Seventh Circuit Holds ERISA Does Not Preempt Arkansas PBM Regulation

What Happened: On August 26, 2026, the Seventh Circuit Court affirmed in Central States SE & SW Areas Health & Welfare Fund v. McClain that the Employee Retirement Income Security Act of 1974 (ERISA) does not preempt an Arkansas insurance regulation designed to regulate how pharmacy benefit managers (PBMs) compensate pharmacies. 

Why It Matters: This decision is the latest in a growing body of case law determining which state laws and regulations for PBMs are preempted by federal law. 

The Details: The following is a brief background and summary of the Seventh Circuit's reasoning in Central States.

Background

In 2015, Arkansas passed "Arkansas Act 900," which required PBMs to reimburse pharmacies at a price equal to or higher than what the pharmacy paid the wholesaler. In Rutledge v. PCMA, the US Supreme Court held that Arkansas Act 900 is not ERISA preempted. Building on that law, in September 2024, the Arkansas Legislative Council passed a temporary emergency rule to ensure that PBM reimbursements for pharmacy services were "fair and reasonable" ("Rule 128"). Rule 128 was fully adopted in December 2024.

Rule 128 has two components. First, it authorizes the Insurance Commissioner of Arkansas to require health plans to pay additional dispensing fees if the plan’s pharmacy compensation program (often administered by a PBM) is not deemed “fair and reasonable” (the "Dispensing Fee Requirement"). Second, it requires plans to report pharmacy compensation data to the Arkansas Insurance Department (the "Reporting Requirement"). 

The plaintiffs that challenged Rule 128 in Central States represent a self-funded, multi-employer welfare benefit fund that provides health benefits to approximately 500,000 participants nationwide, including in Arkansas.

The District Court for the Northern District of Illinois, Eastern Division, granted Arkansas's motion to dismiss and held that Rule 128 was not ERISA preempted. The Seventh Circuit affirmed.

Seventh Circuit Decision: The Dispensing Fee Requirement

In Rutledge, the US Supreme Court held that state laws that merely affect the cost of prescription drugs do not have a "reference to" or "impermissible connection" with ERISA plans necessary to trigger preemption. However, a state law merely regulating cost can be preempted if its economic effects are "so acute that it will effectively dictate plan choices." Here, the Seventh Circuit applied Rutledge and held that Arkansas’s Dispensing Fee Requirement is a "cost regulation" without an impermissibly acute economic effect and therefore, it is not preempted by ERISA. See our previous blog post on Rutledge here.

Similar state laws regulating PBMs were at issue in three cases in the Sixth, Eighth, and Tenth Circuits, which all held that the laws were ERISA preempted (as we discussed in previous blog posts: McKee Foods; Flowers; and Mulready). Here, the Seventh Circuit distinguished the Dispensing Fee Requirement because it only regulates cost, while the other state laws "went far beyond mere cost regulation" by regulating how PBMs can structure their networks, offer discounts, or designate preferred pharmacy networks. 

Seventh Circuit Decision: The Reporting Requirement

In Gobeille v. Liberty Mutual Insurance Co., the US Supreme Court held that a Vermont law requiring plans to report on "health care costs, prices, quality, utilization, or resources" was preempted by ERISA because reports with detailed information about claims and plan members "intrude[d] upon a central matter of plan administration and interfere[d] with nationally uniform plan administration." Here, the Seventh Circuit applied Gobeille and Rutledge together, reasoning that under Rutledge, ERISA does not preempt state laws regulating cost, therefore ERISA cannot preempt the recordkeeping and reporting incidentally required to enforce such regulations. The Court reasoned that unlike the reports in Gobeille, the Rule 128 Reporting Requirement only includes the pharmacy reimbursement data necessary to carry out the Dispensing Fee Requirement.

Moreover, in Gobeille, the court acknowledged a potential exception where the analysis "may be different when applied to a state law[,] ... the enforcement of which necessitates incidental reporting by ERISA plans." Here, the Seventh Circuit held that the Reporting Requirement fits the exception because it only exists to carry out the purpose of Rule 128, which is to determine if the pharmacy compensation is "fair and reasonable."

Please see our previous blog post on Gobeille here. 
 

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