In Rutledge v. Pharmaceutical Care Mgt. Assoc., — U.S. –, 2020 WL 7250098 (Dec. 10, 2020), the Supreme Court held that ERISA’s broad express preemption will not reach a state law that focuses on the price of prescription drug benefits that a plan chooses to provide.

The particular question in Rutledge was whether ERISA preempted an Arkansas law regulating the price at which pharmacy benefit managers (PBMs) reimburse pharmacies for the cost of drugs covered by ERISA prescription drug plans. The Court described PBMs as

a little-known but important part of the process by which many Americans get their prescription drugs. Generally speaking, PBMs serve as intermediaries between prescription-drug plans and the pharmacies that beneficiaries use. When a beneficiary of a prescription-drug plan goes to a pharmacy to fill a prescription, the pharmacy checks with a PBM to determine that person’s coverage and copayment information. After the beneficiary leaves with his or her prescription, the PBM reimburses the pharmacy for the prescription, less the amount of the beneficiary’s copayment. The prescription-drug plan, in turn, reimburses the PBM.

PBMs play a significant role in the overall healthcare economy, representing about a $400 billion piece of the $2.6 trillion health care industry

The Arkansas law, Act 900, sought to remedy a concern that a PBM’s reimbursement rate for some drugs – found in a unique list of prices maintained by each PBM called a “maximum allowable cost” (MAC) – might be less than the wholesale prices smaller pharmacies have to pay for those drugs. To remediate that concern, Act 900: (i) required PBMs to update their MAC lists when wholesale prices increase; (ii) required PBMs to provide administrative appeal procedures for a pharmacy to challenge a MAC that was below wholesale price; and (iii) permitted pharmacies to refuse to sell a drug to a plan beneficiary if the PBM’s MAC for that drug was below the pharmacy’s acquisition cost.

The Pharmaceutical Care Management Association (PCMA), a trade association of PBMs, sued, arguing that ERISA preempted Act 900. The District Court agreed, relying on an Eighth Circuit decision that held that ERISA preempted a similar Iowa statute. Pharmaceutical Care Mgmt. Assn. v. Gerhart, 852 F. 3d 722 (8th Cir. 2017). After the Eighth Circuit affirmed, the Supreme Court granted certiorari and reversed, finding that ERISA did not preempt Act 900.

ERISA expressly preempts “any and all State laws insofar as they may now or hereafter relate to any employee benefit plan” covered by ERISA. 29 U.S.C. § 1144(a). The Court has noted that almost any law could “relate to” an ERISA plan, if the term is construed literally. As applied, however, the express preemption provision requires consideration whether the state law has an “impermissible connection” with an ERISA plan, which requires, in turn, consideration whether the state law interferes with ERISA’s objectives. Mapping the precise boundaries of express preemption has led to myriad Supreme Court decisions.

It is well-known that ERISA has multiple, often conflicting, objectives, but the Court in Rutledge focused on the objective to “make the benefits promised by an employer more secure by mandating certain oversight systems and other standard procedures.” To achieve that objective, Congress sought to establish “a uniform body of benefits law” to minimize “the administrative and financial burden of complying with conflicting directives[.]” Therefore, the Court held: ERISA “is primarily concerned with preempting laws that require providers to structure benefit plans in particular ways, such as by requiring payment of specific benefits[.]” The Court then provided a shorthand: if a state law “governs a central matter of plan administration or interferes with nationally uniform plan administration,” then it is preempted.

The Court held that one of the lines it had previously drawn in deciding the boundaries of express preemption applied here: “ERISA does not pre-empt state rate regulations that merely increase costs or alter incentives for ERISA plans without forcing plans to adopt any particular scheme of substantive coverage.” The Court relied on New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U. S. 645 (1995), which held that ERISA did not preempt a New York law imposing surcharges on hospital billing rates for patients covered by insurers other than one of the Blues. Though the New York law incentivized plans to insure benefits with one of the Blues, it did not “bind plan administrators to any particular choice” because “any plan will shop for the best deal it can get.”

Concluding that “Act 900 is merely a form of cost regulation[,]” the Court found that forcing PBMs to pay higher costs for some drugs, and passing those costs along to plans, did not interfere with a central matter of plan administration or with national uniformity.

The Court rejected the argument that Act 900 affects plan design by mandating a particular pricing methodology for pharmacy benefits, finding “that argument is just a long way of saying that Act 900 regulates reimbursement rates.”

The Court also rejected the argument that imposing an appeal process for pharmacies and “dictat[ing] the substantive standard governing the resolution of [the] appeal” interfered with central matters of plan administration.  It held “any contract dispute implicating the cost of a medical benefit would involve similar demands and could lead to similar results. 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.”

It is useful to compare and contrast Rutledge with a recent preemption case, Gobeille v. Liberty Mut. Ins. Co., 136 S. Ct 936 (2016). In Gobeille, the Court found that ERISA preempted a Vermont law requiring plans to make various disclosures to the state regarding health care payments. One of the arguments Vermont had made to avoid preemption was that the disclosures required by the law would not increase costs for plans. The Court found the cost of compliance (or lack of cost) was irrelevant, because recordkeeping, reporting, and disclosure were central matters of plan administration with which the Vermont law interfered.

Arguably, if the Arkansas law had not required PBMs to pay the wholesale price for a drug when their MAC was lower, but merely required them to track and report on instances in which the wholesale price exceeded the MAC, it would have been preempted under Gobeille. This seems to be the case even though Act 900 would appear to have a more-significant impact on ERISA plans than a reporting requirement.

Photo of Patrick Begos Patrick Begos

Mr. Begos has nearly 30 years of commercial and insurance litigation, arbitration, mediation and negotiation experience, representing companies and individuals in a wide array of industries. He has a national reputation in handling litigation under the Employee Retirement Income Security Act (ERISA) and…

Mr. Begos has nearly 30 years of commercial and insurance litigation, arbitration, mediation and negotiation experience, representing companies and individuals in a wide array of industries. He has a national reputation in handling litigation under the Employee Retirement Income Security Act (ERISA) and, in particular, denial of group benefits claims. Mr. Begos has litigated hundreds of ERISA cases and has been involved in shaping the development of ERISA law across the country. He is a regular speaker at ERISA and insurance conferences around the country and has written extensively for various nationwide publications. Read his full bio here.