California Legislation to Regulate PBMs Puts Self-Insured Plans at Risk, ERIC Warns

The ERISA Industry Committee has urged members of the California State Assembly to pay close attention to a California State Senate bill that aims to control the cost of prescription drugs by enacting new regulations on pharmacy benefit managers. 

SB 966, introduced on January 24 by State Senators Scott Wiener and Aisha Wahab, would require a PBM to apply for and obtain a license from the California Department of Insurance by January 1, 2027 to operate as a PBM.  

The bill would also require PBMs to use a passthrough pricing model, in which payments made by the health care service plan or health insurer client to the PBM for a covered outpatient drug would be equal to the payment the PBM makes to the pharmacy or provider for the drug. The stated goal of the bill is to reduce or ensure appropriate drug costs for providers and patients. 

In a comment letter, ERIC cautioned that this legislation could overstep state authority by directly impacting the design and administration of plans covered by the Employee Retirement Income Security Act, which could in turn lead to costly litigation.  

PBMs have recently come under fire for inflating prescription drug costs and squeezing unaffiliated pharmacies. The Federal Trade Commission is considering a lawsuit against the largest three PBMs—OptumRx (UnitedHealth Group), Caremark (CVS Health) and Express Scripts (Cigna Group)—alleging they pushed patients to more expensive brand-name drugs, driven by higher rebates from manufacturers. The FTC also argued that PBM business practices “remain extraordinarily opaque.” 

Plan sponsors often work with PBMs to administer health care benefits to their enrolled participants, and sponsors typically issue requests for proposals detailing their pharmacy benefits needs, to which PBMs respond and compete on quality, cost effectiveness and accountability.  

Dillon Clair, director of state advocacy at ERIC, wrote in a comment letter to assembly member Buffy Wicks and the California State Assembly Appropriations Committee that ERIC supports the need to regulate certain PBM practices and applauds efforts to improve the affordability of prescription drugs. However, Clair also expressed concerns that the bill “may open the door for enforcement against self-funded employer plans, which would violate federal law, and could ultimately lead to the California law being struck down.” 

Since ERISA was enacted, the Supreme Court has interpreted ERISA’s preemption clause very broadly to supersede state laws that either refer explicitly to ERISA plans or have a substantial financial or administrative impact on them, including regulating the provider networks that plans may use.  

“While the bill does not explicitly reference ERISA or self-insured employer plans, it also does not exempt or carve-out these federally protected plans,” Clair wrote. “The [Appropriations] Committee should clearly exempt these plans and, at the very least, clarify that these plans are not deemed to be engaged in the business of insurance.” 

The bill currently states that, “any activity conducted by a pharmacy benefit manager… shall be construed as the business of insurance.” 

ERIC finds this concerning because it deems all PBM services insurance, without providing further distinction or exception. As a result, state regulators could interpret this provision to include self-insured ERISA plans, therefore “jeopardizing the plans’ control over the design and administration of plan benefits and potentially sparking legal challenges,” according to ERIC. 

For example, ERIC argued that the bill could restrict benefit design by prohibiting PBMs from differentiating between affiliated and non-affiliated pharmacies. It might also require PBMs to be reimbursed on a flat, dollar-amount basis—preventing fiduciary pursuit of contracts that provide greater benefit to participants.  

“These provisions demonstrate the serious threat that SB 966 poses to preserving critical ERISA preemption protections—protections that allow large, multi-state employers to offer uniform, affordable health benefits to millions of workers and their families—if unaddressed,” Clair stated.  

ERIC also urged the State Assembly’s Committee on Appropriations to amend the bill to prevent any and all application to self-insured ERISA health benefit plans. Specifically, ERIC argued that the bill should clarify that ERISA plans are not deemed to be engaged in the business of insurance, as well as include an exemption for self-insured ERISA plans.  

The bill is currently sitting in the California State Assembly’s Committee on Appropriations, and a hearing date is scheduled for Thursday, August 15.