By Douglas W. Dahl II, a Member of Bass, Berry & Sims PLC, and Susan K. Bilbro, Counsel to the firm, both practicing in the Nashville, TN office.

Over the past several years, state legislatures have addressed prescription drug costs and pharmacy benefit managers’ (“PBMs”) increased bargaining power by adopting legislation to regulate prices and PBMs’ ability to dictate the operation of prescription-drug networks. Some laws are meant to achieve a specific goal, such as ensuring network adequacy or preventing patient steerage to certain pharmacies, while others put forward a comprehensive set of reforms. The laws also vary in which part of the drug-distribution process they target: drug manufacturers, pharmacies, insurance providers, or PBMs. Tennessee enacted two of the most recent laws aimed at comprehensively regulating PBMs and protecting independent pharmacies—TN 2021-HB1398 (2021), and a companion law TN 2022-HB2661 (2022) (hereinafter the “TN PBM Laws”).

For several reasons, these laws are highly controversial and have been, and continue to be, the subject of various lawsuits, some of which ended up before the U.S. Supreme Court. Because many of these laws directly apply to plans subject to the Employee Retirement Income Security Act of 1974 (“ERISA”), the principal issue in many of the cases has been whether ERISA preempts those state laws impacting employer-sponsored health plans under which prescription drug coverage is offered. As discussed below, the jurisprudence on this issue is far from settled.

What is ERISA Preemption?

In order to ensure uniform administration of employer-sponsored benefit plans and to prevent the patchwork application of various state laws to such plans, Congress included a provision in ERISA that expressly preempts any and all state laws that “relate to” (i.e., that have a connection with or a reference to) employee benefit plans, such as ERISA health plans and, by extension, the prescription drug coverage provided thereunder. However, ERISA also carves out from this general preemption any state laws regulating insurance. The impact of this carve-out is that states generally can control the coverage and benefits provided under fully insured ERISA health plans, while not having that same control over self-funded ERISA health plans because the latter are not deemed to be providing insurance.

ERISA’s preemption provision is not only broad, it is also quite vague. Putting aside state regulation of insurance, the question of whether ERISA preempts other state laws affecting employer health plans (whether fully insured or self-funded) hinges on whether the laws “relate to” employer health plans. Unfortunately, neither ERISA nor its implementing regulations specify what it means for a law to “relate to” an employer health plan. As a result, the determination of whether ERISA preempts a specific state law rests in the hands of the reviewing federal court and hinges upon the court’s interpretation of the vague statutory standard through the lens of controlling case law. For many years, federal courts tended to interpret ERISA’s preemption provision broadly; however, in recent years, federal courts appear to be applying ERISA preemption more narrowly, particularly for laws affecting prescription drug prices and PBM operation.

Recent Court Cases Involving Prescription Costs and PBM Regulation

In 2015, Arkansas passed Act 900 (the “Arkansas Law”) to regulate PBM reimbursement rates for pharmacies and effectively create a reimbursement floor. PBMs act as intermediaries between pharmacies and prescription drug plans, reimbursing pharmacies for the cost of drugs covered by the plans. In order to determine the reimbursement rate for each drug, PBMs develop and administer maximum allowable cost (“MAC”) lists, which set a maximum amount that a payer will pay for generic drugs and brand name drugs that have generic versions available (multi-source brands). Under the Arkansas Law, PBMs are generally required to reimburse Arkansas pharmacies at a price equal to or higher than the pharmacy’s wholesale cost for acquiring the drug. It also requires PBMs to timely update their MAC lists when wholesale drug prices increase, and to provide appeal rights to challenge MAC reimbursement rates. The Pharmaceutical Care Management Association (“PCMA”), a trade association representing several large PBMs, filed suit, alleging ERISA preempted the Arkansas Law. The Eastern District of Arkansas agreed, and the Eighth Circuit affirmed the ruling that ERISA preempted the Arkansas Law. However, the Attorney General of Arkansas subsequently appealed the decision to the Supreme Court.

