Supreme Court Decision Sheds Light on State Authority to Regulate Health Care Costs

Supreme Court Decision Sheds Light on State Authority to Regulate Health Care Costs

Legal Sidebari
Supreme Court Decision Sheds Light on State
Authority to Regulate Health Care Costs
March 26, 2021
Alongside recent federal efforts to combat escalating prescription drug costs, state governments have
sought to address these high costs within their borders. Many state efforts involve restrictions on
pharmacy benefit managers (PBMs), companies that facilitate the purchase of drugs through the
pharmaceutical distribution chain and administer prescription drug coverage on behalf of health insurers,
employers, and others. While many states have enacted legislative measures intended to hold PBMs
accountable for their role in the pharmaceutical marketplace, PBMs have chal enged some of these
measures on the basis that they are preempted by the federal Employee Retirement Income Security Act
(ERISA). On December 10, 2020, in Rutledge v. Pharmaceutical Care Management Ass’n, the Supreme
Court weighed in on this issue, concluding that a state PBM law withstood preemption by the federal act.
Why does this case warrant attention for the Biden Administration and the 117th Congress? In the past,
courts have concluded that ERISA restricts states from enacting certain health care regulatory measures
that affect employment-based health coverage. In the wake of Rutledge, questions may arise about the
degree to which states have leeway to regulate health care costs in the context of PBMs and beyond. This
Legal Sidebar provides background on ERISA preemption; examines the Rutledge decision; and
concludes with selected legal considerations for Congress as it continues to address drug pricing reforms.
ERISA Preemption Overview
ERISA provides a comprehensive federal scheme for the regulation of private-sector employee benefit
plans. Although ERISA was enacted in 1974 primarily to regulate pension plans following some notable
pension defaults, the Act also regulates employment-based plans that provide medical, surgical, and other
health benefits. Under ERISA, health plans must comply with various standards, including plan fiduciary
standards, reporting and disclosure requirements, and numerous private health insurance market reforms
established by the Patient Protection and Affordable Care Act. Recent reports estimate that approximately
135 mil ion individuals in the United States have employer-sponsored health coverage to which ERISA
applies.
According to the Supreme Court, Congress, through ERISA, federalized the regulation of plan
administration “to minimize the administrative and financial burden of complying with conflicting
directives among States or between States and the Federal Government.” This goal is carried out in part
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through a critical feature of ERISA: its express preemption clause. Under Section 514 of the Act, ERISA
broadly preempts “any and al State laws insofar as they may now or hereafter relate to any employee
benefit plan.” The question whether ERISA preempts state law is an issue of frequent litigation, finding
its way to the Supreme Court almost two dozen times. In numerous opinions, the Court has interpreted the
“relate to” language as applying to any state law that “has a connection with or reference to [an employee
benefit] plan.” The Court has observed that a state law has an impermissible “connection with” an ERISA
plan if it “governs . . . a central matter of plan administration” or “interferes with national y uniform plan
administration.” A state law has a “reference to” an ERISA plan if it acts “immediately and exclusively”
on ERISA plans, or if the existence of such a plan is essential to the law’s operations. In the health care
context, states cannot, for instance, require employers to provide a minimum level of health coverage or
specific health benefits as part of their benefit plans.
The Supreme Court’s 2016 decision in Gobeille v. Liberty Mutual Insurance Co. il ustrates how ERISA’s
express preemption provision can affect state efforts to enact health care regulatory initiatives. In
Gobeille, the Court examined a Vermont law that required employer-sponsored health plans and other
entities to report health care claims information for inclusion in an al -payer claims database (APCD).
APCD data can general y be used by researchers to study the cost, use, and quality of health care within a
state. In a 6-2 decision, the Supreme Court concluded that Vermont’s reporting law was preempted to the
extent it applied to ERISA plans. Citing ERISA’s extensive reporting, disclosure, and recordkeeping
requirements, the Court held that Vermont’s reporting regime “imposes duties that are inconsistent with
the central design of ERISA, which is to provide a single uniform national scheme for the administration
of ERISA plans without interference from laws of the several States.” Even though the Vermont law’s
objective was to better control health care costs and outcomes, not to regulate employee benefit plans, the
Court’s majority reasoned the state law’s reporting scheme was a “direct regulation of a fundamental
ERISA function,” and that any difference in purpose did not convert this regulation “into an innocuous set
of additional rules.”
Despite ERISA Section 514’s broad scope, the Supreme Court has articulated that “[s]ome state actions
may affect employee benefit plans in too tenuous, remote, or peripheral a manner to warrant a finding that
the law ‘relates to’ the plan.” For instance, in New York State Conference of Blue Cross & Blue Shield
Plans v. Travelers Insurance Co., insurance companies providing health coverage to ERISA-governed
plans chal enged a state law that required them, but not Blue Cross & Blue Shield, to pay hospital
surcharges. Although the state law at issue triggered higher costs for ERISA plans, the Court upheld the
law, concluding it had an “indirect economic influence” that did not bind administrators to particular
choices with respect to a plan. In the wake of Gobeille, Travelers, and other cases, lower courts have
grappled with applying the Court’s ERISA precedent and determining whether state legislation survives
ERISA preemption.
The Rutledge Decision
At issue in Rutledge was Arkansas Act 900, a state statute intended to manage PBM pharmacy
reimbursement practices. As intermediaries between health insurance plans and pharmacies, PBMs may
receive payment from health insurers for drug benefit administration and reimburse pharmacies for
dispensing drugs to insured individuals. Certain rural and independent pharmacies expressed concerns
that PBMs’ reimbursement rates for drugs were frequently less than what the pharmacies paid to obtain
them. To protect the financial viability of these pharmacies, the Arkansas statute established certain
mechanisms designed to anchor PBM pharmacy reimbursement rates to the pharmacies’ acquisition costs.
A PBM trade association sued the state, claiming, among other things, that ERISA preempted the
Arkansas state law as it applied to PBMs that service ERISA plans. The association further argued that the
state law had a direct regulatory effect on ERISA plans, plan design, and how these plans manage drug

