Fight Brewing Over Health Benefits Preemption Gets House Hearing

The growing tension between state law and federal preemption over regulating drug benefits will be high on lawmakers’ agenda at an upcoming House hearing on strengthening the Employee Retirement Income Security Act as the law turns 50.

“When you’re talking about ERISA in Congress, you know preemption is the main focus,” said James Gelfand, president and CEO of the ERISA Industry Committee (ERIC), which represents large employers. “Employers love preemption,” he said, but groups that represent state interests “don’t like the preemption we already have, much less do they want to see it strengthened.”

Many business groups that responded to a recent request for comments from the House Education and the Workforce Committee want to alleviate problems they say they’re experiencing from “a rash of state efforts to place mandates on ERISA pharmacy benefits,” among other state actions.

Groups testifying at the hearing Tuesday will likely encourage the committee to draft legislation as it revisits the 1974 law that sets minimum standards for most voluntarily established retirement and health plans in private industry and generally prevents states from regulating the plans. An estimated 153 million employees and dependents are covered by employer-sponsored health plans, which are governed by ERISA.

A 2020 US Supreme Court decision, Rutledge v. Pharmaceutical Care Management Association, found that an Arkansas law requiring pharmacy benefit managers (PBMs) to reimburse state pharmacies at least as much as wholesale costs wasn’t preempted by ERISA. A number of states have since put laws in place that employer groups say infringe on ERISA protections.

In the States

Laws enacted in recent years in Oklahoma, Tennessee, and Florida seek to control network standards, cost-sharing practices, and reimbursement rates for PBMs, the pharmaceutical industry middlemen who negotiate health plans’ pricing and rebates, but who have been criticized for certain business practices.

States see the new laws as an effort to help community pharmacists who may be harmed by PBM practices, but employer groups say the laws could block them from designing their health plan benefits in ways that reduce pharmacy costs.

In August 2023, the US Court of Appeals for the Tenth Circuit struck down part of Oklahoma’s law regulating PBMs in Pharm. Care Mgmt. Ass’n v. Mulready, and the state is expected to ask the Supreme Court to review the appeals court decision.

In its March 15 letter to the Education and the Workforce Committee, ERIC cited Florida’s Prescription Drug Reform Act (SB 1550), which it said mandates “specific pricing terms for existing contracts between employers and their PBMs,” and requires “specific plan design elements.” It also cited Oklahoma, Tennessee, New York, and New Jersey laws that have an impact on cost sharing, mail order drugs, and which pharmacies must be covered.

“State legislation in this area impermissibly attempts to directly control the design and administration of self-funded ERISA plans, and further increases health care costs instead of reducing them,” ERIC said.

ERIC recommended that vendors with critical roles in plan design and administration, including PBMs, be designated as fiduciaries—as employer plan sponsors are—making them subject to required disclosures of plan information. The status would also help ensure they act in the best interest of plan participants, it said.

The National Community Pharmacists Association (NCPA), which supports efforts by states to further regulate some PBM practices, pushed back at arguments by employer groups that ERISA is in danger of being weakened.

“Our opponents are making so much into an ERISA issue, inappropriately expanding almost everything into a benefit design argument,” Joel Kurzman, NCPA director of state government affairs, said in an email.

“This strategy is both misleading and premature as it relates to ongoing developments with the Mulready case,” Kurzman said. Groups “who would prefer PBM practices remain opaque” are using ERISA “as an excuse to tank meaningful reform,” he said.

Big v. Small Companies

As federal lawmakers consider ERISA preemption of laws to regulate PBMs, they’ll be faced with discrepancies between the interests of large and small employers.

Large companies with multistate operations have relied on preemption to prevent a patchwork of state laws from emerging to govern employee drug benefits and pricing.

However, some 100 million Americans or so who are under mid- and small-market companies’ health plans may have different interests from participants in large company plans, said Chris Deacon, principal and founder of employer health care consulting firm VerSan Consulting LLC.

“They’re not always aligned, and I think that their voice often gets lost,” she said. Regional employer coalitions don’t have as much clout with Congress and don’t get an opportunity “to make their case,” she said.

State efforts to more closely regulate PBMs may help smaller employers with a regional presence that are less concerned with compliance over a larger number of states, according to Deacon.

The question of how much states can and should legislate on health-care benefits is an issue that goes beyond PBM-related laws. The issue may be especially important for medium and smaller businesses that appear to be struggling most with health-care spending.

About 98% of firms with 200 or more workers offer health benefits to at least some workers, but only 53% of firms with three to 199 workers do, according to a 2023 reportfrom health-care research organization KFF.

“As healthcare costs soar, states are employing various strategies to enhance transparency and curb expenses, impacting all citizens, including ERISA plan participants,” Deacon and Lee Lewis, chief strategy officer for the Health Transformation Alliance, said in their March 15 comment letter to Congress.

Costs and Transparency

Increased health care costs, including through mandates imposed by the Affordable Care Act, have resulted in an erosion in small business coverage, said Joel White, president of the Council for Affordable Health Coverage. As the government increases subsidies for ACA plans, many employees are moving to marketplace coverage and Medicaid, he said.

“Several states have effectively eliminated small employer access to self-funded plans by attempting to make the sale of reinsurance to small employers illegal, banning the sale of level-funded plans to certain size groups, or making the sale of low attachment point plans (which are needed by most small employers seeking a level-funded plan arrangement) illegal,” the CAHC said in its letter.

Protecting small business access to self-funded plans in all states “would involve clarifying ERISA preemption with respect to self-funded arrangements for small businesses,” CAHC said.

The National Association of Insurance Commissioners said in its March 1 comment letter that “not all self-funded plans are offered by multistate employers,” and some employers that use self-funded plans aren’t large.

Concerns have arisen among state regulators that want to ensure that federal preemption protects only employers that are truly self-funded, rather than third parties that act as insurers, NAIC said. State insurance departments normally have jurisdiction over fully insured plans.

Another issue that commenters brought to the House committee that cuts across plans and employers of all sizes is data transparency.

Under ERISA, self-insured plans must be able to shop for the best quality of care at the lowest prices, and to make sure that billing and claims data are accurate, said Cynthia Fisher, founder and chairman of Patient Rights Advocate, which works on health-care transparency issues.

“Employers are having a really difficult time getting access to the billing and claims data from the third party administrators,” many of which are part of large health insurers, she said.