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Medicare and ERISA Preempt Arkansas Pharmacy Benefits Manager Law

On Behalf of | Aug 2, 2018 |

The Eighth Circuit Court of Appeals, in Pharmaceutical Care Management Association v. Rutledge, has held that Medicare Part D and ERISA preempt an Arkansas statute that imposed regulations on pharmacy benefits managers (“PBMs”).

Facts. In 2015, Arkansas passed legislation that sought to prevent pharmacies from being forced to sell generic prescription drugs at a loss by requiring that PBMs reimburse the pharmacies at a price equal to the cost of acquiring the drugs from wholesalers. In particular, the law provided a “decline-to-dispense” option whereby pharmacies could refuse to dispense a drug if they were to lose money on the transaction.

In response, Pharmaceutical Care Management Association (“PCMA”), whose membership includes the nation’s leading PBMs, filed a lawsuit asking the court to rule that ERISA and Medicare preempted Arkansas’ PBM legislation. The federal district court assigned to the matter determined that the state law was preempted by ERISA but not Medicare Part D.

Both Arkansas and PCMA responded by filing appeals with the Eighth Circuit.

Medicare Part D. Under Medicare Part D, a state law is preempted if: (1) CMS has established standards in the area; and (2) the state law acts with respect to those standards.

Medicare Part D also requires that pharmacy networks be structured so that a certain percentage of beneficiaries live within a certain distance of a network pharmacy.

Eighth Circuit. Upon reviewing the matter, the Eighth Circuit reversed the district court, finding that the Arkansas law acted with respect to two CMS standards: the “negotiated prices” standard and the “pharmacy access” standard.

The Eighth Circuit observed that the negotiating prices standard establishes requirements for prescription drug coverage and access to negotiated prices. Thus, the court determined that, by regulating the price of retail drugs, the legislation acted with respect to CMS’s (negotiated prices) standard.

With respect to Medicare Part D, the district court found that it did not preempt the Arkansas statute because its decline-to-dispense provision did not render a pharmacy out-of-network. The Eighth Circuit disagreed, finding that a pharmacy that refused to dispense drugs was, in effect, an out-of-network pharmacy. Accordingly, the court ruled that Medicare Part D also preempted the state law because it acted with respect to the pharmacy access standard.

The court also ruled that the statute was preempted by ERISA because it had a prohibited “reference to” ERISA, and because, contrary to Congressional intent, it interfered with national uniform administration of employee benefit plans.