U.S. Supreme Court Decision Supports State Regulation of Pharmacy Benefit Managers

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The U.S. Supreme Court’s recent unanimous decision clears the way for state regulation of Pharmacy Benefit Managers (“PBMs”). Rutledge v. Pharm. Care Mgmt. Ass’n, 141 S. Ct. 474 (2020). At issue before the High Court was Arkansas’ Act 900, which requires PBMs to reimburse Arkansas pharmacies at a price equal to or higher than that which the pharmacy paid for the medication to a wholesaler. Arkansas is one of numerous states around the country that passed legislation regulating PBMs in the interest of pharmacies and patients’ access to care. The Arkansas statute was challenged by the Pharmaceutical Care Management Association (“PCMA”), which represents the 11 largest PBMs in the country, as preempted by the 1974 Employee Retirement Income Security Act (“ERISA”). Reversing the Eight Circuit decision, the High Court found Arkansas’ Act 900 not preempted by the federal statute. For states like New York, where PBM practices are largely unregulated, this landmark ruling supports the adoption of new laws that will help pharmacies stay afloat.

Overview of PBMs and Act 900

PBMs are intermediaries between drug plans and pharmacies. They administer drug benefit programs for health plans, and process and pay pharmacy claims for prescription drugs. As intermediators, PBMs largely escape any oversight, regulation and disclosure obligations in the midst of a highly regulated pharmacy industry, and make their own rules, contract terms, and pharmacy provider manuals.

PBMs receive payment from a drug plan for prescription drugs. Instead of passing the full payment to the pharmacy for dispensing the patient’s medication, PBMs keep an undisclosed portion of that amount for themselves. That difference generates a profit for PBMs. They develop their own maximum allowable cost (“MAC”) lists for drugs as a basis for pharmacy reimbursement, without having to substantiate their source, method, or formula, deeming this information a trade secret. This often results in reimbursement to pharmacies below the pharmacy acquisition costs, with PBMs having the last word per their take-it-or-leave it contractual terms and pharmacy provider manuals, leaving pharmacies without any recourse.

Most states have enacted statutes that regulate PBMs to some extent. In 2015, Arkansas adopted Act 900 in response to concerns by rural and independent pharmacies that the reimbursement rates set by PBMs were far below their acquisition costs – driving them out of business. Act 900 requires PBMs to reimburse Arkansas pharmacies at or above their acquisition costs. To accomplish this result, the Act uses three enforcement mechanisms. First, PBMs must timely update the MAC lists when drug wholesale prices increase. Second, PBMs must provide administrative appeal procedures for pharmacies to challenge reimbursement below the acquisition cost. If a pharmacy cannot procure the drug from its typical wholesaler equal to or less than the MAC price, then PBMs must increase their reimbursement rate to cover the cost. Finally, the Act allows a pharmacy to refuse to dispense a drug if a PBM’s MAC reimbursement price is below its purchase price.

Framework to determine whether a state law “relates to” an ERISA Plan

The issue before the U.S. Supreme Court in Rutledge was whether Arkansas’ Act 900 is subject to ERISA’s provision that preempts state laws that “relate to any employee benefit plan.” 29 U.S.C. §1144(a). A state law “relates to” an ERISA plan if it (1) has an impermissible connection with an ERISA plan; or (2) “refers to” an ERISA plan. Rutledge v. Pharm. Care Mgmt. Ass’n, 141 S. Ct. 474 (2020), citing Egelhoff v. Egelhoff 532 U.S. 141, 147 (2001).

A state law has an “impermissible connection” with an ERISA plan if it “governs a central matter of plan administration or interferes with nationally uniform plan administration.” Id., quoting Gobeille v. Liberty Mut. Ins. Co., 577 U.S. 312, 320 (2016). A state law “refers to” an ERISA plan if it “acts immediately and exclusively” upon ERISA plans or where the existence of an ERISA plan is “essential to the law’s operation.” The Court held that Act 900 does not act “immediately and exclusively” upon ERISA plans and does not directly regulate health benefits at all. Rather, Act 900 permits PBMs to transmit higher pharmacy reimbursement rates to prescription drug plans. Moreover, ERISA is not essential to Act 900’s operation because it regulates PBMs regardless of whether the plan is covered by ERISA. Therefore, Act 900’s cost regulation does not have an impermissible connection with nor reference to an ERISA plan.

Potential Implications for New York

The Supreme Court’s ruling not only settles the legality of existing laws regulating PBMs in Arkansas, but all around the country. The ruling has already prompted New York to reintroduce previously vetoed legislation. New York pharmacies in particular had a stake in the outcome of Rutledge since 2019 when Governor Andrew Cuomo vetoed a bill that would have regulated PBMs. Moreover, Governor Cuomo’s newly issued 2022 Executive Budget recognizes the need for PBM accountability, “to bring transparency to their operations and control to skyrocketing prescription drug costs”:

The difference between what the PBM collected [from the insurer] and what it passed on [to the pharmacy] is the spread. PBMs — which set both amounts — do not have to disclose to insurers how much they pass on to pharmacies or disclose to pharmacies how much they collect from insurers.

(Governor Andrew M. Cuomo’s FY 2022 Executive Budget Briefing Book). The Executive Budget would require PBMs to register with the New York State Department of Financial Services and to disclose financial incentives and financial arrangements affecting patients.

In addition to Rutledge bringing some good news for the economic viability of pharmacies, PBMs have faced scrutiny into their undisclosed financial and contractual relationships from the U.S. Senate Finance Committee, releasing a January 2021 report on insulin pricing investigation, finding in part “PBMs have an incentive for manufacturers to keep list prices high, since the rebates, discounts, and fees PBMs negotiate are based on a percentage of a drug’s list price—and PBMs retain at least a portion of what they negotiate.” (United States Senate Finance Committee “Insulin: Examining the Factors Driving the Rising Cost of a Century Old Drug” Staff Report, January 14, 2021).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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