The Great Divide: ERISA Integrity versus State Desire to Hold Pharmacy Benefit Managers Accountable for Pharmaceutical Drug Pricing.

• Author: Stecker, Alexandra M.

1. INTRODUCTION II. BACKGROUND A. ERISA and Its Interaction with Healthcare B. The Relevant Cases & Their Stances on ERISA Preemption of State Reporting Requirements C. Today's Circuit Holding: Gerhart III. Analysis A. The Positive Side of ERISA Preemption B. The Cons of ERISA Preemption IV. Recommendation A. Recommendations Without Altering ERISA 1. Changing State Legislative Actions 2. Circuit Split Resolution in Favor of State Statutes. B. A Long-term Proposal: Federal Regulation of PBM Actions or Amending ERISA V. Conclusion I. INTRODUCTION

   Healthcare is one of the most widely contested and fundamentally important issues of the twenty-first century. The rise of technology, advances in pharmaceuticals, and greater understanding of the human mind and body within the medical field have created a boom in the healthcare industry, sparking a variety of legislation and statutes. With these advancements came the steady and ever-rising costs of healthcare and pharmaceutical drugs. (2) Most people like consistency and want to know what they are paying for. For example, when paying for a new car, an individual will want to know how the vendor set that price and if that price is comparable and fair. If people want to know this information about cars, groceries, or other everyday items, they will also want the same information for necessary prescription drugs. (3) Unfortunately, the pricing of medications is an incredibly vague area of healthcare, and the laws, or lack thereof, surrounding pricing methodologies are not much help either. (4)

   To combat the opaque drug pricing methodologies, states have tried to enact statutes requiring pharmacy benefit managers (PBMs) to report how they came up with their drug prices. (5) Unfortunately, specific federal legislation has rendered these state statutes invalid in several jurisdictions. (6) Yet, courts in other jurisdictions have upheld these state reporting requirements. (7) Therefore, the question within the healthcare and pricing methodology debate is whether state statutes that require the disclosure of pricing data and a transparent methodology for setting drug prices from PBMs are federally preempted by the Employee Retirement Income Security Act of 1974 (ERISA). (8)

   This Note's analysis focuses on the circuit split arising from the Eighth Circuit's ruling in Pharmaceutical Care Management Ass'n v. Gerhart. This 2017 case focuses on state pricing data requirements placed on PBMs and whether ERISA invalidates those requirements. (9) The Eighth Circuit ultimately ruled that ERISA does preempt these reporting requirements following the D.C. Circuit's Pharmaceutical Care Management Ass 'n v. District of Columbia decision. (10) However, other circuits, such as the First Circuit, have upheld the state law reporting requirements. (11) As this Note will discuss, striking down the Iowa pharmaceutical reporting law creates a troubling lack of transparency as to how PBMs determine drug prices and suppresses accountability. (12) On one side, commentators argue that state laws requiring reporting disclosures to state agencies (in addition to ERISA's national reporting requirements) put a great burden on PBMs. (13) On the other side, commentators argue that a state law forcing PBMs to report pricing data increases accountability and does not substantially affect the true spirit of ERISA. (14) This Note discusses the precedent leading up to this circuit split, the respective rationales of each side in the split, the circuit split's implications in health insurance law, and finally why ERISA should not preempt state laws that require PBMs to report their drug pricing methodologies. This Note will conclude by recommending various solutions to avoid ERISA preemption, while still holding PBMs accountable for their drug pricing methods.

2. BACKGROUND

   Before delving into the complicated relationship demonstrated in Gerhart and of other circuits' decisions, some background information on ERISA and the evolution of state reporting requirements is necessary. In addition to covering the development of ERISA, this section will break down the rulings of several circuits and their rationales for ERISA preemption or non-preemption. Lastly, this section will cover the recent ruling of Gerhart and will briefly cover the ruling in Rutledge.

