Featuring Helgi C. Walker, Matthew S. Rozen, and Max E. Schulman, attorneys in the Appellate and Constitutional Law practice group at Gibson, Dunn & Crutcher LLP in Washington, D.C.; and Aphrodite Kokolis, an attorney at Schiff Hardin LLP in Chicago, IL.
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Case: Rutledge v. PCMA, U.S. Supreme Court Docket No. 18-540 (Argument date: October 6, 2020)
Question Presented: Whether Arkansas’s Act 900, which regulates pharmacy benefit managers’ reimbursement rates, is preempted by the Employee Retirement Income Security Act of 1974 (“ERISA”).
Summary of the Case: Arkansas’s Act 900 regulates pharmacy benefit managers (“PBMs”)—third-party administrators hired to manage prescription-drug benefits on a plan’s behalf. The Act requires PBMs to: (1) update the lists specifying the rates at which PBMs reimburse pharmacies for drugs prescribed to plan members; (2) maintain appeal procedures allowing pharmacies to challenge reimbursements they consider too low; and (3) grant certain appeals, increase the reimbursements at issue, and adjust the price list going forward.
The district court held that Act 900 has an impermissible “connection with” ERISA and is thus preempted. In affirming, the court of appeals considered itself “completely bound” by its earlier decision that an Iowa statute was preempted because it made “implicit reference” to ERISA by regulating PBMs that administer benefits for entities that can include ERISA plans. See Pharmaceutical Care Mgmt. Ass’n v. Gerhart, 852 F.3d 722, 728-31 (8th Cir. 2017) (invalidating Iowa PBM law).
Judgment for Respondent (Authored by Helgi C. Walker, Matthew S. Rozen, and Max E. Schulman)
ERISA Section 514(a) expressly preempts “any and all State laws” that “relate to” employee benefit plans. 29 U.S.C. § 1144(a). The Eighth Circuit held that this provision preempts an Arkansas statute regulating the administration of prescription-drug benefits on behalf of ERISA-governed benefit plans. We agree and affirm the judgment below.
In ERISA, Congress aimed to encourage formation of employee benefit plans by establishing a “uniform regulatory regime.” Aetna Health v. Davila, 542 U.S. 200, 208 (2004). ERISA’s broad express-preemption provision serves that goal by preventing a hodge-podge of state regulations that would “complicate the administration of nationwide plans” and produce “inefficiencies that employers might offset with decreased benefits.” FMC Corp. v. Holliday, 498 U.S. 52, 60 (1990).
We apply a two-part test for preemption under Section 514. “A law ‘relates to’ an employee benefit plan” and is preempted “if it has a [(1)] connection with or [(2)] reference to such a plan.” Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 96-97 (1983). We focus here on the first part of this test. A state law “has an impermissible ‘connection with’ ERISA plans” if it “governs” a “central matter of plan administration,” “interferes with nationally uniform plan administration,” or imposes “acute, albeit indirect, economic effects” that “‘force an ERISA plan to adopt a certain scheme of substantive coverage or effectively restrict its choice of insurers.’” Gobeille v. Liberty Mut. Ins. Co., 136 S. Ct. 936, 943 (2016).
Arkansas’s Act 900 is preempted under this test. It directly regulates (and increases) the rates that PBMs—acting as agents for ERISA plans—pay for prescription drugs, and requires PBMs to process claims for benefits under different substantive and procedural rules in Arkansas than in other states.
Arkansas’s defense of Act 900 rests on the misconception that ERISA does not preempt state “rate regulation.” On the contrary, state regulation of the rates that plans agree to pay to provide coverage to their members is at the core of ERISA preemption. “[T]he payment of benefits” is “a central matter of plan administration” that ERISA squarely protects from state regulation. Egelhoff v. Egelhoff ex rel. Breiner, 532 U.S. 141, 148 (2001). We have thus long recognized ERISA preemption of state laws that, like Act 900, “regulat[e] a plan’s “method of calculating . . . benefits,” De Buono v. NYSA-ILA Med. & Clinical Servs. Fund, 520 U.S. 806, 814-15 (1997), or “force an ERISA plan to adopt a certain scheme of substantive coverage,” N.Y. State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 668 (1995). Act 900’s direct regulation of plan benefit levels is antithetical to ERISA’s statutory scheme, in which “Congress’ primary concern” was to ensure that employers pay the benefits due to their employees, Massachusetts v. Morash, 490 U.S. 107, 115 (1989), not to “mandate what kind of benefits employers must provide if they choose to have [benefits] plans,” Lockheed Corp. v. Spink, 517 U.S. 882, 887 (1996). Act 900 is thus plainly preempted because its direct regulation of benefits and benefit administration establishes an impermissible “connection with” ERISA-governed plans.
Act 900 is not saved by the arguments of the United States as amicus. The United States argues that the Act is not preempted because it applies to third parties that administer benefits for ERISA plans. But Gobeille confirms that ERISA preemption applies equally when a state regulates core plan functions by imposing requirements on a plan’s “third-party administrator” or agent, rather than the plan itself. 136 S. Ct. at 942.
