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Supreme Court Holds Arkansas Statute Regulating PBMs Not Preempted By ERISA

States seeking to regulate pharmacy benefit managers (PBMs) and prescription drug pricing received a win from the Supreme Court, which reversed an Eighth Circuit decision that had invalidated an Arkansas law governing pharmacy and PBM conduct on ERISA preemption grounds.

Eighth Circuit Decision

On December 10, 2020, in a unanimous 8-0 decision (Justice Amy Coney Barrett did not participate), the Supreme Court held that an Arkansas state law that regulates the price at which PBMs pay pharmacies for prescription drugs is not preempted by the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1001, et seq. Rutledge v. Pharmaceutical Care Mgmt. Ass’n, 592 US __ (2020), slip op. at 1.

PBMs are intermediaries between prescription drug benefit plans and pharmacies. Id. When a covered individual goes to a pharmacy to obtain a prescription drug, the PBM pays the pharmacy for the prescription, and the plan pays the PBM. Id. at 1-2. The amount the pharmacy receives depends on the terms of the contract between the pharmacy and the PBM. Such contracts typically provide that payment will be based on the drug’s “maximum allowable cost” (MAC), developed by the PBM. Id. at 2. The PBM’s payment, in turn, is governed by its separate contract with the plan and generally exceeds the MAC so that the PBM makes a profit. Id.

In 2015, Arkansas adopted Act 900 (the Act) to protect pharmacies that were paid by PBMs at rates that were too low to cover the pharmacies’ costs. The Act requires PBMs to pay Arkansas pharmacies at rates equal to or higher than the drug’s acquisition cost, i.e., what the pharmacy paid the wholesaler for the drug. See Ark. Code Ann. § 17–92–507(c)(4)(A)(i)(b). The Act contains three mechanisms to ensure that result. First, PBMs must update their MAC lists when the wholesale price of a drug increases so that the MACs are tied to the pharmacies’ acquisition costs. Id. § 17–92–507(c)(2). Second, pharmacies must be afforded administrative appeal rights to challenge MAC payment rates, under which a PBM must increase its payment rate to cover the pharmacy’s acquisition costs if it is determined that the pharmacy could not have acquired the drug at a lower price. Id. § 17–92–507(c)(4)(A)(i)(b)), 17–92– 507(c)(4)(C)(i)(b)). Third, the Act permits a pharmacy to decline to sell a drug to a beneficiary if the pharmacy would be paid less than its acquisition cost. Id. § 17–92–507(e)).

The District Court and the Eighth Circuit Held ERISA Preempts Act 900

Respondent Pharmaceutical Care Management Association (PCMA), a national trade association representing PBMs, brought suit on behalf of its members against the Attorney General of the State of Arkansas challenging Act 900. Among other grounds, PCMA argued that the Act was preempted by ERISA. On cross-motions for summary judgment, the District Court for the District of Arkansas granted partial summary judgment in favor of PCMA, holding that “Act 900 is invalid as applied to PBMs in their administration and management of ERISA plans.” Pharm. Care Mgmt. Ass’n v. Rutledge, 240 F. Supp. 3d 951, 957 (E.D. Ark. 2017), aff’d in part, rev’d in part and remanded, 891 F.3d 1109 (8th Cir. 2018), rev’d and remanded, No. 18-540, 2020 WL 7250098 (US Dec. 10, 2020).

ERISA preempts “any and all State laws insofar as they may now or hereafter relate to any employee benefit plan” covered by ERISA, i.e., any state law that “has a connection with or reference to” an ERISA plan. See 29 U. S. C. §1144(a); Egelhoff v. Egelhoff, 532 US 141, 147 (2001). The District Court held that it was bound by a recent Eighth Circuit ruling that a similar Iowa statute was preempted by ERISA because it “interferes with nationally uniform plan administration” and thus had a prohibited “reference to” and “connection with” ERISA. See Rutledge, 240 F. Supp. 3d at 958 (citing Pharmaceutical Care Management Ass’n v. Gerhart, 852 F.3d 722 (8th Cir. 2017)). The Iowa statute at issue in Gerhart required PBMs to provide a procedure for pharmacies to appeal MAC reimbursements. The Gerhart court concluded that the Iowa statute interfered with uniform plan administration—and thus had a “connection with” an ERISA plan—because it “restricted an administrator’s control in the calculation of drug benefits and removed the ability to conclusively determine final drug benefit payments and monitor funds.” Id. (citing Gerhart, 852 F.3d at 730–31). The Gerhart court also concluded that “restricting the class of drugs PBMs may place on MAC lists” and “restricting the sources from which PBMs may obtain pricing information” impermissibly “interfere[d] with the calculation of benefit levels and with making disbursements.” Id.

