Legal Resources – The National Academy for State Health Policy

Comparison of State Prescription Drug Affordability Review Initiatives

March 31, 2022/in Prescription Drug Pricing Maine, Maryland, Massachusetts, New Hampshire, New York, Ohio Charts, Featured News Home Administrative Actions, Legal Resources, Model Legislation, Newly-Enacted Laws, Prescription Drug Pricing, State Rx Legislative Action /by NASHP Staff

Toolkit: New Legislative and Medicaid Models to Lower Drug Prices

December 13, 2021/in Prescription Drug Pricing Featured News Home, Toolkits Legal Resources, Model Legislation, Prescription Drug Pricing /by Drew Gattine, Jennifer Reck and Sarah Lanford

Manufacturers to Pay Higher Rebates for Drugs with Large Price Increases under the American Rescue Plan

March 22, 2021/in COVID-19 Relief and Recovery Resource Center Blogs, Featured News Home Administrative Actions, Legal Resources, Prescription Drug Pricing, Relief and Recovery, State Rx Legislative Action /by Johanna Butler

In addition to providing critical funding for state COVID-19 response efforts, the American Rescue Plan requires drug manufacturers to pay more in Medicaid rebates for drugs with large price increases. This change, effective in 2024, has the potential to generate significant federal and state savings.

Under the Medicaid Drug Rebate Program (MDRP), manufacturers are required to provide certain rebates to state Medicaid programs in order to have their drugs covered by Medicaid. States and the federal government share these rebates based on the federal medical assistance percentages (FMAP), which is the share of state Medicaid spending paid for by the federal government. The rebate amount a manufacturer provides to states is determined by two federal rebate requirements:

Without the rebate cap in place, manufacturers face a new pricing landscape that requires them to pay larger Medicaid rebates if they significantly increase a drug’s price.

A basic rebate: This rebate amount is based on a percentage of the average manufacturer price (AMP) – 23.1 percent for most brand-name drugs and 13 percent for generic drugs, and
An inflationary rebate: An additional inflationary rebate is applied if the increase in a drug’s AMP exceeds inflation, defined by the urban consumer price index.

Under the current formula, the total rebate amount a state can receive (when the basic plus inflationary rebates are applied) cannot exceed 100 percent of a drug’s AMP. A drug manufacturer typically triggers this cap only if it increases a drug’s price substantially over time and therefore must provide such a large inflationary rebate that the rebates equal the drug’s price. Once the cap is reached, a manufacturer has little incentive to moderate drug price increases as they can charge a higher price to other private plans without paying larger rebates to Medicaid programs.

The American Rescue Plan eliminates the rebate cap, creating incentives for manufacturers to limit price increases and enabling state Medicaid agencies to collect more in rebates when large price increases occur. Without the rebate cap in place, manufacturers face a new pricing landscape that requires them to pay larger Medicaid rebates if they significantly increase a drug’s price.

This change reflects a June 2019 Medicaid and Children’s Health Insurance Program Payment and Access Commission (MACPAC) recommendation. In its recommendation, MACPAC highlighted that the change would result in higher Medicaid rebates and put downward pressure on manufacturer price increases. At the request of MACPAC, the Congressional Budget Office estimated potential savings from this change would be $15 to $20 billion in federal savings over 10 years. States would receive the non-federal share of these savings to their Medicaid programs. MACPAC, however, did caution that this change would only address drugs with large price increases – not drugs with high-launch prices.

MACPAC is currently considering an additional recommendation to change the MDRP related to rebates on drugs that receive accelerated approvals. An accelerated approval is a Food and Drug Administration (FDA) pathway that allows for quicker approval of drugs that treat serious or life-threatening conditions and fill an unmet medical need. MACPAC is considering a proposal to increase rebates required for drugs that receive an accelerated approval until the manufacturer completes the required post-market clinical trials.

The goal of the MDRP change would be to increase rebates on these drugs while there is limited clinical evidence of their effectiveness and to incentivize manufacturers to complete the post-market trials that are often delayed or take a number of years to complete.

Guidance from the Centers for Medicare & Medicaid Services in 2018 made it clear that state Medicaid programs are required to cover drugs approved through the accelerated approval pathway, despite the fact that these drugs often having high prices and unclear evidence of clinical benefit. Recently, indications for two drugs that received accelerated approvals – the cancer drugs Tecentriq and Imfizi – were withdrawn after follow-up trials showed the drugs did not improve overall survival.

MACPAC will vote on the recommendation to increase rebates for drugs with accelerated approvals at its April meeting. The National Academy for State Health Policy will follow its actions.

