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Supreme Court rules ERISA does not preempt Arkansas PBM law

Health and Benefits
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By Rich Gisonny , Anu Gogna and Ben Lupin | December 30, 2020

The decision may encourage more states to adopt laws regulating minimum prices at which pharmacy benefit managers must reimburse pharmacies.

On December 10, 2020, the U.S. Supreme Court held in Rutledge v. Pharmaceutical Care Management Association that ERISA does not preempt an Arkansas statute that regulates the minimum prices at which pharmacy benefit managers (PBMs) must reimburse pharmacies within the state. Specifically, the court held that the Arkansas PBM law has neither an “impermissible connection with” nor reference to ERISA and is therefore not preempted. At least 38 states have passed laws regulating PBM reimbursement rates that are similar to the Arkansas law.

The Supreme Court’s opinion does not specify an effective date. As a result, the decision is currently in effect and will be invoked by other courts if they are asked to rule in similar cases.

Background

In 2015, to address the trend in Arkansas of significantly fewer independent and rural pharmacies, the state legislature adopted Act 900, which mandates that pharmacies be reimbursed for generic drugs at or above the cost the pharmacies paid for the drugs. Further, the law requires PBMs to update their maximum allowable cost lists within at least seven days from the time there has been a certain increase in acquisition costs. Finally, the law contains a “decline-to-dispense” option for pharmacies that will lose money on a specific transaction.

The Pharmaceutical Care Management Association (PCMA), a national trade association representing the 11 largest PBMs in the country, sued Arkansas in federal district court, alleging that Act 900 was preempted by ERISA. In 2017, an Arkansas federal district court ruled that the law was preempted by ERISA to the extent that it applies to PBMs administering ERISA-covered group health plans. Following an appeal of that decision, the 8th U.S. Circuit Court of Appeals agreed that the law was preempted by ERISA in 2018.

Supreme Court’s ruling

In an 8 – 0 opinion (with Justice Amy Coney Barrett not taking part), the Supreme Court ruled that “Act 900 is merely a form of cost regulation” that applies equally to all PBMs and pharmacies in Arkansas and therefore is not “impermissibly connected” with an ERISA plan. The court stated that “ERISA does not pre-empt state rate regulations that merely increase costs or alter incentives for ERISA plans without forcing plans to adopt any particular scheme of substantive coverage.”

Further, the court stated that a statute refers to ERISA when it “acts immediately and exclusively upon ERISA plans or where the existence of ERISA plans is essential to the law’s operation.” The court concluded that Act 900 does not refer to ERISA because it applies to all PBMs regardless of whether the PBM manages an ERISA plan. The court stressed that Act 900 affects plans only insofar as PBMs may pass along higher pharmacy rates to plans with which they contract. Crucially, the Arkansas statute applies when PBMs pass along those charges not only to ERISA plans but also to plans provided by Medicaid, Medicare, the military or the marketplace.

The court acknowledged that ERISA plans may pay more for prescription-drug benefits in Arkansas than in another state, creating potential nationwide “inefficiencies” for plan sponsors; however, the court concluded that “creating inefficiencies alone is not enough to trigger ERISA pre-emption.”

Going forward

The Rutledge decision validates the enforceability of Arkansas’ PBM law. It also will indirectly support the enforceability of similar laws in other states and may encourage more states to adopt laws regulating PBM reimbursement rates. Employers should review the terms of their agreements with their PBMs to determine what impact, if any, the ruling would have on prescription drug costs.

Employers also should be aware that some states may view the Rutledge decision as an opening to advance additional laws that directly impact the cost of health care, beyond prescription drugs, for ERISA-covered health plans without directly mandating changes to the terms of the plan.

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