Issue: Winter 2021

2020 U.S. Supreme Court Benefits Case Round-Up

By: Lindsey H. Chopin, Jackson Lewis P.C., New Orleans, LA

With the passing of the U.S. Supreme Court’s 27-year veteran, Justice Ruth Bader Ginsburg, the addition of the newly appointed Justice Amy Coney Barrett, and COVID-19 related changes to long-held Court procedures, such as arguments by phone and a regimented question and answer period, the U.S. Supreme Court’s October 2020 term was unlike any other. One thing remains constant, though: the Court considered a number of cases impacting employee benefits and benefits litigation, from prescription drug benefit regulation to the constitutionality of the Affordable Care Act and benefits for railroad workers.

State Law Regulating Pharmacy Benefit Managers is Not Preempted by ERISA. Early in the term, the Court heard arguments in Rutledge v. Pharmaceutical Care Management Association, a case concerning ERISA’s preemptive effect on state laws regulating pharmacy benefit managers’ (PBMs) generic drug reimbursement rates. Though the Justices seemed skeptical during oral argument, the Court unanimously held that a  law that directly impacts the cost of prescription drugs provided under ERISA-governed benefit plans, and the administration of those plans, is not preempted. Rutledge v. Pharm. Care Mgmt. Ass’n, No. 18-540, 2020 U.S. LEXIS 5988 (Dec. 10, 2020).

PBMs are third party administrators that act as intermediaries between employers that sponsor prescription drug benefit plans and insurers, pharmacies, and other healthcare providers. Frequently, PBMs create schedules of covered drugs (called MAC lists) that set the maximum rate at which the plan will reimburse the pharmacy generic drugs. One way in which PBMs bill for their services is to charge a fixed rate that is higher than the MAC list price, with the PBM retaining the “spread” between the MAC list price and the plan’s cost. Concerned that PBMs were setting MAC list prices so low that pharmacies, especially independent and rural pharmacies, were unable to earn a profit and may have even been losing money on certain drugs, Arkansas passed a law (Act 900) requiring MAC lists to: (1) allow reimbursements to pharmacies at a rate at least equal to the pharmacy’s acquisition cost; (2) be updated within seven days of a 10 percent increase in a pharmacy’s acquisition cost from 60 percent of wholesalers; and (3) be disclosed to pharmacies. The law also created a proscribed appeal procedure to be provided for claims by pharmacies challenging MAC-based reimbursements and allowed pharmacies to decline to dispense medications if their acquisition cost would not be reimbursed.

With Justice Sonia Sotomayor writing for the unanimous court, the Court held that Arkansas’ Act 900 law is simple rate regulation and “ERISA does not pre-empt state rate regulations that merely increase costs or alter incentives for ERISA plans without forcing plans to adopt any particular scheme of substantive coverage.” The Court explained that the law only sets a floor for pharmacy reimbursements by PBMs. It is not directed at ERISA plans, it said, and the fact that PBMs may pass their increased costs on to ERISA plans is not ERISA’s concern. Moreover, a focal point at oral argument and in briefing was whether the proscribed appeal procedures improperly infringed on central matters of plan administration, but the Court found that administrative burdens and operational inefficiencies do not meet that standard. At bottom, nothing in Arkansas’s Act 900 law required ERISA plan administrators to structure their plans in a certain way, so the law survives. Arkansas’ Act 900 law was at issue in Rutledge, but the reach of the Court’s decision goes further. Many states’ statutes that are similar to Arkansas’ Act 900 law are the subject of suits pending or recently decided in the lower courts, and Supreme Court approval may prompt additional states to draft similar legislation or amend current laws in place.

Finally, while some speculated that the Court may have seized this opportunity to speak more generally on how ERISA’s preemption provisions should be interpreted in an attempt to simplify the current preemption framework, that did not come to fruition in the majority opinion. Only Justice Clarence Thomas, in a concurring opinion, continued his calls for reformation of ERISA preemption standards because they create an amorphous test that is results-driven and veers too far from ERISA’s statutory text.

Constitutionality of the ACA. In the consolidated cases California v. Texas and Texas v. California, the Court is considering the validity of the Affordable Care Act’s individual mandate for a second time. The Court already determined in National Federation of Independent Businesses v. Sebelius (“NFIB”), 567 U.S. 519 (2012), that the ACA’s individual mandate was unconstitutional under the Commerce Clause, but could fairly be read as exercising Congress’s power to tax because failure to comply with it would trigger a tax under the individual shared responsibility penalty provision of the ACA. However, Congress later passed the Tax Cuts and Jobs Act of 2017 (TCJA), which reduced the individual shared responsibility penalty triggered by failing to comply with the individual mandate to zero, giving rise to a fresh challenge of the ACA.

