A law regulating reimbursements by pharmacy benefit managers (PBMs) should stand because it doesn’t regulate benefits or plan administration, Arkansas Solicitor General Nicholas Bronni argued before the U.S. Supreme Court on Tuesday (Oct. 6).
The attorney representing PBMs, however, argued the law is preempted by the Employee Retirement Income Security Act of 1974, a federal law otherwise known as ERISA.
Craig Wilson, health policy director for the Arkansas Center for Health Improvement, said the case has potentially broad implications regarding the ability of states to regulate PBMs.
At issue is Act 900, a state law passed in 2015 to regulate PBMs. PBMs act as middlemen between pharmacists and insurance providers. Their reimbursement rates theoretically incentivize pharmacies to find lower wholesale drug prices. Three control 85% of the market: CVS Caremark, which is part of the corporation that operates the CVS drugstore chain, OptumRX and Express Scripts.
Pharmacists say the PBMs’ reimbursement rates too often fall below their cost of procurement. Act 900 requires PBMs to increase reimbursements for generic drugs if they are below wholesale costs, and it creates an appeals process for pharmacies to challenge the reimbursements.
When the law went into effect in September 2015, the Pharmaceutical Care Management Association (PCMA), which represents PBMs, immediately sued. The industry argued that state laws can’t preempt payments made for voluntarily created employee benefit plans in private industry under ERISA. Those plans are typically self-funded and created by large companies.
The Eastern District of Arkansas federal court enjoined the law in March 2017, so the state appealed to the Eighth Circuit Court of Appeals, which ruled in favor of the PCMA in June 2018.
The case is Rutledge v. Pharmaceutical Care Management Association. Leslie Rutledge is Arkansas’ attorney general.
Bronni said the state’s law isn’t preempted by ERISA because it doesn’t regulate benefits, but instead regulates the price of drugs already covered. He said ERISA doesn’t preempt laws regarding rate regulation. The state’s law regulates PBM reimbursement practices, which plans don’t control. Finally, Act 900 doesn’t refer specifically to ERISA plans, so they are not discriminated against.
“At the end of the day, ERISA doesn’t preempt state rate regulation, and Act 900 is state rate regulation,” he said.
Bronni repeatedly referred to another case, New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Co., which he said set a precedent that ERISA was not meant to preempt basic rate regulation.
Bronni briefly gave an opening statement and then answered questions from the justices starting with Chief Justice John Roberts and then the others in order of seniority.
Notably, Justice Clarence Thomas asked two questions, one of Bronni and one of PCMA attorney Seth Waxman. Thomas rarely asks questions during oral arguments.
Representing the PBMs, Waxman argued the law does not allow states to add their own regulations to what are supposed to be national plans.
“Act 900 directly compels ERISA plan administrators to comply with state specific rules and procedures in administering their benefits programs,” he said. “In doing so, it adds to a thicket of varying state laws that make uniform plan administration impossible.”
Waxman argued that a more controlling precedent would be Gobeille v. Liberty Mutual Insurance Co., a 1996 case where Vermont impermissibly tried to regulate reporting requirements for health care plans including ERISA plans.
Bronni, however, said that case involved a regulation of a fundamental ERISA function, record keeping and reporting, that is specifically listed in the federal law. There are no ERISA provisions that govern a dispute between what a third party administrator or a plan pays a provider, he said. Those are left to the states to regulate.
When Justice Brett Kavanaugh asked about the effect Act 900 would have on plan beneficiaries, Bronni replied that the state is regulating what the PBM pays the pharmacy – in other words, the profit margins. The PBM doesn’t have to pass any cost increases to beneficiaries.
Also arguing in favor of the state’s law was Frederick Liu, assistant to the U.S. solicitor general. In response to a question by Justice Sonia Sotomayor, Liu said there are eight cases where a state law had been found to have an impermissible connection to ERISA. One, Gobeille, refers to a function specifically addressed by ERISA. The other seven regulated the plan-participant relationship. This case does not involve either of those situations, he said.
Asked by Justice Elena Kagan about the need for uniformity, Liu said all state laws create some potential for a lack of uniformity.
“The question has to be, is the lack of uniformity in an area that ERISA cares about?” he said.
Waxman pointed to widely varying procedures and laws that have occurred among states. Four states, including Arkansas, have provisions allowing pharmacies to decline to dispense drugs. That would mean employees of the same company would have unequal benefits from state to state.
He noted that Arkansas-based J.B. Hunt Transport Services had filed a brief in support of PCMA’s case.
Justice Neil Gorsuch asked what other laws would be preempted if ERISA preempted this law. Where would the line be drawn?
Bronni made the same point in his brief closing comments.
“If you accept their position that … any time a regulation imposes cost, that can lead to preemption because it might affect the benefits calculation, that really has no limiting principle,” he said. “You would, frankly, preempt things like state minimum wage laws that have exactly that same effect.”
The ACHI’s Wilson said the lack of a limiting principle appeared to be one issue with which the Court is struggling. Taken to an extreme, states could do nothing to protect citizens, providers, health plans or employers. On the other hand, if the Court permits the type of regulation included in Act 900, would that result in higher costs that would affect benefits or plan administration?
Wilson said it was hard to tell which way the justices were leaning based on the questions they asked. They seemed equally inquisitive of the attorneys.
He said the Court could issue a split decision and allow regulation of payment rates as long as it’s not accompanied by procedural requirements that affect plan administration.
The loss of the recently deceased Justice Ruth Bader Ginsburg could have an effect on the case because she had an unfavorable view of federal preemption without a limiting principle and had dissented regarding this issue in the past, Wilson said. A 4-4 tie would uphold the 8th Circuit decision and invalidate the law.
Wilson said the Court’s ruling could have major implications for states that require PBM licensure, prohibit spread pricing (where PBMs keep part of the money paid for them for prescription drugs instead of reimbursing pharmacies), and prohibit gag clauses in contracts with pharmacists.
“This could really have broad implications if the Court takes a step to broad federal preemption under ERISA,” he said.