On December 10, 2020, the Supreme Court released its decision in Rutledge v. Pharmaceutical Care Management Association. By a vote of 8-0, the judgment of the U.S. Court of Appeals for the Eight Circuit was reversed and the case remanded. Per Justice Sotomayor's opinion for the Court: "Arkansas’ Act 900 regulates the price at which pharmacy benefit managers reimburse pharmacies for the cost of drugs covered by prescription-drug plans. The question presented in this case is whether the Employee Retirement Income Security Act of 1974 (ERISA), 88 Stat. 829, as amended, 29 U. S. C. §1001 et seq., pre-empts Act 900. The Court holds that the Act has neither an impermissible connection with nor reference to ERISA and is therefore not pre-empted." Justice Sotomayor's opinion was joined by all other members of the Court except Justice Barrett, who took no part in the consideration or decision of the case. Justice Thomas filed a concurring opinion.
Anthony G. Provenzano, Member, Miller & Chevalier
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Dean Reuter: Welcome to Teleforum, a podcast of The Federalist Society's practice groups. I’m Dean Reuter, Vice President, General Counsel, and Director of Practice Groups at The Federalist Society. For exclusive access to live recordings of practice group teleforum calls, become a Federalist Society member today at fedsoc.org.
Nick Marr: Welcome everyone to The Federalist Society's Teleforum conference call as this afternoon, December 15, 2020, we have a Courthouse Steps Decision Teleforum on Rutledge v. Pharmaceutical Care Management Association. I'm Nick Marr, Assistant Director of Practice Groups at The Federalist Society.
As always, please note that expressions of opinion on today's call are those of our expert.
We’re very fortunate to have with us, this afternoon, Anthony Provenzano. He's a member at Miller & Chevalier. After Anthony gives his opening remarks covering the case, should go about a half-hour, we'll be looking to you, the audience, for questions about the case. And we'll take those one at a time. So be thinking of those and have them in mind for when we get to that portion of the call.
Without much more delay, Anthony, thanks very much for being with us. I'll give the floor off to you.
Anthony Provenzano: Thanks so much, Nick. I appreciate it. Today, we're going to talk about Rutledge v. Pharmaceutical Care Management Association or PCMA regarding ERISA preemption. We spoke about this, I believe, in October regarding the arguments. We were somewhat surprised at the very quick decision. And just to kind of really give it to you in a nutshell, in this case, the Supreme Court found that Arkansas's statute was not preempted by ERISA. So state wins. It was an 8-0 decision. Thomas did write a concurrence. The decision did note that Justice Barrett did not take part in the consideration of the case.
To boil it all down, it's a very brief decision, relative to some of the precedents. And it took the same position that was in a prior Supreme Court case called Travelers that, and it could really be boiled down to, that when a state law regulates or attempts to regulate prices or cost, then ERISA won't preempt that law. And so, I mean, that -- it really does give the states a lot of running room in their attempts to try to control costs, healthcare costs. And it also reflects the fact that a number of states, I read that 30 to up to 40 states have passed very similar laws, all of which were at some level of contention in the courts. And so this case will go a long way towards resolving many of those challenges to laws aimed at pharmaceutical benefits and pharmaceutical pricing.
So let's step back and just talk a minute about the law at issue in the case. In particular, Arkansas had passed a statute that was really aimed at saving the mom-and-pop pharmaceutical retailers in rural towns that may not have a CVS or Walgreens. And I think there's also a hint of antitrust here, where the states are -- again, they're trying to protect mom-and-pops against the mega-chains, such as CVS, Walgreens.
So there is this concern that these chains are too big, that people aren't getting access. And there's also a concern with -- as it concerns pharmacy benefit managers. Pharmacy benefit manager acts as the middle man between the actual pharmacy and whether it's the ERISA plan or the insurer the third-party administrator, whoever's running the plan. So they are, in some ways, their own third-party administrator. These PBMs, and they are the go-between. And they handle the prices. And they dictate in accordance with the terms of, whether it's the insurance policy or the employee benefit plan, how much they're going to pay for a particular drug.