If allowed to stand, Act 900 would open the door to a patchwork of state laws that would decrease efficiency and increase plan costs—not just in the PBM context, but in numerous others involving different kinds of benefits and plans, different aspects of plan administration, and different kinds of third-party administrators. The result would be to “undermine the congressional goal of ‘minimiz[ing] the administrative and financial burden[s]’ on plan administrators—burdens ultimately borne by the beneficiaries.” Gobeille, 136 S. Ct. at 944. ERISA forbids that result.
The judgment is affirmed
Dissenting View (Authored by Aphrodite Kokolis):
ERISA preempts state laws “insofar as they may now or hereafter relate to any employee benefit plan.” 29 U.S.C. § 1144(a). We have cautioned, however, that a literal reading of “relate to” could invalidate state legislation to an extent not intended by Congress.
The decision below employs a sweeping interpretation of ERISA’s preemption provision that is inconsistent with our precedent, pays inadequate regard to the states’ historic police powers to regulate health care, and would leave a significant gap in the regulation of PBMs nationwide. I would therefore reverse the judgment below.
PBMs have played an increasingly important role in the pricing and delivery of pharmaceuticals in the United States. PBMs serve as intermediaries between pharmacies and health plans, both ERISA and non-ERISA plans: PBMs contract with pharmacies to establish pharmacy networks, and separately contract with plans to provide access to those networks. At issue here are PBMs’ maximum allowable cost lists, which set reimbursement rates to pharmacies dispensing generic prescription drugs. Those rates are sometimes lower than the wholesale cost to the pharmacy, causing the pharmacy to lose money. Many independent pharmacies, particularly those serving rural areas, have closed as a result, often leaving those communities unserved.
To address these issues, many states have enacted legislation regulating PBMs. The Arkansas statute is not directed at ERISA plans. Rather, it regulates the prices at which PBMs reimburse pharmacies for generic drugs and requires disclosure in the price-setting process. Ark. Code Ann. §§ 17-92-507(a), (c).
The Arkansas PBM statute is not preempted by ERISA. First, the Arkansas statute does not “relate to” ERISA plans, because it does not make “reference to” or have a “connection with” ERISA plans. A state law has an impermissible “reference to” ERISA plans if it “acts immediately and exclusively upon ERISA plans” or if “the existence of ERISA plans is essential to the law’s operation.” Gobeille v. Liberty Mut. Ins. Co., 136 S. Ct. 936, 943 (2016). A state law has an impermissible “connection with” ERISA plans if it governs “a central matter of plan administration” or “interferes with nationally uniform plan administration.” Id.
The Arkansas statute does none of these things. It does not regulate ERISA plans at all, but instead regulates PBMs and applies regardless of whether the PBM’s customer is an ERISA or non-ERISA plan. Nor does the statute dictate ERISA plans’ health care choices. Although the statute could have an indirect effect on an ERISA plan’s choice of insurance, such state laws of general application are not preempted simply because they could indirectly affect ERISA plans. New York State Conf. of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 659-61 (1995). The court of appeals’ “implicit reference” standard invites precisely the sort of “limitless application” of ERISA preemption that we have rejected. Gobeille, 136 S. Ct. at 943.
Second, the decision below fails to account for the federal deference to state health care regulation, an area “traditionally occupied by the States.” De Buono v. NYSA-ILA Med. & Clinical Servs. Fund, 520 U.S. 806, 814 (1997). We repeatedly have recognized the “historic primacy of state regulation in matters of health and safety.” Medtronic, Inc. v. Lohr, 518 U.S. 470, 485 (1996). These state police powers may not be superseded unless that was the “clear and manifest purpose of Congress.” Travelers, 514 U.S. at 655.
There is no such “clear and manifest” congressional intent here. On the contrary, Congress could not have intended the sweeping displacement of state health care regulation contemplated by the decision below. Congressional intent not to preempt is further evidenced by ERISA’s legislative history. In enacting ERISA in 1974, Congress imposed comprehensive federal regulation of retirement plans, but no substantive federal regulation of health care plans. See 29 U.S.C. §§ 1001(a), (c) (findings concerned with pension plans); H.R. Rep. No. 93-533, at 17-18 (1974); S. Rep. No. 93-127, at 1 (1974). The absence of such regulation of health care plans strongly suggests Congress’ intent not to displace state regulation of those plans. ERISA’s preemption provision must be interpreted in light of this dichotomy.
Finally, federal preemption of state PBM laws would result in a substantial regulatory gap. Petitioner has demonstrated the adverse effect of PBMs on the viability of independent pharmacies and the statewide health care crises precipitated by their closures. Congress has yet to act comprehensively to address these issues. Congress could not have intended ERISA to invalidate these state laws without corresponding federal regulation.
I respectfully dissent.