Employee Benefits Newsletter 2025

State Laws Emerge to Regulate Pharmacy Benefit Managers

In 2025, a total of 26 states enacted legislation regulating pharmacy benefit managers ("PBMs"). Although the content of the legislation varies among states, there is a consensus to increase transparency and lower prescription drug costs. This article explains current state legislative trends affecting PBMs.

Prohibition on Gag Clauses

A gag clause is a contract provision that prevents disclosing cost information and the availability of lower-cost prescription drug alternatives to individuals. The Consolidated Appropriations Act, 2021 is a federal law that eliminated the use of gag clauses in PBM agreements with group health plans. State laws aim to expand the prohibition to all PBM contracts. These provisions aim to increase price transparency by allowing patients to compare prices and make informed healthcare decisions.

States: AK, AL, AR, AZ, CA, CO, CT, DE, FL, GA, IA, ID, IL, IN, KS, KY, LA, MD, ME, MI, MN, MO, MS, MT, NC, ND, NE, NH, NJ, NM, NV, NY, OK, OR, PA, RI, SC, SD, TX, UT, VA, VT, WI, WV, WY

Prevents or Prohibits Spread Pricing

Spread pricing occurs when a PBM charges a health plan more than the amount paid to the pharmacy for a medication with PBMs retaining the difference, or "spread," as profit. States are enacting transparency laws that prohibit, limit or require disclosure of spread pricing practices, requiring PBMs to make a profit through other methods, such as flat fee schedules.

States: AR, CA, CO, DE, FL, IA, ID, IL, IN, LA, MD, MI, MN, NC, NE, OK, UT, VA, VT, WA, WV

Restricts PBM Steering

Many PBMs have common ownership with pharmacies. Steering is when a PBM directs patients to their affiliated pharmacy and limits or completely restricts access to competitor pharmacies. States seeking to discourage steering have taken different approaches. One common approach prohibits disparate reimbursements to affiliate and nonaffiliate pharmacies. Higher reimbursements incentivize patients to use affiliate pharmacies over nonaffiliate pharmacies.

States: AL, AR, CO, DE, GA, IA, IL, IN, KY, LA, MD, MI, MN, MT, NC, ND, NE, OK, OR, PA, SC, SD, TN, TX, UT, VA, VT, WA, WV

Rebate Transparency

PBMs negotiate rebates and discounts for prescription drugs with pharmaceutical drug manufacturers. Rebate transparency provisions attempt to clarify the amount of rebate savings retained by PBMs and encourage full rebates to pass through to consumers.

States: AL, AR, CA, CO, CT, IA, IL, ID, IN, KY, LA, ME, MI, MN, MT, NC, ND, NH, NJ, NM, NV, NY, OR, UT, VA, WA, WI, WV

Fiduciary Duty to Insurer

Healthcare insurers have fiduciary duties requiring insurers to act in the best interest of the insured (i.e., plan participants and beneficiaries). States are adding provisions requiring PBMs to act in a similar fiduciary capacity owing a duty to both healthcare insurers and those insured. PBMs with fiduciary duties will have to put the insureds' interest above their own profits.

States: AL, IN, ME, NC, VT

PBM Licensure or Registration

In an attempt to increase transparency, many states require PBMs to be licensed, registered or to have obtained a certificate with the state before operating or conducting business. Typically, a license is renewed annually. Violations of any state PBM law can result in license revocation or denial of renewal.

States: AK, AL, AR, DE, FL, GA, IA, IL, IN, KY, LA, MD, ME, MI, MN, MT, NC, ND, NE, NJ, NM, NY, OK, OR, SD, TN, UT, VA, VT, WA, WI, WV

MAC List Requirements

A maximum allowable cost ("MAC") list is a payment model that sets the highest price a PBM will reimburse pharmacies for medications. MAC list requirements vary by state. Common MAC list requirements include MAC list source disclosures, weekly MAC list updates, and prerequisites for drug placement on the MAC list.

States: AK, AR, AZ, DE, GA, IA, ID, IL, IN, KS, LA, MD, ME, MI, MN, MT, NE, NH, NM, OR, SC, SD, TX, VT, WV

Prohibition on Clawbacks

A clawback is when a PBM retroactively reduces payment to a pharmacy after the point of sale. It often occurs when the plan's copay is higher than the prescription cost. The clawback results in the PBM recovering the difference and retaining the spread as profit. State prohibition on clawbacks are often limited to clean claims, meaning claims that are complete and consistent with plan terms. If a clawback is done as a result of an audit or fraud, a PBM is permitted to retain the clawback. In states where clawbacks are prohibited, the pharmacies retain the full amount.

States: AL, AR, CO, CT, DE, GA, IA, ID, IN, KY, LA, MD, ME, MI, MN, ND, OK, PA, SC, SD, TX, UT, WA, WI, WV

Limitation on Patient Cost Sharing

States that limit patient cost sharing seek to decrease the cost of prescription drugs by reducing patient payments. The amount a patient is required to pay can be reduced by requiring manufacturer rebates to be passed through to patients or applied toward their deductible. Additionally, some states require patients to pay the lesser of the National Average Drug Acquisition Cost or the wholesale acquisition cost.

