Does the Employee Retirement Income Security Act of 1974 preempt a state law regulating pharmacy benefit managers’ drug-reimbursement rates?
This case asks the Supreme Court to decide whether an Arkansas state law regulating pharmacy benefit managers’ drug reimbursement rates is preempted by the Employee Retirement Income Security Act of 1974 (“ERISA”). Whether ERISA preempts the state law, Act 900, depends on whether Act 900 has an impermissible connection to ERISA or refers to ERISA. Arkansas Attorney General, Leslie Rutledge, argues that ERISA does not preempt Act 900 because Act 900 is simply a basic rate regulation that does not have an impermissible connection to ERISA or refer to ERISA. The Pharmaceutical Care Management Association counters that ERISA, in fact, preempts Act 900, as Act 900 regulates a central part of ERISA plan administration, making it impermissibly connected to ERISA, and refers to ERISA. The Court’s decision in this case will influence the ability of states to regulate pharmacy benefit managers and, by extension, could impact the costs of prescription drugs and the access patients have to pharmacies.
Questions as Framed for the Court by the Parties
Whether the U.S. Court of Appeals for the 8th Circuit erred in holding that Arkansas’ statute regulating pharmacy benefit managers’ drug-reimbursement rates, which is similar to laws enacted by a substantial majority of states, is pre-empted by the Employee Retirement Income Security Act of 1974, in contravention of the Supreme Court’s precedent that ERISA does not pre-empt rate regulation.
In 2015, the State of Arkansas passed Act 900, a law created to regulate the practices of pharmacy benefit managers (“PBMs”). Pharm. Care Mgmt. Ass’n v. Rutledge at 1111. PBMs serve as a link between pharmacies and health plans. Id. PBMs run mail-order prescription transactions, process claims, and disburse drugs. Id. PBMs also contract with pharmacies to create pharmacy networks. Id. For these networks, PBMs set a Maximum Allowable Cost (“MAC”) list, which specifies the maximum rate at which health plans reimburse pharmacies for dispensing generic drugs that the pharmacies bought from wholesalers. Id. Contracting with PBMs allows pharmacies to become part of a health plan’s preferred network, but might also result in pharmacies agreeing to be reimbursed for less than what they paid a wholesaler for that same drug. Id.
Seeing the influence these MAC lists seemed to have on the decreasing number of local, independently run, and rural-serving pharmacies in the state, the Arkansas state legislature passed Act 900 to address the issue. Id.; see also Ark. Code Ann. § 17-92-507. Act 900 creates a system to ensure that the MAC list rates are not less than what it costs for pharmacies to purchase drugs from a wholesaler—thereby ensuring that pharmacies will not lose money when selling a generic drug. Pharm. Care Mgmt. Ass’n v. Rutledge at 1111. The Act achieves this goal by requiring PBMs to update their MAC lists within seven days when the acquisition cost of a drug from a wholesaler increases by a certain amount. Id. Further, Act 900 includes an administrative appeal procedure through which pharmacies can challenge MAC reimbursements if those reimbursements are less than what the pharmacy paid to acquire the drug. Id. Finally, Act 900 allows pharmacies to refuse to dispense prescriptions to a patient if, due to a MAC list, the PBM will reimburse the pharmacy at a lower rate than what it cost the pharmacy to acquire the drug from a wholesaler. Id.
The Pharmaceutical Care Management Association (“PCMA”), which represents some of the largest PBMs in the country, challenged Act 900 by arguing that the Act is preempted by the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. § 1144(a), and Medicare Part D, 42 U.S.C. § 1395w–26(b)(3). Id. At trial, the district court ruled that ERISA preempts Act 900, but that Medicare Part D does not preempt Act 900. Id. at 1112. PCMA appealed the district court’s holding as to Medicare Part D, and the State of Arkansas cross-appealed the court’s holding as to ERISA. Id. On appeal, the United States Court of Appeals for the Eighth Circuit partially upheld and partially reversed the district court’s ruling, holding that both ERISA and Medicare Part D preempt Act 900. Id. at 1114. The Eighth Circuit reasoned that Act 900, while not directly referencing ERISA, had a strong enough relation with and connection to employee benefits plans, and thus implicitly referenced ERISA, which is enough for the Act to be preempted. Id. at 1112. It further reasoned that the decline-to-dispense clause in Act 900 could render a pharmacy out-of-network for Medicare Part D, triggering preemption by Medicare Part D as well. Id. at 1114.
