Do pharmacy benefit managers have to give Texas pharmacies notice before dropping them from a health plan network?

Plain-English summary

State Senator Charles Schwertner asked the AG whether two Insurance Code provisions protecting providers from sudden contract terminations apply to a pharmacy benefit manager (a "PBM"), the company that builds and runs pharmacy networks, when the PBM is acting on behalf of a health maintenance organization (HMO) or a preferred provider organization (PPO). The concern was practical: the statutes name HMOs and insurers, not PBMs, so a PBM could argue it can drop a pharmacy from a network without the notice and review the statutes require.

On the first question, about HMOs, the AG started with section 843.306, which requires an HMO to give a physician or provider a written explanation before terminating a contract and, on request, an advisory review panel within 60 days. A "pharmacy" counts as a provider under chapter 843, so an HMO owes that notice to a pharmacy it contracts with. The statute names only HMOs, but an HMO is allowed to contract with others to perform its functions, and when it delegates a function required by chapter 843 it must sign a written delegation agreement requiring the delegated entity to comply with every statutory and regulatory requirement tied to that function. The AG concluded that when a PBM serves as a delegated entity of an HMO and administers the pharmacy contracts, the PBM must comply with section 843.306's notice and review requirements.

On the second question, about PPOs, the AG looked at section 1301.057, which requires an insurer to give written reasons before terminating a contract with a preferred provider and, for practitioners, a review mechanism within 60 days. A pharmacy is a "health care provider" and can be a "preferred provider," so the protection extends to pharmacies. Section 1301.057 names only insurers, but section 1301.061 says every preferred provider benefit plan must comply with the chapter, and allows an insurer to agree with a PPO that either the insurer or the PPO will meet the notice requirements, while still requiring the insurer to ensure the requirements are met. The AG concluded that before a preferred provider's contract is terminated, the insurer must ensure that either it or the entities it contracts with, which could include PBMs, follow the notice and review process in section 1301.057. The AG noted it was not deciding whether any particular delegation or contract between an HMO and a PBM is authorized.

Currency note

This opinion was issued in 2015. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. Texas has enacted significant pharmacy benefit manager and insurance legislation since 2015, and the Insurance Code provisions cited here (chapters 843, 1272, and 1301) may have been amended, so confirm the current statutes before relying on these specifics.

What the opinion meant for those who asked

Pharmacies in HMO and PPO networks (as the opinion described it): The opinion described a pharmacy as a "provider" under chapter 843 and a "health care provider" and possible "preferred provider" under chapter 1301, so the notice and review protections in sections 843.306 and 1301.057 can apply when a pharmacy's contract is terminated.

Pharmacy benefit managers (as the opinion described it): The opinion described a PBM acting as a delegated entity of an HMO and administering pharmacy contracts as required to comply with section 843.306's notice and review requirements. For PPO arrangements, it described PBMs as among the entities an insurer might contract with to carry out the section 1301.057 process.

HMOs and insurers (as the opinion described it): The opinion described an HMO that delegates a chapter 843 function as needing a written delegation agreement requiring the delegated entity to comply with the statute, and an insurer offering a preferred provider plan as needing to ensure that either it or its contracted entities meet the section 1301.057 requirements.

Common questions

Can a pharmacy benefit manager drop a pharmacy from an HMO network without notice?
Not when it is acting as the HMO's delegated entity. The AG concluded that a PBM serving as a delegated entity and administering pharmacy contracts must comply with section 843.306, which requires written reasons before termination and, on request, an advisory review.

What protection does a pharmacy have in a PPO (preferred provider) plan?
The AG concluded that section 1301.057 requires written reasons before terminating a preferred provider's contract, and a review mechanism for practitioners. The insurer must ensure that either it or the entities it contracts with, which could include a PBM, comply with that process.

Why do these rules reach PBMs when the statutes only mention HMOs and insurers?
Because the law lets HMOs and insurers delegate their functions but does not let them shed the underlying requirements. The AG pointed to the delegation-agreement rules for HMOs and to section 1301.061 for PPO plans, both of which keep the statutory notice and review obligations attached to the function even when a PBM performs it.

Did the AG decide whether an HMO can hire a PBM in the first place?
No. The AG expressly noted it was not addressing whether any specific delegation of authority or contract between an HMO and a PBM is authorized.

Background and statutory framework

A pharmacy benefit manager is "a person, other than a pharmacy or pharmacist, who acts as an administrator in connection with pharmacy benefits" (Tex. Ins. Code Ann. § 4151.151 (West 2009)). For HMOs, chapter 843 requires an HMO to provide written reasons before terminating a contract with a physician or provider and, on request, an advisory review panel within 60 days (Tex. Ins. Code Ann. § 843.306(a)-(b) (West 2009)), and a "pharmacy" is a provider for that purpose (id. § 843.002(24)(A)(ii) (West Supp. 2014)). An HMO may contract with others to perform its functions (id. § 843.104 (West 2009)), but a delegation of a chapter 843 function requires a written delegation agreement obligating the delegated entity to comply with each statutory or regulatory requirement relating to that function (id. § 1272.052(a); § 1272.056(2); § 1272.002). On that basis the AG concluded a PBM acting as a delegated entity must comply with section 843.306.

