Dive Brief:
- CVS is suing Tennessee’s pharmacy board over a new law prohibiting pharmacy benefit managers from owning or operating pharmacies in the state.
- The complaint filed Friday argues that Tennesee’s law, which was passed last week despite fervent opposition from major PBMs, constrains out-of-state competition against Tennessee’s independent pharmacies in violation of the Constitution.
- CVS said it will be forced to close 136 retail and specialty pharmacies and halt mail-order services in Tennessee if the law is allowed to go into effect. Currently, companies have until July 2028 to comply.
Dive Insight:
Tennessee is the second state to pass a law prohibiting PBMs, powerful middlemen in the pharmaceutical supply chain, from owning pharmacies amid widespread concern that conglomerates like CVS that operate both are using their market power to drive independent pharmacies out of business.
It’s also the second state to be sued over such a mandate. Arkansas, which signed a similar bill into law last year, saw its own law enjoined last summer following legal challenges from major PBMs, including CVS.
Tennessee lawmakers faced similar opposition. PBMs embarked on an intense lobbying campaign against the bill, called the the Freedom, Access and Integrity in Registered Pharmacy (FAIR Rx) Act, which would shift billions of dollars away from out-of-state operators and to local pharmacies.
PBMs and their allies spent more than $7 million and hired more than 60 lobbyists in an attempt to kill the legislation, according to the National Community Pharmacists Association.
However, the FAIR Rx Act received broad bipartisan support in both chambers of Tennessee’s legislature. Gov. Bill Lee signed the bill into law on Friday, spurring the lawsuit from CVS.
CVS’ complaint filed in the Middle District of Tennessee attacks the legislation as a thinly veiled attempt to constrain legal competition against Tennessee’s independent pharmacies.
The law violates the Constitution’s Dormant Commerce Clause by discriminating against an out-of-state business, according to CVS’ suit.
It’s also preempted by multiple federal statutes. For one, the legislation hinders the administration of nationwide employee benefit plans under a law called ERISA, by preventing them from relying on PBM-affiliated pharmacies in a single state, CVS alleges.
Though the law would constrain a number of conglomerates that offer mail-order pharmacy services, such as UnitedHealth and Cigna, CVS would be especially affected if it goes into effect. The Woonsocket, Rhode Island-based company accounts for 136 of the more than 160 pharmacies that will be forced to close or sell due to the legislation, according to the complaint.
CVS would also have to close 25 of its retail medical clinics, and lay off some 2,000 employees, a spokesperson said.
Moreover, restricting out-of-state pharmacy conglomerates would also impact costs and access for residents of Tennessee, they argued. According to CVS, nearly 1.5 million patients will be forced to find a new pharmacy to fill their prescriptions, while Tennessee employers’ drug costs will jump more than $180 million a year.
“The Act’s effect is entirely inconsistent with a purported interest in the welfare of Tennesseans, but it serves the Act’s true purpose perfectly: protecting local pharmacies against out-of-state competitors,” CVS’ lawsuit reads.
Independent pharmacies have complained for years that major PBMs are restricting their reimbursement, including by strong-arming them into unfavorable contracts, steering patients to in-house pharmacies and clawing back revenue that the pharmacies say they’re owed. Federal regulators have found that the companies pay their own pharmacies preferential rates, contributing to pharmacy closures and limiting patient access to drugs.
Major PBMs like CVS’ Caremark, Cigna’s Express Scripts and UnitedHealth’s Optum Rx say that allegations about conflicts of interest are unfounded, and that they pay unaffiliated operators at similar levels or more than in-house pharmacies. Still, the companies have attempted to make nice with independent PBMs amid scrutiny from federal regulators.
PBMs are pursuing voluntary reform of some of their most-maligned business practices as Washington gets increasingly serious about oversight. Federal legislation enacted to date doesn’t touch the main enabler of anticompetitive business practices: joint ownership of PBMs and pharmacies, experts say.
Though such legislation is unlikely to get through a divided Congress, there’s still some interest in breaking up the companies — a bill that would force companies that own health insurers or PBMs to divest their pharmacy businesses was reintroduced in Congress earlier this month.
Meanwhile, at the state level, at least nine other states are considering legislation that would restrict PBMs from owning pharmacies, according to the NCPA.
