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High Court Upholds State Law Reining in Pharmacy Drug Middlemen (2)

Dec. 10, 2020, 3:07 PMUpdated: Dec. 10, 2020, 6:21 PM

The U.S. Supreme Court upheld an Arkansas law Thursday that regulates the powerful pharmacy drug middlemen that employer health plans hire to manage prescription drug benefits.

In a 8-0 decision, the court held the law isn’t preempted by the Employee Retirement Income Security Act. Justice Amy Coney Barrett took no part in consideration of the case.

Arkansas’s law “is merely a form of cost regulation,” Justice Sonia Sotomayor said in the court’s majority ruling.

The case had threatened to cripple state efforts to control the cost of prescription drugs and other health-care services at a time when health-care costs are rising. Last year the Office of the Actuary in the Centers for Medicare & Medicaid Services projected national health spending would reach $6.2 trillion by 2028

Arkansas’s law regulates the rates at which pharmacy benefit managers reimburse pharmacies for drugs and gives pharmacies a right to appeal the rates they set. Arkansas argued it’s needed to control drug prices and protect independent rural pharmacies, many of which have had to close because PBMs have set their reimbursement rates below cost.

The law requires pharmacy benefit managers to reimburse prescription drugs at a rate equal to or higher than the pharmacy’s acquisition cost, Sotomayor explained.

“PBMs may well pass those increased costs on to plans, meaning that ERISA plans may pay more for prescription-drug benefits in Arkansas than in, say, Arizona,” but cost uniformity was almost certainly not an object of preemption, she said

Similar Laws in at Least 36 States

In a statement, National Community Pharmacists Association CEO B. Douglas Hoey called the court’s decision a historic victory that “confirms the rights of states to enact reasonable regulations in the name of fair competition and public health.”

“This is an important unanimous win for not only locally owned pharmacies that have experienced financial hardships at the hands of pharmacy benefit managers, but more importantly, this is a win for all Arkansans and Americans to have access to affordable health care,” Arkansas Attorney General Leslie Rutledge echoed in a statement of her own.

At least 36 other states have passed similar laws regulating PBMs. In a friend-of-the-court brief, 32 states and the District of Columbia warned that invalidating Arkansas’s law would create confusion and uncertainty over states’ powers to regulate PBMs.

As middlemen between insurers, drugmakers, and pharmacies, PBMs “have taken on an increasingly important role in recent years, as prescription drug costs have risen rapidly throughout the United States,” the states said.

The Pharmaceutical Care Management Association , the trade group for these pharmacy benefit managers, argued Arkansas’s law was preempted by the ERISA. ERISA prohibits states from passing laws that relate to an ERISA plan or have an impermissible connection to an ERISA plan.

But the Supreme Court said Arkansas’s law has “neither of those impermissible relationships with an ERISA plan.”

PBM Disappointment

The court’s decision marks the first time PBMs are being told they’re going to be regulated just like everyone else, said Julie Selesnick, who is of counsel at Cohen Milstein.

“When you sue over a law that says you can’t pay someone less than they paid to get something in a reimbursement and you think that violates your rights, that probably means you’ve been operating with impunity for way too long,” she said.

In a statement, PCMA said it’s disappointed in the court’s decision and predicted that it will result in the unraveling of federal protections under ERISA.

“As states across the country consider this outcome, we would encourage they proceed with caution and avoid any regulations around prescription drug benefits that will result in higher healthcare costs for consumers and employers,” the association said.

The court’s decision reversed the U.S. Court of Appeals for the Eighth Circuit decision, which had sided with PCMA despite Arkansas Attorney General Leslie Rutledge’s argument that the law is basic rate regulation that’s not preempted by ERISA.

Justice Clarence Thomas filed a concurring opinion in which he said he continues to doubt the court’s ERISA preemption jurisprudence.

The court’s precedents have “veered from the text” of ERISA, transforming the test of preemption into a “vague and potentially boundless” preemption clause that relies on generalized notions of congressional purposes, he said.

Three PBM companies—OptumRx, CVS Caremark, and Express Scripts—control 85% of the market share for PBM services, the National Association of Specialty Pharmacy said in a brief supporting Arkansas.

OptumRx is a subsidiary of UnitedHealth Group, CVS Caremark is a subsidiary of CVS Health, and Express Scripts is a subsidiary of Cigna Corp.

In addition to negotiating drug prices, discounts and rebates with pharmaceutical manufacturers, conducting drug-utilization reviews, and determining the composition of pharmacy and wholesaler networks, PBMs run mail-order and affiliated specialty pharmacies that often compete with brick-and-mortar pharmacies, the 32-state coalition told the court.

The case is Rutledge v. Pharm. Care Mgmt. Ass’n, U.S., No. 18-540, opinion 12/10/20.

(Updated with commentary throughout.)

To contact the reporter on this story: Lydia Wheeler in Washington at lwheeler@bloomberglaw.com

To contact the editors responsible for this story: Fawn Johnson at fjohnson@bloombergindustry.com; Brent Bierman at bbierman@bloomberglaw.com