Your Company's Benefit Plans
CHARLES MCCLELLAN | Partner | Foulston Siefkin LLP
EREMY GRABER | Partner Foulston Siefkin LLP
Employer-sponsored retirement and welfare benefits are a critical component of most employers’ compensation packages. They help employers attract and retain talent, and they provide critical benefits to millions of American workers. More than 70% of civilian workers have access to retirement and medical-care benefits through employer-sponsored plans.
In 1974, Congress passed the Employee Retirement Income Security Act (ERISA), setting standards for the creation, maintenance and operation of employer-sponsored benefit plans. ERISA includes strong preemption rules, meaning ERISA plans are subject to the nationwide standards established by ERISA, generally free from state-by-state legislation.
ERISA PREEMPTION
ERISA takes precedence over any state law that “relates” to employee benefit plans. A state law relates to a benefit plan if it has a connection with or a reference to such a plan; however, if the connection is too remote, it is not preempted (like minimum wage laws). Similarly, the Supreme Court has declared ERISA’s enforcement rules as plan participants’ only resort in case of a dispute with a benefit plan, meaning ERISA overrides state-law remedies, such as a claim for breach of contract.
This broad preemption clause is limited, however, by exceptions listed in the statute. The most notable exception is that ERISA does not preempt “any State law which regulates insurance,” meaning the law (1) is specifically directed toward entities engaged in insurance and (2) substantially affects the risk-pooling arrangement between the insurer and insured. This exception does not apply to self-insured ERISA plans because these plans are not engaged in insurance or subject to state insurance laws (even if they use a third party to administer their self-funded benefits).
Supporters of ERISA preemption claim uniform regulation lowers compliance costs and makes benefits more widely available to employees. Opponents, however, claim that state-specific legislation could allow states to reduce benefit costs and ensure better protections for their citizens.
STATE LAWS ONLY IMPACTING THE COST TO PROVIDE BENEFITS ARE NOT PREEMPTED
For decades, it seemed ERISA preemption was set in stone, and state efforts to legislate ERISA-covered plans generally fell flat.
But that façade began to crack with the U.S. Supreme Court’s 2020 Rutledge v. PCMA decision. Rutledge involved an Arkansas law regulating pharmacy benefit managers (PBMs). Most health plans that offer prescription-drug benefits contract with a PBM to manage those benefits. The PBMs, in turn, contract with drug manufacturers on pricing and with pharmacies to set up pharmacy networks, often with different “tiers,” such as a “standard” and “preferred network and mail-order or specialty pharmacies. Some critics believe these arrangements drive rural and independent pharmacies out of business.
PBMs face little federal regulation, and Arkansas is one of many states that has tried to regulate them. It passed a law requiring PBMs to tie reimbursement rates to pharmacies’ actual costs, while allowing pharmacies to refuse to dispense drugs when their costs would exceed the reimbursement rate.
The PBMs sued to block the Arkansas law, arguing that ERISA preempts it. But the Supreme Court disagreed and upheld the state law. It explained that Arkansas’ law was not connected to and did not reference ERISA plans because it applied to all PBMs (not just those contracted with ERISA plans) and it merely increased the cost or altered the incentives for ERISA plans, without forcing them to adopt any particular plan design.
DID RUTLEDGE OPEN THE FLOODGATES FOR STATE-LAW REGULATION?
Rutledge seems to have invigorated state regulators, legislators and attorneys general, resulting in more aggressive attempts to regulate ERISA plans, particularly by targeting PBMs.
Oklahoma, for example, passed the Patient’s Right to Pharmacy Choice Act to regulate PBMs. In PCMA v. Mulready, the PBMs sued to block 13 of the Act’s provisions. Based on Rutledge, a federal district court said ERISA did not preempt any part of the Act. The PBMs appealed four provisions:
retail pharmacy access, requiring that a certain percentage of beneficiaries live within prescribed distances of a physical pharmacy;
discount prohibition, prohibiting cost-share and copay reductions that drive beneficiaries to in-network pharmacies;
“any willing provider,” requiring PBMs to accept any pharmacy into their preferred network that will accept the network’s terms; and
probation prohibition, prohibiting PBMs from excluding a pharmacy from preferred networks merely because that state has placed a pharmacist on probation.
On appeal, the U.S. Court of Appeals for the Tenth Circuit (which covers the federal courts in Kansas) concluded that ERISA preempted all four provisions. Although the Act did not directly target ERISA plans because PBMs, themselves, are not regulated, the court concluded the challenged provisions had a connection with ERISA plans because they dictated plan design and, thus, were preempted, even under Rutledge.
The court treated the first three provisions as direct network-design provisions because they ultimately required PBMs to structure benefit plans in a specific way and prohibited alternative designs. Network design is a key component of any ERISA plan, and ERISA preempted the Act because it took those design decisions out of the employer’s hands.
The Tenth Circuit concluded that ERISA also preempted the fourth challenged provision — the probation prohibition — because it, too, dictated terms and conditions for network participation. Oklahoma argued this provision only had a de minimis (or minor) effect on pharmacy-benefit design and that ERISA did not preempt such laws. The court acknowledged that state laws might not be preempted if they only have a minor economic effect (i.e., cost to the plan), but said that principle did not extend to laws impacting plan design. It went on to say that, in any event, forcing a plan to allow any pharmacy to participate in its networks eliminated one plan-design option — to exclude pharmacists on probation — had more than a minor effect.
WHAT DOES MULREADY MEAN FOR THE FUTURE OF ERISA PREEMPTION?
We can take three lessons from Mulready. First, the Tenth Circuit did not treat Rutledge as a paradigm-shifting limitation on ERISA preemption, a win for proponents of broad preemption.
Second, Mulready uncovered another potential argument that might support PBM regulation in future cases, even within the Tenth Circuit. During the Mulready appeal, the Department of Justice supported Oklahoma’s Act, arguing (1) it fell within the state’s historical authority to regulate insurers and was not preempted and (2) because the law only targeted PBMs, which could be regulated as insurers, it was not preempted even for self-funded plans who contracted with PBMs. Both positions reflect a significant departure from existing case law, but Mulready did not address them because they had not been raised with the district court. Future ERISA litigation is sure to address these arguments, which could significantly impact states’ ability to legislate around ERISA’s preemption rules.
Third, the Tenth Circuit reminded us that Congress enacted the existing preemption statute, and states that want greater authority to regulate ERISA plans can ask Congress to amend ERISA.
In the meantime, in Kansas and the rest of the Tenth Circuit, the impact of Rutledge seems fairly muted. But this battle for state control over ERISA plans is hardly over and will continue to percolate in the courts until we have definitive guidance from the Supreme Court or action by Congress.
TK
