Federal Proscription on State Prescriptions: A Sensible Approach to ERISA Preemption

David Wovrosh, Associate Member, University of Cincinnati Law Review

Over half of all Americans suffer from a chronic illness requiring prescription medication.[1] As a result, Americans spend more per capita on prescription medication than anywhere else in the world.[2]  Every year, Americans spend the equivalent of eighteen percent of the U.S. GDP on prescription medication.[3] Criticism of the exponential increases in the cost of necessary medication has been leveled at nearly all players in the medical industry.[4] Whether the federal government or the states are to shoulder the responsibility to act is an ongoing legal saga playing out among the circuit courts.

As of August 2017, thirty states have introduced over sixty drafts of legislation aimed at increasing the transparency of drug pricing.[5] In response, the Pharmaceutical Care Management Association (PCMA)[6] has challenged the states’ legal authority to do so. In a recent case, Pharmaceutical Care Management Association v. Gerhart,[7] the Eighth Circuit Court of Appeals found that the Employee Retirement Income Security Act of 1974[8] (ERISA) preempted states’ ability to legislate drug transparency and pricing.[9]

The ruling relies on an increasingly untenable framework for analyzing federal law preempting states from regulating employer benefits. It is time for the Supreme Court to acknowledge that the existing body of ERISA preemption legislation far exceeds its originally-intended scope and purpose.  To make the preemption doctrine more workable, the Supreme Court should create a two-tiered analysis based on pension and non-pension plans.

ERISA, Preemption, and Opaque Standards

ERISA was enacted to “safeguard employees from the abuse and mismanagement of funds that had been accumulated to finance various types of employee benefits.”[10] The primary aim of ERISA is “to provide a single uniform national scheme for the administration of ERISA plans without interference from the laws of the several States.”[11] To achieve this, Congress included a preemption clause, known as 514(a), stating that ERISA “shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan.”[12] The “opaque language”[13] of 514(a) has forced the Supreme Court to often and begrudgingly take up the question of what it means to “relate to” an employee benefit plan such that it is preempted.[14]

The Supreme Court has articulated a two-prong test to determine whether a state law “relates to” an employee benefit plan.[15] First, courts look to whether the statute in question “connects to” ERISA in a meaningful way.[16] Second, courts must look to whether the statute impermissibly “references” ERISA.[17] This lack of clarity in defining the scope of ERISA preemption has, as the Court noted, caused an “avalanche of litigation in the lower courts.”[18]

ERISA in its Proper Historical Context

ERISA was enacted in 1974 in reaction to chronic underfunding and mismanagement of private employee retirement accounts.[19] Congress sought to stabilize the pension system by requiring national uniformity, given the dearth of regulation surrounding private retirement accounts at the time.[20] This was to be accomplished by establishing fiduciary duties on retirement plans and by mandating reporting and compliance requirements for all employee benefit plans.[21] Foremost among the outcomes sought by imposing regulations was the ability of consumers to make a meaningful and informed choice about their options for retirement accounts and fairly assess the security of their existing retirement accounts.[22]

ERISA’s legislative history is surprisingly quiet on its application to non-pension plans, despite the “uncommonly thorough document[ation]” of Congress’ motivations for “comprehensively reform[ing] the private pension industry.”[23] Indeed, many of the ERISA provisions that enforce and regulate “substantive protections” of core ERISA benefits do not apply to non-pension benefits at all.[24] This conspicuous absence from an otherwise well-documented statute has led come commentators to posit that ERISA’s application to health plans is, at best, peripheral.[25] Some scholars have even questioned whether Congress intended for ERISA’s preemption clause to apply to state regulations of non-pension plans at all.[26] Nevertheless, preemption of non-pension plans remains one of the most litigated aspects of 514(a).[27]

The Lower Court Litigation Avalanche

At the heart of the misunderstanding of 514(a)’s preemptive scope has been diametrically opposed Supreme Court interpretations of 514(a). Courts have applied both a textualist approach and an approach giving greater deference to states.

