ERISA Broadly Preempts State Regulation of PBM-Pharmacy and PBM-Plan Agreements

ERISA Background

The Employee Retirement Income Security Act of 1974 (ERISA)1established a federal regulatory framework that governs both insured and self-insured “employee welfare benefit plans”2 and retirement plans sponsored by employers, labor unions, and certain other entities. Employer-sponsored health benefit plans are “welfare benefit plans” and thus subject to ERISA. ERISA does not cover governmental plans3 or church plans.4

ERISA’s Broad Preemption Provision

ERISA’s express preemption provision—one of the broadest preemption provisions in the United States Code—preempts all state laws that “relate to” ERISA-governed employee benefit plans.5 Congress’s purpose in including this sweeping express preemption provision was to establish a uniform federal regulatory scheme and protect ERISA plans from the administrative and compliance burdens of satisfying a patchwork of different state regulations.6

The US Supreme Court has construed ERISA’s broad preemption provision as preempting any state law that has a “reference to” or “connection with” ERISA-governed plans.7

Under the Supreme Court’s “reference to” test, ERISA preempts state laws that impose requirements by reference to ERISA-governed plans; that act immediately and exclusively on ERISA-governed plans; or where the existence of ERISA-governed plans is essential to the law’s operation.8

Under the Supreme Court’s “connection with” test, ERISA preempts state laws that govern central matters of plan administration or that interfere with nationally uniform plan administration.9 Matters of plan administration include calculating benefit levels, making disbursements, monitoring the availability of funds, and keeping records to comply with reporting requirements.10 Where a state law impacts either the structure11or administration12 of ERISA-governed plans, preemption occurs.13

Because ERISA’s express preemption provision reaches both “direct[] [and] indirect[]” state regulation of ERISA plans,14 preemption occurs even where a state’s regulation is imposed on third-party administrators (TPAs) administering ERISA-governed plans.15

Pharmacy Benefit Managers as TPAs for ERISA Health Plans

Pharmacy benefit managers (PBMs) serve as TPAs for health benefit plans. In that capacity, PBMs perform the essential functions necessary to deliver prescription drug benefits to plan members. PBMs contract with health plans to establish pharmacy networks, pharmacy credentialing and performance requirements, and otherwise manage the prescription-drug benefits provided by plans. PBMs in turn contract with pharmacies to provide access for plan members to a plan’s prescription-drug benefits. Such contracts necessarily include arrangements for how much PBMs will reimburse (on behalf of a plan) network pharmacies for any particular prescription drug covered by the plan.

ERISA Preemption of State PBM Regulation

Recently, several states have enacted legislation designed to regulate PBMs administering prescription-drug benefits for ERISA plans in various ways. ERISA preempts these efforts.

Where a state law regulates PBMs and defines the scope of the law to either expressly or implicitly include those PBMs administering pharmaceutical benefits for entities that are subject to ERISA regulation, the state law impermissibly refers to ERISA-governed plans and is preempted.16

Further, state regulation of the PBM-pharmacy relationship and/or the PBM-plan relationship has an impermissible “connection with” ERISA insofar as it regulates PBMs serving as TPAs for ERISA plans. In such circumstances, state law impermissibly dictates administrator choices pertaining to plan structure and administration. The following provides examples of state laws that ERISA preempts when imposed on PBMs serving as TPAs for ERISA plans:

PBM Duty-of-Care Requirements

• Requiring PBMs to owe a fiduciary duty to health plans or to perform their duties to a fiduciary standard17

Health-Plan Reimbursement Requirements

• Requiring PBMs to pass drug manufacturer benefits on to health plans
• Requiring PBMs to transfer payment received due to drug substitution

Pharmacy-Reimbursement Requirements

• Mandating particular pharmacy reimbursement rates18
• Allowing pharmacies to reverse and re-bill claims19
• Requiring retroactive payment to pharmacies for claims not in accord with the state law’s rates²⁰
• Prohibiting PBMs from imposing fees not apparent at the time of claim processing or after point of sale
• Allowing pharmacies to retain the adjudicated cost if the patient pays a copayment
• Requiring PBMs to reimburse pharmacies at the same rate used to reimburse a PBM affiliate

Pharmacy Network and Accreditation Requirements

• Prohibiting PBMs from having an ownership interest in a patient assistance program or mail order pharmacy unless the PBM “agrees to not participate in a transaction that benefits” the PBM “instead of another person owed a fiduciary duty”
• Requiring PBMs to provide a “reasonably adequate and accessible” pharmacy network structure
• Prohibiting PBMs from imposing accreditation standards more stringent than federal and state pharmacy licensing laws