Will Laws to Lower Drug Prices Harm Innovation? The Evidence Says No.

March 8, 2021/in Prescription Drug Pricing Blogs, Featured News Home Administrative Actions, Consumer Affordability, Health System Costs, Legal Resources, Making the Case for Action, Model Legislation, Newly-Enacted Laws, Prescription Drug Pricing, State Rx Legislative Action /by Sarah Lanford

Drug makers claim high prices are necessary to support new drug development and innovation, but research shows that public investment in drug research and development combined with large industry profits leaves manufacturers room to lower prices while continuing to innovate.

Drug manufacturers have brought new vaccines to market in record speed to stop the spread of COVID-19. That notable achievement was made possible by massive financial investments from the public. More than $19 billion in government funding has been invested in the research, development, manufacturing, and distribution of COVID-19 vaccines. In total, the United States has guaranteed purchase of 900 million doses for a population of approximately 330 million and assumed financial risk so manufacturers don’t have to.

Even companies that did not accept federal funding for research and development have benefited from previous taxpayer-funded research. The Pfizer vaccine contains a publicly-funded, government-developed spike protein technology that rapidly accelerated its development process.

Taxpayer-funded research for each of the 356 drugs approved by the FDA in the last decade totals $230 billion. Despite taxpayers’ investments in drug development, manufacturers face few restrictions on what they can charge for these drugs in the United States.

Public funding is not unique to vaccines though. The drug industry relies heavily on public funding for all forms of drug development. Taxpayer-funded research for each of the 356 drugs approved by the US Food and Drug Administration in the last decade totals $230 billion. Despite this level of public investment in drug development, manufacturers face few restrictions on what they can charge for their drugs in the United States despite taxpayers’ investments.

As a result, drug prices are on average 2.5-times higher in the United States than comparable countries, even though those countries also contribute considerably to research and development (R&D) costs. High drug prices in the US market have generated substantial profits for the pharmaceutical industry. Between 2008 and 2018, the profitability of pharmaceutical companies was almost double that of other large, public companies.

Despite the significant amount of taxpayer funding, pharmaceutical industry officials argue that high drug prices reflect the cost of R&D and the risk associated with developing a new drug. However, high US drug prices exceed what is necessary to fund R&D. For example, drug manufacturers Amgen, Biogen, Pfizer, and Teva generated more than double their global R&D budgets from excessive US prices, and three companies covered or nearly covered all of their research spending through high US prices on their top-selling products alone:

AbbVie’s Humira (an immunosuppressant);
Biogen’s Tecfidera (treats multiple sclerosis); and
Teva’s Copaxone (an immunomodulator that treats multiple sclerosis).

Two of these drugs – Humira and Tecfidera – appear on the Institute for Clinical and Economic Review’s 2020 list of drugs that have prices increases unsupported by new clinical evidence.

With little action on drug prices from the federal government, states are considering new ways to control drug spending, and lawmakers have filed more than 200 bills this session, including bills with the potential for real impact on prices. Five states have introduced the National Academy for State Health Policy’s (NASHP) model legislation to establish international reference rates to bring prices in line with Canadian rates, which could result in savings ranging from 60 to 85 percent. Three states have introduced NASHP’s model legislation that fines pharmaceutical manufacturers whose drug price increases are unsupported by new clinical evidence – including Humira and Tecfidera cited above – based on the Institute for Clinical and Economic Review’s research.

As states ramp up their efforts to address excessive drug prices, the industry continues to argue that lower prices would harm innovation. Trail-blazing states can be reassured, however, that there is room for manufacturers to lower prices while still maintaining their profit margins and preserving their capacity for innovation.

States Take Diverse Approaches to Drug Affordability Boards

February 12, 2021/in Policy Maine, Maryland, Massachusetts, New Hampshire, New York, Ohio Blogs, Featured News Home Administrative Actions, Legal Resources, Model Legislation, Newly-Enacted Laws, Prescription Drug Pricing, State Rx Legislative Action /by Johanna Butler, Jennifer Reck and Trish Riley

As states take important steps to lower prescription drug costs, at least six have implemented prescription drug affordability review initiatives, although approaches vary across states. The National Academy for State Health Policy (NASHP)’s new chart, Comparison of State Prescription Drug Affordability Review Initiatives, provides a road map of the diverse efforts taken by Maryland, Maine, New Hampshire, New York, Massachusetts, and Ohio.

NASHP’s Prescription Drug Affordability Board (PDAB) model legislation, first released in 2017, defines a PDAB as an entity comparable to a public utility commission, with the ability to establish upper payment limits when a state’s PDAB determines a drug is otherwise unaffordable for state health care purchasers and consumers.

