ERISA Preemption of State PBM Regulation After Rutledge

ERISA Preemption of State PBM Regulation After Rutledge

In December 2020, the U.S. Supreme Court issued an opinion in the case of Rutledge v. Pharmaceutical Care Mgmt Ass’n, holding that an Arkansas statute regulating pharmacy benefit managers (PBMs) was not preempted by ERISA. The Rutledge decision may have narrowed the scope of ERISA preemption of state law in some respects. This article discusses general ERISA preemption concepts, the Rutledge decision and the impact of that decision on other states’ regulation of PBMs, looking specifically at a recent 8th Circuit Court of Appeals decision and a law recently enacted in Tennessee.  

ERISA Preemption of State Law

ERISA’s preemption rule is found in Section 514, the key portions of which provide as follows:

(a) Supersedure; effective date.
Except as provided in subsection (b) of this section, the provisions of this title and title IV shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan described in section 4(a) [29 USC §1003(a)] and not exempt under section 4(b) [29 USC §1003(b)]. This section shall take effect on January 1, 1975.

 

(b) Construction and application.

(1) This section shall not apply with respect to any cause of action which arose, or any act or omission which occurred, before January 1, 1975.

(2)

(A) Except as provided in subparagraph (B), nothing in this title shall be construed to exempt or relieve any person from any law of any State which regulates insurance, banking, or securities.

(B) Neither an employee benefit plan described in section 4(a) [29 USC §1003(a)], which is not exempt under section 4(b) [29 USC §1003(b)] (other than a plan established primarily for the purpose of providing death benefits), nor any trust established under such a plan, shall be deemed to be an insurance company or other insurer, bank, trust company, or investment company or to be engaged in the business of insurance or banking for purposes of any law of any State purporting to regulate insurance companies, insurance contracts, banks, trust companies, or investment companies.

Generally speaking, under Section 514, all state laws that “relate to any employee benefit plan” subject to ERISA are preempted other than laws regulating insurance, banking or securities.[1] If a law is preempted, it generally cannot be enforced against the plan, the employer sponsoring the plan or third parties providing services to the plan.

As discussed in the Rutledge opinion, the Supreme Court has generally interpreted Section 514 to apply when the state law has a connection with or a reference to an ERISA plan.

Connection With. When determining whether a state law has a connection with an ERISA plan, the Rutledge Court has said that ERISA is primarily concerned with preempting “laws that require providers to structure benefit plans in particular ways, such as by requiring payment of specific benefits . . . or by binding plan administrators to specific rules for determining beneficiary status” or when “economic effects of a state law force an ERISA plan to adopt a certain scheme of substantive coverage.” Put another way, a state law generally will be preempted due to its connection with an ERISA plan when it “governs a central matter of plan administration or interferes with nationally uniform plan administration.”[2]

Refers To. A state law generally will be considered to “refer to” an ERISA plan if it “acts immediately and exclusively upon ERISA plans or where the existence of an ERISA plan is essential to the law’s operation.”[3]

The Rutledge Decision

In the Rutledge case, the Supreme Court considered whether ERISA preempted an Arkansas law regulating PBMs. The law in question (referred to as “Act 900”) essentially requires PBMs to reimburse pharmacies at a rate equal to or higher than the rate paid by the pharmacy to acquire the drug. Act 900 contains three key elements: (1) it requires PBMs to timely update their lists of maximum allowable costs (MAC) when wholesale drug prices increase; (2) it requires PBMs to provide administrative appeals to allow pharmacies to challenge MAC reimbursement rates that were lower than the acquisition cost paid by the pharmacy and required PBMs to increase the reimbursement rate if the pharmacy could not obtain the drug at a lower price; and (3) it permits a pharmacy to refuse to sell a drug to someone covered by a plan if the PBM’s reimbursement would be less than what the pharmacy paid to acquire the drug. Act 900 was challenged by the Pharmaceutical Care Management Association, which claimed that the law was preempted by ERISA Section 514.

The Supreme Court determined Act 900 is not preempted by ERISA. First, the Court found Act 900 did not have a connection with ERISA plans. The Court held that, although Act 900 has some impact on ERISA plans by affecting the rates such plans must pay for pharmacy benefits, “ERISA does not preempt state rate regulations that merely increase costs or alter incentives for ERISA plans without forcing plans to adopt any particular scheme of substantive coverage.”

The Court also found Act 900 did not refer to ERISA plans. It determined Act 900 applied to PBMs regardless of whether they were providing services to an ERISA plan and ERISA plans were not essential to the operation of Act 900. Tellingly, the Court wrote that Act 900 “ does not directly regulate health benefit plans at all …. It affects plans only insofar as PBMs may pass along higher pharmacy rates to plans with which they contract”, which does not result in the law referring to ERISA plans.

[1] Section 514 includes other exceptions not relevant here.

[2] Gobeille v. Liberty Mut. Ins. Co., 577 U.S. 312 (2016).

[3] Gobeille, 577 U.S., at 319-20.


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