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benefits. The district court agreed with the association’s contention that ERISA superseded the state law,
and the U.S. Court of Appeals for the Eighth Circuit affirmed.
In an 8-0 decision, the Supreme Court reversed the Eighth Circuit’s judgment, holding that ERISA does
not preempt Arkansas’s PBM law. (Justice Amy Coney Barrett did not participate in the consideration or
decision in the case.) Writing for the Court, Justice Sonia Sotomayor employed the Court’s traditional test
for ERISA preemption: whether the state law has “a connection with or reference to” an ERISA plan. The
Court concluded that the Arkansas statute fel outside of these categories and was beyond ERISA’s
preemptive reach. In discussing why the Arkansas law lacked a prohibited “connection with” an ERISA
plan, the Court explained that ERISA is “primarily concerned with preempting laws that require providers
to structure benefit plans in particular ways,” such as requiring payment for a specific benefit. ERISA
does not, the Court found, preempt state requirements that “merely increase costs or alter incentives for
ERISA plans without forcing plans to adopt any particular scheme of substantive coverage.” The Court
maintained that the Arkansas statute was similar to the state law at issue in Travelers—a type of cost
regulation that did not compel plans to offer coverage in a particular manner. The Court further
determined that the Arkansas law did not impermissibly “refer to” ERISA plans because ERISA plans are
unrelated to the state law’s operation—the law applies to PBMs regardless of whether they manage
ERISA plans or not.
Justice Clarence Thomas authored a concurring opinion in Rutledge, expressing support for the case’s
outcome, but a desire for the Court to revisit its ERISA preemption jurisprudence. According to Justice
Thomas, the Court’s current test for ERISA preemption departs from the law’s text and “offers little
guidance or predictability” to lower courts. To remedy this, Justice Thomas suggests that the Court adopt
a different test to determine whether ERISA supplants state law: a two-part test that asks (1) whether any
ERISA provisions govern the same matter as the state law at issue, and (2) whether the state law bears a
meaningful relationship to ERISA plans. Such a test would seemingly be a narrower standard for ERISA
preemption, but one that Justice Thomas believes would apply ERISA Section 514 as written.
Considerations for Congress
In Rutledge, the Supreme Court clarified that state laws regulating health care costs may be immune from
ERISA preemption, even if the laws indirectly affect costs or alter incentives for providing benefits in
ERISA-governed plans. Following the path of Travelers, the Rutledge decision appears to signal that
states may regulate the rates that health care providers and other entities charge for drugs or other items
and services covered by ERISA plans. However, similar to Travelers and other cases, the Court
recognized limits on this flexibility: the state requirement at issue cannot compel plans to offer a certain
type of coverage or administer benefits in a particular manner. The question of which state laws
permissibly regulate health care costs for plans and which ones impermissibly “dictate plan choices” wil
likely be the subject of future litigation.
While the practical impact of Rutledge remains to be seen, the decision is notable in that it may preserve
states’ ability to regulate the business practices of PBMs more comprehensively, even when PBMs are
servicing ERISA plans. To address states’ concerns that PBMs have impeded access to affordable
prescription drugs, over 44 states have enacted a variety of legislation targeting these entities. State
requirements include provisions that require PBMs to disclose their price lists and other information to
improve transparency, as wel as requirements that PBMs engage in good faith and fair dealing in their
business relationships with plan sponsors and pharmacies. While the Court in Rutledge only analyzed
Arkansas’s PBM statute, it appears the decision’s reasoning may apply to other state laws addressing
PBM payment rates or other functions. Additional y, it is possible that Rutledge’s reasoning may extend
beyond the PBM context to the regulation of other entities that contract with ERISA plans. ERISA plan
sponsors rely on various third parties to provide services to plan participants, including health care

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facilities and provider networks. It seems possible that the Court’s decision in Rutledge may lend support
for state regulation of the costs of services by these or other entities.
Congress remains free to enact legislation that further defines ERISA’s preemptive reach. Federal
legislation could, among other things, address a PBM’s role in service to ERISA plans, or more broadly
speak to states’ ability to enact reforms that affect private-sector, employment-based health coverage.
Such legislation could explicitly restrict state authority to pass cost-control measures affecting ERISA
plans to promote a more uniform, federal regulatory approach, or alternatively articulate the degree to
which states may experiment with measures designed to improve health care financing and access.
Federal legislation articulating the parameters of ERISA preemption may help guide the courts as they
examine likely future legal chal enges to state health reform efforts.

Author Information

Jennifer A. Staman

Legislative Attorney

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