This chart compares state prescription drug affordability review initiatives in Maryland, Maine, New Hampshire, New York, Massachusetts, and Ohio.

Maryland’s PDAB Phased-in Approach

Maryland’s PDAB, enacted in 2019, was based on the NASHP model but initially limits the board’s ability to set upper payment limits to only public purchasers, pending approval by the state legislature. The landmark Maryland law also includes a phased-in approach that could eventually establish upper payment limits for all payers in the state, including the commercial market. The start-up cost for the Maryland PDAB is roughly $750,000 and covers five full-time employees. The funding mechanism for Maryland’s board was vetoed by Gov. Larry Hogan, however the General Assembly recently overrode the veto.

In determining whether a drug is unaffordable, the Maryland board can consider a variety of factors, including:

The wholesale acquisition cost (manufacturers’ list price) or another relevant drug cost index;
Average rebates provided to health plans, pharmacies, and pharmacy benefit managers;
Net drug prices; and
Average patient copay.

In its early meetings, the board began to outline a list of potential drug pricing data sources it will need to access in order to determine an appropriate upper payment limit.

State Approaches that Leverage Purchasing Power

Maine and New Hampshire have also enacted laws creating their own unique PDABs. While these boards are called PDABs, it is important to note that, unlike Maryland, they do not have the authority to set payment limits, but are instead focused on leveraging public purchasing power to lower drug costs.

To accomplish that mission, Maine and New Hampshire’s boards are charged with recommending strategies for public purchasers to lower the cost of prescription drugs in order to meet drug spending targets that will be established by the boards. Ohio enacted a law creating a Prescription Drug Transparency and Affordability Council, but the law does not aim to set upper payment limits. Instead, it established a group of stakeholders to provide recommendations to the governor and legislature on actions that could lower drug costs in Ohio.

Medicaid Models

In addition to the models described above, New York and Massachusetts are engaged in affordability review initiatives that focus on drugs purchased by their states’ Medicaid agencies. As NASHP’s new chart shows, New York and Massachusetts use affordability reviews and direct negotiations with drug manufacturers to attain supplemental rebates on high-cost drugs.

Using Canadian Prices to Set Upper Payment Limits

NASHP’s model legislation’s key strategy was to set enforceable upper payment limits for prescription drugs in order to rein in drug prices. However, particularly with COVID-19’s impact on state budgets, not every state has the resources and capacity to establish a new entity to oversee the robust review of drug costs necessary to establish upper payment limits through a PDAB. During the 2020 legislative session, Washington Gov. Jay Inslee vetoed a number of bills based on cost concerns, including a measure that would have established a PDAB.

In the current 2021 legislative session, four states have introduced bills to establish a PDAB but others have refrained due to budget constraints. To support states facing those budget pressures, NASHP has also released a less costly, alternative approach to setting an upper payment limit – NASHP’s international reference rate model.

Using Canadian drug prices, the model allows a state insurance department to set an upper payment limit for up to 250 high-cost drugs (determined by drug price times utilization). A state could revise the model and use an affordability board structure as well. Canadian prices, which are established with reference to prices in various comparable countries, offer a less costly and labor-intensive process of determining upper payment limits.

Lawmakers in five states (HI, ME, OK, ND, and RI) have introduced or pre-filed bills based on the NASHP’s international reference rate model legislation and more bills are expected to be filed. To learn more about NASHP’s legislative models to curb drug costs and estimated savings from each of them, please contact Jennifer Reck.

District Court Judge Upholds California’s Rx Transparency Law, Adding Another Win for States

January 11, 2021/in Prescription Drug Pricing California Blogs, Featured News Home Legal Resources, Model Legislation, Prescription Drug Pricing, State Rx Legislative Action /by Jennifer Reck

In late December, a US District Court judge in the Eastern District of California upheld that state’s drug price transparency law. The ruling represents the latest legal victory for states working to curb drug prices following the December Supreme Court decision that upheld an Arkansas law regulating pharmacy benefit managers (PBMs).

California’s drug price transparency law, SB17, requires manufacturers to report and provide information about certain drug price increases. They must give a 60-day advance notice of drug price increases if the wholesale acquisition cost (WAC), or list price, is more than $40 and if the price increased more than 16 percent over the past two years.

The industry trade group, Pharmaceutical Researchers and Manufacturers of America (PhRMA), which challenged the California law in federal court, claimed the law violated the federal dormant Commerce Clause by regulating out-of-state commerce and also the First Amendment by compelling speech. The judge rejected both of the constitutional challenges, denying PhRMA’s request for a summary judgement. The judge’s order establishes that:

SB17 does not regulate out-of-state drug prices simply by requiring reporting on a drug’s WAC, and dormant
The state has sufficient interest to require manufacturers to provide notice of and justification for drug price increases.

