The U.S. Supreme Court handed down a decision on Thursday of last week that will impact state-level regulation of pharmacy benefit managers (PBMs) by holding that an Arkansas law regulating PBMs was not preempted by the Employee Retirement Income Security Act (ERISA). The decision capped off a busy week in litigation for PBMs as on Monday the Second Circuit held that a business transaction between a PBM and an insurer was not a fiduciary act under ERISA. Although the cases involve distinct issues, they provide some clarity for PBMs on the interplay between business decisions and litigation risks, and some expectation for future regulation at the state-level.
The Second Circuit
Last week started with the Second Circuit upholding a district court decision dismissing a class action against insurer Anthem, Inc. and PBM Express Scripts, Inc. The lawsuit, In re Express Scripts/Anthem, was brought by Anthem plan participants, alleging that it was a fiduciary breach for the insurer and the PBM to enter into a 2009 agreement, as a condition of Express Scripts purchasing three PBM companies from Anthem, that permitted Express Scripts to charge higher prescription drug prices under Anthem health plans than PBMs charge to other health plans. The three-judge panel at the Second Circuit unanimously backed the district court’s holding that Anthem and Express Scripts were not acting as fiduciaries when entering into the 2009 agreement and setting prescription drug prices. The court reasoned that “[t]he decision to sell a corporate asset is not a fiduciary decision — even if the sale affects an ERISA plan.” Further, Express Scripts was not acting as a fiduciary because (1) a PBM does not exercise discretion when setting prices according to a contractual agreement; and (2) the PBM did not control its own compensation.
In an era where ERISA fiduciaries and fiduciary-adjacent entities face many novel theories of fiduciary breach by plan participants, the Second Circuit’s decision largely shields PBMs from such claims. Given the public’s attention on prescription drug prices, however, this issue is likely not over and may find its way to the Supreme Court.
The Supreme Court
The week ended with a Supreme Court decision that will likely leave PBMs facing increased scrutiny and regulation from state governments in the future. In Rutledge v. Pharmaceutical Care Management Association, the Court held that ERISA does not preempt states’ ability to regulate PBMs and other members of the health care supply chain. The decision was written by Justice Sotomayor, and was joined by all Justices except Justice Barrett, who took no part in the decision. Justice Thomas authored a concurring opinion.
Arkansas enacted Act 900 in 2015, regulating the rates of reimbursement that PBMs make to pharmacies for certain drugs covered under prescription drug plans. Arkansas and forty-six state attorneys general banded together to appeal an Eighth Circuit decision holding that ERISA preempts Act 900. The Supreme Court overturned the Eighth Circuit and found state regulations that merely increase costs for ERISA plans without forcing the plans to adopt any particular scheme of substantive coverage are not preempted by ERISA. Nor did Act 900 “refer to” ERISA because it regulates PBMs regardless of whether the plans they service are governed by ERISA. The Supreme Court’s decision opens the door to regulation on PBMs by other states. Considering the bipartisan effort by state attorneys general, it would be safe to assume that PBMs can expect additional regulation in the future.
Beyond state regulation of PBMs, Rutledge may be a broader signal that the Court would like to curb ERISA preemption. The opinion notes that ERISA only preempts states’ ability to regulate employee benefit plans, and Justice Thomas’ concurrence opines that Supreme Court precedent has veered from the plain text of ERISA’s preemption provision and transformed it into a “vague and ‘potentially boundless’” clause. Rutledge may potentially clear the way for future decisions pulling back on ERISA preemption in other contexts.