Rutledge v. PCMA may have big impact on how states regulate PBMs

In its December 8, 2020 decision, the Supreme Court unanimously upheld Arkansas Act 900 (Act 900), which regulates the rates at which PBMs reimburse pharmacies for prescription drugs. At issue in the case was whether ERISA, the federal law that governs employee benefit plans, prohibits states from implementing legislation that regulates the reimbursement that PBMs provide to pharmacies.  ERISA includes a clause that preempts (or prohibits) states from adopting laws that “relate to” employee benefit plans covered under ERISA. So the question for the Court was whether or not Act 900 relates to plans governed by ERISA in a manner that constitutes prohibited state regulation.

Arkansas enacted Act 900 after many independent pharmacies claimed that they were forced to close at least partially because PBMs set reimbursement rates for prescription drugs at amounts lower than the cost at which the pharmacies acquired the drug. In addition, these local, often rural, pharmacies complained that PBMs reimbursed pharmacies affiliated with the PBM at significantly higher rates.

Act 900 requires that PBMs reimburse prescription drugs at a rate equal to or higher than the pharmacy’s acquisition cost for the prescription drug and permits Arkansas pharmacies to refuse to dispense a drug to a patient if the reimbursement rate set by the PBM is lower than the acquisition cost. The Act also requires PBMs to timely update their maximum allowable cost (MAC) lists, which establish reimbursement that PBMs provide to pharmacies for certain prescription drugs, when wholesale prices increase. Act 900 also creates an administrative appeal procedure through which pharmacies can challenge MAC reimbursement rates.

PCMA, a trade association for PBMs, brought a lawsuit, arguing that because employee health plans routinely use PBMs to administer their prescription drug benefits, Act 900 impermissibly relates to ERISA plans by interfering with central matters of plan administration, and was therefore preempted by the federal law.

PCMA succeeded in its arguments before the U.S. District Court in Arkansas and the U.S. Court of Appeals for the Eighth Circuit (Eighth Circuit), which leaned on its prior decision in PCMA v. Gerhart in siding with PCMA. In Gerhart, the Eighth Circuit ruled that a similar Iowa law was preempted because it made “implicit reference” to ERISA by regulating PBMs that administer ERISA plan benefits, and maintained an impermissible connection to ERISA plans because the appeal process, which allowed pharmacies to challenge PBM reimbursement rates, limited plan administrators’ control over drug benefit calculations.

Overturning the Eighth Circuit’s decision, the Court held 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 preempted by ERISA.” The Court also held that Act 900 “does not act immediately and exclusively upon ERISA plans” because the Act governs PBMs irrespective of whether they manage ERISA plans. Nor are ERISA plans essential to the operation of Act 900. For these reasons, the Court concluded that Act 900 lacks the specific focus on and interference with ERISA plans that federal law curtails.

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.” 

While Rutledge may result in positive change for independent pharmacies, the PCMA released a statement after the release of the opinion saying, “As states across the country consider this outcome, we would encourage they proceed with caution and avoid any regulations around prescription drug benefits that will result in higher health care costs for consumers and employers.”

If state laws result in higher drug reimbursement, it could lead to higher costs to health plans, employers or even employees or health plan members. On the other hand, complexity in the pricing of drugs at various stages of the distribution cycle makes it hard to predict the specific impact of laws like Act 900. The hope, however, is that those complications will forestall the closure of many independent pharmacies, and streamline the supply chain that delivers specialty drugs to patients.