December 2020 |
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Victory in the Supreme Court for Independent Pharmacies

States Have More Flexibility to  Regulate Abusive Practices of Pharmacy Benefit Managers

On December 10, 2020, independent pharmacies scored a huge victory in the Supreme Court of the United States. The unanimous, landmark decision of Rutledge v. Pharmaceutical Care Management Association will pave the way for states to reign-in the abusive pricing and reimbursement practices that have caused many independent pharmacies to close their doors. The closure of independent pharmacies is particularly problematic because they tend to serve rural communities with smaller populations. Forcing them out of business leaves patients with diminished access to care. Following Rutledge, we may see additional state regulation of PBMs that help independent pharmacies keep their doors open.

A.     A Little Background: PBMs Are Part of Massive Healthcare Conglomerates

Many PBMs are part of massive healthcare conglomerates that dominate the insurance and pharmacy market. These huge healthcare companies often own insurance companies, retail pharmacy chains, and pharmacy benefit managers. CVS Health is a great example. It owns Aetna, its own retail pharmacy chain, and CVS Caremark, which is a PBM. These players are so large that independent pharmacies are forced to play by their rules — including their PBM’s rules — or quit playing the game altogether. This is because PBMs serve as the middleman between insurance companies and pharmacies. To accept insurance is to submit to the PBM and its rules. Unfortunately, however, these rules often stack the deck against the independent players and abusive pricing and reimbursement practices shut them down.

B.     Spread Pricing – An Abusive Practice That Pads PBM Pockets and Closes Independent Pharmacies

One abusive practice that closes independent pharmacies concerns how PMBs charge plan sponsors and reimburse pharmacies. Generally, PBMs function as an intermediary between prescription drug insurance plans and pharmacies. When a patient presents a prescription to a pharmacy, the pharmacy accepts its and checks with the relevant PBM to confirm coverage under a drug plan. If covered, the pharmacy fills the prescription and bills the PBM who pays the pharmacy a contracted amount. In turn, the plan sponsor reimburses the PBM pursuant to a different contracted amount. The sponsor usually reimburses the PBM an amount that is greater than what the PBM paid to the pharmacy. This spread is one of the ways that PBMs generate profit.

Moreover, PBMs are generally in control of this spread. They determine how much to pay pharmacies based on “maximum allowable cost” (“MAC”) lists that they establish and administer themselves. These MAC lists are often arbitrary and result in abusive reimbursement practices. For example, these self-established and administered lists can result in pharmacies dispensing drugs at a loss because the PBMs do not pay the pharmacy enough. This concern caused Arkansas to pass the law at the center of the Rutledge case. Obviously, filling prescriptions at a loss is not a sustainable business practice. However, for these large healthcare companies and their PBMs, forcing independent pharmacies out of business is good. Closures result in less competition and less competition naturally results in greater market share for those left standing. Ultimately, the PBMs do not care whether independent pharmacies dispense drugs at a loss.

C.     Arkansas Passes Law Protecting Pharmacies From Abusive Reimbursement Policies

Arkansas passed Act 900 in 2015 in response to concerns that PBMs were not reimbursing pharmacies enough to cover amounts pharmacies paid to wholesalers to acquire drugs. Under the Arkansas law, PBMs are generally required to reimburse pharmacies an amount that at least covers the pharmacies’ acquisition costs. The law has three main components:

  • It requires PBMs to timely update the MAC lists that establish pharmacy reimbursement rates;
  • It requires PBMs to provide administrative appeal procedures for pharmacies to challenge reimbursement prices that are below the pharmacy’s acquisition costs. If the pharmacy could not have acquired the drug at a lower price from its typical wholesaler, the PBM must increase its reimbursement rate to cover the pharmacy’s costs; and
  • Pharmacies are allowed to decline selling drugs to plan beneficiaries if the PBM will reimburse the pharmacy for less than its acquisition costs.[1]

 D.     The Supreme Court’s Landmark Rutledge Decision Gives States Much Needed Flexibility to Protect Independent Pharmacies

Although the Arkansas law only applies to Arkansas, the Rutledge case opens the door for other states to enact similar regulations with confidence that such regulations can withstand legal scrutiny at the highest federal level. In Rutledge, the Supreme Court considered whether a federal statute that regulates employee benefit plans – i.e., ERISA – preempted the Arkansas law. Through their trade association, the PBMs argued in Rutledge that ERISA applies to override, or preempt, the Arkansas law. The Court disagreed and held that the Arkansas’ law is “merely a form of cost regulation” not subject to ERISA preemption.

ERISA does not preempt state rate regulations that merely increase costs or alter incentives for ERISA plans without forcing plans to adopt any particular scheme of substantive coverage.”[2]

Rutledge is a landmark decision for Arkansas, independent pharmacies, and other states wishing to regulate PBMs because ERISA’s preemption provision is broad. It often serves as one of the largest hurdles for state regulators seeking to reign-in abusive practices of PBMs. The preemption provision has not always been applied consistently and different courts have adopted different approaches. The Rutledge decision provides some degree of confidence that state regulations mirroring Arkansas’ Act 900 will survive an ERISA preemption challenge. The Rutledge case is a huge victory for independent pharmacies.

If you are an independent pharmacy or have questions regarding PBMs or payor audits, do not hesitate to contact the Attorneys at Elliott Sauter, PLLC. We can be reached at (469) 758 – 4150.

[1] See generally, Ark. Code Ann. § 17-92-5017.

[2] Rutledge v. Pharm. Care Mgmt. Ass’n, No. 18-540, 2020 U.S. LEXIS 5988, *11 (2020).


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