Seyfarth Synopsis: Arkansas has become the first state in the nation to enact legislation, effective starting in 2026, prohibiting pharmacy benefit managers (PBM’s) from owning or operating actual pharmacies within the state. We take a look at what that may mean for employers sponsoring health plans with pharmacy benefits in the state.
Background on PBMs Role in the Marketplace
PBMs have become a unifying scapegoat in the escalating concern about the cost of prescription drug coverage in the country. So, it becomes important to understand what role they really play. PBMs act as a middle man of sorts for the prescription drug coverage offered by many employer health benefit plans. With the ever expanding universe of prescription drugs, including the many specialty drugs that are being offered and widely advertised to the public, it is difficult for plan sponsors to be able to directly manage this benefit. PBMs grew up as an answer to the needs for a third party to administer drug coverage under plans.
At a high level, PBMs will directly negotiate for rebates and discounts with the drug manufacturers on behalf of the plans they represent to determine how much participants will pay. PBMs then develop a formulary (list of covered drugs) that health plans use to determine which drugs (generic, brand and specialty) are covered under the plan and at what level. PBMs then contract with networks of pharmacies where plan participants can fill their prescriptions for those covered drugs at the agreed-upon cost. These can be retail, mail-order or specialty pharmacies. Finally, PBMs adjudicate the claims under the plan as participants access their prescription benefits – reimbursing the participants and pharmacies and billing the plan itself for the drugs and the administration.
While that all sounds helpful, PBMs have been criticized for profiting off the prescription drug arena as they create obtuse pricing strategies that are difficult to parse, and have an interest in keeping drug prices artificially high as they keep the difference between what the insurers pay and the pharmacies receive. They also create an environment where small independent pharmacies cannot compete with the large chains and sometimes wind up filling prescriptions for less than cost. This last concern is a major factor that led the independent pharmacies in Arkansas to push for this legislation.
Arkansas AB 1150 – Addressing the PBM Conflict
While Arkansas has been at the forefront of PBM reform for years (including passing an aggressive law regulating PBMs that made it all the way to the Supreme Court where it was upheld as applied to ERISA plans), their legislature was determined to do more. According to the text of the bill, recently passed AB 1150 attempts to “minimize conflicts of interest by stopping the pharmacy benefits managers acting as a “fox guarding the henhouse” by being both a price setter and price taker”.
Specifically, starting in 2026, the law would prohibit the Arkansas State Pharmacy Board from issuing, and requires that they revoke or decline to renew, any licenses issued to retail, mail order or specialty pharmacies that are owned (directly or indirectly) by a PBM.
The law does contain a limited exception that allows the issuance of licenses to PBM-affiliated pharmacies for certain rare, orphan, or limited distribution drugs, but this window for exceptions closes in September 2027 (presumably intended to provide a transition period to source these drugs through pharmacies not affiliated with PBMs).
Potential Impact on Employers with Arkansas Employees
Most of the largest PBMs in the country also own pharmacies, retail, mail order and specialty, and therefore will be directly impacted by the Arkansas law. At least one PBM is choosing to continue with that business line, and has announced that it will be closing its 20+ retail pharmacies in the state and has decried the new statute as one that “will take away access to pharmacy care in local communities.”
Unfortunately for employers (including employers with self-funded plans governed by ERISA), there may be limited options for the forthcoming disruption. Because the law only directly regulates pharmacies and pharmacy licensing, there does not appear to be a strong case for ERISA preemption. As such, we presume employers will need to choose between (a) engaging a PBM with no ties to licensed pharmacies in Arkansas, or (b) working with their existing PBMs to modify their network to extend to non-affiliated pharmacies (including for purposes of specialty and mail-order drugs). Much of this decision will be driven by PBM reaction to the law.
Other states are keeping a close eye on Arkansas as they consider their own response to PBMs, and there is bipartisan federal legislation in the works.
