Seyfarth Synopsis: The Supreme Court unanimously upheld Act 900, an Arkansas law regulating Pharmacy Benefit Managers (PBMs). The opinion could be used as a framework for states to attempt to indirectly regulate ERISA plans via statutes or regulations that affect plan costs.
Background
We previously addressed the Supreme Court's consideration of Rutledge v. PCMA, which featured a pharmaceutical industry group's challenge to Arkansas Act 900. The Act (a) regulated the price PBMs paid for certain prescription drugs, (b) created an appeal process whereby pharmacies could challenge a PBM's rate of reimbursement, and (c) permitted pharmacies to decline to sell drugs at reimbursement rates below acquisition cost. As noted in our prior posts, PCMA (as supported by many amicus briefs from ERISA groups) argued that the law "relate[s] to an employee benefit plan" and, insofar as it applies to self-funded ERISA plans is preempted and thus impermissible. These ERISA groups argued that piecemeal state regulation undermines a central purpose of ERISA: to create one national private sector benefit plan jurisprudence, resulting in administrative savings and ultimately more plan benefits.
Holding
In an 8-0 Opinion (Justice Amy Coney Barrett not participating), the Court unanimously ruled in favor of Arkansas. The Court found that, while the Act can be said to be connected to increased plan costs and operational inefficiencies, "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 added: "[C]ost uniformity was almost certainly not an object of pre-emption." Finally, the Court said that ERISA plans are not essential to the Act's operation, meaning that it has no exclusive reference to ERISA plans.
Justice Thomas alone concurred in the Opinion. He continued his disagreement with the Court's ERISA preemption "connection with or reference to" standard. He would replace that standard with one that addresses whether any ERISA provision governs the same matter as the state law, and has a "meaningful," presumably direct, relationship to the plan in light of ERISA's text.
Implications for ERISA Plan Sponsors
The Court's Opinion could be problematic for ERISA plan sponsors, who typically prefer a uniform administrative scheme across state lines. Many PBM agreements contain provisions permitting PBMs to charge additional fees or limit the scope of their services where states impose more restrictive regulations or guidelines. The Opinion will embolden states and localities to be more aggressive in their regulation of pharmacy benefits. We should expect these jurisdictions to argue that, after Rutledge, there is no preemption because they are simply regulating plan costs.
In any event, Rutledge leaves open the possibility that preemption will apply if the cost regulation is "so acute that it will effectively dictate plan choices." And, state law that provides a cause of action or additional state remedies for claims allowed by ERISA, or directly amends ERISA plan terms or the ERISA scheme that governs plan administration, remain preempted.
Stay tuned to this blog for further updates on this important issue of benefit plan administration.
Originally Published by Seyfarth Shaw, December 2020
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