Does ERISA Pre-Empt State Laws on Prescription Drug Costs?

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customer paying for prescription at pharmacy

The U.S. Supreme Court heard oral argument Oct. 6 in a case that asks whether the Employee Retirement Income Security Act (ERISA) pre-empts a state statute regulating prescription drug reimbursement rates that are set by pharmacy benefit managers (PBMs).

Employer health plans that offer prescription drug benefits generally contract with a PBM to manage such benefits and serve as an intermediary between the plan and pharmacies. The Arkansas law at issue—which is similar to laws in many other states—sets some standards for PBMs. For example, under the statute, PBMs must allow pharmacies to appeal certain reimbursement rates and reverse and rebill reimbursements that are less than the wholesaler's invoice price.

In Rutledge v. Pharmaceutical Care Management Association, the Arkansas attorney general argued that the state's law aims to curb "abusive prescription drug reimbursement practices."

The association that challenged the statute argued that it interferes with "uniform national plan administration" and is pre-empted by ERISA.

"The Rutledge case is significant for employers because it has the potential to impact drug pricing under their employer-sponsored health plans and uniform, nationwide plan administration," said Mark Casciari and Benjamin Conley, attorneys with Seyfarth Shaw in Chicago, in a joint statement.

The Society for Human Resource Management (SHRM) filed a friend-of-the-court brief supporting ERISA pre-emption in the case. SHRM highlighted the importance of protecting federal ERISA pre-emption and said that "any solution to the challenge of prescription drug costs must be achieved through a national effort rather than state-by-state regulation."

Purpose of Pre-Emption

ERISA "is a federal law that sets minimum standards for most voluntarily established pension and health plans," according to the U.S. Department of Labor. The act pre-empts similar or conflicting state and local laws regarding employee benefit plans.

"One of the principal goals of ERISA is to enable employers to establish a uniform administrative scheme, which provides a set of standard procedures to guide processing of claims and disbursement of benefits," according to Supreme Court precedent.

[Need help with legal questions? Check out the new SHRM LegalNetwork.]

"ERISA pre-emption is critical to the success of the employer-based system, providing certainty and affording employers of all sizes the ability to confidently design uniform, equal, and more robust benefit plans and prescription drug offerings for employees and their families nationwide," SHRM wrote to the court.

In response to SHRM's 2019 Annual Benefits survey of its members, about 99 percent of U.S. respondents reported that their organization offers health care coverage, and an estimated 89,000 employer members have self-funded ERISA pharmacy benefit plans.

Frederick Liu, an attorney with the U.S. Department of Justice, said the key question in the current case is whether the Arkansas law directly regulates a central matter of plan administration. "If it does, then the law has an impermissible connection with ERISA plans," he said. "If it does not, then there is no impermissible connection and no ERISA pre-emption."

Oral Argument

PBMs reimburse pharmacists for the cost of prescription drugs. "Those reimbursements are frequently below a pharmacist's cost," argued Arkansas Solicitor General Nicholas Bronni. "That drives pharmacists out of business, and it has left many communities without a pharmacist."

He said the Arkansas statute, which regulates what PBMs pay pharmacists, isn't pre-empted by ERISA because the state law doesn't regulate benefits or plan administration and doesn't discriminate against ERISA entities.

Seth Waxman, an attorney with WilmerHale in Washington, D.C., argued in favor of ERISA pre-emption on behalf of the Pharmaceutical Care Management Association.

The Arkansas law "compels ERISA plan administrators to comply with state-specific rules and procedures in administering their benefits programs," Waxman said to the justices. "In doing so, it adds to a thicket of varying state laws that make uniform plan administration impossible."

Casciari and Conley of Seyfarth Shaw said it was difficult to read how the court may rule based on oral arguments. "Most justices questioned both sides and were careful not to tip their hand," they observed.

Justice Clarence Thomas said that under the Arkansas law, if a pharmacy wins an appeal challenging the PBM's rate, then it has to rebill and determine the plan participant's co-pay. "So that seems to be something, the co-pay determination, that you would normally expect the plan to decide," he said. "So isn't that something central to the plan?"

Bronni responded that the state statute doesn't affect the co-pay, which would be a flat fee paid by the participant.

Waxman noted in his argument that compliance with multiple state laws would be complicated for PBMs.

"But it struck me that what they do, even without a law like Arkansas', is extremely complicated," said Justice Samuel Alito Jr. "Why would it be so difficult and costly and burdensome for the PBMs to deal with a variety of different state laws?"

Waxman responded that the "complexity of providing American workers with pharmacy benefits is tremendous, and that's why, as a practical matter, [plan sponsors] have to use third-party administrators to do this. The fact that they have third-party administrators, which allow them to provide these kind of benefits on a price-efficient basis, doesn't mean that ERISA permits every individual state to add additional levels of complexity."

How might the high court rule? Casciari and Conley said the court could find that the Arkansas law regulates the cost aspect of ERISA benefits, and under prior jurisprudence, cost uniformity is not a goal of ERISA pre-emption.

However, the court has been struggling with how best to define the ERISA pre-emption test, they said, so the court "could use this opportunity to say that ERISA provisions define the field that a state law cannot play on." The court then could say that the Arkansas law imposes administrative obligations on plans that fall within ERISA's and is therefore pre-empted.

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