Supreme Court hears Arkansas law on Rx benefits

At issue: Rein on insurance, pharmacies middlemen

WASHINGTON -- The U.S. Supreme Court reviewed an Arkansas law Tuesday that regulates pharmacy benefit managers, the middlemen between insurance companies and pharmacies.

Forty-five other states, the District of Columbia and the Trump administration have sided with Arkansas.

Only eight justices participated in oral arguments for Rutledge vs. the Pharmaceutical Care Management Association; the ninth, Justice Ruth Bader Ginsburg, died Sept. 18.

The case was originally scheduled to be heard in April. Because of covid-19, the proceedings were pushed back to Tuesday and held remotely.

Under Act 900 of 2015, pharmacy benefit managers must pay drugstores at least as much as what the stores pay to wholesalers to obtain drugs. It allows pharmacists to refuse to fill prescriptions if the reimbursement is too low for them to recoup their cost. It requires a "reasonable administrative appeal procedure" so that pharmacists can challenge reimbursement rates.

In some instances, pharmacy benefit managers and pharmacies have common ownership or control. In those instances, Act 900 prohibits managers from paying affiliated pharmacies more than they pay other drugstores for the same drugs.

Pharmacy benefit managers help negotiate drug prices with pharmaceutical companies, influence which drugs are covered and set the "maximum allowable cost" that is paid to pharmacies filling prescriptions.

The figures change regularly, affecting patients and pharmacists. Under Act 900, pharmacies must receive copies of updated lists "on a timely basis."

The managers claim their drug-purchasing strategies save patients money, but aren't required to reveal the financial data.

Pharmacy benefit managers sometimes get rebates from drugmakers that aren't disclosed to patients or pharmacists.

Critics of pharmacy benefit managers say they're driving many Arkansas rural and small-town pharmacies out of business by offering unreasonably low reimbursements. In some instances, the pharmacy benefit manager reimbursement doesn't even cover the pharmacists' costs for the medicine.

Act 900 aimed to protect Arkansas pharmacists. Dozens of other states have similar laws.

Since its passage by the Arkansas Legislature in 2015, the law has been tied up in the federal courts.

U.S. District Judge Brian Miller ruled that portions of the statute conflict with the federal Employee Retirement Income Security Act of 1974, which preempts "any and all State laws insofar as they may now or hereafter relate to any employee benefit plan."

The 8th U.S. Circuit Court of Appeals in St. Louis upheld that ruling.

Defending the law Tuesday, Arkansas Solicitor General Nick Bronni said the law doesn't interfere with employee plans themselves, arguing that states are entitled to regulate the intermediaries between insurers and pharmacies.

Nothing in the law requires insurance companies to use pharmacy benefit managers.

In a 1995 ruling, New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., the Supreme Court allowed the state to regulate hospital rates, even though the regulation might have an "indirect economic influence" on ERISA plans. (The Employee Retirement Income Security Act of 1974 is a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans, according to the U.S. Department of Labor.)

In that case, the high court said the Employee Retirement Income Security Act "pre-empts state laws that mandate employee benefit structures or their administration as well as those that provide alternate enforcement mechanisms."

Gobeille v. Liberty Mutual Insurance Co., on the other hand, struck down a Vermont law requiring self-funded employer plans to report claim information for a state database.

"The state statute imposes duties that are inconsistent with the central design of ERISA, which is to provide a single uniform national scheme for the administration of ERISA plans without interference from laws of the several States even when those laws, to a large extent, impose parallel requirements," the 2016 decision stated.

Bronni argued that the Arkansas law is consistent with the 1995 and 2016 rulings.

"Act 900 does not regulate benefits. Instead it regulates the price of drugs that a plan has already decided to cover. That's rate regulation and under Traveler's that's not preempted. And that's because cost differences don't force plans to behave differently in different states and thus don't interfere with uniform administration," he told the justices Tuesday.

Frederick Liu, an assistant to the U.S. solicitor general, also defended Act 900, telling the court that preemption should not apply.

