States are trying to regulate pharmacy costs. Can they override federal law?
For over 50 years, the Employee Retirement Income Security Act (ERISA) has served as the foundation around which employer benefit plans are built.
That foundation, however, has shown cracks in recent years as the cost of healthcare continues to rise and many states try to take regulatory matters into their own hands.
From Alabama to California, state houses have passed legislation intent on keeping pharmaceutical costs in check. Many of these laws are being challenged in the courts.
Why this matters to employers
How those cases play out could mean change and greater complexity in the ways that employers manage health and welfare benefits. While insurance carriers (and therefore fully insured plans) must follow state law, self-funded health plans generally have the protection of ERISA preemption over state laws relating to those plans. It’s important for plan sponsors that employ people across multiple states to stay informed of these developments or have trusted advisors who can keep track of the ongoing tug-of-war between ERISA and the states.
As you’ll read below, questioning ERISA preemption on the state and local levels isn’t new. But the number of challenges, and the intensity of those challenges, have grown in recent years.
Over the past five decades, as companies expanded and it became more common to have employees in multiple states, the streamlining and predictability provided by the federal law allowed health and welfare plans to innovate in providing for their employees while maintaining efficiency in plans spanning multiple jurisdictions. This power came from “preemption,” or ERISA’s mandate that essentially blocks state laws that “relate to” an employee benefit plan that is covered by ERISA.
What this means in practice, however, has fluctuated over the decades. Today’s state efforts to regulate pharmacy benefit managers (PBMs) represent the latest chapter in an ongoing saga between ERISA and state legislatures.
For employers to understand the current regulatory environment, it helps to understand how ERISA preemption has evolved over the years and where it stands today.
The development of ERISA preemption
From the signing of ERISA in 1974, it took almost a decade to get an answer as to what “relates to” means for a state law to be preempted. The following cases stand as milestones marking the continued evolution of ERISA's reach across the decades.
1983
Shaw v. Delta Airlines
Clarified ERISA by creating the “relates to” test, holding that a state law is preempted if it has a connection with an ERISA plan
1997
Cal v. Dillingham
Restricted ERISA preemption further by not applying it to any state tax or other law that increases cost of providing employee benefits
2020
Rutledge v. PCMA
Restricted ERISA preemption, saying Arkansas state law could require PBM reimbursement rates to match or exceed wholesale drug costs
2023
PCMA v. Mulready
Upheld ERISA preemption, saying states can't restrict pharmacy network access standards, network cost-sharing mandate, “any willing provider” contracting requirement, and pharmacy quality standards
1995
New York State Conference of BCBS Plans v. Travelers
Restricted ERISA preemption by ruling it can’t regulate “indirect economic influence” from surcharges or hospital bills
2016
Gobeille v. Liberty Mutual
Upheld ERISA preemption, saying state law requiring data reporting interfered with uniform plan administration
2021
PCMA v. Wehbi
Restricted ERISA preemption, saying North Dakota's PBM regulations applied to all plans, including ERISA plans
In 1983’s U.S. Supreme Court case Shaw v. Delta Airlines about mandated benefits, the court established the foundational “relates to” test, holding that a state law is preempted if it has a connection with or reference to an ERISA plan. This test was intended to be used broadly.
Even with this expansive protection, cracks in ERISA’s shield began to show and courts began to retreat. In 1995, the Supreme Court began narrowing the scope of preemption with New York State Conference of BCBS Plans v. Travelers. The court upheld the New York state law imposing surcharges on hospital bills, finding it did not mandate plan structure or administration, and that “indirect economic influence” did not regulate the plan itself.
The nation’s highest court took this concept slightly further in 1997 in Cal. v. Dillingham, holding that a California apprenticeship wage law was not preempted by ERISA because it didn’t bind a plan. It instead had a cost impact. Since state law can touch on countless topics that can raise the cost of a benefit plan, the court clarified that just because "[a]ny state tax, or other law that increases the cost of providing benefits to covered employees" will have some effect on the benefit plan, "that simply cannot mean that every state law with such an effect is pre-empted.”
After a decade of erosion, proponents of ERISA preemption finally scored a victory in 2016, when the Supreme Court found in Gobeille v. Liberty Mutual that a Vermont law requiring data reporting to an all-payer claims database was preempted because it interfered with uniform plan administration.
