Massachusetts Enacts Drug Pricing Legislation: Introducing PBM Licensure, Mandatory Cost Reporting, and Consumer Cost-Sharing Limits

Given the breadth of the Act and its aggressive implementation timetables, those in the pharmaceutical supply chain should take notice.

Market Context

The Act was signed in tandem with Massachusetts House Bill 4653 (Health Market Oversight Act), which increases regulatory hurdles for private equity (PE) investors and real estate investment trusts (REITs) engaging in the health care marketplace, as we previously wrote about in this post. The Massachusetts legislature, with support from other statewide elected officials such as the governor and attorney general, is sending a strong message that the Commonwealth of Massachusetts intends to protect consumers through vigorous oversight of the health care delivery system and drug pricing markets. This is partly a response to prominent national hospital system financial failures in 2024, which negatively impacted Massachusetts communities.

Taken together, the Act and the Health Market Oversight Act signal the intent by Massachusetts to use its health care agencies and government oversight boards to more closely scrutinize and regulate (for the benefit of consumers) certain large for-profit actors in the health care sector, including PBMs, pharmaceutical manufacturers, and health plans in the case of the Act, and PE investors and REITs in the case of the Health Market Oversight Act. While elements of these Massachusetts laws are similar to what some states have previously enacted, it is possible that they may serve as a template for additional states looking to shore up consumer protections in the health sector.

Overview of the Act

The key elements of the Act: (1) impose on certain health plans targeted consumer cost-sharing limitations for selected pharmaceuticals used to treat delineated chronic conditions; (2) impose mandatory licensing and regulation of PBMs, including constraints on to-be-defined PBM conflicts of interest; and (3) require PBMs and pharmaceutical manufacturers to comply with detailed cost and pricing data reporting requirements to two Massachusetts government bodies, coupled with the imposition of a financial assessment mandate that will require PBMs and pharmaceutical manufacturers to contribute funding to this expanded industry oversight.

Targeted Cost Sharing Limitations

The Act imposes targeted cost-sharing limits upon health insurance plans for drugs used to treat diabetes, asthma, and certain chronic heart conditions. The cost sharing limits apply to all applicable health plan contracts entered into, renewed, or amended effective on or after July 1, 2025.

Affected Health Plans

The cost sharing limits have been added to Massachusetts statutes governing the following:

• Public employee retirement coverage.
• Medicaid (MassHealth) (also applies to certain Medicaid-contracted health plans, managed care organizations, behavioral health management firms, and third-party administrators).
• Health insurers (applies to any policy, contract, agreement, plan, or certificate of insurance issued, delivered, or renewed within the Commonwealth and which is considered “creditable coverage”).
• Nonprofit hospital service plans.
• Medical services corporations.
• Health maintenance organizations (HMOs) (applies to an HMO contract issued or renewed “within or without” the Commonwealth).

The Act imposes the cost sharing limit on many commercial and publicly sponsored health plans, including MassHealth and its contractors. However, there are significant questions about how this mandate will be interpreted and applied to health plans doing business in Massachusetts. For example, it will be important to understand how “credible coverage” is interpreted, and how this cost sharing limit will apply to: (1) health insurers issuing coverage in Massachusetts that extends to individuals who work, reside, or receive health care outside of Massachusetts, and (2) health insurers issuing coverage outside of Massachusetts that extends to individuals who work, reside, or receive health care in Massachusetts.

Cost Limits

Each regulated health plan generally must: (1) fully cover, without cost sharing, one generic medication for diabetes (insulin), asthma, and the two most prevalent heart conditions among its enrollees; and (2) cover one brand-name medication for these conditions, capping cost-sharing at $25 for a 30-day supply. Each health plan must select these drugs based on statutory criteria, including clinical benefit, cost-effectiveness, widespread use, and low risk of abuse, addiction, or fraud. In addition, consumers are protected by provisions requiring retail pharmacies to charge individuals the lesser of the applicable cost-sharing amount or the retail price, and health plans are prohibited from requiring an insured consumer to make a cost sharing payment higher than what the retail pharmacy charges.

PBM Licensing Requirements

The Act creates a licensing process for PBMs that is to be developed and overseen by the Division of Insurance (DOI). PBMs must obtain a license to operate, which will be valid for three years and require a $25,000 application and renewal fee. The Act directs the DOI to grant a PBM a license when the DOI is satisfied that the PBM has the necessary organization, background expertise, and financial integrity to provide the services offered. The DOI may impose restrictions on a PBM license to protect consumer interests, such as limiting the types of services or activities in which a license holder may engage. Licensure applications to be developed by the DOI must, among other things, include the names and addresses of individuals with management or control over the PBM and any of the PBM’s audited financial statements.

To maintain their DOI-issued licenses, PBMs must disclose any activities or arrangements that present a conflict of interest to their health plan clients. The Act stipulates that a PBM cannot pay a consultant or broker hired by a health plan sponsor for bidding or contracting if the payment creates a conflict of interest, as decided by the DOI Commissioner. The Act directs the DOI to adopt written policies and procedures or promulgate regulations to delineate these conflicts of interest.

The DOI Commissioner is required to examine the affairs of a PBM at least every three years or as frequently as the Commissioner deems it prudent. The DOI may suspend, revoke, refuse to issue or renew, or place on probation a PBM license for various reasons, including engaging in fraudulent activity, failing to comply with the newly imposed reporting requirements to the Center for Health Information and Analysis (CHIA) described below, or failing to submit the license renewal fee. If a PBM violates the Act’s licensing provisions, the DOI can issue fines of either $5,000 per day when a violation goes uncorrected or $5,000 per violation, depending on the type of violation.

