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Supreme Court Sides With States in Drug Benefits Ruling

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The U.S. Supreme Court today issued an 8-0 ruling that could help states develop indirect strategies for regulating large employers’ benefits plans.

The court handed down the ruling in connection with Rutledge v. Pharmaceutical Care Management Association (Case Number 18-540).

A provision in the federal Employee Retirement Income Security Act of 1974 (ERISA) normally “preempts,” or blocks, efforts by states to impose state benefits laws on the kinds of large employer-sponsored health plans governed by ERISA. Congress put in the preemption provision in an effort to keep state rule variations from increasing the cost of large, multistate benefit plans.

In the past, the Supreme Court has often ruled in favor of employers and employer groups in ERISA preemption cases.

In the new Rutledge v. PCMA ruling, the court held that an Arkansas prescription drug payments standards law is too far away from ERISA and ERISA plans to have an “impermissible connection” with ERISA plans, even though the law has an indirect effect on what ERISA plans pay for prescription drugs.

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“State rate regulations that merely increase costs or alter incentives for ERISA plans without forcing plans to adopt any particular scheme of substantive coverage are not preempted by ERISA,” Justice Sonia Sotomayor wrote in an opinion explaining the ruling.

Justice Clarence Thomas wrote in a concurring opinion that he agrees with the other justices on the outcome of the case but believes that the court should take a different approach, based more directly on the text of ERISA, when deciding whether a state benefits law relates to ERISA.

The Arkansas Law

Until recently, U.S. prescription drug costs were increasing more rapidly than other types of health care costs. Many health insurers and large employer plans have tried to fight back by using outside pharmacy benefits managers, or PBMs, to help them buy and negotiate lower prices for drugs.

Trade groups for rural pharmacies and independent pharmacies have argued that, in some cases, the PBMs’ strategies are unfair to independent pharmacies.

Arkansas, like many other states, has developed a law that governs PBM operations.

A section in the Arkansas PBM law requires a PBM to pay pharmacies prices for drugs that are equal to or higher than the wholesale prices for the drugs, based on the information in frequently updated drug wholesale price lists.

The Arkansas law applies to all PBM operations.

The Litigation History

PCMA, a trade group that represents 11 large PBMs, sued to block the Arkansas minimum price law, arguing that ERISA should preempt any effort by Arkansas to apply the PBM law minimum pricing requirement to ERISA plans.

A U.S. District Court judge in Arkansas ruled in favor of the PCMA.

The 8th U.S. Circuit Court of Appeals also ruled in favor of the PCMA.

 The Court’s Reasoning

Sotomayor wrote in the court’s opinion that the Arkansas pricing law does not have an “impermissible connection” with an ERISA plan because it does not “govern a central matter of plan administration” and “does not interfere with central matters of plan administration.”

“ERISA does not preempt state rate regulations that merely increase costs or alter incentives for ERISA plans without forcing plans to adopt any particular scheme of substantive coverage,” Sotomayor wrote.

The Arkansas law also does not act “immediately and exclusively upon ERISA plans,” and the existence of ERISA plans is not essential to the operation of the law, Sotomayor wrote, citing earlier Supreme Court opinions.

In some cases, when conflicts over prices occur, the administrators of a plan in Arkansas would have to participate in a specific appeals process, Sotomayor wrote.

“But any contract dispute implicating the cost of a medical benefit would involve similar demands and could lead to similar results,” Sotomayor wrote. “Taken to its logical endpoint, PCMA’s argument would pre-empt any suits under state law that could affect the price or provision of benefits. Yet this Court has held that ERISA does not preempt ‘state-law mechanisms of executing judgments against ERISA welfare benefit plans, even when those mechanisms prevent plan participants from receiving their benefits.’”

— Read Supreme Court Rules on ERISA Fiduciary Obligationson ThinkAdvisor.

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