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Supreme Court Green Lights Arkansas Law Regulating PBM Pricing Practices

On December 10, 2020, the Supreme Court in Rutledge v. Pharmaceutical Care Management Association held that ERISA does not pre-empt an Arkansas law regulating PBM prescription drug payment rates to pharmacies because it merely functions as a "cost regulation"—it does not "forc[e]" ERISA plans "to adopt any particular scheme of substantial coverage" or otherwise impermissibly "relate to" ERISA plans.    As a practical matter, the 8-0 ruling, which surprised many in the industry, likely puts an end to any serious ERISA pre-emption challenges to similar laws adopted in more than 35 states.  More importantly, the ruling may give more leeway to states seeking to expand regulation of prescription drug and other health care reimbursement rates, even if those efforts might lead to increases in health plan costs or reductions in plan benefits.

 

Arkansas' Efforts to Regulate PBM Reimbursement Payments to Pharmacies

Although unfamiliar to many, pharmacy benefit managers ("PBMs") are some of the largest companies in the United States.  PBMs are middlemen hired by health plans and insurers to handle the administration of prescription drug benefits.  Among other things, PBMs contract with retail pharmacies, maintain lists of covered drugs, and run the electronic adjudication of prescriptions at the pharmacy counter.  PBMs also set the payment rates to pharmacies for filling plan prescriptions.  The PBM payment rate to a pharmacy for any given drug, however, is not based on the specific price the pharmacy paid a wholesaler for the drug.  Instead, PBMs develop and administer unique maximum allowable cost ("MAC") lists that set pharmacy reimbursement rates and are typically based on the average cost of acquiring the drug from wholesalers.  In some instances, the PBM payment rate for a drug is lower than the pharmacy's acquisition cost, leaving the pharmacy with a loss on that sale.

Pharmacies and legislators have raised concerns about PBMs and their use of MAC lists, pointing out that below-cost reimbursement rates threaten the viability of independent and rural pharmacies.  In response to those concerns, Arkansas and other states have moved to regulate PBM reimbursement rates to protect pharmacies from receiving below-cost payments.  
Arkansas' Act 900, adopted in 2015, requires PBMs to reimburse pharmacies at a price that is equal to or higher than the price the pharmacy paid to the wholesaler.  The Arkansas Act enforces this policy through three primary mechanisms: (1) requiring PBMs to timely update their reimbursement rates when wholesale prices increase;2  (2) requiring PBMs to provide an appeal procedure that allows a pharmacy to challenge reimbursement rates that are below its acquisition costs and to receive a rate increase to cover the pharmacy's acquisition cost in the event of a successful appeal;3 and (3) allowing a pharmacy to refuse to sell a drug if the PBM's reimbursement will be less than the pharmacy's acquisition cost.

 

The Lower Courts Ruled ERISA Pre-Empts Arkansas' Act 900

The Pharmaceutical Care Management Association ("PCMA"), a national association representing 16 PBMs, challenged the Arkansas Act in the Eastern District of Arkansas, alleging that ERISA pre-empts the Act.5  The district court agreed,6  relying on the Eighth Circuit's decision in Pharmaceutical Care Management Association v. Gerhart—a parallel case brought by the PCMA challenging a similar Iowa statute.7 In Gerhart, the Eighth Circuit determined that ERISA pre-empted the Iowa law because the law (1) implicitly referenced to ERISA plans by regulating PBMs' conduct in administering benefits for ERISA plans; and (2) was impermissibly "connect[ed] with" ERISA plans by limiting a health plan's control over the calculation and disbursement of its benefits, and thus interfering with the administration of those benefits.8 The district court in Rutledge held Gerhart's reasoning equally applied to the Arkansas Act and found it pre-empted.9  The Eighth Circuit affirmed on the same grounds, and the Supreme Court granted cert.10

 

The Issue at the Supreme Court: Is Arkansas Act 900 Permissible Market Regulation or Pre-Empted ERISA Plan Regulation? 

