Supreme Court hears arguments over states’ ability to regulate drug costs

How much leeway states have to control drug middlemen was at the heart of arguments Tuesday before the U.S. Supreme Court. 

The case, Rutledge v Pharmaceutical Care Management Association, pits 47 state attorneys general and the U.S. Solicitor General against an industry group representing three of the 20 largest corporations in the United States. 

The states are arguing that the pharmacy middlemen owned by those corporations are engaging in anti-competitive practices and driving community pharmacies out of business. 

Not only is the price of prescription drugs growing at three times the rate of inflation, officials in many states say the loss of the only pharmacy in small towns and rural communities can make it impossible for some of the poor and the elderly to reach what should be their most accessible point of care.

“When a small-town pharmacy closes here in Arkansas, it may be 30 miles to get drugs or 30 miles to get immunizations,” Arkansas Solicitor General Nicholas Bronni said. “We’re protecting those individuals in those communities.”  

For their part, the middlemen, known as “pharmacy benefit managers,” are saying that a patchwork of state regulation would drive up costs and is preempted by a federal law intended to bring uniformity to the employee-benefit marketplace.

Seth P. Waxman, the lawyer for the Pharmaceutical Care Management Association, said that if every state can make its own rules, “It’s an immense complication and it affects the benefits the beneficiaries receive. Employees of the same company will have unequal benefits from one state to another.”

Tuesday morning’s was the third argument the high court heard in its October Term. As with the others, it was held over the telephone, with the justices taking turns asking questions.

From the court’s perspective, the task was to refine the boundaries of the 1974 Employee Retirement Income Security Act, or ERISA, which applies to self-insured health plans such as those carried by many large employers.

The idea of the law is to set minimum standards for employee pensions and some health plans.

States, including Arkansas, say laws attempting to regulate pharmacy benefit managers aren’t aimed at getting in the middle of the relationship between beneficiaries and their health plans. Rather, they say, they’re trying to curb the power of huge corporations to arbitrarily set prices and warp the marketplace.

Pharmacy benefit managers are hired by insurance plans and among the things they do is contract with pharmacies. The PBMs use a non-transparent system to decide how much they reimburse pharmacies for the generic drugs they dispense.

The corporations, such as CVS Health, have been accused of using the pricing system to unfairly profit and to push out retail competition, although they deny that. 

Among its other requirements, Act 900 — the Arkansas law disputed in the Supreme Court case — requires PBMs to scrap their pricing system and instead use one based on what pharmacists pay wholesalers for drugs.

Arkansas Solicitor General Bronni said such a regulation steers clear of the federal ERISA law’s purview as laid out in an important Supreme Court precedent.

Bronni said such laws “regulate PBM reimbursement practices and (health) plans don’t control those practices. Instead, those practices are controlled by PBM-pharmacy contracts that aren’t even shared with plans.”

Waxman, the attorney for the PBMs, said such regulations very much affect the benefits employees receive from their plans. He used the hypothetical example of a driver for JB Hunt, an Arkansas-based trucking company that filed a friend-of-the-court brief in support of the PBMs.

“You’re a driver for JB Hunt, but if you try to fill your prescription in Arkansas, even though we have promised you that you can fill your prescription at this pharmacy at the coinsurance or copay obligation, you have to understand that that pharmacy has the right to refuse to give you that benefit,” he said.

It was difficult to read from the justices’ questions how they might be leaning in the case.

Early in Bronni’s presentation, Chief Justice John Roberts seemed skeptical of Bronni’s argument that Arkansas’ reimbursement regulations didn’t violate the federal ERISA law.

“At the end of the day, all this might have an impact on drug prices, but it seems to me that it’s very different and those differences really do go to what ERISA is trying to regulate,” Roberts said.

Later in the hearing, Justice Elena Kagan seemed just as skeptical of the case made by Waxman on behalf of the PBMs.

“The only thing ERISA cares about is the relationship between the plan and the beneficiary in the claims-processing sphere,” she said, summing up the states’ case. “So why isn’t that the way to look at this?”

The justices will likely discuss the case and vote in conference on Friday. They’ll release a written opinion by summer.