Dan Gorenstein: We’re hard at work on new episodes we’ll begin to drop in mid-January, but we want to bring you an important update. 

Late last week, the Supreme Court handed down a major health care decision…no, not on the ACA, but another case we’ve been following closely: Rutledge vs. the Pharmaceutical Care Management Association.

Ultimately, this is about an obscure federal law that often pits states against large employers and big health care companies.

Erin Fuse Brown: It was really surprising, but the states won big.

DG: This ruling could end up impacting policies from drug prices to surprise bills. So today, we’re re-airing an episode that we first aired back in October for a little context to better understand last week’s decision. Then we’ll talk again with Law Professor Erin Fuse Brown on what comes next after this unexpected ruling.

Let’s get to it.

DG: 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.

EFB: 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…

Sfx: Court room ambiance

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

DG: That’s the attorney general of Arkansas.

Sfx: Crowd noise

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!

Sfx: Court room ambiance

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.

Sfx: Boxing bell

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: 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: We called Erin back last week after the Supreme Court delivered its ruling on Rutledge.

EFB: I was sitting in my office at my computer and I started seeing my phone blow up. Email, Twitter, everything was sort of blowing up because it was, you know, surprising and very exciting.

DG: Actually, it was a pretty stunning 8-0 sweep for the state of Arkansas, a decision Erin certainly didn’t expect after the Court ruled 6-2 against another state, Vermont, in 2016. Erin says more than the blowout score she was impressed with the substance of the ruling.

EFB: I mean, the entire PBM law here was upheld and there were no cracks, there was no wiggle room. There was no place where the court kind of equivocated and said, well, had the state done this or that, that might have been preempted. The opinion by Justice Sotomayor was pretty clear. It was just like 100 percent, states have the right to regulate their health care costs, and it didn’t seem particularly sympathetic to what PBMs are doing or their arguments. And so, you know, the state’s ability to regulate in this area was certainly strengthened.

DG: And and so what does this ruling mean for states more broadly beyond the particulars of the Arkansas pharmacy benefit manager law? Like we had a source who told us somebody at the state or the local level was like, “OMG, states won! ERISA lost! Unanimous. We’re going to want to amend a lot of bills now.”

EFB: Yes, the 40 states that have already passed PBM regulations, pretty much all of those regulations are fine. But the court’s ruling isn’t limited to PBM regulation. It creates this whole new category of laws—those that are aimed at health care costs—that are safe from ERISA preemption. Health care rate regulation is clearly on the table. States’ surprise billing laws suddenly have a much broader lane and even more comprehensive state health reforms like public options are given a much wider path forward than they had before.

DG: So basically the Court is saying, “Listen, employers and whatever PBMs or other vendors you use, you don’t get to cry wolf (ERISA) every time a state regulation happens to touch on the health benefits you offer.”

But it’s not carte blanche for state policymakers either, right? What are some of the things, Erin, that states still can’t touch so long as ERISA is on the books?

EFB: The Supreme Court opinion actually lays out what would still be preempted even under this broad Rutledge rule. The first thing is if a state were to mandate a particular specific benefit. For example, if a state were to say all health plans have to cover fertility services, that would be preempted insofar as they apply to ERISA plans. The other type of regulation the Supreme Court said is still off the table are laws that force the plan to administer their benefits in a certain way. But anything that just sort of has economic impacts, changes the incentives, changes some of the minor administrative details—that’s all fair game.

DG: You said when we talked in October that ERISA was never intended to become a health care law, but it’s become one anyway. What would it take, Erin, to change that?

EFB: So the ERISA problem for state health care regulation is still there. And so I think Congress still needs to act to clarify and limit the scope of ERISA preemption here. But I also think that that there is this sense that there is more room for states to run. And so it sort of puts the puts the state, instead of being in a defensive crouch, kind of puts the state on the offensive.

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.