Employers are increasingly burdened by high and rising health care costs. But can state-level policy tools, such as NASHP’s model legislation to prohibit anticompetitive contracting, help employers whose health coverage is governed by the federal Employee Retirement Income Security Act of 1974 (ERISA)? In short — yes! The 2020 Supreme Court’s decision in Rutledge vs. Pharmaceutical Care Management Association (PCMA) puts states on firm ground to regulate health care costs and extend state cost containment laws to employer self-funded plans.
NASHP’s model legislation prohibiting anticompetitive contracting terms is not only permissible under the Rutledge decision and likely would survive an ERISA preemption challenge, but it also benefits most purchasers of care, including employers with self-funded plans. Prohibitions on anticompetitive contracting will give employers more negotiating leverage to lower hospital costs and direct their employees to low-cost, high-value providers.
What Is ERISA and Why Does It Matter for States?
Many large employers offer health coverage through “self-funded” plans. Rather than purchasing health insurance from a large carrier, employers that “self-fund” or “self-insure” set aside company funds and pay for employee health benefits directly. Companies offering self-funded plans typically contract with third-party administrators (TPAs) or other contractors like pharmacy benefit managers (PBMs) to administer health benefits. Almost 60 percent of private-sector employees receive health benefits through self-funded plans, which is a substantial proportion of the market.
While states have always had the authority to regulate fully insured health insurance plans, ERISA restricts how states can regulate self-funded plans. ERISA was enacted to provide uniform federal regulation for “employee benefit plans” and preempts any state laws that “relate to” employee benefits. The broad language in the statute has led to several high-profile legal challenges and a difficult road for state policymakers. As a result, although self-insured plans can be a more cost-effective way to provide health benefits, state health reforms to reduce costs generally do not apply to these plans when offered by employers.
In Rutledge, there was a significant change in the ERISA debate when the U.S. Supreme Court upheld an Arkansas law that regulates PBMs. The ruling clarifies that states have leeway to regulate self-funded plans’ contractors, such as PBMs or TPAs, because these contractors are not the plans themselves. The court also clarified that state regulation of health care costs is not preempted unless it binds plans to adopt a certain scheme of substantive coverage. The Rutledge decision should give a state more confidence to enact laws aimed at lowering health care costs that will affect all its residents.
NASHP’s Model Act to Prohibit Anticompetitive Contracts
NASHP’s model legislation prohibiting anticompetitive contract terms prevents health care providers, insurers, and plan administrators from demanding, soliciting, or agreeing to any health care contract that contains anticompetitive terms. Prohibiting anticompetitive contract terms can help level the playing field for negotiations between insurers and large health systems, allowing insurers to negotiate lower in-network prices and design networks with the highest-quality, lowest-cost providers. Without these prohibitions in place, health systems may leverage their “must-have” providers to restrict insurers’ ability to design high-value provider networks. NASHP’s model bill prohibits four types of anticompetitive contracting terms: all-or-nothing contracting, anti-tiering or anti-steering clauses, most favored-nations (MFN) clauses, and gag clauses.
Most self-funded plans would benefit from a prohibition on anticompetitive contracting. Dominant health systems use anticompetitive contract provisions to keep high-cost, low-value providers in preferred plan networks and to raise hospital prices. Prohibiting anticompetitive contracting would give TPAs, working on behalf of self-funded employers, a greater ability to negotiate lower prices or to develop innovative programs to improve quality or access. For all the contract clauses, with the possible exception of MFN clauses, the financial interests of self-funded plans align with policymakers, and self-funded plans may voluntarily work with policymakers to enforce these prohibitions.
ERISA Implications
The NASHP model to prohibit anticompetitive contracting is on firm legal and policy grounds to avoid preemption and work in favor of self-funded plans. The Rutledge decision gives states broader leeway to regulate contractors who administer the self-funded plans. In Rutledge, the court held that the Arkansas PBM law does not “directly regulate health benefit plans at all” and that ERISA did not preempt state regulation of PBMs working as contractors for self-funded plans. This same logic can be extended to TPAs. NASHP’s model law explicitly states that “plan administrators” are prohibited from using anticompetitive contracting — this will extend protections from anticompetitive contract terms to self-funded plans. NASHP’s model legislation does not require self-funded plans to adopt a certain scheme of coverage.
NASHP’s model law also prohibits health care providers from demanding prohibited contract terms. Even if the model’s application to self-funded plans were preempted, the prohibition would still apply to providers. In this case, enforcement may be more challenging as a state would not be able to inspect plan contracts, but self-funded plans may still voluntarily work with states on enforcement.
NASHP’s Center of Health System Costs will continue to explore how the Rutledge decision opens the door for new health care cost regulations extending to the self-funded market. State policymakers with specific questions on NASHP’s anticompetitive contracting model law or concerns about legal impacts may contact Maureen Hensley-Quinn.
More on NASHP’s Model Law
- NASHP Model Act to Address Anticompetitive Terms in Health Insurance Contracts
- NASHP white paper: Weighing Policy Trade-offs: Overview of NASHP’s Model Prohibiting Anticompetitive Contracting
- NASHP white paper: A Tool for States to Address Health Care Consolidation: Prohibiting Anticompetitive Health Plan Contracts
More on ERISA
- Health Affairs Forefront: The Implications of Rutledge v. PCMA for State Health Care Cost Regulation
- The Commonwealth Fund: State Cost-Control Reforms and ERISA Preemption
Acknowledgments
NASHP thanks Erin Fuse Brown and Katie Gudiksen for guidance and review of this blog and contributing their expertise to NASHP’s model legislation and support materials.
