Tennessee is currently advancing the “Freedom, Access, and Integrity in Registered Pharmacy (FAIR Rx) Act” (SB2040/HB1959), a legislative effort that would fundamentally restructure the state’s prescription drug supply chain. If enacted, the legislation will prohibit Pharmacy Benefit Managers (PBMs) from directly or indirectly owning, operating, or controlling any licensed pharmacy dispensing drugs to Tennessee residents, effective January 1, 2027 (Tennessee — SB2040).
The bill is predicated on the rationale that PBM-pharmacy co-ownership creates an inherent conflict of interest—described by the legislation’s sponsors as a “fox guarding the henhouse” scenario that drives up costs, reduces transparency, and restricts patient choice (Tennessee — HB1959). By forcing a structural separation between those who set pharmacy reimbursement rates and those who dispense medications, Tennessee seeks to eliminate patient steering and opaque spread pricing. However, this forced dis-integration poses complex strategic questions. While independent pharmacies stand to gain dispensing volume, PBMs and insurers may simply exert their remaining leverage to squeeze reimbursement rates further. Furthermore, unwinding these vertically integrated networks threatens to strand significant corporate assets—such as retail locations, mail-order hubs, and embedded clinics—while potentially sacrificing the clinical coordination benefits that integrated models provide.
Background and Context: The Push to Unwind Vertical Integration
Over the past two decades, the U.S. pharmaceutical supply chain has undergone aggressive horizontal consolidation and vertical integration. Today, the three largest PBMs—CVS Caremark, Express Scripts, and OptumRx—control nearly 80 percent of all prescription claims and are entirely integrated with major health insurers and downstream pharmacies (Pharmacy Benefit Managers: The Powerful Middlemen …). These affiliated pharmacies have captured immense market share, accounting for almost three-quarters of mail-order dispensing revenue and nearly 70 percent of specialty drug revenue nationally (Pharmacy Benefit Managers: The Powerful Middlemen …).
Tennessee’s FAIR Rx Act represents a shift from behavioral regulation (e.g., banning spread pricing) to structural antitrust-style remedies. The legislation mandates that PBMs divest ownership or control of pharmacy licenses in the state, making compliance a condition of licensure by the Tennessee Board of Pharmacy (Tennessee — SB2040). The bill allows PBM-affiliated pharmacies to operate through December 31, 2026, provided they are pursuing a bona fide sale to an unaffiliated entity, and grants exceptions for certain rare or limited-distribution drugs (Tennessee — HB1959).
Tennessee’s effort mirrors Arkansas’s Act 624, the first state law to categorically ban PBM pharmacy ownership. However, the Arkansas law was temporarily enjoined by a federal judge in July 2025 following a lawsuit by major PBMs, citing likely violations of the Dormant Commerce Clause and preemption by the federal TRICARE statute (Mintz, Federal Court Blocks Arkansas PBM Ownership Law, Citing … — August 6, 2025). Tennessee lawmakers are advancing the FAIR Rx Act into this fraught legal environment, testing the boundaries of state authority over national healthcare conglomerates.
Shifting Bargaining Power and Margin Capture
A structural separation of PBMs and pharmacies theoretically redistributes volume back to independent and unaffiliated pharmacies. However, it does not guarantee that these smaller entities will actually capture the financial margin.
PBMs were originally designed to aggregate purchasing power for insurers, a role that gives them outsized leverage in negotiating with both drug manufacturers and retail pharmacies (American Enterprise Institute, What is (or isn’t) the problem with PBMs? — November 8, 2022). If PBMs are stripped of their dispensing arms, they will lose the direct revenue generated by their owned mail-order and specialty pharmacies. To preserve profitability, PBMs and their parent insurers are highly likely to utilize their remaining market power to extract concessions elsewhere. For instance, PBMs may tighten Maximum Allowable Cost (MAC) lists and Generic Effectiveness Rates (GERs) to aggressively push down the reimbursement rates paid to independent pharmacies (Commonwealth Fund, Competition, Consolidation, and Evolution in the Pharmacy Market — August 2021).
Furthermore, PBMs could offset lost dispensing margins by shifting their revenue models toward plan sponsors, demanding higher administrative, data, or management fees from the employers and insurers they serve (Brookings Institution, A brief look at current debates about pharmacy benefit managers). Because PBM markets are highly concentrated—with 79 percent of regional PBM markets deemed “highly concentrated” by federal antitrust standards—insurers and plan sponsors have few alternative vendors and little leverage to resist fee increases (American Medical Association, PBM markets are at risk of harming patients — July 31, 2025).
Regarding drug manufacturers, structural separation could fundamentally alter formulary incentives. Currently, vertically integrated PBMs have a financial incentive to favor high-list-price drugs with large manufacturer rebates, particularly if those drugs are channeled through the PBM’s highly profitable specialty pharmacy (Arnold Ventures, Pharmacy Benefit Manager (PBM) Policy Brief). By removing the PBM’s ability to profit directly from the dispensing volume of its own specialty pharmacy, the FAIR Rx Act could reduce the incentive to steer patients toward the most expensive medications, potentially reshaping rebate negotiations to focus more on net drug costs.
Operational Trade-Offs: Coordination vs. Supply Chain Inefficiency
The FAIR Rx Act forces policymakers to weigh the consumer protection benefits of dis-integration against the potential loss of clinical and operational coordination.
Advocates of vertical integration argue that combining insurers, PBMs, and pharmacies creates significant cost and revenue synergies. Integrated entities can theoretically bundle medical and pharmacy benefits, utilizing centralized data to track therapy progress, calibrate treatment plans, and manage expensive chronic conditions (Senate Hearing 118-542). Mail-order pharmacies, when properly resourced, offer convenience and reliability for patients managing long-term regimens. Dismantling this integration could introduce friction: plan sponsors and PBMs would be forced to rebuild networks with unaffiliated providers, potentially delaying patient access to complex specialty medications that require high-touch clinical coordination.
