Pharmaceutical Care Management v. Leslie Rutledge , 891 F.3d 1109 ( 2018 )

United States Court of Appeals
For the Eighth Circuit
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No. 17-1609
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Pharmaceutical Care Management Association
lllllllllllllllllllll Plaintiff - Appellant
v.
Leslie Rutledge, in her official capacity as Attorney General of Arkansas
lllllllllllllllllllll Defendant - Appellee
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Arkansas Pharmacists Association; National Community Pharmacists Association
lllllllllllllllllllllAmici on Behalf of Appellee(s)
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No. 17-1629
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Pharmaceutical Care Management Association
lllllllllllllllllllll Plaintiff - Appellee
v.
Leslie Rutledge, in her official capacity as Attorney General of Arkansas
lllllllllllllllllllll Defendant - Appellant
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National Community Pharmacists Association; Arkansas Pharmacists Association
lllllllllllllllllllllAmici on Behalf of Appellant(s)
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Appeals from United States District Court
for the Eastern District of Arkansas - Little Rock
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Submitted: January 9, 2018
Filed: June 8, 2018
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Before LOKEN, BEAM, and KELLY, Circuit Judges.
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BEAM, Circuit Judge.
In this dispute between a pharmacy trade association, Pharmaceutical Care
Management Association (PCMA) and the State of Arkansas, PCMA appeals the
district court's ruling that an Arkansas state statute is not preempted by Medicare Part
D, 42 U.S.C. § 1395w-26(b)(3), and the State of Arkansas appeals the district court's
ruling that the statute is preempted by ERISA, 29 U.S.C. § 1144(a). Because the state
statute in question is preempted by both ERISA and the Medicare Part D statutes, we
affirm in part, reverse in part, and remand.
I. BACKGROUND
In 2015, the Arkansas General Assembly passed a state law which attempted
to govern the conduct of pharmacy benefits managers ("PBMs")–the entities that
verify benefits and manage financial transactions among pharmacies, healthcare
payors, and patients. PBMs are intermediaries between health plans and pharmacies,
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and provide services such as claims processing, managing data, mail-order drug sales,
calculating benefit levels and making disbursements. Pharmacies acquire their drug
inventories from wholesalers. The patient buys the drug from the pharmacy, but often
at a lower price due to participation in a health plan that covers part of the price.
Further, the PBMs create a maximum allowable cost ("MAC") list which sets
reimbursement rates to pharmacies dispensing generic drugs. Contracts between
PBMs and pharmacies create pharmacy networks. Based upon these contracts and
in order to participate in a preferred network, some pharmacies choose to accept
lower reimbursements for dispensed prescriptions. Thus, unfortunately, a pharmacy
might actually lose money on a given prescription transaction.
In an attempt to address the trend in Arkansas of significantly fewer
independent and rural-serving pharmacies in the state, the state legislature adopted
Act 900, Arkansas Code Annotated § 17-92-507, an amendment to the state's
then-existing MAC law, to "Amend the Laws Regarding Maximum Allowable Cost
Lists; to Create Accountability in the Establishment of Prescription Drug Pricing."
2015 Ark. Laws Act 900, S.B. 688 (Ark. 2015). The Act mandates that pharmacies
be reimbursed for generic drugs at a price equal to or higher than the pharmacies' cost
for the drug based on the invoice from the wholesaler. It did this by defining
"pharmacy acquisition cost" as the amount charged by the wholesaler as evidenced
by the invoice. Ark. Code Ann. § 17-92-507(a)(6). The Act further imposes
requirements on PBMs in their use of the MAC lists by making them update the lists
within at least seven days from the time there has been a certain increase in
acquisition costs. Id. § 17-92-507(c)(2). The Act also contains administrative appeal
procedures, id. § 17-92-507(c)(4)(A)(i), and allows the pharmacies to reverse and re-
bill each claim affected by the pharmacies' inability to procure the drug at a cost that
is equal to or less than the cost on the relevant MAC list where the drug is not
available "below the pharmacy acquisition cost from the pharmaceutical wholesaler
from whom the pharmacy or pharmacist purchases the majority of prescription drugs
for resale." Id. § 17-92-507(c)(4)(C)(iii). Finally, the Act contains a
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"decline-to-dispense" option for pharmacies that will lose money on a transaction.
Id. § 17-92-507(e).
PCMA brought this action on behalf of its members, the nation's leading
PBMs, claiming Act 900 is preempted by both ERISA and Medicare Part D, and also
that it is unconstitutional on a number of other grounds not at issue on appeal
(because PCMA did not appeal the district court's adverse ruling on these claims).