The question before the Supreme Court was whether ERISA pre-empts the Arkansas Act.  Arkansas argued that the Act does not "relate to" ERISA plans in a way that triggers pre-emption because the Act is an ordinary market regulation that does not dictate how health plans must be run.  Arkansas pointed to Supreme Court precedent that ERISA does not pre-empt the regulation of rates charged to health plans for goods and services, relying primarily on N.Y. State Conference of Blue Cross & Blue Shield Plan v. Travelers Insurance Co.11   Arkansas further argued that the Eighth Circuit and PCMA overstated ERISA's pre-emptive reach, which, if followed, would exempt ERISA plans from state contract law and a number of applicable state health and safety regulations.12

Numerous amici, including pharmacy groups, industry organizations, the United States, and 46 state attorneys general, joined Arkansas' appeal.  The amici emphasized concerns with PBM pricing methodologies, alleging that PBMs have used market power to pay low reimbursement rates, diminish access and support for lower-cost drug alternatives, and direct patients to pharmacies owned by PBMs and away from independently owned pharmacies, to the detriment of pharmacies and patients.13 Laws such as the Arkansas Act, the amici argued, effectuate necessary rate regulation of PBMs to address these concerns.  They argued further that the law regulates PBMs, not health plans, and therefore should not be pre-empted.

The PCMA, on the other hand, argued that the Act regulates the administration of prescription drug benefits on behalf of ERISA-governed plans because it establishes Arkansas-specific rules that control the amount plans must pay for benefits, the methodology for determining the amounts to be paid, the timing and procedure for updating payment terms, and the dispute resolution process for pricing disputes.  All of these matters, PCMA argued, impermissibly relate to ERISA plans, and thus require pre-emption, because they are central to plan administration.14

Multiple health insurance trade organizations and the U.S. Chamber of Commerce weighed in on behalf of PCMA, arguing that regulations such as the Arkansas Act upend the goals of ERISA to allow health plans to create nationally uniform and cost-effective prescription benefit plans, because the statute imposes reimbursement and administrative schemes that would override an ERISA plan's benefit design and upheave the administration of ERISA-governed benefits.15

Reversing the Eighth Circuit, the Supreme Court Held that Arkansas' Act 900 is a "Cost Regulation" not Pre-Empted by ERISA

In an 8-0 opinion, the Supreme Court reversed and held that the Arkansas Act "amounts to cost regulation that does not bear an impermissible connection with or reference to ERISA," and therefore is not pre-empted.16  Justice Sotomayor issued the opinion, with Justice Thomas concurring separately and Justice Barrett not participating.17

The Court first looked to the text of ERISA, which mandates that it pre-empts a state law that "relate[s] to any employee benefit plan" covered by the statute.18  Following precedent, the Court explained that a state law "relates to" an ERISA plan if it has a "connection with or reference to" an ERISA plan.  If either of those impermissible relationships exists, the state laws is pre-empted by ERISA.19

The Court relied on ERISA's objectives to flesh out the parameters of an "impermissible connection with" an ERISA plan.20  The Court found ERISA was enacted to make benefits "more secure" and ensure plans are subject "to a uniform body of benefits law."21 The ERISA pre-emption provisions consequently, according to the Court, are concerned with state laws that "require providers to structure benefit plans in particular ways," "bind[] plan administrators to specific rules for determining beneficiary status," or create economic effects that "force an ERISA plan to adopt a certain scheme of coverage."22   Thus, the Court explained, a state law may be "impermissibly connected" with ERISA plans—and therefore pre-empted—only where the state law "governs a central matter of plan administration or interferes with nationally uniform plan administration."23 

The Court held the Arkansas Act did neither.  The decision repeatedly referenced the same principle—the law merely regulates and affects costs, not plan administration—and relied heavily on Travelers.  The Court made it clear that "not every state law that affects an ERISA plan or causes some disuniformity in plan administration has an impermissible connection with an ERISA plan," especially where the law "merely affects costs."24   Therefore, while the Court acknowledged that the Arkansas Act may result in increased costs that would not be uniform across different states, it determined such cost effects are not the "object of pre-emption."25   In other words, "ERISA does not pre-empt state regulations that merely increase costs or alter incentives for ERISA plans without forcing plans to adopt any particular scheme of substantive coverage."26   