The Supreme Court’s early decisions involved a very strict and literal interpretation of what it meant to “relate to” an ERISA plan.[28] This approach embodies an understanding of the preemption clause that resulted from a “plain language” reading of the text.[29] Shaw v. Delta Air Lines, Inc. became the litmus test for preemption, finding that ERISA’s broad text was an intentional design meant to have an aggressive and sweeping preemptory effect on state law.[30] In Shaw, the Supreme Court used a textual interpretation of ERISA’s preemption clause to find that a New York law prohibiting maternity discrimination in employer-sponsored disability insurance claims was preempted by ERISA. As a result of Shaw and its progeny, any state legislation having even a marginal impact on any employee benefit would result in near “automatic preemption.”[31]

This literalist approach was silently rejected over a decade later.[32] In New York State Conference of Blue Cross & Blue Shield Plans v. Travelers Insurance Co. (Travelers),[33] the Supreme Court sought to depart from the textualist interpretation under Shaw. In Travelers, the Court found that the Shaw approach gave too little deference to traditional state’s rights.[34] The Court emphasized that they “have never assumed lightly that Congress has derogated state regulation.”[35] Instead, the Court must examine “pre-emption with the starting presumption that Congress does not intend to supplant state law.”[36]

The PCMA has subsequently sought to prohibit states from passing pharmaceutical transparency legislation, arguing that states are wading into territory preempted by ERISA. The result has been a number of divided circuits that are at loggerheads as to whether ERISA preempts state legislation mandating the disclosure of drug pricing.

In January 2017, the Eighth Circuit handed PCMA a victory in Pharmaceutical Care Management Association v. Gerhart.[37] The Eighth Circuit held that an Iowa law requiring prescription insurance companies to disclose drug pricing methodologies[38] was preempted by 514(a).[39] The court found that the Iowa statute’s reporting requirements impermissibly referenced ERISA plans[40] as well as an impermissible “connection to” ERISA.[41]

Both the D.C. Court of Appeals as well as the First Circuit Court of Appeals arrived at the opposite conclusion. In Pharmaceutical Care Management Association v. Rowe, the First Circuit found a Maine statute requiring disclosures of drug pricing outside 514(a)’s scope.[42] The First Circuit found that the Maine statute’s disclosure requirements had neither a “connection to”[43] nor an impermissible “reference to” ERISA.[44] Conversely, the D.C. Circuit Court of Appeals found partial preemption in Pharmaceutical Care Management Association v. District of Columbia.[45] The D.C. Circuit found that placing fiduciary duties on PBMs is too burdensome on plan administration and that ERISA therefore preempted that portion of the D.C. statute, while allowing other transparency portions of the statute to survive.[46]

Whither the Laboratories of Democracy?

Proponents of an expansive reading of 514(a) point to the ability of the preemption clause to enable national stability among the various employee benefit plans.[47] National uniformity in law, they argue, ensures that significant costs can be saved by avoiding duplicitous state regulatory schemes that are superimposed on top of national law.[48] This avoids the costly administration of state-imposed regulations which pass these costs on to the consumers.[49] While this may be true for employee pension plans, 514(a) has the unintended consequence of creating regulatory “vacuums” as a result of 514(a) preemption.[50] ERISA’s tangential reference to non-pension plans brings those plans within 514(a)’s orbit. The net effect is to ensure that only federal legislation can regulate those environments. From a federalist perspective, this has proven incredibly problematic.

One of the core functions incumbent on the states is the responsibility to manage and implement healthcare.[51] The sweeping interpretation of 514(a) has severely curtailed the ability of states to carry out this core function, thereby creating a “regulatory vacuum.”[52] ERISA itself provides little in the way of creating the kind of stability and regulatory oversight for non-pension plans that it affords to pension plans.[53] The result is a paradox: states are estopped from regulating in a field that is within their domain by a regulatory body that is relatively indifferent to consumer needs.

