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Stuck In the Middle: Whether ERISA Preempts Regulation of PBMs

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Rutledge v. Pharmaceutical Care Mgmt. Ass’n,

No. 18-540,
891 F.3d 1109 (8th Cir. 2018),
cert. granted,
140 S. Ct. 812 (2020).

Oral argument October 6.

Editorial Note: Case decided December 10, 2020.  Opinion (PDF)

Result: The Supreme Court unanimously ruled that ERISA does not preempt Arkansas’ PBM transparency law.

Issue: Whether the U.S. Court of Appeals for the 8th Circuit erred in holding that Arkansas’s statute regulating pharmacy benefit managers’ drug-reimbursement rates, which is similar to laws enacted by a substantial majority of states, is preempted by the Employee Retirement Income Security Act of 1974, in contravention of the Supreme Court’s precedent that ERISA does not preempt rate regulation.

The State of Arkansas, like most states, enacted a law attempting to regulate the conduct of pharmacy benefit managers (PBMs) and lower drug prices. See Ark. Code § 17-92-507 (2019). PBMs are intermediaries between health plans and pharmacies that set reimbursement rates for prescription drugs distributed by pharmacies. Pharm. Care Mgmt. Ass’n v. Rutledge, 891 F.3d 1109, 1111 (8th Cir. 2018). The Arkansas legislature argues that PBMs were reimbursing pharmacies at a lower rate than what the pharmacies paid for prescription drugs, resulting in a spate of rural pharmacy closures and increased costs for consumers.  Petition for a Writ of Certiorari at 2-3, Rutledge v. Pharm. Care Mgmt. Ass’n, 140 S. Ct. 812 (2020) (No. 18-540). The Arkansas statute narrowed the gap between wholesale drug prices and PBM reimbursement rates. 891 F.3d at 1111.

The Pharmaceutical Care Management Association challenged the law, arguing that it is preempted by the Employee Retirement Income Security Act of 1974 (ERISA). Pharm. Care Mgmt. Ass’n v. Rutledge, 240 F. Supp. 3d 951, 957 (E.D. Ark. 2017). Congress enacted ERISA to protect the well-being and security of employees by providing standards to govern the management of employee benefit and health plans. 29 U.S.C. § 1001. ERISA has a broad preemption clause, which provides that, “the provisions . . . shall supersede any and all state laws insofar as they may now or hereafter relate to any employee benefit plan.” Id. § 1144(a). The Supreme Court has expanded this provision, holding that a state law relates to an employment benefit plan even if there is just a “connection with or reference to such a plan.” Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 96-97 (1983).

The district court held that ERISA preempted Arkansas’s law, and the Eighth Circuit affirmed. Rutledge, 891 F.3d at 1111. The Eighth Circuit joins the D.C. Circuit with this ruling. See Pharm. Care Mgmt. Ass’n v. District of Columbia, 613 F.3d 179 (D.C. Cir. 2010). The First Circuit, on the other hand, has held that ERISA does not preempt regulation of PBMs, citing their position outside the web of principal players in the scenarios contemplated by ERISA. Pharm. Care Mgmt. Ass’n v. Rowe, 429 F.3d 294, 305 (1st Cir. 2005). The Supreme Court originally set oral argument in this case for April 27, 2020, but rescheduled it due to the coronavirus.

The State of Arkansas argues that the Eighth Circuit’s decision conflicts with the Supreme Court’s earlier precedent regarding preemption. Petition for a Writ of Certiorari at 15, Rutledge, 140 S. Ct. 812 (No. 18-540). Arkansas further argues there is no preemption under the Supreme Court’s standards for ERISA preemption, which requires a “connection with” or “reference to” ERISA plans. Brief for the Petitioner at 18-19, Rutledge v. Pharm. Care Mgmt. Ass’n, No. 18-540 (filed Feb. 24, 2020). The Pharmaceutical Care Management Association argues that the Arkansas law regulates benefits on behalf of plans and has an “impermissible connection” with ERISA plans because it can affect the benefits plans offered by affecting drug prices. Brief for Respondent at 22, Rutledge, No. 18-540 (filed March 25, 2020).

AARP and AARP Foundation filed a brief with the Supreme Court, urging the Court to hold that ERISA does not preempt state regulation in this area, specifically citing states’ authority to regulate the health, safety, and welfare of its citizens. Brief of AARP and AARP Foundation as Amici Curiae Supporting Neither Party at 4, Rutledge, No. 18-540 (Mar. 2, 2020). Further, AARP emphasized that the preemption standard put forth by the Court of Appeals reaches too far and would encompass laws that have a completely different purpose and effect than ERISA. Id. at 9-11.

WHAT'S AT STAKE

The outcome of this case could have a significant effect on the approach states take to regulate the exorbitant costs of prescription drugs. In their Supreme Court brief, AARP and AARP Foundation noted that prescription drugs are the single largest healthcare expense for consumers with private commercial insurance. Id. at 12. Additionally, drug prices are vastly exceeding the growth of incomes of older adults. Id.

AARP continues to champion making prescription drugs more easily attainable for every American through its Stop Rx Greed campaign, which aims to promote transparency and affordability. If the Supreme Court holds that ERISA preempts state action in this sector, states would find it increasingly difficult to take action to assist persons that depend on prescription medications.

Barbara Jones
bjones@aarp.org

Dara Smith
dsmith@aarp.org