Supreme Court Rules States Can Regulate Pharmacy Reimbursement Rates without Triggering ERISA Preemption in Important Case for 340B Reimbursement Protection

By , Published On: December 10, 2020

On December 10, 2020, the Supreme Court ruled in a unanimous decision (8-0) in Rutledge v. Pharmaceutical Care Management Association (PCMA)[1] that an Arkansas law that requires Pharmacy Benefit Managers (PBMs) to reimburse pharmacies for the cost of prescription drugs at no less than the pharmacies’ acquisition costs is not preempted by the Employee Retirement Income Security Act of 1974 (ERISA).

This significant decision upholding the legality of Arkansas Act 900 clears the way for enforcement of similar laws designed to protect federal 340B drug discount program covered entities and their contract pharmacies from unfair discriminatory payment practices increasingly used by PBMs.

Prior to the enactment of Act 900 in 2015, PBMs could reimburse Arkansas pharmacies at a rate that was significantly less than the pharmacy’s cost to acquire a drug, forcing many pharmacies to lose significant profits or even close permanently. Pharmacies essentially must participate in major PBM networks and frequently complain that reimbursement is decreasing below cost.  Act 900 sought to remedy this issue by requiring PBMs to reimburse Arkansas pharmacies at a price equal to or higher than what they paid to buy the drug from a wholesaler.

The central issue in the case focused on whether ERISA precludes state laws that, like Arkansas Act 900, create enforcement mechanisms to require that PBMs do not pay pharmacies less than their drug acquisition costs. Writing for the majority, Justice Sotomayor explained that ERISA does not preempt the Arkansas law because it is not one that “governs a central matter of plan administration” and thus does not “relate to” an employee benefit plan.  It also does not “refer to” a plan because it regulates all PBMs and not just ERISA-covered employer plans. The full Rutledge v. PCMA opinion may be found here.

The decision provides clarity on several key features often found in 340B program-specific legislation:

340B Pricing Discrimination

Increasingly, PBMs have begun to implement a two-tier pricing model in which 340B covered entities are reimbursed at lower rates than non-340B entities. PBMs justify this model by arguing that because 340B covered entities pay less for their 340B drugs, they should also be reimbursed at a lower rate. This pricing model reduces important savings that 340B covered entities rely on to provide services to patients in underserved communities.

In response to the implementation of this new pricing model, some states have enacted laws prohibiting PBMs from discriminating in regard to reimbursement, fees, and/or network access on the basis of an entity’s participation in the 340B Drug Pricing Program or mandating that 340B entities be paid a minimum amount.  Until Rutledge v. PCMA, it was unclear whether those laws applied to ERISA-covered plans.

In addition to reimbursement discrimination, or pickpocketing, PBMs often preclude the use of mail-order pharmacies and/or force patients to use their own mail-order pharmacies as a means of increasing profits and having more control over patient choice. The decision provides state legislatures with clear guidance from the Supreme Court to consider when drafting legislation to protect pharmacies and patients against these unfair competitive practices by PBMs.  PBMs also have opted to exclude 340B covered entities and their pharmacies from their networks entirely. The decision clarifies the opportunity for states to expand their anti-price discrimination laws to protect 340B covered entities against carve-outs.

Feldesman Tucker Leifer Fidell LLP (FTLF) has worked with state Primary Care Associations to develop 340B anti-discrimination legislation, including protections passed in West Virginia and moving forward in other states.  If you have any questions regarding the decision or would like to discuss ways your state legislature might be able to provide protection for 340B program covered entities, please contact Jason Reddish at jreddish@ftlf.com or Michael Glomb at mglomb@ftlf.com.


[1] No. 18-540, slip op. (December 10, 2020).