Health Affairs
On December 10, 2020, the Supreme Court handed a significant win to states and broadened the path forward for state health care cost control efforts. In Rutledge v. Pharmaceutical Care Management Association, the Court ruled 8-0 that the Employee Retirement Income Security Act (ERISA) did not preempt Arkansas’s law regulating pharmacy benefit managers (PBMs), the intermediaries that administer prescription drug benefits for health plans.
In Rutledge, Justice Sonia Sotomayor spoke for the unanimous Court in holding that a state law requiring PBMs to pay pharmacies no less than their acquisition costs for prescription drugs was not preempted by ERISA, the federal statute governing employee benefits. The Court concluded, “ERISA does not pre-empt state rate regulations that merely increase costs or alter incentives for ERISA plans without forcing plans to adopt any particular scheme of substantive coverage.”..
Most immediately, Rutledge puts PBM regulations passed by more than 45 states on much firmer footing. These laws do different things, but they are all aimed at reigning in prescription drug costs. Some ban PBM gag clauses that prevent pharmacies from telling consumers about lower-cost options. Others limit patient cost-sharing, require PBMs to disclose their price lists and manufacturer rebates to improve transparency, or prohibit so-called “spread pricing” where PBMs charge plans more than they reimburse pharmacies. Justice Sotomayor’s opinion sweeps broadly enough that its reasoning is not limited to the particulars of the Arkansas law. Applying the logic of Rutledge, PBM laws are a form of health care cost regulation, and PBMs are not health plans but rather their administrative contractors, so ERISA should not preempt states’ PBM regulations.
Moreover, the Rutledge decision extends beyond PBMs to all state health care rate regulation. The Travelers case previously established that states can regulate the rates paid to health care providers, and the Rutledge Court extended the logic of Travelers to state regulation of prescription drug reimbursement rates. Health care rate regulation—whether for services or therapeutics—is clearly fair game for states, including when the state dictates how much payers must reimburse providers and suppliers. Continue Reading
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