Today, the US Supreme Court is scheduled to hear oral arguments in a legal challenge of an Arkansas law that regulates the reimbursement rates that pharmacy benefit managers (PBMs) pay to pharmacies.
The extent of a ruling against Arkansas would depend on key details of the decision. For example, even if the court decides that ERISA preempts Arkansas’ law as applied to PBMs serving self-funded employee plans, that would leave in place rate regulation for PBMs serving state-regulated health plans. This would create a patchwork regulatory scenario in which a state could ensure adequate reimbursement rates for pharmacies for some – but not all – transactions.
Since ERISA was enacted in 1974, Supreme Court rulings have gradually expanded its reach. It is possible that a ruling favoring the PCMA would continue the trend of expanding the reach of ERISA preemption and increase the roadblocks states face when attempting to regulate their insurance markets, with ramifications reaching beyond PBM regulation. A ruling in favor of Arkansas, however, would provide clarity on states’ ability to implement PBM regulations, putting to rest inconsistent lower court rulings on the subject of ERISA preemption. A decision in the case is expected by July 2021.
Arkansas Act 900
PBMs are third parties that organize pharmacy networks, negotiate rebates with drug manufacturers, and process claims for prescription drug coverage. In their contracts with PBMs, pharmacies agree to be reimbursed at a rate set by the PBM. For generic drugs, this rate is called the maximum allowable cost (MAC). Notably, in most PBM contracts, nothing prohibits PBMs from setting a MAC for a drug below a pharmacy’s actual acquisition cost, which can result in under-reimbursement to pharmacies. According to Arkansas’s brief, 12.6 percent of independent pharmacies in the state closed between 2006 and 2014, in part due to systematic below-cost reimbursement from PBMs.
In 2015, Arkansas enacted Act 900 to tie MAC reimbursements to pharmacies’ actual acquisition costs by allowing pharmacists to appeal when a PBM’s reimbursement is lower than a drug’s wholesale acquisition cost. The law also allows pharmacies to decline to dispense a drug if a PBM’s MAC is less than what the pharmacy paid to purchase the drug. The PBM trade group PCMA challenged the law in district court, where a judge ruled that the act was preempted by ERISA. Arkansas appealed the ruling in the Eighth Circuit Court of Appeals, which upheld the lower court’s decision on the grounds that Act 900 was preempted because it implicitly and impermissibly referenced ERISA plans because it regulated PBMs that acted on behalf of plans regulated by federal law under ERISA.
Lower Court Rulings
Lower courts have issued inconsistent rulings on whether ERISA preempts state PBM regulations. PCMA previously challenged two nearly identical PBM laws in circuit courts in Washington, DC and Maine with different outcomes. These laws required PBMs to owe a fiduciary duty to health plan clients, pass payments received from drug manufacturers to health plans, and disclose conflicts of interests. In the Maine case, the court ruled that ERISA did not preempt Maine’s PBM regulations because PBMs do not exercise authority in the management of health plans. However, in the Washington, DC case, the court ruled that laws regulating third-party administrators of an ERISA plan function as a regulation of an ERISA plan itself and were therefore invalid.
PCMA also challenged a MAC pricing regulation in Iowa, where the Eighth Circuit Court of Appeals held that the law’s explicit exclusion of self-funded employee benefit plans was a “reference to” ERISA. The court also ruled that the law implicitly referred to ERISA because it regulated PBMs that administer benefits for plans subject to ERISA. Similar to Rutledge, the court held that ERISA preempted the law. PCMA has also filed an appeal in the Eighth Circuit against two North Dakota laws that regulate PBM conduct after the US District Court of North Dakota rejected ERISA preemption claims. It remains unclear how the court will apply these rulings to Act 900.
In its court filings, Arkansas argues that Act 900 regulates drug reimbursement as a form of rate regulation to ensure PBMs reimburse pharmacies at reasonable rates. In her brief, Arkansas Attorney General Leslie Rutledge argues that the Supreme Court has previously held that ERISA does not shield plans or their third-party administrators from state laws that regulate rates charged for those services, and therefore Act 900 is saved from ERISA preemption.
PCMA argues that the Arkansas law “relates to” ERISA because it regulates central matters of plan administration and interferes with nationally uniform plan administration. PCMA also points to the Supreme Court’s decision in Gobeille v. Liberty Mutual Co., which held that ERISA preempted a Vermont law that required health plans or their benefit administrators to submit claims data to the state’s all-payer claims database. PCMA claims that this ruling invalidates the Maine circuit court finding that ERISA does not preempt PBM regulation.
For case filings and additional information about legal challenges to state prescription drug laws, explore NASHP’s legal resources webpage that includes the legal analysis, Navigating Legal Challenges to State Efforts to Control Drug Prices: PBM Regulation, Price Gouging, and Price Transparency.