Last week, states won a clear path to regulating pharmacy benefit managers (PBMs) in a unanimous US Supreme Court ruling in Rutledge vs. Pharmaceutical Care Management Association (PCMA). At issue was whether federal law preempted an Arkansas law (Act 900) that requires PBMs to reimburse pharmacies at no less than what pharmacies pay to acquire drugs, among other provisions.
PCMA, the trade group representing PBMs, argued the Arkansas law was preempted by the Employee Retirement Income Security Act of 1974 (ERISA), the federal law that governs employee benefits. Enacted to protect employee benefit plans from fraud and mismanagement, the law applies to health benefits and – with few exceptions – preempts all state laws that attempt to regulate those plans. While states may regulate fully-insured health insurance plans, they are barred from regulating – either directly or indirectly – health benefits that are paid for directly by employers, often referred to as self-funded plans. More than 60 percent of employees with employer-based coverage are enrolled in such self-funded plans.
View all of NASHP’s model laws that help states curb prescription drug pricing here.
State health policymakers have followed the Rutledge case closely as any ERISA challenge has the potential to impact broader state health care reforms. State health reforms efforts have regularly been subjected to ERISA challenges in the courts, making the acronym ERISA better named in state policy circles as, “Every Roadblock to Innovative State Action.” For example, in Gobeille vs. Liberty Mutual Insurance, the Supreme Court ruled that ERISA preempts states from collecting much-needed data that would improve how they paid for and delivered health care. The Gobeille decision established that self-funded plans do not need to submit health care claims – data needed to advance cost containment efforts – to states.
The 8-0 decision was unequivocal in its ruling that the Arkansas law was not preempted by ERISA. The opinion, authored by Associate Justice Sonia Sotomayor, characterized Arkansas Act 900 as “a form of cost regulation that does not dictate plan choices” and therefore is not preempted by ERISA.
The Rutledge decision, rather than rely on Gobeille’s rationale, expands on the 1995 ERISA case, New York State Conference of Blue Cross & Blue Shield Plans vs. Travelers Insurance, that found that a state’s imposition of surcharges on employer-sponsored health plans was not preempted by ERISA, despite its indirect economic impact on health plans. In that case, the surcharge was assessed on hospital claims. The Rutledge decision extended the Travelers ruling to create a new category of health care cost regulation that surpasses ERISA’ past legal preemptions, paving the way for new state action that exceeds regulation of PBMs that administer benefits for health plans. Protection from ERISA’s preemptions for a broader category of health care cost regulations, as seen in Rutledge, positions states for important and emerging cost containment efforts.
The Rutledge decision is good news for all states, including those that have been recently actively regulating PBMs. Since 2017, 46 states have implemented more than 90 laws regulating PBMs. Some of those laws appear similar to Arkansas’ Act 900, which focused on pharmacy reimbursement, while other laws go further. Examples include laws prohibiting spread pricing – which occurs when PBMs pay pharmacies a lower reimbursement rate for prescriptions and then claim higher rates from a health plan while retaining the difference as profit. Other new laws require PBMs to pass savings from rebates negotiated with drug manufacturers back to health plans and consumers. All of these state PBM regulations are designed to control prescription drug costs. The logic driving the Rutledge decision potentially now shields all of these state laws from ERISA preemption.
The Rutledge ruling represents an important step in the right direction to clarify the scope of ERISA while also enabling states to exercise the regulatory authority needed to take on drug costs – and broader health care costs – in the absence of federal action.
