The Court’s decision marks an important development in ERISA preemption jurisprudence and provides guidance to states as they increasingly regulate PBMs. To date, approximately 36 states regulate PBM business practices in some form.
Rutledge is an interesting contrast to a recent ERISA preemption decision, Gobeille v. Liberty Mut. Ins. Co., where the Court found that ERISA preempted a Vermont law requiring health plans to disclose certain plan cost information for use in the state’s all-payer claims database. The Supreme Court determined that gathering and reporting such information were matters central to plan administration, such as recordkeeping, disclosure and reporting – areas already regulated – and therefore preempted – by ERISA. Because Rutledge was decided later, it may, in future cases, be viewed as a limitation on Gobielle.
States already broadly regulate PBM business practices, largely to combat rising prescription drug costs. By insulating state regulation from ERISA preemption, the Rutledge decision is likely to encourage additional state efforts in several areas.
A. Specialty Pharmacies and Practices with In-office Dispensing
Specialty pharmacies and practices with in-office dispensing have voiced frustration in recent years about access to new and advanced cancer treatments to patients outside the hospital setting. While oral cancer treatments offer hope of more sophisticated, out-patient cancer therapy, there are allegations that PBMs use their influence in the mail-order specialty pharmacy space to delay or interfere with the distribution of those drugs.
One major complaint among oncologists is that PBMs offer reimbursement rates for cancer drugs that are lower than the acquisition cost. In light of Rutledge, states might seek to regulate the reimbursement costs for all drugs obtained through a PBM to ensure fair reimbursement, and could curtail practices like “white bagging,” which requires that a drug be purchased through a specialty pharmacy before it is shipped to the provider’s office for administration, instead of allowing the physician’s staff or hospital pharmacy to prepare the drug on-site.
B. Balance Billing and Emergency Care
States have recently sought to regulate surprise medical billing and balance billing practices by insurers. Because Rutledge narrows the breadth of ERISA preemption, it may empower states to more broadly regulate in this area for the purpose of protecting patients from unanticipated healthcare costs.
For example, the United States District Court for the Southern District of Texas recently held that a Texas state law that requires insurers to compensate nonpreferred and non-network emergency medical providers at “usual and customary” rates was not preempted by ERISA. After a review of Rutledge, the court said it could not distinguish “between an Arkansas law that regulates the rate at which PBMs reimburse pharmacies, and the Texas emergency care statutes, which regulate the rate at which insurers and insurance plan administrators reimburse emergency care physicians,” in the context of ERISA preemption.
Importantly, the court noted that the emergency care statutes do not require insurers to adopt any specific scheme, and wrote that the statutes “equate to cost regulation,” which, under Rutledge, is not preempted by ERISA. The court highlighted that state laws that “merely increase costs or alter incentives for ERISA plans” are not preempted by ERISA. If other district courts interpret Rutledge similarly, states may have a clearer path to regulate costs for various kinds of healthcare service providers, not just pharmacies.
C. DIR Fees
Rutledge may also empower states to more broadly regulate post-point-of-sale price concessions, such as DIR fees, negotiated between PBMs or plans and pharmacies (both retail and specialty). Pharmacies have long objected to the growth in both fixed and percentage-based DIR fees, which they argue unreasonably strain margins, due to their unpredictability, and raise patient cost sharing at the pharmacy counter.
In Wilke v. Pharm. Care Mgmt. Ass’n, the Supreme Court recently remanded to the Eighth Circuit a case where PCMA challenged a North Dakota statute that, among other things, seeks to regulate DIR fees that PBMs charge to pharmacies. While discussions around changing the regulatory structure for DIR fees in the Medicare program continue at the federal level, at least assuming that the Eighth Circuit now upholds the North Dakota statute, other states may regulate in this area. Because Rutledge allows for regulation of costs paid to PBMs, provided new regulations do not require insurers to “adopt any specific scheme,” states may be able to limit the amount or extent to which PBMs collect rebates or chargebacks from pharmacies post-point-of-sale. It remains to be determined whether direct regulation of the quality metrics that PBMs use to determine pharmacy performance for calculating DIR fees would constitute an “impermissible connection with or reference to ERISA.”