Health Law Daily Supreme Court rules for pharmacies, state law not preempted by ERISA
Friday, December 11, 2020

Supreme Court rules for pharmacies, state law not preempted by ERISA

By Cathleen Calhoun, J.D.

The U.S. Supreme Court has ruled unanimously (8-0) to reverse the Eighth Circuit, finding that an Arkansas law on reimbursements to pharmacies by PBMs is not federally preempted.

In an 8-0 decision, the U.S. Supreme Court reversed an Eighth Circuit decision and found that the Employee Retirement Income Security Act (ERISA) did not preempt an Arkansas state law on reimbursement payments to pharmacies. In the majority opinion, written by Justice Sotomayor and joined by all the other justices, except Justice Barrett who took no part in the decision, and Justice Thomas who wrote a separate concurring opinion, the Court held that ERISA preempts state laws that relate to a covered employee benefit plan, or that have a connection with or reference to such a plan, and that the Arkansas law had neither of those impermissible relationships. The Court also analyzed other arguments in favor of ERISA preemption but found that the Arkansas law "amounts to a cost regulation" and that a connection between ERISA and the law was lacking (Rutledge v. Pharmacy Benefit Managers Association, December 10, 2020, Sotomayor, S.).

Arkansas law. Pharmacy Benefits Managers (PBMs) are the intermediaries between prescription-drug plans and the pharmacies where beneficiaries fill their prescriptions. Pharmacies check with PBMs when filling prescriptions to find out if a beneficiary has coverage and the amount of copayment. The PBMs reimburse the pharmacy for the prescription, less the copayment. After that, the prescription drug plan reimburses the PBMs. In 2015, Arkansas passed Act 900, which sought to protect pharmacies from being forced to sell drugs at a loss by requiring PBMs to reimburse Arkansas pharmacies at a price equal to or higher than that which the pharmacy paid to buy the drug from a wholesaler. The state law further sought to protect pharmacies by (1) requiring PBMs to tie reimbursement rates to pharmacies’ acquisition costs by timely updating their maximum allowable costs (MAC) lists when drug wholesale prices increase; (2) requiring PBMs to provide administrative appeal procedures for pharmacies to challenge MAC reimbursement prices that are below the pharmacies’ acquisition costs; and (3) including a "decline-to-dispense" option, which permits pharmacies to refuse to dispense a drug if they were to lose money on the transaction.

Eighth Circuit decision. In the Eighth Circuit decision Pharmaceutical Care Management Association v. Rutledge, the court ruled that both ERISA and Medicare Part D preempted the Arkansas law that sought to govern the conduct of PBMs. Ruling in favor of Pharmaceutical Care Management Association (PCMA), an association of PBMs, the court determined both that the Arkansas law implicitly "related to" ERISA in violation of ERISA’s preemption provision and that the law "acted" with respect to standards that CMS had established, in violation of Medicare Part D’s preemption provision. The question brought to the U.S. Supreme Court was whether the Eighth Circuit erred in holding that ERISA preempts the Arkansas statute regulating PBMs' drug-reimbursement rates (see Part D preempts Arkansas law regulating pharmacy benefits managers, June 11, 2018; Health law takes center stage at U.S. Supreme Court, October 5, 2020).

Majority opinion. The Supreme Court rejected multiple arguments that ERISA preempted the Arkansas state law. ERISA is primarily concerned with preempting laws that require providers to structure benefit plans in particular ways, such as by requiring payment of specific benefits, or by binding plan administrators to specific rules for determining beneficiary status, according to the Court. "Crucially, not every state law that affects an ERISA plan or causes some disuniformity in plan administration has an impermissible connection with an ERISA plan. That is especially so if a law merely affects costs…In short, ERISA does not preempt state rate regulations that merely increase costs or alter incentives for ERISA plans without forcing plans to adopt any particular scheme of substantive coverage," the Court stated. The Court noted too that Act 900 is not as intrusive as other laws that have been preempted by ERISA, since applies equally to all PBMs and pharmacies in Arkansas. Also, according to the Court, Act 900 does not refer to ERISA and does not act immediately and exclusively upon ERISA plans because it applies to PBMs whether they manage an ERISA plan or do not manage and ERISA plan. Additional arguments by PCMA, such as that Act 900 interferes with central matters of plan administration by allowing pharmacies to decline to dispense a prescription if the PBM’s reimbursement will be less than the pharmacy’s cost of acquisition, and that Act 900’s enforcement mechanisms interfere with nationally uniform plan administration by creating operational inefficiencies, also failed. In summarizing its decision, the Supreme Court said that Arkansas Act 900 amounted to a cost regulation that does not bear an impermissible connection with, or reference to, ERISA.

The case is No. 18-540.

Attorneys: Nicholas Jacob Bronni, Arkansas Attorney General's Office, for Leslie Rutledge. Seth P. Waxman (Wilmer Cutler Pickering Hale and Dorr LLP) for Pharmaceutical Care Management Association.

Companies: Pharmaceutical Care Management Association

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