As numerous states (e.g., Arkansas, Florida, New York, Oklahoma, Tennessee and Texas) pass laws that regulate pharmacy benefit managers (PBMs), would these state laws be preempted by federal law (i.e., ERISA) for my self-insured prescription drug plan?
Not necessarily. Under ERISA, preemption of state laws is not automatic; it requires a federal court decision. Whether or not ERISA preemption could affect some or all of the provisions of the state PBM law will depend on the terms of the actual law being implemented and the courts’ interpretation of that law. Absent a clear court decision, sponsors of self-insured prescription drug plans would want to discuss compliance with their legal counsel and their PBMs.
Since the 2020 U.S. Supreme Court’s decision in Rutledge v. PCMA, many states have passed (or are considering passing) laws regulating PBMs (including PBMs for self-insured prescription drug plans). The overall goal of these laws is to lower prescription drug costs and increase transparency.
More specifically, these laws include:
While some of these laws’ requirements (such as reporting/attestation) apply directly to self-insured plans, most of them regulate PBMs. Nonetheless, they may impact the terms of the underlying ERISA covered group health plan (both fully and self-insured prescription drug plans) in certain instances. Given the potential impact on plan design and cost, self-insured plan sponsors have questions about ERISA’s impact and whether states can regulate these plans and the plans’ PBMs.
ERISA is a federal law that generally preempts “any and all state laws” to the extent they “relate to” employee benefit plans. While ERISA preemption may seem simple, a complex set of court decisions and federal guidance surrounds the issue. Only federal courts can ultimately determine whether ERISA preemption applies.
One key preemption issue that courts must typically weigh is whether a state law primarily relates to an employee benefit plan or is a general payroll tax or business assessment that will only “incidentally” relate to ERISA-governed plans. For example, the U.S. Supreme Court has held that a state law assessing a fee on all hospital payers had an “indirect economic effect” on ERISA plans that might increase costs; however, because the state law did not directly regulate plans, it was not preempted. In contrast, a federal district court held that another state health coverage continuation law for divorced spouses was preempted for self-insured plans because it applied to plans subject to COBRA (the federal continuation coverage law, which is a part of ERISA).
Historically, state laws seeking to regulate PBMs have only been enforceable against fully insured plans (plans subject to state regulation) and self-insured non-ERISA plans; however, this previously long-standing principle was weakened by the U.S. Supreme Court in 2020 via the ruling in Rutledge v. PCMA.
In Rutledge, the Supreme Court upheld an Arkansas reimbursement law providing that PBMs must reimburse pharmacies at a rate equal to or greater than a pharmacy’s acquisition cost for a drug. The 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 — and did not make “reference to” or have an impermissible “connection with” ERISA plans.
The Supreme Court further held that laws that “require providers to structure benefit plans in particular ways” can be preempted by ERISA. In contrast, 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.
The Rutledge decision appears to have changed the playing field for state legislation of PBMs.
In 2021, shortly after the Rutledge decision, the Supreme Court once again weighed in on ERISA preemption in a case involving a North Dakota law that was more comprehensive than the Arkansas law. Among other things, it regulated the fees PBMs and third-party payers may charge pharmacies, limited what copayments PBMs or third-party payers may charge, and prohibited PBMs from setting limits on information pharmacists may provide customers. The 8th Circuit Court of Appeals had ruled that the North Dakota law was preempted by ERISA “because its references to ‘third-party payers’ and ‘plan sponsors’ impermissibly relate to ERISA benefit plans.” However, after Rutledge, the Supreme Court sent the case back to the 8th Circuit for further consideration. On remand, the 8th Circuit vacated its original opinion based on the precedent set by Rutledge; therefore, North Dakota’s PBM law was not preempted by ERISA.
Another case may soon test the balance of ERISA preemption and state PBM laws at the U.S. Supreme Court. In the case of Mulready v. PCMA, PCMA sued Oklahoma over its “Patient's Right to Pharmacy Choice Act” in the U.S. District Court for the Western District of Oklahoma in 2019. A district court judge ruled in favor of Mulready and Oklahoma's PBM law in 2022 (i.e., that ERISA did not preempt the state law).
However, on appeal, the lower court ruling was overturned in August 2023. In that decision, the U.S. Court of Appeals for the 10th Circuit ruled that the following four provisions of the law are preempted by ERISA:
The case was then appealed to the U.S. Supreme Court; as of this writing, the court is awaiting the opinions of the U.S. solicitor general on this case and the laws at issue in Mulready v. PCMA. The eventual decision from the U.S. Supreme Court could affect how states apply PBM laws to self-insured plans and their vendors in the future.
State laws seeking to regulate PBMs have increased significantly over the past few years. These laws continue to 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. Some laws are meant to achieve a specific goal, such as ensuring network adequacy or preventing patient steerage 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).
Many state PBM bills are silent on whether they apply to PBMs working on behalf of ERISA-covered self-insured plans, apparently leaving that decision to state regulators. Other laws specifically include PBMs for self-insured plans as well as well as the self-insured plans. While these state laws may be passed with the intention of lowering prescription drug costs and protecting consumer pharmacy choices, the danger of increased state regulatory authority is the potential erosion of ERISA’s protection of employer-sponsored health plans. Even when applied indirectly, these laws often result in increased costs to plan sponsors, which may ultimately be realized by participants in the form of higher premiums.
Congress is actively considering federal PBM legislation as it continues to discuss prescription drug costs. In fact, PBM “reform” was included in the year-end government funding bill in 2024. The bill would have required PBMs to provide detailed disclosure to insured and self-insured group health plans at least semi-annually and summary documents for participants and beneficiaries upon request. PBMs would also have been required to pass through all drug manufacturer rebates, fees, discounts and remuneration (other than bona-fide service fees) to ERISA covered group health plans or the plan sponsor. While it appeared the bill would become law, it was dropped from the legislation at the eleventh hour.
PBM reform legislation continues to have bipartisan support and is expected to remain under discussion during the 2025–2026 Congressional term. The timing and pathway for any final legislation remains unclear.
Note: While this “Since you asked” discusses ERISA preemption for self-insured group health plans, depending on the facts and circumstances (including the scope and the specific wording of state PBM laws), fully insured ERISA group health plans may also be able to make a claim for ERISA preemption.