The district court agreed that the pertinent portions of Act 900 were preempted by
ERISA based upon controlling Eighth Circuit case law. See Pharm. Care Mgmt.
Ass'n v. Gerhart, 852 F.3d 722 (8th Cir. 2017). However, the district court found that
Medicare Part D did not preempt Act 900, nor was the law unconstitutional on any
of the several bases advanced by PCMA. PCMA appeals the Medicare Part D ruling,
and the state cross-appeals the ERISA ruling.
II. DISCUSSION
We review de novo the district court's preemption/statutory interpretation
rulings. Id. at 726.
A. ERISA Preemption
ERISA preempts "any and all State laws insofar as they may now or hereafter
relate to any employee benefit plans." 29 U.S.C. § 1144(a). The breadth of this
section is well known. See New York State Conference of Blue Cross & Blue Shield
Plans v. Travelers Ins. Co., 514 U.S. 645, 655 (1995). A state law is preempted if it
"'relates to'" an ERISA plan by having "'a connection with or a reference to such a
plan.'" Express Scripts, Inc. v. Wenzel, 262 F.3d 829, 833 (8th Cir. 2001) (quoting
Travelers, 514 U.S. at 656). In Gerhart, we held that an Iowa statute, similar in
purpose and effect to Act 900, was preempted by ERISA because it had a prohibited
"reference to" ERISA, and because it interfered with national uniform plan
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administration. 852 F.3d at 729, 731. The district court found that Gerhart controlled
the outcome of the ERISA preemption claim in the instant case. We agree. The Iowa
statute in Gerhart required PBMs to provide information regarding their pricing
methodologies to Iowa's insurance commissioner at the commissioner's request. Id.
at 727. The statute further limited the types of drugs to which a PBM could apply
MAC pricing and limited the sources from which a PBM obtained pricing
information. Id. Finally, the statute required PBMs to provide information regarding
their pricing methodologies in their contracts with pharmacies and to provide
procedures by which pharmacies could comment on and appeal MAC price lists or
rates, with potential retroactive payment to pharmacies for incorrect pricing. Id. We
held that the Iowa statute both explicitly and implicitly referred to ERISA by
regulating the conduct of PBMs administering or managing pharmacy benefits, and
also had a connection with ERISA. It was therefore preempted. Id. at 729-30.
The state argues that Gerhart should be limited to its consideration of the Iowa
Act’s "express reference" to ERISA, and that Gerhart's "implicit reference" analysis
is dicta inconsistent with Supreme Court precedent. We disagree. In addition to
finding that Iowa Code § 510B.8 had a prohibited express reference to ERISA, the
Gerhart court found that the "Iowa law also makes implicit reference to ERISA
through regulation of PBMs who administer benefits for 'covered entities,' which, by
definition, include health benefit plans and employers, labor unions, or other groups
'that provide[] health coverage.' These entities are necessarily subject to ERISA
regulation." 852 F.3d at 729. None of the state's arguments convince us that we are
not completely bound by a prior panel's reasoning on the exact question before us.
Nor do we believe Gerhart to be inconsistent with the Supreme Court's precedent in
Travelers or De Buono v. NYSA-ILA Medical and Clinical Services Fund, 520 U.S.
806 (1997). While both cases indicate there is generally a presumption against
preemption, De Buono, 520 U.S. at 813; Travelers, 514 U.S. at 654, where, as here,
the state law both relates to and has a connection with employee benefit plans, the
presumption is gone and the law is preempted. Cal. Div. of Labor Standards Enf't v.
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Dillingham Constr., N.A., Inc., 519 U.S. 316, 324-25 (1997). The district court
correctly found that Act 900 was preempted by ERISA.
B. Medicare Part D and Preemption
Medicare Part D is a comprehensive statutory and regulatory scheme for
prescription drugs, which aims to balance cost with access to those drugs. The Part
D program funds prescription drug benefits through payments from the Medicare
government trust fund, and beneficiaries generally get prescriptions through a Part
D network provider. See 42 C.F.R. §§ 423.120, 423.124. The statute prohibits both
federal and state interference in negotiations between Part D sponsors and pharmacies
(known as the "non-interference" clause, 42 U.S.C. § 1395w-111(i)). The federal
scheme preempts a state law when (1) Congress or the Centers for Medicare and
Medicaid Services (CMS) has established "standards" in the area regulated by the
state law; and (2) the state law acts "with respect to" those standards. Id. §
1395w-26(b)(3) Conflict between the state law and the federal standard is
unnecessary. PCMA argues the district court erred in holding that Act 900 was not
preempted by Medicare Part D. It contends that Act 900 acts "with respect to" two
standards created by Congress and CMS for Medicare Part D–the Negotiated Prices
Standard, and the Pharmacy Access Standard.
