US Supreme Court Hears Argument on State’s Ability to Regulate PBMs

On October 6, 2020, the Supreme Court of the United States (SCOTUS) entertained oral argument in the case of Rutledge v. Pharmaceutical Care Management Association.​¹

Rutledge involves a challenge to an Arkansas law regulating the conduct of pharmacy benefit managers (PBMs). More specifically, “Act 900”, as the Arkansas statute has come to be known, mandates that PBMs must reimburse pharmacies for generic drugs at a price equal to or higher than the pharmacies’ acquisition cost for the drug from its wholesaler. Because at least 36 other states have enacted similar legislation to curb what’s seen as unfair PBM practices, such as “below-cost” reimbursements, the SCOTUS’s decision in Rutledge is expected to have far-reaching implications not only on PBM reimbursements, but also on related PBM conduct throughout the United States, such as PBMs erecting barriers to network entry and engaging in unfair auditing practices. These types of predatory practices, combined with their ever-increasing market power, have resulted in PBMs adversely impacting patient care in the United States. Unless States like Arkansas are permitted to regulate PBM conduct within their borders, patient care will suffer.

In Rutledge, the Attorney General of the State of Arkansas is appealing a lower court decision from the Eighth Circuit Court of Appeals holding that Act 900 was preempted by the Employee Retirement Income Security Act of 1974 (ERISA).² As a general proposition, ERISA preempts state laws that relate to an employee benefit plans. A state law “relates to” an ERISA plan by having “a connection with or a reference to such a plan.” In Rutledge, Arkansas argues that Act 900 does not relate to plan administration because the law regulates the relationship between PBMs and pharmacies, not health plans and beneficiaries. Arkansas further argues that Act 900 regulates PBM operations and does not directly affect patients. Respondent PCMA argues that no legal distinction should be made between a health plan and its contractor (ie, the PBM), and consequently, Act 900 attempts to regulate core aspects of a plan’s decisions and administration.

Like Arkansas, a majority of states have enacted laws to address not only “below-cost” reimbursements, but other PBM practices such as erecting artificial barriers to the PBMs’ networks, improper termination of pharmacies and other providers from their networks, and unlawful auditing of prescription drug claims. PBMs routinely rely on the doctrine of ERISA preemption to avoid state regulation of their conduct. Consequently, the Eighth Circuit’s broad ruling on ERISA preemption which invalidated Act 900 interferes with the states’ ability to regulate PBM conduct and, in turn, directly interferes with patient-provider relationships.

Take, for example, the oncology space. Recent pharmacologic advancements and innovations in the oncology space have provided oncologists with new and additional options to effectively treat cancer with oral chemotherapy and related anti-cancer and supportive care oral drugs. However, unlike their intravenously infused predecessors, which were historically administered in-office under direct oncologist supervision and covered and paid for by insurers and self-insured employers as a medical benefit, these self-administered oral cancer drugs are dispensed on an outpatient basis and paid for now as a pharmacy benefit. Brand oral cancer drugs are very expensive, and thus offer a very lucrative market for PBMs that promise payers effective management of the costs of oral cancer drugs. In doing so, PBMs insert themselves between oncologists and their patients thereby not only adversely impacting the overall quality of care, but also the manner in which cancer treatment is delivered.

Similarly, because PBMs effectively control the network of oncology providers that can dispense oral cancer drugs to patients as a pharmacy benefit, if a provider is excluded from a PBM network the provider cannot provide care for patients in that network. Thus, oncologists’ access to PBM networks is critical for patient care. Nevertheless, PBMs restrict oncologists from providing oral cancer drugs directly to their patients by requiring patients to obtain their oral cancer drugs from the PBM’s affiliated mail-order specialty pharmacy. In other cases, PBMs will pay “below-cost” reimbursements to oncologists causing the oncologist to lose money every time the oncology drug is dispensed. These types of PBM practices often result in patients needing to use the PBM’s mail-order pharmacy. This, in turn, directly and adversely impacts cancer care as patients routinely experience delays, denials, and incorrect drugs and/or dosages when delivered by a PBM mail-order pharmacy.

The consequences of the SCOTUS’s decision in Rutledge are likely to be significant as the decision will affect the way that lower courts throughout the country interpret and apply ERISA preemption analysis to similar laws enacted in other states. On the one hand, if SCOTUS affirms the Eighth Circuit’s decision holding that Act 900 is preempted by ERISA, then a state’s ability to regulate PBM conduct will be substantially limited. Such a decision will, in turn, have a ripple effect on pharmacies, community oncology providers, and other dispensing providers, but most importantly on patient care. On the other hand, should the SCOTUS reverse the Eighth Circuit decision and uphold Act 900, states will have a blueprint to follow, vis-à-vis Act 900, to ensure that their laws will withstand ERISA preemption scrutiny in the courts. States will be able to regulate PBM conduct to ensure not only that providers are protected against abusive PBM practices, but most importantly, that patient choice and care remain of the utmost importance.

 SCOTUS is expected to issue its decision in Rutledge prior to the Court’s recess for the summer in late June/early July.

Todd Mizeski, Esq., is a Partner in Frier Levitt’s Life Sciences, Litigation Department. Todd represents health care professionals in all aspects of litigation and counseling. The piece reflects his views, not necessarily those of the publication.

References

1. Hearing Before the United States Court of Appeals for the Eighth Circuit on Leslie Rutledge, Attorney General of Arkansas, Petitioner v. Pharmaceutical Care Management Association (October 6, 2020). Case No 18-540.

2. Pharmaceutical Care Management Association v. Rutledge, 891 F.3d 1109 (8th Cir. 2018). Accessed October 29, 2020. https://www.supremecourt.gov/DocketPDF/18/18-540/67660/20181022164724632_PCMA%20-%20Petition.pdf​