Last month, the Federal Trade Commission released a scathing report alleging that pharmacy benefit managers – the middlemen in the drug supply chain known as PBMs – “make profits by driving up drug prices, squeezing high-street pharmacies.”

The FTC found that because of consolidation in the industry, the three largest PBMs now manage nearly 80% of all prescriptions filled in the U.S. The PBMs use this power, the agency concluded, to raise drug prices, control patient access to drugs and steer people away from independent pharmacies and toward pharmacies they own.

A week after the FTC released its report, Vermont filed suit against CVS, Evernorth Health Services (a subsidiary of insurance giant Cigna) and nearly two dozen affiliated companies, claiming they “distorted the market to their advantage at the expense of Vermont patients” and the state. The PBMs, the suit says, “drive up drug prices and deny patients access to life-sustaining treatments to increase their profits.”

Vermont was the first state to file a lawsuit specifically citing the FTC report, but it likely won’t be the last.

In their efforts to lower prescription drug prices, states have increasingly filed lawsuits against PBMs. This has happened in part because they have encountered obstacles in trying to address the problem through legislation, including fierce lobbying by the PBMs and a federal law that prevents them from helping the two-thirds of Americans who get their health insurance through their employers and so-called self-funded plans.

By taking their fight to court, the states are also turning the tables on the companies that have filed lawsuits to try to block legislative attempts at regulation.

“The pharmaceutical companies themselves are pursuing a scorched earth policy towards any changes in laws and regulations. In other words, the industry will use every possible demand against the states to prevent the law from being implemented,” says Robin Feldman, a professor at UC Law San Francisco and an expert in pharmaceutical law.

The state’s lawmakers and policymakers “have decided that if (their laws) end up in court, they may be able to make claims of their own,” Feldman told Stateline.

In recent years, Arizona, Hawaii, Indiana, Kentucky, Ohio and Utah have sued PBMs, and New Jersey has consolidated complaints from dozens of states and municipalities across the country into a class action lawsuit.

And in June, 32 state attorneys general and five professional pharmacist associations joined a lawsuit in support of an Oklahoma law that would impose tough new regulations on PBMs — but the companies have blocked the law in court.

Laura Fine, a Democratic state senator from Illinois and a member of the Health and Human Services Committee who is pushing for new regulations for health care companies, said she was frustrated by the restrictions in the legislation.

“I’m glad we have attorneys general who are taking on these issues and concerns on behalf of the people of our state,” Fine told Stateline. “I think it’s an important tool in the toolbox for everyone to know that if we don’t get what needs to be done, we have our attorneys general behind us to make sure they can be there to protect the consumer.”

Key players

As intermediaries in the drug supply chain, PBMs determine which drugs are available under a person’s insurance plan, set copayments, and decide how much pharmacies must pay to purchase drugs.

The PBMs argue that they use their bargaining power to negotiate lower drug prices for consumers and pharmacists. They blame drug manufacturers – often known as Big Pharma – for prices that are higher in the United States than elsewhere.

Greg Lopes, vice president of public affairs and communications for the Pharmaceutical Care Management Association, an industry group that represents PBMs, wrote in an email to Stateline that “any notion that PBMs increase prescription drug costs is patently false.”

“Employers choose to hire PBMs because they have been proven to reduce drug costs for health plan sponsors, which translates into lower premiums and lower out-of-pocket costs for patients,” Lopes wrote. “PBMs protect employers’ ability to provide high-quality health insurance by serving as the only check against the unlimited pricing power of drug companies.”

David Winthrop, vice president of external relations at CVS Health, which owns PBM CVS Caremark, said the company is “proud of the work we do to make medicines more affordable for American businesses, unions and patients.”

“Any measures that would limit the PBM’s negotiating tools would be a handout to the pharmaceutical industry and would subject those who pay for prescription drugs to the prices set by the pharmaceutical manufacturers,” Winthrop said.

The Federal Trade Commission sees the problem differently.

Its report notes that CVS Caremark is one of three major players that dominate the PBM landscape, along with Express Scripts and Optum Rx. Express Scripts is a subsidiary of Cigna and Optum Rx is owned by UnitedHealth. Together, the FTC alleges, the three companies use their dominance to “exercise enormous power and influence over patients’ access to medications and the prices they pay.”

“This can have devastating consequences for Americans, with nearly three in 10 Americans surveyed saying they ration or even skip their prescription medications because of the high costs,” the FTC report said.

The agency also notes that PBMs harm independent pharmacies, “who struggle to navigate contract terms imposed by PBMs that they find confusing, unfair, arbitrary and harmful to their business.” Between 2013 and 2022, the report found, about 10% of independent retail pharmacies in rural America closed.

“Health insurers and PBMs often just try to preserve the status quo as it exists today, for obvious reasons, because the environment has benefited them significantly,” says Antonio Ciaccia, CEO of 46brooklyn Research, a nonprofit that studies drug pricing data.

Daniel Aaron, an associate professor at the University of Utah’s SJ Quinney College of Law and a health policy specialist, noted that by pursuing legal action, states could circumvent the PBMs’ lobbying power in legislatures.

Aaron argued that legislation and litigation can go hand in hand.

“Lawsuits can actually help shape policy,” Aaron said in an interview. “And because these lawsuits attract a lot of attention, generate public interest and reveal a lot of documents, they can actually help shape policy and attract even more public attention.”

He also pointed out that state attorneys general could raise their political profiles by taking on unpopular defendants – and that many of them aspire to become governors.

Ben Widlanski, one of the lead attorneys in a legal battle over insulin pricing, agreed that lawsuits are valuable because they shed light on companies’ behavior in ways that state and federal regulators have failed to do.

“Because there is not much oversight and the government agencies responsible have not been doing their jobs properly for a very long time, the only immediate response that has a chance of making a difference is litigation,” says Widlanski, a partner at Kozyak Tropin & Throckmorton in Florida.

When suing large corporations, state attorneys general often hire outside law firms on a contingency basis.

The limits of litigation

Aaron said successful lawsuits “can, at least in theory, hold parties accountable for illegal conduct and harm caused. They can increase the costs of illegal conduct by making that conduct more expensive.”

But Ron Howrigon, a former Cigna executive, warned that using litigation to rein in deep-pocketed corporations is not as effective as passing tough laws — difficult as that may be. Howrigon said many large health care companies view expensive legal settlements as merely a cost of doing business.

“I don’t think they’re really worried that the individual lawsuit is going to kill the whole thing,” said Howrigon, who is now president and CEO of Fulcrum Strategies, a firm that specializes in insurance contracts. “As a friend of mine put it, it’s like ‘Band-Aids on gunshot wounds.'”

What healthcare companies are really afraid of is comprehensive political change, says Howrigon.

“If I were an insurance company, I would rather pay millions of dollars in fines than have a new law that I have to comply with going forward,” he said. “So I’m not going to say that lawsuits don’t have an impact. But they don’t have nearly the impact that a change in the law would have.”

This report was first published by Stateline, part of the nonprofit news network States Newsroom. It is supported by grants and a coalition of donors as a 501c(3) nonprofit organization. Stateline maintains its editorial independence. If you have questions, contact Editor Scott S. Greenberger: (email protected). Follow Stateline on Facebook and X.