On October 6, 2020, the US Supreme Court (the “Court”) heard arguments on an Employee Retirement Income Security Act (“ERISA”) case that has the potential to curtail the rights of states to regulate their individual healthcare markets, in Rutledge v. Pharmaceutical Care Management Association (the “Case”).

Background

ERISA contains a broad federal preemption clause pursuant to which federal law take precedence over state law concerning the administration of employee benefit plans. Since the late 1990s, applicable jurisprudence held that a state law runs afoul of ERISA preemption when it “mandates employee benefit structures or their administration.” However, the application of this test was broadened in the 2016 case of Gobeille v. Liberty Mutual Insurance Co. In Gobeille, the Court determined that ERISA-covered healthcare plans were exempt from state health data reporting requirements on federal preemption grounds, finding that the reporting requirements at issue would prevent ERISA’s goal of a “single uniform national scheme for the administration of ERISA plans without interference from laws of the several States even when those laws, to a large extent, impose parallel requirements.

The Case at Hand

At the heart of the Case is Arkansas Act 900 (the “Act”), an Arkansas law designed to incentivize pharmacies to retain sufficient stock of generics by requiring pharmaceutical benefit managers (PBMs) to pay pharmacies at least the wholesale cost the pharmacies paid to obtain the generic medications. In a June 8, 2018 decision, the Eighth Circuit Court of Appeals held that the Act is preempted by ERISA.

In oral arguments[1] before the Court, Arkansas Solicitor General Nicholas Bronni argued that the Act does not regulate benefits or plan administration, or discriminate against ERISA plans. Rather, he stated that the law was aimed at regulating the price of drugs and the relation between the PBM and the pharmacy. In defending the Act, Solicitor General Bronni cited New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Co., a seminal case in which the Court upheld a New York statute, intended to regulate state healthcare markets, in the face of an ERISA-based preemption challenge.

While the outcome of the Case remains to be seen, questions asked by conservative and liberal Justices during oral argument indicate that the Court may uphold the Eight Circuit’s decision. In rebutting Bronni’s arguments, Chief Justice Roberts stated the procedural portions of the statute do seem directly tied to what ERISA is trying to regulate. Justice Gorsuch brought up the Court’s decision in Gobeille v. Liberty Mutual Insurance Co. and suggested that if data reporting relates to health plans, then payments for drugs does as well. From the Court’s more liberal wing, Justices Sotomayor and Kagan also raised preemption concerns, questioning the potential impact of the Act on drug prices and the lack of uniformity that could result if PBMs had to behave differently in each state.

If the Court upholds the Eight Circuit’s decision, ERISA preemption principles could significantly undermine effective state regulation of healthcare costs. A decision is expected in July 2021. We will continue to watch and provide any updates.

FOOTNOTES

[1]  A transcript of the oral arguments can be found here.