For preferred provider plans, chapter 1301 requires an insurer to provide written reasons before terminating a preferred provider's contract and, for practitioners, a review mechanism within 60 days (Tex. Ins. Code Ann. § 1301.057 (West 2009)). The term "insurer" is defined in section 1301.001(5) (West Supp. 2014), and a pharmacy qualifies as a health care provider and preferred provider under the chapter. Section 1301.061 requires every preferred provider benefit plan to comply with the chapter and allows an insurer to agree with a PPO that either the insurer or the PPO will meet the notice requirements, while still requiring the insurer to ensure those requirements are met (Tex. Ins. Code Ann. § 1301.061(a)-(b); § 1301.061(c) (West 2009)). The AG concluded that the insurer must ensure that either it or the entities it contracts with, which could include a PBM, comply with the section 1301.057 process. The AG did not address whether any specific HMO-PBM delegation or contract is authorized.

Citations

Statutory provisions:

• Tex. Ins. Code Ann. § 4151.151 (West 2009) (definition of pharmacy benefit manager)
• Tex. Ins. Code Ann. § 843.306(a)-(b) (West 2009) (HMO notice and advisory review before terminating a provider)
• Tex. Ins. Code Ann. § 843.002(24)(A)(ii) (West Supp. 2014) (pharmacy is a "provider")
• Tex. Ins. Code Ann. § 843.104 (West 2009) (HMO may contract with others to perform functions)
• Tex. Ins. Code Ann. § 1272.052(a) (written delegation agreement required)
• Tex. Ins. Code Ann. § 1272.056(2) (delegated entity must comply with each requirement)
• Tex. Ins. Code Ann. § 1272.002 (delegated entity compliance)
• Tex. Ins. Code Ann. § 1301.057 (West 2009) (insurer notice and review before terminating a preferred provider)
• Tex. Ins. Code Ann. § 1301.001(5) (West Supp. 2014) (definition of "insurer")
• Tex. Ins. Code Ann. § 1301.061(a)-(b) (insurer/PPO agreement; insurer must ensure compliance)
• Tex. Ins. Code Ann. § 1301.061(c) (West 2009) (preferred provider benefit plan must comply with the chapter)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/ken-paxton/kp-0036
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/2015/kp0036.pdf

Original opinion text

Best-effort transcription from the official PDF. Minor extraction artifacts were corrected; the linked PDF is authoritative.

KEN PAXTON
ATTORNEY GENERAL OF TEXAS

August 14, 2015

The Honorable Charles Schwertner Opinion No. KP-0036
Chair, Committee on Health and
Human Services Re: Whether sections 843.306 and 1301.057 of
Texas State Senate the Insurance Code apply to a pharmacy benefit
Post Office Box 12068 manager acting on behalf of a health
Austin, Texas 78711-2068 maintenance organization or a preferred provider
organization (RQ-0016-KP)

Dear Senator Schwertner:

You ask two questions concerning whether specific provisions of the Insurance Code apply to a pharmacy benefit manager ("PBM") acting on behalf of a health maintenance organization ("HMO") or a preferred provider organization ("PPO"). [1] A PBM is "a person, other than a pharmacy or pharmacist, who acts as an administrator in connection with pharmacy benefits." TEX. INS. CODE ANN. § 4151.151 (West 2009). You explain that PBMs develop "pharmacy panels through provider participation agreements with individual pharmacy service providers." Request Letter at 1. You further explain that PBMs then contract with HMOs and PPOs to "provide and administer pharmacy benefits to beneficiaries or enrollees" of the HMOs or PPOs. Id.

You first ask whether section 843.306 of the Insurance Code applies to a PBM acting on behalf of an HMO. Id. Chapter 843 of the Insurance Code governs HMOs, and Subchapter I addresses HMO relations with physicians and providers. See TEX. INS. CODE ANN. §§ 843.001-.464 (West 2009 & Supp. 2014). Section 843.306 of Subchapter I states, in relevant part:

(a) Before terminating a contract with a physician or provider, a health maintenance organization shall provide to the physician or provider a written explanation of the reasons for termination.

(b) On request, before the effective date of the termination and within a period not to exceed 60 days, a physician or provider is entitled to a review by an advisory review panel of the health maintenance organization's proposed termination . . . .

Id. § 843.306(a)-(b) (West 2009). Relevant to your question, for purposes of chapter 843, "provider" includes, among others, "a pharmacy." Id. § 843.002(24)(A)(ii) (West Supp. 2014). Thus, an HMO must provide notice to a pharmacy with whom it contracts before terminating a contract with that pharmacy.

