PBM Case
Rachel Balick
If you’re confused about Rutledge v Pharmaceutical Care Management Association (PCMA, the association that represents PBMs)—the upcoming Supreme Court case about an Arkansas state law regulating PBMs’ pharmacy reimbursement rates—you’re not alone. The specifics of the case are complicated, thorny, and ultimately, the outcome may or may not provide clear answers on the circumstances under which states can regulate PBMs.
The Rutledge v PCMA timeline
Here’s how Arkansas’s conflict with PCMA has unfolded.
2015: The Arkansas state legislature passed Act 900, which sought to require that PBMs reimburse pharmacies at or above the wholesale costs of generic drugs. This act addressed the PBM practices that caused some pharmacies to lose money on the prescriptions they filled, threatening their business and patients’ access to their services.
Act 900 also forbid PBMs from reimbursing affiliated pharmacies more than they paid others (e.g., CVS Health comprises the PBM CVS Caremark and the CVS pharmacy chain) and created an avenue for pharmacies to appeal reimbursements lower than wholesale acquisition cost.
2017: PCMA challenged Act 900 in federal court, claiming that the act was preempted by ERISA (see sidebar) and Medicare Part D. U.S. District Court Judge Brian Miller ruled partly in favor of Arkansas by rejecting the argument that the act was preempted by Medicare Part D. His decision did exempt from Act 900 regulation of the reimbursement rate for plans governed by ERISA, a win for PBMs.
2018: PCMA appealed the district court ruling that Act 900 was not preempted by Medicare Part D to the Eighth U.S. Circuit Court of Appeals. Arkansas Attorney General Leslie Rutledge filed a cross-appeal on the ERISA preemption piece.
The Eighth Circuit Court, basing its decision on the ruling in an Iowa case, reversed the lower court’s judgment that Act 900 was not preempted by Medicare Part D but affirmed that the act was preempted by ERISA. The ruling essentially struck down the entire Arkansas law.
In October 2018, Arkansas submitted a petition for a writ of certiorari to the Supreme Court. Led by California, in November, 32 states and the District of Columbia submitted an amicus curiae brief in support of Arkansas’s petition. The signers of the amicus brief had their own state regulations of PBMs that they have been unable to implement.
2019: U.S. Solicitor General Noel Francisco recommended that Rutledge v PCMA be heard by the Supreme Court. “The court of appeals held that ERISA preempts Arkansas’s regulation of the rates at which PBMs reimburse pharmacies. That decision is incorrect,” read the solicitor’s petition for writ of certiorari. “It is contrary to this Court’s precedent and the decisions of other courts of appeals on an important question of federal law.”
2020: On January 10, the Supreme Court granted the writ of certiorari. The date of oral arguments was announced in February: They will begin on April 27, 2020. On March 2, 2020, APhA, the National Community Pharmacists Association, the National Alliance of State Pharmacy Associations, and the Arkansas Pharmacists Association submitted an amicus curiae in support of Arkansas. The brief was also signed by 48 of the 49 remaining states and the District of Columbia. To read the brief, visit https://apha.us/AmicusBrief.
To review the entire case docket, visit https://apha.us/RutledgeDocket.
What’s at stake
“If Arkansas loses this case, that means that Act 900 in Arkansas will be preempted with respect to ERISA plans, which ultimately means that a large majority of pharmacy reimbursements will not be subject to any regulation, since there are no federal regulations on PBMs,” Arkansas Attorney General Leslie Rutledge told Pharmacy Today.
But if Arkansas wins the case—and Rutledge is optimistic that it will—“that means that our law will apply to ERISA plans and that the act will still preempt Medicare Part D plans.”
Rutledge said PBMs have had a negative impact on the cost of prescription medications and access to patient care in Arkansas and across the country. “If PBMs are allowed to reimburse at a rate less than what our pharmacists are paying, the pharmacist loses money and eventually will not be able to take care of Arkansas patients,” Rutledge said. “Patients are not going to be able to use their local trusted pharmacists that they have worked with for years and years.” She noted that many pharmacies have dipped into their savings to stay afloat and that 16% of the state’s rural pharmacies have closed.
When asked for comment, PCMA referred to its February 25, 2020, press release, in which the group expressed confidence in the merits of its case.
“Unique state laws governing the administration of pharmacy benefits are proliferating across the country, establishing vastly different standards. These inconsistent and often conflicting state policies eliminate flexibility for plan sponsors and create significant and costly administrative inefficiencies,” the statement continued. “This will result in increased premiums and prescription drug costs for patients and payers.”
According to Rutledge, the stakes couldn’t be higher.
“This case is one of the most impactful health care cases at the Supreme Court in a decade. That’s why the U.S. Solicitor General encouraged the Court to take this case,” she said. The case will give clarity that would allow states to implement their PBM regulations or put some in place. “This is to protect the American consumer—to protect patients—and make sure that they have access to quality health care and that they are able to continue to use their own pharmacist of choice.”
