Pharmaceutical groups defend Iowa PBM law against legal challenge

Diving brief:

• Pharmaceutical associations are defending a controversial Iowa law restricting the business practices of pharmacy benefit managers in a case before a federal appeals court.
• The National Community Pharmacists Association, the Iowa Pharmacy Association, the American Pharmacists Association and the Independent Pharmacy Cooperative filed a friend-of-the-court brief Tuesday, arguing the law is legal and urging the 8th Circuit Court of Appeals to allow it to stand.
• The groups, which represent independent community pharmacies, say the PBM actions targeted by the Iowa law are driving unaffiliated pharmacies out of business and harming patients’ access to medications. Meanwhile, employer and health plan plaintiffs seeking to overturn the law say it will dramatically increase costs for businesses by upending prescription drug coverage.

Dive overview:

The Iowa law passed in June, called SF 383, overhauls a number of PBM practices.

This requires PBMs to allow patients to choose the in-network pharmacy of their choice or direct patients to a specific pharmacy. It prohibits PBMs from paying unaffiliated pharmacies less than what they pay their own pharmacies for dispensing a drug, and requires that payment be consistent with national averages. It also requires PBMs to pay fees to pharmacists for dispensing medications.

According to the law, PBM are required to pay pharmacists for dispensing medicines and to give all pharmacies in a geographic coverage area the opportunity to participate in its networks. PBMs must also pass on any discounts they negotiate with drug manufacturers to their health plan customers.

However, the law never came into force. Iowa’s largest business association, two health plans and two health plan sponsors quickly filed a challenge in an Iowa district court, arguing that the law violates the First Amendment and is preempted by the Employee Retirement Income Security Act of 1974, or ERISA, the federal law that regulates employee benefit plans.

The district court partially agreed, upholding much of SF 383 while issuing an injunction against some reforms.

For example, the requirement that PBMs pass on savings to their customers was retained. But the court prohibited PBMs from paying pharmacies the same amount that drug plans reimburse them and prohibited PBMs from designating drugs as specialty drugs to drive business to their own specialty pharmacies.

Anti-discrimination provisions, including requiring PBMs to invite willing pharmacies into their networks, were rejected, as was requiring PBMs to pay dispensing fees to pharmacists.

The plaintiffs and the defendant, the Iowa Insurance Commissioner, cross-appealed in July. And now, big pharma is joining the fray, arguing that PBMs are not employee benefit plans, but rather third-party administrators whose plans are their clients and therefore do not fall under ERISA’s jurisdiction.

“This is a flimsy legal argument that was already unanimously rejected by the United States Supreme Court in 2020,” NCPA CEO B. Douglas Hoey said in a statement Wednesday, referring to a case called Rutledge v. Pharmaceutical Care Management Association in which the Supreme Court ruled that a state law targeting PBMs was not preempted by ERISA.

As such, the court should not have blocked pass-through pricing, specialty drug designation, anti-discrimination and dispensing fee provisions in Iowa law, the pharmaceutical groups argue.

Their amicus brief also argues that the plaintiffs, who represent businesses and plan sponsors, lack standing to challenge the law, which targets PBMs.

“In short, there is no basis for Plaintiffs to act as agents for willfully absent PBMs. PBMs know how to file lawsuits to protect their rights and interests. For whatever reason, they have decided not to do so,” the brief states.

All 50 states have passed laws targeting PBMs in an effort to lower prescription drug prices, increase patient access to medications and keep community pharmacies in business, according to the National Academy for State Health Policy. PBMs, which sit between drugmakers, payers and pharmacies in the U.S. pharmaceutical supply chain, stand in the way of achieving these goals, the companies’ critics say.

After a yearlong investigation, the Federal Trade Commission issued reports last summer and earlier this year accusing PBMs of anticompetitive business practices. Reports have particularly focused on the effects of PBMs on independent pharmacies.

The largest pharmaceutical intermediaries are vertically integrated with health insurers and own their own pharmacy businesses, giving them a financial incentive to refer patients to in-house pharmacies so they can pay for drug dispensing themselves, according to the report. They also engage in a practice called spread pricing, in which they reimburse pharmacies for less than what the plan pays them for a drug and pocket the difference.

Additionally, major PBMs are exercising their market power to force unaffiliated pharmacies into harmful contracts, the pharmacies claim.

In total, pharmaceutical groups largely blame PBMs for the increase in pharmacy closures. In Iowa, more than 200 pharmacies have closed since 2014, including 34 in 2024 alone, according to the amicus brief.

PBMs argue that the U.S. pharmaceutical market is robust, citing research that independent pharmacies open as often as they close.