State Cost-Control Reforms and ERISA Preemption

Abstract

• Issue: State legislators continue to pursue reforms aimed at reducing health care costs. But the federal Employee Retirement Income Security Act (ERISA) threatens enforcement of state laws that impact employer-sponsored health insurance, especially the self-funded plans that comprise 64 percent of employer-sponsored coverage. ERISA preempts state laws directly targeting these plans and stretches into topics with only a tangential relationship to employer insurance. Preemption dilutes states’ ability to collect data, control prices, and protect consumers.
• Goals: Identify types of health care cost reforms states have pursued since 2019 and assess the ERISA preemption implications for those state reforms.
• Methods: Survey state health bills relating to health care costs passed from 2019 to June 2021, identify common provisions, and analyze the ERISA preemption implications for those provisions.
• Key Findings and Conclusions: States recently passed an array of reforms, mostly targeting prescription drug costs, provider reimbursement, consumer protection, data collection on health care spending, and insurance coverage. Many of these reforms are fully enforceable, but ERISA preemption threatens some popular measures as applied to employers’ self-funded plans. While recent Supreme Court precedents limit ERISA preemption’s application, the law still poses an obstacle to state cost-control reforms — whether ambitious or modest.

Introduction

States have an especially keen interest in reducing the burden of health care costs. State governments pay a large portion of these costs through public programs and as an employer responsible for state employees’ health care needs. Unlike the federal government, many states are bound by law to balance their budgets and, therefore, must divert funds from other priorities when health care costs increase.¹ Federal law impacts states’ capacity to enforce these urgently needed health reforms in several ways:

• Federal programs may fund state health care reform efforts, such as in the Medicaid program and the Affordable Care Act (ACA) state insurance exchanges.
• Federal law may create minimum standards and protections to which state law may add, such as the ACA’s requirement that insurers cover a set of essential health benefits.
• Federal law preempts the enforcement of state law to the extent that the two conflict, usually instances where a state law would permit less protective regulation than federal law requires.

In health reform, states also must contend with a federal hurdle in the Employee Retirement Income Security Act of 1974 (ERISA).² ERISA preempts state laws that directly regulate employers’ health benefit choices, and it preempts some state laws that only indirectly relate to those choices, too. An employer’s choice of how to fund health benefits is particularly relevant to the strength of ERISA preemption. Under fully insured employer-sponsored plans, the insurer sets the benefits and takes on most of the financial risk. Employers that choose a self-funded approach assume most of the financial risk and have more flexibility to design employee benefits. While states may regulate insurers that sell group plans to employers, ERISA preempts states from enforcing insurance regulations on self-funded employer-sponsored health plans.

For example, ERISA would preempt a state law directing employers to offer health benefits for infertility treatment. However, a state law requiring that health insurance cover infertility treatment would be enforceable on insurers selling group plans. So, if an employer chose to offer a fully insured plan, the carrier selling that plan would have to cover the infertility treatment. But if the employer chose instead to self-fund its plan, ERISA would preempt enforcement of the state law and the employer would not have to cover infertility treatment in its plan.

In contrast to many other preemptive federal laws, ERISA creates relatively little federal regulation for employer-sponsored insurance,³ leaving a void of preemption in which state law is unenforceable and federal law is nonexistent. The breadth and indeterminacy of the statute’s preemption language make it easier for employers and other entities to mount litigation challenging the enforcement of state law. That litigation consumes state governments’ time and resources in defending their laws, even if they ultimately prevail.

Because employer-sponsored health insurance provides coverage for nearly half of all people in the U.S., ERISA’s preemption of state law that relates to employer-sponsored insurance puts a major obstacle in the path of state health reform.⁴

The Supreme Court’s interpretation of ERISA has left states a few narrow avenues. States may not enforce laws that reference or “act immediately and exclusively upon” employer-sponsored plans, nor may state law have too direct a connection with those plans by intruding on “central matters of plan administration,” such as recordkeeping and claim processing.