Meet ERISA
The Employee Retirement and Income Security Act (ERISA) of 1974 is the complex, debated, and often misunderstood federal law at the center of PCMA’s challenge of Arkansas’s Act 900.
What is ERISA, and how does it apply to patients?
ERISA protects the interests of private-sector employee benefit plan participants and their beneficiaries. The law, which has been amended many times since 1974, requires plan sponsors to provide plan information to participants, sets standards of conduct for plan managers and other fiduciaries, and establishes enforcement provisions to ensure that plan funds are protected and that qualifying participants receive their benefits, even if a company goes bankrupt.
“Many people incorrectly equate the term ‘ERISA plan’ with ‘self-funded plans,’” said Katherine L. Gudiksen, PhD, MS, who is senior health policy researcher for The Source on Healthcare Price and Competition, a program associated with the University of California Hastings College of the Law.
Contrary to that common misconception, ERISA also applies to fully funded plans, in which the employer pays a fixed premium or portion of a premium to an insurance company per covered employee. The insurance company takes on the risk that the health care costs of covered employees might exceed what the company paid in premiums. On the flip side, covered employees’ claims could amount to less than the fixed per-member premium the employer pays to the insurance company, so the employer may lose money.
Many large employers avoid the latter possibility by operating a self-funded plan, although self-funded plans are being increasingly adopted by small- and medium-sized employers as well. In self-funded plans, the employer pays only for submitted claims—therefore it assumes the risk that members could consume more health care than the employer has collected in employee premiums. On the other hand, any unused portion of the premium goes back to the employer.
In self-funded plans, while the employer pays for the medical expenses directly, employers often use a third-party administrator (TPA)—typically an insurance company—to administer the plan. “Many people are unaware they are covered by a self-funded plan because their insurance card looks the same whether Aetna, United, [or another insurance company] is acting as an insurer or a TPA.” Approximately 60% of people who get insurance through their employer are enrolled in self-funded plans.
What does ERISA mean to state laws attempting to regulate PBMs?
ERISA expressly preempts any state law that “relates to” an employee benefit plan. But it’s a bit more complicated than that.
“Congress saved any state insurance law from ERISA preemption, so states [are able to] continue to regulate insurance—including health insurance—in the state,” Gudiksen said. “But Congress ‘deemed’ self-funded plans not to be insurance, so ERISA preempts the application of any state insurance law to self-insured plans.” That means state laws don’t protect or apply to patients covered by a self-funded employer—which amounts to approximately two-thirds of Americans who get insurance through their employers.
“ERISA exempts self-funded insurance plans from state regulations,” Gudiksen said.
States should be able to pass laws to regulate pharmacy reimbursement for insurance plans regulated by the state (i.e., exchange plans or fully funded plans offered by employers). But those laws are unlikely to apply to any self-funded plans.
How does this affect Rutledge v PCMA?
Most states regulate PBMs in some way, and most of the laws have never been challenged. “Many of these laws, however, govern how PBMs interact with pharmacies (e.g., regulating fair pharmacy edits and timely updates of [maximum allowable cost, or MAC] lists) and do little to control the cost of drugs or ensure that PBMs act in the best interest of patients and plan sponsors,” wrote Gudiksen and The Source colleagues in a report for the National Academy for State Health Policy. “Nonetheless, laws that govern how PBMs set prices and act on behalf of insurers remain vulnerable to legal challenges and lobbying efforts.” Read the report, Navigating Legal Challenges to State Efforts to Control Drug Prices: Pharmacy Benefit Manager Regulation, Anti-Price Gouging Laws, and Price Transparency, at https://apha.us/StateRegulations.
The Arkansas case is particularly confusing—and many legal scholars would say wrongly decided by the Eighth Circuit Appeals Court—because the state tried to exempt self-funded ERISA plans when it wrote the law. “The decision [by the Eighth Circuit Court of Appeals] is very terse and nearly completely relies on a similar decision in Iowa, in which the court took a perplexingly broad interpretation of what ‘relates to’ an employee benefit,” Gudiksen said. “The court struck down the whole [Arkansas] law rather than just ruling that it did not apply to self-funded plans—which would [align with] decisions in other areas.”
Lower courts have been split in their rulings on cases about PBM regulation, not only in Arkansas but also in Iowa, Maine, the District of Columbia, and North Dakota. If the Supreme Court overturns the Eighth Circuit’s Rutledge decision, states will likely have more leeway in regulating reimbursement details for PBMs, Gudiksen said.
The federal government, however, could pass rules that apply to all plans. “Things like surprise billing or adding coverage must be done at the federal level if it is going to apply to those Americans with self-funded insurance.”