U.S. Supreme Court deals big blow to pharmacy middlemen

The U.S. Supreme Court on Thursday ruled 8-0 that states have broad powers to regulate powerful pharmacy middlemen without being preempted by federal law.

The case was brought by the $400-billion-a-year industry, known as “pharmacy benefit managers,” against the state of Arkansas over a 2015 law that set a minimum, market-based rate the middlemen had to reimburse pharmacists for the drugs they dispensed.

More than 70% of the industry is controlled by three corporations: CVS Caremark, Express Scripts and OptumRx. 

Its critics say those companies are often in direct competition with retail pharmacies, and they use obscure, anti-competitive reimbursement practices to underpay them. This has driven many community pharmacists out of business and deprived many small communities of pharmacy access, Arkansas Attorney General Leslie Rutledge argued.

In Ohio and elsewhere, state legislatures have been taking steps to rein in PBMs that deal with Medicaid programs. Ohio found that in 2017, CVS Caremark and OptumRx charged taxpayers $244 million more for Medicaid drugs than they paid pharmacists, who complained that they often lost money filling Medicaid prescriptions.

In the Arkansas case, the state passed a law requiring PBMs to at least pay pharmacies’ wholesale costs for prescription drugs — regardless of whether the PBM was operating in the Medicaid program or on behalf of a company’s self-insured program, which could be operating in multiple states.

The U.S. Solicitor General and 46 other state attorneys general signed up to help defend Rutledge in the case brought against her by the PBM industry group, the Pharmaceutical Care Management Association.

That group argued that the Arkansas law was unconstitutional because it preempted the Employee Retirement Income Security Act — or ERISA — a federal law that regulates major employer health plans. PCMA argued that Arkansas was regulating the health plans by imposing minimum reimbursements for drugs on the PBMs.

The Supreme Court disagreed.

“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 by ERISA,” Associate Justice Sonia Sotomayor wrote for the court. Justice Amy Coney Barrett didn’t participate in the case because she wasn’t yet on the court when oral arguments were held in early October.

The boundaries of ERISA’s jurisdiction have been disputed for years and Thursday’s ruling is expected to help define them.

PCMA, the industry group, said the ruling could erode protections for health plan beneficiaries and drive up drug costs.

“We are disappointed in the Court’s decision that will result in the unraveling of federal protections under the Employee Retirement Income Security Act of 1974,” it said in a statement. “As states across the country consider this outcome, we would encourage they proceed with caution and avoid any regulations around prescription drug benefits that will result in higher healthcare costs for consumers and employers.”

A national group representing small pharmacists was ecstatic.

“This is a historic victory for independent pharmacies and their patients. And it confirms the rights of states to enact reasonable regulations in the name of fair competition and public health,” said National Community Pharmacists Association CEO B. Douglas Hoey.

While PBMs say the Arkansas law is an improper intrusion on federal, Scott J. Knoer, CEO of the American Pharmacists Association, said PBMs have long been improperly intruding elsewhere.

“For years, PBMs have threatened the sacrosanct relationship between pharmacists and their patients and have never been forced to answer to any authority for their actions,” he said in a statement. “This opinion redresses that imbalance and returns the power to protect the interests of patients to the states and other local authorities, where it belongs.”