PBM Vertical Integration: State Ownership Restrictions and the Tennessee Strategic Rewrite

PBM Vertical Integration: State Ownership Restrictions and the Tennessee Strategic Rewrite

The legal and regulatory battleground over state-level restrictions on vertically integrated Pharmacy Benefit Managers (PBMs) has intensified following a landmark federal appeals court ruling and a coordinated industry lawsuit in Tennessee. The core tension lies between state-level attempts to restrict PBM-pharmacy ownership and the federal judiciary's robust enforcement of ERISA preemption and constitutional limits.

The Eighth Circuit ERISA Preemption Ruling: Flowers v. Caremark

On June 29, 2026, the Eighth Circuit Court of Appeals issued a major ruling in Flowers v. Caremark PCS Health, LLC, No. 25-3068, holding that ERISA preempts Arkansas's geographic pharmacy network adequacy regulations.¹ These regulations mandated that PBMs ensure a high percentage of covered individuals (90% in urban/suburban areas, 70% in rural areas) live within a short distance of a network pharmacy.

The Eighth Circuit adopted a broad view of ERISA preemption, ruling that the geographic requirements unconstitutionally interfered with plan administration uniformity:

"requir[e] PBMs to tailor and retailor their networks — and perhaps even build new brick-and-mortar pharmacies — to comply with a set of exacting particularities." According to the Court, this law therefore "bulldozed through [Congressional] objectives" under ERISA, and thus caused the Arkansas law to be preempted.

This decision creates a significant legal barrier for states attempting to regulate PBM network compositions, as similar geographic access rules in other states are now highly vulnerable to ERISA challenges.

Tennessee's Fair RX Act Under Coordinated Legal Attack

In May 2026, Tennessee enacted the Fair RX Act, a statute designed to bypass the legal pitfalls that blocked Arkansas's anti-vertical integration law (Act 624). Arkansas's law, which sought to prohibit PBMs from owning or operating pharmacies, was preliminarily enjoined in Express Scripts, Inc. v. Richmond, No. 25-2529 (currently on appeal to the Eighth Circuit), due to Commerce Clause violations and TRICARE preemption.

To avoid a similar fate, Tennessee lawmakers strategically exempted military and federal contracts (to bypass TRICARE preemption) and omitted protectionist legislative findings that could trigger dormant Commerce Clause violations.

Despite these precautions, the Fair RX Act was hit by three independent lawsuits in late June/early July 2026 in the U.S. District Court for the Middle District of Tennessee. The lawsuits were filed by CVS's Caremark, Cigna's Express Scripts, and the Pharmaceutical Care Management Association (PCMA). The plaintiffs argue that:

1. Federal Preemption: Medicare, TRICARE, and ERISA preempt the ownership ban because PBMs operate within existing federal frameworks that govern network design and contracting.
2. Dormant Commerce Clause: The law unconstitutionally discriminates against out-of-state pharmacies.
3. Takings Clause: The law constitutes an unconstitutional taking by compelling the divestiture of long-standing, highly integrated business units and pharmacy operations.

These legal developments demonstrate that while states are aggressively rewriting statutes to restrict vertical integration, federal courts remain a formidable defense for the PBM industry, leaning heavily on ERISA preemption and constitutional protections to preserve integrated business models.