Independent pharmacies across the country—particularly those in rural areas—have struggled financially in recent years. Between 2003 and 2018, 16.1% of independent pharmacies in rural areas closed their doors. Pharmacies often experience financial hardship because reimbursements rates are below the costs of acquiring and dispensing some drugs, with some pharmacies reporting as much as 80% of reimbursements being below the cost to dispense.1 These reimbursements come from pharmacy benefit managers (PBMs), third-party administrators that manage prescription drug benefits on behalf of health plans.
To protect pharmacies’ bottom lines, more than 40 states have passed statutes regulating PBM reimbursement rates. PBMs responded by filing lawsuits seeking to overturn state PBM laws, arguing these laws violated a federal statute that limits state regulation of certain employee benefit plans. In December 2020, the US Supreme Court decided such a case, Rutledge v Pharmaceutical Care Management Association, and unanimously upheld an Arkansas PBM law.2 The decision is an important victory for pharmacies; ensuring adequate reimbursements from PBMs will allow many pharmacies to continue providing medications to patients. Rutledge also has important implications for states’ abilities to regulate PBMs and drug pricing.
PBMs, Pharmacies, and State Regulation
At the center of Rutledge is the complicated system for paying for prescription drugs and the role of PBMs. Pharmacies purchase drugs from wholesalers, paying an acquisition cost. When patients with prescription drug benefits purchase drugs at the pharmacy, they pay their portion of the drug’s cost, and the pharmacy submits claims to a PBM for the health plan’s portion. The PBM then approves or denies the claim; if approved, the PBM receives a payment from the health plan for the drug and reimburses the pharmacy. Contracts between PBMs and pharmacies set reimbursement rates, generally based on the maximum allowable cost (MAC) for each drug developed by the PBM. MAC lists reflect the average price paid by pharmacies for a generic drug from a wholesaler, but the calculation is left to the PBM’s discretion, such that the rate may be more or less than the pharmacy actually paid when purchasing the drug from a wholesaler. Many pharmacies across the country, especially independent pharmacies, have been consistently reimbursed for prescription drugs below the drugs’ costs. This is attributable in part to independent pharmacies’ exclusion from PBMs’ preferred networks.1
Arkansas passed the statute at issue in Rutledge to address concerns that independently owned pharmacies were disproportionately penalized because of PBM reimbursement rates being below their acquisition costs.3 The law effectively requires PBMs to reimburse pharmacies above or equal to the pharmacy’s acquisition costs. Specifically, the statute requires PBMs to frequently update their MAC lists to tie reimbursement rates to pharmacy acquisition costs, allow pharmacies to challenge reimbursements, and enable pharmacies to decline to dispense drugs if the pharmacy’s acquisition cost exceeds the reimbursement rate.3
Employee Retirement Income Security Act Preemption and Rate Regulation
The question before the Supreme Court in Rutledge was whether the Arkansas PBM law was preempted by the federal Employee Retirement Income Security Act (ERISA). ERISA regulates most employee benefit plans, including health plans, and was enacted to protect employees by “mandating certain oversight systems and other standard procedures” to secure benefits promised by employers.4 ERISA preempts or supersedes state laws that “relate to” employee benefit plan administration.5
Rutledge concerned whether state laws regulating PBMs relate to employee benefit plans and therefore are preempted by ERISA. In previous cases, the Supreme Court has interpreted ERISA’s relate to requirement as preempting state laws with “a connection with or reference to” an ERISA plan.6 Advocates and justices alike have criticized the vagueness of this test, pointing to the lack of clarity regarding how close a state law’s connection may be without running afoul of ERISA. For example, in 1995 the Supreme Court upheld a New York law requiring hospitals to collect a surcharge from certain patients based on their ERISA-regulated health plan, saying that rate regulation statutes were not preempted by ERISA.7 However, in 2016 the Supreme Court held that a Vermont law mandating that ERISA-regulated health plans report health claims data to the state all-payer claims database was preempted by ERISA.4
In Rutledge, PBMs argued for broad ERISA preemption, such that it would constrain states from regulating PBMs’ reimbursement rates to pharmacies because these reimbursements affect the costs of administration for health plans governed by ERISA. Arkansas argued for a narrower interpretation, preempting only statutes that conflict with ERISA or direct plan determinations about beneficiary status or coverage of benefits.
Rutledge and the Future of State Health Care Regulation
The Supreme Court, in a unanimous opinion authored by Justice Sotomayor, sided with Arkansas and upheld the PBM statute. It held that the rate requirements imposed on PBMs are not sufficiently related to administration of ERISA plans and therefore do not trigger ERISA’s preemption provision. The court emphasized that ERISA’s preemption operates on plan administration and that the Arkansas PBM law does not affect health plans’ benefit structures, coverage decisions, or plan administration.
The Rutledge decision has national implications and is important for a wide array of state health care regulations. First, Rutledge not only affirms the validity of the Arkansas statute regulating PBMs, but it also allows many state statutes regulating PBMs throughout the country to stand. At least 40 states require PBMs to regularly update their MAC lists, and 36 mandate PBMs to provide pharmacies with an appeals process. Second, the Rutledge decision’s characterization of the Arkansas law as a permissible cost regulation paves the way for states to promote affordability and accessibility of prescription medications. These laws play an important part in keeping rural and independent pharmacies open and protecting access to medicines. Finally, Rutledge may also support a new wave of state health care finance regulation on issues from drug pricing to surprise medical bills.
Rutledge v Pharmaceutical Care Management Association is an important victory for independent pharmacies. The decision will help pharmacies receive higher reimbursements, making them more financially secure, with a better chance to survive. Patients served by these pharmacies will thus have better access to the medications they need.
Open Access: This is an open access article distributed under the terms of the CC-BY License. © 2021 Knox RP et al. JAMA Health Forum.
Corresponding Author: Ryan P. Knox, JD, Yale Law School, 127 Wall St, New Haven, CT 06511 (firstname.lastname@example.org).
Conflict of Interest Disclosures: None reported.
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Knox RP, Gagneja D, Kraschel KL. Independent Pharmacies Gain Unanimous Victory in Recent US Supreme Court Case. JAMA Health Forum. 2021;2(2):e210171. doi:10.1001/jamahealthforum.2021.0171