Pension & Benefits News ERISA does not preempt Arkansas law regulating pharmacy benefit managers, Supreme Court rules
Monday, January 4, 2021

ERISA does not preempt Arkansas law regulating pharmacy benefit managers, Supreme Court rules

By Pension and Benefits Editorial Staff

The Supreme Court has ruled that ERISA does not preempt an Arkansas law that regulates the price at which pharmacy benefit managers (PBM) reimburse pharmacies for the cost of drugs covered by prescription-drug plans because the law amounts to cost regulation that does not bear an impermissible connection with or reference to ERISA. The court reversed the Eighth Circuit’s ruling that the law implicitly "related to" ERISA in violation of ERISA’s preemption provision.

Arkansas law. In 2015, Arkansas passed Act 900, which sought to protect pharmacies from being forced to sell drugs at a loss by, among other things, requiring that pharmacy benefit managers reimburse the pharmacies for generic drugs at a price at least equal to the pharmacies’ cost in acquiring the drug from a wholesaler. The state law also included what is known as a "decline-to-dispense" option, which permitted pharmacies to refuse to dispense a drug if they were to lose money on the transaction. The Pharmaceutical Care Management Association (PCMA), a national trade association representing the 11 largest PBMs in the country, filed suit in Arkansas federal district court, asking the court to declare Act 900 preempted by both ERISA and Medicare Part D. The court ruled that ERISA preempted Act 900 but that Medicare Part D did not, at which point the state appealed the part of the ruling finding that ERISA preempted the law, while the PCMA cross-appealed the determination that Medicare Part D did not.

Court of appeals. In June 2018, the Eighth Circuit ruled that ERISA preempted Act 900 and Medicare Part D. 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.

Petition for certiorari. In January 2020, the Supreme Court granted Arkansas Attorney General Leslie Rutledge’s petition for certiorari and heard the case in October 2020. The only question presented was whether the Eighth Circuit erred in holding that Arkansas’s statute regulating PBMs’ drug-reimbursement rates, which is similar to laws enacted by a substantial majority of states, was preempted by ERISA, in contravention of the Supreme Court’s precedent that ERISA does not preempt rate regulation.

Cost regulation. The Supreme Court ruled that Act 900 does not have an impermissible connection with an ERISA plan. The court explained 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. That is especially so if a law merely affects costs.” Relying on its decision in New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., the court found Act 900 was merely a form of cost regulation. It requires PBMs to reimburse pharmacies for prescription drugs at a rate equal to or higher than the pharmacy’s acquisition cost. PBMs may well pass those increased costs on to plans, meaning that ERISA plans may pay more for prescription-drug benefits in Arkansas than in other states. However, “cost uniformity was almost certainly not an object of pre-emption.” In addition, the effect of Act 900 is not so acute that it will dictate plan choices.

Does not regulate health benefit plans. The court also ruled that Act 900 does not “refer to” ERISA. “Act 900 does not act immediately and exclusively upon ERISA plans because it applies to PBMs whether or not they manage an ERISA plan. Indeed, the Act does not directly regulate health benefit plans at all, ERISA or otherwise. It affects plans only insofar as PBMs may pass along higher pharmacy rates to plans with which they contract,” the court wrote. Likewise, ERISA plans are not essential to Act 900’s operation. Act 900 regulates PBMs whether or not the plans they service fall within ERISA’s coverage.

Unraveling of federal protections. The PCMA indicated it was disappointed in the court’s decision, stating in a press release that the decision “will result in the unraveling of federal protections” under ERISA. “As states across the country consider this outcome, we would encourage they proceed with caution and avoid any regulations around prescription drug benefits that will result in higher healthcare costs for consumers and employers,” PCMA said.

Attorney General Rutledge praised the ruling. “This is an important unanimous win for not only locally owned pharmacies that have experienced financial hardships at the hands of pharmacy benefit managers, but more importantly, this is a win for all Arkansans and Americans to have access to affordable health care,” she said in a statement following the ruling.

SOURCE: Rutledge v. Pharmaceutical Care Management Association, (SCt), No. 18–540, December 10, 2020.

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