PUTT Blog | Seventh Circuit Court of Appeals Says Arkansas’ Rule 128 Stands. Here’s What That Could Mean for Pharmacies Everywhere

Breaking news last week was good news for Arkansas pharmacies, when the Seventh Circuit Court of Appeals unanimously affirmed the dismissal of a legal challenge to Rule 128, effectively ruling that ERISA does NOT preempt the insurance department or a state’s ability to regulate PBM payment of dispensing costs, nor does it preempt a state regulatory agency from auditing, collecting data, or requiring reporting of PBM and plan pricing data to enforce PBM pricing laws. In essence, it makes the PBM show their homework so states can finally see behind the curtain.

What is Rule 128?

Rule 128 is an Arkansas Department of Insurance regulation that was initially enacted as a temporary emergency rule in September 2024. It was made permanent in December 2024. It supports the 2018 law that set pharmacy reimbursement requirements to at least National Average Drug Acquisition Cost (NADAC) or invoice cost (MAC appeal), and requires pharmacies be paid a fair and reasonable cost to dispense. 

Commissioner Alan McClain promulgated Rule 128 in direct response to the fallout of a series of reimbursement and reimbursement-related crises at the time: PBMs reimbursing pharmacies at or near NADAC minimums and/or Maximum Allowable Cost (MAC) without sufficient reimbursement to cover the cost to dispense; CMS’ rule requiring DIR fees be paid at point of sale rather than after the fact had been in effect since January 1, 2024 (the “DIR cliff” that was already threatening to close as many as 30% of community pharmacies); and the number of Arkansas pharmacies that had closed or were on the brink of closure. Arkansas DOI determined Rule 128 was necessary to protect patient access to care and the local pharmacies providing it.

Rule 128 included another important provision: pharmacy reimbursement reporting. 

Rule 128 extends the Insurance Commissioner’s authority to review and accept or reject a health plan’s PBM-administered pharmacy reimbursement program. While the factors determining a PBM’s reimbursement model will not be made available to the public, the Seventh Circuit’s decision requires PBMs to “show their math” to state insurance regulators when it comes to determining how PBMs reimburse pharmacies.

Who Challenged Rule 128 and Why?

Central States Funds/Team Care, a not-for-profit labor union self-insured plan covering some 500,000 Teamsters, challenged Rule 128 on the basis of ERISA pre-emption.

It is unlikely the Supreme Court would agree to hear a challenge to Rule 128. In 2020, SCOTUS heard Rutledge v. PCMA and ruled that Arkansas’ Act 900, which set a pharmacy reimbursement floor tied to acquisition cost and allowed pharmacies to refuse to fill scripts they would incur losses on, does not preempt ERISA. 

So what does this mean for states wanting to regulate PBM reimbursements, dispensing fees and reimbursement reporting?

Arkansas’ Act 900 set a precedent for states seeking to regulate the PBM practice of reimbursing pharmacies below acquisition cost, and arguably opened the floodgates to a rush of new laws that outlaw anticompetitive practices including below-cost reimbursement, charging pharmacies transaction fees to process claims, excessive fees and accreditation and certification standards for participation in the PBM’s pharmacy network. 

This latest favorable ruling appears to continue the precedent, validating the reality and need for professional dispensing fees as reimbursement for the real costs associated with dispensing, but only time and the states’ willingness to stand up to PBM practices that undercut local pharmacies will tell for certain. Even more important, the ability to collect data, examine and audit PBM compensation practices for state PBM pricing laws is a massive win for enforcement upheld by the 7th Circuit.