Tennessee Legislature Passes Comprehensive PBM Reform

Pharmacy benefit managers (PBMs) were created as a third party to reduce administrative costs for insurers, validate a patient’s eligibility, administer plan benefits, and negotiate costs between pharmacies and health plans. A lack of transparency in PBM practices has led several states to implement licensure/registration, fair pharmacy audit, or generic drug pricing legislation to try to level the playing field for pharmacies and patients.

In addition, medication affordability remains an important topic for many Americans. A recent Kaiser Family Foundation report noted that thirty percent of adults skipped medication due to cost in the last year. Reforms to the PBM industry, given its role at the center of medication transactions, seem an obvious place to address some of the issues with medication affordability. The pace of activity to make changes, however, has slowed at the federal level due to changes in administrations. At the state level, things are accelerating and most recently, a number of states have enacted legislation, including Tennessee.

On May 4, 2021, the Tennessee General Assembly passed comprehensive legislation seeking to reform the practices of PBMs in the state of Tennessee. Public Chapter 569, which was signed into law by Governor Lee on May 26, 2021, aims to increase transparency and implement accountability measures for PBMs operating in Tennessee, with the goal of eliminating drug price discrimination against 340B healthcare providers, local pharmacies, and patients statewide. Historically, PBM regulation has been structured and controlled at the federal level. However, in the landmark case of Rutledge v. PCMA, the U.S. Supreme Court unanimously ruled that the Employee Retirement Income Security Act (ERISA) did not preempt an Arkansas state law regulating the reimbursement practices of PBMs, thus placing PBM reform legislation enacted by state legislatures across the country on stable ground. Tennessee joins 29 other states that have proposed a variation of PBM reform legislation in recent years.

The new law consists of five key parts:

(1) 340B Drug Pricing Discrimination

The federal 340B drug pricing program requires pharmaceutical manufacturers to enter into a Pharmaceutical Pricing Agreement (PPA) with the Health and Human Services (HHS) Secretary in exchange for coverage of their drugs under Medicaid and Medicare Part B. The drug manufacturer agrees to facilitate front-end discounts on covered outpatient drugs purchased by certain providers, deemed “340B covered entities.” This legislation prevents PBM’s from reimbursing a 340B covered entity at a lesser amount than a non-340B entity for drug costs, assess a fee, chargeback, or adjustment upon a 340B entity that is not equally assessed on non-340B entities, and exclude 340B entities from its network of participating pharmacies based on criteria that is not applied to non-340B entity. There are nearly 700 healthcare providers in Tennessee that participate in the federal 340B drug pricing program, which include county health departments, community clinics, indigent care hospitals, and Ryan White clinics.

(2) Specialty Pharmacy Patient Steering

Many PBMs own, or are owned by, the pharmacies they require patients to use. Patient steering is a practice employed by health insurance entities and PBMs to steer patients to their network of affiliated hospitals, providers, and pharmacies. Under this newly adopted law, a PBM may not require a person covered under a pharmacy benefit contract that provides coverage for prescription drugs, including specialty drugs, to pay an additional fee, higher copay, higher coinsurance, second copay, second coinsurance, or other penalty when obtaining prescription drugs, including specialty drugs from a contracted pharmacy. The law also clarifies that a PBM may not interfere with the patient's right to choose a contracted pharmacy, including offering financial or other incentives. Advocates of this legislation argue that this policy change will allow patients more choice to readily access much needed drugs at specialty pharmacies, which are a uniquely designed to help patients manage rare diseases and illnesses, such as cancer.  

(3) Spread Pricing/Rebate Retention

Spread pricing occurs when a PBM charges a payer more for a certain drug than it reimburses the pharmacy dispensing the drug, and retains a portion of the difference as profit. Thus, there is a spread between the amount that the health plan pays the PBM and the amount that the PBM reimburses the pharmacy for a beneficiary’s prescription. Beginning July 1, 2021, a PBM may not charge a covered entity an amount greater than the reimbursement paid by a PBM to a contracted pharmacy for a prescription drug or device.

Further, the law prohibits a PBM from reimbursing a contracted pharmacy for a prescription drug or device an amount that is less than the actual cost to that pharmacy for the prescription drug or device. This provision will not apply to a covered entity or PBM that establishes a clearly defined process through which a pharmacy may contest the actual reimbursement received for a particular drug or medical product or device. If a pharmacy chooses to contest the actual reimbursement cost for a particular drug or medical product or device, then the pharmacy has the right to designate a pharmacy services administrative organization or other agent to file and handle its appeal of the actual reimbursement.

(4) Reporting Responsibility

The law specifies that a PBM has a responsibility to report any entitlement benefit percentage to both the plan and the patient.

(5) Transparency

The law reduces ambiguity within the PBM system by freeing up data to provide accurate information to patients at the point of care, empowering discussions and decisions about medications a patient can afford. Such information currently exists in the system, but present regulations on data sharing inhibit the free flow of data to fix this issue. Most importantly, these provisions create transparency for patients and providers, as they will now be able assess the cost of their copays on the frontend of medical treatment. Advocates of this legislation assert that accurate, patient- specific cost and coverage information, when available electronically at the time that the medication is being ordered or prescribed, will lead to stronger communication between the prescriber and patient, better outcomes for those patients, and lower costs to the health delivery system.

The legislation was overwhelming approved by both houses of the Tennessee General Assembly, with a collective total of five members voting against the bill. The majority of the law will take effect on July 1, 2021, while the data sharing provisions described above will take effect on January 1, 2022.