Express Scripts Challenges Tennessee Fair Rx Act: Another Attempt To Preserve The Status Quo

The legal challenge recently filed by Express Scripts against Tennessee’s Fair Rx Act is about far more than a single state law. At its core, the lawsuit is a fight over whether states have the authority to address what many lawmakers, pharmacies, patients and plan sponsors view as one of the most significant conflicts of interest in the prescription drug marketplace: the ownership of pharmacies by pharmacy benefit managers (PBMs).

The challenge also highlights a growing divide between policymakers seeking to increase accountability in the prescription drug supply chain and large PBMs seeking to preserve business models that have come under increasing scrutiny in recent years.

As discussed in a previous article regarding Tennessee’s Fair Rx Act, Tennessee enacted one of the most aggressive PBM reform laws in the country. Unlike many PBM laws that focus on transparency, reimbursement standards, appeals rights or audit requirements, the Fair Rx Act goes directly to the issue of ownership and vertical integration.

Tennessee lawmakers concluded that allowing a PBM to own pharmacies while simultaneously controlling reimbursement methodologies, network participation requirements, specialty pharmacy mandates, formulary decisions and claims adjudication creates conflicts that cannot be adequately addressed through disclosure requirements alone.

Not surprisingly, the legislation immediately drew opposition from the largest PBMs.

Express Scripts’ lawsuit seeks to prevent the implementation of the law and preserve its ability to continue operating under its current business model. While the legal arguments will be addressed by the courts, the lawsuit itself raises an important question: Why are PBMs willing to spend significant resources challenging laws designed to separate PBM functions from pharmacy ownership?

The answer may lie in the tremendous value that vertical integration provides to large PBM organizations.

Over the last two decades, the PBM industry has undergone substantial consolidation. What were once primarily claims processing companies have evolved into healthcare conglomerates with ownership interests throughout the prescription drug supply chain.
Today, major PBMs have either affiliation or direct ownership over specialty pharmacies, mail order pharmacies, group purchasing organizations, data analytics companies and health insurers. These integrated structures allow enormous influence over how prescription drugs are priced, dispensed, reimbursed and managed.

Critics argue that this level of control creates incentives that may not align with the interests of patients, pharmacies, employers or health plans.

Independent pharmacies have voiced these concerns for years.

Many pharmacy owners have experienced reimbursement reductions, increasingly restrictive network participation requirements, specialty pharmacy limitations and aggressive audit activity. At the same time, PBMs have continued expanding their ownership of affiliated pharmacy operations. From the perspective of many independent pharmacies, the issue is straightforward. A PBM should not be permitted to act as both regulator and competitor.

When a PBM determines reimbursement rates while simultaneously owning pharmacies that compete for the same prescriptions, concerns regarding fairness and impartiality naturally arise. Likewise, when a PBM controls network design and specialty pharmacy requirements while maintaining ownership interests in affiliated pharmacies, questions arise regarding whether patients are being directed toward certain dispensing channels for legitimate clinical reasons or for financial reasons.

Self-Funded Employers Have the Same Concerns

Increasingly, employers and plan sponsors are asking similar questions.

For years, plan sponsors largely viewed PBMs as administrative service providers responsible for managing prescription drug benefits. However, that perception has begun to change as greater attention has been directed toward rebate arrangements, spread pricing, specialty pharmacy requirements, affiliated business relationships and overall prescription drug spending.

Many employers are now asking whether vertically integrated PBM structures create conflicts that impact the costs ultimately borne by health plans and beneficiaries.

Those concerns have been amplified by numerous governmental reports and investigations examining PBM business practices.
Federal and state policymakers have spent years reviewing issues involving reimbursement methodologies, spread pricing arrangements, rebate retention practices, patient steering concerns, and market concentration. Regardless of one’s position on the appropriate regulatory response, there is little debate that PBMs have become a focal point of healthcare policy discussions throughout the country.

Against that backdrop, Tennessee enacted the Fair Rx Act.

The law reflects a growing belief among some policymakers that transparency requirements alone may not be sufficient to address concerns regarding vertical integration. Instead of simply requiring additional disclosures, Tennessee chose to examine whether PBMs should be permitted to own pharmacies at all.

Many prior PBM reform efforts focused on reporting obligations and transparency measures. Tennessee took a different approach by addressing the ownership structure itself.

As a result, the lawsuit filed by Express Scripts could have implications extending far beyond Tennessee’s borders. States across the country have considered legislation to address PBM practices. Some have focused on reimbursement standards. Others have addressed audit procedures, network adequacy requirements, patient steering concerns, specialty pharmacy mandates or rebate transparency.

The Tennessee law stands apart because it challenges the underlying structure of the PBM business model.

If Tennessee successfully defends the law, other states may view the legislation as a roadmap for future reform efforts. Lawmakers who have become frustrated with incremental approaches may begin considering whether ownership restrictions offer a more effective solution. Conversely, if Express Scripts succeeds in blocking the law, states may be forced to pursue alternative strategies that stop short of structural reforms. Either way, the litigation is likely to influence future legislative activity across the country.

The lawsuit also arrives during a period when independent pharmacies continue to face significant economic pressures.

Community pharmacies remain critical healthcare access points, particularly in rural and underserved areas. Yet many pharmacy owners report ongoing challenges associated with reimbursement levels, direct and indirect remuneration fees, specialty pharmacy restrictions, inventory costs and administrative burdens.

For these pharmacies, the Tennessee litigation represents more than an abstract legal dispute.

Many view the case as a test of whether states can take meaningful action to address market conditions that have contributed to pharmacy closures and increased consolidation. The stakes are equally significant for plan sponsors.

Employers continue searching for ways to control prescription drug spending while ensuring that plan members maintain access to necessary medications. As part of that effort, many are demanding greater visibility into PBM compensation structures, rebate arrangements, affiliated entities and potential conflicts of interest.

The Tennessee litigation raises broader questions regarding whether ownership structures themselves should become part of that conversation. Even if the courts ultimately invalidate the law, the issues that prompted its enactment are unlikely to disappear.

Conclusion

Lawmakers are continuing to examine PBM practices. Attorneys general remain active. Employers are demanding more transparency.

Independent pharmacies continue advocating for reform. Federal agencies remain engaged in evaluating competition within the prescription drug marketplace.

In short, the pressure on the PBM industry is not decreasing. That reality helps explain why the Tennessee litigation matters. The lawsuit is not merely about one state statute. It concerns whether states have the authority to address perceived conflicts of interest arising from vertical integration in the prescription drug supply chain. It is about whether policymakers can move beyond transparency measures and directly challenge ownership structures that they believe contribute to market distortions. It is about the future direction of PBM reform nationwide.

The courts will determine whether Tennessee’s approach survives legal scrutiny. What is already clear, however, is that the debate surrounding PBM ownership and vertical integration is far from over. If anything, the challenge filed by Express Scripts ensures that these issues will remain at the center of healthcare policy discussions for years to come.

For pharmacies, plan sponsors and healthcare stakeholders across the country, this is a case worth watching closely. The outcome may ultimately shape not only the future of the Tennessee Fair Rx Act, but also the future of PBM reform itself.

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