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Rutledge further demonstrates need for ERISA reform

December 18, 2020

Topics: Quote of the Day

U.S. Department of Labor

The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans.


Restoring The Preemption Status Quo: Rutledge, ERISA, And State Health Policy Efforts

By Carmel Shachar, I. Glenn Cohen
Health Affairs Blog, December 17, 2020

On Dec 10, 2020, the Supreme Court issued its opinion in Rutledge v. Pharmaceutical Care Management. While this case was perhaps overshadowed by recent election litigation, it is an important development in the ongoing tug of war between state health care policy initiatives and the federal Employment Retirement Income Security Act (ERISA) of 1974. ERISA’s very broad preemption clause has been used to block state efforts to regulate certain types of health insurance plans on several occasions. Before Rutledge, the last major ERISA health care case, Gobeille v. Liberty Mutual Insurance, allowed these health plans to use ERISA as a shield against state health care policy initiatives.

Rutledge represents a step back from the expansive application of ERISA preemption found in Gobeille. That is very welcome news to states looking to control pharmaceutical pricing in health insurance plans and (likely to a lesser extent) to states considering other major health policy initiatives. Nevertheless, Rutledge represents a return to ERISA preemption status quo rather than a new path forward in balancing ERISA and state health care reforms. There is still a significant need for Congress to reconsider the broad preemption mandate it created in ERISA, especially in the context of health care policy.

ERISA, Preemption, And State Health Care Reform Efforts

ERISA is a federal statute designed to set minimum standards for voluntarily established pensions and other employee benefit plans. ERISA is perhaps mostly notable because it includes one of the broadest preemption clauses of any federal statute. This clause blocks any state regulation of the administration of these employee benefit plans in favor of federal regulation. The purpose of this clause was to allow multistate employers to offer a single, consistent plan to all of their workers, reducing administrative and regulatory burdens while keeping administrative costs low.

While it was never intended to be a health care statute, ERISA does govern employer-sponsored health care plans, or insurance plans in which an employer covers the full financial risk of its employees’ claims for health care benefits, because they are a type of employee benefit plan. These types of health insurance plans represent a significant portion of the health insurance market. In 2018, 61 percent of workers who got their health insurance through their employer were enrolled in plans that were at least partially self-funded and fell into this category.

Setting The Stage For Rutledge

In 2016, the Supreme Court expanded the application of ERISA preemption to health care laws in Gobeille v. Liberty Mutual Insurance. The Court concluded that ERISA preempted a Vermont state law mandating that all health care plans report claims data to the Vermont all-payer claim database.

Gobeille was an expansion of ERISA’s preemptory reach, striking down the Vermont state law because it could result in wasteful administrative costs, thereby frustrating ERISA’s purpose.

There was significant concern that Rutledge would follow Gobeille in extending the reach of ERISA into state health care reform efforts. In this case, the potentially preempted state statue was Arkansas Act 900, which sought to regulate drug pricing by imposing requirements on pharmacy benefit managers (PBMs) such as Caremark. The purpose behind Arkansas Act 900 was to ensure that PBMs do not undermine pharmacies by reimbursing them less than what it costs pharmacies to procure drugs from wholesalers.

A Return To The Preemption Status Quo

Fortunately, the Court, in a short and unanimous opinion (Justice Barrett did not participate), rejected the argument that ERISA blocks the application of Arkansas Act 900 to employer-sponsored health insurance plans. To arrive at this conclusion, Justice Sonia Sotomayor used an ERISA analysis that drew heavily on the cases from the 1990s, such as Travelers Insurance. In fact, she drew significant parallels between Rutledge and Travelers, which concluded that a New York State law imposing a 13 percent surcharge on hospitals that used non-Blue Cross/Blue Shield insurers did not violate ERISA.

Justice Sotomayor stated that “[t]he logic of Travelers decides this case.” Sotomayor argued that, “[l]ike the New York surcharge law in Travelers, . . . [Arkansas Act 900] is merely a form of cost regulation” and not “primarily concerned with pre-empting laws that require providers to structure benefit plans in particular ways.”

What Next?

It is clear that the Justices were unhappy with the reading of Gobeille offered by the challengers to Arkansas Act 900. State regulators and policymakers no doubt breathed a sigh of relief that the Court suggested more of a return to its 1990’s ERISA preemption jurisprudence, case law that is more favorable to health care reform efforts. But it is far too soon to declare victory – while today Gobeille may not be extended, it has not been interred in whole or in part. It remains murky how far a state can go in health reform without foundering on the shoals of ERISA preemption.

In an ideal world Congress could step in with ERISA-reforming legislation that articulates better boundaries for preemption’s reach, acknowledging explicitly or implicitly that ERISA was never intended to regulate health care. But even if, unfortunately, Congressional reform of ERISA preemption is unlikely, the latest Supreme Court decision signals to health care reformers that the ERISA obstacles may not prove as formidable as they did before.


