December 10, 2020

Supreme Court Decides Rutledge v. Pharmaceutical Care Management Association

On December 10, 2020, the U.S. Supreme Court decided Rutledge v. Pharmaceutical Care Management Association, No. 18–540, holding that the Employee Retirement Income Security Act of 1974 (ERISA) does not preempt an Arkansas statute that regulates the minimum prices at which pharmacy benefit managers must reimburse pharmacies within the state, and that gives those pharmacies the discretion not to sell prescription drugs that are not reimbursed at an amount at least equal to their acquisition cost, because the statute neither has a connection with nor reference to an ERISA plan.

Pharmacy Benefit Managers (PBMs) act as intermediaries between prescription-drug plans and pharmacies. When a prescription-drug plan beneficiary has a prescription filled, the PBM reimburses the filling pharmacy for the prescription at a contracted rate, known as the maximum allowable cost (MAC). The PBM then obtains reimbursement from the prescription-drug plan at an amount greater than what the PBM paid the pharmacy. The difference in the two amounts creates a profit for the PBM.

In 2015, Arkansas adopted Act 900 (“the Act”) to prevent some pharmacies, particularly rural and independent pharmacies, from going out of business because the MACs set by many PBMs were often too low to cover the pharmacies’ operating costs. The Act requires PBMs to reimburse pharmacies at an amount at least equal to what the pharmacy paid to acquire the drug by requiring PBMs to (1) timely update their MAC when the price of drugs increases, (2) provide administrative appeal procedures by which pharmacies may challenge the prices included in the MAC list, and (3) permit pharmacies to refuse to sell a drug that is not reimbursed at an amount at least equal to its acquisition cost. The Pharmaceutical Care Management Association (PCMA), a national trade association representing the 11 largest PBMs in the country, sued the State of Arkansas in district court, alleging that ERISA preempts the Act. The district court held that Act 900 was preempted, and the Eighth Circuit affirmed.

The Supreme Court reversed, holding that ERISA does not preempt the Act because the Act neither has a connection with nor reference to an ERISA plan. ERISA preempts only state laws that “‘relate to any employee benefit plan’ covered by ERISA.” “[A] state law relates to an ERISA plan if it has a connection with or reference to such a plan.”

The Court stated that a state law has an impermissible connection to ERISA and is therefore preempted when it “governs a central matter of plan administration or interferes with nationally uniform plan administration.” For example, statutes that require payment of specific benefits require plan administrators use specific rules to determine beneficiary status, or require a “plan to adopt a certain scheme of substantive coverage” are all impermissibly connected to ERISA provisions. In contrast, state laws that only affect cost do not have an impermissible connection.

The Court held that “Act 900 is merely a form of cost regulation” that applies equally to all PBMs and pharmacies in Arkansas, and therefore is not impermissibly connected with an ERISA plan. A statute refers to ERISA when it “acts immediately and exclusively upon ERISA plans or where the existence of ERISA plans is essential to the law’s operation.” The Court concluded that Act 900 does not refer to ERISA because it applies to all PBMs without regard to whether the PBM manages an ERISA plan.

Justice Sotomayor delivered the opinion of the Court, which was joined by all the Justices except Justice Barrett, who took no part in the consideration or decision of this case. Justice Thomas also filed a concurring opinion.

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