Ten states have enacted drug price transparency laws, including Oregon. Oregon’s law is very similar to California’s and currently faces a challenge from PhRMA on the same grounds the trade group used to challenge California’s law.

In Major Victory for States, Supreme Court Clears the Way for State Health Reform

December 15, 2020/in Model Legislation and Contracts Arkansas Blogs, Featured News Home Legal Resources, Model Legislation, Newly-Enacted Laws, Prescription Drug Pricing /by Jennifer Reck and Trish Riley

Last week, states won a clear path to regulating pharmacy benefit managers (PBMs) in a unanimous US Supreme Court ruling in Rutledge vs. Pharmaceutical Care Management Association (PCMA). At issue was whether federal law preempted an Arkansas law (Act 900) that requires PBMs to reimburse pharmacies at no less than what pharmacies pay to acquire drugs, among other provisions.

PCMA, the trade group representing PBMs, argued the Arkansas law was preempted by the Employee Retirement Income Security Act of 1974 (ERISA), the federal law that governs employee benefits. Enacted to protect employee benefit plans from fraud and mismanagement, the law applies to health benefits and – with few exceptions – preempts all state laws that attempt to regulate those plans. While states may regulate fully-insured health insurance plans, they are barred from regulating – either directly or indirectly – health benefits that are paid for directly by employers, often referred to as self-funded plans. More than 60 percent of employees with employer-based coverage are enrolled in such self-funded plans.

View all of NASHP’s model laws that help states curb prescription drug pricing here.

State health policymakers have followed the Rutledge case closely as any ERISA challenge has the potential to impact broader state health care reforms. State health reforms efforts have regularly been subjected to ERISA challenges in the courts, making the acronym ERISA better named in state policy circles as, “Every Roadblock to Innovative State Action.” For example, in Gobeille vs. Liberty Mutual Insurance, the Supreme Court ruled that ERISA preempts states from collecting much-needed data that would improve how they paid for and delivered health care. The Gobeille decision established that self-funded plans do not need to submit health care claims – data needed to advance cost containment efforts – to states.

The 8-0 decision was unequivocal in its ruling that the Arkansas law was not preempted by ERISA. The opinion, authored by Associate Justice Sonia Sotomayor, characterized Arkansas Act 900 as “a form of cost regulation that does not dictate plan choices” and therefore is not preempted by ERISA.

The Rutledge decision, rather than rely on Gobeille’s rationale, expands on the 1995 ERISA case, New York State Conference of Blue Cross & Blue Shield Plans vs. Travelers Insurance, that found that a state’s imposition of surcharges on employer-sponsored health plans was not preempted by ERISA, despite its indirect economic impact on health plans. In that case, the surcharge was assessed on hospital claims. The Rutledge decision extended the Travelers ruling to create a new category of health care cost regulation that surpasses ERISA’ past legal preemptions, paving the way for new state action that exceeds regulation of PBMs that administer benefits for health plans. Protection from ERISA’s preemptions for a broader category of health care cost regulations, as seen in Rutledge, positions states for important and emerging cost containment efforts.

The Rutledge decision is good news for all states, including those that have been recently actively regulating PBMs. Since 2017, 46 states have implemented more than 90 laws regulating PBMs. Some of those laws appear similar to Arkansas’ Act 900, which focused on pharmacy reimbursement, while other laws go further. Examples include laws prohibiting spread pricing – which occurs when PBMs pay pharmacies a lower reimbursement rate for prescriptions and then claim higher rates from a health plan while retaining the difference as profit. Other new laws require PBMs to pass savings from rebates negotiated with drug manufacturers back to health plans and consumers. All of these state PBM regulations are designed to control prescription drug costs. The logic driving the Rutledge decision potentially now shields all of these state laws from ERISA preemption.

The Rutledge ruling represents an important step in the right direction to clarify the scope of ERISA while also enabling states to exercise the regulatory authority needed to take on drug costs – and broader health care costs – in the absence of federal action.

PhRMA Challenges Federal Importation Rule and Canada Limits Exports, States Continue Work

November 30, 2020/in Prescription Drug Pricing Blogs, Featured News Home Administrative Actions, Legal Resources, Model Legislation, Newly-Enacted Laws, Prescription Drug Pricing, State Rx Legislative Action /by Jennifer Reck and Trish Riley

As expected, last week the Pharmaceutical Research and Manufacturers of America (PhRMA) filed suit in US District Court for the District of Columbia to block a new federal rule that allows states to import less costly prescription drugs from Canada. Also last week, the Canadian Minister of Health issued an order prohibiting the bulk export of prescription drugs that face shortages in Canada.

