Dan Gorenstein: This week, in the long shadow of the late Justice Ruth Bader Ginsburg, the Supreme Court begins a new term.

Sfx: Oyez! Oyez! Oyez!

DG: One of the first cases they’ll hear reads like a jambalaya of health care jargon…

Sfx: PBMs, preemption provision, all payer claims databases, PCMA, ERISA, third party administrators, self-funded employer plans

DG: And while the future of the Affordable Care Act will NOT come up, this case could kneecap states’ power to regulate everything from surprise bills to prescription drug prices.

Erin Fuse Brown: All of these state laws hang in the balance and depend on how the Supreme Court rules in this case. 

DG: Today, we are on the case, from the Annenberg Studio at the University of Pennsylvania, I’m Dan Gorenstein and this is Tradeoffs.

There are few people who follow the corner of health care where insurance, employer and state laws meet as closely as Erin Fuse Brown. 

EFB: Associate professor and of law and the director of the Center for Law, Health and Society at Georgia State University.

DG: And to her, when she thinks about this case, it’s like a wonky welterweight fight…

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Announcer: Ladies and gentleman…the main event…in one corner from Little Rock…Leslie Rutledge

DG: That’s the attorney general of Arkansas.

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Announcer: And in the other corner, from right here in Washington, DC the Pharmaceutical Care Management Association.

DG: The trade group that represents pharmacy benefit managers.

Announcer: Oyez! The Court is now sitting!

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DG: In a few minutes, we’ll explain why someone like Erin thinks of this case like it’s some championship clash but first, it helps to know what this case is about on its face…which isn’t nearly so grand.  

EFB: So the issue in the Rutledge case is whether states in this case, Arkansas, can regulate entities called pharmacy benefit managers. 

DG: A quick note on pharmacy benefit managers, what lots of people call PBMs. They specialize in wheelin’ and dealin’ up and down the prescription drug supply chain.

Their goal: get the best price for their clients, often large employers…and take a cut for themselves too.

EFB: One of the ways the PBM makes money is by pinching everyone else in the supply chain, including pharmacies. And that was what was happening in Arkansas. 

News clip: Brent Bradley says the profit sucking middlemen are forcing Bradley’s Health Mart Pharmacy to close after nearly two decades. 

DG: PBMs have squeezed mom and pop pharmacies like this one ,paying them less to dispense some drugs than they had paid to acquire them…forcing the pharmacies into the red.

News clip: I’m gonna miss the everyday patient relationships I’ve had over the last 25 years.

DG: So, several years ago, Arkansas legislators started taking a look at what losing these pharmacies might mean for competition and, ultimately, consumers. By 2015…

Rep. Gray: This is Senate Bill 688, it deals with the PBMs and their pricing.

DG: Some legislators had seen enough.

EFB: Arkansas in this case passed a law to protect these independent pharmacies that requires PBMs to pay pharmacies enough to cover the pharmacies’ cost of acquiring a generic drug.

DG: The PBMs liked the new law so much… they decided to take Arkansas to court, relying on an obscure law originally designed to regulate pensions.  

EFB: The Pharmacy Benefit Manager Trade Association is arguing that this federal law called ERISA, preempts or blocks the state from having the power to regulate the PBM in this way.

DG: After the break, we’ll get into ERISA and how it has thwarted dozens of efforts to rein in health care spending…over the last 50 years.

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DG: So before the break, Erin, you told us that this case really comes down to this federal law, ERISA, and whether it prevents states from regulating PBMs…and other insurance issues too.

Can you first help us understand what this law even is?

EFB: So, ERISA stands for the Employee Retirement Income Security Act, and it was passed in 1974, true to its name, to mainly regulate and protect employee retirement plans like pensions. 

DG: Private pensions…whose vulnerabilities NBC exposed in a 1972 investigation often credited with motivating lawmakers to pass ERISA.

News clip: We figured that if we put in 20 or 25 years, when we retired we would get a pension.

But no because they got cheated they still have to work.

The pension system is essentially a consumer fraud, a shell game and a hoax. 

EFB: There is little or no evidence that Congress was even thinking about employer-based health coverage when it passed ERISA. It was never meant to be a law about health care coverage, but that’s what it has become. 

