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New York To Regulate Pharmacy Benefit Managers

Under legislation signed on December 31 by Governor Kathy Hochul, (S.3762/A. 1396; L2021, ch. 828), all pharmacy benefit managers operating in New York State will be required to register with the State Department of Financial Services (DFS) by April 1, 2022, and thereafter to be licensed by January 1, 2023. Failure to do so can result in a cease and desist order from DFS and a penalty of at least $1000 or "the aggregate economic gross receipts attributable to all violations," whichever is greater. The bill also sets forth duties and obligations that PBMs must follow when performing services and allows the Department of Financial Services to enforce the law and receive complaints from consumers, pharmacies, and healthcare providers.
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The new law adds Article 29 to the Insurance Law and defines "pharmacy benefit manager" as any entity providing "pharmacy benefit management services," which includes "the procurement of prescription drugs to be dispensed to patients, or the administration or management of prescription drug benefits, including but not limited to, any of the following:

  1. mail service pharmacy;
  2. claims processing, retail network management, or payment of claims to pharmacies for dispensing prescription drugs;
  3. clinical or other formulary or preferred drug list development or management;
  4. negotiation or administration of rebates, discounts, payment differentials, or other incentives, for the inclusion of particular prescription drugs in a particular category or to promote the purchase of particular prescription drugs;
  5. patient compliance, therapeutic intervention, or generic substitution programs;
  6. disease management;
  7. drug utilization review or prior authorization;
  8. adjudication of appeals or grievances related to prescription drug coverage;
  9. contracting with network pharmacies; and
  10. controlling the cost of covered prescription drugs."

Registered pharmacy benefit managers must file a detailed report to DFS by July 1, 2022, which provides information requested by the Superintendent, including, without limitation, "(i) any pricing discounts, rebates of any kind, inflationary payments, credits, clawbacks, fees, grants, chargebacks, reimbursements, other financial or other reimbursements, incentives, inducements, refunds or other benefits received by the pharmacy benefit manager; and (ii) the terms and conditions of any contract or arrangement, including other financial or other reimbursements incentives, inducements, or refunds between the pharmacy benefit manager and any other party relating to pharmacy benefit management services provided to a health plan or provider, including but not limited to, dispensing fees paid to pharmacies."

Information contained in the required report will not be subject to public disclosure under the State Public Officers Law's freedom of information provisions, but failure to submit a timely report can result in up to a $1000 penalty for each day of default. Registrants will also be required to have compliant cybersecurity plans which satisfy the detailed requirements of 11 NYCRR Part 500, including filing annual certifications of compliance with DFS by April 15, 2022.

All registrations will expire on December 31, 2022. By January 1, 2023, pharmacy benefit managers will need to be licensed by DFS. After that date, any unlicensed entity would be subject to the same penalty as failure to have the required registration in 2022. The law authorizes the DFS Superintendent to consult the Commissioner of Health in establishing licensure standards that may address unfair and deceptive claims handling, anti-competitive practices, and conflicts of interest between a pharmacy benefit manager and a health plan or an insurer. The new statute authorizes the Superintendent to examine any registrant or licensee at any time she or he deems it expedient. Registrants and licensees are required to pay reasonable, proportional assessments to DFS to defray the costs of implementing new Article 29.

Grounds for revocation or suspension of a registration or license include fraudulent applications or practices, incompetence, financial irresponsibility, intentional misrepresentation, unfair trade practice and fraud, violation of specified regulatory standards as well as disciplinary actions in other states. Due process provisions addressing notice, hearings, evidence, and appeals are provided.

Besides imposing particular accounting obligations on pharmacy benefit managers in terms of amounts they receive from health plans and insurers, the new law also amends Section 280-A of the Public Health Law to require that they act with skill, care, professionalism, diligence, and in the best interest of the health plan or provider. Section 280-A explicitly prohibits a pharmacy benefit manager from substituting an alternate drug that has been prescribed without the consent of the prescriber or as required by law.

Our team of insurance regulatory and health care advisors would be pleased to assist clients in the pharmacy benefit management space in complying with these various requirements.

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