Supreme Court Finds State Law Regulating PBMs Not Preempted by ERISA

On December 10, 2020, the Supreme Court of the United States issued an opinion in the case Rutledge v. PCMA, impacting a state’s ability to regulate pharmacy benefit managers (PBMs).

PBMs act as intermediaries between pharmacies and prescription-drug plans. They administer the drug benefit program for an employer’s group health plan by reimbursing pharmacies for the cost of drugs covered by the prescription drug plan. The prescription drug plan, in turn, reimburses the PBM. The reimbursement amount is not necessarily tied to how much the pharmacy paid to purchase that drug. Rather, PBMs set their reimbursement rates according to a list specifying the maximum allowable costs (MAC) for each drug. PBMs generally develop their own unique MAC lists. The reimbursement from the prescription drug plan to the PBM may differ from and exceed the PBM’s reimbursement to a pharmacy.

In 2015, Arkansas passed Act 900, which regulates the minimum prices at which PBMs must reimburse Arkansas pharmacies. Prior to the passage of the Act, PBMs were found to reimburse pharmacies at less than the pharmacy’s cost to acquire the drug. This caused some pharmacies, such as rural and independent pharmacies, to go out of business.

The Act requires PBMs to reimburse a pharmacy for generic drugs at a price at least equal to the wholesale invoice amount that the pharmacy paid for the drug inventory. The Act also mandates that PBMs use updated MAC lists and permit appeals. Finally, the Act gives pharmacies the discretion to “decline to dispense” when a particular transaction would cause them to lose money.

In response to this Act, Pharmaceutical Care Management Association (PCMA), which is a national trade association, sued in the Eastern District of Arkansas, alleging that the Employment Retirement Income Security Act of 1974 (ERISA) preempts the State Act and therefore is not enforceable. The District Court sided with PCMA and held the Act was preempted by ERISA. The Eighth Circuit, upon appeal, affirmed the lower court’s decision.

However, the U.S. Supreme Court reversed the decision and unanimously held that the State Act was not preempted by ERISA. The Court held that the state law is merely a form of cost regulation that applies equally to all PBMs and pharmacies in Arkansas and is not impermissibly connected with an ERISA plan. Additionally, the law does not refer to ERISA because it applies to all PBMs without regard to whether they manage plans that are subject to ERISA.

Since there currently are no federal laws regulating PBMs, this decision may open the door for states to issue new regulations on PBMs. PBMs have a considerable influence on health plan costs. New state-level regulation could be implemented to control reimbursement rates and create more transparency in PBM contracts.

Employers who work with PBMs in administering their prescription drug plan will need to work with their PBMs to determine to what extent, if any, any given state’s PBM regulations may apply to their prescription drug plans.