Mississippi has recently moved regulation of pharmacy benefit managers (PBMs) from the state insurance commissioner to the state pharmacy board. Pharmacy representatives have sought similar regulatory changes in other states. Giving state pharmacy boards (which are typically comprised of practicing pharmacists) regulatory power over PBMs creates a significantconflict of interest for board members because PBMs are market adversaries of pharmacists. In a new article accepted for publication in the Harvard Journal of Law & Public Policy, Emory University Law School Associate Professor Alexander Volokh reviews the potential legal exposures of state pharmacy boards and their members resulting from anti-competitive regulation of PBMs.
State pharmacy boards comprised of practicing pharmacists are an example of “private regulation,” where governments have turned over some or all of the role of regulating an industry to private parties, including participants in the regulated industry. In his article, “The New Private Regulation Skepticism: Nondelegation, Due Process, and Antitrust Challenges,” Professor Volokh uses the Mississippi Board of Pharmacy and several other real-world examples of private regulation (e.g., North Carolina Board of Dental Examiners, Amtrak) to expound on the recent trend of state and federal courts ruling against private regulatory organizations.
As Professor Volokh explains, the “new regulation skepticism” provides several useful tools for aggrieved parties to challenge instances of private regulation. The first such tool is the “non-delegation doctrine,” a federal and state principle that looks at whether the legislative branch has impermissibly given away its legislative powers. In particular, Professor Volokh notes that there are state court non-delegation doctrines (e.g., in Texas) that could render illegal some types of delegations of power to private parties – particularly where the private delegate has a pecuniary or personal interest that could create a conflict with his public function.
The second and more powerful tool for challenging private delegations is the U.S. Constitution’s Due Process Clause. Professor Volokh reviews several U.S. Supreme Court cases and notes that delegating “coercive power to a private parties has long been held to be a potential violation of due process.” He states that “delegation of power plus pecuniary bias is a due process no-no.” He specifically notes that the Mississippi Board of Pharmacy’s regulatory proposal (since withdrawn) to impose a fiduciary duty on PBMs could have been problematic under the Due Process Clause because of Board bias. Also questionable would be Board exercise of discretion to require submission of sensitive financial information. As Professor Volokh explains, “biased rulemakers can often be challenged, unless their role is limited to enforcing commands they didn’t create by suing violators in courts they don’t operate.” A PBM or other party adversely affected by such regulation could “obtain money damages … against the board members” for a due process violation.
The third tool for challenging private regulation is federal antitrust law which Professor Volokh states “is available to guard against the anticompetitive dangers of ‘industry regulating itself.’” While states are immune from antitrust liability under the “state action” doctrine, that immunity might not extend to agencies “depending on their degree of privateness.” Once an antitrust violation is established, the “standard remedy is treble damages.” In looking at the antitrust laws as they might apply to Mississippi Board of Pharmacy example, Professor Volokh raises concerns about the Board’s discretionary authority to require additional financial information and its attempt to impose a fiduciary duty. The fact that all of the Board members must be licensed Mississippi pharmacists that the Governor chooses from a list submitted by the Mississippi Pharmacy Association would be enough to make the Board “private” for purposes of state action immunity in the view of the Federal Trade Commission (one of the federal antitrust regulators).
In determining whether there is a potential antitrust violation, Professor Volokh notes that “it becomes relevant whether the antitrust plaintiffs and defendant are competitors (and, more generally, whether the defendant has a financial interest in the outcome)….” He says the “Mississippi Board of Pharmacy thus seems vulnerable. Once state action immunity is overcome, the competitive relation between pharmacists and pharmacy benefit managers … can at least create a strong presumption of a substantive antitrust violation.” In discussing remedies, Professor Volokh notes the “result could be treble damages and attorney’s fees for those who are found to have conspired to restrain trade.” Even a purely injunctive suit “would still require the defendants to pay both their own and the prevailing plaintiff’s litigation costs.”