The U.S. Supreme Court is scheduled to hear oral arguments Tuesday in Arkansas’ appeal of a case regarding reimbursements pharmacies receive from insurance providers. At issue is a 2015 law passed by the Arkansas General Assembly which has the potential to be a precedent-setting case.
Arkansas Solicitor General Nicholas Bronni will argue in support of the law, which sought to regulate pharmacy benefit managers (PBMs). They act as middlemen between pharmacies and insurance providers to negotiate deals on prescription drugs in an effort to find the lowest wholesale prices possible. Many pharmacies say the PBMs’ reimbursement rates are too low, causing them to lose money and, in some cases, shut down.
When the law first went into effect in September 2015, the Pharmaceutical Care Management Association (PCMA) sued. The group argued that state laws cannot preempt payments for voluntarily created employee benefit plans in private industry under the Employee Retirement Income Security Act of 1974, better known as ERISA.
To help explain the background of the case and what’s at stake, Dan Gorenstein, co-host of the health policy podcast Tradeoffs spoke with KUAR’s Michael Hibblen. Gorenstein is also the former senior health care reporter for Marketplace.
MICHAEL HIBBLEN: The Arkansas law was designed to regulate pharmacy benefit managers or PBMs. First explain what are PBMs.
DAN GORENSTEIN: Yeah, it’s not always easy to really understand what a pharmacy benefit manager is, and I think the way I’ve always tried to understand it is, you know, they are often described as middlemen. But I think the point is that large employers hire these companies, these PBMs, to negotiate deals on prescription drugs. And so a PBM’s job is to get an employer the lowest price possible for prescription drugs, and along the way they want to make a bit of money for themselves.
HIBBLEN: And this was initially set up, or at least proponents of this, say it was set up to encourage pharmacies to seek out the lowest cost generic medications.
GORENSTEIN: Yes, so what the employer wants is to pay as little for prescription drugs as possible and so the PBM has an incentive to try to control costs up and down the supply chain, and there are lots of different steps between the drug maker and you when you go to the pharmacy. One of the ways that the PBM tries to control costs is to negotiate with a pharmacy, you know, a chain pharmacy or a mom-and-pop pharmacy, and what they’ll basically do is they’ll come to a pharmacist and they’ll say, “We represent a thousand employees, and if you want that business, if you want those customers to come in your store, you’re gonna have to carry these certain drugs at the price we tell you to pay.” And what was happening in Arkansas, and what happens in other states, is the price could be so low that the pharmacy itself ended up taking a loss on that drug.
HIBBLEN: Our attorney general [Leslie Rutledge], during a conference call with reporters last week, said that has led to many of the small mom-and-pop pharmacies losing so much business that I believe she said 14% during one year were closing and citing this. The state legislature responded by putting this law into effect and the Pharmaceutical Care Management Association filed a federal lawsuit arguing states cannot regulate reimbursements. The court sided with the PCMA, an appeals court agreed. What do you expect now as this Arkansas case goes before the Supreme Court?
GORENSTEIN: Well, I expect, and you talked about this at the outset Michael, that the outcome could have a significant impact, not only on that law you all have there in Arkansas. I think this Supreme Court case could go a long way towards directing how much authority and control states have in trying to regulate drug prices and in how much states have the ability to make reforms in healthcare overall.
HIBBLEN: And 45 states and the District of Columbia have filed briefs supporting Arkansas’ case, so this is getting a lot of national attention.
GORENSTEIN: It is Michael, and I’ll tell you why it’s getting a lot of attention. And that’s because this really is on a high level, this is a battle over what states can do and what large multi-state employers can do. And basically, you’ve got this law ERISA, which applies to lots of these large employers, that basically larger employers have argued, “Look we don’t want our health insurance plans to be subject to different regulations in Arkansas and in Texas, in Oklahoma. We just want to be beholden to one set of regulations.” And in the last several years, courts have, there was a major Supreme Court case in 2016 that sided with employers in this. And one of the reasons why you’ve got so many states watching this closely is because if the Supreme Court decides in favor of employers here, in favor of the PBMs, it could kneecap states’ abilities to regulate employers and the companies that some of these employers hire to do their health insurance work.
HIBBLEN: Who are some of the groups that are supporting the PBMs?
GORENSTEIN: So you’ve got the Chamber of Commerce and the American Benefits Council, which represents 400-plus large employers, including AT&T, Pepsi, and Apple. And then, you know, you have lots of states, as you said, supporting Arkansas, as well as President Trump’s administration, the solicitor general.
HIBBLEN: Well the Supreme Court has scheduled an hour to hear this case with justices joining by conference call. The state Solicitor General, Nicholas Bronni, will speak on behalf of Arkansas and have 20 minutes. Then the U.S. solicitor general will have 10 minutes. PCMA will then have 30 minutes to make its case and then the state will have the chance to rebut that. Then justices will be able to ask questions in order of seniority. But Dan, it’s safe to say we probably won’t have a decision anytime soon.
GORENSTEIN: I think that’s right. One of the nation’s premier experts in ERISA law said it’s really hard to know how a court will rule on it, and she said to us, quote, “Lawyers and law students and even the Supreme Court justices hate ERISA because it’s so difficult to apply. It’s like putting a fence around a cloud.” And Michael, I feel like when we think about what may happen in this court ruling, it sort of underscores that it really is a potential jump ball. This law, ERISA, is murky, and I think the justices understand just how much is at stake.