The recent rise in state law regulation of pharmacy benefit managers (PBMs) and prescription drug pricing continues to test the limits of preemption under the Employee Retirement Income Security Act of 1974, as amended (ERISA).
While certain recent legislation includes provisions that are purported or explicitly drafted to apply to self-funded employer-sponsored health plans subject to ERISA, these laws have faced ongoing challenges on the basis that ERISA generally preempts state laws that impermissibly relate to self-funded ERISA health plans, as further discussed in our prior blog post.
On April 7, the United States Court of Appeals for the Sixth Circuit delivered a win for self-funded ERISA plan sponsors by upholding an earlier district court ruling that portions of Tennessee’s PBM laws are preempted by ERISA and cannot be applied to self-funded ERISA plans.
The Sixth Circuit reviewed portions of Tennessee’s Public Chapters 569 and 1070, as amended, which restricted PBMs operating in the state in two ways:
- PBMs were required to admit any pharmacy willing to accept a particular PBM’s terms into the PBM’s network (the “any-willing-provider” provision).
- PBMs were prohibited from offering incentives, like cost-sharing arrangements, or providing disincentives, such as additional fees and higher copayments, to steer beneficiaries to specific in-network pharmacies (the “incentive and disincentive” provisions).
The Sixth Circuit determined that the Tennessee any-willing-provider provision impermissibly restricted self-funded ERISA plans because by removing the plan sponsor’s choice of pharmacy network providers, the law effectively made network decisions, which were “a central matter of plan administration,” and required plans to be designed in a particular way. The any-willing-provider provision was also impermissibly restrictive because by requiring networks to admit any willing Tennessee‑licensed pharmacy, the law necessitated tailored benefits specific to Tennessee, which would “disrupt nationally uniform plan administration.”
The incentive and disincentive provisions were also held to be impermissible restrictions on self-funded ERISA plans by dictating key plan design and structure requirements, because “forbidding differential cost-sharing structures is the same as requiring identical cost-sharing structures” within the pharmacy network. The appeals court determined that these impermissible plan design requirements disrupt the plan’s uniformity.
Further, because the Sixth Circuit decided that both the any-willing-provider and the incentive and disincentive provisions effectively dictate key plan decisions, they cannot escape ERISA preemption as a regulation that merely “increases costs or alters incentives for ERISA plans.”
The Sixth Circuit’s decision confirms the continuing vitality of ERISA preemption. However, given increasingly novel legislative action at the state level with respect to PBMs, prescription drugs, and other issues involving healthcare coverage, we are certain the limits of ERISA preemption will continue to be tested in federal courts.
We will continue to monitor ongoing developments in PBM regulations and litigation for employers who sponsor self-funded ERISA plans. If you have questions regarding specific state PBM laws or ERISA preemption, please contact a member of our Employee Benefits Practice Group for more information.