Friends, do you feel, as we do, that the health and employee benefits policy world is blowing up these days? We’ve been waiting a month to discuss the Supreme Court of the United States' (SCOTUS) decision in Rutledge v. PCMA with all of you. Unfortunately, a few minor things like all of the Consolidated Appropriations Act of 2021 developments, the new transparency rules, and work-related COVID-19 vaccine guidance got in our way. However, the case's impact on ERISA preemption of state laws relating to employee benefit plans is critical, and we are giving it all of our attention today. We’ll get back to you about recent Paycheck Protection Program updates, the newly finalized 2022 Notice of Benefits and Payment Parameters, and the proposed changes to the HIPAA privacy requirements and group wellness programs waiting in the wings!
On December 10, 2020, the SCOTUS ruled 8-0 in favor of Rutledge,narrowing the scope of ERISA preemption somewhat dramatically (at least in our eyes). SCOTUS’ action may lead to new state-level attempts to regulated self-funded plan service providers and an uptick in healthcare and prescription drug cost containment measures.
Our best friends will remember that we’ve been fascinated by this case for a while. It involves the pharmacy benefits manager (PBM) trade association, which sued the state of Arkansas about a law regulating how PBMs reimburse pharmacies for the cost of generic medications. It requires pharmacy reimbursement based on the wholesale price, rather than a maximum allowable charge developed by the PBM. So the Pharmaceutical Care Management Association (PCMA), initiated legal action claiming Act 900 violates ERISA, as most prescriptions processed by PBMs are ultimately paid for by group health plans. They argued, "Act 900 has an impermissible connection with an ERISA plan because its enforcement mechanisms both directly affect central matters of plan administration and interfere with nationally uniform plan administration.”
However, the SCOTUS, in an opinion authored by Associate Justice Sonia Sotomayor, found that Act is just “a form of cost regulation that does not dictate plan choices.” Going further, she wrote, "ERISA does not preempt state rate regulations that merely increase costs or alter incentives for ERISA plans without forcing plans to adopt any particular scheme of substantive coverage.” The court holding makes it clear that this standard applies “even if plans decide to limit benefits or charge plan members higher rates as a result.”
So, what does this mean for employee benefits plans and professionals everywhere? From our perspective, quite a lot. SCOTUS seems to have opened the door to direct state-level regulation of PBMs and other vendors that provide services to self-funded plans, like third-party claims administrators.
Why this is true all stems back to the breadth of the ERISA preemption. The 1974 law includes language superseding any state law that “relate[s] to any employee benefit plan." Over the years, many federal courts, including the SCOTUS, have interpreted the nebulous words "relate to" many times. They typically land on the side of laws that specifically mention ERISA plans and using the ERISA preemption as a means of ensuring national uniformity in plan regulation. For the last 25 years, the prevailing standard for preemption largely stemmed from a 1995 SCOTUS ruling in New York Blue Cross Plans v. Travelers Insurance Co. That opinion established a state law is permissible if it indirectly affects ERISA plans, including an indirect economic impact. So, a state law directly requiring a self-funded plan to cover a specific benefit violates the ERISA preemption standard. However, a state law that indirectly causes one commercial group health plan option to be more expensive than another but does not mandate a plan’s actions, like in the Travelers case, is acceptable.
Rutledge upholds the Travelers ruling and takes it a step further. The earlier standard allowed provider regulation that has an indirect impact on an employer plan costs. Now, SCOTUS is saying that state laws that regulate the amount PBMs pay for prescriptions directly but do not reference ERISA plans specifically are not preempted. The Rutledge opinion also weakens the longstanding holding that regulatory uniformity is a core ERISA principle. Justice Sotomayor writes that “not every state law that affects an ERISA plan or causes some dis-uniformity in plan administration has an impermissible connection with an ERISA plan. That is especially so if a law merely affects costs.”
If you extend that logic out, it would appear that state laws regulating self-funded plan service providers and their related costs are now okay too. This standard could include measures dictating how much third-party administrators or reference-based pricing vendors pay providers, as long as they do not place direct requirements on the underlying ERISA-based plan. The concept is fascinating given the recent federal action on surprise billing with the passage of the CAA. The federal surprise billing law just set a federal protection floor and allows explicitly for stricter state laws. Plus, it does not take effect until next year. So, will some states attempt to regulate third-party administrators and other intermediary service providers and the rates they pay to out-of-network providers in the year ahead? What about more state-level regulation of PBMs and other intermediaries that work on behalf of both fully-insured and self-funded plans in general? We have a feeling that those answers are going to be yes and yes. If we’re right, then which states will it be and how will they do it?
We’re also going to go out on a limb and predict more state-level legislative or regulatory efforts intended to contain health care and prescription drug costs. Such measures may include new regulation of (and efforts to advance) cost containment strategies that self-funded plan administrators currently utilize to manage their overall plan expenditures. We hope any such efforts in the state capitals will lead to lower costs for both employers and employees and improve the quality of care available through group health plans. At the same time, though, we are a bit nervous about the prospect of a patchwork of new state laws that could just as likely raise premium costs as they could lower them. We also do not want to see any degradation of existing and innovative cost and quality tools self-funded group sponsors and plan participants already have available.
What do you think, friends? Will more state-level policy activity improve the employer-based healthcare system? Or were we better off before we heard what SCOTUS had to say about Rutledge v. PCMA? Or is it just too soon to tell?