The laws that ended pharmacy gag clauses

On October 10, 2018, two short bills became law on the same day. The Know the Lowest Price Act of 2018¹, Public Law 115-262, had cleared the Senate on September 4 and the House on September 25. The Patient Right to Know Drug Prices Act², Public Law 115-263, passed the Senate on September 17 and the House the same day as the first. Both targeted a single kind of contract term.

That term, a pharmacy gag clause, kept pharmacists from telling an insured customer that paying cash would cost less than the copay. By the end of 2018, 27 states had already banned gag clauses on their own, according to a year-end review¹¹ by the Source on Healthcare Price and Competition, a health policy research site.

Those federal laws still matter at the counter every day, and they are often described more broadly than they are written. This piece sets out what each law says, who it covers, what the states did first, and what neither law requires. GxRadar's companion piece, when the cash price beats the copay, covers the arithmetic from the customer's side.

What a gag clause was

CMS defined the term in a May 17, 2018 memo to Part D plan sponsors⁷: "contracting terms and conditions that prevent pharmacies from telling customers about the availability of lower cash prices." The memo said CMS found "any form" of gag clause "unacceptable," and an accompanying press release⁸ described such clauses as provisions in contracts between plans, their pharmacy benefit managers and pharmacies.

How often customers overpaid was measured in a 2018 research letter in JAMA⁹. Using claims from the first half of 2013, the authors found that 22.94 percent of 9.5 million claims involved a copay that exceeded the average pharmacy reimbursement for the same prescription, beyond a small cushion the authors built in. For generics the rate was 28.17 percent, against 5.95 percent for brand drugs. The mean overpayment on a generic was $7.32, and total overpayments came to $135 million for 2013.

Public benchmarks make the gap easy to see. In early November 2026, the CMS NADAC survey¹³ put what pharmacies pay to acquire 20 mg atorvastatin at $0.02858 a tablet.

NADAC is the pharmacy's acquisition cost, before any dispensing fee or margin, so it is not a counter price. The $10 copay is a round illustration. Still, the spread shows why a pharmacy's cash price for a cheap generic can land under a flat copay, and why contracts that barred mentioning it drew attention. GxRadar's price pages carry NADAC histories for 47 generics.

What the two federal laws say

Both laws use nearly the same words, for two different markets.

Under the Medicare law, now at 42 U.S.C. 1395w-104(m)³, a plan may not restrict a pharmacy from informing an enrollee, "nor penalize such pharmacy for informing," of any difference between the plan's negotiated price, copay or coinsurance and "a lower price the individual would pay" without insurance.

For the commercial market, the law codified at 42 U.S.C. 300gg-19b⁴, bars a plan or insurer from restricting a pharmacy "directly or indirectly" from telling an enrollee the difference between the out-of-pocket cost under the plan and the cash price. That law also makes the plan responsible for its pharmacy benefit manager following the same rule. The law defines out-of-pocket cost to include deductibles, copays and coinsurance. A second section of the act, unrelated to pharmacies, extended to biosimilars an existing requirement to file certain patent settlement agreements with federal antitrust agencies.

CMS later wrote the Part D rule into its regulations. At 42 CFR 423.120(a)(8)(iii)⁵, a Part D sponsor "may not prohibit a pharmacy from, nor penalize a pharmacy for," telling an enrollee about a cash price below what the plan would charge.

The states moved first

An August 2018 review¹⁰ by the Source traced how fast the idea spread. Its table lists six states with gag-clause prohibitions enacted before 2018, most of them also covering clawbacks, in which a plan or PBM keeps the difference when a copay exceeds what it pays the pharmacy. In the 2018 sessions, 34 states considered bills on the two issues.

Sources: Source on Healthcare Price and Competition, August 2018¹⁰ and December 2018¹¹.

State laws took different shapes. South Dakota's barred any contract term that kept a pharmacist from sharing cost-sharing information. Utah's went at the price itself, providing that a PBM may not require an insured patient to pay more than the lesser of the plan's cost share or the drug's retail price without coverage. That lesser-of idea is the same logic behind a pharmacy's usual and customary price.

What the laws do not do

Neither federal law requires a pharmacist to bring up the cash price. Both stop plans from restricting or penalizing the pharmacy for doing so. Neither sets a price, caps a copay, or bans clawbacks outright. The practical route to the cash price is still to ask, which GxRadar covers in how to ask for the cash price.

Part D already had a related rule. Under 42 CFR 423.132⁶, a Part D sponsor must require its pharmacies to tell an enrollee about any price difference between the drug dispensed and the lowest-priced therapeutically equivalent generic available at that pharmacy. CMS's 2018 memo also said existing Part D policy requires sponsors to make sure enrollees pay the lesser of the negotiated price or the copay.

A cash purchase also sits outside the plan. Whether it counts toward a deductible or an out-of-pocket limit is a question for the plan, and GxRadar explains how those limits work in deductibles and coinsurance for prescriptions. Pharmacy benefit managers, whose contracts carried the clauses, are covered in what a pharmacy benefit manager does.

A second gag-clause law, aimed at plans

Congress used the phrase again in the Consolidated Appropriations Act, 2021, for a different problem. Section 201 of its transparency title bars group health plans and insurers from signing agreements with providers, networks or administrators that restrict the plan from sharing provider-specific cost or quality information or from getting de-identified claims data, according to CMS¹². Plans must attest each year that they comply.

First attestations were due by December 31, 2023, and CMS says later ones are due by December 31 of each year. The next deadline is December 31, 2026. GxRadar tracks the newer federal pharmacy benefit rules in what the 2026 federal PBM law changes.