States compete for investment, jobs, and residents. Taxes matter, but so does regulation. Every new mandate consumes resources and management attention that could have been used to expand a business or hire employees.
Reasonable rules can protect consumers. The problem is regulatory accumulation: one layer of government adding requirements before another layer’s reforms have taken effect. According to one estimate, a 10% increase in state regulatory restrictions reduces annual state GDP growth by 0.37 percentage point. Compounded over several years, that means fewer jobs, less investment and a smaller tax base.
The latest example is unfolding in the health care marketplace. Pharmacy benefit managers, or PBMs, negotiate with drug manufacturers, build pharmacy networks and manage prescription benefits for insurers and employers. They have faced criticism involving transparency, patient steering, rebate incentives and payments to independent pharmacies. Those concerns deserve answers. But they do not justify redesigning the economics of an entire industry one state legislature at a time.
Nevertheless, several states are enacting or considering laws that dictate the structure of vertically integrated health care companies. Act 624 in Arkansas and the FAIR Rx Act in Tennessee have passed in their respective states and bar PBMs from operating retail or mail-order pharmacies. States like New York and New Jersey have considered similar divestiture legislation. All in all, the Associated Press reports that lawmakers in at least 26 states introduced more than 120 PBM bills this year.
Why are Arkansas and Tennessee, states that advertise themselves as pro-business alternatives to blue states, embracing the kind of economic micromanagement they usually criticize in New York? There is no sound economic justification for government dictating how private companies must organize their businesses.
State-ordered PBM divestiture was always a blunt substitute for addressing specific conduct. Now it is also duplicative. Congress and the Trump administration have already taken major actions aimed squarely at the practices that prompted these state proposals. It is difficult to justify any additional regulation before identifying any unaddressed problems. Good policymaking measures the results of one set of reforms before imposing another.
For instance, the Consolidated Appropriations Act of 2026 became law in February. Beginning in 2028, it will impose extensive requirements on how PBMs are compensated, require rebates and discounts to flow through to plan sponsors, and expand transparency and enforcement requirements. These reforms are designed to make prescription drug spending easier to track, reduce incentives favoring higher-priced drugs and help health plans identify potential self-dealing. Plan sponsors will gain the information and audit rights needed to follow the money and hold PBMs accountable.
The Federal Trade Commission, meanwhile, has reached settlement agreements with two of the three largest PBMs, and a settlement with the third appears imminent. These agreements require measures that tie patient costs more closely to net drug prices, allow sponsors to move away from spread pricing and rebate guarantees, delink certain manufacturer payments from list prices, and expand transparency. Such agreements address many of the issues targeted by individual states’ PBM divestiture bills and negate the rationale for duplicative state efforts. States should determine whether those reforms succeed before layering on new mandates.
If legislators persist with these duplicative mandates, employers and their workers will bear much of the burden. The measures could reduce the options available to businesses that hire PBMs to manage benefit costs and disrupt the retail, mail-order, and specialty-pharmacy networks their employees use. This could ultimately prove to be both an economic development and health policy concern as one recent corporate survey found over 87% of executives rated quality of life — including access to health care — as important or very important when making expansion and location decisions.
Vertical integration does not excuse unlawful behavior, but neither does it constitute wrongdoing. Misconduct should be addressed directly, as the federal law and FTC settlements demonstrate. But when targeted enforcement gives way to government orders forcing lawful companies to dismantle their operations, policymakers are no longer policing misconduct; they are dictating how an industry must be organized.
California offers a warning of what can happen when overregulation runs amok. As the most regulated state in the country, the newest Rich States, Poor States index ranks the Golden State 47th for economic outlook and reports that it lost more than 2.1 million residents to domestic migration from 2015 through 2024. The latest IRS migration data also show nearly $12 billion in adjusted gross income leaving California on net in a single year.
No one policy explains every departure. But the direction is unmistakable: People and capital notice when government keeps raising the price of living and doing business through excessive regulation.
Arkansas, Tennessee and other states should give the federal reforms time to work before imposing new rules. Otherwise, they may discover that overregulation is not only bad health policy. It is bad economic medicine.
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