ERISA Permits State PBM Cost Regulation and “Necessitated, Incidental” Reporting to Enforce It

1. Introduction

In Central States SE & SW Areas Health & Welfare Fund v. Alan McClain, the Seventh Circuit addressed whether the Employee Retirement Income Security Act of 1974 (ERISA) preempts Arkansas Insurance Department Rule 128, a regulation designed to protect Arkansas pharmacies from being paid below “fair and reasonable” rates for dispensing medications.

The plaintiffs, Central States, Southeast and Southwest Areas Health and Welfare Fund and its trustee Charles A. Whobrey (collectively, “the Fund”), operate a self-funded, multiemployer welfare benefit plan covering approximately 500,000 participants nationwide, including in Arkansas. The defendant, Alan McClain, was sued in his official capacity as Arkansas Insurance Commissioner.

The dispute centered on two Rule 128 components:

  • Dispensing Fee Requirement: authorizes the Commissioner to require plans to pay additional dispensing fees if the plan’s payment program is not “fair and reasonable.”
  • Reporting Requirement: requires health benefit plans to submit pharmacy-compensation information to enable the Commissioner to assess whether reimbursement is “fair and reasonable,” implemented through AID Bulletin #18-2024.

The Fund argued ERISA preempted both provisions as having an “impermissible connection” with ERISA plans—by dictating plan choices (fees) and intruding on ERISA’s uniform reporting regime (data submissions).

2. Summary of the Opinion

The Seventh Circuit affirmed dismissal under Rule 12(b)(6). Applying Rutledge v. Pharmaceutical Care Management Association, it held Rule 128’s dispensing-fee mechanism is permissible state cost regulation that ERISA does not preempt.

On reporting, the court acknowledged tension with Gobeille v. Liberty Mutual Insurance Co., which broadly held that state laws compelling plan reporting can intrude on “a central matter of plan administration.” Nonetheless, on the Fund’s own allegations, the Reporting Requirement fell within Gobeille’s exception for state laws whose enforcement “necessitates incidental reporting by ERISA plans”. The Fund did not plausibly allege the reporting was more burdensome than necessary or non-incidental.

The court also noted Congress’s recent amendment creating federal uniform reporting of similar pharmacy-compensation data (29 U.S.C. § 1185o), effective for plan years beginning 30 months after February 3, 2026, and left open whether that future federal regime will later preempt Rule 128’s reporting.

3. Analysis

A. Precedents Cited

1) Rutledge v. Pharmaceutical Care Management Association, 592 U.S. 80 (2020)

Role in this case: Rutledge supplies the controlling framework for distinguishing state laws that merely regulate costs from state laws that effectively dictate ERISA plan design or coverage structures.

  • In Rutledge, Arkansas’s Act 900 increased PBM reimbursement requirements; the Supreme Court held ERISA did not preempt it because ERISA “does not pre-empt state rate regulations that merely increase costs or alter incentives for ERISA plans without forcing plans to adopt any particular scheme of substantive coverage.”
  • The Seventh Circuit treated Rule 128’s Dispensing Fee Requirement as analogous: it may increase the Fund’s costs but does not bind administrators to a particular benefit design or network structure.
  • The court also relied on Rutledge’s caveat that cost effects could still be preempted if “so acute” as to “effectively dictate plan choices,” but found the Fund pleaded no such “acute” economic effect.

2) Gobeille v. Liberty Mutual Insurance Co., 577 U.S. 312 (2016)

Role in this case: Gobeille provides the benchmark for when state reporting mandates intrude on ERISA’s central administration functions and threaten national uniformity.

  • Vermont required extensive periodic submissions of claims and member data for a statewide database; the Supreme Court held ERISA preempted it because reporting and disclosure are “central to” ERISA’s uniform plan-administration system.
  • The Seventh Circuit found Rule 128’s reporting “in tension” with this broad language but emphasized Gobeille’s acknowledged carve-out: “The analysis may be different when applied to a state law … the enforcement of which necessitates incidental reporting by ERISA plans.”
  • The court read the carve-out as not limited to taxes (Gobeille’s example), but as potentially extending to other non-preempted state laws—here, a Rutledge-type cost regulation.

