ERISA Preempts State Regulation of PBM–Pharmacy Pricing Agreements

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ERISA broadly preempts state laws that “relate to” ERISA-governed employee benefit plans to ensure a uniform federal regulatory scheme and to relieve ERISA plans from the burdens of satisfying a patchwork of state laws. Recently, however, several states have enacted legislation designed to regulate the prices that pharmacy benefit managers, as third-party administrators for ERISA-governed plans, agree to reimburse pharmacies for dispensing prescription drugs to ERISA plan members. These regulations run afoul of ERISA, as the US Court of Appeals for the Eighth Circuit has twice held.

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ERISA Background

The Employee Retirement Income Security Act of 1974 (ERISA)1 established 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 structure11 or 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.

PBMs’ Use of MAC Pricing Lists

“Maximum Allowable Cost” or “MAC” pricing lists specify the maximum amount a health plan or its PBM will reimburse a pharmacy for a particular generic drug. By limiting a pharmacy’s reimbursement for a given generic drug, MAC pricing encourages pharmacies to acquire generic drugs at the lowest available price. MAC lists represent a carefully tailored, market-oriented balance between fairly compensating pharmacies to encourage dispensing of generic drugs and providing cost-effective prescription-drug benefits to health plans.

ERISA Preemption of State MAC Laws

Recently, several states have enacted legislation designed to regulate MAC lists in various ways. The US Court of Appeals for the Eighth Circuit, however, has already held that ERISA preempts such laws in Iowa and Arkansas.16

Where a state MAC 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.17

Further, the following specific provisions of MAC laws have an impermissible connection with ERISA and are preempted:

  • Mandating particular reimbursement rates18
  • Requiring PBMs to disclose their MAC pricing methodology to the state19
  • Requiring PBMs to disclose MAC pricing methodology to pharmacies20
  • Limiting the data sources used to create MAC pricing lists21
  • Limiting the types of drugs to which MAC pricing can apply22
  • Requiring procedures for pharmacies to comment on MAC lists or pricing23
  • Requiring procedures for pharmacies to appeal MAC lists or pricing24
  • Requiring updates to MAC lists within a particular time25
  • Allowing pharmacies to reverse and re-bill claims26
  • Requiring retroactive payment to pharmacies27
  • Allowing pharmacies to decline to dispense covered drugs28

In short, ERISA preempts state MAC laws insofar as they regulate entities administering prescription drug benefits for ERISA-governed plans.

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.

1 29 U.S.C. § 1001 et seq.
2 Id. § 1002(1).
3 Id. § 1003(1).
4 Id. § 1003(2).
5 Id. § 1144(a).
6 See, e.g., Fort Halifax Packing Co., Inc. v. Coyne, 482 U.S. 1, 11–12 (1987).
7 Gobeille v. Liberty Mut. Ins. Co., 136 S. Ct. 936, 943 (2016).
8 Cal. Div. of Labor Standards Enf’t v. Dillingham Constr., N.A., 519 U.S. 316, 324–25 (1997).
9 Gobeille, 136 S. Ct. at 943.
10 Pharm. Care. Mgmt. Ass’n v. Gerhart, 852 F.3d 722, 730 (8th Cir. 2017); see also Fort Halifax, 482 U.S. at 9.
11 Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 97 (1983).
12 Gobeille, 136 S. Ct. at 943.
13 Minn. Chapter of Associated Builders & Contractors, Inc. v. Minn. Dep’t of Pub. Safety, 267 F.3d 807, 816 (8th Cir. 2001).
14 See 29 U.S.C. § 1144(c)(2).
15 N.Y. State Conf. of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 659 (1995); Pharm. Care Mgmt. Ass’n v. Rutledge, 891 F.3d 1109 (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).
16 See Rutledge, 891 F.3d 1109; Gerhart, 852 F.3d 722.
17 Rutledge, 891 F.3d at 1112; Gerhart, 852 F.3d at 729.
18 Rutledge, 891 F.3d at 1111.
19 Gerhart, 852 F.3d at 727.
20 Id.
21 Id.
22 Id.
23 Id.
24 Rutledge, 891 F.3d at 1111; Gerhart, 852 F.3d at 727.
25 Rutledge, 891 F.3d at 1111.
26 Id.
27 Rutledge, 891 F.3d at 1111; Gerhart, 852 F.3d at 727.
28 Rutledge, 891 F.3d at 1111.