ERISA Preemption of State PBM Laws

On April 4, 2022, in the case Pharmaceutical Care Management Association (PCMA) v. Mulready, (Mulready), the United States (U.S.) District Court for the Western District of Oklahoma ruled that Oklahoma’s Patient’s Right to Pharmacy Choice Act (Oklahoma Act) was not preempted by the Employee Retirement Income Security Act (ERISA). Mulready is one recent ruling in a string of decisions on claims of ERISA preemption brought on against state laws regulating pharmacy benefit managers (PBMs). PCMA, a trade association representing eleven of the largest PBMs in the country, has brought many ERISA preemption claims against different state laws in the past several years.

The “supremacy clause” of the U.S. Constitution allows federal laws to preempt state laws.

ERISA is one such law. ERISA has an express preemption provision, which says that a state law that “relates to” an ERISA plan is preempted by federal law. There is an exception for state laws that regulate insurance, banking, or securities as provided for under the “saving clause” that allows insurers to be regulated by state law. States may regulate the insurers that provide services to an insurance plan, but not an employee benefit plan itself. The intent of ERISA preemption for employee benefit plans is to keep plan uniformity across the country.

Courts use a test to determine whether a state law “relates to” an ERISA plan. As provided in §514, ERISA “shall supersede any and all State laws insofar as they may now and hereafter relate to any employee benefit plan”. A state law “relates to” ERISA if it has a connection with or reference to the plan. A state law need not directly impact an ERISA plan to be preempted, but the more impact the law has on the central matter of plan design and administration, the more likely it is to interfere with national plan uniformity and therefore the more likely it is to be preempted. Laws that have an incidental impact on a plan are less likely to be preempted.

Mulready is only one of many state laws that PCMA and other claimants state are preempted by ERISA.

In December 2020, the Supreme Court of the United States (SCOTUS), in a unanimous decision, held in the case Rutledge v. PCMA, (Rutledge), that an Arkansas law that regulates the relationship between PMBs and pharmacies is not preempted by ERISA. The law in question requires PBMs to reimburse pharmacies at a rate that, at the minimum, reimburses what the pharmacy paid for the drug from a wholesaler. While the lower courts in Rutledge found for PCMA, ruling that the law is preempted by ERISA, SCOTUS concluded that the law is not preempted by ERISA for two reasons. First, because there is no impermissible connection to ERISA because the law is a form of cost regulation, and while the law may increase ERISA plan costs, it does not force plans to adopt any particular type of coverage and that the cost increase would not impact plan choices. Second, the law does not “relate to” an ERISA plan because the law governs PBMs whether or not they manage ERISA plans.

Following the SCOTUS ruling in Rutledge, an ERISA preemption ruling in the case PCMA v. Tufte (Tufte), on a North Dakota law out of the Eighth Circuit, was remanded back to an appellate court.

Tufte was only one of several cases PCMA brought in North Dakota at approximately the same time, on laws regulating PBMs’ ERISA preemption. The North Dakota law regulated PBMs and third-party payers, and among other things, authorized pharmacists to disclose information to the plan sponsor or patient and mail or deliver drugs to a patient while stating that the PBM or third-party payer could not prohibit the pharmacist or pharmacy from charging a shipping and handling fee. The court held that these provisions were not preempted by ERISA because the provisions in question had a minimal impact on ERISA plan administration. While the North Dakota law is not the same as the Arkansas law on the merits, based on the decision the Court made in Rutledge, the case needed to be reviewed by the appellate court.

In what is now nearly a year and a half since the Rutledge decision, more than 40 states have introduced upwards of 100 pieces of legislation intended to regulate PBMs.

The laws are all different and aim to regulate the PBM industry in different ways. The differences make applying case law in Rutledge and other precedent cases difficult and make predicting outcomes nearly impossible. Because of the outcome in Rutledge, it is likely that more states will implement laws regulating PBMs because, although the substance of the laws may differ, states may try to rely on precedent ruling by stating that the laws have minimal impact on ERISA plan administration and that although there may be a cost impact, such increase does not impact ERISA plan design, choices or relate to an ERISA plan.

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