The Fox Guarding the Henhouse: The Regulation of Pharmacy Benefit Managers by a Market Adversary

Pharmacy benefit managers (PBMs) save Americans billions of dollars each year by lowering both the prices that consumers pay for prescription drugs and the prices that health plans pay for drug coverage. As I explain in this Article, however, new regulatory developments in some states threaten to undercut competition in the PBM industry and disrupt the cost-savings PBMs currently generate. The regulatory scheme that was adopted by Mississippi in 2011, and that is currently under legislative consideration in several other states, shifts regulatory control of PBMs from the neutral Insurance Commissions to the states’ Boards of Pharmacy. The fundamental problem with this structure is that the Boards of Pharmacy are made up of pharmacists, the direct market adversaries of PBMs. In several different areas of the prescription drug market, PBMs and pharmacists are in direct competition over profits. Thus, the pharmacist-controlled Boards of Pharmacy have both the incentive and the opportunity to exert their regulatory authority in ways that benefit pharmacies at the expense of PBMs; reductions in PBMs’ profits generally lead to more profits for pharmacists. Indeed, I describe two important regulatory changes that the Board has enacted in its first two years that harm PBMs and benefit pharmacies. The power to regulate a market adversary gives pharmacists unprecedented power and will undercut competition in the prescription drug market. I explain how this regulatory scheme will not only hurt the PBM industry, but will also increase the prices that consumers and third parties pay for prescription drugs.