U.S. Supreme Court: State Law Regulating PBMs Is Not Preempted by ERISA

The U.S. Supreme Court has held that a state law regulating the relationship between pharmacies and pharmacy benefit managers (PBMs) is not preempted by ERISA, reversing an appellate court decision (see our Checkpoint article). PBMs manage prescription drug benefits on behalf of health plans by, among other things, negotiating prescription drug prices with drug manufacturers and reimbursing pharmacies based on maximum allowable cost (MAC) lists. The state law at issue in this case was enacted in response to concerns that PBM reimbursement rates were often too low to cover rural and independent pharmacies’ costs, and requires, among other things, that PBMs reimburse pharmacies at a price at least as high as what the pharmacy paid to a wholesaler. A PBM trade association challenged the law, arguing that it implicitly regulated ERISA plans and was preempted by ERISA.

In holding that the law was not preempted, the Court cited the general rule that ERISA preempts state laws that have an impermissible “reference to” or “connection with” an ERISA plan. It explained that a state law has an impermissible connection with ERISA plans if it governs a central matter of plan administration or interferes with nationally uniform plan administration. However, ERISA does not preempt state rate laws such as this, that merely increase costs or alter incentives for ERISA plans without forcing them to adopt any particular coverage. Acknowledging that PBMs may pass the increased expense of reimbursing pharmacies at a higher rate on to plans, the Court determined that the impact of the law was not so acute as to effectively dictate plan choices. The Court also concluded that the law does not have an impermissible reference to ERISA plans, because it applies to PBMs whether or not they manage plans that are subject to ERISA.

EBIA Comment: This decision will reverberate through the lower courts, as they try to delineate whether particular state PBM laws are or are not preempted by ERISA. The potential impact on employee benefit plans could be even broader as the courts inevitably consider how this decision applies to various state laws regulating TPAs and others. For more information, see EBIA’s ERISA Compliance manual at Sections XXXIX.C (“State Laws That ‘Relate to’ ERISA Plans Are Generally Preempted”) and XXXIX.H.8.c (“Preemption Analysis Applied to Specific State Laws: Pharmacy Benefit Managers (PBMs)”). See also EBIA’s Self-Insured Health Plans manual at Section V.E (“ERISA Preemption and the Application of State Mandates”).

Contributing Editors: EBIA Staff.