In an effort to more closely regulate the pharmaceutical industry, Governor Matt Bevin signed Senate Bill 117 into law on April 9, 2016. With the passage of this law, Kentucky pharmacy benefit managers will now be required to get a license from the Kentucky Department of Insurance and post a $1,000,000 surety bond by January 1, 2017 in order to conduct business in the state.

What is a pharmacy benefit manager?

Pharmacy benefit managers are integral to the pharmaceutical industry in that they operate as a middleman for pharmacies, drug manufacturers and insurance companies in order to keep the cost of drugs reasonable for insurance companies. By negotiating with pharmacies and manufacturers and guaranteeing to the manufacturers that their products will be available to the public, pharmacy benefit managers are able to get the insurance companies a discount on drugs. They then profit from this by either charging the insurance company slightly more than the discounted amount and keeping the difference or just keeping a portion of the rebate offered by the manufacturer.

The new Kentucky law is very clear in that anyone who provides services under Kentucky Revised Statutes 205 on behalf of a health benefit plan, state agency, insurer or managed care organization is a pharmacy benefit manager. Kentucky pharmacy benefit managers are also considered as such if they provide the following services:

• contracts directly or indirectly with pharmacies to provide prescription drugs to individuals
• administers a prescription drug benefit
• processes or pays pharmacy claims
• creates or updates prescription drug formularies
• makes or assists in making prior authorization determinations on prescription drugs
• administers rebates on prescription drugs
• establishes a pharmacy network

Why is the license requirement for Kentucky pharmacy benefit managers important?

In 2013, Kentucky became the first state in the country to adopt new legislation requiring pharmacy benefit managers to make the process of calculating maximum allowable cost, or the maximum amount that a pharmacy benefit manager will reimburse a pharmacy, more transparent. This law was enacted to combat the rapidly escalating prices of generic drugs for pharmacies, because prior to the law, pharmacy benefit managers could essentially set prices for pharmacies, at which point they could either choose to pay or forgo rights to the drugs. By forcing pharmacy benefit managers to be more transparent when calculating the maximum allowable cost, smaller pharmacies are now able to negotiate pricing with pharmacy benefit managers.

The passage of Senate Bill 117 further regulates the practices of Kentucky pharmacy benefit managers by requiring them to become licensed with the Department of Insurance. Despite the 2013 transparency law, pharmacy benefit managers in Kentucky found ways around it, resulting in money lost by independent pharmacies. Now that the department requires them to be licensed, pharmacy benefit managers may now face punitive action if it is discovered that they have violated any provisions of SB 117.

Ultimately, the regulation of pharmacy benefit managers protects independently owned pharmacies by ensuring that they are given a fair opportunity to secure reasonable prices on manufactured drugs.

Why is a bond required for licensure?

As part of the licensing for Kentucky pharmacy benefit managers, the Department of Insurance requires the submission of a $1,000,000 surety bond.  By providing the department with a bond, the pharmacy benefit manager guarantees that if they violate any rules and regulations cited in the bond, then there is money available to cover loss or damages incurred by the state or any of its citizens. If a claim results from actions committed by a pharmacy benefit manager, then the surety company that issued the bond will pay up to the full amount of the bond in order to reach a settlement. However, if a surety does pay out, then the pharmacy benefit manager will be responsible for repaying the surety, as bonds are issued with the assumption that there is no risk of financial loss.

For more information on the application process for Kentucky pharmacy benefit managers, see Section 2 of SB 117.