Arkansas' PBM Law Upheld By Supreme Court

In an 8-0 opinion by Justice Sotomayor issued on December 10, 2020 (minus the Court's newest justice, who joined after oral arguments in this case), the Supreme Court held that Arkansas's Act 900 (Arkansas Code §17-92-507) regulating pharmacy benefit managers is not pre-empted by Employee Retirement Income Security Act of 1974 (ERISA). This ruling will likely result in a flurry of copycat legislation in other states and could usher in broader change in the regulation of PBMs at the state level.

A Brief History of Rutledge v. Pharmaceutical Care Management Association

Arkansas’s Act 900 mandates that PBMs: (1) reimburse pharmacies for generic drugs at a price equal to or higher than the pharmacies’ cost for the drug; (2) update their MAC lists at least seven days after a certain increase in acquisition costs; (3) follow certain administrative appeals procedures; (4) allow pharmacies to reverse and re-bill each claim when a pharmacist cannot procure a drug at a cost that is equal to or less than the MAC price; and (5) allow pharmacies to decline to dispense a drug if the reimbursement rate is lower than the pharmacy’s acquisition cost. A trade association which represents the 11 largest PBMs in the country, the Pharmaceutical Care Management Association (PCMA), sued, alleging that Act 900 is preempted by the ERISA. Following Circuit precedent in a case involving a similar Iowa statute (PCMA v. Gerhardt, 852 F.3d722 (8th. Cir. 2018)), which had been previously held to be preempted by ERISA, the District Court similarly held that ERISA preempts Act 900. The Eighth Circuit affirmed, and Arkansas petitioned the Supreme Court to hear the case.

The Court decision in Rutledge overturning the 8th Circuit, found that Act 900 (1) does not have a connection with; or (2) reference to an ERISA plan. The Court used the test in Gobeille vs. Liberty Mut. Ins. Co., 136 S.Ct. 936 (2016) to determine whether a “connection” exists, i.e., the Court asked whether the Act 900 governs a central matter of plan administration or interferes with nationally uniform plan administration. Finding that there was no connection, the Court stated that “[s]tate rate regulations that merely increase costs or alter incentives for ERISA plans without forcing plans to adopt any particular scheme of substantive coverage are not pre-empted by ERISA.” The Court was also dismissive of PCMA’s arguments that Act 900’s requirement that PBMs comply with a specific appeals procedure and bar on requiring participating pharmacies to fill all covered prescriptions that customers present to them were central to plan administration.

With respect to the reference prong of the preemption analysis, the Court concluded that Act 900 did not refer to ERISA because it did not act immediately and exclusively on ERISA plans. The Court supported its conclusion by pointing to the fact that Act 900 regulates PBMs regardless of plan type and impacts ERISA plans only if the PBM passes along higher pharmacy rates to the plans.

Previous Rulings Involving ERISA Preemption

In recent years, states have attempted to legislation to regulate PBMs. In general, ERISA preempts all state laws to the extent the law may "relate to any employee benefit plan." ERISA § 514(a). There are few exceptions and as a result of the broad, somewhat convoluted language of Section 514(a) and minimal exceptions, state regulations of PBM activity are often challenged as preempted by ERISA. Many employer health plans are ERISA plans. PBMs, in carrying out functions on behalf of those ERISA plans, are also often protected from regulation as a result of the preemption clause.

There have been previous instances where specific types of law were determined to not be preempted, such as in Kentucky Association of Health Plans, Inc. v. Miller, 538 U.S. 329 (2003). In that case, the Court held that Kentucky's any willing provider law was not preempted by ERISA because it is a state law regulating insurance, and thus not subject to preemption. Following that decision, many states enacted various versions of any willing provider laws. Although they vary in robustness and enforcement, the spread of these laws may provide insight into what could be expected based on the Arkansas law this time around.

What's Next

Almost all states now regulate PBMs in some capacity and state interest in promulgating laws governing PBM activity has increased in recent years, particularly with respect to PBM and pharmacy relationships. Examples of these types of laws include prohibitions on spread pricing, fair pharmacy auditing practices, prohibition of gag clauses, PBM licensure or registration requirements, anti-clawback regulations, and Maximum Allowable Cost list regulations. Historically, ERISA preemption has been an effective tool for striking down state laws that regulate PBM activity, particularly when it is possible to argue that a state regulation is too broad and encroaches on protected activity under ERISA in addition to regulating activity outside of ERISA.

Some ways that the Rutledge decision may change the landscape of PBM regulation or PBM-pharmacy relationships include:

• States may enact similar legislation. Of note, 47 State Attorneys General made a bipartisan effort to support Arkansas in this litigation.
• Emboldened by the unanimous favorable decision, states and pharmacy lobbyists may more aggressively explore ways they can expand upon Act 900 concepts and still avoid pre-emption. In particular, the Court’s decision that the procedural aspects of the law were not preempted may provide a foundation for states argue that similar enforcement mechanisms are not preempted by ERISA because they are incidental to what is otherwise lawful regulation.
• The decision may reinvigorate interest in use of any willing provider laws. Many states have laws requiring health plans to allow "any willing provider" to participate in the network. However, the impact of these laws on PBM network design has been inconsistent.
• PBMs will face an increasingly complex patch-work quilt of state requirements if, as we predict, states enact additional laws governing PBMs in the wake of the decision.
• Overall, this ruling enhances a state’s ability enact and enforce laws governing PBM activity.

For more information on the Supreme Court ruling and how it may affect your state, please contact your Quarles & Brady attorney or:

• Katea Ravega: (317) 399-2849 / katea.ravega@quarles.com
• Simone Colgan Dunlap: (602) 229-5510 / simone.colgandunlap@quarles.com