Supreme Court scrutinizes Arkansas law that regulates PBM payments to pharmacies

Supreme Court
Several Supreme Court justices were skeptical of an Arkansas law that regulates what pharmacy benefit managers pay pharmacies. (Getty/BrianPIrwin)

Several justices on the Supreme Court expressed skepticism of an Arkansas law regulating pharmacy benefit managers as they heard oral arguments Tuesday in a case challenging the law.

How the court ultimately rules in Rutledge v. Pharmaceutical Care Management Association could determine whether a federal law should preempt a state law that regulates PBM payments to pharmacies. The case, which could significantly dampen states’ abilities to regulate PBMs and potentially hand the PBM industry a massive win, is being closely watched by the pharmaceutical and payer industries.

The case centers on a law Arkansas passed in 2015 that prohibits PBMs from reimbursing pharmacies at a lower rate than the cost it takes to dispense the drug. The state law also allows pharmacies to refuse to sell a drug if the maximum allowable cost for a product, or the upper limit that a plan will pay for drugs, is too low.

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But PBM industry group PCMA has balked at the law, charging that it violates the Employee Retirement Income Security Act of 1974 (ERISA), which preempts state laws that regulate the plan administration of health insurance to better create a uniform program.

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A federal appeals court already has ruled in favor of the PBM industry.

Arkansas argued before the Supreme Court that the state law doesn’t dictate how health plans must be run. Earlier Supreme Court precedent has allowed states to regulate rates, which Arkansas argues is what it is doing with the PBM law.

“We haven’t dictated what to provide," said Nicholas Jacob Bronni, Arkansas’ solicitor general, during oral arguments.

Bronni turns to the Supreme Court case New York State Blue Cross Plans v. Travelers Insurance, which held that New York state’s ability to collect a surcharge for certain hospital patients did not violate the ERISA law.

“The only effect a plan might see is it might pay a little bit more, but that was true in Travelers,” he said.

In the Travelers case, the court acknowledged that insurers were likely to pass the surcharge onto plan holders via larger premiums, but “at the end of the day that is just cost, but it didn’t dictate substantive plan decision-making,” Bronni said.

But some conservative justices on the court were skeptical of the argument.

“Your point seems to me that law regulates drug prices but doesn’t say anything about drug prices,” said Chief Justice John Roberts. He said that it talks about what plans have to pay for benefits as well as the methodology, timing and procedures for dispute resolution.

“At the end of the day, all of this might have an impact on drug prices, but it seems to me that is very different and those differences really do go to what ERISA is trying to regulate,” he said.

Justice Samuel Alito said that ERISA preempts any state laws that relate to an employee benefit plan covered under ERISA.

“The way we generally interpret statutes in this case you would be in a lot of trouble wouldn’t you,” he said.

Justices Brett Kavanaugh and Sonia Sotomayor also questioned whether the law could have a negative effect on plan beneficiaries.

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Bronni said this doesn’t impact the beneficiaries.

“Ultimately, what we regulated is the price the PBM pays the pharmacy. What is being regulated there is the margin,” he said. “We are requiring, I guess you could say, PBMs to reallocate some of that margin back to local pharmacies to ensure that local pharmacies that they can remain in business.”

He said keeping those pharmacies in business can help beneficiaries, especially in rural areas that may not have a lot of pharmacies.

Bronni added that nothing in the law prevents PBMs from passing along the costs to the plan’s premiums.

“Ultimately, that is up to the PBMs. That is not a product of anything that Arkansas has done,” he said.

PCMA argued that the law is a basic violation of ERISA because it “does bind plan administrators to particular choices,” said Seth Waxman, counsel for PCMA.

He argued that the law imposes several other regulations such as appeal procedures for MACs and other facets of drug dispensation.

But Justice Stephen Breyer was skeptical of that argument. He noted that “every form of rate regulation involves procedures.”

The court, which is shorthanded after the death of Ruth Bader Ginsburg, will render a decision at the end of its term in June 2021. If the justices are tied, then it could mean that the appellate court's finding in favor of the PBM industry will stand. 

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