New Dawn for PBM Regulation? – Supreme Court Determines ERISA Does Not Pre-empt State PBM Law

December 17, 2020, Covington Alert

On December 10, 2020, the Supreme Court of the United States issued a decision in Rutledge v. Pharmaceutical Care Management Association holding that Arkansas’s Act 900, which regulates pharmacy benefit managers’ (“PBMs”) pharmacy reimbursement practices, is not pre-empted by the Employee Retirement Income Security Act of 1974 (“ERISA”). PBMs have long asserted that certain state regulations of PBMs are pre-empted by ERISA because these laws “relate to” ERISA-governed employee benefits plans. The Supreme Court’s ruling in Rutledge clarifies that at least some of these state laws are not pre-empted. Key principles in Rutledge could be used to support state efforts in PBM regulations, and we anticipate policymakers may seek to pursue more active and potentially more aggressive regulation of PBM practices in the future.

In 2015, Arkansas enacted Act 900, which required PBMs to reimburse pharmacies at a rate equal to or higher than the price the pharmacy paid to acquire the drug from a wholesaler. To ensure compliance with the statute, the Act outlines three enforcement mechanisms: 1) PBMs must tie their reimbursement rates to pharmacies’ acquisition costs by updating their Maximum Allowable Cost (“MAC”) lists when wholesale prices increase; 2) PBMs must provide appeal procedures for pharmacies to challenge MAC prices that are below their acquisition costs; and 3) pharmacies can refuse to sell a drug to a beneficiary if the PBM will reimburse the pharmacy at less than its acquisition cost.

Although the Eighth Circuit Court of Appeals found Act 900 to be pre-empted by ERISA, the Supreme Court disagreed. In analyzing whether the state law “relates to” ERISA plans, the Court held that Act 900 was not pre-empted because it neither had “an impermissible connection with” such plans nor did it “refer to” such plans.

In determining that Act 900 did not have an “impermissible connection with” ERISA plans, importantly, the Court recognized that “ERISA does not pre-empt state rate regulations that merely increase costs or alter incentives for ERISA plans without forcing plans to adopt any particular scheme of substantive coverage.”[1] The Court found that Act 900 was a form of cost regulation insofar as it only required PBMs to reimburse pharmacies at a minimum rate. While this could in turn have incidental effects on what plans, including ERISA plans, choose to cover or the rates that they charge members, the law contains no substantive requirement that plans adopt any change.

The Court then quickly addressed and dismissed the argument that the statute “refer[red] to” ERISA plans because the Act’s provisions apply equally to PBMs whether or not they manage an ERISA plan and ERISA plans are not “essential to Act 900’s operation.”

Respondent Pharmaceutical Care Management Association (“PCMA”) contended that the statute goes further than simply cost regulation because its enforcement mechanisms affect a central matter of plan administration and nationally uniform plan administration. The Court disagreed, however, and emphasized that the Act’s enforcement mechanisms did not raise pre-emption concerns because they did not force plans to structure benefits in a particular manner or amount to anything more than “potential operational inefficiencies.” The Court acknowledged that while plans could decide to limit benefits or charge higher rates in response to Act 900, because the primary effect of the law served to regulate PBM rates rather than plans directly, it was not pre-empted by ERISA.

While the Court’s opinion focused on Arkansas’s specific statute, it also articulated principles that may guide policymakers considering PBM regulations in the future. Specifically, policymakers may look to Rutledge as representing the following:

1. Regulations that merely increase costs incurred by PBMs, but do not force plans to adopt substantive coverage changes, are likely not pre-empted by ERISA under the “connection with” test, even if they could have the incidental effect of limiting benefits or resulting in higher rates for plan participants.

2. Regulations that impact ERISA and non-ERISA plans equally are likely not pre-empted by ERISA under the “reference to” test.

The Court’s opinion may lead policymakers to pursue renewed efforts toward PBM regulation. Notably, 45 states and the District of Columbia joined an amicus brief urging the Supreme Court to uphold Arkansas’s law, and these states could seek to implement statutes similar to Arkansas’s Act 900 or use principles articulated by the Supreme Court to explore expanded PBM regulations.

Examples of regulatory requirements impacting PBMs that states have sought to implement in the past or that they might pursue (some of which are not addressed in the Rutledge decision and could be subject to ERISA preemption) include:

• Accreditation and licensure

• Disclosures on Pharmacy and Therapeutics membership and minimum formulary review

• Fair dealing and disclosure on pharmacy network design

• Transparency reporting on aggregate rebates and other price concessions

• Restrictions on transactions with affiliates, including wholly owned pharmacies, plans, GPOs, and service entities that impact drug pricing

The Rutledge decision, and future state legislation regulating PBMs, is also of importance to employers that sponsor health plans subject to ERISA. Employers may want to monitor state regulatory developments in order to address in contracts with PBMs any state law requirements that affect the design or administration of prescription drug benefits, such as geographical differences in drug reimbursement rates or enforcement rights that could affect participants’ access to prescription drugs.         

Rutledge was not the first case to address ERISA preemption of PBM regulation and likely will not be the last. State policymakers might be emboldened to regulate PBMs and the Rutledge decision includes some guideposts to policymakers for how to avoid an ERISA preemption challenge. However, there are many other aspects of PBM regulation that were not discussed in the Rutledge decision that could still remain subject to challenge on grounds of ERISA preemption, such as state transparency reporting requirements and other disclosure requirements.

As a practical matter, the various stakeholders in this space may wish to monitor state regulatory developments to anticipate and address any impacts that the regulations may have on the design and administration of prescription drug benefits.

If you have any questions concerning the material discussed in this client alert, please contact the following members of our Health Care and Employee Benefits practice groups.