For many years, the business practices of Pharmacy Benefit Managers (PBMs) have been scrutinized, since they often limit patient access to medications and have significant impacts on community pharmacies. Research shows that PBMs cause prescription drug prices to increase, which is exactly the opposite of the role they were designed to have. They do this primarily through (1) spread pricing, which is when PBMs bill the insurance plan for a higher amount than the PBM actually paid the pharmacy, and (2) DIR fees, which are assessed when a PBM evaluates a pharmacy’s performance on certain, ambiguous quality measures and subsequently takes money back from a pharmacy claim previously processed. When these PBMs fees cause pharmacies to close, patients in those communities lose a valuable healthcare provider who knows them and cares about their needs.
In 2015, Arkansas’ state legislature passed a law, Act 900, which attempted to reign in many PBM practices, namely:
- Requiring that PBMs reimburse pharmacies at or above the wholesale costs of drugs
- Requiring PBMs to update their Maximum Allowable Cost (MAC) lists more frequently
- MAC is the maximum amount that a payer (PBM) will pay a pharmacy for a specific medication. These lists vary state-to-state and can change often.
- Prohibiting PBMs from reimbursing PBM-affiliated pharmacies more than they paid other pharmacies
- Creating a reasonable administrative appeal procedure including telephone number, email address or website for the purpose of submitting administrative appeals
- Allowing pharmacists/pharmacies to decline to provide the pharmacist services (decline to dispense) to a patient if the pharmacy is to be paid less than the pharmacy acquisition costs based on the MAC list
The critical question of Rutledge v PCMA is whether or not the Employee Retirement and Income Security Act of 1974, commonly referred to as ERISA, preempts Arkansas’ Act 900. Let’s start by breaking down ERISA.
ERISA was enacted to set minimum standards for private employee benefit plans, specifically pension and health plans, and to protect the beneficiaries in these plans. ERISA requires the plan to inform beneficiaries about the plan features, follow certain procedures such as establishing an appeals process for patients to use if the medication they need is not covered, and act in the best interest of the beneficiaries. Furthermore, ERISA helps guarantee benefits to the beneficiary if the plan is terminated, such as if the company goes bankrupt or if the employee loses their job. To avoid multiple regulations concerning employee benefit plans, Congress included ERISA preemption of any state laws. By doing so, ERISA regulates employee benefit plans as a federal concern and establishes a nationally uniform administration of employee benefit plans. ERISA applies whether the plan is fully funded or self-funded, meaning whether the employer pays the insurance company a fixed premium or only for submitted claims, respectively. ERISA does not apply, however, to non-private plans, such as those set up by government agencies or churches.
For many years, PBMs have maintained that any state laws attempting to regulate PBMs are preempted by ERISA due to a phrase in ERISA section 514a that states that ERISA preempts state laws insofar as they relate to any employee benefit plans. Interpretation of this phrase, in particular the words relate to, is the main reason why lower courts have had trouble with PBM regulation laws and interpretation of this statute is central to this case.
Oral arguments are heard
On October 6th, oral arguments for this case were heard by telephone in the Supreme Court. Arkansas’ Solicitor General, Nicholas Bronni, began the oral arguments (on behalf of Arkansas Attorney General Leslie Rutledge) by providing 3 reasons why Act 900 is not preempted by ERISA:
- Act 900 doesn’t regulate benefits. Act 900 regulates what the PBM pays the pharmacy for drugs that a plan has already agreed to cover.
- Act 900 doesn’t regulate plan administration. Act 900 regulates PBM reimbursement practices which plans neither control nor are even aware of, as PBM-Pharmacy contracts aren’t even shared with the plan.
- Act 900 doesn’t discriminate against ERISA entities. Act 900 applies to both ERISA plans as well as non-ERISA plans.
General Bronni focused his argument around the fact that Act 900 regulates the PBM itself, not the health plan. General Bronni argued that ERISA was designed to regulate the health plan-beneficiary relationship, and Act 900 in no way regulates that plan-beneficiary relationship. This is an important distinction because attempting to regulate the health plan would certainly be preempted by ERISA because that would impact the plan-beneficiary relationship. General Bronni made clear that Act 900 is simply “rate regulation,” the rate here being the amount paid by the PBM to the pharmacy. He acknowledged many times that regulation of PBM’s payment to pharmacies could indirectly raise the cost of medications to patients if the PBM decides to pass along the associated costs to the plan, and the plan then changes what percent of copay their beneficiary would have to pay.
