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The Stacks – 2nd Quarter 2021

Supreme Court Upholds State Regulation of PBMs – Other Vendors Could Be Next

By: Brady Bizarro, Esq.

The United States Supreme Court has experienced a whirlwind of a year. Early on, the threat of COVID-19 forced the Court to take the unprecedented step of hearing oral argument via telephone conference call. Other notable headlines throughout the year included the Court deciding important cases on abortion, religion, and immigration, hearing a crucial case on the Affordable Care Act, rejecting an urgent case on the 2020 presidential election, mourning the loss of an esteemed colleague, and welcoming a new justice to the bench. You would be forgiven, then, if you missed the case of Rutledge v. Pharmaceutical Care Management Association, decided on December 10, 2020. For employer-sponsored health plans and the healthcare industry as a whole, this 8-0 decision may prove to be the most important of its kind in the last several years because of what it foreshadows – more state regulation of PBMs and the possible regulation of other third-party vendors involved in ERISA plan administration.

At its core, Rutledge involved an attempt by a state to regulate its own healthcare market in the face of federal preemption under the Employee Retirement Income Security Act of 1974 (“ERISA”). To properly understand the context of the state law at issue, a brief overview of drug pricing and the process by which many Americans get their prescription drugs is required. Most Americans are covered by private health insurance (specifically, employer-sponsored health plans) and they purchase prescription drugs from retail pharmacies. Hardly any health plans contract directly with pharmacies. Instead, they contract with pharmacy benefit managers (“PBMs”). PBMs are an integral part of this process, serving as intermediaries between health plans and the pharmacies that plan members use.

When a plan member fills a prescription at a pharmacy, the pharmacy checks with the contracted PBM to confirm insurance coverage and determine any cost sharing requirements. After the plan member’s transaction is complete, the PBM reimburses the pharmacy for the prescription (less any cost sharing). Finally, the health plan reimburses the PBM. The amount at which a PBM reimburses a pharmacy for a drug is set by a contract between the PBM and the pharmacy. In that contract, rates are set according to a list specifying the maximum allowable cost (“MAC”). Similarly, the amount at which a health plan reimburses a PBM is set by contract. These contractual arrangements are often crucial to the success of each entity because each relies on access and steerage to some degree.

Consider the following scenario: a pharmacy pays a drug manufacturer $250 to obtain a drug. The PBM has set a MAC of $200 for the drug. If a plan member pays a $15 copay for the drug, the PBM would reimburse the pharmacy $185. Under its contract with the PBM, the health plan reimburses the PBM $300, which includes a spread price or fee for the drug (in some cases a manufacturer rebate is involved). In this example, the pharmacy lost money because the MAC was less than the price the pharmacy paid the manufacturer to obtain the drug in the first place. How or why this occurs is disputed by pharmacies and PBMs alike; however, this situation has caused many independent and rural pharmacies to lose money and close over the past few decades.

In 2015, the Arkansas state legislature took action to protect its independent pharmacies (which are common in rural Arkansas) from this fate. It passed Act 900, which regulates the price at which PBMs reimburse pharmacies for the cost of drugs covered by health plans. Specifically, the bill requires that PBMs reimburse pharmacies at or above their acquisition costs, and it included three key enforcement mechanisms. First, the law requires PBMs to tether reimbursement rates to pharmacies’ acquisition costs by timely updating their MAC lists when drug wholesale prices increase. Second, PBMs must provide administrative appeal procedures for pharmacies to challenge MAC reimbursement prices that are below the pharmacies’ acquisition costs. Finally, the law permits a pharmacy to decline to sell a drug to a beneficiary if the PBM at issue will reimburse the pharmacy at less than its acquisition cost. Ark. Code Ann. § 17-92-507(c)-(e).

Soon after the law passed, the Pharmaceutical Care Management Association (“PCMA”), representing the eleven largest PBMs in the country, filed suit against the state, alleging that Act 900 was pre-empted by ERISA. Under 29 U.S.C. § 1144(a), ERISA pre-empts “any and all [s]tate laws insofar as they may now or hereafter relate to any employee benefit plan.” Courts have broadened the scope of pre-emption over time to include state laws that have a “connection with” or “reference to” an ERISA plan; though the Supreme Court’s jurisprudence in this area has arguably been conflicting. The lower courts, including the Eighth Circuit Court of Appeals, sided with the PCMA, ruling that the Arkansas law had an impermissible “connection with” ERISA plans by interfering with central plan functions and nationally uniform plan administration, as well as an impermissible “reference to” ERISA plans by regulating PBMs that administered benefits for those plans. Arkansas appealed this decision to the U.S. Supreme Court.

