Employers that sponsor employee benefit plans must comply with ERISA and other federal laws and are generally exempt from most state laws. However, lately, states are trying to regulate employee benefit plans in a number of ways. In particular, some states have passed laws that purport to regulate pharmacy benefit managers (“PBMs”) that service self-insured health plans.

Last week, a U.S. district court partially granted a preliminary injunction against an Iowa law that curtails the power of PBMs that operate in Iowa or cover its residents, ruling that ERISA preempts certain provisions of the Iowa law. After Iowa enacted SF 383, set to become effective July 1, employers and employee benefit plans jointly challenged the law, positing that the state law restricts their ability to structure and administer employee benefit programs.

The lawsuit challenged several key features of SF 383, including that the law prohibits PBMs from:

  • Promoting the use of certain pharmacies with preferential treatment (e.g., through referrals or reimbursements);
  • Restricting qualified pharmacy providers from joining the PBMs’ networks; and
  • Classifying drugs with a “specialty drug” designation to block in-network access to participants.

These prohibitions, per the U.S. district court, were likely to infringe upon plan sponsors’ ability to make cost, safety, and service-based decisions essential to managing pharmacy benefits in a way that violates ERISA and other federal laws. The injunction applies only to the named parties.

The court did not enjoin several aspects of the law, including that PBMs may not promote pharmacies because of financial incentives and that PBMs must contribute 100% of manufacturer rebates they receive to health plans.

The Iowa Attorney General has already signaled an intent to defend SF 383 in court.

Iowa joins a growing number of states, including Arkansas, Tennessee, and Texas, that have put PBMs and their business models in the crosshairs. While the Iowa injunction aligns with rulings in other jurisdictions that ERISA broadly preempts state laws that impact plan design and administration, employers and employee benefit plans around the country that engage PBMs for pharmacy benefits should take care to understand current or pending state-level regulations that may affect their operations.

The D+G Benefits + Compensation team continues to track these state nuances for both employers and third party administrators.