A pivotal factor that came up in the questioning is whether or not the PBM’s payment to pharmacies is “central to plan administration.” This is relevant because if it were central to plan administration, then that would interfere with the plan-beneficiary relationship. General Bronni repeatedly emphasized that the payment is not a central function of plan administration, as was established by the Supreme Court in New York State Blue Cross Plans v. Travelers Insurance Co, commonly referred to as Travelers, in which the Supreme Court Ruled that payment to a service provider is not central to plan administration. Later, Assistant Solicitor General of the United States Fred Liu also addressed this point, saying “From the plan perspective, pharmacy reimbursement is simply a matter of costs. As this court’s decision in Travelers make clear, cost isn’t a central matter of plan administration.”
The Justices also brought up a Supreme Court case from 1996, Gobeille v. Liberty Mutual Insurance Co. in which Vermont tried to regulate a third-party administrator by implementing some reporting and recordkeeping requirements. In this case, the Supreme Court ruled ERISA indeed preempted this Vermont law attempting to regulate a third-party administrator. Justice Gorsuch asked General Bronni why, if reporting and recordkeeping of plan administration are preempted, Act 900 shouldn’t be preempted. General Bronni explained that ERISA contains provisions that explicitly detail reporting and recordkeeping, so clearly ERISA was designed to regulate this.
Another important factor is the question of whether or not Act 900 creates potential for lack of uniformity across states. Assistant Solicitor General Liu responded that all state laws create some potential for lack of uniformity, so the question becomes, is the lack of uniformity in an area that ERISA cares about? If the law is a central matter of plan administration, then ERISA applies. If it is not a central matter of plan administration, then ERISA doesn’t apply. General Liu pointed directly to the wording in ERISA, saying that the infamous line “the provisions of this subchapter and subchapter 3 shall supersede any and all state laws insofar as they may now or hereafter relate to any employee benefit plan” specifically refers to what is outlined in those subchapters. Liu’s point is that if it isn’t specifically outlined in the ERISA chapter, then it is not a central matter of plan administration.
Lawyer Seth Waxman, representing Pharmaceutical Care Management Association (PCMA), focused his arguments on how Act 900 would allegedly bind plan administrators to certain choices and make uniform national administration impossible, which ERISA sought to prohibit.
On the lack of uniformity issue, Mr. Waxman stated that the requirement for regular updates to the MAC lists across all states with different requirements for updates would be too complex to keep up with. This uniformity theme is also what Mr. Waxman based his argument for what the relates to term, as mentioned above in the ERISA section, should be interpreted to mean. He said that if a law interferes with nationally uniform plan administration then it must relate to ERISA preemption.
Many justices caught on to the paradoxical situation that basically anything could relate to an ERISA plan. Upon rebuttal, General Bronni addressed this by showing that if the court prevented any costs that relate to plan administration, then even minimum wage laws (as one example) would be preempted.
The impact on pharmacy and patients
The impact that Rutledge v PCMA could have on pharmacy, and on patients, is enormous. First, it should be noted that although there might appear to be a clear “winner” in terms of whether or not Act 900 is legal, there is much more to it than that. Depending on how the opinion is written, this case could set precedent for many similar PBM regulations to occur in other states. For example, the justices could create new rules that apply to anyone paying a pharmacy, whether a PBM or true health insurer. They could also declare the ERISA statute unconstitutional, which would create a need for Congress to amend the language. They could make rules that effectively make the MAC list obsolete and thus require PBMs to totally reimagine how they price and reimburse medications. Conversely, they could create rules that severely hinder states from any PBM regulation whatsoever, meaning the very small amount of PBM regulation already in place (such as typical reimbursement appellate process, etc.) could be busted wide open to legal challenges across the country.
If Arkansas wins, the extent of the win could very well depend on the extent of the written opinion. A win for Arkansas would mean that patients all around the state, and subsequently in other states, would retain access to essential healthcare providers they trust. The Court must provide a ruling by the end of June 2021, however it could come much sooner, perhaps March or April of 2021. There is no doubt that the pharmacy world is greatly anticipating the outcome of Rutledge v PCMA, with hopes that pharmacies everywhere will soon be better able to provide higher-quality patient care.
Guest Writers Profile
John Little is the current Executive Fellow at The American Pharmacists Association (APhA). He received his PharmD from The University of Oklahoma College of Pharmacy where he served as class president and student council president. His practice interests include incorporating digital health into patient care and discovering innovative ways for pharmacists to leverage their medication expertise to provide exceptional patient care. He is passionate about serving pharmacists, and advocating for pharmacists’ recognition as essential healthcare providers.
Through his role at APhA, John has learned the impact that pharmacists can make on a national, regional, and local scale. By advocating for pharmacy practice advancement through associations, John is promoting the patient care that pharmacists provide across the country.