As various states — such as Florida, Oklahoma and Texas — pass laws that regulate pharmacy benefit managers (PBMs), do these state laws apply to or affect my self-insured group health plan?
It depends. While self-insured group health plans covered under the Employee Retirement Income and Security Act (ERISA) may be able to claim ERISA preemption from these types of state laws, preemption is not automatic and must be determined by a federal court. Ultimately it would depend on the terms of the actual state law being implemented and the court’s interpretation of that law.1
Many states have passed laws regulating PBMs that, in general, aim to lower prescription drug costs and increase transparency. Some of these laws ban PBM gag clauses that prevent pharmacies from informing consumers about lower-cost options. Others limit patient cost sharing, require PBMs to disclose their price lists and manufacturer rebates to improve transparency, or prohibit so-called “spread pricing” where PBMs charge plans more than they reimburse pharmacies. While most of these laws apply directly to PBMs, they can also affect the terms of underlying ERISA-covered group health plans (both fully and self-insured plans). Given the potential impact on plan design and cost, self-insured plan sponsors have questions about ERISA and whether states can regulate these plans (and the plans’ PBMs).
Congress enacted ERISA in 1974 to provide national standards for employee benefit plans, including reporting, disclosures, fiduciary responsibilities, claims and appeals, and remedies for noncompliance. ERISA generally preempts “any and all state laws” with regard to employee benefit plans, to ensure ERISA plans are administered the same way in all states; however, only federal courts can ultimately determine whether ERISA preemption applies.
Historically, state laws seeking to regulate PBMs have only been enforceable against fully insured plans (plans subject to state regulation) and self-funded non-ERISA plans. However, this previously long-standing principle was weakened in 2020 after the Supreme Court’s ruling in Rutledge v. PCMA. In Rutledge, the court upheld an Arkansas reimbursement law that said PBMs must reimburse pharmacies at a rate that is equal to or greater than a pharmacy’s acquisition cost for a drug. The Supreme Court noted that Arkansas’ law was not preempted because it did not force plans to structure benefits in a particular way; it merely increased costs or altered incentives for PBMs. Other cases have also been testing the balance of ERISA preemption and state PBM laws.
Since the Supreme Court’s Rutledge decision, state laws seeking to regulate PBMs have increased exponentially. According to the National Academy for State Health Policy, 137 PBM bills have been either signed into law or proposed in 47 states (as of May 26, 2023).
These laws focus on a variety of areas in which PBMs operate, including mail-order pharmacies, specialty and preferred networks, mandatory pharmacy reimbursement, point-of-sale rebates and copay accumulator programs, among other topics. Some laws are meant to achieve a specific goal, such as ensuring network adequacy or preventing steering patients to certain pharmacies, while others put forward a comprehensive set of reforms. The laws also vary in which part of the drug-distribution process they target (i.e., drug manufacturers, pharmacies, insurance providers or PBMs).
In previous ERISA preemption cases, the Supreme Court held that laws that “require providers to structure benefit plans in particular ways” come within the scope of ERISA’s express preemption provision, while laws “that merely increase costs or alter incentives for ERISA plans without forcing plans to adopt any particular scheme of substantive coverage” are not preempted.
Many state PBM bills are silent on whether they apply to PBMs working on behalf of ERISA-covered self-funded plans, apparently leaving that decision to state regulators. Other laws (e.g., Florida’s SB 1550) specifically include PBMs for self-insured plans as well as the self-insured plans.
While state PBM laws may intend to lower prescription drug costs and protect consumer pharmacy choices, increasing state regulatory authority potentially erodes ERISA’s protection of employer-sponsored health plans. These laws often result in increased costs to plan sponsors, which may ultimately lead to higher premiums for plan participants.
When states regulate PBMs, they also indirectly may be regulating the underlying prescription drug plan and any plan design that a plan sponsor chooses to provide valuable benefits to participants (e.g., choice of networks, mail-order rules). If PBMs continue to be restricted in their ability to design networks, then fewer options may be available to employers, ultimately resulting in increased costs.
PBM legislation is under active consideration as Congress continues to discuss prescription drug costs. Several key committees have approved PBM-related legislation or indicated their intention to introduce such legislation. These bills are not identical but have similar legislative goals, such as enhancing transparency and limiting such practices as spread pricing and clawbacks.
Other committees have held hearings and may consider legislation. In addition, the House Oversight and Accountability Committee has launched an investigation into PBM practices.
While PBM reform legislation has bipartisan support, the number of competing PBM bills and a difficult legislative environment could limit quick action. The timing and pathway for any final legislation remains unclear.
