- with readers working within the Healthcare industries
For years, independent pharmacies have argued that Pharmacy Benefit Managers (PBMs) are not merely claims processors or benefit administrators. They are market makers. They decide which pharmacies are in network, which pharmacies patients are steered toward, which pharmacies are permitted to dispense certain drugs and how much those pharmacies are paid.
In many cases, the corporate entities that own some of the largest PBMs also own the pharmacies competing for the very patients whose benefits the PBMs manage.
Tennessee has now taken direct aim at that model.
The Tennessee General Assembly recently passed the Freedom, Access and Integrity in Registered Pharmacy Act, known as the FAIR Rx Act (SB 2040/HB 1959). The legislation targets vertical integration in the pharmacy market by prohibiting certain entities from owning or controlling a pharmacy while also owning or controlling a PBM and a health insurance issuer.
This is not a minor transparency bill. It is not simply another reporting requirement. It is a structural reform bill.
Most PBM reform efforts over the last several years have focused on reimbursement standards, spread pricing, audit practices, patient steering, gag clauses, network adequacy, rebate transparency, pharmacy audit standards and appeals procedures. Those reforms are important. But they often leave the basic structure of the market intact. A vertically-integrated company may still control the plan, manage the pharmacy benefit, own the mail order or specialty pharmacy and compete directly against independent pharmacies.
The Tennessee FAIR Rx Act goes further than recent legislation. It challenges the foundational business model of these PBMs – that a PBM at the corporate level can set the rules of the pharmacy marketplace while also owning one of the players in that marketplace.
What the Tennessee Bill Does
As amended, the FAIR Rx Act prohibits a person or entity from directly or indirectly owning, operating, controlling, or directing the operation of all or part of a pharmacy while also owning, operating, controlling or directing all or part of both a health insurance issuer and a PBM, when the ownership interest exceeds 5%.
The prohibition is scheduled to take effect on July 1, 2028.
The bill also includes a transition period. Pharmacies operating under prohibited ownership structures may continue operating through December 31, 2028 if they demonstrate to the Tennessee Board of Pharmacy that they are actively pursuing a bona fide sale to an unaffiliated owner. The Board may grant one six-month extension if substantial progress toward a sale is shown.
Violations may result in civil penalties of up to $10,000 per violation, per day. The bill also authorizes the Board of Pharmacy to promulgate rules to implement the law and requires potential enforcement actions to be referred to the Tennessee Attorney General.
The bill contains several exceptions. It does not restrict independently owned or unaffiliated pharmacies from offering mail order, specialty or delivery services. It does not restrict hospital or health system pharmacies. Nor does it prohibit an employer from owning and operating a pharmacy or administering pharmacy benefits solely for its own employees, retirees, and dependents under an employee benefit plan. Certain federal healthcare program arrangements are also excluded.
Why This Matters for Independent Pharmacies
The central issue the bill attempts to address is conflict of interest – something independent pharmacies have challenged for years.
Independent pharmacies have long complained that PBMs can use their control over networks, reimbursement, audits, formularies, specialty pharmacy access and patient communications to favor affiliated pharmacies. Pharmacies routinely report being reimbursed below acquisition cost while PBM-affiliated pharmacies appear to receive more favorable treatment. Pharmacies also report patient steering, mandatory mail order requirements, specialty network exclusions and audit practices that disproportionately burden non-affiliated pharmacies.
The Tennessee bill reflects a growing legislative conclusion: disclosure alone may not be enough.
Transparency is useful only if it leads to accountability. A plan sponsor can request rebate data. A pharmacy can challenge reimbursement. A regulator can require reporting. But if the same corporate enterprise controls the insurer, the PBM and the pharmacy, financial incentives remain embedded in the structure.
That is why Tennessee’s bill is significant. It does not merely require vertically-integrated entities to disclose conflicts. It seeks to eliminate the conflict from Tennessee’s pharmacy marketplace entirely.
The Pushback Was Predictable
The opposition from vertically-integrated entities was predictable.
Whenever states consider meaningful PBM reform, the largest PBMs and their affiliated corporate families typically warn that the reform will increase costs, disrupt care, force closures or reduce access. Those arguments should be evaluated carefully, but they should not end the analysis.