So they will say, "Okay pharmacists, we will reimburse you for -- if you sell this particular prescription, we will reimburse you $10 for that prescription." But in this case, though, PBMs don’t actually supply the drug. They simply reimburse. They're only on the payment side. If the pharmacy gets the drugs and it costs them $11, and the PBM is saying it will only reimburse for $10, in certain cases, the pharmacies will lose benefits.
And so there's also this big concern among the states that these pharmacies are, in certain cases, losing money. They're being forced to sell these pharmaceuticals at a loss. They're up against these big, powerful PBMs. There's no recourse. And they're being driven out of business. And again, this goes down to servicing the communities.
So Arkansas passed a law. It's referred to as Act 900. And the goal is to -- it really takes on three main goals. One is to mandate that pharmacies are reimbursed for generic drugs at no less than cost. And it establishes a pharmacy acquisition cost that has to be followed. It makes PBMs update their lists frequently to reflect anytime there's more than a 10 percent increase in costs. So again, the retailers are getting reimbursed.
And finally, it sets up this -- well, it does a couple other things. One, it sets up an administrative appeals process. So if the pharmacy, the retailer, feels it’s not getting paid its true costs, they can appeal it. It does allow for rebilling so this can all be handled. And finally, Act 900 included a Decline to Dispense provision, which allowed a pharmacy to -- if they think they're going to lose money on a particular prescription, just say no, we're not going to sell it. And that became a big point of contention throughout the arguments.
In 2017, let's just go through a brief bit of a history, in 2017 PCMA challenged Act 900. The court said that yes, it was preempted by ERISA. In 2018, they appealed the district court decision. And in reliance on a prior Eighth Court decision that I'll get into in just a second, the Eighth Circuit held that it was preempted by ERISA. So the footing, when it came up to the Supreme Court, was that it was preempted by ERISA and cert was granted last year. But it was only argued in October.
There was a split among the circuits. You had the Eighth Circuit, not only in this case, Rutledge, but in another case, Gearhart, that held that very similar laws governing pharmacy benefit managers and pricing were preempted by ERISA. Prior cases also -- there were cases, such as in the First Circuit, that held that these laws were not preempted by ERISA.
So then we get to -- let's do a bit of background as to what ERISA preemption -- what the goal is, or how it's set out. ERISA Section 514 provides that the provisions of this chapter, and subchapter, shall supersede any and all state laws insofar as they may now or hereafter relate to employee benefit plans. ERISA generally governs -- I should note at the beginning, ERISA generally governs employee benefit plans. In this case, a health and welfare plan.
So your plan that you have with your employers is governed by ERISA. ERISA sets forth a number of protection provisions, fiduciary provisions, as well as claims resolution provisions. A number of different versions. And there's this preemption clause that basically is intended to, in many ways, keep the state out of the employer’s plan and how it governs these plans. So that there's one uniform administration of all employee benefit plans. And that's what I work with on a day-to-day basis, is ERISA and how it applies to health and welfare, as well as to pension plans. So there's this general preemption provision. And for years, it's been disputed as to, well when does a state law regulate a benefit plan and when does it not.
So there's two kind of concepts here that courts have latched onto. Two prongs. One is, has a connection with, or does it reference such a plan. The concept of when it's a plan it has a connection with is this concept of, well, it's got to be a central matter of plan administration, or the state law interferes with a nationally uniform plan administration. In that case, it would be in connection with.
There's also the concept of, what does it mean to reference to an ERISA plan? And that's also a point of contention in all these various cases. If it specifically refers to ERISA, obviously, or an employee benefit plan, then it would be considered in reference to the concept of, does it relate to, or is it in reference to, an employee benefit plan. If you take that too far, obviously, it will cover any state law. Because many state laws, such as wage and hour laws, are going to govern nurses. And nurses provide benefits that are covered under ERISA. So, I mean, there is a limit to how far the ERISA preemption can go.
But courts have held that, when the law acts immediately and exclusively on ERISA plans, or where there's an existence of an ERISA plan is essential. So in other words, if the law doesn't make any sense without an ERISA plan in the rules, then it's going to be considered in reference to an ERISA plan.
