Case No. 18-540 | 8th Cir.
October 6, 2020
Preview by Jacob Reiskin, Online Editor
The issue before the Court is whether an Arkansas law regulating the reimbursement rates that pharmacy benefit managers (“PBMs”) pay pharmacies is preempted by the Employee Retirement Income Security Act of 1974 (“ERISA”), 29 U.S.C. 1144 (2018). The Respondent, a PBM industry group, filed suit against Arkansas in response to the Arkansas law.
For background, PBMs manage prescription drug benefits that employers provide to workers. PBMs act as middlemen, structuring drug plan costs and benefits without actually manufacturing, selling, or dispensing drugs. 95% of large employers rely on PBMs to administer prescription drug benefits. See Brief for Respondent at 6, Rutledge v. Pharmaceutical Care Management Association, No. 18-540 (U.S. filed Mar. 25, 2020). PBMs typically set a maximum allowable cost rate (“MAC”) designed to reflect the rate that pharmacies usually pay for a generic drug at wholesale. However, a pharmacy submitting a claim may find that the actual cost exceeds the MAC. In that situation, the pharmacy has the option to pursue the PBM’s internal appeal process in hopes of closing the shortfall on a money-losing claim.
Arkansas Act 900 has three main features: 1) it requires MACs to be adjusted when wholesale costs increase, 2) it requires PBMs to grant appeals and reimburse pharmacies if pharmacies can demonstrate that the drug acquisition cost was the lowest rate available at its primary wholesaler, and 3) it allows pharmacies to decline to dispense a drug if the PBM’s MAC is less than what the pharmacy paid to acquire it. See 2015 Ark. Acts 900; Brief for Petitioner at 10–11, Rutledge v. Pharm. Care Mgmt. Ass’n, No. 18-540 (U.S. filed Feb. 24, 2020). The Eighth Circuit affirmed the district court, holding that Act 900 is preempted by ERISA because the case is not distinguishable from another Eighth Circuit case. Pharm. Care Mgmt. Ass’n v. Rutledge, 831 F.3d 1109, 1112 (8th Cir. 2018) (citing Pharm. Care Mgmt. Ass’n v. Gerhart, 852 F.3d 722 (8th Cir. 2017)). The appeals court found that although Act 900 did not explicitly reference ERISA, by regulating entities administering ERISA plans, Act 900 acted on ERISA, and thus was preempted. Id.
Arkansas asks that the lower court be overruled, arguing ERISA does not preempt state rate regulation. Brief for Petitioners at 19. Both the United States and California—representing itself, 44 other states, and the District of Columbia—filed amici briefs supporting Arkansas’ position. See Brief for the United States as Amicus Curiae in Support of Petitioner, Rutledge v. Pharm. Care Mgmt. Ass’n, No. 18-540 (U.S. filed Mar. 2, 2020); Brief for California, 44 Other States, and the District of Columbia as Amici Curiae in Support of Petitioner, Rutledge v. Pharm. Care Mgmt. Ass’n, No. 18-540 (U.S. filed Mar. 2, 2020). Arkansas argues that Act 900 does not regulate what benefits are provided; instead, Act 900 regulates cost and dispute resolution. And, the state adds, other court decisions can be distinguished on this difference—regulating benefit cost (allowed) vs. regulating the payment of benefits and what benefits are offered (not allowed). See Reply Brief for Petitioner at 8–9, Rutledge v. Pharmaceutical Care Management Association, No. 18-540 (U.S. filed Apr. 24, 2020). Arkansas insists that PBMs are still in control of benefits administration and the law does not act upon ERISA in any immediate way.
The Respondent argues that Act 900 “directly regulates . . . benefits . . . central to plan administration.” Brief for Respondent at 2. The group insists that PBMs offer a valuable service to employers and that Act 900 disrupts cost savings created by MACs. It relies on the circuit decision to maintain that the law is already settled—when state law relates to and has a connection with employee benefits, including regulation of PBMs, state law is preempted by ERISA. Brief for Respondent at 18. The Respondent also argues that Arkansas’s and other states’ regulation of PBMs interferes with nationwide administration of benefits, and contends that a distinction between cost and benefits is “illusory” because benefits are designed based on costs. Brief for Respondent at 41–42. The trade group also argues that by letting pharmacies decline to dispense drugs that are not reimbursed at cost, Arkansas directly regulates what benefits are administered. Arkansas responds that enforcement is incidental and necessary to the law’s success, and that similar laws, like one providing pharmacists discretion to withhold narcotics, are at risk. Brief for Petitioners at 47.