3) Aetna Health Inc. v. Davila, 542 U.S. 200 (2004)

Davila was cited for ERISA’s purpose: a “uniform regulatory regime” making employee benefit plan regulation “exclusively a federal concern.” This animates the court’s “impermissible connection” analysis, especially with reporting uniformity.

4) California Division of Labor Standards Enforcement v. Dillingham Construction, N.A., Inc., 519 U.S. 316 (1997) and Egelhoff v. Egelhoff, 532 U.S. 141 (2001)

These cases were cited through Gobeille to define ERISA’s two principal preemption pathways: “reference to” (not pursued on appeal) and “impermissible connection” (the focus here).

5) Pharmaceutical Care Management Association v. Mulready, 78 F.4th 1183 (10th Cir. 2023); McKee Foods Corp. v. BFP Inc., 173 F.4th 242 (6th Cir. 2026); Flowers v. Caremark PCS Health, LLC, 180 F.4th 1084 (8th Cir. 2026)

The Fund invoked these decisions to argue that courts have distinguished Rutledge and found PBM-related state laws preempted. The Seventh Circuit treated them as illustrations of when a law goes beyond cost regulation:

  • Mulready: network-design restrictions (preferred, mail-order, specialty) that “impede” fundamental plan/PBM network choices.
  • McKee: “any willing pharmacy” and incentive restrictions eliminating limited networks and steering tools, thus mandating a benefit structure beyond pricing.
  • Flowers: geographic access requirements forcing networks to be “tailor[ed] and retailor[ed]” to meet specified distance/coverage metrics.

By contrast, Rule 128’s Dispensing Fee Requirement was framed as affecting price only, not network composition or benefit design.

6) Self-Insurance Institute of America, Inc. v. Snyder, 827 F.3d 549 (6th Cir. 2016)

The Seventh Circuit noted Snyder’s interpretation of Gobeille’s carve-out as distinguishing direct regulation of core ERISA administration from peripheral touches. The Seventh Circuit did not adopt Snyder’s “direct vs. peripheral” framing as a controlling test, but used it to illustrate that lower courts have struggled to define “incidental reporting.”

7) Procedural pleading authorities

  • Bell Atlantic Corp. v. Twombly: plausibility standard for pleading.
  • Chaidez v. Ford Motor Co.: de novo review of Rule 12(b)(6) dismissals.
  • Ruiz v. Pritzker and Squires-Cannon v. Forest Preserve District of Cook County: complaint allegations accepted as true; attached exhibits can control over contradictory allegations.

B. Legal Reasoning

1) The “impermissible connection” lens

Because the Fund abandoned “reference to” preemption on appeal, the court evaluated only whether Rule 128 governs a central matter of plan administration or interferes with nationally uniform plan administration.

2) Dispensing Fee Requirement: cost regulation under Rutledge

The court treated the Dispensing Fee Requirement as a classic Rutledge-approved state rate/cost measure:

  • It may increase the Fund’s costs in Arkansas, but ERISA does not guarantee cost uniformity across states.
  • The Fund did not plead facts showing “acute” economic effects that effectively dictate plan choices.
  • A clause preventing subscribers from paying “dispensing cost” outside designated co-pay/co-insurance/deductible was not a substantive coverage mandate; it regulated the form of cost-sharing, not whether benefits are covered or how networks are structured.

3) Reporting Requirement: reconciling Gobeille with Rutledge via “necessitated, incidental” reporting

The reporting question was closer because Gobeille characterizes reporting as “principal and essential” to ERISA and warns against “novel, inconsistent, and burdensome” state reporting mandates. The Seventh Circuit’s reconciliation proceeds in three steps:

  1. Recognize the tension: Rule 128 does impose additional reporting obligations that could disrupt uniformity.
  2. Reject a categorical rule: reading Gobeille to preempt all state reporting would “undercut” what Rutledge allows—states would be able to regulate cost but unable to gather the information needed to enforce cost rules.
  3. Apply Gobeille’s carve-out: where enforcement of a non-preempted state law “necessitates incidental reporting,” preemption is not automatic.