And so there's two main cases that I think are relevant that we talked about in our teleconference back in October. And that seems to be -- we seemed to get that right in terms of what we were looking at, or what cases we were focusing on. One was Gobeille, and the other was Travelers.
Travelers is the case that really wins the day. But let's talk about Gobeille for just a second. Gobeille dealt with Vermont state law. So there's two kind of prongs of ERISA preemption, or two ways of looking at it. One is the very broad, that ERISA preempts -- the broader view of preemption in Gobielle, which it was written by Kennedy. And it dealt with a Vermont state law. And this law required disclosure by healthcare providers and health insurers, including healthcare benefit plans, and third-party administrators. It required them to disclose certain information about the benefits being provided and healthcare being provided. I believe the goal of that state law was to gather up all its information for reporting purposes.
And the Court held a couple things. One is, it did specifically refer to a benefit plan, the law itself did. And two, it dealt with reporting and record keeping, both of which are central to an essential part of the uniform system of administration that is contemplated by ERISA as well as that ERISA is supposed to govern -- because ERISA is what's supposed to govern employee benefit plans. And here's a state law that is directly going after the administration of employee benefit plan.
But Gobeille was also viewed, if you just view the language, it's very broad as far as what it would preempt and not preempt. And then you go and you look at Travelers. The Travelers case is a -- comes out of New York. It's New York State Conference's Blue Cross and Blue Shield Plan v. Travelers Insurance Company. And this case, this was a pseudo decision from '95. And the New York case imposed a surcharge on employee benefit plans -- I'm sorry -- imposed a surcharge on benefits, medical expenses that are not covered or paid for by a Blue plan.
In other words, it was an incentive for employers and other people to pick Blue plans and not pick Insurers, because they're thinking if it's a Blue plan, it'll be so much cheaper to use a Blue. And this went up to the Supreme Court. And the Court said that cost uniformity was not an object of preemption. And that ERISA doesn't bar state regulation and hospital costs, it was too indirect that the effect of the state law on hospital charges is too indirect to be preempted by ERISA. It didn't -- this law applied to all hospitals, all hospital expenses. It didn't matter whether it was subject to ERISA or not subject to ERISA. It didn't really affect reporting or disclosure obligations of an ERISA plan. It really just focused on cost. This is based on the Travelers decision.
So now we get up to -- we've got those two cases, kind of looking at the two wings of how to view ERISA preemption. And we get to Rutledge and we get to the Supreme Court. And to be honest, I listened to the oral arguments and you really couldn't -- I think if you tried to guess how things would work out, you really wouldn't have any good feel of it.
Especially looking at the decision, you wouldn’t have guessed an 8-0 decision. I think there was some concern by a number of justices, including Sotomayor, as to the concept of a pharmacy refusing to provide a prescription to somebody. And that the state law would have allowed that. But here we are. When the decision got written, it was written 8-0 that the law is not preempted. That the Arkansas law can stand.
And just go through some of their analysis. The Court found that there was not an impermissible connection with an ERISA benefit plan. We talked about earlier, the two kind of ways in which you can find preemption in the case. One is the permissible connection. And the other is, in reference to. And they didn't find an impermissible connection. This law did not impose or require an employee benefit structure on any benefit plans, and say what you had to provide or not provide. It merely said, this is the cost -- if you do provide it, this is the minimum cost.
It did not -- the impact of this law, as far as cost regulation, did not really affect what had to be provided. It does affect shipping decisions. And it's worth noting that, to get a better sense of Rutledge, the decision itself, Sotomayor actually just said, the logic of Travelers decides this case. So you're back to looking at Travelers. Which, some could view Travelers as having flaws. But again, this is the impact of this decision is, look at the logic of Travelers.
The cost uniformity -- one of the arguments was, well, wait a minute, now I'm going to have different costs in Arkansas. Arguments of PCMA, that the arguments why the law should preempt it is, I'm going to have different costs in Arkansas than I am in any other state. And this isn't uniform administration of a plan. And this decision says, cost uniformity is not an object or a goal of preemption. And that is consistent with the concept of Travelers, and that preemption should not regulate cost.
