Court Rules ERISA Does Not Preempt Arkansas PBM Reporting Law

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An Illinois district court recently ruled in Central States, Southeast and Southwest Areas Health and Welfare Fund et al. v. McClain that the Employee Retirement Income Security Act of 1974 (“ERISA”) does not preempt an Arkansas state law requiring ERISA-covered health plans to report certain compensation-related information related to their pharmacy benefit managers (“PBMs”).

Background on Arkansas Rule 128

Arkansas Insurance Department Rule 128 (“Rule 128”) establishes state-level regulation of PBMs. Under this rule,  group health plans must disclose certain data related to pharmacy reimbursement rates and PBM compensation. The reporting is used by the Arkansas Insurance Department to confirm “that the reimbursement for pharmacist services paid to a pharmacist or pharmacy is fair and reasonable” (the reporting requirement).

If reimbursements are found to unfair or unreasonable, the Arkansas Insurance Commissioner (the “Commissioner”) may require the plan to pay an additional dispensing fee to the pharmacy (the dispensing fee requirement). If the Commissioner determines that the reimbursement is fair and reasonable, no further action is required.  

Legal Challenge to Rule 128

The plaintiffs – Central States, Southeast and Southwest Areas Health and Welfare Fund, a self-funded, multiemployer health plan governed by ERISA, and its trustee – filed a lawsuit arguing that the rule’s reporting and dispensing fee requirements are preempted by ERISA.

They presented four main arguments:

1. Direct Regulation of ERISA Plans: The reporting requirement and dispensing fee requirement refer to ERISA plans because they “impose requirements directly on ERISA plans rather than simply regulating PBMs.”
2. Interference with Plan Administration: The reporting requirement is pre-empted “because it governs a central matter of plan administration.”
3. Interference with Plan Design: The dispensing fee requirement is pre-empted because it “dictates plan design” by restricting how the plan structures and operates its pharmacy network.
4. Cost-Sharing Restrictions: The rule further “dictates plan design” by prohibiting ERISA plans’ ability to require “their Arkansas participants pay a higher amount for their prescription drugs to offset the higher dispensing fees.”

The Court’s Decision

The U.S. District Court in Illinois dismissed the case, holding that the plaintiffs failed to show that Rule 128 either specifically “[refers] to” ERISA plans or has an “impermissible connection with” ERISA plans—the two standards for ERISA preemption.

The court emphasized that Rule 128 applies broadly to all health care payors, not just ERISA-covered plans. Additionally, it found the rule to be a cost-regulation measure, not a mandate on benefit design or a substantive plan requirement. Regarding the reporting requirement, the court viewed the reporting requirement as incidental to the state’s oversight of pharmacy reimbursement, citing the Sixth Circuit’s decision in Self-Insurance Institute of America, Inc. v. Snyder, which held that incidental reporting obligations do not trigger ERISA preemption.

Employer Takeaways

This case is part of a broader trend where states are increasingly regulating PBMs in response to rising drug costs and transparency concerns. Many states have passed laws targeted PBM practices, and more legal challenges are expected.

While courts have been split on whether such laws apply to self-funded ERISA plans, employers should not assume ERISA preempts all state PBM requirements. Plan sponsors, particularly those with self-funded plans, should monitor this case closely – especially if an appeal is filed – and continue to monitor developments in similar cases.