The federal importation rule, slated to go into effect this week, requires states to first obtain certification for their importation programs from the US Secretary of Health and Human Services. To achieve certification, a state program must demonstrate it is safe and has the ability to deliver consumer cost savings.

Rather than leave this certification in the hands of the HHS Secretary, PhRMA along with the Partnership for Safe Medicines and the Council for Affordable Health Coverage asked the federal court to stop the rule, arguing state importation programs cannot be safely implemented while raising questions about their cost-savings.

Canada Limits Rx Exports in Short Supply

The Canadian order, designed to protect that country’s domestic prescription drug supplies, applies to controlled substances (which US federal law already prohibits importation of under any circumstances) and other prescription drugs. An analysis (Q&A: The Facts about Canadian Drug Shortages) of past drug shortages in Canada indicates the majority of shortages have involved generic drugs, which are not a primary target for US importation. State programs are designed to focus on high-cost, brand-name medications that would generate the greatest savings.

NASHP analyzed more than 60 brand-name drugs that states have identified and evaluated for potential importation and found that fewer than a quarter of them had ever appeared on Canada’s lists of drug shortages between March 2017 and January 2020, with only two of them appearing on the list as of January 2020.

State Importation Work Continues

Vermont, Maine, Colorado, and Florida had already submitted their initial importation program designs to HHS Secretary Alex Azar before he issued his final rule on Sept. 24, 2020. Florida recently submitted a second proposal that responds specifically to the requirements laid out in the final rule. Two other states, New Mexico and New Hampshire, plan to submit applications soon to meet deadlines in their state’s importation statutes.

Two other recently issued federal rules related to drug pricing are also expected to face legal challenges by the pharmaceutical industry:

One rule lowers Medicare’s prices for certain drugs to the lowest price available internationally, and
Another ends exemptions allowed by an anti-kickback law that currently protects drug manufacturer rebates.

States have also faced legal challenges for their new laws that prohibit price gouging, regulate pharmacy benefit managers, require drug price transparency, prohibit industry tactics to delay the introduction of generic drugs, tax opioid manufacturers in order to fund state-level efforts to address addiction, and protect consumers from the high cost of insulin.

Despite numerous industry challenges, states are continuing to implement laws and to create new legislative approaches to curb drug costs. As state legislatures reconvene in January, many will continue to press for relief from high drug prices. In the meantime, all eyes are on the federal transition to the Biden Administration and his agenda for drug pricing. States remain active and are eager to partner with the federal government to achieve savings for consumers.

The future of importation may hinge on the Biden Administration’s ability to work with states and the Canadian government to allow importation to succeed while allaying Canadian fears. Meanwhile, states implementing importation continue their hard work. Some states will watch for results while others are pivoting to new strategies such as establishing international reference rates which, in essence, allows a states to import Canadian prices in lieu of importing drugs.

An Act to Reduce Prescription Drug Costs Using International Pricing

November 3, 2020/in Model Legislation and Contracts, Prescription Drug Pricing Administrative Actions, Legal Resources, Model Legislation, Prescription Drug Pricing, State Rx Legislative Action /by NASHP Staff

Section 1. Statement of Legislative Intent; Purpose

The purpose of this Chapter is to protect the safety, health and economic well-being of [Name the State] people by safeguarding them from the negative and harmful impact of excessive and unconscionable prices for prescription drugs. In enacting this Act, the legislature finds that

Access to prescription drugs is necessary for [Name the State] people to maintain or acquire good health;

Excessive prices negatively impact the ability of [Name the State] people to obtain prescription drugs and price increases that exceed reasonable levels thereby endanger the health and safety of [Name the State] people to maintain or acquire good health;
Excessive prices for prescription drugs threaten the economic well-being of [Name the State] people and endanger their ability to pay for other necessary and essential goods and services including housing, food and utilities;
Excessive prices for prescription drugs contribute significantly to a dramatic and unsustainable rise in health care costs and health insurance that threaten the overall ability of [Name the State] people to obtain health coverage and maintain or acquire good health;
Excessive prices for prescription drugs contribute significantly to rising state costs for health care provided and paid for through health insurance programs for public employees, including employees of the state, municipalities and counties, school districts, institutions of higher education, and retirees whose health care costs are funded by public programs, thereby threatening the ability of the state to fund those programs adequately and further threatening the ability of the state to fund other programs necessary for the public good and safety, such as public education and public safety;
Because the costs of prescription drugs and health insurance are tax-deductible, excessive costs for prescription drugs result in a reduction in the tax base and a resultant reduction in state revenue;
The costs to consumers, health plans, and the state for prescription drug coverage is higher than the costs in other countries because the prices charged by manufacturers and distributors of drugs in [Name of State] are higher; and
Based on findings (1) through (6), the legislature finds that excessive prices for prescription drugs threaten the safety and well-being of [Name the State] people and find it is necessary to act in order to protect [Name the State] people from the negative impact of excessive costs.