The Implications Of Rutledge v. PCMA For State Health Care Cost Regulation

By Erin C. Fuse Brown, Elizabeth Y. McCuskey
Health Affairs Blog, December 17, 2020

On December 10, 2020, the Supreme Court handed a significant win to states and broadened the path forward for state health care cost control efforts. In Rutledge v. Pharmaceutical Care Management Association, the Court ruled 8-0 that the Employee Retirement Income Security Act (ERISA) did not preempt Arkansas’s law regulating pharmacy benefit managers (PBMs), the intermediaries that administer prescription drug benefits for health plans.

In Rutledge, Justice Sonia Sotomayor spoke for the unanimous Court in holding that a state law requiring PBMs to pay pharmacies no less than their acquisition costs for prescription drugs was not preempted by ERISA, the federal statute governing employee benefits. The Court concluded, “ERISA does not pre-empt 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 Implications For State Health Care Regulation

Most immediately, Rutledge puts PBM regulations passed by more than 45 states on much firmer footing. These laws do different things, but they are all aimed at reigning in prescription drug costs.

Applying the logic of Rutledge, PBM laws are a form of health care cost regulation, and PBMs are not health plans but rather their administrative contractors, so ERISA should not preempt states’ PBM regulations.

Moreover, the Rutledge decision extends beyond PBMs to all state health care rate regulation. The Travelers case previously established that states can regulate the rates paid to health care providers, and the Rutledge Court extended the logic of Travelers to state regulation of prescription drug reimbursement rates. Health care rate regulation—whether for services or therapeutics—is clearly fair game for states, including when the state dictates how much payers must reimburse providers and suppliers.

In sum, Rutledge narrows the range of state regulations preempted by ERISA, while broadening those that are not. Justice Sotomayor’s opinion helpfully lists the types of state health care laws that ERISA does preempt: (1) laws that require plans to cover specific benefits; (2) laws that bind plan administrators to specific rules for determining beneficiary status; and (3) laws that create acute, indirect, economic effects that force a plan to adopt a certain scheme of coverage. State rate regulation avoids ERISA preemption because it does not tell plans what they must cover or whom, but merely regulates the cost of the items and services covered. This category of cost regulation leaves a lot of running room for states to pursue policies to control health care costs and improve affordability for consumers—the primary objects of most current health policy.

Congress Still Needs To Fix ERISA

While Rutledge represents an unequivocal win for state health reform, the case does not get the ERISA monkey off the backs of states. The courts have made a mess of ERISA jurisprudence, owing in part to the statute’s inscrutable language preempting all state laws that “relate to” employee benefits. ERISA cases are unpredictable and often difficult to reconcile.

While Rutledge’s measured application of ERISA’s broad preemption offers some meaningful and welcome running room for state health care cost regulation, it does not alter the fundamental obstacle that ERISA preemption poses to state health reform. Removing this obstacle requires Congressional intervention, either by altering the statute’s preemption language, adding a waiver mechanism, or both. At the very least, reforming ERISA by adding a federal waiver provision has a growing and bipartisan chorus of support.

Left untouched by Congress, ERISA preemption will continue to fuel relentless industry litigation challenging state reforms and deprive states of the health care regulation tools they urgently need. ERISA reform is health reform.



By Don McCanne, M.D.

This ERISA development is technical, but it’s important.

According to the U.S. Department of Labor, ERISA is a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans. When plans are provided in the private sector they need government oversight to ensure that individuals covered by these plans are protected.

We already have a problem here. Government plans that are not privatized, such as the traditional Medicare program, do not need special protection for the participants. Yet in the private sector, they do. Not only is there a public vs. private divide, there is also a federal vs. state divide. ERISA has been used to limit the state role in providing health plan oversight, yet decisions, such as Rutledge, have created confusion as to the proper roles of the federal government, the states, and the private sector in providing oversight for benefit plans. But it is not the federal government, nor the state, nor the private sector that needs the assurance of oversight, it is the plan beneficiaries themselves. As well meaning as ERISA is, it is often the monkey wrench that screws up the plan oversight to the detriment of the plan beneficiaries.

Efforts to enact comprehensive single payer plans on a state level have often been stymied to some extent by ERISA. The Rutledge decision slightly loosens the restrictions, but it falls far short of what is needed to allow policymakers and politicians to design, enact and implement a program that has the sole purpose of making health care accessible and affordable for everyone. Let’s end ERISA preemption and enact single payer improved Medicare for All, preferably on the federal level, but perhaps transitionally on a state level until barriers to federal enactment can be removed. Don’t let the opponents halt much needed reform by injecting into the process the ERISA boogeyman.

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About the Commentator, Don McCanne

Don McCanne is a retired family practitioner who dedicated the 2nd phase of his career to speaking and writing extensively on single payer and related issues. He served as Physicians for a National Health Program president in 2002 and 2003, then as Senior Health Policy Fellow. For two decades, Don wrote "Quote of the Day", a daily health policy update which inspired HJM.

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