Supreme Court: Arkansas PBM Law Is Not ERISA-Preempted | Practical Law

Supreme Court: Arkansas PBM Law Is Not ERISA-Preempted | Practical Law

The US Supreme Court has held that an Arkansas law that regulates reimbursement rates paid to pharmacies by pharmacy benefit managers (PBMs) was not preempted by the Employee Retirement Income Security Act of 1974 (ERISA).

Supreme Court: Arkansas PBM Law Is Not ERISA-Preempted

Practical Law Legal Update w-028-7777 (Approx. 4 pages)

Supreme Court: Arkansas PBM Law Is Not ERISA-Preempted

by Practical Law Employee Benefits & Executive Compensation
Published on 14 Dec 2020 • USA (National/Federal)
The US Supreme Court has held that an Arkansas law that regulates reimbursement rates paid to pharmacies by pharmacy benefit managers (PBMs) was not preempted by the Employee Retirement Income Security Act of 1974 (ERISA).
In a unanimous ruling, the US Supreme Court has held that ERISA did not preempt an Arkansas law intended to regulate the conduct of pharmacy benefit managers (PBMs) (Rutledge v. Pharm. Care Mgmt. Ass'n, (Dec. 10, 2020)).

Arkansas Law Addresses Low Reimbursement Rates for Prescription Drugs

Enacted in 2015, the Arkansas law at issue in this litigation included various provisions to manage industry cost structures established by PBMs and to address a trend of fewer independent pharmacies in rural areas (Ark. Code Ann. § 17-92-507 (Act 900); see Practice Note, ERISA Litigation: Preemption of Select State Laws: Pharmacy Benefit Manager Laws). As background, PBMs:
  • Serve as intermediaries between ERISA health plans and pharmacies.
  • Are often involved in claims processing, data management, drug sales, and benefit level determinations.
  • Confirm benefits and manage financial interactions between pharmacies and participants.
The Arkansas law sought to set a floor to offset an industry trend in which pharmacies accepted reduced reimbursement rates for dispensed prescriptions (and might actually lose money on given transactions) as a result of participating in a PBM's preferred pharmacy network. The rate reimbursed by a PBM, as established by the PBM's "maximum allowable cost" (MAC) list, could be:
  • Below the cost to the pharmacy for obtaining its drugs from wholesalers.
  • Less than the amount received by the PBM from a prescription drug plan as reimbursement (with the difference resulting in a profit for the PBM).
The Arkansas law required pharmacies to be reimbursed for generic drugs at a price that at least equaled a drug's cost as reflected on the wholesaler's invoice. This amount was referred to as the "pharmacy acquisition cost."
The Arkansas law also required that PBM MAC lists be timely updated when there were changes in acquisition costs. This provision was designed to avoid a practice in which PBMs purportedly used out-of-date MAC lists to provide below-cost reimbursements. Another provision of the law required PBMs to make available procedures through which pharmacies could challenge MAC reimbursement prices that were below the pharmacies' acquisition costs. The Arkansas law also included a "decline-to-dispense" option if a pharmacy would lose money on a particular transaction.
A trade association of PBMs brought suit in federal district court, asserting that the Arkansas law was ERISA-preempted. Relying on Eighth Circuit precedent in another PBM case, however, the district court concluded that ERISA preempted the Arkansas law. The Eight Circuit affirmed and Arkansas asked the Supreme Court to review that decision (see Legal Update, Arkansas PBM Law Preempted by ERISA and Medicare Part D).

Court Applies "Connection With" and "Reference to" Analysis

The Supreme Court reversed, holding that the Arkansas PBM law was not ERISA-preempted (see Practice Note, ERISA Litigation: Preemption of State Laws (Overview)). Applying a framework from its ERISA preemption jurisprudence, the Court analyzed whether the Arkansas law had an impermissible connection with or reference to an ERISA plan.
In concluding that the Arkansas law did not have an impermissible connection with an ERISA plan, the Court reasoned that the statute did not force ERISA plans to take a particular course of action. The Court applied the logic of its 1995 Travelers ruling, in which the Court concluded that ERISA did not preempt a New York law that imposed surcharges on hospital billing rates for patients who were covered by insurers other than Blue Cross/Blue Shield (see Practice Note, ERISA Litigation: Preemption of State Laws (Overview): General Preemption Rule). The Court reasoned that, as in Travelers, the Arkansas law was merely a form of cost regulation—that is, to establish a floor for pharmacy reimbursement rates. Although the Court acknowledged that the Arkansas law might increase costs for PBMs and that PBMs could then pass on those costs to plans, it observed that "cost uniformity" was not a goal of ERISA preemption.
The Court also held that the Arkansas law did not have an impermissible reference to an ERISA plan. In the Court's view, ERISA plans were not essential to the law's operation, because it applied to all PBMs regardless of whether they contracted with ERISA plans. The Court rejected the trade association's arguments that the Arkansas law governed matters central to plan administration or interfered with nationally uniform administration by:
  • Mandating a pricing methodology.
  • Imposing particular appeal procedures for pharmacies to challenge reimbursement rates.
  • Allowing pharmacies to decline to dispense prescriptions that would be reimbursed at a rate below the wholesale price.
  • Creating "operational inefficiencies."
According to the Court, none of these provisions caused the Arkansas law to be anything more than a cost regulation.

Justice Thomas Argues for New Approach to ERISA Preemption Jurisprudence

In a concurring opinion, Justice Thomas agreed that the Court correctly applied its ERISA preemption precedents, but criticized those precedents as having resulted in a vague and confusing preemption test that did not offer the federal courts adequate guidance. As he did in the Court's 2016 Gobeille ruling on ERISA preemption, Justice Thomas asserted that the Court should apply a preemption analysis that is truer to the text of ERISA's preemption provision (see Legal Update, Supreme Court Holds That ERISA Preempts State Health Care Reporting Law: Concurring and Dissenting Opinions).

Practical Impact

Although few would characterize the Supreme Court's ERISA preemption jurisprudence as a model of clarity, the current justices do appear to agree that state rate regulations (such as the ones at issue here and in Travelers) will survive an ERISA preemption challenge if they merely increase costs or affect the cost incentives for an ERISA plan, while stopping short of requiring a plan to satisfy specific substantive coverage requirements.
In the three-and-a-half years since Gobeille, Justice Thomas apparently has not convinced any of his colleagues of the need to fundamentally revamp the Court's approach to ERISA preemption. But given how frequently the Court has been called on to decide ERISA preemption cases over the past decades, his advocacy of an analysis that would offer greater clarity and predictive ability does have a certain appeal.