Section 2. Definitions

(a) “Prescription Drug” has the same meaning stated in [Cite to State’s Pharmacy Act].

(b) “Wholesale Acquisition Cost” has the meaning stated in 42 U.S.C. § 1395w-3a.

(c) “State Entity” means any agency of state government that purchases prescription drugs on behalf of the state for a person whose health care is paid for by the state, including any agent, vendor, fiscal agent, contractor, or other party acting on behalf of the state. State Entity does not include the medical assistance program established under 42 U.S.C. §1396 et seq.

(d) “Health Plan” means [State’s definition of health plan as defined in insurance statute].

(e) “ERISA Plan” means a plan qualified under the Employee Retirement Income Security Act of 1974.

(f) “Participating ERISA Plan” means an ERISA plan that has elected to participate in the requirements and restrictions of this subchapter as described in Section 4 below.

(g) “Referenced Rate” means the maximum rate established by the Superintendent of Insurance utilizing the Wholesale Acquisition Cost and other pricing data described in Section 5 below.

(h) “Referenced Drugs” means Prescription Drugs subject to a Referenced Rate.

Section 3. Payment in Excess of Referenced Rate Prohibited

(a) It is a violation of this Chapter for a State Entity or Health Plan or Participating ERISA Plan to purchase Referenced Drugs to be dispensed or delivered to a consumer in the state, whether directly or through a distributor, for a cost higher than the Referenced Rate as determined in Section 5 below.

(b) It is a violation of this Chapter for a retail pharmacy licensed in this state to purchase for sale or distribution Referenced Drugs for a cost that exceeds the Referenced Rate to a person whose health care is provided by a State Entity or Health Plan or Participating ERISA Plan.

Section 4. ERISA Plan Opt-In

An ERISA Plan may elect to participate in the provisions of this chapter. Any ERISA Plan that desires its purchase of Prescription Drugs to be subject to the prohibition described in Section 3 shall notify the Superintendent of Insurance in writing by [PICK A DATE] of each year.

Section 5. Referenced Drugs Determined

(a) As of [PICK A DATE] of each calendar year, the Director of the State Employee Health Insurance Plan shall transmit to the Superintendent of Insurance a list of the 250 most costly Prescription Drugs based upon net price times utilization. For each of these Prescription Drugs, the Director of the State Employee Health Insurance Plan shall also provide the total net spend on each of those Prescription Drugs for the previous calendar year.

(b) Utilizing this information described in subsection (a) above, as of [PICK A DATE] of each year the Superintendent of Insurance shall create and publish a list of 250 Referenced Drugs that shall be subject to the Referenced Rate.

(c) The Superintendent of Insurance shall determine the Referenced Rate by comparing the Wholesale Acquisition Cost to the cost from the: 1) Ontario Ministry of Health and Long Term Care and most recently published on the Ontario Drug Benefit Formulary; 2) Régie de l’Assurance Maladie du Québec and most recently published on the Quebec Public Drug Programs List of Medications; 3) British Columbia Ministry of Health and most recently published on the BC Pharmacare Formulary; and 4) Alberta Ministry of Health and most recently published on the Alberta Drug Benefit List.

(d) The Referenced Rate for each Prescription Drug shall be calculated as the lowest cost among those resources and the Wholesale Acquisition Cost. If a specific Referenced Drug is not included within resources described in subsection (c) above, the Superintendent of Insurance shall utilize for the purpose of determining the Referenced Rate the ceiling price for drugs as reported by the Government of Canada Patented Medicine Prices Review Board.

(e) The Superintendent of Insurance shall calulate annually the savings that are expected to be achieved by subjecting Prescription Drugs to the Referenced Rate. In making this determination the Superintendent of Insurance shall consult with the Director of the State Employee Health Insurance Plan and the Chair of the State Board of Pharmacy.

(f) The Superintendent of Insurance shall have the authority to implement regulations under [Cite state’s Administrative Procedures Act] to fully implement the requirements of this chapter.

Section 6. Registered Agent and Office within the State

Any entity that sells, distributes, delivers, or offers for sale any Prescription Drug in the state is required to maintain a registered agent and office within the state.

