Arguments: Does ERISA preempt state laws regulating prices paid by prescription drug middlemen?

Last week the U.S. Supreme Court heard oral argument in Rutledge v. Pharmaceutical Care Management Association, 18-540, a case examining whether the Employee Retirement Income Security Act preempts state laws regulating the reimbursement rates paid by "pharmacy benefit managers," or PBMs, to pharmacists who sell prescription drugs to claimants with ERISA-governed health care plans. While this case concerns exclusively an Arkansas state law, because the vast majority of states, including California, have laws imposing some form of regulation on PBMs, this decision could have implications far beyond Arkansas.

ERISA has an express provision broadly preempting "any and all" state laws which "relate to" employee benefit plans governed by ERISA. This preemptive reach is not limitless, however, as the Supreme Court stressed in New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Co., 514 U.S. 645 (1995). The court has addressed preemption under ERISA -- not only under ERISA's express preemption provision, but also as a matter of conflict, field and complete preemption -- in more than two dozen cases. But the principles established in these cases apparently have not made the analysis any simpler or the outcomes easier to predict, as last week's argument demonstrates.

The dispute in Rutledge arose out of the routine practice by health care plans, including those governed by ERISA, of using PBMs to administer prescription drug benefits by acting as intermediaries between pharmacies and the plans. The PBMs do so by creating networks of pharmacies through contracts with the pharmacies that use "Maximum Allowable Cost" lists, known as MAC lists, to dictate the reimbursement rates, which are sometimes below cost, that the PBMs pay the pharmacies for prescriptions. Separate contracts with the plans set the reimbursement that the PBMs receive, an amount that is obviously higher (often considerably) than the amount paid to the pharmacies. Arkansas and many other states have raised concerns that the lower amounts that PBMs pay to pharmacies as the cost of being in their networks threaten to put many small, independent pharmacies out of business.

In an effort to mitigate this perceived problem, Arkansas passed "Act 900" in 2015, which requires PBMs to pay pharmacies at rates higher than those listed on their MAC lists, pursuant to complex but flexible formulas that look to the pharmacy's cost of acquiring the drug at issue. It also creates procedural rules governing pharmacies when challenging MAC prices as well as rules governing how PBMs are required to update and administer the lists.

An association representing PBMs, filed suit against the state of Arkansas claiming that ERISA preempts Act 900 because the law regulates plan administration and therefore "relates to" ERISA plans. Arkansas, on the other hand, argued that Act 900 does not impose a regulatory scheme on ERISA plans, but instead merely regulates reimbursement rates and imposes related, incidental provisions. The district court and the 8th U.S. Circuit Court of Appeals found against Arkansas, concluding that Act 900 is indeed preempted under ERISA's express preemption provision because it "both relates to and has a connection with employee benefit plans."

During last week's argument, the main dispute between the parties again focused on whether the Arkansas law is merely a rate regulation that may incidentally affect the cost of administering ERISA plans or whether the law, in fact, directly and impermissibly regulates plan administration. The Arkansas solicitor general argued that Act 900 is akin to the state law requiring hospitals to collect surcharges from certain insured patients and ERISA-governed HMOs at issue in Travelers, which the Supreme Court concluded was not preempted. The attorney for the United States, which had filed an amicus brief in support of Arkansas, agreed. The attorney for the association, on the other hand, argued that Act 900 adds "to the thicket of state law" governing how plans administer and pay drug benefits, and will therefore create disuniformity in plan administration. Therefore, the association argued that the law was analogous to the Vermont health care reporting law at issue in Gobeille v. Liberty Mutual Insurance Co., 136 S. Ct. 936 (2016), which the Supreme Court concluded was preempted because it would create impermissible disuniformity with respect to a "central matter of plan administration."

The justices picked up on these opposing themes in their questioning. Several justices wondered whether ERISA health care plans are really unconcerned with drug prices. Justice Sonia Sotomayor questioned whether regulating drug pricing could end up dictating plan choices as to whether to even cover certain drugs. Justice Brett Kavanaugh suggested that "something seems to have gone awry" if ERISA is indifferent to whether increased costs are passed along to plans and their participants. Justice Neil Gorsuch suggested that because paying for drugs would seem central to ERISA health care pans, the Arkansas law seemed more like the law in Gobeille than the law in Travelers.

Justices Elena Kagan and Clarence Thomas both asked about the potential for disuniformity given the 45 states that have regulated in the area. Not surprisingly, they received different answers from Arkansas, on the one hand, and the association, on the other.

Justice Samuel Alito seemed to be searching for a satisfactory analytical approach. His first question proposed a textualist approach that would apply the "any and all" language of ERISA's preemption provision and move away from statutory purposes, an approach that the Arkansas solicitor general pointed out had been criticized by Justice Antonin Scalia as having no limiting principle. In questioning the attorney for the United States, Justice Alito suggested that a field or conflict preemption analysis might be preferable, a line of questioning immediately followed up on by Justice Sotomayor. So too, Justice Stephen Breyer noted the court's struggles with "relates to" preemption analysis, and asked the association's attorney "why not" simply apply "ordinary principles of preemption." Yet none of the three attorneys presenting argument seemed to think that applying a different approach would be helpful or lead to a different outcome.

At the end of the day, the court's understandable search for certainty and discernable principles to apply in deciding the case seemed elusive. We will have to wait to see whether the decision will shed any light on the murky waters of ERISA preemption. 