ERISA Preemption: A Sensible Solution

Short of repealing ERISA or legislative action, the kind of change required to recalibrate the scope of 514(a) must come from the Supreme Court itself. The Court should dissolve the twin-prong analysis as applied to non-pension employment benefits. In its stead, the Court should adopt a standard that would preempt non-pension plans only if they directly contradict ERISA directives.

The rationale for a bifurcated 514(a) analysis critically begins with the historical and statutory heft that is given to pension plans and the paucity of regulatory oversight afforded to non-pension plans. As the Court in Travelers directed, “[w]e simply must go beyond the unhelpful text and the frustrating difficulty of defining [514(a)]” and examine Congress’ intent.[54] By enacting ERISA, Congress first and foremost sought to stabilize an unfettered pension market that had been crumbling under mismanagement and uncertainty.[55] ERISA critically omits non-pension from core ERISA provisions.[56] A careful reading of the legislative history shows that “Congress . . . was not dealing with non-pension benefit plans when it enacted ERISA.”[57]

An inquisition into 514(a)’s scope should begin with the “starting presumption that Congress does not intend to supplant state law.”[58] The regulation of healthcare squarely falls within the ambit of state regulation.[59] The Court has been reluctant to supersede the traditional powers reserved to the state unless preemption “was the clear and manifest purpose of Congress.”[60] As the Court in Shaw correctly observes, 514(a)’s legislative history is replete with Congress’ manifest intent to occupy the field of pension benefits.[61] Non-pension benefits, however, were barely contemplated in 514(a)’s legislative history.[62] It is sufficient to say that 514(a)’s preemptive intent had little contemplation of non-pension benefits. It would seem anomalous that Congress had set out to reserve for itself a field traditionally within the states’ ambit when it had little intention of occupying that field in any meaningful manner.

Instead of supplanting an entire field reserved to the states, a more prudent approach would be to bifurcate the 514(a) analysis by according pension and non-pension plans their own respective preemption analysis. The two-prong “relation to” approach would apply to pension plans. Non-pension plans should receive a less exacting level of scrutiny, such as conflict preemption, in which 514(a) would only serve to preempt when the state statute directly conflicts with ERISA such that it is impossible to carry out the mandates of both statutes.[63]

Resolving the Drug Pricing Tension

Nowhere is the usefulness of this approach more evident than the litigation surrounding drug pricing transparency legislation. The D.C. Circuit, First Circuit, and the Eighth Circuit have all applied the same preemption test but come to contradicting conclusions. Both the First Circuit Court of Appeals and the D.C. Circuit Court of Appeals have found state drug pricing legislation permissible under ERISA[64], while the Eighth Circuit has found it to be preempted under 514(a).[65] The wave of pending state pricing transparency statutes[66] makes further litigation inevitable. Under current 514(a) analysis, courts would engage in a fact-intensive and speculative inquiry.[67]

Instead, using the test articulated above, the court need only look to see if the statute directly contradicts ERISA directives. The looming “avalanche of litigation”[68] prompted by the “unhelpful”[69] current 514(a) test would instead be a straightforward conflict-preemption analysis. The litany of drug pricing statutes would be permitted under 514(a) insofar as they do not directly stand in conflict with other ERISA provisions. Under this test, state drug pricing disclosure statutes would fall squarely within the realm of the states. A tiered 514(a) analysis achieves both the current level of scrutiny for pension plans (for which ERISA has far more substantive statutory application to) while giving states the leeway to fill the “regulatory vacuum”[70] that has plagued non-pension benefit plans since Shaw.

Conclusion

Far from an exercise in state-led federalist revanchism, allowing states the leeway to act as laboratories of democracy[71] can work to increase the efficacy of healthcare systems amongst the states by allowing states to develop unique solutions to burgeoning healthcare costs. Uncertainty as to the scope of 514(a) has allowed ERISA to subsume broad swaths of territory that traditionally fall within the states’ ambit. In so doing, ERISA has exceeded its original intent to the detriment of the federalist system. In response to the impending litigation around drug pricing transparency, the Supreme Court should use the underlying rationale in Travelers to bifurcate the 514(a) analysis to account for ERISA’s distinction between pension and non-pension plans. In so doing, the Court will be able to recalibrate the scope ERISA to strike an appropriate balance between federalism and ERISA’s goal of national uniformity in employee pension benefits.