As far as whether or not the Act 900 regulates plan design, the decision was, no. It does not require any type of benefit. It simply establishes a floor for the cost if a plan so chooses to provide that benefit. Again, same as Travelers, it does not prohibit or require any type of coverage. Well, what about the plan administration, does not Act 900 interfere with plan administration?
You've got -- I talked about earlier, this Act 900 has its own dispute administration mechanism, its own appeal procedures. It also has its own right to deny benefits from the retailer. And the decision provides that it's just -- that the administrative appeal procedures imbedded within Act 900 is really just another dispute mechanism. That if you take out -- if you take it to an extreme, if you take out the concept that you can't have administrative procedures to an extreme, well that would really affect all types of dispute resolutions, other than ERISA.
In other words, arbitration, all those things. You can't -- the decision's position is, there has to be a limit as to how far you will prevent plan administration or dispute resolution mechanisms, and that this doesn't go too far. It's just another dispute mechanism, dispute resolution mechanism.
What about the right to deny -- or to deny dispensing the drug? And that this was -- the decision was, well, this was in the, really the purview of the PBM. That doesn't really affect the plan. It's not really an impact on the plan or a requirement that the plan provide coverage or not provide coverage. It's merely that this action lies with the PBM that refused to provide coverage at the same cost.
So in other words, if the PBM set up a structure where it's not providing cost at the pharmacy's cost, well, then that's a decision by the PBM, and it's not really an impact on the plan. And as far as operational efficiencies, or national uniformity, the decision provided that, well, operational -- nothing in ERISA guarantees that you have national pricing, as far as pharmaceutical benefits. So it can be -- it's okay that there's a difference from state to state.
On the second prong of, can you have ERISA preemption as to whether or not the law references ERISA. They look to whether or not something references -- whether or not a state law references a plan really looks to whether the act -- it acts immediately and exclusively on ERISA plans, or where the existence of an ERISA plan is essential.
And the decision looks at Act 900 and says, there's nothing here that's really based on having -- where you must have an ERISA plan, or that specifically talks about ERISA plan. It's only talking about pharmaceutical benefits provided by the retailer that are reimbursed by the PBM. It applies to ERISA plans, non-ERISA plans. Again, you're very similar to Travelers here, in the thinking. There is no connection with ERISA in terms of a specific reference to an ERISA plan. And it's not essential.
One important -- there was in one important reference here with respect to Gobeille, as far as, well, doesn't this really impact plan administration, this law. And there was a note that says -- that basically draws a distinction between Gobeille and what we're dealing with here, where they said that PCMA does not suggest that there's any overlap with ERISA's mechanisms -- overlap from Act 900's mechanisms with ERISA mechanisms. Whereas, Gobeille, you did have an overlap.
By that I mean, Gobeille you had a situation where the provider, the health plan itself, whether insured or self-insured, had to file reports with the state. Reports similar to reports that would be provided under ERISA, such as a form 5500. And here, there is no such overlap between the statute and ERISA. They're separate in terms of this decision, as far as what's being covered. So that is one area where they tried to draw the line between the very broad reach of Gobeille, and the very limited reach of preemption, as discussed in Travelers.
As far as the other key takeaways, as far as what does this all mean? It likely means that the 8-0 decision, the very kind of brief decision, from a 50,000-foot level, it could be viewed as, you know, this maybe the last ERISA preemption case we get in a while. This was highly sought after by a number of states. It seemed to be, I guess in the Court's view, a straight forward case.
And I think the thinking is that, well, at least when we talked about it in October, we had hoped that there would be -- I guess everybody kind of hopes when a case gets to the Supreme Court, that Supreme Court's really going to clean up the law this time. They're really going to make it right. And there's all these cases that don't make any sense. And this time they're going to synthesize it. And that's not what happened.
They took their existing case law and they made it fit into Travelers. And you do see a concurrence in Justice Thomas' concurrence to this decision. You see where he tries to clean up a little bit. You kind of note that the law on ERISA preemption is too muddy. And in his view, it isn't how it should be read. But that's not what the main decision deals with.
It does deal with the exiting kind of murkiness of the two cases, Gobeille and Travelers, and tries to make sense of that. And does -- I think this is going to be the end of -- for the short term, end of the Supreme Court's look thinking about preemption. And that it's going to give a lot of control to the states to help them control costs. So it's probably not going to be the last time we see cases such as this.