To resolve this case, the Court considered whether the Arkansas law had an impermissible “connection with” or “reference to” an ERISA plan. In its brief to the Court, PCMA argued that Act 900 impermissibly affected plan design by mandating a particular pricing methodology for pharmacy benefits. Then, it argued that the law’s appeal procedure interfered with central matters of plan administration. Further, PCMA asserted that the enforcement mechanisms interfered with nationally uniform plan administration by creating “operational inefficiencies.” Finally, PCMA contended that by allowing pharmacies to decline to dispense prescriptions in certain cases, the law effectively denied plan members their benefits.

Writing for a unanimous Court (Justice Amy Cony Barret took no part in the consideration or decision of the case), Justice Sonia Sotomayor first outlined the Court’s ERISA pre-emption scheme. Then, she dealt with the two issue in turn. First, she noted that “not every state law that affects an ERISA plan or causes some disuniformity in plan administration has an impermissible connection with an ERISA plan . . . especially so if a law merely affects costs.” Rutledge, 2020 U.S. LEXIS 5988, at 10. For support, she cited to New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645 (1995). In that case, New York state imposed a surcharge of up to 13% on hospital billing rates for patients covered by insurers other than Blue Cross and Blue Shield (“BCBS”). The Court presumed that the surcharges would be passed on to ERISA plan members, which in turn would incentivize ERISA plans to steer their plan members to BCBS networks. Still, the Court found that the “indirect economic influence” did not create an impermissible connection between the state law and ERISA plans because it did not “bind plan administrators to any particular choice.” Travelers, at 659.

Justice Sotomayor reasoned that the Arkansas law in this case was merely a form of cost regulation, much like the New York law which had been upheld by the Supreme Court in Travelers. She rejected all of PCMA’s arguments, finding that Act 900, as a form of cost regulation, and despite its enforcement mechanisms, did not require plan administrators to structure their benefit plans in any particular manner and did not lead to anything more than potential operational inefficiencies, which by themselves are insufficient to trigger ERISA pre-emption.

Having dealt with the first issue, Justice Sotomayor then easily dispatched the second issue; whether Act 900 impermissibly referenced an ERISA plan. She argued that the law does not act immediately and exclusively upon ERISA plans because it applies to PBMs whether or not they manage an ERISA plan. It affects ERISA plans only insofar as PBMs pay pass along higher pharmacy rates to plans with which they contract. Rutledge, at 12.

After the Court’s decision, the PCMA released a statement expressing disappointment and noting, “As states across the country consider this outcome, we would encourage they proceed with caution and avoid any regulations around prescription drug benefits that will result in higher healthcare costs for consumers and employers.” It is possible, as the Court noted, that one consequence of this decision will be higher drug prices for employer-sponsored health plans and their plan members as PBMs look to recoup losses in revenue. It is far more likely, however, that more states will pass laws modeled on Arkansas’s Act 900, without fear of them being pre-empted by ERISA (though additional litigation is likely to ensue).

Having announced a distinction between cost regulations and dictating plan choices, the Court has also opened up the possibility that states may try to regulate other third-party vendors involved in ERISA plan administration; from third party administrators to provider networks to audit firms. As we in the self-funded space have been saying for years, on issues where the federal government and the relevant industry players have failed to provide relief; prescription drug pricing, balance billing, and price transparency (just to name a few), states will step in to fill the void. Now, with a unanimous Supreme Court restricting the scope of ERISA pre-emption, those state have new latitude to enact laws which may ultimately prove unpopular or even counterproductive for all involved in the fight to contain healthcare costs.

Mental Health Parity Compliance in the Era of COVID-19
By: Corrie Cripps

The COVID-19 (“coronavirus”) pandemic has led to a spike in mental health and substance use disorder (“MH/SUD”) challenges, especially in the employer/employee realm, which highlights the importance of MH/SUD benefits in health plans. Even before the coronavirus pandemic, many health plans struggled in the area of Mental Health Parity and Addiction Equity Act (MHPAEA) compliance, especially since case law is being developed in this area on a regular basis across the country.


The MHPAEA, as amended by the Affordable Care Act (ACA), generally requires that group health plans ensure that the financial requirements and treatment limitations on MH/SUD benefits they provide are no more restrictive than those on medical or surgical benefits. These are also referred to as quantitative and non-quantitative treatment limitations (“QTL” and “NQTL” respectively).