States: AR, AZ, CA, CO, CT, DE, FL, GA, IA, IL, IN, KY, LA, ME, MT, NC, ND, NE, NJ, NM, NV, OK, OR, SD, TX, UT, VA, VT, WA, WI, WV

These provisions are a small sample of current or pending legislation. PBMs are pushing back against these state laws. After two PBMs sued challenging the constitutionality of an Arkansas law prohibiting PBMs from owning pharmacies in the state, a federal court issued a preliminary injunction blocking the enforcement of the legislation. Similarly, Iowa faces a challenge alleging a PBM law recently enacted is preempted by ERISA and in violation of the First Amendment.

If you have any questions about state laws regulating PBMs, contact a member of our Employee Benefits and Executive Compensation practice group.

Mitigating Exposure in ERISA Health and Welfare Fiduciary Litigation Trends

A New Era of Health and Welfare Fiduciary Litigation In recent years there has been an uptick in litigation targeting fiduciaries of health and welfare employee benefit plans. As regulations promoting transparency and participant access to plan pricing data have expanded, plan sponsors and fiduciaries face heightened scrutiny with their vendor arrangements, plan expenses and compliance with fiduciary standards under the Employee Retirement Income Security Act of 1974 ("ERISA").

ERISA's Fiduciary Obligations

ERISA establishes fiduciary standards for those who manage and administer employee health and welfare plans. The core fiduciary obligations include (1) the duty of loyalty, which requires acting solely in the interest of participants and beneficiaries for the exclusive purpose of providing benefits and defraying reasonable plan expenses, and (2) the duty of prudence, which mandates that fiduciaries exercise care, skill, prudence and diligence in their decision-making, comparable to similarly situated fiduciaries. Plan fiduciaries must also follow plan documents, avoid prohibited transactions, and ensure that all agreements and expenses are reasonable. Breaches of these duties can result in personal liability for losses to the plan, restoration of profits made through improper use of plan assets, and other equitable or remedial relief, including removal from fiduciary roles. Courts have described ERISA's fiduciary duties as "the highest known to the law," underscoring the importance of procedural prudence, ongoing monitoring and independent judgment in all plan-related decisions.

Litigation Trends

Pharmacy Benefit Manager ("PBM") Litigation

Lewandowski v. Johnson & Johnson: Participants allege that J&J and its plan fiduciaries breached their duties by failing to prudently manage the prescription drug plan, resulting in excessive costs and higher premiums. The claims allege that fiduciaries must compare service providers, seek the lowest reasonable costs, and monitor plan expenses. Plaintiffs seek to hold fiduciaries personally liable for unnecessary costs.

Navarro v. Wells Fargo: This class action alleges Wells Fargo's plan fiduciaries engaged in prohibited transactions by paying excessive administrative fees to their PBM, resulting in millions of dollars in losses. Plaintiffs seek removal of fiduciaries and appointment of an independent fiduciary.

Stern v. JP Morgan Chase: Allegations include inflated drug costs, lack of formulary oversight, and failure to follow plan documents regarding manufacturer rebates. The complaint underscores the need for prudent vendor selection and ongoing monitoring.

In each case, courts have either dismissed or are pending requests to dismiss claims because plan fiduciaries had met their obligations of prudently administering the plans, or because participants received the benefits promised under the plans and did not suffer any harm.

Other Health and Welfare Litigation

Cybersecurity and Wellness Program Litigation: A recent Change Healthcare cyberattack exposed participants' personal information to hackers, emphasizing plan fiduciary responsibility for robust vendor oversight and compliance with privacy, security, and nondiscrimination rules. Dozens of lawsuits by participants whose data was improperly shared and by providers whose billing was interrupted have been consolidated and are in early stages of litigation.

Use of Artificial Intelligence ("AI"): In KistingLeung v. Cigna Corp., participants sued their health plan claims administrator, Cigna, for imprudently administering the plan's claims procedures by using AI to analyze participant claims for medical necessity without review by a medical director as required by the plan. The AI program wrongfully denied claims and data showed Cigna doctors denied over 300,000 claims while spending an average of 1.2 seconds per review. The court dismissed participants whose claims were not reviewed by AI but denied Cigna's motion to dismiss participants whose claims were denied by the AI program.

Why ERISA Fiduciary Committees Matter

ERISA imposes personal liability on fiduciaries for losses to the plan resulting from breaches of duty. Courts have consistently emphasized that the prudence standard is not about achieving the best possible outcome (hindsight), but about following a prudent process in decision-making. The formation of a fiduciary committee for health and welfare plans establishes this prudent process with best practices that:

• Clearly identify fiduciaries and their responsibilities.
• Enable regular, documented oversight of plan administration, vendor selection and compliance.
• Limit organizational and individual liability through insurance and indemnification.
• Ensure subject matter expertise in areas such as finance, human resources and benefits administration.
• Mirror successful governance structures long used in retirement plan administration.

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