New regulations from New York's financial industry monitor—aimed at leveling the playing field for independent pharmacies by incorporating a series of market conduct rules for pharmacy benefit managers—offer the promise of stemming abuses in that market, and appear able to withstand any challenges, attorneys in the space said.

Jonathan L. Swichar, one of the nation’s leading attorneys on PBM regulatory issues, told the Law Journal on Friday that the rules adopted by the New York State Department of Financial Services put the Empire State atop efforts to rein in PBM "middlemen" who negotiate terms and conditions for access to prescription drugs nationally.

“No state has done more than New York now has to try to put a stop to the kinds of abuses PBMs have been accused of for quite some time,” said Swichar, a Duane Morris partner in Philadelphia who chairs the firm’s Pharmacy Litigation Group.

Among the 17 pages of DFS regulations unveiled Wednesday, anticompetitive practices steering consumers from local pharmacies to larger pharmacies affiliated with PBMs are now prohibited.

Swichar said New York's regulations were drafted in a way that will likely insulate the state from an inevitable legal challenge from the Pharmaceutical Care Management Association which has lobbied multiple states to not set PBM regulations.

Swichar said the association will typically sue a state on the basis its rules are either inconsistent with certain federal preemption laws, or that they violate the federal Employee Retirement Income Security Act of 1974.

“The regulations just passed in New York are very carefully drafted to make clear that they are not applying to any federal insurance program, and are not applying to any program that would otherwise be covered by ERISA,” he said.

“They have been drafted in a way that anticipates a likely objection and court proceeding by PCMA, to best assure that if and when challenged, they would be held legally enforceable,” Swichar added. In recent years, states have either passed laws or introduced bills on a monthly basis to regulate PBMs to provide protection to independent pharmacies.

“We’ve seen more reform the past couple of years than we have in the last approximately 50 years in which PBMs have been in existence,” he said.

Harris Beach partner Marina Plotkin, a pharmacist attorney on the firm’s Medical and Life Sciences Industry Team, said the DFS regulations are welcome news by New York’s pharmacy community and have been awaited since early 2022 when Gov. Kathy Hochul signed into law a comprehensive regulatory structure to the otherwise unregulated PBM space in the Empire State.

“It’s a very positive development,” said Plotkin, president-elect of the New York City Pharmacist Society. “There are many protections built in for both patients and independent pharmacies.”

Plotkin added her appreciation for DFS’s recognition “that anti-competitive practices hurt not only businesses but also patients. They hinder access to medications. They increase drug prices and limit patient choice.”

Plotkin said one of the important changes from DFS’s new rules is that PBMs will now be limited to conducting one pharmacy audit every six months, a help to independent pharmacies she represents.

Additionally, Plotkin points out that the DFS regulations more broadly define “audit” to include what the PBMs had described as “investigations.”

“I have many clients who were being audited almost every month by the same PBM,” Plotkin said. “PBMs claim the audits are investigations.”

The audits are time-consuming and intrusive, the Harris Beach partner said. According to Plotkin, the auditor might call a patient at random to ask for confirmation about a medication dispensed more than two years ago.

In the event the patient tells the auditor he or she doesn’t remember the transaction, this sends the local independent pharmacist scrambling to retrieve documents and patient correspondence, she said.

Plotkin and a Harris Beach colleague co-wrote a legal alert about the DFS regulations describing PBM’s ability to apply their own rules and have the final word, with no recourse available to independent pharmacies, as akin to “having a fox guard the hen house.”

Lucas W. Morgan, a partner in Frier Levitt’s Healthcare and Life Sciences groups, said he was heavily involved in working with certain clients through DFS’s notice and comment rulemaking process and the preceding requests for information issued by the New York Pharmacy Benefits Bureau.

Morgan said it’s evident his clients’ perspectives were incorporated into DFS’s final adopted rules.

“I do feel like some of the comments that we were a part of authoring were considered and in some cases factored into this,” he said.

Morgan added that an original draft version of the rules had provisions that he found concerning – and he was pleased to see they weren’t included in the final version. Under a section of the regulations concerning contracting with network pharmacies, DFS set out 12 provisions related to a PBM’s ability to terminate a pharmacy from a network.

“First of all,” said Morgan, “we thought it was really important to have a provision which gave some limitations to the ability of PBMs to be able to terminate pharmacies from their networks.”

“What we’ve seen is, in the absence of some sort of reasonable regulation, PBMs will invoke a right of termination very, very aggressively. I think this provision strikes a fair balance.”

While Morgan found 10 of those provisions reasonable, he said he still has concerns about two, including allowing PBMs to terminate “where the pharmacy benefit manager has good cause to believe that the pharmacy’s operation poses an imminent harm to patients.”

Morgan said he believes that this has the potential to be taken advantage of since it will present questions about what did the imminent harm actually mean.

“I interpret that as meaning true blue, some sort of physical harm,” he said. “There’s been a determination that the pharmacy was handing out products that were not safe and reliable, and the patient got sick from that.”

His other concern involves a provision “where there is a material breach of a pharmacy contract by the pharmacy.”

“With that,” said Morgan, “I do actually think that’s valuable language – because if we’re requiring the breach to be material, I do think PBMs are likely to respond to that by just superficially calling everything a material breach if they move to terminate a contract. And then it would be up to the pharmacy to show that the breach was not material under applicable laws of New York.”

Overall, Morgan said the final DFS rules illustrate the value of the notice and comment rulemaking process, and it appeared to be a thoughtful process.

“I was struck by the level of detail and the way they were honing in on very specific issues,” the attorney said. “They did this evidence-gathering process that took a few years. And it was very detailed. Then you had several rounds of notice and comment rulemaking. We saw a lot of meaningful revisions to the actual rules from the start to what was ultimately adopted. I think there’s a lot of great things there.”

Reprinted with permission from New York Law Journal, © ALM Media Properties LLC. All rights reserved.