High Court Decision on Arkansas PBM Law, ERISA Opens Door to State Laws

State governments and companies that provide pharmaceuticals for prescription drug plans received a clear ruling from the U.S. Supreme Court on the reach of ERISA preemption in Rutledge v. Pharmaceutical Care Management Association. In an 8-0 ruling, the court held an Arkansas law regulating pharmacy benefit managers is not preempted.

The Supreme Court’s decision is important because it addresses central issues of ERISA preemption as applied to efforts by state governments to regulate PBMs in their reimbursement practices vis-a-vis pharmacies and the provision of drugs to beneficiaries of prescription drug plans.

There is a divergence of views in this area, and the court’s ruling adds clarity and can be viewed by state governments as a positive development, allowing states the authority to legislate PBMs on their contractual arrangements with pharmacies for prescription drug plans.

The Arkansas Law

Arkansas Act 900 regulates the rates at which pharmacy benefit managers reimburse pharmacies for drugs and gives pharmacies a right to appeal the rates they set. Arkansas enacted the law in response to concerns the rates were lower than the wholesale acquisition costs incurred by pharmacies to acquire drugs, resulting in financial distress particularly for independent and rural pharmacies. The Pharmaceutical Care Management Association challenged the Arkansas law, contending that it was preempted by ERISA.

The court parsed the text of ERISA’s preemption provision, and applied its established jurisprudence on preemption under that statute. In doing this, one needs to ask whether a state law “relates to” an ERISA plan. A state law relates to an ERISA plan, and is preempted, if it “refers to,” or has a “connection with” an ERISA plan. The court concluded that Act 900 does not refer to, or have a connection with, an ERISA plan.

Impact on Prescription Drug Market Place

The decision offers opportunities to health-care attorneys who practice in this area, both at the state level and national level. The take-aways focus on the market place for prescription drugs, the financial viability of pharmacies, and their access to networks offered by PBMs.

The decision supports independent and rural pharmacies in their efforts to negotiate viable contractual relationships with PBMs. The decision provides greater financial safeguards for pharmacies, and promotes access to health care to vulnerable members of the population in rural communities.

For these reasons, Rutledge enhances the negotiating position of pharmacies, vis-a-vis their bargaining power with PBMs, and acts to encourage other state governments to enact legislation for the protection of pharmacies and vulnerable populations, particularly in rural communities.

On a broader scope, Rutledge offers encouragement to state legislatures as they look for ways to reign in the costs of prescription drugs. States have long been viewed as test labs for innovative approaches to health-care reform, separate from federal initiatives. Most states have regulated PBMs in some form, and Rutledge offers encouragement for those states that seek to control the rising costs of drugs.

It is also suggested that Rutledge offers encouragement to states beyond health-care rate regulation. This includes the ability of states to improve health-care affordability and other consumer protections. Thus, the import of Rutledge is broader, emphasizing opportunities for broader state health-care reforms.

Beyond that, though, some have suggested that it is time for Congress to re-visit ERISA’s preemption provision, particularly in view of the confusion that exists on the Supreme Court’s jurisprudence governing ERISA’s preemptive reach. This is a fertile area for attorneys to influence the debate at the federal level at a time when health-care reform is a predominant theme in the national discourse.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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Stuart Silverman is a health care attorney in Washington, D.C. He was an attorney with the U.S. Department of Health and Human Services, Office of the General Counsel, and the Office of the Inspector General for the District of Columbia Government, Medicaid Fraud Control Unit. He was also previously associated with the law firm Greenberg Traurig.