By: HUB’s EB Compliance Team
Back on December 10, 2020 the U.S. Supreme Court ruled the Employee Retirement Income Security Acct of 1974 (“ERISA”) did not preempt an Arkansas statute regulating the price that pharmacy benefit managers (“PBMs”) pay to pharmacies. This means the Arkansas statute will stand and others like it could follow, resulting in potential additional costs to employers.
Background
The case is relatively straightforward. As most employers know, PBMs are the entities that process claims for prescription drugs. Arkansas passed a law (Act 900) requiring PBMs to reimburse pharmacies for at least the wholesale cost of drugs they dispense. This prevents the pharmacy from taking a loss on dispensing medications. The state was worried those losses could result in pharmacies closing, particularly in rural or other underserved areas.
The question was whether ERISA, in effect, prohibits the Arkansas law. ERISA has a broad preemption provision that says it supersedes any state laws that “relate to” ERISA plans (with certain exceptions not relevant to this case). If a state law is determined to “relate to” ERISA plans, it is invalid. Over the years, the courts have fleshed out what it means for a law to “relate to” a plan.
In this specific case, the Supreme Court essentially said that Arkansas Act 900 was a form of cost regulation. While cost regulation has an indirect effect on ERISA plans (since it does affect what they pay), it does not mandate benefits or have a direct effect on how plans are administered. To put it another way, ERISA was designed to facilitate nationwide plan administration, but not necessarily nationwide plan costs.
What’s Next?
Now that this case has been decided, there are potential immediate effects and likely longer-term implications.
The immediate effect is that the Arkansas law (and ones like it which may exist in other states) may increase prescription drug costs, although in some cases employers may not see any increases immediately. PBMs may choose to pass any increase costs on to insurers or plans, resulting in increased overall plan costs, or modify contracts to exclude Arkansas from their pricing guarantees.
Over the longer term, this decision provides a roadmap that states can follow to avoid ERISA preemption. Many lawmakers are concerned about healthcare costs. This decision could give state lawmakers a chance to regulate costs for pharmacy and other healthcare services. While laws like Arkansas Act 900 may increase costs, other states may seek to cap hospital or other reimbursement rates in an effort to lower costs. While these laws, if they materialize, will not directly affect employers, they could have an effect on what employers pay for their health plans.
If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.
NOTICE OF DISCLAIMER
The information herein is intended to be educational only and is based on information that is generally available. HUB International makes no representation or warranty as to its accuracy and is not obligated to update the information should it change in the future. The information is not intended to be legal or tax advice. Consult your attorney and/or professional advisor as to your organization’s specific circumstances and legal, tax or other requirements.