By: Danny McDermott, J.D. Candidate 2024, James E. Rogers College of Law

In late 2020, the Supreme Court published its opinion in Rutledge v. Pharmaceutical Care Management Association, empowering states to further regulate pharmacy benefit managers (PBMs) and holding that such state laws are generally not preempted by the Employee Retirement Income Security Act (ERISA), so long as such laws neither make reference to nor have an impermissible connection with ERISA employee benefit plans. This blog will describe the impetus and reasoning behind Rutledge, assess the impact of the decision on efforts to regulate PBM conduct in Arizona and elsewhere, and discuss its relevance for state health care cost-control regulations more broadly.

A. PBMs and State Laws Regulating PBMs

PBMs are third-party administrators that manage prescription drug benefits for health insurance plans and payers. Among other things, PBMs develop formularies, which are lists of prescription drugs that will be covered by the plan, negotiate with drug manufacturers to attain rebates and discounts on those drugs, and contract with pharmacies to establish provider networks that will dispense the drugs to beneficiaries.[1]

PBMs have garnered considerable criticism and ire, with many stakeholders blaming them for contributing to rising and unnecessarily high prescription drug spending while, at the same time, failing to pay independent and rural pharmacies adequate reimbursement. For one, reimbursement rates that PBMs pay to pharmacies for dispensing drugs are based on Maximum Allowable Cost (MAC) lists, which set the upper limit that the PBM will pay a pharmacy for branded or generic drugs. MAC lists are generally not disclosed to health plans and, therefore, the PBM can charge an employer a higher price than it pays a pharmacy for the same drug (referred to as “spread pricing”). Additionally, the rebates that PBMs negotiate with drug manufacturers are often calculated as a percentage of a drug’s list price. Because PBMs keep a share of the rebates they negotiate, they have an incentive to prioritize higher-priced drugs over equally effective, less expensive generics. Finally, PBMs may incorporate “gag clauses” into their network pharmacy contracts that prevent pharmacists from telling patients about lower cost alternatives to prescriptions covered through their insurance. 

In response to these practices and power-dynamics, nearly every state has enacted some law regulating PBM conduct.[2]These laws may include banning gag clauses, requiring PBMs to regularly update their MAC lists, and introducing greater transparency (e.g., mandatory reporting of the amount of rebates negotiated and passed through to the payer). Such laws have invariably been met with legal challenges, primarily from the Pharmaceutical Care Management Association (PCMA)—the trade association representing the nation’s largest PBMs—and often on the grounds that they are preempted by ERISA. 

B. A (Very) Brief Summary of ERISA Preemption 

While ERISA was primarily intended to regulate private pension plans, it has significant implications for employer-provided health benefit plans.[3] ERISA does not govern “fully-insured” health plans purchased by an employer for its employees, but it does govern “self-funded” employer plans that collect premiums from employees and take on the responsibility of paying for plan participants’ medical claims. Crucially, ERISA preempts “any and all state laws insofar as they may now or hereafter relate to any employee benefit plan” covered by the statute.[4] Because roughly two-thirds of workers are covered by self-funded plans, the ERISA preemption clause has hampered state health reform efforts for decades.[5] Relatedly, courts have also found that because PBMs manage benefits on behalf of ERISA plans, a regulation of PBMs “function[s] as a regulation of an ERISA plan itself.”[6] 

The Supreme Court has consistently held that a law “relates to” ERISA plans if it has an impermissible connection with or reference to such a plan.[7] According to the Court, a state law has an impermissible connection with ERISA plans if it: (1) governs a central matter of plan administration, (2) interferes with nationally uniform plan administration, or (3) imposes acute economic effects that force an ERISA plan to adopt a certain scheme of substantive coverage or effectively restrict its choice of insurers.[8] A state law references ERISA when it “acts immediately and exclusively upon ERISA plans . . . or where the existence of ERISA plans is essential to the law’s operation.”[9]

C. Arkansas Act 900 and Rutledge v. PCMA

The Arkansas legislature passed Act 900 in 2015 to address concerns that many pharmacies, particularly independent and rural pharmacies, were losing money on prescriptions and, as a result, being forced to close. Independent pharmacists are often compelled to accept lower reimbursement rates for prescriptions from PBMs—in some cases lower than the cost that the pharmacy paid to acquire the drug from a wholesaler—because they want to participate in a PBM’s network, which would give them access to more patients. In short, Act 900 required PBMs to reimburse pharmacies for generic drugs at a price equal to or higher than the price that the pharmacy paid to acquire the drug from a wholesaler.[10]