MHPAEA generally applies to group health plans that provide coverage for MH/SUD benefits in addition to medical/surgical benefits. Some self-insured plans are exempt from MHPAEA, such as those with 50 or fewer employees.[1] MHPAEA does not require that self-insured group health plans cover MH/SUD benefits; it only requires that if a plan does cover MH/SUD benefits that the benefits are in parity with the medical/surgical benefits.

The U.S. Department of Labor (DOL), specifically the Employee Benefits Security Administration (EBSA), has primary enforcement authority with regard to MHPAEA over private sector employment-based group health plans.

Expansion of the Regulations

The Consolidated Appropriations Act, 2021, (“the Act”) further enhances federal mental health parity protections, with an emphasis on compliance regarding NQTLs on MH/SUD benefits.[2]  On and after February 10, 2021, health plans that impose an NQTL on MH/SUD benefits must perform and document a comparative analysis of the NQTL’s design and application. The comparative analysis and other plan information (such as applicable plan provisions and evidentiary standards relied upon to design and apply the NQTL) must be made available to the applicable state or federal agency upon request.

At the time of this publication, we are currently waiting for additional guidance from the federal agencies on this comparative analysis documentation requirement. In the meantime, plan sponsors should continue their MHPAEA compliance efforts.


NQTLs are generally limits on the scope or duration of benefits for treatment that are not expressed numerically, such as medical management techniques, provider network admission criteria, or fail-first policies. In terms of MHPAEA compliance, plans should ensure that any NQTLs applicable to MH/SUD benefits are comparable to the limitations that apply to the medical/surgical benefits in the same classification.

NQTLs are commonly the area where health plans fall short of MHPAEA compliance. In its “Warning Signs” document, the DOL provides examples that serve as a “red flag” that a plan may be imposing an impermissible NQTL.[3] The examples include preauthorization and pre-service notification requirements; fail-first protocols; probability of improvement; written treatment plan required; patient non-compliance; residential treatment limits; geographical limitations; and licensure requirements. This is a good resource for plans to use when reviewing their plan documents for MHPAEA compliance.

Another helpful DOL resource is its self-compliance tool for evaluating compliance with the MHPAEA, which was just updated in October 2020.[4] The tool includes best practices, warning signs/red flags, guidance for developing internal plan compliance procedures, and a table for evaluating provider reimbursement rates in the MHPAEA context. However, plans should note that the self-compliance tool is not intended to be a substitute for full MHPAEA compliance testing.

In terms of a Plan’s Plan Document/Summary Plan Description, you will often find NQTL language in the utilization management/pre-certification/preauthorization section as well as in the sections that describe the medical benefits and medical exclusions. Some plans make the mistake, when reviewing their documents for MHPAEA compliance, to only update the medical benefit grids, unaware that other sections of the document have an impermissible NQTL on a MH/SUD benefit.

MH/SUD and the Coronavirus Pandemic

There have been several recent studies on the MH/SUD crisis that is linked to the coronavirus pandemic. A U.S. Centers for Disease Control and Prevention study, published in August 2020, found that almost 41% of respondents are struggling with mental health issues stemming from the pandemic.[5] Similarly, the Kaiser Family Foundation (KFF) published its findings from its July 2020 poll, which concluded that “[t]he pandemic is likely to have both long- and short-term implications for mental health and substance use, particularly for groups likely at risk of new or exacerbated mental health struggles.”[6]

A recent article on CNN highlights that many people who had MH/SUD issues before the pandemic are experiencing their levels of uncertainty and fear double.[7] The challenges that stem from the pandemic affect eating disorders, can cause drug relapses, as well as lead to increased levels of depression. And those who may not have experienced MH/SUD issues before the pandemic may now have issues with their stress levels, depression, and sleep disturbances.

As noted above, the MHPAEA does not require that self-insured group health plans cover MH/SUD benefits. Some self-insured group health plans choose not to cover any MH/SUD benefits; however, this is not a common plan design. What these recent studies and polls indicate is that now, more than ever, health plans should consider not only the physical aspects of the pandemic but also the mental health and substance abuse struggles many plan participants are facing. If your current plan design excludes all MH/SUD benefits, maybe now is the time to reevaluate this decision. Alternatively, if your current plan design does cover MH/SUD benefits, it is recommended that you perform of audit of the plan to ensure parity between the medical/surgical and MH/SUD benefits, which also includes any medical necessity standards.