The Court also held that the Arkansas Act does not bear a "reference to" ERISA plans in a way that would require pre-emption because it does not "act immediately and exclusively upon ERISA plans."27 For one, the Court determined that the Act applies to a PBM's pharmacy payment whether or not the PBM manages benefits for an ERISA-governed plan, meaning ERISA plans are not essential to the Act's operation.  Further, the Court highlighted that the Act itself does not regulate health plans, finding instead that it only affects plans "insofar as PBMs may pass along higher pharmacy rates to health plans," and that increased costs alone is not an effect warranting pre-emption.28

The Court squarely rejected PCMA's argument that the Arkansas Act has an impermissible connection with ERISA plans because its enforcement mechanisms "affect central matters of plan administration and interfere with nationally uniform plan information," finding the mechanisms neither "require plan administrators to structure their benefit plans in any particular manner, nor do they lead to anything more than potential operational inefficiencies."29 

The Court determined the Act's price regulation mechanism "establishes a floor for the cost of benefits that a plan chooses to provide," rather than requiring plans to provide benefits in any particular way.30   The Court also found that the Arkansas Act's appeal procedure, while it may affect the amount a plan (and its beneficiary) may ultimately owe, was akin to a contract dispute over cost, which would not be pre-empted.  Notably, the Court concluded that adopting such an argument "would pre-empt any suits under state law that could affect the price or provision of benefits," which would conflict with precedent.31   

The Court further concluded that the Arkansas Act's permission for pharmacies to refuse the sale of a prescription at a below-cost reimbursement, even if it may result in denying a plan benefit to a consumer, does not interfere with central matters of plan administration, reasoning that the genesis of any such result is the PBM's rate-setting decision.32 Last, the Court acknowledged the Act may create "operational inefficiencies," but held operational inefficiencies alone are not enough to trigger pre-emption—even if those inefficiencies lead to increased costs that decrease benefit offerings—when they are effects of cost regulations.33
 

Industry Implications and Key Takeaways  

The Rutledge decision has implications for laws across a number of states, even though they were not directly at issue in the case.  More than 35 states have passed PBM reimbursement regulations similar to the Arkansas Act.  Rutledge likely forecloses any serious ERISA pre-emption challenges to those statutes.34 Laws mandating a specific benefit for ERISA plans, or ones forcing plans to administer their benefits in a certain way, however, likely would still face a tough pre-emption challenge even after Rutledge.  That said, statutes that merely change incentives for health plans—even if they may increase costs and by extension negatively affect benefits—would seem to fit within the type of "cost regulation" that Rutledge would allow.  Not surprisingly, state attorneys general and pharmacy groups have praised the Court's decision as a long-sought victory.35

Moving forward, the decision may have broader implications for pharmaceutical drug distribution, reimbursement, and pricing in the United States.  By allowing Arkansas to protect small pharmacies from certain forms of price competition without tripping over ERISA pre-emption, the decision may open the door for state efforts to foreclose price competition in other ways, as long as the state law is a "cost regulation" that does not force plans to change benefit design.  Despite scepticism from several justices at oral argument,36 the 8-0 opinion shows no concern about the potential for such regulation to increase plan costs and deliver worse benefits to consumers.  States may now have more freedom to encourage politically favored potential economic benefits to the possible detriment of ERISA plans and consumers.  Also, by coming down on the side of a narrower view of ERISA pre-emption, the Court has provided more room for states to investigate the use of "cost regulation" to impact payment rates for all manner of health care costs, not just prescription drugs.  Further, states may try to extend the reach of current state regulations on non-ERISA insurance plans to ERISA-governed plans.  While state efforts to regulate ERISA plans directly remain suspect, Rutledge seemingly broadens the scope of regulations that can survive a pre-emption challenge.

