The Source Blog

Across the healthcare system, companies that once occupied a single layer of the supply chain increasingly own the layers above and below them, and that vertical consolidation can raise costs, narrow patient choice, and create conflicts of interest when one firm both sets prices and competes in the market it is pricing.  Pharmacy benefit managers (PBMs) are a prime example of the potential for harms created by vertical consolidation.  A PBM sits between health plans and pharmacies and determines how much the pharmacy is reimbursed when it dispenses a drug, so when a PBM also owns pharmacies, it creates a strong incentive for self-dealing.  A 2024 Federal Trade Commission report highlighted the significant harm to patients and independent pharmacists resulting from PBMs’ vertically integrated and concentrated market structure, and audits by the state of Tennessee show the scale of the problem. An audit by the Tennessee Department of Commerce and Insurance found that Express Scripts reimbursed affiliated pharmacies at higher rates than non-affiliated pharmacies for 568 of the 2,318 medications sampled, by as much as 3,082 percent, and another audit found the same pattern at CVS Caremark across 661 of 3,646 medications sampled, including one drug reimbursed at a rate roughly 16,000 percent higher.  At a recent U.S. Senate hearing, Senator Booker referred to PBM practices as “corporate violence” and “a moral obscenity.”  Findings like these have prompted policymakers at both the state and federal levels to consider options to address harms from vertical integration in healthcare, and from PBMs in particular.

Some states, including Tennessee and Arkansas, have gone beyond regulating how PBMs operate and have moved to prohibit the ownership arrangement itself. On May 22, 2026, CVS Health sued the Tennessee Board of Pharmacy over a new state law that prohibits anyone from simultaneously owning pharmacies and PBMs in the state.  The case has parallels with a 2025 suit filed against a similar law in Arkansas (which The Source wrote about at the time).  If Arkansas and Tennessee can successfully protect these laws addressing vertical integration in the pharmaceutical supply chain, it would be a positive sign for states considering other ways to limit vertical integration, such as limiting insurer- or hospital-owned medical practices.  If the new laws are overturned, the prospects for analogous legislation may depend on the legal grounds on which they are struck down.

Facts of the case

On May 22, 2026, Tennessee Governor Bill Lee signed the FAIR Rx Act (SB 2040) into law.  The bill prevents PBMs or health insurance issuers from owning or controlling any pharmacy in the state.  The bill has exceptions, including for hospital or health system pharmacies, and for employers that own pharmacies for their own employees.  The bill takes effect in 2027, and PBMs and insurance companies would have until July 1, 2028, to divest any pharmacy holdings.

Supporters of the bill included the Tennessee Pharmacists Association, which stated the new law was necessary to “restore fairness and transparency to the pharmacy marketplace while promoting quality patient care and choice and protecting community pharmacies.”  Other supporters noted the inherent conflict of interest when corporations own insurance, pharmacy, and PBM services.

CVS Health, which operates 134 retail pharmacy stores and 25 MinuteClinic locations in the state, as well as its own PBM (CVS Caremark), had stated that the law would lead to pharmacy closures, job losses, and reduced healthcare access across the state.  Almost immediately after the law was enacted, CVS filed suit against the Tennessee Board of Pharmacy to block it, arguing that it unfairly favors independent local pharmacies and is unconstitutional under the Dormant Commerce Clause, the Supremacy Clause, and the Takings Clause.

Specific arguments in the case focus on:

Dormant Commerce Clause – The Dormant Commerce Clause is inferred from the U.S. Constitution's Commerce Clause, which grants Congress exclusive power to regulate interstate commerce, thereby indirectly prohibiting states from passing laws that discriminate against or unduly burden out-of-state economic activity.  CVS's filing states that the law "discriminates purposefully and in practical effect" in that the state was motivated by "the unlawfully protectionist purpose of shoring up Tennessee's independent pharmacies".  CVS goes on to add that "[t]he law's practical effects blatantly favor in-state interests" and that "the burdens that it imposes on interstate commerce are clearly excessive in relation to the putative local benefits."

Supremacy Clause – The Supremacy Clause in the U.S. Constitution establishes that federal laws are the supreme Law of the Land, meaning that whenever there is a conflict between federal and state law, federal law takes precedence.  Plaintiffs allege the new Tennessee law is unconstitutional as it is “preempted by multiple federal statutes” including ERISA (the federal Employee Retirement Income Security Act of 1974), by preventing ERISA plans from relying on PBM-affiliated pharmacies.

Takings Clause – The Takings Clause of the Fifth Amendment states that the government cannot take private property without paying just compensation.  The suit claims that the law “would effect a taking of CVS’s private property … without just compensation” by forcing CVS to sell its Tennessee pharmacies when “[d]epressed sale prices are practically guaranteed”.

Similarity to the Arkansas case

In April 2025, Arkansas passed similar legislation prohibiting PBMs from acquiring or holding a direct or indirect interest in pharmacies.  Almost immediately, three different suits were filed, one by CVS Caremark, one by Express Scripts, and one by the Pharmaceutical Care Management Association. The suits were consolidated and relied heavily on the Dormant Commerce Clause and the Supremacy Clause, the same theories now at issue in the Tennessee case, to argue that the Arkansas law was unconstitutional.