But state laws that have only indirect economic effects on employer-sponsored plans avoid preemption. The U.S. Supreme Court’s December 2020 opinion in Rutledge v. PCMA further clarified that state laws that “merely” affect or regulate health care costs are not preempted even though they may alter the incentives and decisions facing employer-sponsored plans.⁵ The state law in Rutledge required pharmacy benefit managers (PBMs) to reimburse pharmacies for covered drugs at or above their acquisition cost. The Court held that this regulation applied to PBMs as contractors for employer-sponsored plans does not “directly regulate health benefit plans at all.” The incidental costs of compliance that PBMs might pass along to employer plans, according to the Court, are merely an “indirect economic influence” on health plans that do not trigger ERISA preemption.

This issue brief surveys state legislation influencing health care costs over the past three years and assesses the threat that ERISA preemption poses for the enforcement of these reforms.

Key Findings

States have passed a wide variety of laws aimed at health care costs. Many are designed to have some impact on the commercial group market for health insurance and, therefore, carry at least some potential for ERISA preemption.

We examined a sample of more than 300 state health reform bills passed between January 1, 2019, and August 1, 2021, for their ERISA preemption potential.⁶ Most state legislative efforts during this period fall into one or more general categories of reform: prescription drugs, provider reimbursement, consumer protection, data collection on health care spending, and insurance coverage.

The majority of these efforts exist outside the reach of ERISA preemption because they regulate providers, manufacturers, and patients — rather than payers — and because they tend to enact modest incremental changes, such as transparency of cost information. The threat of ERISA preemption litigation, however, lingers even for relatively modest state laws, as well as for the few more ambitious and transformative efforts.

Prescription Drug Coverage and Cost Regulation

Prescription drug coverage and costs were a frequent target of state legislation. Measures that act directly on manufacturers, rather than on the insurance plans that pay them, avoid ERISA preemption. For instance, states have pursued prescription drug price transparency measures, which primarily target pharmaceutical manufacturers and establish state administrative boards to study and review drug pricing, as well as to enforce transparency and price-capping provisions. Likewise, state bills creating drug importation programs focus on manufacturers and wholesalers, rather than insurers, and so avoid ERISA preemption, despite the ability of employer plans to participate in these buying programs.⁷ States also have enacted laws regulating a variety of pharmacy benefit manager practices, which are on even stronger footing against ERISA preemption after Rutledge.

But some state measures make it unlawful for group plans to pay more than the capped price for certain drugs. These regulations run afoul of preemption because they may intrude on a plan’s ability to establish a formulary and set reimbursement rules.

Responding to manufacturers’ price hikes on epinephrine pens and insulin, many states enacted price caps and limitations on patient cost sharing for these specific therapies.⁸ Because most of these state bills target the patient’s insurance rules on cost sharing, they are enforceable for patients with fully insured plans, but not enforceable against self-funded plans. Similarly, some states have enacted rules limiting insurers’ use of step therapy protocols, which require patients to try less expensive prescriptions drugs before insurance will cover the drug prescribed by the patient’s doctor.⁹ Some state bills create exceptions that permit patients in some circumstances to bypass their insurer’s step therapy protocols. These rules directly alter the insurance contract and, therefore, would be enforceable against insurers, but not against employer self-funded plans.

Provider Billing and Reimbursement Regulation

Another frequent incremental reform that states passed is a patch to insurance reimbursement for telemedicine services.¹⁰ Requiring insurers to reimburse certain medical services delivered via telemedicine falls squarely within the business of insurance, meaning these laws would be enforceable for fully insured health plans but preempted for self-funded plans.

