In 2024, Kentucky took a decisive step to confront controversial practices by Pharmacy Benefit Manages (PBMs) through the enactment of Senate Bill 188 (SB 188). Effective for PBM contracts issued, renewed, extended, or amended on or after January 1, 2025, the law aims to strike an appropriate balance between PBMs and community pharmacies while also seeking to protect patient choice.
This article discusses the substantive reforms in SB 188, the challenges with its implementation, and how recent clarification from the Kentucky Attorney General (AG) clarifies significant points of contention in the legislation and provides a framework for moving forward.
Key Reforms Under SB 188
SB 188 advances a suite of reforms designed to rein in PBM practices that regulators and stakeholders have criticized as opaque or unfair, with a particular focus on the commercial insurance market.
- Reimbursement Floor / Cost-based Benchmarking
A central reform requires PBMs to reimburse pharmacies at least the NADAC (National Average Drug Acquisition Cost) plus a professional dispensing fee. This provision is designed to prevent the widespread practice of paying pharmacies less than their acquisition cost, which has been a major source of financial stress for independent pharmacies. SB 188 sets the dispensing fee at $10.64 until January 1, 2027, pending a biannual cost-of-dispensing survey done by the Kentucky Department of Insurance (DOI) and the Kentucky Board of Pharmacy.
The law also prohibits retroactive claim reductions and forbids PBMs from imposing hidden fees or adjusting reimbursements unless explicitly allowed.
- Network Adequacy and Access Guarantees
SB 188 establishes stringent geographic access standards for PBMs by requiring them to maintain a network of non–mail-order pharmacies accessible to insured individuals within 30 miles or a 30‑minute drive from their residence, provided there is at least one community pharmacy capable of furnishing services in that area. The bill further prohibits PBMs from mandating or steering patients to use mail‑order dispensing. PBMs may, however, offer mail‑order fulfillment as an optional service, so long as the mail‑order option is offered at price parity with in‑person pharmacy services and does not function as a de facto requirement.
Further, PBMs must offer any willing pharmacy or pharmacist access such that a PBM is not permitted to exclude a willing, qualified pharmacy from the PBMs network so long as the pharmacy accepts the reasonable contract terms and conditions extended to the PBM’s affiliated pharmacies.
- Anti-Steering and Anti-Discrimination Provisions
A critical reform in SB 188 seeks to prohibit PBMs from steering or incentivizing patients to use pharmacies owned by the PBM or those that are affiliated with the PBM. The statute bars differential benefit designs, lower co-pays, or other rewards that favor the PBM’s own vertically integrated pharmacy network over independent ones. SB 188 also prevents PBMs from discriminating against non-PBM-owned pharmacies as related to reimbursement, network placement, or contract terms.
- Regulatory Oversight, Reporting, Enforcement, and Complaints
SB 188 explicitly grants the Kentucky DOI authority to promulgate regulations, audit PBMs, revoke PBM licenses, and order reimbursement for monetary losses sustained by pharmacies or insureds for violations. The law also mandates annual reporting by PBMs and insurers as it relates to the PBM’s methodology, contract terms, and financial data. SB 188 also establishes a complaint process for insureds, pharmacies, and pharmacists to petition the DOI to initiate enforcement action against PBMs.
Additionally, the statute requires adherence to the same pharmacy-benefit reforms for Kentucky’s in state employee health plans and other state agency benefit programs.
- Limits and Exceptions, and Federal Preemption Caveats
In an effort to avoid any potential conflicts with existing federal statutes, SB 188 provides in several places that the statute only extends its protections “to the extent permitted under federal law.” This recognition of potential pre-emption is designed to avoid any conflicts with statutes, such as ERISA, which PBMs consistently use to prevent enforcement of PBM regulations in other states. Further still, SB 188 also carves out certain types of plans from coverage such as Medicare Part D and certain state self-insured plans.
It is these qualifying statements in SB 188 that have become a focal point of contention since the law’s enactment which prompted the Kentucky AGto provide clarifying guidance on SB 188’s implementation.
Implementation Tensions and Legal Challenges
Though SB 188 enjoys broad legislative and stakeholder support, its enforcement has not proceeded smoothly. Some independent pharmacies report delays or reluctance on the part of the DOI to fully apply the anti-steering and out-of-state PBM provisions. For example, DOI Commissioner Sharon Clark has issued bulletins suggesting certain portions of SB 188 may be preempted by federal law, particularly ERISA, when applied to employer-sponsored self-insured plans.
In response to the DOI Commissioner’s comments, Kentucky Senator Wise formally petitioned the AG for an advisory opinion to clarify two questions: (1) whether the anti-steering provisions in Section 4 of SB 188 are enforceable or subject to ERISA preemption, and (2) whether out-of-state PBMs performing business in Kentucky may be regulated under SB 188.