   1. ERISA and Its Interaction with Healthcare

      The Employee Retirement Income Security Act (ERISA) was adopted in 1974 for the purpose of protecting "'the interests of participants in employee benefit plans and their beneficiaries' by setting out substantive regulatory requirements for employee benefit plans and to 'provid[e] for appropriate remedies, sanctions, and ready access to the Federal courts.'" (15) In other words, ERISA was created to protect employee benefit plans--particularly retirement plans--from being misused by employers, insurance companies, state agencies, and similar entities. (16)

      When ERISA interacts with state health law and the law's price reporting requirements, ERISA's preemption provision comes into play. (17) Conflict, or obstacle, preemption is the "principle that federal or state statute can supersede or supplant state or local law that stands as an obstacle to accomplishing the full purposes and objectives of the overriding federal or state law." (18) ERISA contains a specific preemption clause that states "[ERISA] shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan." (19) The preemption clause means that when a jurisdiction decides that a state reporting law conflicts or burdens ERISA or ERISA's goals, the state law will be held invalid. The circuit split arises because different jurisdictions have different interpretations of when a state law burdens ERISA. In other words, and as will be shown through the case analysis of Section II (B), the difference in defining and interpreting the "relate to" language in the ERISA preemption clause is the reason for the split. (20)

      This Note analyzes the implications of ERISA on the interactions between PBMs, pharmacies, and state laws. When a patient receives a prescription from their doctor, she will fill it at the pharmacy. (21) Normally a patient's prescription will be fully or partially covered by some sort of health insurance plan, assuming the patient is part of a health insurance plan. (22) "PBMs act as intermediaries between health plans and pharmacies." (23) Additionally,

      PBMs perform such services as processing claims, generating reports and data, and managing clinical and financial information as well as retail and mail-order drug[s] ... To carry out these services, PBMs ... create confidential maximum allowable cost (MAC) lists. [These] lists are used to set reimbursement rates for pharmacies filling generic prescriptions. (24) A "maximum allowable cost" is defined as "the unit price established by the PBM for a ... drug included on PBM's MAC drug lists developed for PBM's clients, which may be amended ... by [the] PBM, in its sole discretion." (25) In other words, a maximum allowable cost (MAC) is a price that is established by PBMs with a PBM methodology that varies from client to client, and can be changed at the PBM's discretion. (26) It is important to keep this breakdown in mind, especially when considering the transparency concern surrounding the MAC methodology that will be discussed later. (27)

   2. The Relevant Cases & Their Stances on ERISA Preemption of State Reporting Requirements

      One of the seminal ERISA preemption cases is New York State Conference of Blue Cross & Blue Shield v. Travelers Insurance Co. (28) This 1995 case concerned a New York law that required hospitals to collect additional charges from those covered under commercial insurers who had employee plans under the jurisdiction of ERISA, but exempted those under Blue Cross/Blue Shield plans from the extra charges. (29) This New York law also applied these charges to Health Maintenance Organizations (HMOs) whose fees were paid for by ERISA. (30) The Supreme Court weighed whether this New York statute conflicted with ERISA to the extent that ERISA preemption would be merited. (31) In deciding this, the Court focused on the ERISA clause stating that ERISA preempts "any and all State laws insofar as they ... [may now or hereafter] relate to any employee benefit plan." (32) The court analyzed how to properly interpret the "relate to" language within the preemption provision. (33) The Court found the language of the ERISA preemption clause frustrating since it provides little guidance on what "relates to" or what "connection with" means. (34) The court ultimately held that state laws regulating cost uniformity that have "only an indirect economic effect on the relative costs of various health insurance packages ... do not bear the requisite 'connection with' ERISA plans to trigger pre emption." (35) The test to be interpreted from this ruling is as follows: to avoid ERISA preemption, the disputed statute (1) has to be a state law whose main purpose is to regulate cost uniformity (for example, a uniform MAC formula for pricing pharmaceutical drugs) and (2) can only have an "indirect economic" cost burden on PBMs. To reiterate, if the statute meets these two requirements, then it will not be preempted by ERISA; as it does "not bear the requisite 'connection with' ERISA plans." (36) While the case does not explicitly deal with additional state reporting requirements, it does show the interaction between a state statute imposing costs on insurance companies and ERISA's preemption provision. (37)

      The next case in the line of ERISA preemption of state statute precedent is Pharmaceutical Care Management Ass'n v. Rowe. (38) In this case, Pharmaceutical Care Management Association (PCMA) (which is a PBM) challenged a district court ruling to uphold Maine's Unfair Prescription Drug Practices Act (UPDPA). (39) UPDPA was enacted to hold PBMs accountable to...