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The United States Supreme Court Decides the Rutledge Case

In a previous article, we told you about a case that was argued in the United States Supreme Court on October 6, 2020.  That case, Rutledge, Attorney General of Arkansas v. Pharmaceutical Care Management Association, was decided by the Court in a unanimous opinion issued on December 10, 2020.

What Was The Case About?

To refresh your recollection, the State of Arkansas had passed a law, known as Act 900, regulating the price at which pharmacy benefit managers (PBMs) are required to reimburse pharmacies for prescription drugs.  While invisible to most plan participants, PBMs are an important part of most employer healthcare plans.

A PBM is an intermediary between a healthcare plan and a pharmacy.  When a plan participant goes to a pharmacy to fill a prescription, the participant may or may not have a co-pay.  Whether the participant has a co-pay or not, the participant expects that the cost of the prescription will be mostly paid by the plan.  Ultimately, the participant is right.  However, it is not the plan that makes a payment to the pharmacy.  The plan’s PBM pays the pharmacy, and the plan reimburses the PBM.

The problem that Act 900 sought to address is that the amount paid to the pharmacy by the PBM may bear no relation to either the amount paid by the pharmacy to acquire the prescription drug or the amount paid by the plan to the PBM.  The PBM enters into a contract with the pharmacy pursuant to which the PBM agrees to reimburse the pharmacy according to rates set by the PBM and known as the maximum allowable cost (MAC).  The PBM also enters into a contract with the plan pursuant to which the plan agrees to reimburse the PBM at a certain amount.  The difference between the MAC for a particular drug and the amount paid by the plan represents profit for the PBM.  However, in certain cases, it may only be the PBM that is making a profit.  That is because the MAC may be less than the pharmacy’s acquisition cost.  And, if that happens too often, a pharmacy may be forced out of business.

Act 900 attempted to resolve this problem by requiring PBMs to periodically update their MACs to ensure that the MAC for a particular prescription drug equaled the pharmacy’s acquisition cost.  In addition, Act 900 provided an appeal procedure whereby a pharmacy could challenge a PBM’s MAC when it was below the pharmacy’s acquisition cost.  Finally, Act 900 provided that a pharmacy could refuse to deliver a prescription drug to a plan participant if the PBM’s reimbursement rate was less than the pharmacy’s acquisition cost.

This case began when the Pharmaceutical Care Management Association (Association), a trade association of the some of the largest PBMs, sued the State of Arkansas in federal district court.  The Association claimed that Act 900 was preempted by the Employee Retirement Income Security Act of 1974 (ERISA) and, as a result, unenforceable.  The Association won in the District Court, and the District Court’s judgment was affirmed by the United States Court of Appeals for the Eighth Circuit.  The State filed a Petition for a Writ of Certiorari, which the Supreme Court granted.

The Supreme Court Finds No ERISA Preemption

In an opinion written by Justice Sotomayor, the Court reviewed the law of ERISA preemption.  It said that ERISA preempts any state law that relates to an employee benefit plan.  Further, a state law relates to an employee benefit plan if it has a connection with or reference to such plan.

The Court found that the purpose of ERISA was “to make the benefits promised by an employer more secure by mandating certain oversight systems and other standard procedures”.  It accomplished this by ensuring that an employer would not be subject to the differing rules and regulations of the various states.  “ERISA is therefore primarily concerned with preempting laws that require providers to structure benefit plans in particular ways, such as by requiring payment of specific benefits.”

Not every state law that affects an ERISA plan is preempted.  “This is especially so if a law merely affects costs.”  The Court discussed its earlier decision in New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Company, in which the Court held that a New York law that imposed a surcharge on hospital billing rates for plans other than Blue Cross Blue Shield plans was not preempted by ERISA.  In discussing the Travelers case, Justice Sotomayor wrote that:

Plans that bought insurance from the Blues therefore paid less for New York hospital services than plans that did not.  This Court presumed that the surcharges would be passed on to insurance buyers, including ERISA plans, which in turn would incentivize ERISA plans to choose the Blues over other alternatives in New York.  Nevertheless, the Court held that such an “indirect economic influence” did not create an impermissible connection between the New York law and ERISA plans because it did not “bind plan administrators to any particular choice.”

In Rutledge, the Court said that it is required to follow the holding of Travelers.

Act 900 is merely a form of cost regulation.  It requires PBMs to reimburse pharmacies for prescription drugs at a rate equal to or higher than the pharmacy’s acquisition cost.  PBMs may well pass those increased costs on to plans, meaning that ERISA plans may pay more for prescription-drug benefits in Arkansas than in, say, Arizona.  But “cost uniformity was almost certainly not an object of pre-emption.”

The Court also found that Act 900 does not refer to ERISA plans.  The reason that Act 900 does not refer to ERISA plans is that it is equally applicable to non-ERISA plans.  Since Act 900 does not have an impermissible connection to ERISA plans and does not refer to ERISA plans, it is not related to ERISA plans and is not preempted.

What Will Be The Impact of Rutledge?

This depends on whom you ask.  The State of Arkansas, as well as the over 30 other states with similar laws, will be pleased.  The states can now regulate the reimbursement rates that pharmacies are paid for prescription drugs to ensure that no pharmacy is forced to close because the MAC is less than the pharmacy’s acquisition cost.  The pharmacies are happy because, in states with such laws, they will no longer be forced to sell prescription drugs for less than cost.

On the other hand, the PBMs are not pleased.  Obviously, this could reduce their profit margins if they are required to increase their MACs.  The impact on prescription drug plans is less clear.  One of the arguments made by the Association before the Supreme Court is that PBMs will be forced to pass on increased costs to healthcare plans.  This will increase the cost of prescription drugs to the plans.  This may force plans to increase co-pays or eliminate certain coverages.  However, the Court’s role in this case was not to judge the wisdom of Act 900.  It was simply to determine whether it was preempted by ERISA.  And, since cost regulation does not relate to an ERISA plan, it found that Act 900 is not preempted by ERISA.