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

(INDIANA CAPITAL CHRONICLE) — Oliver Lackey opened a pharmacy in his hometown of Fairview, Oklahoma, so he could “provide the best patient care.” He set up shop a decade ago in the local grocery store with “zero prescriptions.” Before long, business took off — yet he was still struggling.

“I was getting more patients and was filling more prescriptions,” Lackey told Stateline. “But as I grew in revenues, my reimbursement from the insurance companies and PBMs every year was getting worse.”

PBMs are pharmacy benefit managers, the intermediaries in the drug supply chain that manage prescription drugs for health plans. PBMs determine which drugs are available under a person’s insurance plan, set copayments and decide how much pharmacies must pay to acquire 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 largest health care corporations in the nation, engage in anticompetitive practices that lead to higher prices and drive independent pharmacdies like Lackey’s out of business.

In recent years, all 50 states have enacted laws designed to lower prescription drug costs by curbing 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 applies to the 65% of Americans who work for large employers that cover their workers through so-called self-funded health care plans.

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

What is ERISA?

The Employee Retirement Income Security Act, or ERISA, was signed into law in 1974. It is meant to protect participants in employer-sponsored retirement and health plans by setting uniform standards for how the plans operate.

Five years ago, Oklahoma tried to rein in PBMs by approving a measure barring them from forcing pharmacies to pay certain fees or requiring patients to use PBM-owned or -affiliated pharmacies. The law also prohibited PBMs from giving more generous reimbursements to their own pharmacies or arbitrarily booting pharmacies from their preferred networks.

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

The Pharmaceutical Care Management Association, a trade association representing PBMs, sued to invalidate the law. In August of last year, the 10th U.S. Circuit Court of Appeals ruled that ERISA, the federal law, prevented Oklahoma from applying much of its law to self-funded health care plans.

Greg Lopes, the trade group’s vice president of public affairs, said the Oklahoma law “would raise costs for health plans and consumers in the state.”

“Oklahoma’s law would devastate employer, union, and Medicare plan sponsors as well as hundreds of thousands of their beneficiaries, who would experience higher costs and reduced benefits,” Lopes said in an email.

But in May, the state pushed back: Oklahoma appealed to the U.S. Supreme Court to reverse the decision. In June, 32 state attorneys general and five pharmacist trade groups joined the lawsuit.

The Supreme Court hasn’t decided whether to take the case. If the high court eventually rules in favor of Oklahoma, legal experts say, it could establish an important precedent by allowing states to regulate the health plans that provide coverage to the majority of Americans, instead of being limited to regulating individual and group health plans and Medicaid programs.

But if the high court declines to hear the case or rules against Oklahoma, states will continue to have a hard time applying any 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 shutter his pharmacy in 2020, he said, because PBMs weren’t paying him enough for the drugs he was selling. He now works as the pharmacy director for the nonprofit Great Salt Plains Health Center, which serves patients in five Oklahoma locations.

“I had lots of patients who, when I announced that I was closing, came in crying,” he said. “It was a really tough time to go through that, because you’re essentially 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 setting uniform standards for how the plans operate. The rules are designed to ensure that plan administrators run them in the interest of participants and beneficiaries, solely to provide benefits and cover expenses.

Congress approved 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 the Boston University School of Public Health and School of Law.

“They made a lot of protections for employees, to make sure that the benefits promised to them by their employers were not being fraudulently reduced or squandered,” McCuskey said.

Under ERISA, large employers with thousands of employees in multiple states must abide by a single set of federal standards in their retirement and health benefits, rather than having to follow many different sets of state rules.

“Companies want to offer benefits, and they want to offer very good health plans for their employees,” said James Gelfand, president of the ERISA Industry Committee, a trade group representing large employers covered by the law. “However, it would not be possible to do that if they had to follow different rules in every state, every city or every municipality.”

Having to follow state-specific regulations — such as the ones in the Oklahoma law — likely would make it more expensive for large employers to provide health care coverage to their employees, Gelfand said. In response, he suggested, employers might stop offering certain benefits.

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

At the time ERISA was approved, McCuskey explained, the main concern was pensions, not health care plans. “But it has this tradeoff,” she added, because “the thing that states want and need to regulate over the past 50 years has been their health care markets.”

Legal confusion

ERISA can be triggered fairly easily, so states must be careful when they try to regulate their health care markets, according to 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 Arkansas law. But the constant threat of ERISA-related lawsuits makes it challenging for legislators to do more to curb prescription drug costs, an issue that ranks high on voters’ lists of concerns, experts said.

“It’s so broad, and it’s so muddled, and there’s billions of dollars at stake,” Boston University’s McCuskey said.

McCuskey and other legal experts say a ruling on the Oklahoma case could clear the way for more action. Mulready, the state’s insurance commissioner, hopes they are right.

“We just need clarity on the issue,” he said. “That’s what’s needed by lots of folks across the country as they’re watching this or have watched this play out.”