The PBM Business Model May Be Reaching a Policy Tipping Point
For years, most of the PBM debate focused on individual practices. Pharmacy reimbursement was one fight. Rebates were another. Then there was spread pricing, steering, pharmacy networks and transparency.
Those issues are all still being debated, but something has changed. We are starting to see pressure on several parts of the PBM business model at the same time.
Congress has already changed some of the federal rules around PBM compensation and transparency. States are going further. PBMs and health plans are challenging some of those state laws under ERISA, and the courts are beginning to tell us where the boundaries are.
That is why a new decision from the U.S. Court of Appeals for the Seventh Circuit matters.
On its own, the case is another important decision involving PBM regulation and ERISA. Put it next to what is happening in Illinois, Tennessee and Washington, and a bigger issue starts to come into view.
We may be moving beyond a debate over individual PBM practices and toward a larger fight over the economics of the PBM business model itself.
Rutledge Left the Door Open
The Supreme Court's 2020 decision in Rutledge v. Pharmaceutical Care Management Association gave states important room to regulate what PBMs pay pharmacies. The Court concluded that Arkansas's reimbursement law amounted to cost regulation and did not dictate how an ERISA plan had to structure its benefits.
That did not mean states could regulate PBMs however they wanted.
In Mulready v. Pharmaceutical Care Management Association, the Tenth Circuit found that ERISA preempted portions of an Oklahoma law affecting pharmacy network design. That gave PBMs a stronger argument when state regulation moves beyond price and begins affecting how an ERISA plan operates its pharmacy network.
Importantly, Mulready did not overrule Rutledge, nor could it. Rutledge remains the controlling Supreme Court precedent. Instead, Mulready helped define where courts may draw the line between state regulation of PBM costs and state laws that affect the structure or administration of an ERISA plan.
The fight since then has been over where that line should be drawn.
On August 26, the Seventh Circuit added another piece.
The court upheld an Arkansas rule allowing the state to require additional dispensing fees when pharmacy reimbursement is not considered fair and reasonable. A self-funded health and welfare plan argued that ERISA preempted the rule.
The court disagreed.
The dispensing fee, according to the court, was still cost regulation of the kind permitted under Rutledge. The fact that it could make prescription benefits more expensive did not mean Arkansas was dictating how the plan had to be structured.
The court also upheld an Arkansas reporting requirement tied to pharmacy compensation, although that part of the decision came with an important caveat.
Congress recently created new federal ERISA reporting requirements covering some of the same pharmacy compensation information Arkansas is collecting. Those federal requirements have not yet taken effect. The Seventh Circuit therefore did not decide whether the new federal rules will eventually preempt Arkansas's reporting requirement, expressly leaving that question for another day.
That detail is easy to overlook, but it says a lot about where PBM regulation is heading. Congress, the states and the courts are no longer operating on separate tracks. What Congress does can change the ERISA analysis courts apply to state laws, while those court decisions can determine how much room states have to continue regulating PBMs.
States Are Already Moving Further
Illinois is testing those boundaries now.
Its Prescription Drug Affordability Act addresses spread pricing, steering and transparency, among other PBM practices. PCMA has challenged portions of the law, arguing that Illinois has crossed the line when its requirements affect ERISA plans and their pharmacy networks.
Tennessee has gone further.
Its FAIR Rx Act does not simply regulate reimbursement or require more disclosure. It challenges vertical integration by restricting companies that own PBMs from also owning or operating pharmacies in the state.
That law is also being challenged.
This is where the PBM debate begins to look different. The largest PBMs today are part of much larger healthcare companies that can include insurance, pharmacy benefits, specialty pharmacy, retail pharmacy and healthcare services under the same corporate organization. Once policymakers begin questioning not only how PBMs operate, but whether some of those businesses should remain under common ownership, the debate moves beyond PBM compliance and into the structure and economics of the business itself.
Congress Is Applying Pressure From the Other Direction
Washington matters here too.
Congress has already enacted reforms affecting PBM compensation, rebates and transparency. Additional federal proposals would go further.
None of this dismantles the PBM model. States are not uniformly moving in the same direction either, and Mulready demonstrated that ERISA places real limits on state authority.
Still, look at the areas being challenged at the same time: reimbursement, spread pricing, rebates and compensation, transparency, steering, pharmacy networks and vertical ownership.
None of these changes on its own is likely to remake the PBM business model. The concern is what happens when several of them start happening at the same time.
PBMs are going to be regulated. That question has largely been settled. What matters now is whether all of this pressure begins to change the economics of the business itself.
Follow the Money
This is where the issue becomes relevant well beyond PBMs and pharmacies.
The economics of pharmacy benefits do not exist in a vacuum. Money moves among manufacturers, PBMs, health plans, employers, pharmacies and patients, and the large vertically integrated healthcare companies operating across several of those businesses have spent years building around that flow. If the rules governing that system change, the money does not simply disappear. It moves.
Higher pharmacy reimbursement could move more value toward pharmacies. Changes to rebates and PBM compensation could affect what employers and health plans retain and how they negotiate contracts. Restrictions on steering could change the economics of affiliated specialty and retail pharmacies, while restrictions on ownership could raise a much larger question about the value of vertical integration in the first place.
The point is not that all of these changes will happen, or that the PBM model is about to disappear. There are still major legal questions to be resolved. Mulready showed that ERISA places real limits on what states can do, and some of the more aggressive state laws may not survive.
What is changing is the nature of the risk. A reimbursement mandate or a new transparency requirement can be treated as another regulatory development. The calculation starts to look different when policymakers are changing reimbursement, compensation and transparency while also challenging network design, steering and even ownership.
At that point, the issue begins to look less like a collection of compliance problems and more like business model risk.
The Seventh Circuit did not decide where all of this ends. What it did confirm is that Rutledge continues to leave states with room to regulate PBM costs. Illinois and Tennessee are now testing how much further that authority can reach, while Congress is changing parts of the federal framework at the same time.
For PBMs, pharmacies, health plans and employers, the outcome will matter operationally. For executives and investors looking at the broader healthcare market, there is another question worth following: if policy changes where value is captured in the pharmacy benefit system, who captures it next?
That may ultimately be the bigger story.