Opinion analysis: Court rejects challenge to states’ authority to regulate pharmacy reimbursements

The Supreme Court’s opinion Thursday in Rutledge v. Pharmaceutical Care Management Association firmly rejected an attack on state statutes that protect pharmacies from the prescription-reimbursement intermediaries that health-insurance providers use to administer their prescription-drug programs.

The case involves pharmacy benefit managers like Caremark and Express Scripts, which have come to be the exclusive avenue through which most of us purchase prescriptions covered by our health insurance. PBMs have come under attack in recent years, as pharmacies argue that the standardized prices PBMs pay to pharmacies when pharmacies fill prescriptions often are set at levels below the costs pharmacies pay to buy the drugs from wholesalers. When that happens, pharmacies actually lose money on those prescriptions. Whatever the truth of those attacks (PBMs and their amici dispute them heatedly), more than 40 states have passed statutes in recent years designed to prop up the prices that PBMs pay, hoping to sustain the profitability of pharmacies (especially the independent pharmacies that are common in rural areas).

Rutledge involves an Arkansas statute of that sort, which has three salient provisions. First, it requires PBMs to “tether” their reimbursement rates to the acquisition costs pharmacies pay, by updating price schedules whenever wholesale drug prices increase. Second, it specifies an appeal process PBMs must provide when a pharmacy contends that the reimbursement level for a particular drug is below the pharmacy’s cost of buying the drug. Finally, the statute permits a pharmacy to decline to provide a drug if the PBM’s reimbursement price is less than the pharmacy’s cost. Justice Sonia Sotomayor’s brief opinion for a unanimous court (not even 10 pages long) rejects the argument by the trade association for PBMs that the federal Employee Retirement Income Security Act pre-empts any aspect of the Arkansas statute (or the dozens of other states’ statutes like it).

Tracking the Supreme Court’s standard framework for ERISA pre-emption cases, Sotomayor separately considers whether the Arkansas statute has an “impermissible connection” with ERISA plans and whether it “refers to” ERISA. Viewing the statute as primarily directed at cost regulation, Sotomayor can dispose of those challenges easily, referring to an earlier decision (New York State Conference v. Travelers Insurance) that permitted New York to impose a 13% surcharge on hospitals that used insurers other than Blue Cross/Blue Shield. On the “impermissible connection” point, Sotomayor explains that ERISA is “primarily concerned with pre-empting laws that require providers to structure benefit plans in particular ways,” as opposed to a law that “merely affects costs.” In her view, Travelers shows that “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.” Thus, she reasons that “[t]he logic of Travelers decides this case,” because the Arkansas statute, “[l]ike the New York surcharge law in Travelers, … is merely a form of cost regulation [that] requires PBMs to reimburse pharmacies for prescription drugs at a rate equal to or higher than the pharmacy’s acquisition cost.”

Sotomayor is similarly brisk in disposing of the argument that the Arkansas statute impermissibly “refer[s] to” ERISA, pointing out that it “does not directly regulate health benefit plans at all, ERISA or otherwise. It affects plans only insofar as PBMs may pass along higher pharmacy rates to plans with which they contract.” Crucially, the Arkansas statute applies when PBMs pass along those charges not only to ERISA plans (those that employers provide) but also to plans provided by Medicaid, Medicare, the military or the open market.

Travelers makes Sotomayor’s arguments about cost regulation telling with respect to the price regulation (the first of the three parts of the statute mentioned above). Her point is less compelling with regard to the procedural aspects of the statute (the appellate-process mandate and the decline-to-sell rule). She validates those parts of the statute as incidental to making the price-regulation mandate effective. So, with regard to the mandated appeal process, she notes that “any contract dispute implicating the cost of a medical benefit would involve similar demands and could lead to similar results.” Thus, taking the position of the PBMs “to its logical endpoint … would pre-empt any suits under state law that could affect the price or provisions of benefits.” On that point, she quotes an earlier decision explaining that ERISA does not disturb “state-law mechanisms of executing judgments against ERISA welfare benefit plans, even when those mechanisms prevent plan participants from receiving their benefits.” In the same vein, she approves the decline-to-sell provision, commenting that “[w]hen a pharmacy declines to dispense a prescription, the responsibility lies first with the PBM for offering the pharmacy a … reimbursement” that ignores the state-mandated price floor.

Sotomayor closes by rejecting the PBM association’s argument that the Arkansas statute creates “operational inefficiencies” that “interfere with nationally uniform plan administration.” The problem with that argument, she explains, is that “creating inefficiencies alone is not enough to trigger ERISA pre-emption,” repeating and emphasizing the point that ERISA tolerates a state law “that merely increases costs … even if plans decide to limit benefits or charge plan members higher rates as a result.”

It is at least possible that Rutledge will undermine the cost-containment pressures that have driven insurers to rely so heavily on PBMs, and so it might even lead to some cognizable increase in insurance premiums. On the other hand, it should come as no surprise that the Supreme Court has no interest in stepping in to protect a market that almost all of the states regard as functioning so poorly as to warrant legislative intervention. If Congress disagrees, it certainly could amend ERISA to compel a different arrangement.