After the law was enacted, PCMA promptly filed suit, challenging the law on the grounds that it was preempted by ERISA. In 2017, a District Court ruled in favor of PCMA and held that ERISA preempted Act 900, and the Eighth Circuit affirmed that holding a year later. In 2020, the Supreme Court granted certiorari to clarify ERISA preemption in this area and handle the circuit split resulting from PCMA’s earlier challenges of similar regulations in Vermont and D.C.

In Rutledge v. PCMA, the Court unanimously concluded that Act 900 had neither an impermissible connection with nor reference to ERISA plans and was therefore not subject to preemption.[11] Justice Sotomayor, writing for the Court, cautioned that not every that law that affects ERISA plans, causes some disuniformity in plan administration, or merely affects plan costs without binding plans to any particular choice is preempted. In other words, “state rate regulations that merely increase costs or alter incentives for ERISA plans without forcing plans to adopt any particular scheme of substantive coverage” are not preempted. 

The Court held that Act 900 was a permissible form of rate regulation, akin to a hospital surcharge that applied only to non-Blue Cross Blue Shield plans which was upheld decades earlier.[12] PBMs might have to reimburse pharmacies more for certain drugs in Arkansas than in other states, and they may pass those costs on to plans, but ERISA does not require cost uniformity across states. Summarizing the Court’s precedent, the Rutledge opinion provided a rundown of laws that would trigger ERISA preemption: a state law would be preempted if it (1) requires plans to provide specific benefits; (2) binds plan administrators to specific rules for determining beneficiary status; or (3) has such an economic impact on plan decision-making that it essentially forces plans to adopt a certain scheme of substantive coverage. 

One year later, the Eighth Circuit, applying Rutledge, upheld an even more sweeping North Dakota law regulating PBMs.[13] More recently, PCMA is appealing a 2022 decision from the U.S. District Court for the Western District of Oklahoma, which held that ERISA preempted none of the provisions in a similar Oklahoma law.[14]

D. What Does Rutledge Mean for PBM and Cost-Control Regulations More Broadly?

Post-Rutledge, many PBM regulations across the country are seemingly safe from ERISA’s grasp. 47 states, including Arizona, have enacted some form of legislation regulating PBMs, with 42 such laws passed in 2021 and 2022 after Rutledge was decided.[15] As noted in Rutledge, common PBM regulations—for example, reimbursement standards, banning gag clauses, or requiring disclosure of spread pricing—do not require ERISA plans to offer any particular benefit or relate to determining beneficiary status. 

Arizona has enacted several laws regulating PBM conduct.[16] Arizona requires PBMs to update their MAC lists every seven days and establish a process for pharmacies to appeal MAC pricing reimbursement; prohibits PBMs from charging a pharmacy a fee for the claim adjudication process; prohibits gag clauses; and prohibits PBMs from requiring a pharmacy to collect copayments from patients that exceed the total submitted charges by the applicable network pharmacy. In 2022, a bill was also introduced in the state senate that would prohibit PBMs from steering or directing a patient to use the PBM’s affiliated pharmacy. Still, Arizona does not go as far as many other states, and Arizona legislators have not attempted to prohibit spread pricing or require PBMs to report pricing and rebate information. Were these regulations to be proposed here, they would be safe from preemption and enforceable against PBMs, regardless of whether they manage benefits for self-funded ERISA plans. 

Stepping back, Rutledge clarifies that states may regulate third-party administrators (TPAs) that plans contract with to manage their benefits, and that cost-control regulation is presumptively beyond ERISA’s preemptive scope. As an example, a state could set the rates that providers may charge for certain telemedicine services and potentially the amount that TPAs reimburse providers for those services, though it still could not mandate that self-funded plans cover telemedicine services since doing so would be preempted as requiring coverage of certain services or a substantive scheme of coverage. 

