Supreme Court Ruling on Drug Pricing Complicates Multistate Employer Plans

updated: 1/6/21

On Dec. 10, the U.S. Supreme Court issued a unanimous ruling that allows individual states to enact laws regulating pharmacy benefit managers' (PBMs') ability to set prices for prescription drugs paid for by employee health plans. The court found that these laws, with certain limits, do not violate the Employee Retirement Income Security Act (ERISA).

The court ruled that ERISA does not stop states from regulating the pricing set by PBMs, which administer drug benefits programs in employee health plans and act as intermediaries that reimburse pharmacies for the cost of drugs covered by employee plans.

The ruling in Rutledge v. Pharmaceutical Care Management Association will mean health plans covering employers in multiple states must comply with different drug pricing rules from state to state.

"Major U.S. companies operating nationwide seek to provide uniform, consistent benefits to their workforce," said James Klein, president of the American Benefits Council, which represents employers sponsoring benefits plans. "The ability to do so may be much more challenging in the wake of [the] U.S. Supreme Court's decision."

Others favored the ruling. "This is a historic victory for independent pharmacies and their patients," said National Community Pharmacists Association CEO B. Douglas Hoe. "And it confirms the rights of states to enact reasonable regulations in the name of fair competition and public health."

"The decision may open the door to increasing, and perhaps inconsistent, state regulation of PBMs, third-party administrators and other service providers," according to attorneys at Groom Law Group in Washington, D.C. "The impact is likely to be particularly significant with respect to self-funded plans because state laws directly regulating them are preempted, but, as the court clarified in Rutledge, 'regulations that merely increase costs or alter incentives for ERISA plans' are not," the attorneys noted.

ERISA's Pre-emption of State Laws

To determine the reimbursement rate for each drug, PBMs develop and administer maximum allowable cost lists. In 2015, Arkansas passed Act 900, which requires PBMs to reimburse Arkansas pharmacies at a price equal to or higher than the pharmacy's wholesale cost. Act 900 also permits Arkansas pharmacies to refuse to sell a drug if the reimbursement rate is lower than its acquisition cost.

The Pharmaceutical Care Management Association (PCMA), which represents large PBMs, sued, alleging that Act 900 is pre-empted by ERISA. A district court ruled in favor of the PCMA and on appeal the 8th Circuit affirmed that ruling.

The Supreme Court overturned the 8th Circuit's judgment, finding that Arkansas' Act 900 is not pre-empted by ERISA.

At least 38 states have passed laws regulating PBM pricing that are similar to the Arkansas statute. The Trump administration joined with these states in opposing the 8th Circuit ruling that the Arkansas statute was pre-empted by ERISA.

Supreme Court's Ruling

In Rutledge, the Supreme Court found that Arkansas' law amounts to cost regulation that does not bear an impermissible connection with ERISA.

"The Supreme Court's unanimous ruling creates a potential roadmap for states to influence ERISA plans without running afoul of ERISA's pre-emption provisions," said Benjamin Conley, a partner at law firm Seyfarth Shaw in Chicago. "The court found that while the Arkansas law at issue could certainly influence plan costs and create plan operational inefficiencies, it did not mandate any particular structure, nor did it impact central plan administrative operations. As such, the court opined that extending pre-emption would create a potentially limitless barrier to state regulations."

Conley was among several attorneys who filed an amicus curiae brief in the Rutledge case on behalf of the Society for Human Resource Management (SHRM), which argued in favor of preserving the uniformity of multistate PBM plans.

SHRM's amicus brief argued that ERISA's pre-emption of state laws allowed employers to engage a single nationwide PBM that can negotiate better rates with drug manufacturers nationwide. "SHRM members will want to offer the same benefit plan to employees in Arkansas that they offer to employees in Alabama. But the [Arkansas statute] interferes with employers' ability to do so," the brief explained. "The orderly development and preservation of ERISA's pre-emptive authority [is] crucial to preserving self-funded employer pharmacy benefit plans for tens of millions of Americans."

The Supreme Court took a different view. Going forward, insurers and employers with self-insured drug plans will have to adjust to different pricing schemes based on statutes in different states.

Differing State Regulations

Rebecca Snead, executive vice president and CEO of the National Alliance of State Pharmacy Associations, described the ruling as "truly a best-case scenario for patients, pharmacists and pharmacies. Now, it's time to get to work to make sure states have appropriate PBM regulations in place and continue to work with our members of Congress to do the same for the federal programs."

Klein of the American Benefits Council took a different view, saying the ruling was "a clarion call for employers to confront state and local action that may be well-intentioned but severely complicates the ability to offer employees consistent benefits."

He added, "It is no secret that employers and PBMs are not always aligned. But there was a fundamental principle at stake in this case: whether employers can administer benefit plans free from a patchwork of multiple state and local laws. This decision narrows that principle in ways that could prove to be significant for health and retirement benefits more broadly."

"Longer term, plan sponsors will need to take steps to protect themselves if generic reimbursement rates start rising and these higher costs are passed along to them," according to Mercer, an HR consultancy. "The upshot is that, while these state-led moves may have positive intent, there could be short-term repercussions. Plan sponsors and their advisors will need to communicate early and often with their PBMs to avoid surprises."

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

Related SHRM Articles:

Does ERISA Pre-Empt State Laws on Prescription Drug Costs?, SHRM Online, October 2020

Supreme Court to Hear Case on PBM Drug-Pricing Agreements, SHRM Online, January 2020

SHRM Asks Supreme Court to Uphold ERISA's Uniform Standard for Drug Plans, SHRM Online, April 2020

Negotiating Price Transparency with PBMs Pays Off, SHRM Online, January 2017