Section 7. Use of Savings

(a) Any savings generated as a result of the requirements in Section 3 above must be used to reduce costs to consumers. Any State Entity, Health Plan or Participating ERISA Plan must calculate such savings and utilize such savings directly to reduce costs for its members.

(b) No later than April 1 of each calendar year, each State Entity, Health Plan and Participating ERISA Plan subject to this Chapter shall submit to the Superintendent of Insurance a report describing the savings achieved for each Referenced Drug for the previous calendar year and how those savings were used to achieve the requirements of subsection (a) above.

Section 8. Enforcement

Each violation of this Chapter shall be subject to a fine of $1,000. Every individual transaction in violation of Section 3 is determined to be a separate violation. The Attorney General is authorized to enforce the provisions of this statute on behalf of any State Entity or consumers of Prescription Drugs. The refusal of a manufacturer or distributor to negotiate in good faith as described in Section 9(d) below shall be a valid affirmative defense in any enforcement action brought under this chapter.

Section 9. Prohibition on Withdrawal of Referenced Drugs for Sale

(a) It shall be a violation of this Chapter for any manufacturer or distributor of a Referenced Drug to withdraw that drug from sale or distribution within this state for the purpose of avoiding the impact of the rate limitations set forth in Section 3 above.

(b) Any manufacturer that intends to withdraw a Referenced Drug from sale or distribution from within the state shall provide a notice of withdrawal in writing to the Superintendent of Insurance and to the Attorney General 180 days prior to such withdrawal.

(c) The Superintendent of Insurance shall assess a penalty on any manufacturer or distributor that it determines has withdrawn a Referenced Drug from distribution or sale in the state in violation of subsection (a) or (b) of this section. With respect to each Referenced Drug for which the Superintendent of Insurance has determined the manufacturer or distributor has withdrawn from the market, the penalty shall be equal to 1) $500,000; or 2) the amount of annual savings determined by the Superintendent of Insurance as described in Subsection 5(e) above, whichever is greater.

(d) It shall be a violation of this Chapter to for any manufacturer or distributor of a referenced Drug to refuse to negotiate in good faith with any payor or seller of Prescription Drugs a price that is within the Referenced Rate as determined in Section 5 above.

(e) The Superintendent of Insurance shall assess a penalty on any manufacturer or distributor that it determines has failed to negotiate in good faith in violation of Subsection 9(d). With respect to each Referenced Drug for which the Superintendent of Insurance has determined the manufacturer or distributor has failed to negotiate in good faith, the penalty shall be equal to 1) $500,000; or 2) the amount of annual savings determined by the Superintendent of Insurance as described in Subsection 5(e) above, whichever is greater.

Section 10. Severability Clause

If any provision of this Chapter or the application thereof is determined to be invalid, the invalidity does not affect other provisions or applications of this subchapter which can be given effect without the invalid provision or application, and to this end the provisions of this Chapter are severable.

12/3/2020

Supreme Court Hears Arkansas Pharmacy Benefit Manager Challenge Today

October 5, 2020/in Policy Arkansas Blogs, Featured News Home Administrative Actions, Legal Resources, Prescription Drug Pricing, State Rx Legislative Action /by Sarah Lanford and Jennifer Reck

Today, the US Supreme Court is scheduled to hear oral arguments in a legal challenge of an Arkansas law that regulates the reimbursement rates that pharmacy benefit managers (PBMs) pay to pharmacies.

Forty states have enacted legislation regulating PBM reimbursement rates, so a ruling against Arkansas could have a significant impact rolling back PBM regulation, an arena where states have taken needed action in the absence of federal law.

In the case of Rutledge vs. Pharmaceutical Care Management Association (PCMA), the trade group representing PBMs argues that the Arkansas law regulating the reimbursement rates that PBMs pay to pharmacies is preempted by the Employee Retirement Income Security Act of 1974 (ERISA). ERISA is a federal law that preempts any state laws that regulate or “relate to” self-funded employee benefit plans.

In response, Arkansas argues that the law – which protects pharmacies by preventing PBMs from reimbursing them at lower rates than what pharmacies pay to acquire generic drugs – should be viewed as “ordinary state rate regulation” beyond the reach of ERISA preemption. Arkansas’ law was designed to prevent under-reimbursement by PBMs to pharmacies.

What is the Employee Retirement Income Security Act of 1974 (ERISA)?

ERISA is a federal law that preempts any state laws that “relate to” self-funded employee benefit plans. Self-funded employee benefit plans are not considered insurance under ERISA and are therefore exempt from state regulation. Self-funded plans cover more than 60 percent of Americans with employer-based coverage.

