Legislative Avalanche: How States Are Challenging Vertical Integration of PBMs

By: Kendall Jackson, Esq.

It’s no secret that PBM reform has been a priority in the self-funded industry for many years now. Countless bills, both on the state and federal level, have been introduced to rein in the broad expanse of power held by only a few large entities. While we’ve recently seen a significant federal development with the passage of the Consolidated Appropriations Act, 2026 in February of this year, states have typically had more success with gaining traction for PBM reform legislation over the past few years.

Perhaps one of the most notable developments on the state level was a law passed last year in Arkansas. This law, Act 624 titled “An Act to Prohibit a Pharmacy Benefits Manager from Obtaining Certain Pharmacy Permits; and for Other Purposes,” was the first of its kind in the United States and shook up the state’s PBM pharmacy ownership landscape.

When thinking about pharmacy ownership and the ramifications of this Act, both horizontal consolidation and vertical integration are relevant concepts.  Horizontal consolidation refers to the merger and acquisition of smaller PBMs by large companies that control a significant portion of the market. This was evidenced through a report issued by the Federal Trade Commission (FTC) in 2024, which found that six PBMs processed more than 90% of the prescriptions in the United States, with the top three PBMs accounting for 80% of that total. These numbers exemplify that PBM consolidation stifles the marketplace with the top PBMs having disproportionate power in comparison to smaller PBMs.

Vertical integration is a model in which a single corporation owns and operates entities in each level of the supply chain, including the PBM, retail and mail order pharmacies, drug private labelers, healthcare provider groups, health insurers, and specialty pharmacies. This vertical integration incentivizes PBMs to utilize affiliated pharmacies and networks to generate larger profits and further contributes to the disproportionate market share held by a few large players in the space. The FTC’s report found that due to the control the large PBMs have over the supply chain, they can dictate which drugs are available, the price of such drugs, and which pharmacies patients can use to access the drugs. Not only does this impact patients in terms of access and affordability, but the steerage to their own affiliated pharmacies puts the future of independent pharmacies in jeopardy. Another report issued by the FTC indicated that from 2013 to 2022, around 10% of rural independent pharmacies closed, which demonstrates how smaller pharmacies struggle to compete in the market when PBMs are incentivized to use their affiliated pharmacies rather than independent pharmacies. Furthermore, information from the FTC suggests that exclusionary contracting practices coupled with steerage to affiliate pharmacies create conflicts of interest and are evidence of anticompetitive business practices.

With the FTC reports as evidence of the persistent issue of disproportionate power held by the top PBMs, states have recognized that legislation is necessary to limit this power. The first state to make waves was Arkansas with Act 624. With very limited exceptions, the Act prohibits PBMs from holding a permit for the retail sale of drugs in the state. In other words, PBMs are prohibited from owning retail or mail-order pharmacies in Arkansas. Considering the integrated nature of the major PBMs and their affiliated pharmacies, this law has massive implications for their operation in the state. The law will impact dispensing channels, operational structures and efficiencies, and overall access. While it will cause major disruptions for how the large PBMs function in the state, the legislation’s intention is to return business to locally owned pharmacies, remove limitations on patient access, and broadly improve affordability for patients.

Consistent with trends in state legislation, typically when a law is successfully passed in one state, similar bills will be drafted and introduced in other states that share the same goals. The passing of Act 624 was no exception. Arizona, Tennessee, New York, Vermont, Texas, and Oklahoma are among a number of states that have introduced legislation largely aligning with Arkansas Act 624. Should these bills pass as well, it will lead to severe disruption for the PBMs vertically integrated in those states.

What does this mean for self-funded health plans? If more states follow suit and pass legislation to prohibit PBM ownership of retail and mail-order pharmacies, self-funded health plans can expect, in the short term, the destabilization of pharmacy networks, modifications to dispensing channels, and shifts in contractual language. While it is uncertain if these laws will pass, third-party administrators and self-funded health plans should monitor state law developments to prepare for changes to the pharmacy landscape. Staying informed of new legislation and preparing for the implications of those laws will alleviate the downstream impact when PBMs are forced to modify their operational structures and mitigate risks associated with plan participants’ access to necessary medications.