Lawsuit in Minnesota deepens pharmacy benefit manager pushback against state regulations

A new lawsuit challenges Minnesota’s law for regulating pharmacy benefit managers, a group of companies that structure drug benefits within health insurance plans that critics have accused of inflating medicine prices and driving independent pharmacies out of business.

Plaintiffs in the case, filed in December in the U.S. District Court of Minnesota, argued the state’s regulation of pharmacy networks these companies — called PBMs, for short — created is not allowed under federal law for certain large employers.

Just more than five years ago, the Minnesota Legislature attempted to rein in the oft-critiqued PBM industry by passing a law that allowed the state to regulate the companies to protect consumers and small pharmacies. PBMs have pushed back, though, including in a case Minnesota Attorney General Keith Ellison has asked the U.S. Supreme Court to review, following an appellate court ruling in August 2023 that sided with PBMs in their challenge to state regulations in Oklahoma.

It’s a similar argument to what Cigna Group, a Connecticut-based company that runs a large national health insurer plus a PBM called Express Script, is alleging with this new lawsuit: a decades-old federal law clearly specifies the design and administration of certain employee benefit plans is not something states can control. A trade group for employers and one for labor unions are also plaintiffs in the case.

“Despite assertions defendants may make to the contrary, granting the requested relief here would not mean that PBMs are free from regulation by Minnesota,” the lawsuit stated. “The state has ample regulatory tools at its disposal ... that can be used effectively to challenge alleged misconduct by PBMs.”

The plaintiffs argued Minnesota rules on the PBM industry actually regulate employers who sponsor health plans and design and construct networks of pharmacies where workers can fill their prescriptions, as permitted under federal law.

The state law prevents PBMs from designing mail-order and specialty pharmacy networks that only include pharmacies affiliated with particular PBMs, according to the lawsuit. The statute also blocks PBMs from adopting a pharmacy network that requires patients to obtain maintenance medications from mail-order pharmacies, thereby letting patients use independent pharmacies.

“This kind of open-network law makes a number of commonly used quality control and cost containment measures impossible, thus effectively prohibiting employers and labor union health trust funds from using them,” the lawsuit said. “This kind of intrusive regulation of substantive benefit plan design is plainly preempted by the Employee Retirement Income Security Act of 1974 (ERISA).”

ERISA is the federal law that governs self-insured health plans, which large companies typically offer to their workers and take the financial risk for the cost of medical claims.

About 37.5% of Minnesota residents in 2023 were under self-insured health plans, according to state data, making it the most common type of health insurance coverage. Medicare is second, covering 19.4% of state residents.

The lawsuit named Minnesota Commerce Commissioner Grace Arnold and the state Commerce Department, which regulates the state’s PBM industry, as defendants.

“We have no comment on this litigation at this time and will respond to the complaint via court filing,” the department said in a statement.

In 2019, the Minnesota Legislature passed the law to regulate PBMs, which also negotiate insurer payments to drug manufacturers and pharmacies. These payments come through a complex system of rebates and/or administrative fees that has drawn criticism for lacking transparency.

The state Commerce Department in 2023 levied a $500,000 fine against CVS Caremark, alleging the company used strategies not allowed under Minnesota law for steering consumers to its own pharmacies. The company denied the allegations and did not admit liability.

The new lawsuit cites the fine as an example of how Commerce has been “aggressively enforcing” the state’s PBM law. Following the consent order with CVS Caremark, Commerce initiated a regulatory inquiry of Express Scripts (ESI), according to the complaint.

“ESI confirmed that the in-network mail order pharmacies available to Minnesota enrollees of at least one plan ... consist solely of ESI-owned or affiliated pharmacies,” stated a May 2023 letter from Commerce filed with the lawsuit. “While this alone does not make the network non-compliant, the further confirmation that ESI imposes [other] limits on access to medication for that plan’s enrollees ... places it firmly outside the guidelines.”

A health plan’s network specifies the pharmacies where patients can access “in-network” drug benefits, meaning they pay less out-of-pocket for prescriptions. The lawsuit argued variation in the design of these networks lets employers tailor benefits to the particular needs of their workforce.

Some plans use broader pharmacy networks, which are more costly and therefore command higher premiums, according to the complaint. Others use narrower networks to obtain better prices. Another approach is to use “tiered” networks, where health plans provide financial incentives for patients to use some pharmacies rather than others.

Network rules can also vary by the degree to which patients have incentives or requirements to use mail-order pharmacies as well as specialty pharmacies for certain high-cost medications. Network configurations impact the cost of prescription benefits, the lawsuit said, and provide a means for health plan sponsors to set quality standards for pharmacies.

“Designing and constructing pharmacy networks that meet employees’ needs is an extraordinarily complex and time-consuming task requiring substantial resources; it is one far beyond the ability of a typical plan sponsor acting on its own,” the lawsuit stated. “Plan sponsors thus ordinarily retain one or more pharmacy benefit managers, or PBMs, to provide recommendations concerning the design of the plan to administer their networks, in addition to other administrative aspects of the prescription-drug benefit plan.”

The complaint also stated: “Plan sponsors, not PBMs, exercise ultimate control over pharmacy network design.”

Plaintiffs in the case are asking the court to declare ERISA pre-empted Minnesota’s regulations, and the state’s enforcement for non-Minnesota patients is unconstitutional. They also seek an injunction against the Commerce Department’s regulation of ERISA-covered, self-funded health plans.

Last year, Express Scripts was the nation’s third-largest PBM, according to a recent American Medical Association analysis, with a market share of about 17.1%. The largest PBM at the time was Rhode Island-based CVS Caremark with 21.3% of the market, according to the report. Optum Rx, the PBM Minnetonka-based UnitedHealth Group operates, was second with a 20.8% share.

The fourth-largest PBM was Eagan-based Prime Therapeutics at 10.3%.

Critics argue there’s not enough competition among PBM companies, particularly since the four largest are vertically integrated with large health insurers. UnitedHealth Group owns UnitedHealthcare, the nation’s largest health insurer. CVS Caremark owns Aetna. Several Blue Cross Blue Shield insurers own Prime Therapeutics.

“The call for increased regulatory oversight of PBM business practices is overwhelmingly welcomed by physicians,” said Dr. Bruce A. Scott, AMA president, in a September statement, “as a check against possible anticompetitive harm resulting from low competition and high vertical integration in the PBM industry.”

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