1. Negotiated Prices Standard
42 U.S.C. § 1395w-102 sets forth several requirements for standard
prescription drug coverage and access to negotiated prices. Most specifically, the
regulation defines "negotiated prices" for Part D drugs as the price: "the part D
sponsor (or other intermediary contracting organization) [such as a PBM] and the
network dispensing pharmacy . . . have negotiated as the amount such network entity
will receive, in total, for a particular drug." 42 C.F.R. § 423.100. Negotiated prices
are "inclusive of all price concessions from network pharmacies" but "exclude[]
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contingent amounts, such as incentive fees, if these amounts increase prices and
cannot reasonably be determined at the point-of-sale." Id.
Act 900 acts "with respect to" the Negotiated Price Standard, first and most
obviously by regulating the price of retail drugs. Act 900 effectively replaces the
negotiated MAC price with the pharmacy acquisition cost when the MAC rate is
below the pharmacy's invoice cost, Arkansas Code Annotated § 17-92-
507(b)(4)(A)(i)(b), and requires that the price paid by pharmacy customers be no less
than the price negotiated by the pharmacy with its wholesaler, id. § 17-92-
507(c)(4)(C)(iii). The appeals process which allows the pharmacy to reverse and
re-bill the claim, eliminates "negative reimbursements" for the pharmacies, resulting
in an increase in the retail price of prescription drugs. Id. The state's efforts to
change the pricing model from PBMs negotiating with pharmacies to pharmacies
negotiating with wholesalers easily acts "with respect to" the Part D standard.
The state argues the district court correctly found that Act 900 did not act "with
respect to" the Negotiated Price Standard because Part D's "negotiated prices"
provisions are not a substantive standard,1 and in any event these provisions exclude
Act 900's contingent amounts from its meaning. Further it argues the CMS did not
mean to control prices by regulating, but instead merely meant to provide
transparency and to control entities such as the PBMs. The district court cursorily
reasoned that Act 900 was not preempted, in part because it did not affect negotiated
prices. The court found that Act 900 would only act to increase prices, leading to an
appeal, and the resulting price after the appeal would fall into the category of a
"contingent" amount, which Part D expressly excludes from its standard, 42 C.F.R.
§ 423.100. PCMA points out that the appeal process does not make the price
1
It is, in fact a standard, as a standard within the meaning of the preemption
provision is either a statutory provision or a regulation duly promulgated and
published in the Code of Federal Regulations. Do Sung Uhm v. Humana, Inc., 620
F.3d 1134, 1148 n.20 (9th Cir. 2010).
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"contingent" because even after the appeal, the resulting price could be one of three
pre-determined amounts–the MAC price, the invoice price, or the best price from the
wholesaler higher than the MAC. All three amounts can be determined at the point
of sale. We agree that the appeal provisions do not render the price "contingent."
2. Pharmacy Access Standard
Medicare Part D also sets forth requirements with regard to Medicare
recipients' access to pharmacies. 42 U.S.C. § 1395w-104(b)(1)(C) provides that a
prescription drug plan "shall secure the participation in its network of a sufficient
number of pharmacies that dispense (other than by mail order) drugs directly to
patients to ensure convenient access (consistent with rules established by the
Secretary)." The regulations in 42 C.F.R. § 423.120(a) further spell out the need for
assuring pharmacy access. Thus, the Pharmacy Access Standard requires that
networks be structured so that a certain percentage of beneficiaries live within a
certain distance to a network pharmacy.
The district court found that because the decline-to-dispense provisions do not
render a pharmacy as out-of-network, Act 900 did not act "with respect to" the
standard. We disagree, and find that Act 900 indeed acts "with respect to" the
Pharmacy Access Standard, because a pharmacy that refuses to dispense drugs
becomes, in effect, an out-of-network pharmacy. Act 900's decline-to-dispense clause
could conceivably, and likely would, lead to a beneficiary being unable to fill a
prescription in his or her geographical location. This would actually interfere with
convenient access to prescription drug availability, which is more than is required for
preemption. Again, if the state law in question merely acts "with respect to" the
standard, it is preempted. It clearly does in this instance. Accordingly, we find that
Act 900 is preempted by Medicare Part D.
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III. CONCLUSION
We affirm the district court's ERISA ruling, reverse the Medicare Part D ruling,
and remand for entry of judgment in PCMA's favor.
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