds significantly to our understanding of the potential conflicts of interest and other problems when state pharmacy boards get involved in regulating PBMs.

Professor Shepherd takes a close look at the regulatory regime adopted in Mississippi in 2011 and similar regulatory structures under consideration in other states.  She explains that the fundamental problem with giving state pharmacy boards regulatory supervision over PBMs is that “the Boards of Pharmacy are made up of pharmacists, the direct market adversaries of PBMs.”  Thus, she says, “the pharmacist-controlled Boards of Pharmacy have both the incentive and the opportunity to exert their regulatory authority in ways that benefit pharmacies at the expense of PBMs,” and “will also increase the prices that consumers and third parties must pay for prescription drugs.”

The paper looks at two specific examples of state pharmacy board regulatory mischief in Mississippi that competitively disadvantage PBMs. 

First, the Mississippi Board of Pharmacy (BOP) has the ability to demand from PBMs sensitive financial information that the BOP can then share with any person or entity who provides or operates the health insurance plan or to a pharmacist or pharmacy.  Turning over to the BOP financial information that will then find its way to pharmacies “will reduce PBMs’ bargaining power to negotiate discounts with pharmacies and rebates with drug manufacturers, thus increasing drug prices for consumers.”  As Professor Shepherd makes clear, “Both pharmacists and drug manufacturers are less likely to offer the same price terms to PBMs when they know their rival pharmacies or manufacturers can learn the specifics of the arrangement.”  The paper notes that federal antitrust agencies believe this type of information sharing among competitors can harm consumers because it “can blunt a firm’s incentive to offer customers better deals by undercutting the extent to which such a move would win business away from rivals” and “also can enhance a firm’s incentive to raise prices by assuaging the fear that such a move would lose customers to rivals.” 

The paper also examines a recent Mississippi BOP regulation that would have imposed a fiduciary duty on PBMs by requiring that they “operate to the best interest of the patient or citizen of Mississippi, including costs related to the patient or citizen.”   PBMs operate on behalf of health plan sponsors to try to reduce their prescription drug benefit costs, but the Mississippi regulation would have given PBMs a new fiduciary duty to covered consumers.  The Mississippi fiduciary duty regulation would have exposed PBMs to new litigation risks that would, in turn, increase certain legal, administrative, and operating costs for PBMs. These additional costs would be passed on to health plan sponsors and consumers in the form of increased prescription drug costs.  Also, the fiduciary duty would deter PBMs from engaging in certain cost-reduction practices including owning mail-order pharmacies and providing incentives to direct covered consumers to those mail-order pharmacies.  The fiduciary duty litigation risk would also discourage PBMs from using such cost-saving practices as narrow pharmacy networks or more limited prescription drug formularies.  Fortunately, the Mississippi BOP rescinded the proposed fiduciary duty regulation because of a threatened legal challenge.

The pharmacy lobby has a strong financial incentive to do whatever it can to protect and increase pharmacy profits at the expense of health plans and consumers.  As the paper details, other states at the urging of their local pharmacists, are considering legislation that would turn over to state BOPs the ability to regulate PBMs.  This is a disturbing trend.  We hope that Professor Shepherd’s paper will help shed light on what the pharmacy interests are trying to do and will help state legislators understand why they should leave regulation of PBMs to the neutral insurance commissioners who regulate them in every state but Mississippi.