ERISA preemption is the legal concept that the health policy community loves to cite and rarely examines with sufficient care. The Employee Retirement Income Security Act of 1974 preempts state laws that “relate to” employee benefit plans — a phrase that courts have interpreted expansively, if inconsistently, to cover most state attempts to regulate the design and administration of self-insured employer health plans. The preemption was intended to serve a straightforward administrative purpose: a national employer operating in fifty states should not need to comply with fifty different sets of benefit mandates and plan design requirements. The practical effect, never fully anticipated by Congress, has been to create a large carve-out from state insurance regulation that covers the majority of commercially insured Americans.
What Preemption Actually Forecloses
The range of state reforms that ERISA preemption forecloses is extensive and includes many of the most actively debated health policy interventions of the past decade. State drug price transparency laws that apply to PBMs? Preempted as applied to self-insured ERISA plans, though enforceable against fully insured markets. State surprise billing laws enacted before the federal No Surprises Act? Similarly limited in scope. State network adequacy standards for pharmacy access? Applicable to fully insured plans but not to the self-insured majority. The pattern is consistent: ambitious state-level health reforms that target market practices in the commercial insurance sector reach only the fully insured segment, which is increasingly the smaller and less influential part of the commercial market.
This dynamic creates a bifurcated regulatory environment that is rarely fully appreciated outside the benefits law community. A midsize company in California that offers a fully insured plan is subject to the California Department of Insurance’s network adequacy standards, PBM transparency requirements, and various benefit mandates. A competing company of similar size that self-insures is subject to none of them. The regulatory distinction has nothing to do with the companies’ relative sophistication as health plan sponsors; it is an artifact of a plan funding choice that was originally motivated by cash flow management and actuarial risk tolerance.
The Strategic Use of Preemption
PBMs and health insurers have historically been sophisticated users of the ERISA preemption argument, invoking it to defeat state regulations that would impose transparency obligations, restrict formulary practices, or mandate benefit coverage standards that the commercial products do not currently include. The insurance industry’s lobbying apparatus has consistently opposed state-level PBM regulation by arguing that the regulated entities’ contracts with self-insured employers are ERISA plans and therefore preempted — an argument that is often correct, frequently overstated, and almost always effective in narrowing the reach of state legislation.
The federal legislative response to ERISA’s preemptive scope has been incremental and largely reactive. The No Surprises Act, the Consolidated Appropriations Act’s PBM disclosure requirements, and the ACA’s coverage mandates are all layered onto the ERISA framework rather than restructuring it. Congress has shown no appetite for revisiting the basic preemption architecture, which has been stable since the Supreme Court’s Pilot Life v. Dedeaux decision in 1987 established the broad reading that has governed ever since. The preemption framework is not going away; the question for employers and states is how to work within it effectively.
The Employer’s Dilemma
The preemption framework creates an ironic situation for employers who are nominal beneficiaries of it. ERISA preemption protects employers from state mandates they might find burdensome, but it also insulates from state regulation the PBMs and other intermediaries whose practices may not serve employer interests. An employer in a state with aggressive PBM transparency requirements benefits from those requirements when it purchases a fully insured product but loses that benefit when it self-insures — which is when transparency matters most, because self-insurance puts the employer directly on the hook for drug costs. The legal architecture that gives employers flexibility in plan design also removes the state regulatory pressure that might discipline the intermediaries managing their benefits. It is a tradeoff that the original ERISA drafters did not contemplate and that the current Congress has not resolved.
