Justices Question State Law Guiding Pharmacy Drug Middlemen

(Bloomberg Law) -- A short-handed Supreme Court Tuesday cast doubt upon the validity of an Arkansas law that aims to curb abusive practices by those who manage prescription drug benefit plans.

The justices wrestled with whether the state has the authority to regulate pharmacy benefit managers, or PBMs, under the federal law governing employee benefit plans.

“If we follow the way we generally interpret statutes in this case, you would be in a lot of trouble, wouldn't you?” Justice Samuel Alito asked Arkansas Solicitor General Nicholas Bronni.

Arkansas's law, which is similar to those in 35 other states, not only regulates the rates at which PBMs reimburse pharmacies for drugs, but it gives pharmacies the right to appeal them.

PBMs are hired by employer health plans to manage prescription drug benefits for employees. These claims-processing middlemen often make money on the “retail spread,” or difference between how much they reimburse pharmacies for drugs and the fees they collect from their health plan customers.

Arkansas passed a law in 2013 to stop PBMs from trying to make more money by reimbursing pharmacies at aggressively low rates, an abusive practice that has driven more than 16% of independent rural pharmacies from the health-care marketplace, state Attorney General Leslie Rutledge told the court in her petition.

But the Pharmaceutical Care Management Association (PCMA), the trade group for PBMs, argues the state doesn't have the authority to regulate the administration of prescription drug benefits. The federal Employee Retirement Income Security Act (ERISA) preempts this state regulation, the trade group says. The U.S. Court of Appeals for the Eighth Circuit agreed, leading to this appeal.

Kagan's Query on Uniformity

Justice Elena Kagan noted during Tuesday's arguments that one of the main drivers of ERISA preemption was a desire to have uniform laws for benefit plan administrators. She asked why Arkansas's law doesn't raise the original concerns about a lack of uniformity in state laws that the drafters of ERISA had when they wrote the law.

Arkansas's law regulates the price of drugs that a plan has already decided to cover, which is rate regulation that's not preempted under ERISA, Bronni argued.

“Cost differences don't force plans to behave differently in different states and thus don't interfere with uniform administration,” he said.

Chief Justice John Roberts seemed to be searching for a compromise.

“The PBMs really do two things,” he said. “The first is set the cost of pharmacies, and the state says that's not preempted, but the second is to determine coverage, which they say is. Anything wrong with looking at it that way?”

But “that oversimplifies it to the point of distortion,” said PCMA's attorney, Seth P. Waxman, a partner at Wilmer Cutler Pickering Hale and Dorr LLP.

The law is directed at the plan and plan administrators that use maximum allowable cost, or MAC, lists as part of their methodology for determining what benefits will be provided to which employees for which drugs at which pharmacies, he said.

“It's the interference with the application of the methodology upon which the entire plan is designed that makes this so preempted,” he said.

The justices were scheduled to hear arguments in the case on April 27 but postponed them until the new term, which began Monday, after the coronavirus pandemic forced the court to close and shift arguments online.

The case was heard by only eight justices Tuesday. President Donald Trump's nominee to replace the late Justice Ruth Bader Ginsburg hasn't yet been confirmed to the bench.

The Fundamental Question

The fundamental question is whether PBMs have to comply with a patchwork of state regulations or whether instead they have to comply with uniform regulation, as Congress intended when it enacted ERISA, Michael Kimberly, one of PCMA's attorneys and a partner at McDermott Will & Emery LLP said in an interview with Bloomberg Law.

“One of the central purposes of ERISA was to ensure multi-state employers are encouraged to provide benefits to their employees with a guarantee they don't have to comply with 50 different regimes of regulation,” he said.

The federal government argued in support of Arkansas in Tuesday's case and tried to put some of the justices' concerns about uniformity to rest.

“When we talk about PBM pharmacy reimbursements, it's not like this is an area that was marked by pristine uniformity,” Assistant to the Solicitor General Frederick Liu said. “Whether there is preemption here or not, there's going to be a lack of uniformity in cost and that's by design.”

The case is Rutledge v. Pharm. Care Mgmt. Ass'n, U.S., No. 18-540, arguments 10/6/20.

To contact the reporter on this story: Lydia Wheeler in Washington at lwheeler@bloomberglaw.com

To contact the editors responsible for this story: Fawn Johnson at fjohnson@bloomberglaw.com; Brent Bierman at bbierman@bloomberglaw.com

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