Last month, in Pharmaceutical Care Management Association v. Tufte et al. No. 18-2926 (8th Cir. August 7, 2020), the United States Court of Appeals for the Eighth Circuit invalidated legislation in North Dakota on the grounds that it was preempted by ERISA.

View Pharmaceutical Care Management Association v. Tufte et al. No. 18-2926 (8th Cir. August 7, 2020).

In 2017, North Dakota passed new sections of the North Dakota Century Code (the Legislation) designed to regulate pharmacies and pharmacy benefit managers (PBMs). See S.B. 2258, 2017 Leg., 65th Sess. (ND 2017); S.B. 2301, 2017 Leg., 65th Sess. (ND 2017). The Legislation included provisions that would regulate the fees PBMs and third-party payers may charge pharmacies; limit what copayments PBMs or third-party payers may charge; dictate the quality metrics PBMs and third-party payers may use to evaluate pharmacies; prohibit self-dealing and other abusive practices by PBMs; regulate drug benefit provisions and plan structures; require certain disclosures on the part of PBMs; and prohibit PBMs from setting limits on information pharmacists may provide patients.

Pharmaceutical Care Management Association Filed Suit

The Pharmaceutical Care Management Association (PCMA), a national trade association that represents PBMs, filed suit, claiming, among other things, that the Employee Retirement Income Security Act of 1974 (“ERISA”) preempted the Legislation. On cross-motions for summary judgment, the United States District Court for the District of North Dakota determined that none of the statutory provisions were preempted by ERISA. Specifically, it found that the Legislation did not explicitly make reference to ERISA plans, and that preempting state law based on an implicit reference would have stretched the ERISA preemption doctrine too far. Although the district court found it “conceivable” that the Legislation could encompass ERISA plans because the Legislation also covered entities that are not ERISA plans, the district court concluded that it did not act immediately and exclusively upon ERISA plans, nor was the existence of an ERISA plan essential to the operation of the Legislation’s regulatory scheme. Accordingly, the district court held the Legislation was not preempted by ERISA.

Appellate Court Held ERISA Preempts the North Dakota Century Code PBM Provisions

The Eighth Circuit reversed, based both on its reading of U.S. Supreme Court precedent and Eighth Circuit precedent, which hold that a state law shall be ERISA-preempted when it has an impermissible “reference to” or “connection with” an ERISA plan, whether that be explicit or implicit. In this case, the Legislation referenced “third-party payers” and “plan sponsors.” “Third-party payer” was defined in the Legislation as “an organization other than the patient or health care provider involved in the financing of personal health services.” The Eighth Circuit noted that this definition included ERISA plans, which are necessarily “involved in the financing of personal health services” and are distinct from “the patient or health care provider.” Similarly, the term “plan sponsors” was defined as “the employer in the case of an employee benefit plan established or maintained by a single employer, or the employee organization in the case of a plan established or maintained by an employee organization.” The court noted that “plan sponsor” was an ERISA term of art and, indeed, plan sponsors are often named fiduciaries of ERISA plans. It was thus without question that the Legislation would have an impact on ERISA-governed benefit plans.

Quoting from a prior decision, Pharm. Care Mgmt. Ass’n v. Gerhart, the Eighth Circuit wrote:

“Because benefits affected by [the Legislation] are provided by ERISA-covered programs, the requirements imposed for the management and administration of these benefits necessarily affects ERISA plans” and as such, “it cannot be said that the . . . law functions irrespective of the existence of an ERISA plan.”

The fact that the Legislation might also impact non-ERISA plans did not alter the preemption analysis. While it was possible that the Legislation’s effectiveness as to non-ERISA plans might be saved, North Dakota had not made this argument and thus for the purposes of this case, the Eighth Circuit deemed it waived.

Supreme Court Set to Hear Another 8th Circuit ERISA Case

Pharm. Care Mgmt. Ass’n v. Rutledge, another precedent upon which the Eighth Circuit keenly relied, is notably now before the United States Supreme Court on a writ of certiorari. . As more and more states attempt to regulate pharmacy and PBM conduct, the issue of ERISA preemption is being brought to the forefront. This is an issue to watch, as the Supreme Court is slated to hold oral argument on the Rutledge case next month.