The Arkansas law differs from the Tennessee law in one significant way: the Arkansas law allows PBM-affiliated pharmacies if the PBM serves only the pharmacy's own employee benefit plan.  This language was added to the bill after Arkansas lawmakers stated they could not support legislation that would prevent Wal-Mart from operating pharmacies.

In July 2025, the U.S. District Court for the Eastern District of Arkansas issued a preliminary injunction blocking the Arkansas law from taking effect until the federal court issues a final judgment. The court found it likely to violate the Dormant Commerce Clause, in part because the Wal-Mart exception, together with the statute's openly protectionist purpose, discriminated against out-of-state companies in order to protect an in-state one.

The court found the plaintiffs likely to succeed on two grounds. First, it concluded that the law's openly protectionist purpose, together with the Wal-Mart exception's apparent shielding of an in-state business, discriminated against out-of-state companies in violation of the Dormant Commerce Clause. Second, it found the law likely preempted by the federal law governing TRICARE, the health program for military service members and their families, because barring PBM-affiliated pharmacies from the state would disrupt that program's pharmacy network.

The Tennessee law contains a comparable exception for employers that own pharmacies for their own employees, but it was not written to protect a specific in-state company, which may leave it less exposed to a Dormant Commerce Clause challenge than the Arkansas law.

Effects on Other States Considering Similar Legislation

Other states have considered legislation to break the connection between PBMs and pharmacies.  For example, the introduced version of Oklahoma HB 4457 would have prevented pharmacy benefits managers from holding a license for retail sale of drugs or medicines; the bill was amended and eventually died.  In New York, SB 9222/AB 6546 would prevent anyone from simultaneously owning or controlling both a PBM and a pharmacy, and SB 9191/AB 9184 would prohibit overlapping ownership of pharmacies, PBMs, and insurance companies.  The New York bills are still listed as pending (as of June 12), but seem unlikely to pass this year.  New York legislation does not carry over from even- to odd-numbered years, so would have to be reintroduced for 2027.

The fate of the Arkansas and Tennessee laws may affect what other states consider.  If these laws survive, other states gain an encouraging example; if they are struck down, the defeat will not bar other states from trying, though it might discourage them.  Because both challenges sit in federal district courts – the Middle District of Tennessee and the Eastern District of Arkansas – a ruling in either case would not bind courts elsewhere. A decision striking down either law would give opponents persuasive authority in other states to disallow similar laws, but those rulings would not be controlling precedent.

Should the laws be overturned on constitutional grounds, other states would have to consider if they could draft PBM-insurance company breakup laws that are more narrowly tailored.  Regardless of the fate of structural approaches to PBM/pharmacy behavior, states can always consider entirely different ways to limit harmful PBM behavior, such as anti-steering laws, banning spread pricing, requiring rebate pass-throughs, delinking compensation from drug prices by requiring flat fees, etc.

There are pros and cons to addressing PBM/pharmacy practices through either structural solutions or through conduct restrictions.  The structural approach denies the PBM the incentive to steer patients away from independent pharmacies, restores natural market forces to address prices, and has a low enforcement burden (i.e., doesn’t require the state to monitor the PBM’s ongoing operations).  But if the PBMs end up closing their pharmacies, it could result in pharmacy deserts.  A conduct-oriented approach, like a law prohibiting spread pricing or requiring greater transparency in PBM operations, could preserve the potential cost efficiencies that proponents argue come from vertically integrated PBMs, and can target specific problematic conduct without dismantling the entire business model.  Where structural breakup may be unfeasible (for example, when buyers for a forced divestiture are difficult to find), focusing on conduct may be a more appealing option.  However, the contractual opacity of PBM deals can make enforcement of these laws challenging, and they often leave room for loopholes (such as the use of new fees to replace rebates).

Federal Efforts

In addition to state efforts, the federal government has seen a push to disconnect health insurers from PBM ownership.  The recent “Patients Before Monopolies Act” (H.R. 8779), reintroduced in May of 2026, would prohibit a PBM, a health insurer, or a parent company of these entities, from owning a pharmacy business, with a 3-year divestiture period, similar to the state laws.  Since this would be a federal law, the Dormant Commerce Clause and Supremacy Clause claims made against state laws would not apply.  The Dormant Commerce Clause restricts only state laws that discriminate against or unduly burden interstate commerce, and the Supremacy Clause provides that federal law supersedes state law, so neither would be relevant to a federal PBM law.  The claim that these laws violate the Takings Clause could still potentially be relevant.  Additionally, opponents might claim that a federal bill of this nature could be a violation of the Due Process Clause (forcing businesses to sell assets could be challenged as an arbitrary and unconstitutional retroactive penalty), and a Commerce Clause violation (under the idea that this would be a federal overreach exceeding Congress’s authority to regulate interstate commerce).

Conclusion

The Tennessee and Arkansas cases will help answer a question that reaches well beyond pharmacy benefit managers: whether states can use structural remedies, rather than ongoing regulation of conduct, to address vertical integration in health care. The answer is not yet clear, and it will shape far more than the pharmacy counter. If states can compel divestiture, they hold a structural check on consolidation that does not depend on constant oversight; if they cannot, they are left regulating conduct at the margins while the underlying market structure stays intact. What these cases are really testing is the reach of state power against the most consolidated players in health care.

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