In January, the Supreme Court agreed to accept an appeal filed by the State of Arkansas of a decision by the Eighth Circuit Court of Appeals finding that Section 514 of ERISA expressly preempted the state’s maximum allowable cost law (“MAC law”). Among other things, MAC laws change the way in which pharmacy benefit managers (“PBMs”) determine the amount a network retail pharmacy are reimbursed for dispensing generic drugs in ways that may result in the pharmacy being reimbursed less than the cost of the drug dispensed.
The case is Rutledge v. Pharm. Care Mgmt. Assn., Supreme Court No. 18-540. The decision being appealed is Pharm. Care Mgmt. Assn. v. Rutledge, 891 F. 3rd 1109 (8th Cir. 2018). An important related case that the Eighth Circuit panel relied on in Rutledge is Pharm. Care Mgmt. Assn. v. Gerhart, 852 F. 3d. 722 (8th Cir. 2017)(Iowa MAC law preempted).
However the Court rules on this appeal, the decision will be important for the reasons discussed below.
First, more than 30 states have enacted laws that regulate various aspects of the relationship between PBMs and their network retail pharmacies, including in many cases the use of MAC laws like the one invalidated by the Eight Circuit Court of Appeals. Some states have enacted more than one PBM law in the past few years. Thirty-six states joined in filing as amicus curiae in support of Arkansas’ petition. The Solicitor General did so as well in response to a request from the Court.
As is clear based on the number of states joining the amicus filing, many states believe that their right to regulate PBM business practices falls within their historical police powers and is important to protect their citizens. They further believe that the fact the PBMs provide services to ERISA plans does not warrant federal preemption of their right to regulate PBMs. The Court’s ruling in Rutledge should clarify whether the states have the right to regulate PBMs when servicing ERISA plans or, rather, whether such rights are more broadly prescribed by federal law than some previously thought.
Second, for years the Court struggled to provide clear guidance regarding on the scope of ERISA preemption and, as a result, has found it necessary to issue over thirty opinions addressing either Section 514 preemption or an alternative form of ERISA preemption known as “complete preemption.” This changed somewhat following the issuance of the Court’s seminal decision in New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645 (1995), which identified three types of state laws that its prior holdings had identified as laws Congress intended to preempt; namely, laws that (i) mandate employee benefit structures, or (ii) preclude uniform plan administration on a national basis, or (iii) provide plan members with alternative enforcement mechanisms. Since the Traveler’s decision, there have been a number of lower court decisions applying its analysis to different fact patterns, but relatively few new decisions by the Court.
Nevertheless, particularly with respect to the question of whether a state law interferes with uniform plan administration, questions have arisen regarding what constitutes plan administration for preemption purposes. For example, in the Court’s most recent preemption decision, the Court (in a 6-2 decision) found that an all-payer data collection law enacted in Vermont was preempted because it required reporting and disclosure that precluded uniform national plan administration. In doing so, the majority effectively ignored an amicus curiae brief filed by the Solicitor General and Solicitor of Labor that concluded that the specific data collection and reporting required under the law did not impact plan administration in an ERISA context at all. See Gobeille v. Liberty Mut. Ins. Co., 136 S. Ct. 936 (2016), and Brief for the United States as Amicus Curiae Supporting Petitioner. This in turn led some commentators to question whether the Court was moving away from the guidance it provided in Travelers. The Court’s ruling in Rutledge may well answer this question one way or another.
Which Side Will Prevail? The Eighth Circuit’s preemption analysis in both Rutledge and Gerhart has been criticized as being in direct conflict with existing Court precedents, including both Travelers and Gobeille. Under the Court’s historic approach to preemption, Section 514 preempts a state law if it either impermissibly makes reference to ERISA plans or has an impermissible connection with ERISA plans. In Gerhart and Rutledge, PCMA advanced, and the Eighth Circuit accepted, arguably novel arguments with respect to each of these bases for Section 514 preemption. Following is a summary of the arguments accepted by the Eighth Circuit and those made by the Solicitor General and the states in their amicus filings.
Reference To Preemption. With respect to whether a law makes impermissible reference to ERISA plans, the well-established position of the Court is that a state law is preempted when it either acts immediately and exclusively on ERISA plans or where the existence of such plans is essential to the laws operations. See Cal. Div. of Labor Standards Enforcement v. Dillingham, N.A., Inc., 519 U.S. 316, 325 (1997). In the Eighth Circuit’s view, this test was satisfied because Iowa and Arkansas MAC laws specifically excluded some ERISA plans from its general application and, therefore, was preempted under existing Eight Circuit precedent. In the alternative, the court found that the laws were preempted because they made implicit reference to ERISA by regulating PBMs who administer benefits for covered entities, which includes employers, but then excluding some ERISA plans. In other words, the laws were preempted because they applied to a service provider when servicing some ERISA plans, but not all ERISA plans.
