Supreme Court Rules that Arkansas Act 900, Affecting the Prices that PBMs Pay to Pharmacies, Is Not Preempted Under ERISA
On December 10, 2020, the Supreme Court released its decision in Rutledge v. Pharmaceutical Care Management Association. Justice Sotomayor wrote the Court’s opinion, which was joined by all Members of the Court except Justice Barrett, who did not participate. Justice Thomas filed a concurring opinion, which expressed his prior opinions that the Court’s ERISA preemption tests have strayed from the text of ERISA’s statutory language.
The question presented was whether ERISA preempts Arkansas Act 900, an Arkansas law that regulates the price at which pharmacy benefit managers (PBMs) reimburse pharmacies for the cost of drugs covered by prescription drug plans. PCMA, the Pharmaceutical Care Management Association, which represents some of the largest PBMs in the country, challenged Arkansas Act 900 by arguing that the Act is preempted by ERISA. In the recent Opinion, the Court reversed the judgment of the U.S. Court of Appeals for the Eight Circuit, ruling that Act 900 was not preempted by ERISA.
The Opinion reasoned that Arkansas Act 900’s requirements were too far away from ERISA and ERISA plans to have an “impermissible connection” with ERISA plans, even though the law has an indirect effect on what ERISA plans pay for prescription drugs. “State regulations that merely increase the costs or alter incentives for ERISA plans without forcing plans to adopt any particular scheme of substantive coverage are not preempted by ERISA,” Justice Sotomayor wrote, citing earlier Supreme Court opinions.
The Court’s Opinion is a strict preemption analysis and does not cite to, or reference, the many amicus briefs filed in the case or the political debate surrounding Arkansas Act 900, other than to reiterate the express legislative intent in enacting Arkansas Act 900. PBMs typically use a “maximum allowable cost” list to determine how much pharmacies should be reimbursed. Trade groups for rural and independent pharmacies have argued that PBM’s strategies in reimbursement rates of maximum allowable costs are unfair and can be lower than the pharmacies’ cost to purchase the drug. Conversely, other trade groups in support of PCMA, state that PBMs have expertise in ensuring efficiency and cost reduction, and that drug prices are largely established by drug manufacturers. According to America’s Health Insurance Plans, Inc. (AHIP), PBMs provide incentives to pharmacies to offer low-cost generic drugs and to be more efficient with their drug purchasing. AHIP also claims that PBMs have the expertise in pharmaceutical manufacturing and distribution systems, and that the compliance costs of managing different state regulations make work in this area prohibitively expensive.
The Court’s Opinion may lead to further state regulation of PBMs. A statement from PCMA expressed disappointment and urged states to proceed cautiously: “We are disappointed in the Court’s decision that will result in the unraveling of federal protections under . . . ERISA,” and “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 health care cost for consumers and employers.”