States Laser In on PBMs

If you have been paying any attention to the healthcare debate these days, you know very well that pharmacy benefit managers (PBMs) are having a moment.

As both chambers of Congress work to lower drug costs through federal transparency requirements on PBMs, a more complicated story is playing out in the states, which are on their own quest to regulate the PBM industry.

In the past five years, we have witnessed a surge of PBM-related bills enacted in the states, and, to date, all 50 states regulate them in some form. Notably, the majority of these laws extend to PBMs servicing prescription drug benefits in the employer market. Most of the early bills enacted focused on efforts to register or license PBMs and better track the relationship between PBMs and pharmacies, such as requiring disclosure of “spread pricing” and prohibiting contracts that would bar pharmacists from informing patients of their coverage options. More recently, however, states have been passing much more prescriptive bills on PBM reimbursement and drug coverage practices.

State efforts to regulate the healthcare space are nothing new, but in the context of employee health plans, there’s an 800-pound gorilla waiting in the wings. The Employee Retirement Income Security Act (ERISA) establishes a federal framework for regulating private employee benefits, and Section 514 broadly preempts “any and all State laws insofar as they may now or hereafter relate to any employee benefit plan” (emphasis added). Whether a particular state law “relates to” a plan has been the source of extensive litigation. The Supreme Court has long held that a state law relates to an ERISA plan if it has a connection with or reference to such a plan.

In December 2020, the Supreme Court issued its watershed decision in Rutledge v. Pharmaceutical Care Management Ass’n, ushering in a new wave of state PBM laws and prompting many in the industry to ask just how far these laws can go.

In Rutledge the Court examined the question of ERISA preemption in the context of an Arkansas statute seeking to regulate PBM pharmacy reimbursement practices. The case focused primarily on a provision in Arkansas’ Act 900 that requires PBMs, among other things, to reimburse pharmacies at a price no less than the pharmacy’s acquisition cost for the drug. In an 8-0 decision, the Court disagreed with both the district court and the 8th Circuit and held that ERISA does not preempt Arkansas’ PBM law.

The Court reasoned, in part, that Act 900 does not “relate to” the plan, because imposing a reimbursement floor is “merely a form of cost regulation” and does not constitute an “impermissible connection” with the plan. Relying on its 2001 decision in Blue Cross & Blue Shield Plans v. Travelers, the Court doubled down on its position that “ERISA does not preempt state rate regulations that merely increase costs or alter incentives for ERISA plans without forcing plans to adopt any particular scheme of substantive coverage.”

The question now becomes how far states can push in enacting PBM policies that extend beyond cost regulation before they cross the line into structuring the “substantive coverage” of an ERISA plan. The answer—to the industry’s dismay—is still working itself out.

One case we hope will provide some insight is litigation currently pending in the 10th Circuit where the Pharmaceutical Care Management Association (PCMA) is challenging Oklahoma’s Patient’s Right to Pharmacy Choice Act. The law imposes various new restrictions on PBMs, the most contentious being limits on the use of mail order pharmacies and prohibitions on denying willing pharmacies from participating in the PBM’s preferred network.

In the May 16th oral argument, the three-judge panel seemed receptive to PCMA’s position that these restrictions impact the plan’s provider network design choices and, in doing so, regulate the “substantive coverage” offered by the plan. PCMA argued that these restrictions are considerably different from the cost limitations at issue in Rutledge and are therefore not protected by the Court’s holding.

In its questioning, the panel acknowledged that the Oklahoma law effectively compels a particular design effect by requiring that the plan’s benefits be provided in a fashion that “commits the plan to all willing pharmacies.” In doing so, the panel noted that “the plan has fewer options on what it can say and do,” suggesting that such an outcome is preempted under ERISA. Oklahoma, therefore, could be a case where we see the pendulum swing back toward ERISA preemption of certain state PBM laws.

As we await the 10th Circuit’s decision, states show no signs of slowing down in their efforts to regulate various elements of the PBM model. Florida’s recently enacted law requiring PBMs servicing pharmacy benefit plan contracts to use a pass-through pricing scheme and abide by certain network adequacy requirements is just another iteration of how states are thinking through the role of PBMs in the pharmaceutical supply chain, and more legal challenges are expected.

Add in the anticipated federal legislative PBM package and the Federal Trade Commission’s ongoing oversight inquiry into the industry’s business practices, and the only thing that is certain on the PBM front is that there is much more to come.