ERISA Preempts State Regulation Of PBM–Pharmacy Pricing Agreements

Author:Mr M. Miller Baker and Sarah P. Hogarth
Profession:McDermott Will & Emery


ERISA broadly preempts state laws that "relate to" ERISA-governed employee benefit plans to ensure a uniform federal regulatory scheme and to relieve ERISA plans from the burdens of satisfying a patchwork of state laws. Recently, however, several states have enacted legislation designed to regulate the prices that pharmacy benefit managers, as third-party administrators for ERISA-governed plans, agree to reimburse pharmacies for dispensing prescription drugs to ERISA plan members. These regulations run afoul of ERISA, as the US Court of Appeals for the Eighth Circuit has twice held.

In Depth

ERISA Background

The Employee Retirement Income Security Act of 1974 (ERISA)1 established a federal regulatory framework that governs both insured and self-insured "employee welfare benefit plans"2 and retirement plans sponsored by employers, labor unions, and certain other entities. Employer-sponsored health benefit plans are "welfare benefit plans" and thus subject to ERISA. ERISA does not cover governmental plans3 or church plans.4

ERISA's Broad Preemption Provision

ERISA's express preemption provision—one of the broadest preemption provisions in the United States Code—preempts all state laws that "relate to" ERISA-governed employee benefit plans.5 Congress's purpose in including this sweeping express preemption provision was to establish a uniform federal regulatory scheme and protect ERISA plans from the administrative and compliance burdens of satisfying a patchwork of different state regulations.6

The US Supreme Court has construed ERISA's broad preemption provision as preempting any state law that has a "reference to" or "connection with" ERISA-governed plans.7

Under the Supreme Court's "reference to" test, ERISA preempts state laws that impose requirements by reference to ERISA-governed plans; that act immediately and exclusively on ERISA-governed plans; or where the existence of ERISA-governed plans is essential to the law's operation.8

Under the Supreme Court's "connection with" test, ERISA preempts state laws that govern central matters of plan administration or that interfere with nationally uniform plan administration.9 Matters of plan administration include calculating benefit levels, making disbursements, monitoring the availability of funds, and keeping records to comply with reporting requirements.10 Where a state law impacts either the structure11 or administration12 of ERISA-governed plans, preemption occurs.13


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