Drug Benefit Compliance Is a State-by-State Test for Sponsors

Employers who sponsor health plans for their employees often use pharmacy benefit managers to manage their prescription drug benefits. In recent years, however, all 50 states have passed laws regulating various aspects of PBM operations.

These laws often impose obligations on health plans that cover participants who reside in their state. For example, a state PBM law might restrict how a health plan uses a mail-in pharmacy or might require detailed disclosure of claims data to state regulators.

It can be challenging for plan sponsors to navigate these PBM laws because their requirements vary state by state and because so many PBM laws are being passed in quick succession—even as many existing PBM laws face court challenges to their legal validity.

Below are some issues that plan sponsors should consider as they navigate this evolving legal landscape.

Consider the possibility of ERISA preemption. Many state PBM laws have been challenged in court on grounds that they’re preempted by the Employee Retirement Income Security Act of 1974, or ERISA. Courts assessing preemption challenges to PBM legislation typically focus on whether the law governs a central matter of ERISA plan administration or design or interferes with nationally uniform administration.

It can be difficult to predict whether PBM laws will be struck down based on this standard: Early preemption challenges tend to fail, though more recent challenges have fared better.

The possibility that a PBM law may be preempted by ERISA can influence how a plan sponsor complies with the law, as we explain below.

Confirm whether self-funded plans are in scope (and reach out to state regulators if needed). Some state PBM laws that impose obligations on health plans explicitly exclude self-funded health plans, because these plans can be subject to ERISA preemption.

Sponsors of self-funded health plans should first confirm whether a carve out of this kind is included in the PBM law they are assessing. Other PBM laws don’t make clear whether they’re intended to include self-funded health plans.

Directly contacting state regulators can be valuable in such cases. Doing so may confirm that an ERISA health plan isn’t actually subject to the PBM law. Even if it is, the outreach may yield other, unexpected benefits.

In some cases, for example, employers who have inquired with state regulators about the scope of a state PBM law requiring data disclosure have been granted short filing extensions because of their inquiry.

Comply in a modified manner with an accompanying assertion. Plan sponsors may conclude that a state PBM law is preempted by ERISA based on their own legal analysis, even if state regulators assert otherwise.

A plan sponsor in this situation might nevertheless decide to comply with the PBM law to the best of its ability. For example, suppose a state PBM law requires plans to disclose various plan data and that some of the data is readily available to the plan sponsors, but other data would be costly to prepare.

The plan sponsor might choose to submit the available data based on its reasonable conclusion that submitting the unavailable data isn’t legally required due to ERISA preemption.

A plan sponsor adopting this approach might include in its submission a simple assertion along these lines: “This submission has been prepared based on Plan Sponsor’s interpretation of the applicable laws.”

Customize compliance state-by-state. Consider a state law that restricts how health plans use mail-order pharmacies and that requires PBMs to provide state regulators with detailed transparency reports.

A national employer seeking to comply with this regulation without overly disrupting its ongoing plan operations might modify its PBM contract so that required restrictions on mail-order pharmacies apply only to participants residing in that state. A plan also may work with its PBM to generate and submit required reports only for that state’s population.

This approach gives plan sponsors flexibility by tailoring changes to where they are legally required. It also helps avoid full-scale changes that later may be unnecessary if the PBM legislation is overturned due to ERISA preemption. However, plans should be mindful that PBMs may struggle to administer different benefit structures for different populations.

Clarify when compliance liability rests with the PBM. We have frequently seen plan sponsors receive requests from PBMs asking them to decide whether to disclose information to state regulators. This can happen even when the state law requiring such disclosure doesn’t make it the plan’s responsibility to comply.

For example, a PBM might send a generic notice informing plans that state regulators request certain claims data and that the PBM intends to provide such data on behalf of the plan unless the plan objects.

Plan sponsors unsure about how best to respond to such notices could check whether the state PBM law requires PBMs, not employers, to make the necessary disclosures.

If so, the plan might reply to its PBM with a disclaimer stating that the plan sponsor takes no position on how the PBM should comply with its obligations under the state PBM law and that the plan sponsor reserves all rights regarding data that the PBM may choose (or choose not) to disclose.

Consider HIPAA exposure. Employers should consider whether compliance with PBM laws raises issues under other laws, such as the privacy rules of the Health Insurance Portability and Accountability Act of 1996, or HIPAA.

For example, a PBM law may require employers to provide detailed claim reimbursement data for every prescription drug filled in the state, including participant names and dates of birth. But under HIPAA, a health plan generally can’t share individually identifiable health information without a patient’s consent.

Although HIPAA provides an exception for disclosures to oversight agencies, some practitioners have questioned whether state regulators enforcing PBM laws meet this requirement. Plan sponsors might consider documenting their basis for determining that compliance with a state PBM law doesn’t violate other laws, in cases where concerns arise.

As state regulation of PBMs continues to expand, we encourage affected health plan sponsors to remember that there are several options for maintaining compliance while balancing operational efficiency, vendor relations, and legal obligations under other applicable laws.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Alex Maged is an associate at Ivins, Phillips & Barker focused on employee benefits issues.

Percy Lee is of counsel at Ivins, Phillips & Barker focused on federal income tax, estate and gift tax, and employee benefits issues.

Claire Smith, a former summer associate at Ivins, Phillips & Barker, contributed to this article.

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