On December 10, 2020, the United States Supreme Court issued an opinion in Rutledge v. Pharmaceutical Care Management Association, Case No. 18-540, announcing for the first time that ERISA does not preclude a state's ability to regulate the relationships between independent pharmacies and pharmacy benefit managers (PBMs). More specifically, the decision held that a state could require PBMs to reimburse independent pharmacies at a fair and reasonable rate that is not less than the rate for large retail pharmacy chains affiliated with the PBMs.

The court overturned a decision by the U.S. Court of Appeals for the Eighth Circuit that a 2015 law, known as Arkansas Act 900, which prohibited PBMs from providing below-cost reimbursement to pharmacies, was preempted by the Employee Retirement Income Security Act (ERISA).

PBMs act as middlemen between health insurers and pharmacies by negotiating prices with drug manufacturers to create formularies and organizing networks of pharmacies for insureds to use to obtain prescribed medication. PBMs also reimburse pharmacies that dispense medication to insureds enrolled as members of the PBM.

Act 900 required PBMs to reimburse local, independent pharmacies at the same reimbursement rates as larger chain pharmacies and barred PBMs from reimbursing pharmacies at lower rates for dispensing a drug than what the pharmacy paid for the drug.

The law arose out of complaints to the state that PBMs were providing preferential reimbursement rates to chain pharmacies, large mail-order pharmacies and big-box stores, which were driving independent pharmacies out of business.

Shortly after the enactment of Act 900, the national trade association for PBMs, the Pharmaceutical Care Management Association (PCMA) filed suit against Arkansas alleging that Act 900 was preempted by the federal ERISA law as it purportedly regulated matters central to administering ERISA benefits plan, such as benefit design and uniform pricing. 

The PCMA's lawsuit was successful in 2017, with an Arkansas judge striking down the law. The Eight Circuit upheld the decision in 2018, and in 2019, Arkansas appealed to the Supreme Court. 

On October 8, 2020, the Supreme Court heard oral arguments, in which Arkansas argued that ERISA's reach does not go so far as the PCMA claims to regulate central plan administration, that it solely regulates the relationship between PBMs and pharmacies and not health plans, and that the law was akin to rate regulation, which the Supreme Court previously found not to preempt ERISA. The PCMA, on the other hand, argued that the law will create disuniformity among benefit plan administration, a concept contrary to the goal of ERISA.

Duane Morris attorneys Jonathan Swichar, Robert Palumbos and Bradley Wasser authored an amicus brief in this matter on behalf of the National Association of Specialty Pharmacy. The brief argued that the need for state regulation of PBMs is paramount as specialty pharmacies, which provide acute, life-sustaining pharmacy services to individuals suffering from rare conditions and chronic diseases, are harmed by PBMs nationally, which reimburse below the pharmacies' costs to acquire drugs, restricting and threatening the available care to the most fragile and ill patients in the United States.

The Supreme Court's decision was unanimous in overturning the Eight Circuit, and holds that Act 900 is not preempted by ERISA, as the law does not relate to or interfere with plan benefit administration. This is an important decision for the independent pharmacy industry that will almost certainly impact other states either in the process of drafting legislation similar to Act 900 or those that face objections to similar laws. Most significantly for the pharmacy industry, the decision will allow independent pharmacies to continue to seek fair and reasonable reimbursement for the medications needed by the vulnerable populations they serve.

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Duane Morris attorneys will continue to monitor developments in this area and other related issues and report on the key details for the industry in subsequent Alerts.

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If you have any questions about this Alert, please contact Jonathan L. Swichar, Bradley A. Wasser, any of the attorneys in our Pharmacy Litigation Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.