In a blow to pharmacy benefit managers (PBMs), the Supreme Court last week reversed the Eight Circuit’s affirmation of a District Court’s ruling that the Employee Retirement Income Security Act of 1974 (ERISA) pre-empted an Arkansas law designed to impose regulations on and prohibit certain practices that are central to PBM pricing of generic medications. What may be more surprising than the ruling, is that it was a unanimous 8-0 decision. Justice Amy Coney Barrett did not participate in the case as she was not yet seated prior to oral arguments.
PBMs are middlemen that contract with pharmacies and health plans to provide health plan beneficiaries access to medications through the PBM’s pharmacy network. They have been criticized in recent years for a lack of transparency and in particular for their use of spread pricing, in which they reimburse pharmacies one price for a prescription drug but charge the plan another. The practice has attracted the attention of both state and federal lawmakers. Some states, including Iowa and Arkansas, have attempted to regulate spread pricing without success, prior to this ruling.
When purchasing generic medications, pharmacies can choose from any of a number of suppliers and manufacturers. For these generic drugs, PBMs create a Maximum Allowable Cost (MAC) list which sets the maximum amount that the PBM will reimburse a pharmacy for a particular medication, regardless of the pharmacy’s actual cost to purchase the drug. Because they are contractually obligated to fill the prescription at the money-losing price, this practice can result in the pharmacy losing money when filling a generic prescription for a PBM beneficiary. Arkansas observed that below-cost reimbursement was likely to result in the failure of many pharmacies located in the State, particularly independent and rural pharmacies. In 2015, Arkansas Act 900 (the “Law”) was passed in an effort to help stem the tide of these closings. Primarily, the Law required PBMs to pay a pharmacy at least what the pharmacy paid to their supplier for a particular generic medication, to timely update their MAC list as prices changed, and to provide pharmacies with an administrative appeal process to challenge the MAC price.
The Pharmaceutical Care Management Association (PCMA), the primary trade association representing the interests of the 11 largest PBMs, successfully argued in the lower court that ERISA pre-empted the Law, thereby invalidating its regulation of PBMs. ERISA pre-empts any state law that either has a connection to, or references an ERISA covered employee benefit plan. In the Supreme Court, the PCMA argued in part that the Law impermissibly affected plan administration because it mandated a particular pricing methodology, interfered with plan administration by allowing pharmacies to decline to fill prescriptions, and interfered with national uniform plan administration by creating operational inefficiencies.
Justice Sotomayor delivered the Court’s opinion roundly rejecting the PCMA’s arguments. In short, the Court found that regulations that merely increased the costs or altered incentives for ERISA plans are not pre-empted by ERISA. She wrote that the devices that the PCMA complained of do not require a specific benefit structure or lead to anything more than potential operational inefficiencies. The Court determined that requiring a PBM to comply with a particular process does not equate to governing central matters of plan administration. Furthermore, it found that although the regulation may trigger operational inefficiencies resulting in increased costs to plan members or limited benefits, that is not enough to trigger ERISA pre-emption. It further concluded that the Law does not regulate PBMs in part because it applies equally to pharmacy benefit plans, whether or not they are ERISA plans.
This decision appears to set a more limited universe of ERISA pre-emption than previously believed. The Court’s focus on whether the state law disrupted the ability to provide uniform plan administration, rather than whether it simply affected an ERISA plan, is likely to encourage additional regulation. As a result of this decision, it is likely that other states will introduce legislation to regulate certain practices by PBMs, including other of their pricing practices. It also has the potential to open up state regulation of other facets of employee health benefit plans. As state legislators and interest groups digest this opinion, it would be wise to pay attention to developing regulations in this arena.
If you have a self-insured employee health benefit plan, it is prudent to work with an attorney who is experienced in pharmacy benefits when negotiating your next PBM Services Agreement. Contact Rob Tookoian at Fennemore Dowling Aaron for a complimentary initial discussion about your PBM Services Agreement.