The US Court of Appeals for the Eighth Circuit has held that an Arkansas law intended to regulate the conduct of pharmacy benefit managers (PBMs) was preempted by ERISA and Medicare Part D (Pharm. Care Mgmt. Ass'n v. Rutledge, (8th Cir. June 8, 2018)).

Enacted in 2015, the Arkansas law at issue in this case 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:

Act 900 attempted 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. Act 900 required that pharmacies – which obtain their drug inventories from wholesalers – 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."

Act 900 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 This provision was designed to avoid a practice in which PBMs purportedly used out-of-date MAC lists to provide below-cost reimbursements.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 Act 900 allowed pharmacies to re-bill claims involving drugs that they could not obtain at a cost at least equal to the cost on the PBM's MAC list. Act 900 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 Act 900 was preempted by both ERISA and Medicare Part D. Relying on Eighth Circuit precedent in another PBM case, the district court concluded that Act 900 was ERISA-preempted (but not preempted by Medicare Part D). The State of Arkansas cross-appealed the ERISA preemption ruling, and the PBM trade association appealed the Medicare Part D ruling.

On appeal, the Eighth Circuit agreed that Act 900 was preempted by ERISA (see Practice Note, ERISA Litigation: Preemption of State Laws (Overview): Conflict Preemption Analysis). The court relied on a recent Eighth Circuit decision in which the court held that an Iowa statute similar in purpose to Act 900 was ERISA-preempted (Pharm. Care Mgmt. Ass'n v. Gerhart, 852 F.3d 722 (8th Cir. 2017)). Among other provisions, the Iowa statute in Gerhart required PBMs to make available information about their pricing methodologies on request by Iowa's insurance commissioner (Iowa Code § 510B.8).

In Gerhart, the Eighth Circuit held that the Iowa law was preempted by ERISA because it:

The court concluded that the Iowa law both expressly and implicitly referred to ERISA in regulating PBM conduct and managing pharmacy benefits, and had a connection with ERISA. The court observed that the law implicitly referenced ERISA by regulating PBMs in administering benefits for "covered entities," which necessarily included health plans. Based on Gerhart, the Eighth Circuit held that the district court had correctly found that Act 900 was preempted by ERISA.

The Eighth Circuit also concluded that Act 900 was preempted by Medicare Part D, the statute and implementing regulations that govern prescription drugs (see Article, ACA Changes to Medicare Part D Affecting Retiree Medical Plans).

As in other court of appeal decisions, ERISA's broad preemption rule has once again foiled state legislative efforts to regulate PBM conduct and business practices in the context of employee benefit plans. Regulation in this space may ultimately need to occur at the federal level, and the Trump administration recently expressed an interest in issuing guidance intended to reduce drug costs and potentially address the role of PBMs. In its recent blueprint for lowering drug prices and reducing out-of-pocket costs, the Department of Health and Human Services (HHS) requested comments on issues that could impact PBMs as a matter of federal policy – for example, by imposing a fiduciary duty on PBMs to act solely in the interest of the entity for whom they manage pharmaceutical benefits.