In response, the Kentucky AG issued OAG 25-11 on September 25, 2025 which provides binding legal guidance to the executive branch of Kentucky and provides stakeholders with necessary clarity concerning the statute’s enforceability.
Attorney General Coleman Issues OAG 25-11 Affirming Key Provisions in SB 188
In OAG 25-11, AG Russell Coleman largely rejected the narrow interpretation advanced by DOI and the current gubernatorial administration in Kentucky. OAG 25-11 also affirms that key provisions of SB 188—including the anti-steering rules allegedly subject to ERISA pre-emption—are enforceable.
- Enforceability of Anti-Steering Provisions
The central question posed to AG Coleman by Senator Wise concerned whether the anti-steering provisions in SB 188 were enforceable against PBMs despite the alleged pre-emption by ERISA. OAG 25-11 concluded that the anti-steering rules in Section 4 are not preempted by ERISA and are enforceable under the U.S. Supreme Court’s Rutledge precedent which addressed the proper way to assess the enforceability of state regulation of PBM conduct that otherwise impacted in-state health plans.
The opinion emphasizes that Kentucky’s statute regulates PBM conduct, not the design of benefit plans per se, thereby falling within the State of Kentucky’s authority to regulate health-insurance providers when acting as PBMs.
- Jurisdiction Over Out-of-State PBMs Doing Business in Kentucky
As to the issue of whether SB 188 is applicable against out-of-state PBMs, OAG 25-11 further holds that PBMs located outside Kentucky, but doing business in the Commonwealth, are within the reach of SB 188’s regulatory framework when their activities impact the prescription coverage of Kentuckians. AG Coleman’s understanding of SB 188 is in direct contrast to prior interpretations proffered by Kentucky’s executive branch that would otherwise have determined that Kentucky lacked the authority to regulate non-resident PBMs.
- Legislative Intent and Enforcement Obligation
Lastly, OAG 25-11 underscores that the legislature clearly intended broad application of the law and that selective enforcement undermines statutory purpose and specifically instructs that the executive agencies must proceed to implement SB 188 in full, consistent with statutory language. Notably, while OAG 25-11 does not provide absolute immunity from legal challenge (especially in relation to federal preemption litigation), it carries substantial weight as binding guidance for enforcement decisions and interbranch disputes, a significant win for citizens of Kentucky and independent retail pharmacies.
Assessment, Remaining Risks, and Outlook
SB 188 represents one of the more ambitious state PBM reform efforts in the United States through its incorporation of structural restrictions, transparency mandates, and anti-steering controls in the commercial market. AG Coleman’s opinion only further strengthens this effort to curb the predatory practices of PBMs.
Nevertheless, significant implementation and legal risks remain:
- ERISA preemption litigation: Even with OAG 25-11 defending SB 188’s enforceability, federal courts may reach different conclusions in individual ERISA suits. However, as noted by AG Coleman, this law is similar to the Arkansas law upheld by the Supreme Court in Rutledge v. Pharmaceutical Care Management Association. The Rutledge court noted that ERISA does not pre-empt state laws that merely affect plan costs or incentives without mandating specific coverage schemes.
- Effective enforcement will require vigorous oversight, regulatory rulemaking, audits, complaints investigation, and timely action by DOI. As previously stated, some pharmacists report resistance from the executive branch in applying the law, although stakeholders are hopeful that AG Coleman’s opinion may reduce some of the friction in SB 188’s application.
- Critics of SB 188 (including ERISA-industry groups) warn that mandating minimum reimbursements and restricting PBM cost-management tools could raise insurance costs for employers and insurers.
- The robustness of the law will depend heavily on the quality and scope of PBM reporting and oversight mechanisms, which remain to be fully fleshed out by regulation.
- Ongoing assertion of federal preemption by insurers and PBMs may slow or narrow enforcement in practice, especially in self-insured plan contexts.
Conclusion
The combination of statutory reform and the AG’s opinion positions Kentucky as a potentially significant test case for PBM regulation in commercial insurance. Observers in other states are likely watching closely, and retail pharmacies across the country should remain optimistic that the legislative process will further improve the quality of care patients receive and further diminish the monopolistic influence over the pharmacy services market presently enjoyed by PBMs and their vertically integrated pharmacies.
How Frier Levitt Can Help Pharmacies with Board of Pharmacy Issues
Frier Levitt provides comprehensive legal representation to pharmacies across the country in matters involving PBM relationships. We are dedicated to protecting the rights of pharmacies and guiding them through regulatory challenges and audit responses. If your pharmacy has been under reimbursed by a PBM or is having PBM network issues, Frier Levitt’s experienced attorneys are available to provide informed guidance and effective advocacy. Contact us today.
