Supreme Court Rules that ERISA Does Not Preempt State Regulation of Pharmacy Benefit Managers

On December 10, 2020, the US Supreme Court held in Rutledge v. Pharmaceutical Care Management Association that ERISA did not preempt a state regulation of pharmacy benefit managers (PBMs) that required the PBMs to pay pharmacies regulated by the state for drugs at a price equal to or greater than wholesale cost.

PBMs are entities that coordinate and administer prescription drug programs on behalf of group health plans. As such, they reimburse pharmacies for the cost of drugs covered by those plans. Pharmacies in Arkansas complained that PBMs purchased drugs from them at rates below the wholesale price that the pharmacies pay, thereby forcing the pharmacies to lose money. Arkansas passed Act 900, which required PBMs to reimburse the pharmacies for at least the wholesale cost and requires PBMs to update the lists they keep of the costs they will pay for drugs, referred to as the MAC (Maximum Allowable Cost) list, whenever wholesale prices go up. Act 900 also required PBMs to allow pharmacies to challenge the rates posted in the MAC list and it gives pharmacies the right to refuse to supply a drug when the price offered by the PBMs is less than the wholesale price.

A trade association representing PBMs challenged Act 900, asserting that it was preempted by ERISA. A state statute is preempted by ERISA when it relates to or has a connection with a benefit plan. The PBMs argued that Act 900, by allowing pharmacies to challenge PBM prices for prescription drugs and to refuse to provide drugs, affected matters related to plan administration and interfered with nationally uniform plan administration. Since it is in the interest of benefit plans to contain costs, granting pharmacies these rights interferes with the efficiencies in the PBM arrangement and raises prices. Similarly, by refusing to supply drugs, pharmacies may deny plan beneficiaries the drugs they are entitled to under their plans. So the PBMs claimed that the state statute relates to or has a connection with a benefit plan and is therefore preempted by ERISA, which does not require PBMs to behave in this way.

The Court disagreed with these arguments. For a state statute to be preempted, it must require benefit plans to be structured in certain ways. Act 900, in the Court’s view, does not do this; rather, it focuses on, and affects, costs. The fact that the statute may create inefficiencies in the system is not, by itself, a basis for preemption. Act 900 does not regulate the benefit plans, but instead provides a mechanism whereby the pharmacies have more of a role in determining the costs of drugs paid for by the plan. The procedures established by Act 900 are incidental to this purpose and not enough to call for preemption by ERISA. From this reasoning, the Court ruled that the statute was not preempted.

Employers should be aware of the impact this case will have on prescription drug costs, which may, in turn, cause insurance premiums to rise. This case may also instigate changes in the system under which prescription drug programs are administered, the impacts of which are uncertain but profound enough to merit employers’ attention.

Rutledge v. Pharmaceutical Care Management Association »