State policymakers and healthcare stakeholders are bracing for the U.S. Supreme Court to determine states' leeway in implementing a wide range of healthcare reform policies.
The justices will decide whether a 2015 Arkansas law requiring pharmacy benefit managers to pay pharmacies at least enough to cover their acquisition price for generic drugs violates the Employee Retirement Income Security Act, which preempts state regulation of self-funded employer health plans. The 8th U.S. Circuit Court of Appeals struck down the Arkansas law in 2018, and the high court has postponed its planned arguments in the case due to the COVID-19 pandemic.
If the Supreme Court throws out the Arkansas law, that could jeopardize laws in nearly 40 states that regulate PBMs in various ways, including requirements on pricing, licensing, transparency, and consumer pass-throughs of discounts. That also could make it harder for states to implement group purchasing initiatives, price caps, public option plans, or single-payer models.
An estimated110 million Americans are covered through ERISA-governed health plans.
"ERISA has been a real challenge for states in all kinds of reform initiatives," said Trish Riley, executive director of the National Academy of State Health Policy. "If the court ruled in favor of (the PBMs), anything where you want to help all the citizens of a state would run up against the ERISA preemption."
PBMs, insurers, and big business groups say maintaining ERISA protection for self-insured plans is key to cost control.
"PBMs and health plans are always trying to put downward pressure on costs," said April Alexander, the PCMA's general counsel. "The Arkansas law is taking away tools that we have in the prescription drug space."
The Trump administration, 45 states and the District of Columbia, the American Medical Association, and AARP have urged the justices to overturn the 8th Circuit ruling.
The Supreme Court last considered an ERISA healthcare case in 2016, when it ruled 6-2 to invalidate a Vermont law requiring all health plans in the state to submit claims data to the state's all-payer claims database. Since then, the court has become more conservative with two Trump administration appointees.
The Arkansas law at issue doesn't directly address self-funded employer plans. It allows pharmacies to appeal the price paid by PBMs for generic drugs under PBMs' maximum allowable cost calculation, if the price is below the amount paid by the pharmacy to the drug wholesaler. It also allows pharmacies to decline to dispense a drug to health plan members if they would lose money on the sale.
One of the Arkansas legislature's goals was to help smaller, independent pharmacies survive. The Arkansas Pharmacists' Association said its members lack the clout to bargain with big PBMs but they are an important piece in providing local communities access to pharmacy services.
The law also took aim at the PBM industry's controversial practice of "spread pricing," in which PBMs pay pharmacies a certain amount, then charge health plans a higher price and pocket the difference.
The Pharmaceutical Care Management Association, which represents PBMs, successfully challenged the Arkansas law in federal district and appellate courts. A federal district judge held that the law is invalid as applied to PBMs in their administration of ERISA plans because it interferes with nationally uniform plan administration.
In its amicus brief, America's Health Insurance Plans — whose members administer self-funded employer plans — argued that laws like Arkansas' would cause "upheaval" in the administration of ERISA-governed prescription drug claims and would "markedly" increase plan costs. Such laws would "threaten the broad use of third-party administrators" in serving ERISA plans, the group said.
The U.S. Chamber of Commerce agreed with that position supporting strong ERISA preemption of state rules — even though it said it opposes PBMs' use of the maximum allowable cost pricing model, on which the Arkansas law sets limits.
But the U.S. Solicitor General and the U.S. Department of Labor argued in the government's brief that the 8th Circuit ruling conflicts with Supreme Court precedent and opinions from other appellate courts in that it would provide overbroad preemption of state laws.
The government argued that the Arkansas law regulates only the relationship between PBMs and pharmacies and does not regulate self-funded plans themselves or their relationships with PBMs, pharmacies, or plan participants.
The states, led by California, said the vast majority of them have passed laws regulating PBMs "in response to troubling business practices that have harmed patients, independent pharmacies and state governments." They said those laws are not preempted by ERISA because they are consistent with the traditional role of states in protecting the health and welfare of their residents.
While the Arkansas law that triggered this case is narrow, observers agree the impact of the Supreme Court's ruling on state health policymaking could be broad. It's likely that PBMs would file legal challenges against more state laws regulating their business practices, said Erin Fuse Brown, an assistant law professor at Georgia State University.
Beyond that, other state initiatives could be at risk.
"I've renamed ERISA 'every roadblock to innovative state action,' said Riley of the National Academy of State Health Policy. "This touches all state efforts."