States want to lower drug prices. A federal law stands in their way. • Michigan Advance

Oliver Lackey opened a pharmacy in his hometown of Fairview, Oklahoma, to “provide the best patient care.” He opened a “non-prescription” store in the local grocery store ten years ago. Business soon took off—but he still had problems.

“I was getting more patients and filling more prescriptions,” Lackey told Stateline. “But while my revenue was increasing, my reimbursement from insurance companies and PBMs was getting worse every year.”

PBMs are pharmacy benefit managers, the intermediaries in the drug supply chain that manage prescription drugs for health insurance plans. PBMs determine which drugs are available under a person's insurance plan, set copayments, and decide how much pharmacies must pay to purchase drugs.

PBMs argue that they use their bargaining power to negotiate lower drug prices for consumers and pharmacists. But critics say PBMs, some of which are owned by the nation's largest health care conglomerates, engage in anti-competitive practices that lead to higher prices and drive independent pharmacies like Lackey's out of business.

In recent years, all 50 states have passed laws designed to lower prescription drug costs by limiting the power of PBMs, according to the National Academy for State Health Policy, a nonpartisan research group. But thanks to a 50-year-old federal law called the Employee Retirement Income Security Act, better known as ERISA, almost none of those measures apply to the 65% of Americans who work for large employers that insure their workers through so-called self-funded health plans.

That could change if the U.S. Supreme Court upholds a PBM law passed by Lackey's home state of Oklahoma.

Five years ago, Oklahoma attempted to restrict PBMs by passing a measure that prohibited them from forcing pharmacies to pay certain fees or forcing patients to use PBM-owned or affiliated pharmacies. The law also prohibited PBMs from giving their own pharmacies more generous reimbursements or arbitrarily excluding pharmacies from their preferred networks.

It was “the most aggressive and comprehensive PBM enforcement law in the country,” Oklahoma Republican Insurance Commissioner Glen Mulready told Stateline. “And it was immediately challenged.”

The Pharmaceutical Care Management Association, an industry group representing PBMs, filed suit to invalidate the law. In August of last year, the 10th U.S. Circuit Court of Appeals ruled that federal ERISA prevented Oklahoma from applying much of its law to self-funded health insurance plans.

Greg Lopes, vice president of public affairs for the trade group, said Oklahoma's law would “increase costs for health insurance companies and consumers in the state.”

“Oklahoma's law would devastate employers, unions and Medicare plan sponsors, as well as hundreds of thousands of their beneficiaries who would face higher costs and reduced benefits,” Lopes said in an email.

But in May, the state fought back: Oklahoma filed an appeal with the U.S. Supreme Court to reverse the decision. In June, 32 state attorneys general and five pharmacist associations joined the lawsuit.

The Supreme Court has not yet decided whether to take the case. If the court ultimately rules in Oklahoma's favor, legal experts say it could set an important precedent by allowing states to regulate the health plans that cover the majority of Americans, rather than being limited to regulating individual and group health plans and Medicaid programs.

However, if the Supreme Court declines to hear the case or rules against Oklahoma, it will continue to be difficult for states to apply state regulations to self-funded plans.

Whatever the outcome, it will come too late for Oliver Lackey. He was in business for six years but had to close his pharmacy in 2020 because PBMs weren't paying him enough for the drugs he sold, he said. Today, he works as a pharmacy manager for the nonprofit Great Salt Plains Health Center, which serves patients at five locations in Oklahoma.

“Many of my patients came to me crying when I told them I was closing,” he said. “It was a really tough time because you're basically telling your family or your patients that you can't afford to take care of them anymore.”

Origins of the law

The goal of ERISA, which President Gerald Ford signed into law in 1974, is to protect participants in employer-sponsored retirement and health plans by establishing uniform standards for how the plans should operate. The rules are designed to ensure that plan administrators run them in the interests of participants and beneficiaries and solely to provide benefits and recover costs.

Congress passed ERISA in response to high-profile cases of underfunding and fraud in pension plans, said Elizabeth McCuskey, a professor of health law policy and management at Boston University's School of Public Health and School of Law.

“They have put in place numerous protections for workers to ensure that the benefits promised to them by their employers are not fraudulently reduced or squandered,” McCuskey said.

ERISA requires large employers with thousands of employees in multiple states to follow a single set of federal standards for their retirement and health insurance benefits, rather than having to comply with the rules of many different states.

“Companies want to offer benefits to their employees, and they want to offer them very good health insurance plans,” says James Gelfand, chairman of the ERISA Industry Committee, an industry group that represents large employers covered by the law. “But they wouldn't be able to do that if they had to follow different rules in every state, city or municipality.”

Compliance with state-specific regulations – such as those in Oklahoma law – would likely make it more expensive for large employers to offer health insurance to their employees, Gelfand said. In response, he suggested, employers could stop offering certain benefits.

“We have also told states that we will consider legal action if they pass a law that violates federal law, because our companies will not be able to offer benefits if they have to have different plans in California, Texas, Maryland and Massachusetts,” he said.

When ERISA was passed, McCuskey explained, it was primarily about pensions, not health insurance. “But there is a trade-off,” she added, because “what states have wanted and needed to regulate for the last 50 years is their health care markets.”

Legal confusion

ERISA can be triggered relatively easily, so states must be careful when trying to regulate their health care markets, says Joanne Roskey, an attorney at Miller & Chevalier, where she specializes in ERISA cases. As a result, their legislative efforts typically don't apply to the nearly two-thirds of people enrolled in self-funded plans.

In 2020, the U.S. Supreme Court opened the door to at least some state regulation of PBMs in self-funded plans when it upheld a more limited law in Arkansas. But the constant threat of ERISA-related lawsuits makes it difficult for lawmakers to do more to rein in prescription drug costs, an issue that's high on voters' lists, experts say.

“It's so big and so complicated and there are billions of dollars at stake,” said McCuskey of Boston University.

McCuskey and other legal experts say a ruling in the Oklahoma case could pave the way for further action. Mulready, the state's insurance commissioner, hopes they're right.

“We just need clarity on this issue,” he said. “That's what a lot of people across the country who are watching or have watched this need.”

State border is part of States Newsroom, a nonprofit news network supported by grants and a coalition of donors as a 501c(3) nonprofit organization. State border maintains editorial independence. If you have any questions, please contact the editor, Scott S. Greenberger: [email protected]. Consequences State border on Facebook and X.