The State of Arkansas petitioned the Supreme Court of the United States for a writ of certiorari, which the Court granted on January 10, 2020. Proceedings & Orders 18-540. The parties narrowed the question for the Court’s review to whether ERISA preempts Act 900. Id.
DOES ACT 900 IMPERMISSIBLY CONNECT TO ERISA?
Petitioner Leslie Rutledge, Attorney General of Arkansas, argues that the state’s Act 900 does not have an impermissible connection to ERISA plans, and, thus, is not preempted by ERISA. Brief for Petitioner, Rutledge at 16. Rutledge contends that Congress enacted ERISA to ensure employers provide the benefits they promised to their employees, and that ERISA preempts state laws that are either impermissibly connected to ERISA plans or reference ERISA plans. Id. at 16–18. Addressing the first of these preemption concerns, Rutledge explains that a state law has an impermissible connection to ERISA plans when the state law either dictates a main part of plan administration or impedes “nationally uniform” plan administration. Id. at 18. Rutledge first argues that the case at hand deals with regulation of reimbursement rates for pharmacies and that ERISA was not enacted to preempt such basic rate regulation. Id. at 19. Rutledge contends that the Court previously determined, in New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Company, that ERISA does not preempt a law solely because that law impacts health plan costs. Id. at 21. Additionally, Rutledge articulates that Act 900 does not impact plan-administration uniformity, but only cost uniformity, which is not itself a subject of ERISA. Id. at 19. Moreover, the Court, Rutledge notes, has held that ERISA preempts state laws that directly regulate health plans and their beneficiaries, but not state laws that regulate the relationship between health plans and third parties, like the law at issue here. Id. Rutledge contends that Act 900 regulates the rate of reimbursement for pharmacies by third-party administrators like PBMs. Id. at 23. Rutledge believes that this basic rate regulation does not create rate increases that would be so severe as to compel health plans to cut ties with third-party administrators or modify their available health plans; thus, Rutledge continues, Act 900 does not impact a main part of plan administration. Id. at 23–24.
Rutledge further asserts that Act 900 is not preempted by ERISA because Act 900’s enforcement mechanisms are necessary components of rate regulation. Id. at 24. Without Act 900’s enforcement mechanisms such as the administrative appeal procedure, Rutledge contends, Act 900’s rate regulation would be meaningless. Id. at 25. If a state law is otherwise acceptable, Rutledge continues, ERISA does not preempt the state law’s “necessary incidents” like Act 900’s enforcement mechanisms. Id. at 25–26. Finally, Rutledge contends that Act 900’s enforcement mechanisms simply allow pharmacies to challenge how they receive payments from PBMs following a claim’s processing, and does not control or alter any central matters of plan administration. Id. at 30–31. Because Act 900 only creates such a procedure for addressing reimbursement conflict but does not attempt to regulate claim processing or the relationship between pharmacies and beneficiaries, Rutledge argues it is not preempted by ERISA. Id. at 31.
In contrast, Respondent PCMA counters that Act 900 is impermissibly connected to ERISA, and thus, ERISA preempts this state law. Brief for Respondent, Pharmaceutical Care Management Association at 22. PCMA argues that Act 900 has this impermissible connection to ERISA because the Act both regulates a central portion of ERISA’s plan administration and interferes with nationally uniform plan administration. Id. First, PCMA maintains, Act 900 controls how health plans pay for benefits by essentially dictating the plan-design choices available to employers. Id. PCMA contends that controlling how health plans pay for benefits constitutes a central function of ERISA plan administration, and because ERISA does not require employers to structure the pharmacy benefits in their health plans in any particular way, ERISA should preempt a state law that places these constrains on employers. Id. at 22, 25. Secondly, PCMA asserts that Act 900 also has a prohibited connection to ERISA because it impedes nationally uniform plan administration by requiring that benefits be tailored to the specific laws of each jurisdiction. Id. at 26. PCMA maintains that this creates “inconsistent obligations” within plan administration regulation procedures, a factor that the Court has previously held to weigh in favor of a state law’s preemption under ERISA. Id. at 27. Moreover, PCMA posits, these conflicting obligations demonstrate that Act 900’s effect is inconsistent with the uniformity goals of ERISA’s enactment, another factor that suggests ERISA preempts Act 900. Id. at 32–33.
