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Highlights:
- Understanding state PBM laws is essential for designing self-funded plans that maintain high-quality benefits and employee satisfaction.
- Recent court rulings highlight the need for flexibility in plan design, ensuring employees continue to access pharmacies and programs that support their health.
- Proactively managing PBM contracts and monitoring state regulations helps employers deliver consistent, effective, and compliant wellness and benefits programs.
States have taken a variety of legislative approaches in
response to rising prescription drug prices, including regulating
pharmacy benefit managers (PBMs). This article discusses some
recent developments in state PBM legislation and related litigation
that are complicating the legal landscape for self-funded health
plans.
States generally are permitted to regulate fully insured products
offered in their state, including requiring certain benefits.
However, the Employee Retirement Income Security Act of 1974, as
amended (ERISA), preempts state laws that impermissibly relate to
self-funded employer-sponsored health plans that are subject to
ERISA.
Nevertheless, some new state laws are 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 allowed plan sponsors and other interested parties
to challenge these state laws in federal court as preempted by
ERISA. But because preemption challenges are ongoing, self-funded
ERISA plan sponsors are forced to navigate the uncertainty
regarding interpretation and enforcement authority under differing
state PBM laws, which include potential penalties for
noncompliance.
Portion of Tennessee PBM Law Preempted by ERISA
Recent Tennessee litigation resulted in a promising ERISA
preemption outcome when a federal district court granted summary judgment in favor of a
self-funded ERISA plan sponsor. The court ruled that 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 restrictions that:
- Required PBMs to admit any pharmacy willing to accept the PBM's terms into its preferred network.
- Prohibited PBMs from offering incentives like cost-sharing discounts or providing disincentives such as higher copayments to steer beneficiaries to specific in-network pharmacies.
The court decided the any-willing-provider provision was an
impermissible restriction on the pharmacy network because
self-funded ERISA plan sponsors must be able to choose how their
plans are structured and design their benefits, and network
decisions are "a key aspect of plan administration." By
removing a self-funded ERISA plan sponsor's ability to choose
its network providers, the court held that the regulations imposed
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 network
pharmacies, thereby removing all plan discretion in how
cost-sharing should be allocated. This decision has been appealed
by the commissioner of the Tennessee Department of Commerce &
Insurance.
Arkansas Reporting Requirement Not Preempted by ERISA
In contrast, a federal district court recently dismissed a claim that the reporting
and dispensing fee requirements under an Arkansas rule should be preempted by
ERISA, finding that the rule did not impermissibly relate to
self-funded ERISA plans.
Under Arkansas Insurance Department (AID) Rule 128, health benefit
plans, including self-funded ERISA plans, must submit certain
pharmacy compensation data to AID annually for review by the
Arkansas insurance commissioner. If a plan's reimbursement
arrangements do not provide "fair and reasonable"
compensation to pharmacies, the commissioner may impose an
additional dispensing fee on the plan.
The court found that AID Rule 128 did not exclusively act on ERISA
plans in such a way that would require preemption because the rule
appeared to apply to all health benefit plans, without regard to
whether they are subject to ERISA. The court also found that the
reporting requirement was permissible under ERISA because it was
only incidental to facilitate AID Rule 128's regulation of
dispensing fees. Further, the court determined that the dispensing
fee requirement was a cost regulation that by its terms may not
apply to every plan (or ERISA plan) and did not impermissibly
dictate plan design or a particular coverage strategy.
Separately, Arkansas passed legislation that would restrict PBM
ownership of retail pharmacies as of January 1, 2026, which could
impact retail pharmacy networks and participant access for
self-funded ERISA plans, particularly for those plans that utilize
a PBM that has affiliated retail pharmacies. In July, a court ordered that this law cannot take
effect, but this is being appealed.
Florida Reporting Requirement Enforcement Begins
Pursuant to authority granted under a Florida law that seeks to increase the transparency and accountability of PBMs, the Florida Office of Insurance Regulation has begun requiring PBMs to submit extensive claims reimbursement data. The scope of the law is broad and would require PBMs to provide data from both fully insured and self-funded ERISA 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. Given the apparent broad application and amount of data requested, practitioners and plan sponsors are questioning whether the reporting requirement is applicable to self-funded ERISA plans or whether there is an argument in support of ERISA preemption.
Texas Position that PBM Legislation Not Preempted by ERISA
In February, the Texas attorney general provided an opinion with an ERISA preemption analysis for House Bills 1763 and 1919 — 2021 PBM legislation that included any-willing-provider and anti-steering provisions. While the statutory language of the two bills did not expressly identify or exempt self-funded ERISA plans, the Texas attorney general took the position that if the issue were challenged in court, the bills would not be preempted by ERISA. Despite the attorney general's assertion, House Bills 1763 and 1919 could still face ERISA preemption challenges.
A Dynamic Environment
Given the recent increase in prescription drug legislation and related litigation, state-level PBM reform and its impact on self-funded ERISA plans are continuously evolving. Staying informed on new laws, ERISA preemption challenges and related developments is critical for self-funded ERISA plan sponsors to avoid being caught in a shifting landscape without a map.
More from this Edition
- The Healthcare Cost Tsunami
- Balancing Budgets And Benefits: A New Era Of Employer Healthcare Strategy
- Inside The Rising Costs Of U.S. Healthcare
- Canada's Rising Healthcare Costs Demand Rethinking Of Employee Benefits
Originally published by HR.com.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
