In recent years, prescription drug prices have been top-of-mind for state legislators, who have responded by passing laws that seek to control that pricing in a variety of ways, including by regulating pharmacy benefit managers (PBMs).
While states generally are permitted to regulate fully-insured products offered in their state, including mandating the benefits that insurers must offer, the Employee Retirement Income Security Act of 1974, as amended (ERISA) generally preempts state laws that impermissibly relate to self-funded employer-sponsored health plans that are subject to ERISA.
Nevertheless, some of these laws purport, or are explicitly drafted, to apply to self-funded ERISA plans, and may arguably involve restrictions on the design, operation, and pricing of the pharmacy benefit programs offered by employers, which are core aspects of self-funded ERISA health plans, and traditionally areas where ERISA preemption could apply. This has set the stage for plan sponsors and other interested parties to bring challenges to these state laws in federal court under ERISA on preemption grounds.
Until preemption challenges are resolved by the courts, self-funded ERISA plan sponsors are forced to navigate the uncertainty regarding interpretation and enforcement authority under many different state PBM laws, with diverse requirements and potential penalties for noncompliance. Staying up to date on developments in PBM legislation and related litigation in this ever-changing environment is of paramount importance to self-funded ERISA plan sponsors looking to avoid penalties and potentially costly litigation.
This alert illustrates some of the recent developments in PBM legislation, related litigation, and legal positions taken by state agencies regarding the scope of PBM regulations and applicability to self-funded health plans.
District Court Rules Portion of Tennessee PBM Law Preempted by ERISA
Recent litigation in Tennessee resulted in a promising outcome for self-funded ERISA plan sponsors when a United States District Court granted summary judgment in favor of McKee Foods, Inc. The court ruled portions of Tennessee’s Public Chapters 569 and 1070 were preempted to the extent that they attempted to govern self-funded ERISA plans.
These laws, as amended, imposed certain restrictions that:
- Required PBMs to admit any pharmacy willing to accept the PBM’s terms into its preferred network (the “any-willing-provider” provision).
- Prohibited PBMs from offering incentives, like cost-sharing discounts, or providing disincentives, such as additional fees and higher copayments, to steer beneficiaries to specific in-network pharmacies (the “incentive and disincentive” provisions).
As part of the March ruling, the court decided that the any-willing-provider provision was an impermissible restriction on a self-funded ERISA plan’s pharmacy network because plan sponsors must be able to choose how their plans structure and design their benefits, and network decisions are “a key aspect of plan administration.”
By removing the ability of the self-funded ERISA plan sponsor to choose the providers for its network, the Tennessee regulations impose requirements to structure benefit plans in a particular way.
Further, the court held that the incentive and disincentive provisions also impermissibly restrict self-funded ERISA plans because they “functionally mandate that ERISA plans charge plan participants the same copays and/or fees at all pharmacies in a given network,” thereby removing all plan discretion in how cost-sharing should be allocated.
Arkansas Health Benefit Plan Reporting Requirement Challenged by Teamster Fund
Recently, an International Brotherhood of Teamsters healthcare fund (the Fund) brought a preemption challenge to an information reporting requirement imposed by the Arkansas Insurance Department (AID) under the Arkansas Pharmacy Benefits Manager Licensure Act.
The reporting requirement (AID Rule 128) mandates the submission of certain pharmacy compensation data points by all health benefit plans, including self-funded health plans, to the AID on an annual basis so that the Arkansas Insurance Commissioner may review whether health benefit plan pharmacy reimbursement arrangements provide “fair and reasonable” compensation to pharmacies. If a health benefit plan’s arrangement does not pass muster, AID Rule 128 provides for the imposition of an additional dispensing cost on the plan.
The Fund’s preemption challenge is rooted in the reporting authority already granted to the Department of Labor (DOL) under ERISA, which covers the annual submission of certain prescription drug spending information to the DOL on an annual basis. Essentially, the Fund is arguing that ERISA preempts the reporting requirement imposed by AID Rule 128 because ERISA already imposes similar reporting requirements at the federal level. This argument is based in part on Gobeille v. Liberty Mutual Insurance Company, 577 U.S. 312, 320 (2016), where the Supreme Court determined that a Vermont law requiring plans to report detailed information about claims and plan members to a state agency was pre-empted by ERISA.
While an answer to the Fund’s complaint has not yet been filed by the Arkansas Insurance Commissioner, it seems likely the state will lean heavily on the favorable precedent found in Rutledge v. Pharmaceutical Care Management Association, 592 U.S. 80, 87 (2020), a case in which Arkansas won out against a preemption challenge of a separate Arkansas PBM law that imposes certain minimum pharmacy reimbursement rates on PBMs.
Additionally, self-funded ERISA plan sponsors should be prepared to navigate complexities when selecting a PBM and network pharmacies in Arkansas as the state pioneers a new approach to PBM regulation. As covered in our colleagues’ publication, new legislation will restrict PBM ownership of retail pharmacies in Arkansas beginning in 2026. With the anticipated pharmacy ownership changes, retail pharmacy networks and participant access will be important considerations for self-funded ERISA plans.
Florida Begins Biennial Examinations by Requesting Claims Data from PBMs
In May 2023, Florida passed the Prescription Drug Reform Act (SB 1550), which sought to increase the transparency and accountability of PBMs. As part of this regulation, Florida included authority to biennially examine the business and affairs of PBMs, with the first cycle of reviews beginning on January 1, 2025. The scope of the new SB 1550 broadly defines a PBM as an entity “that contracts to administer prescription drug benefits on behalf of a pharmacy benefits plan or program.” “Pharmacy benefit plans” specifically include self-funded ERISA plans and extend the application to plans that have any covered individual who uses pharmacy services in Florida—even if the plan has only a single prescription filled within the state. As part of these examinations, the Florida Office of Insurance Regulation (FLOIR) is requiring PBMs to submit extensive claims reimbursement data.
Because FLOIR’s reviews began just a few months ago, there have not yet been formal challenges to the biennial examinations and data requests. However, practitioners and plan sponsors are questioning whether the Florida legislation properly can be applied to self-funded ERISA plans for the same reason raised by the Fund in its challenge to AID Rule 128: ERISA already governs reporting and disclosure obligations for self-funded ERISA plans. Plan sponsors should be aware the issue of ERISA preemption is an open question regarding this legislation and may be subject to future litigation.
Texas Takes the Position that PBM Legislation Applies to Self-Funded ERISA Plans
In 2021, Texas enacted PBM legislation as part of House Bills 1763 and 1919, which included any-willing-provider and anti-steering provisions. The statutory language of the two bills does not expressly identify nor exempt self-funded ERISA plans. However, in response to the request of one of the bill’s authors, the Texas Attorney General recently provided an opinion providing an ERISA preemption analysis for the bills, which took the position that if the issue were challenged in a Texas court, the PBM legislation in House Bills 1763 and 1919 would not be preempted by ERISA.
After the Texas Attorney General’s opinion was issued, new Texas Senate Bill 1122 was proposed to reinforce the application of House Bills 1763 and 1919 to ERISA plans. Even if this Senate Bill is ultimately passed, it, or the underlying Texas PBM legislation could still face ERISA preemption challenges, similar to those with respect to some of the other state-specific PBM legislation described in this alert.
Where Does This Leave Self-Funded ERISA Plans?
Given the recent increase in legislation and related litigation, ERISA preemption regarding state level PBM reform is largely a moving target.
We will continue to monitor ongoing developments in this area for employers who sponsor self-funded ERISA plans. If you have questions regarding specific state PBM laws, please contact a member of our Employee Benefits Practice Group for more information.