Conversely, proponents of the FAIR Rx Act argue that the theoretical benefits of coordination have devolved into exploitative practices. The legislation cites the steering of patients to PBM-owned entities and the inflation of costs through self-dealing (Tennessee — SB2040). Data from a Tennessee Department of Commerce and Insurance audit revealed that CVS Caremark paid its own affiliated pharmacies up to 16,510 percent more for certain medications than it paid non-affiliated local pharmacies (The Tennessean, Restoring fairness to Tennessee’s rigged pharmacy market | Opinion — April 6, 2026). Additionally, PBMs frequently utilize mandatory mail-order clauses that result in significant medication waste (e.g., auto-shipping unwanted prescriptions) and isolate pharmacists from the rest of the patient’s care team (Senior Care Pharmacy Coalition, The Hidden Monopolies That Raise Drug Prices — March 28, 2017). While separating these entities may cause short-term administrative inefficiencies, it removes the perverse incentive for PBMs to silo care solely to drive dispensing revenue.
Stranded Assets and Competitive Realignments
A forced divestiture in Tennessee threatens to strand substantial physical and logistical assets currently held by major PBM conglomerates.
CVS Health—which operates the largest retail pharmacy chain in the country and owns the PBM CVS Caremark—has stated that the FAIR Rx Act would force the closure of all 134 of its pharmacy locations in Tennessee (WCYB, Proposed bill would limit PBMs action in Tennessee: CVS threaten closures if passed). Beyond retail pharmacies, CVS warned that the legislation would also necessitate the closure of its 25 embedded MinuteClinics, as these primary care clinics rely on the underlying retail and pharmacy infrastructure to operate (NewsChannel 9, Tennessee bill to bar PBM-owned pharmacies advances as CVS warns of closures). Furthermore, out-of-state mail-order and specialty fulfillment hubs owned by PBMs (such as Cigna’s Express Scripts or UnitedHealth’s OptumRx) would lose their legal ability to ship medications to Tennessee residents, stranding the portion of their infrastructure dedicated to that market.
If these PBM-affiliated entities are barred or choose to exit rather than divest, substantial prescription volume will enter the open market. The primary beneficiaries would be independent community pharmacies, which have suffered severe attrition (620 closures in Tennessee since 2017) due to low PBM reimbursement rates and patient steering (The Tennessean, Restoring fairness to Tennessee’s rigged pharmacy market | Opinion — April 6, 2026). Regional grocery chains with pharmacy operations (e.g., Kroger) and independent specialty pharmacies are also well-positioned to capitalize on the displaced patient base, provided they have the capacity to absorb the volume and negotiate viable network contracts with the newly separated PBMs (Avalere Health, Implications of PBM-Pharmacy Co-ownership Legislation).
A Blueprint for Redefining Healthcare Conflicts of Interest
A forced divestiture in Tennessee threatens to strand substantial physical and logistical assets currently held by major PBM conglomerates.
CVS Health—which operates the largest retail pharmacy chain in the country and owns the PBM CVS Caremark—has stated that the FAIR Rx Act would force the closure of all 134 of its pharmacy locations in Tennessee (WCYB, Proposed bill would limit PBMs action in Tennessee: CVS threaten closures if passed). Beyond retail pharmacies, CVS warned that the legislation would also necessitate the closure of its 25 embedded MinuteClinics, as these primary care clinics rely on the underlying retail and pharmacy infrastructure to operate (NewsChannel 9, Tennessee bill to bar PBM-owned pharmacies advances as CVS warns of closures). Furthermore, out-of-state mail-order and specialty fulfillment hubs owned by PBMs (such as Cigna’s Express Scripts or UnitedHealth’s OptumRx) would lose their legal ability to ship medications to Tennessee residents, stranding the portion of their infrastructure dedicated to that market.
If these PBM-affiliated entities are barred or choose to exit rather than divest, substantial prescription volume will enter the open market. The primary beneficiaries would be independent community pharmacies, which have suffered severe attrition (620 closures in Tennessee since 2017) due to low PBM reimbursement rates and patient steering (The Tennessean, Restoring fairness to Tennessee’s rigged pharmacy market | Opinion — April 6, 2026). Regional grocery chains with pharmacy operations (e.g., Kroger) and independent specialty pharmacies are also well-positioned to capitalize on the displaced patient base, provided they have the capacity to absorb the volume and negotiate viable network contracts with the newly separated PBMs (Avalere Health, Implications of PBM-Pharmacy Co-ownership Legislation).
Conclusion and Strategic Outlook
The Tennessee FAIR Rx Act represents one of the most aggressive state-level interventions into the pharmaceutical supply chain to date. By mandating the structural separation of PBMs and pharmacies, the legislation aims to eliminate self-dealing, protect independent pharmacies, and redirect market dynamics toward fair competition.
However, the path to implementation is fraught with immediate legal peril. Following the blueprint of the litigation against Arkansas’s Act 624, major PBMs will almost certainly challenge the FAIR Rx Act in federal court. Opponents will likely argue that the law violates the Dormant Commerce Clause by effectively serving as a proxy ban on out-of-state national pharmacies, and that it is preempted by federal programs like TRICARE and ERISA (CVS Health, Why Act 624 is wrong; Mintz, Federal Court Blocks Arkansas PBM Ownership Law, Citing … — August 6, 2025). The ultimate success of Tennessee’s legislation relies not just on legislative passage, but on surviving these federal challenges—a ruling that will dictate whether states have the authority to structurally dismantle the nation’s largest healthcare monopolies.