Summary

The U.S. Supreme Court unanimously upheld an Arkansas statute that regulates the price that pharmacy benefit managers (PBMs) pay retail pharmacies for prescription drugs.  

The Upshot

• Act 900 in Arkansas regulates the price paid by PBMs for the cost of drugs purchased at retail pharmacies through mechanisms designed to ensure that the pharmacy would at least recover the cost that it is able to negotiate with a typical wholesaler selling the drug. An association of PBMs sued to overturn the legislation on the grounds that it is preempted by the Employee Retirement Income Security Act of 1974, known as ERISA. The federal district court and Eighth Circuit Court of Appeals agreed. The Supreme Court reversed.
• The Supreme Court ruled that Act 900 does not have “a connection with or reference to” an employee benefit plan. It found that the Act does not “immediately and exclusively” affect ERISA plans but is a form of cost regulation that will not so acutely affect the benefits and operation of employee benefit plans as to warrant preemption.
• The case may have further implications for the provision of prescription drug benefits and the reach of ERISA preemption.

The Bottom Line

The direct effect of this decision on prescription drug benefits offered under group health plans will depend on how many states introduce regulations affecting prescription drug cost reimbursements and how PBMs respond to such legislation in their contracts with employee benefit plan sponsors. The decision comes at a time when there is increasing federal scrutiny of prescription drug prices, which may affect how states choose to act. The effect of the case on ERISA preemption will similarly be determined by future state action and court decisions.

FULL ALERT

In a case that may have further implications for the provision of prescription drug benefits and the reach of ERISA preemption, the U.S. Supreme Court has unanimously upheld an Arkansas statute that regulates the price that pharmacy benefit managers (PBMs) pay retail pharmacies for prescription drugs. 

Many employee benefit plans provide prescription drug coverage through contracts with PBMs. These contracts often include complex financial arrangements, typically involving discounts and rebates, that determine how much the plan will pay the PBM for prescription drugs provided to plan members. The PBM, in turn, enters into contractual arrangements with drug manufacturers, relating to the cost of drugs provided by these manufacturers, and with pharmacies, relating to the amount that the PBM will reimburse the pharmacy for drugs provided under an arrangement administered by the PBM. The reimbursement rates established under these pharmacy contracts may be based on factors such as a listing maintained by the PBM of the maximum allowable cost (MAC) that the PBM will pay for a particular drug. 

Finding that the amounts paid by PBMs do not always reimburse retail pharmacies for their cost in obtaining drugs from wholesalers, the State of Arkansas enacted Act 900. Act 900 regulates the price paid by PBMs for the cost of drugs purchased at retail pharmacies through mechanisms designed to ensure that the pharmacy would at least recover the cost that it is able to negotiate with a typical wholesaler from whom it may purchase the drug. 

An association of PBMs sued to overturn the legislation on the grounds that it is preempted by ERISA. The federal district court and Eighth Circuit Court of Appeals agreed. The Supreme Court reversed.

The Supreme Court ruled that Act 900 does not have “a connection with or reference to” an employee benefit plan.  It found that the Act does not “immediately and exclusively” affect ERISA plans but is a form of cost regulation that will not so acutely affect the benefits and operation of employee benefit plans as to warrant preemption. 

The direct effect of this decision on prescription drug benefits offered under group health plans will depend on how many states introduce regulations affecting prescription drug cost reimbursements and how PBMs respond to such legislation in their contracts with employee benefit plan sponsors. It comes at a time when there is increasing federal scrutiny of prescription drug prices, which may affect how states choose to act. 

With regard to ERISA preemption, the Supreme Court decision aims to place the Arkansas law in the context of other laws directed toward health care costs, particularly New York’s surcharge on hospital care, which it previously upheld against an ERISA preemption challenge. In that sense, the Court does not treat its decision as a major inroad to the scope of ERISA preemption. However, as is often the case, the full meaning of this decision for ERISA preemption will be determined by future state legislation and court decisions.