More newsworthy, Rutledge’s sanction of cost-control regulations presumably applies to efforts to limit surprise out-of-network bills. The No Surprises Act took effect in 2022 and provides some consumer protections against balance billing for emergency care,[17] but it acts as a floor and allows states to adopt further limitations on billing for out-of-network emergency care. Even though balance billing protections regulate both providers and payers—prohibiting providers from sending surprise bills but requiring payers to cover out-of-network services at in-network rates—Rutledge seems to empower states to adopt further surprise billing protections so long as they do not force plans to provide specific benefits, bind plan administrators to specific rules for determining beneficiary status, or adopt any particular scheme of substantive coverage. 

A 2021 District Court ruling out of Texas seemed to adopt this view: “This Court can find no legally meaningful distinction, for purposes of express ERISA preemption, between an Arkansas law that regulates the rate at which PBMs reimburse pharmacies, and the Texas emergency care statute, which regulates the rate at which insurers and insurance plan administrators reimburse [out-of-network] emergency care physicians.”[18] Balance billing laws like Texas’s merely increase costs for ERISA plans without forcing them to adopt any particular scheme of substantive coverage.

In summary, the exact bounds of the Rutledge decision are still uncertain and will likely be tested in litigation over the coming years. Nonetheless, Rutledge is a narrowing of the Court’s application of its ERISA preemption doctrine and an obvious victory for states seeking to regulate health care costs generally and PBMs specifically. 

[1] Pharmacy Benefit Managers and their Role in Drug Spending, Commonwealth Fund (Apr. 22, 2019), https://www.commonwealthfund.org/publications/explainer/2019/apr/pharmacy-benefit-managers-and-their-role-drug-spending. 

[2] State Drug Pricing Laws: 2017-2023, National Academy for State Health Policy (last visited Jan. 17, 2023), https://www.nashp.org/rx-laws/. 

[3] Employee Retirement Income Security Act of 1974 (ERISA), 88 Stat. 829, as amended, 29 U.S.C. § 1001 et seq.

[4] 29 U.S.C. § 1144(a) (emphasis added).

[5] 2022 Employer Health Benefits Survey, KFF (Oct. 27, 2022), https://www.kff.org/report-section/ehbs-2022-section-10-plan-funding/.

[6] Pharm. Care Mgmt. Ass’n v. District of Columbia, 613 F.3d 179, 188 (D.C. Cir. 2010).

[7] Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 96–97 (1983) (emphasis added). 

[8] Gobeille v. Liberty Mut. Ins. Co., 577 U.S. 312, 320 (2016).

[9] California Div. of Lab. Standards Enf’t v. Dillingham Const., N.A., Inc., 519 U.S. 316, 325 (1997).

[10] See Ark. Code Ann. § 17-92-707. More specifically, the law imposed several requirements on PBMs including, among other things, requiring them to: (1) update their MAC lists within seven days after a drug’s wholesale price increases; (2) provide administrative appeals procedures for pharmacies to challenge MAC reimbursement prices that were below the cost that the pharmacy paid to acquire the drug; (3) allow pharmacies to “reverse and rebill” reimbursement claims that were successfully appealed; and (4) permit the pharmacy to decline to sell a drug to a beneficiary if the relevant PBM will reimburse them less than their acquisition cost.

[11] Rutledge v. Pharm. Care Mgmt. Ass’n, 141 S. Ct. 474, 483 (2020).

[12] See New York State Conf. of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645 (1995). 

[13] Pharm. Care Mgmt. Ass’n v. Wehbi, 18 F.4th 956 (8th Cir. 2021). 

[14] See Pharm. Care Mgmt. Ass’n v. Mulready, 598 F. Supp. 3d 1200 (W.D. Okla. 2022).

[15] See National Academy for State Health Policy, supra note 2, available at https://www.nashp.org/rx-laws/. Additionally, in May 2022, Senators Chuck Grassley and Maria Cantwell introduced a bill to the Senate entitled the Pharmacy Benefit Manager Transparency Act of 2022. The proposed bill received bipartisan support and would accomplish many of the things that states have done through their own regulations, including prohibiting PBMs from engaging in spread pricing.

[16] A.R.S. §§ 20-3331, 20-3332, 44-1752. 

[17] The No Surprises Act also imposes billing and payment limitations on non-emergency services provided by out-of-network providers during visits to in-network facilities.

[18] ACS Primary Care Physicians Sw., P.A. v. UnitedHealthcare Ins. Co., 514 F. Supp. 3d 927, 941 (S.D. Tex. 2021).