 

1 Rutledge v. Pharm. Care Mgmt. Ass'n, No. 18-540, slip op. at 6 (Dec. 10, 2020) ("Rutledge").
2 See Ark. Code. Ann. § 17-92-507(c)(2).
3  See Ark. Code. Ann. §§ 17-92-507(c)(4)(A)(i)(b); 17-92-507(c)(4)(C)(i)(b).
4  See Ark. Code. Ann. § 17-92-507(e).
5  The Employee Retirement Income Security Act ("ERISA") governs qualified health plans offered by private employers and pre-empts state laws that "relate to" any employee benefit plan that is governed by ERISA.  29 U.S.C. §§ 1003(a), 1144(a).  
6 Pharm. Care Mgmt. Ass'n v. Rutledge, 240 F. Supp. 3d 951 (E.D. Ark. 2017).
7 852 F.3d 722 (8th Cir. 2017).
8 Id. at 730–31.
9 Rutledge, 240 F. Supp. 3d at 958.
10 Pharm. Care Mgmt. Ass'n v. Rutledge, 891 F.3d 1109, 1112–13 (8th Cir. 2018).
11  514 U.S. 645 (1995).
12  See generally Br. for Pet'r., Rutledge v. Pharm. Care Mgmt. Ass'n, No. 18-540 (Feb. 24, 2020).
13  See, e.g., Br. for California, 44 Other States, and the District of Columbia as Amici Curiae in Supp. of Pet'r., Rutledge v. Pharm. Care Mgm't Ass'n., No. 18-540 (Mar. 2, 2020).
14 See generally Br. for Resp't, Rutledge v. Pharm. Care Mgmt. Ass'n, No. 18-540 (Mar. 25, 2020).
15 See, e.g., Br. of Amicus Curiae America's Health Insurance Plans, Inc. in Supp. of Resp't and Affirmance, Rutledge v. Pharm. Care Mgm't Ass'n, No. 18-540 (Apr. 1, 2020).
16 Rutledge, slip op. at 10.
17 Justice Thomas' concurrence addressed his concern with the Court's ERISA pre-emption jurisprudence, which he believes is not properly text-based and too amorphous to be applied consistently.  In his view, ERISA pre-emption should apply only when an ERISA provision governs the same matter as the state law and the state law has a "meaningful relationship" to ERISA plans.  See id. (Thomas, J. concurring) at 1–6.  
18 Id. at 4 (citing 29 U.S.C. § 1144(a)).
19 Id.
20 Id. 
21 Id. (quoting Gobeille v. Liberty Mut. Ins. Co., 577 U.S. 312, 320–21 (2016)). 
22 Id. at 4–5 (quoting Gobeille, 577 U.S. at 320).
23Id. at 5 (quoting Gobeille, 577 U.S. at 320).
24 Id.
25Id. at 6 (quoting Travelers, 514 U.S. at 662).
26 Id.
27 Id. at 6–7.
28 Id. at 7.
29 Id. at 7–8.
30 Id. at 8.
31 Id. at 9.
32 Id. 
33 Id.
34 See Br. for Pet'r at 9; see also, e.g., "Pharmacy Groups Hail Supreme Court's Rutledge Decision," Chain Drug Review (Dec. 10, 2020)
35 See, e.g., "Pharmacy Groups React to Supreme Court Ruling on State Regulation of Controversial PBMs," Nat'l Alliance of State Pharmacy Ass'ns (Dec. 10, 2020).
36 For example, Justice Kavanaugh asked, "Why shouldn't ERISA care about costs that are going to be increased and then passed on in the form of worse benefits to Arkansas workers?"  Hr'g Tr. 35:16–19, Rutledge v. Pharm. Care Mgmt. Ass'n, No. 18-540 (Oct. 6, 2020).

 

Lily Kim (Associate, New York) also assisted in the development of this publication.

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