READ TIME: 6 MINUTES
Pharmacy benefit managers (PBMs) play a pivotal role in the U.S. healthcare system, managing prescription drug benefits on behalf of insurers and employer-sponsored health plans. However, rising concerns over PBM transparency, pricing practices, and reimbursement rates have led to an expanding patchwork of state-level legislation. For employers – especially those offering self-insured health plans – these developments introduce complex compliance challenges, particularly in the context of federal ERISA preemption.
ERISA Preemption: A Primer for Employers
The Employee Retirement Income Security Act of 1974 (ERISA) establishes uniform national standards for employer-sponsored health plans. One of its most important provisions is preemption—ERISA overrides state laws that directly regulate these plans. However, the scope of ERISA preemption is nuanced.
- Fully Insured Plans: Generally subject to state insurance regulations. PBM-related laws at the state level typically apply.
- Self-Insured Plans: Typically shielded from state insurance laws under ERISA preemption. But if a state law regulates PBMs (rather than health plans directly), ERISA may not preempt it.
The issue of ERISA preemption over state PBM laws reached the U.S. Supreme Court in 2020. This 2020 case, Rutledge v. Pharmaceutical Care Management Association, clarified the distinction between laws regulating plans versus those regulating PBMs. In this case, the Court upheld an Arkansas law that required PBMs to reimburse pharmacies at or above acquisition cost. The Court stated that this law targeted PBMs directly and did not regulate employer health plans, and therefore the law was not preempted by ERISA. This decision has had significant implications for the regulation of PBMs nationwide because it allowed states to pass laws that regulate PBMs without risking violations of ERISA.
The Evolving Patchwork of State PBM Laws
Since Rutledge, most states have introduced or enacted bills targeting PBM practices. These laws are generally aimed at lowering drug costs, increasing transparency, and protecting pharmacies. Common statutory themes include:
- Prohibiting spread pricing (charging the client (the insurer) a higher amount than is reimbursed to the pharmacy)
- Mandating disclosure of manufacturer rebates
- Limiting patient cost-sharing
- Imposing network access requirements
- Requiring detailed reporting and compliance attestations
As these laws expand in number and scope, the burden on plan sponsors (especially those operating across multiple states) increases.
Employer Action Items
To manage risk and maintain compliance in a shifting regulatory environment, employers should take proactive steps based on the type of plan they offer.
All Employers
- Monitor legal developments. Assign internal or external legal resources to track PBM-related legislation and litigation in states where employees reside.
- Engage with PBMs. Regularly review PBM contracts to understand how regulatory compliance is addressed and whether reporting obligations are covered.
Employers with Fully Insured Plans
- Coordinate with carriers. Work closely with insurance carriers to ensure compliance with new state laws, especially regarding reporting and cost-sharing requirements.
- Understand cost impact. Analyze how PBM practices shaped by state law may influence premiums or pharmacy benefit costs.
Employers with Self-Insured Plans
- Consult ERISA counsel. Legal guidance is essential to determine whether specific state PBM laws may impact your plan, particularly if those laws regulate PBMs rather than plans directly.
- Assess PBM support for compliance. Confirm that your PBM partner is capable of handling multi-state compliance, including reporting and transparency mandates. If operating in multiple states, evaluate whether regional variations in law necessitate operational changes or different PBM arrangements.
The legal landscape governing PBMs is in flux. As state legislatures continue to pass new laws and courts assess the reach of ERISA preemption, plan sponsors must stay up to date on legal developments. Compliance is not guaranteed by satisfying ERISA alone. Maintaining strong relationships with PBMs, working closely with legal counsel and other advisors, and remaining informed about legislative trends will be key to navigating this complex and rapidly evolving area of law.
This information has been prepared for UBA by Fisher & Phillips LLP. It is general information and provided for educational purposes only. It is not intended to provide legal advice. You should not act on this information without consulting legal counsel or other knowledgeable advisors.
