Part D preempts Arkansas law regulating pharmacy benefits managers

The Eighth Circuit has ruled that both ERISA and Medicare Part D preempted an Arkansas law that sought to govern the conduct of pharmacy benefits managers by mandating that pharmacies be reimbursed for generic drugs at a price equal to or higher than the pharmacies’ cost for the drug. In ruling in favor of Pharmaceutical Care Management Association (PCMA), an association of pharmacy benefits managers, the court determined both that the Arkansas law implicitly “related to” ERISA in violation of ERISA’s preemption provision and that the law “acted” with respect to standards that CMS had established, in violation of Medicare Part D’s preemption provision.

Background. In 2015, Arkansas passed Act 900, which sought to protect pharmacies from being forced to sell drugs at a loss by, among other things, requiring that pharmacy benefits managers reimburse the pharmacies for generic drugs at a price at least equal to the pharmacies’ cost in acquiring the drug from a wholesaler. The state law also included what is known as a “decline-to-dispense” option, which permitted pharmacies to refuse to dispense a drug if they were to lose money on the transaction. The PCMA, which includes as members the nation’s leading pharmacy benefits managers, filed suit in Arkansas federal district court, asking the court to declare Act 900 preempted by both ERISA and Medicare Part D. The court ruled that ERISA preempted Act 900 but that Medicare Part D did not, at which point the state appealed the part of the ruling finding that ERISA preempted the law, while the PCMA cross-appealed the determination that Medicare Part D did not.

Medicare Part D. Under Medicare Part D (42 U.S.C. §1395w-26(b)(3)), 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. The Eighth Circuit, reversing the trial court, ruled that the Arkansas law acted with respect to two CMS standards: the negotiated prices standard and the pharmacy access standard. The standard for negotiated prices is set forth in 42 U.S.C. §1395w-102, which establishes requirements for prescription drug coverage and access to negotiated prices. By regulating the price of retail drugs, the Eighth Circuit noted, Act 900 acted with respect to that standard. In effect, Act 900 replaced the negotiated price when that price is below the pharmacy’s invoice cost.

As for the pharmacy access standard, Medicare Part D requires that networks be structured so that a certain percentage of beneficiaries live within a certain distance of a network pharmacy. The trial court ruled that Medicare Part D did not preempt that state law because the decline-to-dispense provision did not render a pharmacy out of network. The Eighth Circuit, however, disagreed, on the ground that a pharmacy that refused to dispense drugs became, in effect, an out-of-network pharmacy. As a result, that provision of the Arkansas law “acted” with respect to the pharmacy access standard. Medicaid Part D, therefore, preempted Act 900.

The Eighth Circuit affirmed the lower court’s ruling on ERISA preemption and reversed the lower court’s ruling on Medicare Part D preemption. The court, therefore, ruled completely in PCMA’s favor.

SOURCE: Pharmaceutical Care Management Association v. Rutledge, (CA-8), No. 17-1609, June 8, 2018.
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