States can regulate how much providers charge for their services without interference from ERISA preemption. The preemption problem arises when states regulate the payer side of the transaction. So state bills prohibiting hospitals and clinics from charging facility fees for services delivered via telemedicine do not implicate preemption.¹¹

Consumer Protection Measures

States also pursued consumer protection measures, preventing providers from balance billing or surprise billing insured patients for out-of-network care in certain emergency situations and when out-of-network providers are working at in-network facilities.¹² The federal No Surprises Act took effect in 2022, propping up some of these state measures with a federal floor.¹³ In addition, Rutledge’s approach to cost-control regulation would likely uphold several of the state measures that go further on surprise billing than the federal law does. Like the federal law, many of the state surprise-billing protections regulate both providers and payers, prohibiting providers from sending and collecting surprise bills but also requiring insurers to cover surprise-billed services at in-network rates and to implement oversight and enforcement of the new rule. Rutledge’s requirement that PBM contractors for self-insured plans abide by the state’s pharmacy reimbursement methodology and appeals processes offers some hope that states could enforce their additional surprise-billing protections, such as out-of-network rate calculations and dispute resolution processes, against the third-party administrators of self-insured plans, as well.

Other state laws requiring providers to disclose rates and policies to patients easily avoid ERISA preemption, though there is scant evidence that price transparency actually helps patients control costs for themselves or their insurers.¹⁴

Health Care Spending Data and Analysis

A powerful information-gathering tool that states continue to pursue is an all-payer claims database and collection of other statewide health care cost data. Supreme Court precedent put self-funded plans’ data just out of reach for state regulation.¹⁵ However, some states have proposed workarounds by conditioning the reporting requirement on entities’ receipt of tax credits, rather than their status as insurer or third-party administrator. Though ingenious, this approach will likely not be enforceable to the extent that the data reporting requirements intrude on the plan functions governed by ERISA.

State legislatures have begun directing their health authorities to assess data relevant to health equity concerns, particularly on race, ethnicity, gender identity, sexual orientation, spoken language, and disability. State laws that require providers (typically hospitals) to collect and report these patient data avoid ERISA preemption.¹⁶ But when states also seek to collect demographic data about the payment of health care claims and health care costs, ERISA preemption prevents states from collecting those data from self-funded employer plans.¹⁷

States also have established commissions to conduct longer-term inquiries into health care spending, quality, and equitable distribution of care.¹⁸ State authority to establish these bodies is well beyond the reach of ERISA preemption.¹⁹

Insurance Coverage

Coverage for addiction treatment services was a frequent target for state bills requiring insurers to cover particular items, or at least cover them with parity to other services.²⁰ As before Rutledge, these substantive coverage requirements remain enforceable against insurers, but preempted for self-funded plans. Similarly, state laws that enact or expand on the ACA’s insurance protections²¹ are enforceable, except against self-funded plans.

Funding for public insurance programs,²² even if collected from employers, can still avoid ERISA preemption. Washington, Colorado, and Nevada passed laws establishing public-option plans. More recent bills have proposed funding these plans from a mix of sources, including payroll taxes on employers. Expert assessments have concluded that these revenue-generating measures would not bear the connection to or economic effect on employer-sponsored plans that would trigger ERISA preemption,²³ though that conclusion will not necessarily deter litigation if the bills get passed.

Discussion

The prevalence of discrete, modest price transparency and consumer protection provisions among states’ recent reform efforts likely results from a number of factors. Yet the threat of ERISA preemption takes a toll on state reform efforts, even at the modest incremental level. Most crucial policy tools that states have for controlling health care costs and expanding access should survive preemption challenge — especially because state reforms that target costs at the provider level, that regulate contractors who service employer plans, and that have incidental economic effects on the cost structure of employer-sponsored plans can more comfortably avoid ERISA preemption after Rutledge.

But that success is not assured. Even a dwindling chance at preemption does not deter employers and their trade associations from filing litigation that consumes public resources.²⁴ And ERISA preemption continues to deprive states from regulating a significant portion of their health insurance market: employer self-funded plans. State legislation that most comfortably avoids ERISA preemption may not always be the most effective means for reaching health policy goals, such as the popular price transparency law, which easily avoids preemption but has limited impact on health care costs.

Nevertheless, the limits placed by ERISA preemption on the power of state reform does not appear to be dampening states’ enthusiasm for pursuing incremental reforms in light of urgent health care cost pressures.