In the view of the Solicitor General and the states, neither “reference to” analysis in Gebhart and Rutledge can be reconciled with Dillingham, which requires that a law either act immediately and exclusively upon ERISA plans or that the existence of ERISA plans be essential to the law’s operation. In the view of the Solicitor General and the states, the Arkansas MAC law operates directly on PBMs and does so both when the client is the sponsor of an ERISA plan or a non-ERISA plan. Therefore, the laws do not act either immediately or exclusively on ERISA plans. Moreover, since the definition of the plans subject to the law encompasses both ERISA and non-ERISA plans, the Arkansas law functions irrespective of the existence of ERISA plans. Thus, in the view of the Solicitor General, the Arkansas law did not resemble state laws that the Court previously found to be preempted under a “reference to” theory. See Brief for the United States in Rutledge v. Pharm. Care Mgmt. Ass., No. 18-540 at 9; see also, the brief for the states at 13-17.
Connection With Preemption. PCMA’s “connection with” argument in both Gerhart and Rutledge was based on the assumption that the Arkansas and Iowa MAC laws interfered with the structure and administration of ERISA plans by requiring administrative processes unique to each state. The Eighth Circuit agreed, finding that the laws’ requirements were imposed on PBMs when engaged in the management and administration of benefits under ERISA plans and, as they impermissibly affected plan administration, were preempted.
The Eighth Circuit’s analysis arguably represents a significant misunderstanding of how MAC laws work. In fact, arguably the only real impact a MAC law has on an ERISA plan is to potentially increase the cost of a drug to the ERISA plan and the member by increasing the amount paid to the retail pharmacy. However, such increased costs may or may not result in all cases. The PBM’s contract with the plan sponsor may or may not allow the PBM to pass on the increased cost under a MAC law to its client and whether the member has an increase in cost at the point of sale depends on the plan design (i.e., set dollar or percentage copayment).
More importantly, the Court previously made clear in Travelers that a law of general application (i.e., one not targeted at ERISA plans) that has an incidental impact on such plans’ costs is not preempted. This is due to the fact that such laws “do not bind plan administrators to any particular choice,” force an ERISA plan to adopt a certain scheme of substantive coverage,” or function as a regulation of the ERISA plan itself”. See Brief of the United States at 12-13 citing Travelers at 659, 662 and 668. In other words, the Eighth Circuit arguably confused administration of benefits under the plan (such as the processing of claims that is clearly part of ERISA plan administration) and a PBM’s administration of its network (which, in the view of the Solicitor General, is unrelated to plan administration in an ERISA preemption context).
Arguably, a PBM’s administration of its network has no impact on ERISA plan administration for the same reasons that the Solicitor General and Solicitor of Labor argued the reporting and disclosure in Gobeille did not affect ERISA plan administration. Similarly, the Solicitor General in its amicus filing argued that unlike the disclosure law in Gobeille, MAC laws do not require the plans to do anything. The laws impose obligations on PBMs, not plans. A MAC law “thus regulates PBM administration, not ERISA plan administration,” “does not interfere with uniform plan administration,” and, thus, is not preempted. See Brief for the United States at 15.
Moreover, the position taken by the Eighth Circuit that a PBM’s administration of its retail network is “plan administration” is also arguably inconsistent with prior case law holding that a PBM is not acting in a fiduciary capacity with administering its retail network, negotiating with drug manufacturers, or administering its formulary. See, e.g., Chicago District Council of Carpenters Welfare Fund v. Caremark, Inc., 474 F.3d 463 (7th Cir. 2007), Moeckel v. Caremark, Inc., 622 F. Supp. 2d 663 (M.D. Tn. 2007); In re Express Scripts, Inc., 2008 U.S. Dist. LEXIS 80769 (E.D. Mo. July 30, 2008)
The arguments are clear. Which one the Court will accept less so.
If the Court upholds the Eighth Circuit’s position, the ruling could have a similar impact to the decision in Travelers in 1995. The rules for evaluating ERISA preemption will have changed materially, we just do not yet know how. If the Court reverses the Eighth Circuit, it will likely do so based on the arguable conflict with, and reinforce the importance of, Travelers and confirm that Gobeille’s import is limited mostly to its facts and does not represent the Court moving away from its decision in Travelers.