Supreme Court Rules in ERISA Pre-Emption Case

A case that went before the Supreme Court back in October has already received a unanimous ruling in the last week that could have impacts for benefit plans, pharmacy benefit managers and patients in need of prescription drugs.

The case in question was the topic of a recent HR Exchange podcast episode featuring Mark Casciari and Benjamin Conley, attorneys with the national labor law firm Seyfarth. In Rutledge v Pharmaceutical Care Management Association, a state court held that the Employee Income Security Act of 1974 pre-empted state regulations that sought to regulate the ability of pharmacy benefit managers (PBMs) to reimburse pharmacies at a lower rate than the cost of a given drug. Arkansas’ Act 900 has the power to do that, prompting a challenge from the PBM industry.

The Supreme Court last week laid out its ruling, reversing the decision of the lower court that viewed ERISA as pre-empting the state law and therefore making it unenforceable. The decision represents a narrowing on the scope of ERISA’s pre-emptive effects and could lead to more states passing laws.

“The Supreme Court ruling only creates a binding precedent to the extent states pass identical laws,” Casciari said. “The court did say that state cost implications could be so acute as to dictate ERISA plan terms and thus be preempted.”

Opening PBMs to state regulation will have an impact on health plan design and administration, though what those effects are remains to be seen, but it could lead to the development of new federal regulations.

“In the short term, this could result in increased costs in certain jurisdictions (such as Arkansas), where law requires PBMs to reimburse pharmacies at higher rates,” Conley said. “In the longer term this could present more challenges as states begin to edge more into regulating plan costs, and thus plan design and administration. The decision appears to afford states more leverage to push desired behaviors through cost increases and we expect many states will take advantage of that opening.”

The ruling could also create more fundamental administrative challenges, according to Conley. Those challenges could cause PBMs to pull out of states or localities entirely.

“It’s unclear how a health plan would operate in such a jurisdiction in the absence of a PBM administration,” Conley said.

Several states have already adopted prescription drug legislation, Act 900 was just the challenge that reached the Supreme Court level. However, Conley and Casciari do expect that the ruling will spur other states on in efforts to enhance their existing prescription drug laws or pass new, further reaching legislation.

As for the consumer, the decision will impact their plans as end-purchasers. Costs could go up but in the long term view, the opposite might be true.

“There’s an argument that this will lower costs through preserving access to pharmacies in rural communities and preserving competition by bolstering independent pharmacies, allowing them to compete against larger pharmacy/PBM chains,” Casciari said. He adds, “the law doesn’t regulate pharmaceutical manufacturers, just PBMS. So it’s unlikely that the law at issue in Rutledge will result in any longer term savings for consumers. Let’s see whether other states jump on the ERISA plan cost regulations bandwagon.”