The more difficult, and perhaps more pertinent, question is this: access to what kind of marketplace?
A market where independent pharmacies are technically “in network” but reimbursed below cost is not a functioning market. A market where patients are told they have pharmacy choice but are financially or administratively directed to affiliated pharmacies is not real choice. A market where the entity adjudicating the claim also owns the pharmacy dispensing the claim is not neutral.
The traditional answer in healthcare regulation has been straightforward: when conflicts of interest become too severe, structural separation may be necessary. That is the theory behind Tennessee’s bill.
The Legal Fight Is Coming
Independent pharmacies in Tennessee should not assume the battle with legacy PBMs is over. Affected entities will almost certainly challenge the law. Similar laws and PBM restrictions have triggered litigation in other states. The key arguments will likely involve federal preemption, the Commerce Clause, ERISA, Medicare Part D, and whether the state is regulating pharmacy licensure and ownership or impermissibly regulating benefit design and interstate commerce.
The Tennessee bill appears drafted with those challenges in mind. The bill explicitly states that it regulates the qualifications, licensure, ownership and control of pharmacies as a condition of professional practice in Tennessee, and that it does not regulate drug manufacturing, labeling, interstate shipment, pricing, reimbursement, insurance benefits or the design or administration of ERISA governed employee benefit plans.
Whether that drafting strategy survives judicial scrutiny remains to be seen. But the broader policy message is unmistakable. States are increasingly unwilling to accept a prescription drug system where the largest PBMs can simultaneously manage benefits, own insurers, own pharmacies and control patient flow.
What Pharmacies Should Do Now
Independent pharmacies should not view the Tennessee FAIR Rx Act as an isolated state development. It is part of a broader national movement toward more aggressive PBM regulation and structural change. Even if the law is challenged, narrowed, delayed or partially enjoined, it will influence other states.
Independent pharmacies in Tennessee and across the country should be paying attention for several reasons.
First, state legislatures are becoming more comfortable regulating PBM ownership structures. Earlier PBM reforms often focused on claims-level conduct. Tennessee’s bill focuses on corporate structure, a major shift that is part of a growing national effort to curb PBM conflicts of interest.
Second, pharmacy ownership disclosures are likely to take center stage. The bill requires attention to direct and indirect ownership, control, beneficial interests, affiliates, management arrangements and operational influence. Pharmacies with complex ownership, management services, PSAO, central fill, specialty or affiliated service arrangements should expect increased scrutiny.
Third, specialty pharmacy and limited distribution drug issues will remain a battleground. PBMs and vertically-integrated specialty pharmacies often defend their role by pointing to access, accreditation, limited distribution networks, and clinical support. Tennessee’s bill includes exceptions for certain specialty drug distribution scenarios, reflecting the practical difficulty of separating PBM-affiliated pharmacies from certain limited distribution or restricted access dispensing models.
The Bigger Picture
The Tennessee FAIR Rx Act is significant because it recognizes a basic truth that pharmacy stakeholders have known for years: the PBM problem is not limited to a single bad contract term, a single unfair audit or a single underpaid claim.
The deeper issue is control.
PBMs control reimbursement. PBMs control networks. PBMs control formulary placement. PBMs control specialty pharmacy access. PBMs control claims data. And in vertically-integrated models, they control the pharmacy that receives the patient.
That level of control would be troubling in any industry. In pharmacy, where patients depend on timely access to medication and pharmacies depend on fair reimbursement to keep their doors open, the stakes are higher.
Tennessee’s legislation will not end the PBM debate, but it may trigger the next major chapter of PBM litigation. The bill sends a strong message: states are no longer content to regulate around the edges. They are beginning to question whether the current vertically-integrated PBM model is compatible with fair competition, patient choice, and community pharmacy access.
For independent pharmacies, the passage of the FAIR Rx Act is a meaningful development. For PBMs and vertically integrated healthcare companies, it is a warning shot. And for plan sponsors, it is another reminder that pharmacy benefit arrangements must be evaluated not only for price, but also for conflicts, incentives, and control.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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