Additionally, in response to Rutledge’s arguments regarding rate regulations, PCMA argues that Act 900’s enforcement mechanisms are not necessary incidents to rate regulation. Id. at 36. Rejecting Rutledge’s reliance on Travelers, PCMA declares that Act 900 does not regulate rates at all, as it does not regulate the prices of medications or pharmacy services. Id. at 36–37. Instead, asserts PCMA, Act 900 regulates the administration of benefits by mandating a certain state-specific procedure for processing claims and paying benefits. Id. at 37. PCMA acknowledges that the Court’s precedent does allow for the possibility of upholding laws that regulate areas that ERISA does not directly address but have an incidental effect on ERISA. Id. at 41. PCMA asserts that no such possibility exists in this case, however, because Act 900 regulates the central matter of payment of benefits, an area that ERISA directly address. Id. Finally, PCMA maintains that it is meaningless to draw a distinction between Act 900’s enforcement mechanisms and regulations on claim processing because both impact the benefits that plan subscribers receive. Id. at 41–43. PCMA argues that, because of this, Act 900 impacts the relationship between health plans and beneficiaries, not just health plans and third parties as Rutledge contends. Id. Therefore, PCMA concludes, Act 900 impacts a main portion of plan administration and is preempted. Id.
DOES ACT 900 REFERENCE ERISA PLANS?
Rutledge argues that Act 900 does not refer to ERISA plans by regulating PBMs that ERISA also regulates, and, therefore, Act 900 is not preempted by referencing ERISA plans. Brief for Petitioner at 48. Rutledge contends that a law refers to ERISA plans only when it acts “immediately and exclusively” upon the plan or if ERISA plans are necessary for the law to go into effect. Id. Rutledge states that Act 900 does not satisfy either requirement. Id. To support this contention, Rutledge first asserts that Act 900 defines PBM as “any entity that administers or manages a pharmacy benefits plan or program,” and thus, Act 900 does not act solely upon ERISA plans but also upon PBM service of non-ERISA plans, including Medicare and individual market plans. Id. at 49. Rutledge also argues that Act 900 does not depend upon the existence of ERISA plans in order to function. Id. Rutledge contends that because Act 900 does not operate exclusively upon ERISA plans, but also operates on non-ERISA plans, Act 900 does not refer to ERISA plans by requiring ERISA plans to operate. Id.
PCMA counters that Act 900 does refer to ERISA plans by including ERISA plans within its broad coverage of employee benefit plans, and thus is preempted by ERISA. Brief for Respondent at 48. PCMA acknowledges that Act 900’s broad definition of a “pharmacy benefits plan or program” encompasses non-ERISA plans as well as ERISA plans. Id. at 48–49. However, PCMA contends, the Court has previously found that state laws with similar broad language referenced ERISA. Id. The Court, emphasizes PCMA, should consider this issue in light of its precedent in District of Columbia v. Greater Washington Board of Trade and FMC Corp. v. Holliday, both of which involved laws that employed broad language but still referred to ERISA plans. Id. at 48. Indeed, notes PCMA, the state law at issue in Greater Washington Board also included non-ERISA plans in its coverage but was still preempted by ERISA. Id. at 49.
THE EFFECT OF STATE REGULATION OF PBMS ON HEALTHCARE COSTS
The State of California and 44 other states (“California”), in support of Rutledge, asserts that the outcome in this case will have wide ranging implications for state ability to regulate PBMs. See Brief of Amici Curiae California and 44 Other States (“California”), in Support of Petitioner at 3. Without the ability to regulate PBMs, California contends, drug costs are likely to increase, leading to increased costs for states, which help finance health insurance, and for state residents seeking healthcare. Id. at 11, 13. California explains that PBMs’ method of earning profits through negotiating drug rebate prices sets up an incentive for PBMs to direct patients to more profitable drugs, even if they may not be the most cost effective for the patient. Id. at 11–12. For example, the Alliance for Transparent and Affordable Prescriptions (“Alliance”), also in favor of Rutledge, describes how Pfizer had been “dissuaded” from decreasing prices of certain drugs for fear of losing formulary access to a PBM’s network. Brief of Amicus Curiae Alliance for Transparent and Affordable Prescriptions (“Alliance”), in Support of Petitioner at 11–12. Additionally, California further explains that common clauses in PBM contracts with pharmacies increase costs for patients. Brief of California at 11–12. These contracts, California states, can include “gag clauses” that prevent pharmacies from telling customers when their copay exceeds the usual cost of the drug. Id. For all of these reasons, California asserts, state laws are necessary to continue to regulate PBMs. Id. at 21.