On the pleadings, the Fund effectively conceded the Reporting Requirement was in “furtherance” of the cost-regulation purpose, and even alleged Rule 128 would have “no operative effect” without the data submissions—supporting “necessitated” reporting. The complaint also did not allege the reporting was excessive relative to that purpose or meaningfully burdensome—undermining the claim that it crosses Gobeille’s line.

4) The opinion’s implicit rule-like synthesis

Without purporting to define the full boundary of “incidental,” the decision establishes a practical pleading-and-purpose benchmark:

  • If a state law is a Rutledge-type cost regulation (not preempted), then reporting that is necessary to implement that cost regulation and plays a subordinate/minor role in the overall regulatory scheme may fit within Gobeille’s “necessitates incidental reporting” exception.
  • Plaintiffs challenging such reporting should plausibly allege (and ultimately prove) that the state reporting is non-incidental (i.e., a major, stand-alone regulatory aim), more exhaustive than necessary, or burdensome in the Gobeille sense.

C. Impact

1) For ERISA preemption challenges to PBM/pharmacy regulation

The opinion strengthens states’ ability to pair permissible cost regulation with enforcement-oriented data collection, so long as the reporting is plausibly “incidental” and “necessitated” by the cost regime. It also clarifies that multi-circuit PBM preemption cases (e.g., network-design mandates) do not undermine Rutledge where the state law is genuinely price-focused.

2) For litigation strategy and pleadings

The decision is notably pleading-driven: the Fund’s own allegations that reporting was “in furtherance” of fair-and-reasonable reimbursement, and that Rule 128 lacks operative effect without reporting, supported the carve-out. Future plaintiffs may attempt to plead (with specificity) that:

  • the reporting is broader than needed to set/assess fair dispensing fees,
  • the reporting resembles Gobeille-style claims/member-data databases rather than enforcement-limited submissions, or
  • the compliance burden materially disrupts uniform plan administration (e.g., multi-state conflicting formats/frequencies).

3) Interaction with new federal reporting (29 U.S.C. § 1185o)

The court flagged a coming inflection point: Congress has enacted uniform reporting for “similar pharmacy-compensation data,” but it is not yet effective for the relevant plan years. Once effective, defendants (or plaintiffs) may argue the new federal reporting occupies the field or heightens the case for preemption of state reporting like Rule 128’s—an issue explicitly reserved.

4. Complex Concepts Simplified

  • ERISA preemption (“relate to”): ERISA can override state laws that connect too closely to employee benefit plans, to keep plan regulation nationally uniform.
  • “Impermissible connection”: a state law is preempted if it controls core plan administration (how plans are run) or disrupts national uniformity in administration.
  • Cost regulation vs. benefit design: states may regulate prices paid in healthcare markets (cost regulation), but may not force plans into a particular coverage/network structure (benefit design).
  • “Incidental reporting”: reporting that plays a minor, subordinate role—information demanded mainly to enforce a permissible state rule, rather than to create a broad, independent reporting regime.
  • Rule 12(b)(6): a case can be dismissed early if the complaint does not plausibly allege a legal violation, even assuming alleged facts are true.

5. Conclusion

The Seventh Circuit’s decision affirms that Arkansas may (1) impose a commissioner-enforced dispensing-fee adjustment as a Rutledge-approved cost regulation, and (2) require plans to submit pharmacy-compensation data when that reporting is plausibly necessitated and incidental to enforcing the non-preempted cost rule, notwithstanding Gobeille’s strong protection of ERISA reporting uniformity.

The opinion’s significance lies in its practical reconciliation of Rutledge and Gobeille: states can regulate PBM/pharmacy reimbursement and collect the minimum information needed to enforce those rules, but plaintiffs may still succeed where state reporting becomes stand-alone, exhaustive, or burdensome in a way that meaningfully disrupts uniform ERISA plan administration— and future litigation may sharpen these boundaries as new federal reporting under 29 U.S.C. § 1185o comes online.