Supreme Court Decision Upholding Arkansas PBM Rule Carries ERISA Preemption Implications

December 11, 2020

The Supreme Court ruled 8-0 in favor of a 2015 Arkansas law regulating pharmacy benefit manager (PBM) reimbursements, reversing a lower court order blocking the Arkansas law.

The Arkansas law:

  • Required PBMs to reimburse pharmacies for generic drugs at a rate equal to the wholesaled invoice amount the pharmacy paid for the drug inventory,

  • Mandated PBMs to use updated maximum allowable cost lists, and

  • Enabled pharmacies to decline to dispense when a particular transaction would cause them to lose money.

No ERISA preemption:  In a unanimous decision, the Supreme court ruled ERISA does not preempt the Arkansas law because it only regulates the relationship between PBMs and pharmacies.  The state law does not make "reference to" or have an impermissible "connection with" ERISA health plans.  Nor does the law regulate plans themselves or their relationships with PBMs, pharmacies, or plan participants.

The Court's decision may pave the way for additional state regulation and health reform that indirectly impacts the cost of employer health plans at the state level.  As health care reforms make little progress at the federal level, states may engage in additional state level reforms to decrease health care costs for their state populations. 

Could surprise billing be addressed through state reforms?  As Congress approaches the end of the year, federal action on surprise billing seems less likely.  Justice Sotomayor wrote in her opinion that “…not every state law that affects an ERISA plan or causes some disuniformity in plan administration has an impermissible connection with an ERISA plan.  That is especially so if a law merely affects costs.”  Following that logic, state approaches like bans on surprise billing by providers or limits on out-of-network charges may not be preempted by ERISA either.