On December 10, 2020, the Supreme Court held in Rutledge v. Pharmaceutical Care Management Ass’n, 141 S. Ct. 474, 480 (2020), that the Arkansas Law was not preempted by ERISA. In determining whether the Arkansas Law “related to” ERISA health plans, the Supreme Court looked at whether the Arkansas Law had an impermissible connection with ERISA plans and whether the law specifically referred to ERISA plans. The Supreme Court ruled that there was no impermissible connection because the Arkansas Law was “merely a form of cost regulation” that did not “require plan administrators to structure their benefit plans in any particular manner.” Id. at 481-82. In other words, although the Arkansas Law may have increased costs or altered incentives for ERISA plans, it did not force them “to adopt any particular scheme of substantive coverage” or pertain to a central matter of plan administration. Id. at 480. The Supreme Court also ruled that the Arkansas Law did not “refer to” ERISA plans because it applies to PBMs whether or not they manage an ERISA plan, does not act “immediately and exclusively upon ERISA plans,” and the existence of ERISA plans is not “essential to [the Arkansas law]’s operation.” Id. at 481 (applying the standard used in Gobeille v. Liberty Mut. Ins. Co., 577 U.S. 312, 319-20 (2016) for determining whether a law “refers to ERISA.”).

Although the Supreme Court’s decision in Rutledge likely changed the playing field for state legislation of PBMs specifically aimed at regulating prescription drug reimbursement rates and MAC lists, whether the Rutledge decision would act as a springboard for protecting more comprehensive state legislation remained unsettled. However, on February 22, 2021, shortly after the Supreme Court decided Rutledge, the Court once again weighed in on ERISA preemption in a case involving a North Dakota law that was more comprehensive. The North Dakota law, among other things, regulated the fees PBMs and third-party payers may charge pharmacies, limited what copayments PBMs or third-party payers may charge, and prohibited PBMs from setting limits on information pharmacists may provide customers. The Eighth Circuit had ruled that the North Dakota law was preempted by ERISA “because its references to ‘third-party payers’ and ‘plan sponsors’ impermissibly relate to ERISA benefit plans.” Pharmaceutical Care Mgmt. Ass’n v. Tufte, 968 F.3d 901 (8th Cir. 2020). However, the Supreme Court granted, vacated, and remanded the case to the Eighth Circuit for further consideration after Rutledge. On remand, in Pharmaceutical Care Management Ass’n v. Wehbi, 18 F.4th 956 (8th Cir. 2021), the Eighth Circuit vacated its original opinion based on the precedent set by Rutledge; namely, that “a state law has an impermissible connection with ERISA plans if and only if it governs a central matter of plan administration, interferes with nationally uniform plan administration, or acute, economic effects of the law force an ERISA plan to adopt a certain scheme of substantive coverage.” Id. at 968.

Future of Prescription and PBM Legislation and ERISA Preemption Challenges

Following the Supreme Court’s decision in Rutledge, more states have moved to propose or adopt comprehensive legislation affecting prescription drug costs and the operation of PBMs.  For example, the aforementioned TN PBM Laws include provisions setting minimum reimbursement amounts, requiring higher professional dispensing fees for low-volume pharmacies, and requiring more transparency by PBMs.  The TN PBM Laws also prohibit PBMs from steering covered participants toward lower-cost pharmacies (through network and pricing design) and impose significant disclosure requirements on covered entities, which specifically include ERISA health plans. Other states have similar provisions that both align with and go beyond the laws considered in Rutledge and Wehbi.

Although the Eighth Circuit’s reconsideration and ruling in Wehbi likely provided additional support that more comprehensive laws could survive an ERISA preemption argument, the fact remains that state laws that are broader than the Arkansas and North Dakota laws at issue in Rutledge and Wehbi, respectively, remain subject to legitimate challenges by opponents. Should the TN PBM Laws or similar broad-based state laws be challenged, because of the emerging case law, we expect courts will evaluate ERISA preemption claims on a provision-by-provision basis and only preempt or invalidate provisions that clearly and directly impact ERISA plans’ design choices or other areas of plan administration. In the meantime, ERISA plan administrators—especially those employers that maintain self-insured plans—and PBMs will need to pay close attention to these various state prescription drug laws, as well as certain other state laws regulating PBMs, to ensure compliance.