The District Court held that ERISA preempted Act 900 because the Act “regulates PBMs in ways fundamentally similar to the Iowa statute in Gerhart.” Id. First, the District Court reasoned that the Act’s requirement to afford pharmacies an administrative appeal procedure to reverse claims that were priced above the pharmacy’s acquisition cost was an unlawful restriction on a plan administrator’s control over drug benefits. Id. Second, though the Act “does not limit the sources from which PBMs may obtain pricing information per se,” tying PBMs’ MAC list and administrative appeal obligations to the pharmacy’s acquisition cost was “as intrusive with MAC methodology as the Iowa statute.” Id. Accordingly, the District Court held that the Act was invalid as applied to ERISA plans. Id.

The Eighth Circuit agreed with the District Court that Gerhart controlled the outcome of PCMA’s ERISA preemption claim. Pharm. Care Mgmt. Ass’n v. Rutledge, 891 F.3d 1109, 1112 (8th Cir. 2018), rev’d and remanded, No. 18-540, 2020 WL 7250098 (US Dec. 10, 2020). The appellate court held that the Act, as the Iowa statute at issue in Gerhart, “interfered with national uniform plan administration” through its administrative appeal requirements and limitations on PBMs’ ability to control drug pricing. Id. The Eighth Circuit also held that the Act made “implicit reference” to ERISA by regulating PBMs that administer benefits for ERISA plans. Id.

Supreme Court Holds That Act 900 is Not Preempted By ERISA

The Supreme Court reversed, holding that the Act neither was connected with nor made reference to an ERISA plan. On the first inquiry—whether the law is “connected with” an ERISA plan—the Court emphasized that state laws that “merely increase costs or alter incentives for ERISA plans without forcing plans to adopt any particular scheme of substantive coverage” will not “interfere with nationally uniform plan administration” and are not preempted. Rutledge, slip op. at 5-6. The Court held that the Act was “merely a form of cost regulation” because it “requires PBMs to reimburse pharmacies for prescription drugs at a rate equal to or higher than the pharmacy’s acquisition cost.” Id. at 6. Though these costs might ultimately get passed on to ERISA plans, they do not “effectively dictate plan choices” and thus do not “interfere with nationally uniform plan administration.” Id. at 6-7. Moreover, the requirement to reimburse pharmacies at or above the pharmacies’ acquisition costs does not dictate how ERISA benefit plans are structured in any particular way. Id. at 7-8. That ERISA plans might “decide to limit benefits or charge plan members higher rates as a result” of the increased costs and operational efficiencies the PBMs pass on to the plans is immaterial, as “ERISA does not pre-empt a state law that merely increases costs.” Id. at 9. The Court further held that the Act’s administrative appeal requirements did not “affect central matters of plan administration” and thus did not have an impermissible connection with an ERISA plan. Although a plan might be required to reprocess a claim if a pharmacy’s appeal is successful, that is analogous to “any contract dispute implicating the cost of a medical benefit.” Id. at 8-9. The Court has long held that “state-law mechanisms of executing judgments against ERISA welfare benefit plans” are not preempted “even when those mechanisms prevent plan participants from receiving their benefits.” Id. at 9 (internal quotation marks omitted).

Likewise, the Court held that the Act does not impermissibly “refer to” ERISA. “A law refers to ERISA if it acts immediately and exclusively upon ERISA plans or where the existence of ERISA plans is essential to the law’s operation.” Id. at 6 (internal quotation marks omitted). The Court reasoned that the Act does not apply “exclusively upon ERISA plans,” as it applies to all PBMs regardless of whether they contract with ERISA plans. Nor is the existence of ERISA plans essential to the Act’s operation—it “does not directly regulate health benefit plans at all, ERISA or otherwise,” and only impacts ERISA plans to the extent that the PBMs with which they contract choose to pass on their increased costs to the plans. Id. at 7. Accordingly, because the Act “amounts to cost regulation that does not bear an impermissible connection with or reference to ERISA,” the Court reversed the Eighth Circuit’s judgment in favor of PCMA.

The Court’s decision reinforces that ERISA preemption does not have as broad of a sweep as the statute’s language might suggest. State laws that may indirectly impact a plan’s costs or a participant’s benefits, that “establish[] a floor for the cost of the benefits that plans choose to provide,” id. at 8, do not impact “central matters of plan administration” and so are not preempted. The Court’s ruling will no doubt embolden states seeking to regulate pharmacy and PBM conduct, and will be relied upon by parties seeking to protect state law-based rights in court, with respect to prescription drug reimbursement or otherwise.

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