Comply With Us

Rutledge v. PCMA – We Cannot Wait for SCOTUS's Take

October 20, 2020

In our last blog post, we talked about why we weren’t getting too worked about the latest Affordable Care Act (ACA) challenge case pending before the Supreme Court of the United States (SCOTUS).  People on both sides of the political aisle are going bananas about California v. Texas because they fear (or hope) it could lead to the ACA's complete repeal. We think the FAR more likely result is the standalone repeal of the ACA’s individual mandate requirement. Since that outcome is not too different than where we are now with a $0 individual mandate penalty, we quite frankly find California v. Texas boring.

What we did not mention in our previous post is how we are captivated by a different case being considered by SCOTUS right now. Rutledge v. PCMA isn’t getting much media attention, but we believe it will rock the employee benefits world in the years ahead.

The case is a challenge to an Arkansas state law, Act 900, which attempts to regulate pharmacy benefit managers (PBMs) by prohibiting them from reimbursing local pharmacies less than the medicine's list price for a generic drug. The PBM trade association, the Pharmaceutical Care Management Association (PCMA), argues most prescriptions processed by PBMs are ultimately paid for by employer-sponsored health plans.  Therefore, the Arkansas law and other similar state-level PBM regulations violate the federal preemption standard in the Employee Retirement Income Security Act (ERISA).  ERISA is, of course, the federal law that dominates our lives...oops we mean provides oversight for employee benefit plans. 

We are obsessed with Rutledge v. PCMA for two reasons: 

  1. It has the potential to exponentially increase or hinder state-level action intended to lower the price of prescription drugs.
  2. It could dramatically change legal precedent about the scope of ERISA’s preemption of state-level regulatory authority. 

Right now, PBMs have a considerable influence on health plan costs, but they operate in a cloud of secrecy.  Even though virtually every American with private health insurance coverage is affected by PBMs, most don't understand what they do. PBMs serve as the middleman between pharmacies and health insurance plans.  Since health insurance carriers and self-funded plans rarely contract directly with pharmacies, they hire PBMs to administer claims and reimburse pharmacies for the cost of the prescriptions they fill.

However, unlike pharmacies, employer group health plans, and insurance companies, there is currently very little oversight over PBMs.  No federal laws regulate their activities right now. So if SCOTUS finds in Rutledge v. PCMA that states can’t address PBM behavior, then PBMs will be free to act with impunity when it comes to prescription drug price reimbursement.  On the other hand, if SCOTUS allows states to regulate PBMs , we predict a flood of state-level measures to control reimbursement rates and create more transparency in PBM contracts. (And Jessica’s pretty plugged into the NAIC, so her state regulation predictions tend to be quite accurate…)  

Perhaps even more fascinating to us is the impact Rutledge v. PCMA will have on interpreting the scope of ERISA's preemption clause.  Since ERISA passed in 1974, there’s been legal debate about the breadth of its preemption clause. SCOTUS’s 1995 decision in New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co. is currently the ERISA preemption gold standard.  That case established three types of state laws that are preempted by ERISA:

  1. Any state law that places requirements on the structure of an employee benefit plan;
  2. Any state law that interferes with national employee benefit plan administration standards; and
  3. Any state law that creates an alternative ERISA plan enforcement mechanism for beneficiaries.

In Rutledge v. PCMA, SCOTUS will examine a much broader position on preemption taken by the Eighth Circuit Court of Appeals.  In their ruling, the Circuit Court found that ERISA preemption covers “any and all state laws insofar as they now or hereafter relate to any employee benefit plan.” They concluded that since Act 900 relates to and has connections with employee benefit plans, preemption is explicit. If SCOTUS agrees with this interpretation, that means that not only does ERISA's state law preemption apply to employee benefit plans directly, but that it can also apply to service providers that contract with ERISA plans to help carry out plan administrative functions.  ERISA preemption could apply even if the service provider has no fiduciary responsibility. 

While the Rutledge v. PCMA case specifically addresses pharmacy reimbursement for maximum allowable charges, it could affect all kinds of health plan provider contracts moving forward. Going further, the Court could rule that even laws that don’t directly address employer plans could be preempted. Alternatively, the Court could disagree with the Eighth Circuit, dramatically narrowing the scope of preemption. In either case, a SCOTUS ruling changing the ERISA preemption standard will profoundly alter health plan design, contracting, and costs moving forward. 

Obviously, we are watching the progress of Rutledge v. PCMA like little employee benefit compliance hawks. SCOTUS heard oral arguments in the case via Zoom on October 6, 2020. While many of the Justices' questions suggest a preference for ERISA preemption, there was no clear indicator of how the high court will ultimately rule.  Court analysts say it takes an average of 91.73 days to decide after hearing oral arguments, which would be January 6, 2021.  SCOTUS often takes much longer to issue opinions in cases with significant public interest or legal consequences, so we expect that it will be later in the Spring or even early Summer when the Court rules in this case.  Since any new Justice will not have participated in oral arguments, we can expect a recusal and just eight Justices voting in this case. A SCOTUS tie decision reverts to the lower court ruling, so the possibility of an expansion of ERISA's preemption clause is even higher than usual.  

The bottom line is you have two friends who have Google Alerts set for Rutledge v. PCMA. As soon as we know how the case will impact prescription drug benefit plans and health plan regulation overall, you better believe that we will be back here to discuss it with you!