SCOTUS Upholds Arkansas Law Regulating PBMs

On December 10, 2020, the United States Supreme Court issued a unanimous decision in Rutledge v. Pharmaceutical Care Management Association (PCMA), upholding an Arkansas statute regulating the prices that pharmacy benefit managers (PBMs) pay pharmacies for prescription drugs. The ruling has broad implications for the manner in which states are able to regulate PBMs and drug prices, as well as the reach of ERISA preemption.

Arkansas passed Act 900 in response to concerns that the reimbursement rates PBMs pay pharmacies were sometimes too low to cover the pharmacies’ costs, particularly for rural or independent pharmacies. Act 900 created the following mechanisms to regulate PBMs’ reimbursement rates and ensure they cover pharmacies’ costs:

  • PBMs must update their maximum allowable cost (MAC) lists when wholesale prices increase;
  • PBMs must provide appeal rights for pharmacies to challenge MAC prices that are below a pharmacy’s wholesale acquisition costs; and
  • Pharmacies can refuse to sell a drug to a patient if the PBM’s reimbursement rate is less than the pharmacy’s acquisition cost.

After Act 900 was enacted, a trade association representing the 11 largest PBMs in the country filed suit against the State of Arkansas, claiming that Act 900 is preempted by ERISA. Both the District Court and the Eighth Circuit Court of Appeals agreed and concluded that ERISA preemption applied. Arkansas appealed the ruling to the Supreme Court.

ERISA preempts state laws that “relate to any employee benefit plan” covered by ERISA. In determining whether ERISA preemption applies, courts consider whether the state law has an “impermissible connection” with an ERISA plan. The key issue is whether the law “governs a central matter of plan administration or interferes with nationally uniform plan administration.” State laws that merely affect costs without forcing plans to adopt any particular coverage scheme are not preempted.

Here, SCOTUS held that Act 900 “is merely a form of cost regulation” not subject to ERISA preemption. It also noted that Act 900 does not impermissibly “refer to” ERISA because it regulates PBMs regardless of whether they are managing an ERISA plan. Therefore, the Court reversed the Eighth Circuit’s decision and held that Act 900 is not preempted by ERISA.

SCOTUS’ decision comes at a time when prescription drug prices have faced intense scrutiny from federal and state regulators alike. The ruling may create a model as other states look to pass similar legislation with the aim of protecting independent pharmacies. PCMA, on the other hand, has cautioned that similar state legislation could lead to higher drug costs for consumers.

IMA will continue to monitor regulator guidance and offer meaningful, practical, timely information.

This material should not be considered as a substitute for legal, tax and/or actuarial advice. Contact the appropriate professional counsel for such matters. These materials are not exhaustive and are subject to possible changes in applicable laws, rules, and regulations and their interpretations.