South Dakota Enacts Law Providing Transparency in Prescription Drug Pricing

On March 27, 2023, South Dakota Governor Kristi Noem signed into law HB 1135, providing South Dakota consumers and providers with a much-needed dose of transparency in prescription drug pricing. HB 1135 amends existing legislation and introduces new provisions removing barriers between pharmacies and patients and, among other things, prohibiting Pharmacy Benefit Managers (“PBMs”) from assessing performance-based fees against pharmacies licensed in South Dakota. Some of the more significant achievements of HB 1135 include:

1. Increased Payor Oversight and Civil Remedies

Payors licensed in South Dakota now have the statutory authority to audit their PBMs’ agents. In connection with those audits, payors are entitled to claim-level reimbursement data paid to participating pharmacies, including any clawbacks or other fees, rebates or adjustments. In addition, payors are entitled to review the difference between the reimbursement amounts paid to affiliated pharmacies versus non-affiliated pharmacies and any manufacturer rebates received directly or indirectly by the PBM. This new legislation allows payors to shine a light on abusive PBM practices and even initiate civil proceedings to enforce these new requirements or seek civil damages for violations thereof.

2. Elimination of Gag Clauses

With ever-increasing deductibles and coinsurance obligations, paying cash at the counter for your prescription drugs may actually be the more affordable alternative. PBMs know this and have drafted “gag clauses” in their contracts with pharmacies prohibiting them from disclosing to patients that paying cash at the counter may save them money. HB 1135 prohibits such clauses. Now, PBMs licensed in South Dakota cannot penalize pharmacies or pharmacists who educate patients on the cost and efficacy of a more affordable alternative prescription drug or the difference between the amount an individual would pay if they submitted a claim through their insurance carrier versus the amount they could pay without submitting a claim.

3. Elimination of Performance-Based Fees

Many PBMs require network pharmacies to pay fees based on “performance” in various categories such as medication adherence. PBMs use these performance-based fees to maximize profits. These fees are often referred to as Direct and Indirect Remuneration Fees (“DIR Fees”). In recent years, there has been a wave of state-based legislation attempting to regulate or prohibit PBMs from assessing them altogether. One of the major issues with “performance-based” fees is that PBMs often collect them many months after the point-of-sale, thereby leaving pharmacies unable to clearly understand their net reimbursements on a prescription drug claim. Furthermore, the assessment of DIR Fees has the potential to reduce a pharmacy’s net reimbursement to below acquisition costs. HB 1135 states that “[a] pharmacy benefit manager may not assess, charge or collect, from a pharmacy any remuneration fee, including … performance-based fee[s],” indicating a significant win for South Dakota pharmacies.

4. MAC Lists

HB 1135 introduces certain Maximum Allowable Costs (“MAC”) protections. For example, HB 1135 requires PBMs to ensure that the drugs appearing on MAC lists are available to all pharmacies. This is important because it eliminates a common PBM tactic in which the PBM lists a drug that is “available”, but only to one pharmacy (or a small group of pharmacies) that obtained an extremely favorable rate. PBMs engage in this tactic to exploit loopholes in state laws requiring that PBMs provide pharmacies with access to their MAC lists, but not explicitly requiring that all pharmacies have access. HB 1135 protects South Dakota pharmacies from this type of PBM gamesmanship.

Areas of Improvement

While HB 1135 certainly promotes transparency and fairness in prescription drug pricing, it does not provide pharmacies with the same private right of action provided to payors. Given that pharmacies are often the most impacted by abusive PBM practices, HB 1135 could do more to provide South Dakota pharmacies with legal recourse to recover monetary damages and injunctive relief against PBMs for damages caused by the PBMs’ failure to comply with law.

In addition, while HB 1135 defines “spread pricing” and requires PBMs to provide enough information to the Director of Insurance to help identify instances of “spread pricing”, the law does not explicitly prohibit spread pricing. The law also fails to address what remedies, if any, are available to the Director or other affected parties if a PBM is found to have engaged in spread pricing.

Finally, while HB 1135 takes meaningful steps towards regulating MAC lists, PBMs still enjoy too much leeway in creating MAC lists. The concern is that, under the current framework, PBMs are not required to ensure that drugs appearing on their MAC lists are multisource generics rather than brand name or single-source generics. Because multisource generics are often more susceptible to the competitive free market forces that keep costs down, PBMs should be required to include them on their MAC lists.

How Frier Levitt Can Help

Frier Levitt is a premier healthcare boutique law firm with offices in New York and New Jersey. Our attorneys are leading practitioners providing an array of services to healthcare and life sciences clients nationally. For more than 20 years, the Firm has been and continues to be the nation’s leading law firm in combatting abusive PBM practices. Frier Levitt attorneys are at the forefront of disputing PBM-imposed DIR fees and have successfully challenged DIR fees against major PBMs, obtaining more than $40M in damages on behalf of our pharmacy clients. For more information, contact us to speak with an attorney.