[1] Norman R. Augustine et al., Nat’l Acad. of Sci., Eng’g, & Med., Making Medicines Affordable: A National Imperative 5 (2017).

[2] Id.

[3] Id.

[4] Id. at 6-7.

[5] Trevor Flynn & Jerin Philip, Lowering Drug Costs: Transparency Legislation Sets Off Flurry of New State Approaches, Nat’l Acad. State Health Pol’y (Aug. 22, 2017), https://nashp.org/lowering-drug-costs-transparency-legislation-sets-off-flurry-of-new-state-approaches/.

[6] The PCMA is the national organization that represents pharmacy benefit managers. See About, Pharmaceutical Care MGMT. Ass’n, https://www.pcmanet.org/about/.

[7] 852 F.3d. 722 (8th Cir. 2017).

[8] 29 U.S.C.A § 1001 et seq.

[9] Gerhart, 852 F.3d. at 731.

[10] Massachusetts v. Morash, 490 U.S. 107, 112 (1989).

[11] Gobeille v. Liberty Mut. Ins. Co., 136 S. Ct. 936, 947 (2016).

[12] 29 U.S.C.A. 29 § 1144(a).

[13] De Buono v. NYSA-ILA Med. and Clinical Services Fund, 520 U.S. 806, 809 (1997).

[14] Id. at 808 n.1. The Court in De Buono commented in dismay on the number of ERISA preemption cases on its docket during that term, as well as the sheer number of Supreme Court cases that had already been brought to the Court.

[15] See generally Egelhoff v. Egelhoff, 532 U.S. 141, 146-49 (2001).

[16] Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 96 (1983).

[17] New York State Conf. of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 656 (1995).

[18] De Buono, 520 U.S. at 808 n1.

[19] See Dahlia Schwartz, Breathing Lessons for the ERISA Vacuum: Toward A Reconciliation of ERISA’s Competing Objectives in the Health Benefits Arena, 79 B.U. L. Rev. 631, 636 (1999).

[20] See Donald T. Bogan, Protecting Patient Rights Despite ERISA: Will the Supreme Court Allow States to Regulate Managed Care?, 74 Tul. L. Rev. 951, 964-972 (2000).

[21] Id.

[22] Id. at 967.

[23] See Id. at 964; Mallory Jensen, Is ERISA Preemption Superfluous in the New Age of Health Care Reform?, 2011 Colum. Bus. L. Rev. 464, 473 (2011).

[24] See Bogan, supra note 20, at 974-75. Such protections that do not apply to healthcare plans regulations protecting against plan insolvency. Healthcare funding mandates are not covered. ERISA does not include healthcare plans in its regulations and requirements for vesting and distribution of benefits and termination of benefits.

[25] See Jensen, supra note 23 at 474-75.

[26] Dahlia Schwartz, Breathing Lessons for the ERISA Vacuum: Toward A Reconciliation of ERISA’s Competing Objectives in the Health Benefits Arena, 79 B.U. L. Rev. 631, 638 (1999).

[27] Id. at 638-39.

[28] See generally Shaw v. Delta Air Lines, Inc., 463 U.S. 85 (1983).

[29] Id. at 97.

[30] 463 U.S. 85.

[31] Edward A. Zelinsky, Travelers, Reasoned Textualism, and the New Jurisprudence of ERISA Preemption, 21 Cardozo L. Rev. 807, 816 (1999).

[32] See generally Edward A. Zelinsky, ERISA Preemption After Gobeille v. Liberty Mutual: Completing the Retrenchment of Shaw, 34 Hofstra Lab. & Emp. L.J. 301, 306-11 (2017).

[33] 514 U.S. 645, 650 (1995).

[34] Id. at 654.

[35] Id.

[36] Id.