A block of states and two individuals filed suit against the federal government challenging the individual mandate. Because the federal government responded to the lawsuit by advocating for an order declaring the individual mandate unconstitutional and severing the ACA’s individual mandate, guaranteed issue provisions, and community-rating requirements (and, on appeal, for total invalidation of the ACA), additional states intervened to defend the ACA. The district court declared that the ACA’s individual mandate is unconstitutional because the only basis on which the Supreme Court upheld its constitutionality in NFIB (i.e., the power to tax) was eliminated when Congress passed the TCJA, reducing the individual shared responsibility penalty amount to zero and nullifying its revenue raising potential. The district court also determined that the individual mandate is essential to and thus inseverable from the remainder of the ACA, meaning the entire ACA must be invalidated. The court also rejected the argument that the plaintiffs lacked standing to challenge the constitutionality of the ACA. The United States Fifth Circuit Court of Appeals affirmed the district court’s ruling in part in a 2-1 decision, and the Supreme Court accepted for review both blocks of states’ and the federal governments’ petitions.

Against that backdrop, there are three potential issues before the Court:

First, the Court will determine whether the plaintiff states and private individuals have suffered an injury sufficient to create standing. Specifically, the Court will consider whether the individual plaintiffs have been injured in that they only purchased insurance because they felt compelled to under the ACA, and whether the states have been injured because the individual mandate causes more individuals to buy insurance and increases the states’, as employers of these individuals, administrative costs associated with tracking and reporting on ACA compliance. The standing issues presented in this case could give the Justices a way out of the case without rendering a decision on the merits.

Second, assuming the Court reaches the merits, it will decide whether Congress’s setting the penalty tax at zero and erasing its revenue raising potential rendered the individual mandate an unconstitutional “command to purchase insurance,” as the lower courts held, or whether, with the tax currently set at zero, Americans can choose whether to purchase insurance or not, with no penalty for the latter. If the Court adopts the second view, the ACA will stand as is.

Third, if the Court agrees with the lower courts that the individual mandate is now unconstitutional, it must decide whether the individual mandate is severable from the rest of the ACA or, in the inverse, if it is so intertwined with the remaining provisions that the entire ACA must be invalidated. If the Court finds that the individual mandate is constitutional, or that it is unconstitutional but can be severed, there likely will be little change to the status quo. As it currently stands, there is no penalty for failing to purchase insurance and that would continue, and severing the individual mandate only leaves other protections in the ACA, such as its guaranteed issue provisions and the community-rating requirements, intact. Affirming the district court’s finding that the entire ACA must be thrown out with the individual mandate, however, will eliminate the ACA and all of its protections. There is also a middle position, where some provisions would be severed and some would remain, depending on their relation to the individual mandate.

Appeal Rights for Railroad Benefits. The Court is also considering whether the Railroad Retirement Board’s denial of a claimant’s request to open a prior benefits decision is a “final decision” reviewable by the courts in Salinas v. U.S. R.R. Ret. Bd. (No. 19-999). The issue before the Court is a straightforward question of statutory interpretation. Section 355(f) of the Railroad Unemployment Insurance Act (RUIA) provides that any claimant, certain railway labor organizations, certain of the claimant’s employers, “or any other party aggrieved by a final decision under [§ 355(c)]” may obtain a court review of “any final decision of the Board” if they follow the prescribed claims procedures.

The Board construes the provision as limiting court review to the types of final decisions listed in § 355(c) of the RUIA. In support of its position, it argues that the term “other” in the phrase “any other party aggrieved by a final decision under [§ 355(c)]” indicates the other categories in the list of individuals or entities that can seek review also must have been “aggrieved by a final decision under [§ 355(c)].” Since § 355(c) does not encompass decisions regarding reopening claims, there is no right to appeal such a decision. This construction is appropriate, the Board said, because reopening of claims is a matter of “agency grace,” not a statutory requirement.

The petitioners disagree, contending the phrase “any final decision” in § 355(f) means just that – every decision is a claimant’s “last stop” at the administrative level, including a denial of a request to reopen a claim. They argue that the Board’s limited reading of the statute cuts off claimants’ recourse in the courts prematurely, potentially depriving them of benefits owed to them but mistakenly denied and violating “bedrock principles of agency accountability.”

This issue is narrow but significant. The Board administers billions of dollars of retirement, disability, sickness, and unemployment benefits each year for hundreds of thousands of claimants under the RUIA and Railroad Retirement Act. A Supreme Court order limiting the availability of judicial review to a discrete list of decisions, as the Board argues is appropriate, would have a profound impact on those claimants.