The DOI must promulgate regulations implementing PBM licensure requirements no later than October 1. Subsequently, PBMs must obtain a license before January 1, 2026. This will create a very tight window for PBMs to prepare for licensure, interpret the regulations, apply for licensure, and receive a license in advance of January 1, 2026.

PBM and Pharmaceutical Manufacturer Data Reporting Requirements, Cost Trend Hearings, and Financial Assessments

Data Submission to CHIA: CHIA Analysis and Reporting

PBMs and pharmaceutical manufacturers will be required to submit detailed cost and pricing data annually to CHIA. The Act directs CHIA to promulgate regulations needed to assure uniform reporting of information from PBMs to enable CHIA to analyze: (1) year-over-year changes in wholesale acquisition costs, formulary, maximum allowable cost lists, and cost-sharing design; (2) aggregate information regarding discounts, utilization limits, rebates, administrative fees charged to PBMs, and other financial incentives or concessions related to pharmaceuticals or formularies; and (3) trends in estimated aggregate drug rebates and other aggregate drug price reductions from PBMs to health plan sponsors and carriers. Moreover, the Act directs CHIA to require detailed information from PBMs about aggregate rebates and administrative fees received; the aggregate number of rebates the PBM retains, passes through to, and shares with each health plan sponsor or carrier; and information related to the PBM practices of spread pricing, administrative fees, claw backs and formulary placement. The Act indicates that much of the data will be exempt from Public Records Law disclosure and acknowledges that the data will not be disclosed in a manner likely to compromise the financial, competitive, or proprietary nature of the data or in a manner that would reveal specific pricing or rebate information. Utilizing the data, CHIA will produce an annual report that will include the analysis described above.

HPC Hearings, Creation of OPPA, and HPC Analysis and Reporting

The Act requires PBMs and pharmaceutical manufacturers to participate in Cost Trend Hearings at the Health Policy Commission (HPC). These annual hearings typically have taken place in November. HPC uses the hearing to examine the costs, prices, and cost trends of health care providers, payers, and now, pharmaceutical manufacturers and PBMs, with a focus on factors contributing to cost growth within the health care system. Ultimately, HPC uses findings from the hearings, CHIA, and other sources to draft reports which it submits to the Massachusetts legislature’s Joint Committee on Health Care Financing and makes available to the public annually. The Act now also requires the HPC to produce a report to the legislature every two years analyzing the efficacy of the newly implemented pharmaceutical cost-sharing provisions described above.

The Act also creates the HPC’s Office of Pharmaceutical Policy and Analysis (OPPA), which will have an active role in analyzing pharmaceutical spending data from the HPC hearings, CHIA, other agencies, and other sources. OPPA will produce annual reports on trends related to access to, affordability of, and spending on pharmaceuticals. The Act provides detailed direction to OPPA on the trends to be addressed in the annual report, and OPPA must make recommendations regarding strategies for mitigating pharmaceutical spending growth, promoting affordability of, and enhancing access to prescription drugs. Additionally, OPPA will advise the HPC and the state legislature on pharmaceutical drug policy and assist in identifying proposed supplemental rebates for eligible drugs.

Financial Assessments on PBMs and Pharmaceutical Manufacturers

Beginning in fiscal year 2026 (which commences July 1), CHIA and HPC each will impose annual financial assessments on pharmaceutical companies and PBMs to fund their respective oversight activities. These assessments will be calculated based on the entities’ market share within Massachusetts and will amount to between 5% and 10% of HPC and CHIA’s operating budgets. Initial payments will be due by October 1; the first payment will be equal to half of the initial year’s total assessment.

Next Steps and Practical Considerations

There are still many unknowns about the implementation of the Act, as regulations have yet to be promulgated. Accordingly, PBMs, pharmaceutical manufacturers, and health plans will want to monitor regulating entities for further guidance on how to comply with the Act. Additionally, in the coming months these impacted parties should consider the following timeline and be prepared to comply accordingly:

• July 1, 2025. Regulated health plans (along with certain parties contracting with MassHealth) must be prepared to adjust to the new cost-sharing limitations, ensuring coverage for specific medications without consumer cost-sharing or with capped costs. Before then, health plans should: (1) confirm whether they are regulated by the cost sharing limits, and, if yes, (2) categorize drugs based on statutory criteria, considering clinical benefit and cost-effectiveness, and procedures for maintaining coverage for existing prescriptions when the Act requires it. The DOI is charged with assuring compliance.
• September 2025. PBMs and pharmaceutical manufacturers may be required to report necessary data, as determined by CHIA. In the meantime, PBMs and pharmaceutical manufacturers should monitor for CHIA guidance to determine the exact data reporting requirements for 2025. Affected parties should review their data management systems to ensure they are able to report the mandatory data to CHIA in a timely manner.
• October 1, 2025. CHIA and HPC will charge PBMs and pharmaceutical manufacturers financial assessment fees, with the first installment for the fiscal year 2026 assessment amounting to 50% of the annual total. Additionally, the DOI will issue PBM licensure regulations no later than October 1, with which PBMs must comply by the licensure compliance deadline of January 1. In the meantime, PBMs can monitor for DOI updates on the licensure regulations and application process.
• November 2025. PBMs, pharmaceutical manufacturers, and health plans must be prepared to participate in HPC’s cost trend hearings if HPC requests their testimony.
• January 1, 2026. All PBMs must be licensed according to the forthcoming DOI licensure requirements.

At ArentFox Schiff, our attorneys have experience guiding pharmaceutical and health sector clients through regulatory compliance matters in Massachusetts and throughout the country. For further clarification about the applicability of the Act to your organization, or strategies to prepare for complying with the Act, please contact one of our attorneys for further information.