Will ERISA reforms lead to health reforms?

Employers with self-funded employee health plans have long felt protected from state laws that attempted to regulate ERISA plans, however a U.S. Supreme Court case decided last year may begin to change that, according to benefits attorney Felicia Finston. 

The 2021 Supreme Court decision in Rutledge v. Pharmaceutical Care Management Association (PCMA) case allows states to indirectly regulate self-funded plans by imposing laws that regulate costs or alter incentives in general in the marketplace, according to Finston. And the marketplace includes self-funded plans.

“The Rutledge case involved a law that required PBMs (Pharmacy Benefit Managers) to pay pharmacies their wholesale costs,” Finston said. “That may indirectly affect the cost of an ERISA plan, but it does not impact the design of it. It doesn’t require it to cover specific benefits; it doesn’t require the plan administrator to do specific things; and it doesn’t require plans to adopt certain schemes of coverage. Some think this case opens the door to allow states to regulate ERISA plans under the guise of consumer protections.”

So, does this SCOTUS ruling benefit self-funded employers?The answer, according to Finston, is it depends on the perspective. “To the extent to which it imposes requirements on the plan that increases costs, those may be passed on by the employer to the plan participants and that could be adverse.” However, states could also start enacting legislation to curb health care expenditures or seek to lower costs by regulating what PBMs charge for drugs or TPAs for their services and that might benefit self-funded employer plans.

Another issue that may impact employers is allowing individual state action that differs across state lines.

“For example, if you’re an employer and you have employees in Massachusetts and Texas life is good because you have one rule for your plan in both states. After the Rutledge decision, states might begin imposing their own legislation which may be deemed not to be preemptive. That means we could have a federal standard and then, let’s say, in Massachusetts we could have this elevated standard but in Texas we wouldn’t.”

This, she said, could end up defeating the purposes of ERISA and the desire to have uniform plan administration because it creates a loophole that allows states to impose indirect requirements on the operation of plans. Currently, employers that operate in multiple states don’t have to figure out how to comply with each state’s laws.

“ERISA imposes a uniform scheme of regulation on plans where states can’t regulate the administration of those plans, the benefits required, or require plans to do certain things. What this case does is indirectly says, we can’t say in your plan you must cover all generic drugs, but we can say if you’re going to cover generic drugs then you must pay the pharmacy for those drugs at wholesale price.”

Finston said ERISA was broadly enacted to address retirement plans but also health and welfare, but it is evolving.  

“At the time it was enacted, a lot of health and welfare plans were funded like retirement plans, so ERISA really focused more on the fiduciary side to protect employees’ money. There was nothing in ERISA until recently that mandates any type of benefits. Prior to that, there was no requirement in ERISA that you provide any specific benefits.

“ERISA is more complicated when it comes to health and welfare because, especially with pharmacy contracts, as in the Rutledge case, most employers and lawyers don’t understand the financial implications because it is behind the cloak of pharmacy operations. That’s where the law comes in and starts regulating and can indirectly impact an employer. But it’s hard to anticipate impact.”

Finston said employers will probably sit and watch if any changes happen as a result of the 2021 decision.

“The healthcare system is so overwhelmed with all transparency and surprise billing legislation, just complying with that will take time,” she said. “Employers will likely sit back and wait as it will probably take a couple of years for anything to happen. States would also wait to see what’s happening with the federal legislation and then ‘improve’ upon it. I don’t anticipate that states are going to go out and create new legislation at this point.”

Felicia A. Finston is partner at Finston Friedman Fisher Law Group LLP. She has over 30 years of experience handling benefit and compensation issues for Fortune 500 and other public and private companies and tax-exempt entities. She is an advisor for SmartLight Analytics.