Conversely, the Academy of Managed Care Pharmacy (“Academy”) in support of PCMA, states that PBMs have expertise in ensuring efficiency and cost reduction, but the compliance costs of managing different state regulations may make their work in this area prohibitively expensive. Brief of Amicus Curiae Academy of Managed Care Pharmacy (“Academy”), in Support of Respondent at 7–8. If each state is allowed to set their own regulations, in addition to what is required by ERISA and Medicare Part D, the Academy explains, the landscape may interfere with the efficiency and cost-saving measures PBMs employ. Id. Indeed, America’s Health Insurance Plans, Inc. (“AHIP”), in support of PCMA, argues that PBM practices are designed to keep drug costs low. Brief of Amicus Curiae America’s Health Insurance Plans (“AHIP”), in Support of Respondent at 13. By setting rates on MAC lists at the lower end of an acceptable range of prices, AHIP posits, PBMs provide incentives to pharmacies to offer low-cost generics and be more efficient with their drug purchasing. Id. PBMs also negotiate with both employers and health plans simultaneously, AHIP continues, which achieves better terms for plan beneficiaries. Id. at 10. According to AHIP, the expertise of PBMs in navigating complex pharmaceutical manufacturing and distribution systems positions them, not states, in the best position to design beneficial, cost-effective plans through price negotiations, pharmacy network creation, and claims processing. Id. at 10–13. Act 900, AHIP claims, directly interferes with employer-sponsored benefits, increasing benefit costs even further and negating the cost-saving measures PBMs employ. Id. at 17, 19.
PATIENT ACCESS TO PHARMACIES AND QUALITY OF PATIENT CARE
California further asserts that regulation of PBMs is essential to ensuring continued patient access to pharmacies and the prescriptions they distribute. See Brief of California at 6–7. If rates on MAC lists are too low, California continues, pharmacies risk losing money on drugs they distribute, which has an especially strong impact on rural and independently owned pharmacies and the customers they serve. Id. According to California, three PBMs serve 80% of the market, giving smaller pharmacies minimal bargaining power and little choice but to either contract with a PBM and risk losing money or not contract with a PBM and risk losing customers entirely. Id. at 7. The Arkansas Pharmacists Association and others, in support of Rutledge, contend that decreased revenue in pharmacies has caused cuts in pharmacy staff, which, in turn, has reduced pharmacist interaction with patients and less comprehensive management of treatments. Brief of Amici Curiae Arkansas Pharmacists Association et al. (“APA”), in Support of Petitioner at 16. Furthermore, California maintains, the PBM practice of securing rebates to give certain drugs preference over others can prevent patient access to the drugs their doctors have prescribed. Brief of California at 12. Patient and doctor’s choices are further limited by PBM practices such as step therapy, Alliance explains, which requires patients try certain drugs and see if they work before allowing them coverage for the drug their doctor initially prescribed. Brief of Alliance at 17.
In contrast, the Academy argues that, far from limiting patient choice, PBM policies such as step therapy, when properly utilized, encourage use of the safest and most affordable treatments. Brief of Academy at 11. According to the Academy, another PBM practice that can ensure patient safety and quality of care is prior authorization. Id. at 8. For example, explains the Academy, when PBMs require prior authorization for opioids, they encourage healthcare providers to first look at less addictive pain management therapy and give riskier medicines only when absolutely necessary. Id. at 9. The AHIP adds that PBMs can implement cost-saving drug management strategies, clinical and educational programs, and other services that ensure that clinically appropriate treatment guidelines are followed. Brief of AHIP at 10–13. Finally, J.B. Hunt Transport Services, Inc., in support of PCMA, asserts that their company’s use of PBMs for the above services allows them to provide drug benefits to their employees, but a state-by-state patchwork of regulations would make it difficult and expensive for PBMs to operate, which could lead to employers like them decreasing benefits altogether. Brief of Amicus Curiae J.P. Hunt Transport Services, Inc., in Support of Respondent at 18, 26.
- Samantha Liss, Supreme Court to Take on PBM Rate Regulation, Healthcare Dive (Jan. 13, 2020).
- Michael Woolever, SCOTUS Agrees to Take on ERISA Preemption Once Again!, JD Supra (Feb. 19, 2020).