The language of section 843.306 expressly applies only to HMOs; however, an HMO "may contract with any person to perform" administrative functions on behalf of the HMO. Id. § 843.104 (West 2009). An HMO that delegates an administrative function required by chapter 843 of the Insurance Code "shall execute a written delegation agreement with the entity to which the function is delegated." Id. § 1272.052(a). The delegation agreement must provide that the "delegated entity shall comply with each statutory or regulatory requirement relating to a function assumed by or carried out by the entity." Id. § 1272.056(2); see also id. § 1272.002 (requiring a delegated entity to "comply with each statutory or regulatory requirement that relates to a function assumed by or carried out by" the entity). [2] Thus, to the extent that a PBM serves as a delegated entity of an HMO and, pursuant to the delegation agreement, administers contracts with pharmacy providers, the PBM must comply with the notice and review requirements of section 843.306. [3]

In your second question, you ask whether section 1301.057 of the Insurance Code applies to a PBM acting on behalf of a PPO. Request Letter at 1. Chapter 1301 of the Insurance Code governs preferred provider benefit plans. See TEX. INS. CODE ANN. § 1301.0041(a) (West Supp. 2014); see generally id. §§ 1301.001-.202 (West 2009 & Supp. 2014). Section 1301.057 states, in relevant part:

(a) Before terminating a contract with a preferred provider, an insurer shall:

(1) provide written reasons for the termination; and

(2) if the affected provider is a practitioner, provide, on request, a reasonable review mechanism, . . .

(b) The review mechanism described by Subsection (a)(2) must incorporate, in an advisory role only, a review panel selected in the manner described by Section 1301.053(b) and must be completed within a period not to exceed 60 days.

Id. § 1301.057 (West 2009). For purposes of chapter 1301 of the Insurance Code, the term "insurer" is defined as "a life, health, and accident insurance company, health and accident insurance company, health insurance company, or other company operating under Chapter 841, 842, 884, 885, 982, or 1501, that is authorized to issue, deliver, or issue for delivery in this state health insurance policies." Id. § 1301.001(5) (West Supp. 2014). The Insurance Code does not define PPO; however, "preferred provider benefit plan" is defined as "a benefit plan in which an insurer provides, through its health insurance policy, for the payment of a level of coverage that is different from the basic level of coverage provided by the health insurance policy if the insured person uses a preferred provider." Id. § 1301.001(9). Thus, under some circumstances a PPO itself could be considered an insurer for purposes of section 1301.057.

Under the Insurance Code, "preferred provider" includes a "health care provider, or an organization of . . . health care providers, who contracts with an insurer to provide medical care or health care to insureds covered by a health insurance policy." Id. § 1301.001(8). "Health care provider" expressly "includes a pharmacist and a pharmacy." Id. § 1301.001(1-a). A PPO subject to section 1301.057 would therefore be required to provide an explanation of the reasons for terminating a contract with a pharmacy.

The language of section 1301.057 expressly applies only to insurers and does not address PBMs that contract with provider pharmacies. Insurance Code section 1301.061, however, provides that "[e]ach preferred provider benefit plan offered in this state must comply with this chapter," which includes section 1301.057. Id. § 1301.061(c) (West 2009). That section also states:

(a) An insurer may enter into an agreement with a [PPO] for the purposes of offering a network of preferred providers. The agreement may provide that either the insurer or the [PPO] on the insurer's behalf will comply with the notice requirements and other requirements imposed on the insurer by this subchapter.

(b) An insurer that enters into an agreement with a preferred provider organization under this section shall meet the requirements of this chapter or ensure that those requirements are met.

Id. § 1301.061(a)-(b) (emphasis added). Thus, with regard to preferred provider benefit plans, before a contract with a preferred provider is terminated, an insurer must ensure that either itself or the entities with whom it contracts, which could include PBMs, comply with the notice and review process required under section 1301.057.

SUMMARY

If a pharmacy benefit manager serves as a delegated entity of a health maintenance organization and thereby terminates contracts with pharmacy providers, the pharmacy benefit manager must comply with the notice and review requirements of section 843.306 of the Insurance Code.

With regard to preferred provider benefit plans, before a contract with a preferred provider is terminated, an insurer must ensure that either itself or the entities with whom it contracts, which could include pharmacy benefit managers, comply with the notice and review process required under section 1301.057 of the Insurance Code.

Very truly yours,

KEN PAXTON
Attorney General of Texas

CHARLES E. ROY
First Assistant Attorney General

BRANTLEY STARR
Deputy Attorney General for Legal Counsel

VIRGINIA K. HOELSCHER
Chair, Opinion Committee

Assistant Attorney General, Opinion Committee

[1] Letter from Honorable Charles Schwertner, Chair, Senate Comm. on Health & Human Servs., to Honorable Ken Paxton, Tex. Att'y Gen. at 1 (Apr. 30, 2015), https://www.texasattorneygeneral.gov/opinion/requests-for-opinions-rqs ("Request Letter").

[2] "Delegated entity" is defined as "an entity, other than a health maintenance organization authorized to engage in business under Chapter 843, that by itself, or through subcontracts with one or more entities, undertakes to arrange for or provide medical care or health care to an enrollee in exchange for a predetermined payment on a prospective basis and that accepts responsibility for performing on behalf of the health maintenance organization a function regulated by . . . Chapter 843 . . . ." TEX. INS. CODE ANN. § 1272.001(a)(1) (West 2009); see also id. § 843.002(30) (West Supp. 2014).

[3] You do not ask, and we do not address, whether any specific delegation of authority or contract between an HMO and a PBM is authorized.