Self-funded Plans: History & Implications of ERISA Law

Self-funded health plans have traditionally been governed by the provisions of the Employee Retirement Income Security Act (ERISA). According to the U.S. Department of Labor, the provisions of ERISA “were enacted to address public concern that funds of private pension plans were being mismanaged and abused. ERISA was the culmination of a long line of legislation concerned with the labor and tax aspects of employee benefit plans. Since its enactment in 1974, ERISA has been amended to meet the changing retirement and health care needs of employees and their families.”

Because self-funded plans are governed by federal ERISA law, they are exempt from many new mandates and red tape proposed by state lawmakers and regulators. For larger companies with younger, healthier workforces, ERISA plans can offer pronounced savings over fully-insured options.

Companies with self-funded plans operating in multiple states have been able to operate under one regulatory framework governed by federal ERISA law. Multi-state companies with fully-insured plans, on the other hand, must navigate a complicated patchwork of state laws governing health insurance requirements. This can present compliance challenges, introduce significant variance in costs from one state to another, and create an environment where employees in one state receive significantly richer benefits than employees in another.

ERISA & Self-Funded Plans are Under Attack

For nearly 50 years, ERISA has prevented state legislators from preempting federal laws governing self-funded plans. This means employers with self-funded plans could expect consistency across state lines. However, a 2020 U.S. Supreme Court decision in Rutledge v. PCMA has jeopardized those federal protections. The Rutledge decision upheld an Arkansas law that required PBMs to reimburse pharmacists at certain levels. The decision has emboldened a wave of state-level activism driven by lobbyists for Big Pharma and independent pharmacists who are looking to increase their profits. Today, those lobbyists are pushing legislation aimed at boosting their profits by undermining self-funded plans, further diminishing ERISA law, and undercutting a PBM’s ability to negotiate lower drug prices.

• Eliminating the ability of self-funded plans to incentivize shopping at pharmacies with lower prices. Employers and PBMs work to drive down costs by using lower co-pays to encourage patients to visit pharmacies that sell drugs at lower prices. Several states have already outlawed the use of those incentives, using government control to rewrite private contracts.
• Eliminating protections from price gouging for specialty drugs and at specialty pharmacies. Physician-owned pharmacies can overcharge on specialty drugs and their lobbyists have worked to ban measures to control costs.
• Attacking incentives for mail-order delivery of drugs and access to mail-order. Mail-order is cheaper and, in many cases, healthier for patients, who are more likely to adhere to their prescribed medications if they are delivered to their homes at regular intervals.
• Regulating employers with self-funded plans as if they are PBMs. Some states have introduced legislation that forces employers to deal with the same regulations and red tape meant to regulate pharmacy benefit managers, increasing their costs and administrative burdens.

In states where these attacks on private health insurance and prescription drug coverage are successful, the cost of prescription drugs could increase by billions of dollars in the next decade. Those costs will be borne by employers and their employee policyholders.