[37] 852 F.3d. 722 (8th Cir. 2017).

[38] I.C.A. § 510B.8.

[39] Gerhart, 852 F.3d. at 731.

[40] Id. at 729.

[41] Id. at 731.

[42] Pharm. Care Mgt. Ass’n v. Rowe, 429 F.3d 294, 298 (1st Cir. 2005).

[43] Id. at 303.

[44] Id. at 304.

[45] 613 F.3d 179 (D.C. Cir. 2010).

[46] Id. at 185-87.

[47] See Jenson, supra note 23, at 476.

[48] See Patricia M. Danzon PhD et al., Dept. of Labor, PBM Compensation and Fee Disclosure 13-14 (2014).

[49] Federal Circuit Court Strikes Down Iowa Mandate Restricting PBM Tools, PCMA, https://www.pcmanet.org/federal-circuit-court-strikes-down-iowa-mandate-restricting-pbm-tools/ (last visited Feb. 2 2018); see generally Health Policy Issue Brief: Successful Employer-Provided Health Plans Depend On Nationally Uniform Standards, The ERISA Industry Committee (2007).

[50] See generally Schwartz, supra note 26.

[51] New York State Conf. of Blue Cross & Blue Shield Plans v. Travelers Ins. Co,514 U.S. 645, 655 (1995).

[52] See Jensen, supra note 23 at 475 n.42; see generally Andrew L. Oringer, A Regulatory Vacuum Leaves Gaping Wounds-Can Common Sense Offer A Better Way to Address the Pain of ERISA Preemption?, 26 Hofstra Lab. & Emp. L.J. 409, 412 (2009).

[53] See Bogan, supra note 20, at 974-75.

[54] Id. at 656.

[55] See Bogan, supra note 20 at 965-67.

[56] See ERISA and its Proper Historical Context, supra and accompanying text.

[57] Bogan, supra note 20. at 977.

[58] Travelers, 514 U.S. at 654.

[59] Id. at 655.

[60] Rice v. Santa Fe Elevator Corp., 331 U.S. 218, 230 (1947).

[61] Shaw, 463 U.S. at 98-99.

[62] See Bogan, supra note 20, at 980-83.

[63] See generally Geier v. Am. Honda Motor Co., Inc., 529 U.S. 861 (2000) (describing the mechanics of conflict preemption).

[64] See Pharm. Care Mgt. Ass’n v. Rowe, 429 F.3d 294 (1st Cir. 2005); Pharmaceutical Care Management Association v. District of Columbia, [64] 613 F.3d 179 (D.C. Cir. 2010).

[65] See Pharmaceutical Care Management Association v. Gerhart, 852 F.3d. 722 (8th Cir. 2017).

[66] See Flynn & Philip, supra note 5.

[67] While both the Maine and D.C. statutes required drug pricing disclosure, the D.C. circuit’s reticence to uphold the law in full stems from the D.C. statute’s imposition of fiduciary duties on prescription insurance plans. PCMA v. District of Columbia, 613 F.3d at 185-87. Because the plans became statutory fiduciaries, the D.C. Circuit found the fiduciary duties to be too onerous for insurance plans to administer alongside ERISA’s reporting requirements and the statute was thus preempted. Id. The First Cicruit in Rowe, in contrast, found the pricing disclosure requirements, without more, to be “purely ministerial.” 429 F.3d at 301. As such, reporting requirements failed to rise to the kind of burden preempted by ERISA. Id. In both cases, the courts were required to engage in a fact-intensive analysis of the legislation to anticipate what kind of effect it could have on ERISA plans.

[68] De Buono v. NYSA-ILA Med. and Clinical Services Fund, 520 U.S. 806, 808 n.1 (1997).

[69] New York State Conf. of Blue Cross & Blue Shield Plans v. Travelers Ins. Co., 514 U.S. 645, 646 (1995).

[70] See generally Oringer, supra note 52.

[71] New State Ice Co. v. Liebmann, 285 U.S. 262, 311 (1932) (Brandeis, J., dissenting).