With that, it's really a very short decision. Like I said earlier, the syllabus, itself, almost takes as long to read as the heart of the decision. But with that, I think we can open the floor to any questions.
Nick Marr: Great. Thanks very much, Anthony. And we've got one caller on the line right now. We'll go to you now.
Joy Madero: Hello. This is Joy Madero. And I understand this case is health and welfare plans. But implications for pension plans, in particular, the efforts by states to establish mandate for employers who do not provide a plan to do, I guess, their kind of an IRA type style program. So it sounds to me that these would not be preempted.
Anthony Provenzano: Thanks so much for the question. My reaction is is that those would still be -- I still could view a distinction between the Travelers and this Rutledge case, where you already have the employer's right to establish or not establish a benefit plan, which is an essential part of ERISA.
And the case you're talking about, where states are trying to get into the business of forcing employers to offer a benefit plan, I would still think that the obligation to actually provide a benefit plan would be -- it would specifically relate to an employee benefit plan. This is just my reaction. It would specifically relate to an employee benefit plan. And it certainly would be in connection with or central to the idea of providing an employee benefit plan, that that would still be too far -- that that would be preempted. Because it would actually cause the creation of an employee benefit plan.
Joy Madero: So in a sense that issue is still up for litigation?
Anthony Provenzano: Yes. That would be my reaction.
Joy Madero: Thanks.
Nick Marr: Great. I'll offer another reminder, since we don't have any more questions on the line right now. So no one on, yet, Anthony. I don't know if there's anything that you didn’t cover in your opening you'd like to get to. Give you the chance right now.
Anthony Provenzano: No. I think that's how states are going to -- there's two ways, the reasons why these cases come up, is because states realize they can't go directly at an employee benefit plan. So they can go after administrators. They can go after TPAs. They can go after providers, doctors, or health -- or pension. You raised a great point. Can they go after -- what about your TPAs, your Vanguards, your -- you know, your big major TPAs. What kind of requirements can they impose on them? And that's going to be -- that will generate a lot of litigation.
Because when I think of states trying to -- I don't want to get too far ahead of my skis, but I can just see that generating a lot of litigation. But that is how states, I think, are -- that's always been how they've tried to go after these plans. If they can't go after the plan, or the employer directly, they will go through the side door to try to go after the people that are downstream from the plan. In this case, it's the retailer, the pharmacy, the pharmaceutical benefits -- and it's the middle man, the PBM.
And so from the pension side, I think it's the same thing. What they're going to do is go downstream to get the other people that are involved. To try to regulate some aspect. Whatever ill they think is happening, that's how they would try to tackle it.
Nick Marr: So Anthony, we might end a little early. I’ll turn the floor back to you if you want to offer any closing remarks. If we get a question, I'll let you know. But otherwise, we can wrap up a little bit early this afternoon.
Anthony Provenzano: No. I just appreciate your time. And I think this will keep -- this decision -- it's already been out there so it's not like it's going to open the floodgates. Like I said, 40 states have already had this. So maybe it will, over the next five years, maybe it'll -- we'll just have to come up with newer ideas. If they can win this, maybe they can do something else.
But I think the very short term is that they've already -- this is a battle they've already been trying to win. And maybe cases they've lost in the past on this issue—there was a case in the Eighth Circuit. There was a case, I believe, in the D.C. Circuit—that now, I think, are going to be revisited, or those legislatures will review those issues. But I think PBM regulation is going to be here for a while.
Nick Marr: Great. Well, thank you very much Tony, and on behalf of The Federalist Society, I want to thank you for the benefit of your valuable time and expertise today in covering this case. And to our audience for calling in with the good questions. As always, be keeping an eye on your emails and our website for announcements about upcoming Teleforum calls and events, so tune into those. I'll see you there. Thank you all for joining us today. We are adjourned.
Dean Reuter: Thank you for listening to this episode of Teleforum, a podcast of The Federalist Society’s practice groups. For more information about The Federalist Society, the practice groups, and to become a Federalist Society member, please visit our website at fedsoc.org.