Pharmacy benefit managers (PBMs) play a role in the US healthcare system by negotiating drug prices and formulary placements on behalf of insurers and employer sponsored health plans. Recently, there have been concerns about certain PBM business practices, including drug pricing transparency and reimbursement rates. This has prompted numerous states to enact laws regulating PBMs. A key legal challenge to these state laws is whether ERISA preempts these laws.
ERISA is a federal law that sets national standards for employer-sponsored health plans. One of its most important provisions is preemption, meaning that ERISA overrides state laws that attempt to regulate employer health plans directly. However, ERISA does not preempt all state laws. While it prevents states from regulating self-insured employer health plans, it generally does not block states from regulating fully insured plans. Additionally, some state laws that regulate third-party entities, like PBMs, have been upheld as enforceable, even when they impact employer-sponsored plans indirectly.
For employers sponsoring self-insured plans with employees in multiple states, this creates additional complexity. If ERISA does not preempt a state law, plan sponsors may have to comply with different PBM regulations in each state where they operate.
Further, recent court rulings and ongoing legislative changes indicate that this landscape is constantly shifting. For employer plan sponsors (whether sponsoring self-insured or fully insured group health plans) it is important to understand the evolving PBM landscape to ensure compliance.
Background: ERISA Preemption and PBMs
In general, state insurance laws do not apply to self-insured group health plans due to ERISA preemption. In recent years, several legal cases have challenged the application of ERISA preemption to state PBM laws and self-insured plans. The U.S. Supreme Court’s 2020 decision in Rutledge v. Pharmaceutical Care Management Association held that an Arkansas law requiring PBMs to reimburse pharmacies at certain rates was not preempted by ERISA. The court reasoned that the law regulated PBMs rather than employer health plans directly.
This means that while some of these laws directly regulate PBMs, they may also indirectly affect the terms and costs of self-insured prescription drug plans. If ERISA does not preempt a state PBM law, self-insured plan sponsors may be subject to certain state-imposed PBM regulations. This could include increased regulatory burdens, additional reporting requirements and cost increases. Employers sponsoring self-insured plans should be prepared for the possibility that state laws could dictate how prescription drug benefits are structured, limiting flexibility and increasing administrative complexity.
Recent State Legislative Initiatives
Since Rutledge, many states have enacted PBM regulations aimed at lowering prescription drug costs and increasing transparency. These laws typically:
- Limit patient cost-sharing requirements.
- Require PBMs to disclose pricing and manufacturer rebates.
- Prohibit spread pricing, where PBMs charge plans more than they reimburse pharmacies.
- Impose network access requirements.
- Mandate reporting and compliance attestations.
With over 100 PBM-related bills introduced across more than 45 states in recent years, it is clear that state regulation of PBMs is expanding. Recent examples of state legislation include:
- Texas Senate Bill 1122 (SB 1122): Introduced on February 6, SB 1122 seeks to clarify the applicability of certain prescription drug insurance laws to health benefit plans and PBMs. As of March 13, the bill has been referred to the Senate Health & Human Services Committee.
- Indiana Senate Bill 140 (SB 140): SB 140 mandates that insurers and PBMs ensure their networks are reasonably adequate and accessible, requiring annual reporting. It also imposes limitations on pharmacy services under health plans and prohibits certain ownership interests between health carriers and PBMs to address concerns about vertical integration. The bill passed the Senate with a 47-2 vote on February 20, and is currently under consideration in the House.
- Alabama Senate Bill 93 (SB 93): Introduced on February 4, SB 93 would prohibit PBMs from reimbursing a pharmacy less than the actual acquisition cost paid by the pharmacy and would prohibit PBMs from charging pharmacies miscellaneous fees related to network participation and claims processing. It also permits pharmacists to disclose information to consumers about drug prices and alternative drugs for treatment.
- Mississippi House Bill 1123: This bill would prohibit PBMs from engaging in spread pricing, which is the practice of paying insurers more for drugs than the amount pharmacists received. It would require PBMs to submit reports detailing the rebates, or cost savings, they receive from pharmaceutical companies and to disclose their affiliations with pharmacies to the Board of Pharmacy. It would also require drug manufacturers and health insurers to submit reports detailing wholesale drug costs and information about drug costs and spending to the Board of Pharmacy.
While these legislative efforts show a push for PBM oversight, legal challenges will continue, particularly concerning ERISA preemption.
Employer Takeaways
State regulations on PBMs are expanding, but ERISA preemption adds an additional layer of analysis, especially for self-insured plans. There will continue to be legal challenges to these various state laws and courts are going to determine whether ERISA preemption ultimately applies. To stay compliant, employer plan sponsors should work closely with their carriers, PBMs and ERISA counsel to understand their legal responsibilities around the growing number of state laws.
For Employers with Fully Insured Plans: We recommend working with insurers and PBMs to assess how new laws impact plan costs, pharmacy networks and any reporting requirements. Although we typically see insurance carriers assisting with reporting requirements, employers will want to confirm.
For Employers with Self-Insured Plans: We recommend working with PBMs and ERISA counsel to determine whether a state law may apply and whether any action may be required from the employer. Employers will want to be aware of how their PBM is supporting any reporting requirements and/or plan compliance.
Connect with a Sequoia consultant to learn how Sequoia’s compliance services are integrated in our benefits services and tailored solutions. And if you’re already a Sequoia client, stay on top of your employer obligations with your Compliance Checklist that highlights important compliance dates, action items, and resources.
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