Pharmacy Performance Requirements

• Requiring PBMs to employ particular standards or programs to measure pharmacy performance
• Limiting pharmacy performance fees to the amount of the dispensing fees

MAC List Requirements

• Limiting the data sources used to create MAC pricing lists21
• Limiting the types of drugs to which MAC pricing can apply22
• Requiring updates to MAC lists within a particular time23

Pharmacy Comment and Appeal Requirements

• Requiring procedures for pharmacies to comment on or appeal MAC lists or pricing24

Pharmacy Dispensing Requirements

• Allowing pharmacies to decline to dispense covered drugs25
• Allowing pharmacies to dispense any and all drugs allowed under their state license
• Allowing all pharmacies to mail or deliver drugs
• Prohibiting PBMs from limiting pharmacies’ charging of shipping or handing fees to patients

Reporting Requirements

• Requiring PBMs to report their MAC pricing methodology to the state26
• Requiring an “adequacy” report describing the PBM’s pharmacy network to the state
• Allowing insurance commissioner to review and approve PBM-plan compensation structure for pharmacies

Disclosure Requirements

• Requiring PBMs to disclose MAC pricing methodology to pharmacies27
• Requiring PBMs to disclose conflicts of interest to plans28
• Requiring PBMs to disclose to plans when they dispense a substitute drug that costs more than the prescribed drug29
• Requiring PBMs to disclose the quantity of drugs and net cost to plans
• Requiring PBMs to disclose the terms of remuneration between PBM and manufacturer to plans
• Requiring PBMs to disclose ownership interests in patient assistance programs or mail order pharmacies to plans
• Allowing pharmacies to disclose “relevant information” to patients, including information about adjudicated reimbursements
• Requiring PBMs to provide pharmacies with processor control numbers, bank identification numbers, and group numbers for each pharmacy network

In short, ERISA preempts state PBM regulation insofar as it regulates PBMs administering prescription-drug benefits for ERISA-governed plans in areas of ERISA concern.

This publication is intended to provide information of general interest in a summary manner and should not be construed as individual legal advice. Readers should consult with their McDermott Will & Emery lawyer or other professional counsel before acting on the information contained in this publication. ©2018 McDermott Will & Emery. This communication may be considered attorney advertising. Previous results are not a guarantee of future outcome.

129 U.S.C. § 1001 et seq.
2Id. § 1002(1).
3Id. § 1003(1).
4Id. § 1003(2).
5Id. § 1144(a).
6See, e.g., Fort Halifax Packing Co., Inc. v. Coyne, 482 U.S. 1, 11–12 (1987). 
7Gobeille v. Liberty Mut. Ins. Co., 136 S. Ct. 936, 943 (2016).
8Cal. Div. of Labor Standards Enf’t v. Dillingham Constr., N.A., 519 U.S. 316, 324–25 (1997). 
9Gobeille, 136 S. Ct. at 943.
10Pharm. Care. Mgmt. Ass’n v. Gerhart, 852 F.3d 722, 730 (8th Cir. 2017); see also Fort Halifax, 482 U.S. at 9.
11Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 97 (1983).
12Gobeille, 136 S. Ct. at 943.
13Minn. Chapter of Associated Builders & Contractors, Inc. v. Minn. Dep’t of Pub. Safety, 267 F.3d 807, 816 (8th Cir. 2001).
14See 29 U.S.C. § 1144(c)(2). 
15Pharm. Care Mgmt. Ass’n v. Rutledge, 891 F.3d 1109, 1112–13 (8th Cir. 2018); Gerhart, 852 F.3d 722; Pharm. Care Mgmt. Ass’n v. Dist. of Columbia, 613 F.3d 179 (D.C. Cir. 2010).
16Rutledge, 891 F.3d at 1112; Gerhart, 852 F.3d at 729.
17See, e.g., Dist. of Columbia, 613 F.3d at 183, 188.
18See, e.g., Rutledge, 891 F.3d at 1111.
19See, e.g., id.
20See, e.g., Rutledge, 891 F.3d at 1111; Gerhart, 852 F.3d at 727.
21See, e.g., Gerhart, 852 F.3d at 727.
22See, e.g., id. 
23See, e.g., Rutledge, 891 F.3d at 1111.
24See, e.g., Gerhart, 852 F.3d at 727.
25See, e.g., Rutledge, 891 F.3d at 1111.
26See, e.g., Gerhart, 852 F.3d at 727.
27See, e.g., id.
28See, e.g., Dist. of Columbia, 613 F.3d at 183, 188.
29See, e.g., id.