"The key question in this case is whether the Arkansas law directly regulates a central matter of plan administration. If it does, then the law has an impermissible connection with ERISA plans. If it does not, then there is no impermissible connection and no ERISA preemption," Liu said.

"From the plan's perspective, pharmacy reimbursement is simply a matter of cost," he said. "And as this court's [previous] decisions ... make clear, cost isn't a central matter of plan administration."

Seth P. Waxman, who argued the case for the pharmacy benefit managers, told the justices that Act 900 was preempted by federal law.

"Act 900 directly compels ERISA plan administrators to comply with state-specific rules and procedures in administering their benefits programs. In doing so, it adds to a thicket of varying state laws that make uniform plan administration impossible," he said.

"Now Arkansas says it can dictate how plans should be administered as a means of so-called rate regulation, but state regulation of ERISA plans as a means to some other end, whether it's rate regulation or otherwise, has never been permitted," he said.

Chief Justice John Roberts questioned whether Arkansas bears the blame for the existing pricing scheme.

"It's not the state or the pharmacy's fault that the PBMs have such byzantine procedures that affect drug prices," he said.

"Nobody is saying that it's anybody's fault," Waxman replied. "The fact of the matter is that if you look through Act 900, you will look in vain to find a single substantive provision that just says pharmacies can charge this amount."

Tuesday's case drew attention from a broad range of organizations.

The Arkansas Pharmacists Association, the American Pharmacists Association, the American Medical Association and the Arkansas Medical Society, among many others, signed on to friend-of-the-court briefs favoring Act 900.

Those filing amicus briefs opposing the law included America's Health Insurance Plans Inc., the U.S. Chamber of Commerce and J.B. Hunt Transport Services, the Lowell-based Fortune 500 company.

In a news release after the hearing, the Pharmaceutical Care Management Association, which represents pharmacy benefit managers, called the Arkansas law "misguided," arguing that it threatens employer-provided coverage.

"More than 266 million Americans rely on the prescription drug benefits PBMs administer, and now more than ever we're committed to protecting accessible, affordable health care," said association President and CEO JC Scott. "Today showed, yet again, the strength of our arguments and the importance of federal preemption to ensure employers are able to provide the best possible drug benefits for employees, no matter where they live and work."

At a Little Rock news conference after the oral arguments, Arkansas Attorney General Leslie Rutledge said the case bearing her name is "one of the two biggest Supreme Court cases that will be heard this term."

"What the law simply requires is that our local pharmacies be reimbursed at a fair rate by the pharmacy benefit managers," she said. "Our law was necessary to implement because we lost 16% of our local pharmacies because they could not afford the cost."

David Smith, co-owner of Smith Family Pharmacy in Conway, said the state law was necessary.

Decades ago, when some pharmacists were still using typewriters, pharmacy benefit managers were a bridge between insurers and pharmacies, he said.

"They were just the middlemen to get data from point A to point B using computers. When they were in that role, they served a useful purpose," he said. "Over the course of time, they've gotten more and more powerful."

"They've taken choices away from patients, and health care for those patients has gone downhill tremendously and the costs have gone up exponentially, and I blame the PBMs for that," he said.

In its amicus brief, J.B. Hunt argued that the law would result in "a patchwork of complex and often inconsistent regulations, all of which are preempted by ERISA."

The company estimated that the law would have cost members of its plan at least $800,000 in Arkansas between 2015 and 2019.

"Act 900 has the effect of depleting the Plan's assets and increasing the cost to Plans Members, for example, through increased co-insurance and increased contributions (through payroll deductions) to replenish depleted Plan assets," it stated in its brief. "While J.B. Hunt appreciates Arkansas' concerns about whether PBMs pass on savings to benefit plans, J.B. Hunt is equally confident that its thoroughly vetted decision to use PBM-generated benefits is delivering massive savings to the Plan and its Members."

Information for this article was contributed by Linda Satter and Andy Davis of the Arkansas Democrat-Gazette.