Compliance Actions

The DOL and the Centers for Medicare & Medicaid Services (CMS) issues an annual “MHPAEA Enforcement Fact Sheet”. The fiscal year 2019 Fact Sheet was issued on March 16, 2020.[8] In fiscal year 2019, the EBSA conducted 183 MHPAEA-related investigations. Of these, 68 investigations involved fully-insured plans, 91 investigations involved self-insured plans, and 24 investigations involved plans of both types (the plan or service provider offered both fully-insured and self-insured options). EBSA cited 12 MHPAEA violations in 9 of these investigations.

This Fact Sheet gives a glimpse into the kinds of compliance issues that the DOL is seeing in health plans. The main issues for MHPAEA compliance still appear to be dollar limitations/visit limits and NQTLs on MH/SUD benefits that are not similarly applied to the medical/surgical benefits. Employers can use this information to ensure they do not have these same issues in their plans.


The DOL’s published enforcement reports suggest that the DOL is continuing to investigate compliance with MHPAEA. To ensure compliance, self-insured health plans should consider conducting periodic claims audits and reviews, and can use the DOL’s self-compliance tools to assist with this. This is especially important since the Consolidated Appropriations Act, 2021, added a new requirement for comparative analysis of the NQTL’s design and application (if the health plan has an NQTL on MH/SUD benefits). Due to the coronavirus pandemic, MH/SUD issues will be in the limelight in 2021, which may mean even more health plan investigations by EBSA. Plan sponsors should review cost-containment techniques with counsel to ensure they are designed to mitigate risk in this area while ensuring compliance.

[1] Mental Health and Substance Use Disorder Parity,, (last visited January 5, 2021).

[2]    H.R.133 - Consolidated Appropriations Act, 2021, December 27, 2020,, (last visited January 5, 2021).

[3] Warning Signs – Plan or Policy Non-Quantitative Treatment Limitations (NQTLs) that Require Additional Analysis to Determine Mental Health Parity Compliance,  (last visited January 5, 2021).

[4]    Self-Compliance Tool for the Mental Health Parity and Addiction Equity Act (MHPAEA), October 23, 2020,, (last visited January 5, 2021).

[5]    Mental Health, Substance Use, and Suicidal Ideation During the COVID-19 Pandemic — United States, June 24–30, 2020, August 14, 2020,, (last visited January 5, 2021).

[6]    The Implications of COVID-19 for Mental Health and Substance Use, August 1, 2021,, (last visited January 5, 2021).

[7]    Mental Health is One of the Biggest Pandemic Issues We’ll Face in 2021, CNN Health, January 4, 2021,, (last visited January 5, 2021).

[8]    FY2019 MHPAEA Enforcement Fact Sheet, March 16, 2020,, (last visited January 5, 2021).

Pharmacy Deserts: A Vicious Cycle Threatens to Bottleneck Vaccine Rollout

By: Nick Bonds, Esq.

One of the brightest spots in the headlines over the past few months has been the success of several vaccine candidates to inoculate the world against the scourge of the coronavirus pandemic. These vaccines have been developed at an unprecedented pace in the face of an unprecedented public need. They are truly a marvel of modern medical technology, and likely our most direct path back to some semblance of normalcy.

Even so, the promised miracle of these vaccines cannot be fulfilled until the doses find their way into the arms of the public. As dramatic efforts are being undertaken to ensure adequate supplies of vaccines, the rollout of a mass vaccination campaign is impeded by logistics. Individuals otherwise eligible to receive the vaccine struggle to schedule appointments, are discouraged by long lines at administration sites, or they struggle to make their way to one such site to begin with. These are all problems at least partially amplified by a dilemma that has been quietly festering within the healthcare industry for years: the pharmacy desert.

The “pharmacy desert” is a companion of the “food desert” – a concept utilized by the U.S. Department of Agriculture to denote a geographic area with insufficient access to fresh, healthful food. Residents living in these food deserts experience a number of negative impacts from this phenomenon, including significantly higher food expenses, and substantially inadequate nutrition, as well as a myriad of related detrimental health and developmental complications. These food deserts disproportionately impact low-income and minority communities, in both urban and rural settings.

In 2014 article, Dr. Dima M. Qato and her co-authors expanded on this concept, coining the term “pharmacy desert” to describe a parallel anomaly in the health care space.[1] Through their research, they identified a trend in areas around Chicago where whole communities were losing access to pharmacies. Residents of these pharmacy deserts found themselves with little or no avenue to obtain not just prescription drugs, but also the other myriad services for which had come to depend upon their local pharmacy: over-the-counter products, diagnostic services, even a level of preventive and urgent care services. For some in these low-access areas, even a pharmacy more than two miles away could be completely inaccessible in an urban setting where individuals lack readily available personal vehicles or efficient public transportation. For rural pharmacy deserts the distances may be even greater, with the nearest pharmacy upwards of ten miles away. Simply being unable to physically reach a pharmacy could make it impossible to complete a course of pharmaceutical treatment.  

