The NCSL Blog


By Lisa Soronen

In a unanimous decision, the U.S. Supreme Court held in Rutledge v. Pharmaceutical Care Management Association that states may regulate the price at which pharmacy benefit managers (PBMs) reimburse pharmacies for the cost of prescription drugs without violating the Employee Retirement Income Security Act (ERISA).

pillsPBMs act as an intermediary between prescription-drug plans and pharmacies. When a pharmacy fills a prescription the PBM reimburses the pharmacy less the co-pay. The prescription drug plan then reimburses the PBM. PBMs’ contracts with pharmacies typically set the reimbursement rates, which may not cover the price the pharmacy paid to purchase that drug from a wholesaler.

In 2015 Arkansas passed a law requiring PBMs to reimburse Arkansas pharmacies at a price equal to or higher than that which the pharmacy paid to buy the drug because “many pharmacies, particularly rural and independent ones, were at risk of losing money and closing.” In its petition asking the Supreme Court to decide this case, Arkansas stated that 36 states have enacted similar legislation intended to “curb abusive prescription drug reimbursement practices.”

The Pharmaceutical Care Management Association sued Arkansas claiming that its law is preempted by ERISA. The Supreme Court disagreed in an opinion written by Justice Sonia Sotomayor.

ERISA preempts “any and all State laws insofar as they . . . relate to any employee benefit plan” covered by ERISA. “[A] state law relates to an ERISA plan if it has a connection with or reference to such a plan.” According to Sotomayor, “[b]ecause [Arkansas’s law] has neither of those impermissible relationships with an ERISA plan, ERISA does not preempt it.

Arkansas’s law does have an “impermissible connection” with an ERISA plan, the court reasoned, because in previous cases the court held 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.” Arkansas’s law is “merely a form of cost regulation.” “It requires PBMs to reimburse pharmacies for prescription drugs at a rate equal to or higher than the pharmacy’s acquisition cost. PBMs may well pass those increased costs on to plans, meaning that ERISA plans may pay more for prescription-drug benefits in Arkansas than in, say, Arizona.”

Arkansas’s law also doesn’t “refer to” ERISA, the Court opined. A law refers to ERISA if it “acts immediately and exclusively upon ERISA plans or where the existence of ERISA plans is essential to the law’s operation.” According to the court, Arkansas’s law “does not act immediately and exclusively upon ERISA plans because it applies to PBMs whether or not they manage an ERISA plan. Indeed, the Act does not directly regulate health benefit plans at all, ERISA or otherwise. It affects plans only insofar as PBMs may pass along higher pharmacy rates to plans with which they contract.”

Lisa Soronen is executive director of the State and Local Legal Center and a regular contributor to the NCSL Blog on judicial issues.

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This blog offers updates on the National Conference of State Legislatures' research and training, the latest on federalism and the state legislative institution, and posts about state legislators and legislative staff. The blog is edited by NCSL staff and written primarily by NCSL's experts on public policy and the state legislative institution.