However, victory for preemption would be short-lived.
2015
The Rutledge sledgehammer to preemption and squaring the circle
In 2015, Arkansas passed a law in the attempt to regulate the relationship between PBMs and pharmacies by mandating certain reimbursement and providing more control in dispensing drugs.
As PBMs are often providing services to ERISA plans, the statute triggered a prolonged legal battle that culminated in 2020 with Rutledge v. PCMA. In Rutledge, the Supreme Court unanimously held that the Arkansas PBM regulation requiring reimbursement rates to match or exceed wholesale drug costs (with the belief that large PBMs could take losses on certain drugs that independent pharmacies couldn’t) was not preempted by ERISA.
The court reached this decision because Arkansas’ law:
- does not govern central matters of plan administration;
- does not mandate any particular benefit structure; and
- applies equally to all PBMs and pharmacies, regardless of ERISA status. Just because the law may alter costs and incentives, the court ruled, it doesn’t mean the law is preempted.
Within a few short years, we have seen the fall-out of Rutledge. The 2021 8th Circuit case PCMA v. Wehbi re-examined North Dakota’s laundry list of PBM regulations that had previously been held preempted. Upon re-review using the new standard established by Rutledge, the 8th Circuit Court found each new standard was not preempted by ERISA. Therefore, the following provisions were allowed:
- Prohibition on co-pay claw-backs
- Pharmacy accreditation standards limited to federal/state standards
- PBM self-dealing prohibition
- Prohibition on retroactive claim adjudication/fees
- Regulation of pharmacy performance measures and fees
Mulready: Preemption strikes back
While the 8th Circuit finding that so many provisions were not preempted was concerning for plan sponsors, they received a slight reprieve in 2023 when the 10th Circuit reasserted ERISA preemption in PCMA v. Mulready.
The court found Oklahoma’s pharmacy network access standards, network cost-sharing mandate, “any willing provider” contracting requirement, and pharmacy quality standards were all preempted by ERISA.
At first reading, several conclusions found in Mulready and the 2021 Wehbi ruling seem to contradict each other, which should prompt a review by the Supreme Court. However, for better or for worse, the high court declined to take up hearing Mulready, letting the assertive, pro-ERISA decision stand. Mulready made clear that states do not have total freedom to regulate third parties that service ERISA plans and is serving as a guidepost in a post-Rutledge world.
A surge in state PBM laws challenging ERISA's preemption
In the post-Rutledge world, states across the country have been following Arkansas’ lead, passing laws on a yearly basis aimed at what they believe are unfair practices by PBMs that are driving up the cost of healthcare. States that have passed PBM legislation in the past year include Iowa, Indiana, Illinois, California and North Carolina.
Some of these state laws explicitly exclude ERISA-preempted plans from their attempted purview of oversight. However, other states have been pushing the boundaries, either remaining vague and leaving it up to state regulators or courts to decide scope, or explicitly stating the laws apply to the PBM functions of an ERISA self-funded health plan.
As noted above, courts have had a tough time consistently stating which provisions of the laws are or are not preempted for ERISA-governed plans. And the fact that the only appellate guideposts we’ve had since 2020’s Rutledge decision are Mulready and Wehbi (two cases that may see hard to square together) make matters even more difficult.
This lack of clarity has led to some eyebrow-raising results. There seems to be confusion as to which functions belong to the PBM and which are up to the ERISA-regulated health plan. The following 2025 cases highlight this discord:
Will the Supreme Court take action?
Given the increasing legislation and litigation, as well as variant opinions of the courts, we may find a PBM law back in front of the United States Supreme Court to resolve the inconsistencies. Clearly, the make-up and jurisprudence of today’s Supreme Court is much different than in the 1980s and 1990s. While the Court has yet to take on this issue, continual movement across the nation may require action in the near future.
What employers can do now
With the constant stream of new legislation and the following litigation in numerous states, employers and plan sponsors, particularly those with employees across multiple states, must keep informed and, if necessary, make requisite plan changes to comply with relevant state PBM laws. Not doing so could result in surprising, mandatory and costly benefit impacts.
With the increase in telework and the decentralized nature of many companies, being aware of what is happening on state PBM regulation issues by engaging with your consultant and PBM is crucial to good ERISA governance, staying in compliance, and keeping costs manageable.
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