The extent of a ruling against Arkansas would depend on key details of the decision. For example, even if the court decides that ERISA preempts Arkansas’ law as applied to PBMs serving self-funded employee plans, that would leave in place rate regulation for PBMs serving state-regulated health plans. This would create a patchwork regulatory scenario in which a state could ensure adequate reimbursement rates for pharmacies for some – but not all – transactions.

Since ERISA was enacted in 1974, Supreme Court rulings have gradually expanded its reach. It is possible that a ruling favoring the PCMA would continue the trend of expanding the reach of ERISA preemption and increase the roadblocks states face when attempting to regulate their insurance markets, with ramifications reaching beyond PBM regulation. A ruling in favor of Arkansas, however, would provide clarity on states’ ability to implement PBM regulations, putting to rest inconsistent lower court rulings on the subject of ERISA preemption. A decision in the case is expected by July 2021.

Arkansas Act 900

PBMs are third parties that organize pharmacy networks, negotiate rebates with drug manufacturers, and process claims for prescription drug coverage. In their contracts with PBMs, pharmacies agree to be reimbursed at a rate set by the PBM. For generic drugs, this rate is called the maximum allowable cost (MAC). Notably, in most PBM contracts, nothing prohibits PBMs from setting a MAC for a drug below a pharmacy’s actual acquisition cost, which can result in under-reimbursement to pharmacies. According to Arkansas’s brief, 12.6 percent of independent pharmacies in the state closed between 2006 and 2014, in part due to systematic below-cost reimbursement from PBMs.

In 2015, Arkansas enacted Act 900 to tie MAC reimbursements to pharmacies’ actual acquisition costs by allowing pharmacists to appeal when a PBM’s reimbursement is lower than a drug’s wholesale acquisition cost. The law also allows pharmacies to decline to dispense a drug if a PBM’s MAC is less than what the pharmacy paid to purchase the drug. The PBM trade group PCMA challenged the law in district court, where a judge ruled that the act was preempted by ERISA. Arkansas appealed the ruling in the Eighth Circuit Court of Appeals, which upheld the lower court’s decision on the grounds that Act 900 was preempted because it implicitly and impermissibly referenced ERISA plans because it regulated PBMs that acted on behalf of plans regulated by federal law under ERISA.

Lower Court Rulings

Lower courts have issued inconsistent rulings on whether ERISA preempts state PBM regulations. PCMA previously challenged two nearly identical PBM laws in circuit courts in Washington, DC and Maine with different outcomes. These laws required PBMs to owe a fiduciary duty to health plan clients, pass payments received from drug manufacturers to health plans, and disclose conflicts of interests. In the Maine case, the court ruled that ERISA did not preempt Maine’s PBM regulations because PBMs do not exercise authority in the management of health plans. However, in the Washington, DC case, the court ruled that laws regulating third-party administrators of an ERISA plan function as a regulation of an ERISA plan itself and were therefore invalid.

PCMA also challenged a MAC pricing regulation in Iowa, where the Eighth Circuit Court of Appeals held that the law’s explicit exclusion of self-funded employee benefit plans was a “reference to” ERISA. The court also ruled that the law implicitly referred to ERISA because it regulated PBMs that administer benefits for plans subject to ERISA. Similar to Rutledge, the court held that ERISA preempted the law. PCMA has also filed an appeal in the Eighth Circuit against two North Dakota laws that regulate PBM conduct after the US District Court of North Dakota rejected ERISA preemption claims. It remains unclear how the court will apply these rulings to Act 900.

The Arguments

In its court filings, Arkansas argues that Act 900 regulates drug reimbursement as a form of rate regulation to ensure PBMs reimburse pharmacies at reasonable rates. In her brief, Arkansas Attorney General Leslie Rutledge argues that the Supreme Court has previously held that ERISA does not shield plans or their third-party administrators from state laws that regulate rates charged for those services, and therefore Act 900 is saved from ERISA preemption.

PCMA argues that the Arkansas law “relates to” ERISA because it regulates central matters of plan administration and interferes with nationally uniform plan administration. PCMA also points to the Supreme Court’s decision in Gobeille v. Liberty Mutual Co., which held that ERISA preempted a Vermont law that required health plans or their benefit administrators to submit claims data to the state’s all-payer claims database. PCMA claims that this ruling invalidates the Maine circuit court finding that ERISA does not preempt PBM regulation.

For case filings and additional information about legal challenges to state prescription drug laws, explore NASHP’s legal resources webpage that includes the legal analysis, Navigating Legal Challenges to State Efforts to Control Drug Prices: PBM Regulation, Price Gouging, and Price Transparency.