While the 2014 article focused on Chicago, the trend they detailed were troubling. About 32% of the census tracts they observed were located within a pharmacy desert, translating to roughly a million Chicagoans with little to no ability to easily fill their prescriptions at a pharmacy.[2] Development of these pharmacy desserts is driven by a number of factors. Lower income and minority neighborhoods tended to have lower rates of insurance coverage and pharmacy providers in those areas experienced lower rates of reimbursement for prescription drug claims. Smaller pharmacy operating on relatively thin margins struggle to stay afloat, with many selling out to larger chains or closing entirely. Areas with higher reliance on Medicare and Medicaid also tended to have lower rates of reimbursement for prescription drugs, and saw their local pharmacies going dark.

While the hardships faced by smaller pharmacies led to increased consolidation by the massive chain stores like CVS, Duane Reade, and Walgreens, these pharmaceutical behemoths were not immune to the negative economic forces. These chains have resorted to closing substantial numbers of their locations in areas where they are less profitable, thus expanding the radius of the pharmacy deserts.

On top of relatively mundane market forces, the companies administering state Medicaid plans have made changes that effectively cut off access for individuals relying on Medicaid for prescription drug coverage. As detailed by the Chicago Tribune, near the end of last year, Aetna drooped Walgreens from its pharmacy network, meaning about 400,000 Medicaid members could no longer fill their prescriptions at a Walgreens location. These new holes in prescription drug available effectively riddled Illinois with a new swath of pharmacy desserts just as the economic impacts of the coronavirus pandemic drove more and more pharmacies to shutter their doors, spurring the cycle of contributing factors faster still.

For self-funded plans, these developments are especially troubling. Prescription drug spending is a huge expense for many plans, particularly those with older employee populations – the same populations that are at elevated risk of infection by the coronavirus. The expansion of pharmacy desserts serves to drive up prescription drug prices. Additionally, many plans are already struggling to contend with the cost of coronavirus testing, a service frequently performed at local pharmacies. For populations in a pharmacy desert, the associated cost of this testing – which self-funded plans are mandated to cover – will also continue to be pushed ever higher.

Perhaps most importantly, the efforts to vaccinate the public are also being exacerbated by pharmacy deserts, blunting the impact of one of our key weapons to address this public health struggle. Pharmacies like CVS and Walgreens are two of the biggest vectors through with many are likely to seek their coronavirus vaccine. For individuals living in a pharmacy desert, this avenue may be prohibitively difficult, thus delaying distribution of the vaccine to some of our most vulnerable populations. The virus has already hit lower income communities the hardest, and areas caught in a pharmacy desert will struggle to share equitably in the most effective solution.

Urban communities tend to be hot spots of viral transmission. Where these hot spots overlap with a pharmacy desert, not only are efforts at testing and treating that community greatly hindered, on top of the effort to vaccinate that community being hamstrung as well. In other words, a pharmacy desert becomes a vaccine desert, and these communities are hit doubly as hard. This perpetuates a vicious cycle of ever-burgeoning risk alongside the intractability of the underlying problem: the economic havoc wrought by the pandemic squeezes out small, local pharmacies. The reduced pharmacy access expands the radius of pharmacy deserts. And the diminishing access to pharmacies and all the services they offer (e.g., vaccinations) intensifies the health and financial impacts of the pandemic, ad infinitum. 

This quandary will inevitably begin having an impact on self-funded plans covering individuals in these urban pharmacy deserts similar to the struggles faced by plans whose participants are in more remote rural areas. As participants find themselves with ever more limited access to pharmacies, the plan’s spending on prescription drugs will begin creeping higher. Furthermore, as the pandemic rolls on and plans find themselves covering more and more coronavirus testing, treatment, and vaccinations, the ultimate costs of those services will be driven higher as well.

Where an individual lives should not determine their access to prescription drugs, let alone the coronavirus vaccine. Ultimately, the only solution is to break this particular wheel. In the near term, that means overcoming the coronavirus, which necessarily requires a significant push in testing, tracing and vaccinating – all of which appear to be priorities of the Biden administrations pandemic response. Beyond that, addressing the expansion of pharmacy deserts will require a broad policy push, including: funding to expand pharmacy access in underserved communities; expansion of telemedicine and direct shipment of prescription drugs; adjustment to Medicaid and Medicare requirements on when and where prescriptions can be filled; and continued efforts to rein in the total cost of prescription drugs.