DG: The trouble, says Erin, began when Congress wrote ERISA to cover not just pensions, but all so-called “employee welfare benefits”…even health coverage…including for employers who offer the coverage themselves through what’s known as a self-funded plan.

EFB: But about a decade after ERISA was passed, the Supreme Court interpreted one sort of ambiguous provision of the law to exempt all of these self-funded plans from state regulation. And when the court interpreted this clause to exempt self-funded plans from state regulation, the court essentially created a loophole.

DG: Why has this loophole actually become such a big problem? 

EFB: So when the court created a loophole, it created an incentive for large employers to self-insure to escape state regulation. So even though, you know, very few of these employers in the 1970s, self-funded, 60 percent of people today have employer based coverage that is self-funded. And now that may sound like a technical matter, but this means that, you know, almost a third of the U.S. population is virtually untouchable and unprotectable by state health care regulation.

DG: To be fair here…private employers…especially big ones…say they like self-funded plans for other reasons…lower costs…more control. 

And when it comes to ERISA, large employers argue it’s not a loophole…but vital protection against the messy and expensive burden of having to comply with 50 different sets of regulations.

It’s that exact protection that PBMs are claiming in this Rutledge case that they too deserve…because they help administer these self-funded plans.

Alright, Erin, so let’s look ahead to what could happen in this Rutledge case. What’s really at stake here if the Supreme Court sides against Arkansas?

EFB: So I think one of the immediate impacts is that the nearly 40 states that have passed some sort of PBM regulation in the last few years, all of those states are going to see immediate legal challenges to those laws. And I think that there is also a broader impact. It does provide a bit of a chilling effect for states to innovate and move forward. And in all other areas of health care regulation, you know, if a state wants to do other types of reform, surprise medical billing or price transparency or even single payer health reforms, you know, the states will have a very narrow path to walk if the Supreme Court continues to read preemption very, very broadly.

DG: So it seems like given recent rulings, including a 2016 Supreme Court ERISA decision against Vermont, that states really might be on the ropes here. Do you think this Arkansas case could be a potential knockout punch?

EFB: I’m hopeful that it won’t be, but it certainly could be the knockout punch for state health care regulation, particularly following the death of Ruth Bader Ginsburg. Of course, it’s hard to predict exactly which way the case will go. But Justice Ginsburg wrote the lone dissent in the 2016 ERISA case, and was willing to apply a nuanced analysis of ERISA. The Rutledge case, you know, will be heard by an eight-member court, so it could be a split decision. And if there is no majority then the Eighth Circuit’s holding, which was that ERISA preempts Arkansas’s PBM regulation, will stand.

DG: There is still a chance that states could get up off the mat, even if they lose big. In its nearly 50 years of existence, every time ERISA’s legal gray areas seem to be settled, the law ends up back in court.

EFB: That’s why lawyers and law students and even Supreme Court justices hate ERISA because it’s so difficult to apply. It’s like putting a fence around a cloud. 

DG: It sounds like there’s a remote chance in your mind that Arkansas will win this case. If it does, what would the impact of that be?

EFB: So I think if the court sides with Arkansas, a lot of states will breathe a sigh of relief because they can continue to implement all of these laws that they’ve put in place and other reforms aimed at reining in health care costs. But it really won’t put the issue of ERISA preemption entirely to bed. At best, it would just provide one more narrow path forward for states to move. But the court cases go back and forth over the years, opening and then narrowing the paths for states health regulation. So it’s not like they can get the ERISA monkey off their back.

DG: What would it really take to get that monkey off their backs once and for all? And is that likely to happen?

EFB: So I think ERISA needs to be fundamentally revised. ERISA was never meant to be a health care law, and yet it has become one. But it’s almost like an anti health care law. It blocks state regulation, but it doesn’t replace it with any meaningful federal standards. But the states can’t do this on their own and the courts can’t even do this for Congress. Congress is the only one who has the power to change the way ERISA is written. But do I think that’s likely to happen? It’s highly unlikely to happen at this point.

DG: Erin, thanks so much for taking the time to talk to us on Tradeoffs.

EFB: Thanks. It’s been a pleasure.

DG: I’m Dan Gorenstein, and this is Tradeoffs.