On August 15, 2023, the U.S. Court of Appeals for the Tenth Circuit issued an opinion in Pharmaceutical Care Management Association v. Glen Mulready, in his official capacity as Insurance Commissioner of Oklahoma, Oklahoma Insurance Department, No. 22-6074. The Pharmaceutical Care Management Association (PCMA), which represents pharmacy benefit managers (PBMs), challenged Oklahoma’s 2019 Patient's Right to Pharmacy Choice Act Title 36 § 6958 et seq (the Act). PCMA “sued to invalidate the Act, alleging that the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C. § 1001 et seq., and Medicare Part D, 42 U.S.C. § 1395w-101 et seq., preempted the Act. The district court ruled that ERISA did not preempt the Act but that Medicare Part D preempted six of the thirteen challenged provisions.” PCMA then appealed “the court’s ERISA ruling on four provisions of the Act and the court’s Medicare Part D ruling on one provision.”
What is ERISA?
For context on this dispute, let’s begin with a background on ERISA. ERISA is a federal law which sets minimum standards for most retirement and health plans in private industry. To protect individuals participating in these plans, ERISA requires plans to provide participants with plan-related information, including information about plan features and funding, and standards for participation.
ERISA refers to employer-provided benefits as “employee welfare benefit plans” (see 29 U.S. Code § 1002(1)), and it applies to plans established and maintained by an employer to provide benefits to current or former employees or their beneficiaries. There are approximately 2.2 million ERISA health plans in the U.S. covering approximately 136 million people (60% of which in self-funded plans and 40% in insured plans).
What is ERISA Preemption and why is it important?
ERISA's minimum standards provide a nationally uniform regulatory framework which supports and protects the ability of employers operating in multiple states to administer benefits consistently. This ability has been instrumental in the growth of employee benefit plans (i.e., employers are not required to tailor benefits to the particularities of multiple jurisdictions).
This ability to administer plan benefits consistently across state lines relies heavily upon ERISA's preemption of state laws which "relate to" such plans. Specifically, per ERISA § 514(b): “[T]he provisions of this subchapter and subchapter III shall supersede any and all State laws insofar as they may now or hereafter relate to any employee benefit plan [.]” (Emphasis added.)
Per the U.S. Supreme Court (SCOTUS), a state law “relates to” an ERISA plan if it:
- i) makes reference to employee benefit plans; or
- ii) has an impermissible connection with employee benefit plans.
SCOTUS provides that a state law “makes reference to” an ERISA plan if the law acts immediately and exclusively upon ERISA plans, or if the existence of an ERISA plan is essential to the law’s operation.
SCOTUS further provides that a state law “relates to” an ERISA plan if it: i) makes reference to employee benefit plans; or ii) has an impermissible connection with employee benefit plans.
A state law has an "impermissible connection with" an ERISA plan when it:
- affects employee benefit plan structures or administration; or
- binds employers or plan administrators to particular choices or precludes uniform administrative practice; or establishes an alternative enforcement mechanism to ERISA.
Essentially, a state law “relates to” an ERISA plan and is preempted if it affects the ability of employers to administer plan benefits consistently across state lines.
Challenging the Oklahoma’s 2019 Patient's Right to Pharmacy Choice Act
Originally, PCMA challenged the four provisions of the Act that:
- Limit use of mail-order pharmacies;
- Require PBMs to permit "any willing pharmacy" to participate in the PBM's preferred network;
- Prohibit cost-sharing discounts; and
- Restrict the ability of PBMs to deny or limit pharmacy contracts when a pharmacist is on probation with the state pharmacy board.
A three-judge panel of the U.S. Court of Appeals for the Tenth Circuit heard argument in an appeal by PCMA in its effort to prevent enforcement of the Act on May 16, 2023. On cross-motions for summary judgment, the U.S. District Court for the Western District of Oklahoma granted judgment in favor of Oklahoma, holding that the challenged provisions of the Act were not preempted by ERISA.
In its recent decision, the Court found that under its jurisdiction under 28 U.S.C. § 1291 “ERISA and Medicare Part D preempt the four challenged provisions” and it reversed. The Court stated, “[h]owever sliced, the network restrictions ‘require providers to structure benefit plans in particular ways,’ Rutledge, 141 S. Ct. at 480, and ‘prohibit employers from structuring their employee benefit plans in a [certain] manner,’ Shaw, 463 U.S. at 97. And either way, ERISA preempts these provisions because a pharmacy network’s scope (which pharmacies are included) and differentiation (under what cost-sharing arrangements those pharmacies participate in the network), are key benefit designs for an ERISA plan.
Indeed, at summary judgment, Oklahoma conceded that ‘[p]lans design pharmacy benefits by determining, among other factors, what drugs are covered, where beneficiaries can obtain these drugs using their plan benefits, and any cost-sharing the plan member will be required to pay for the covered drug.’ App. vol. 2, at 390 (PCMA motion); App. vol. 3, at 690 (Oklahoma response). The network restrictions ‘govern a central matter of plan administration’ and thus have an impermissible connection with ERISA plans. Rutledge, 141 S. Ct. at 480.” The Court goes on to reflect on each of the provisions PCMA challenged and to illustrate how a “logical endpoint compels a preemptive result.” Specifically, the Court explains:
- Mail-Order Pharmacies Provision: The decision provides, “[b]efore the Act, PBMs could use mail-order pharmacies to serve rural Oklahomans and reduce plan costs. Now, to comply with the Access Standards, PBMs working for Oklahoma plans with rural-dwelling employees must include many more brick-and-mortar pharmacies. Because adding pharmacies costs plans money, this is a choice that plans might not otherwise make.”
- Any Willing Provider Provision: The decision provides, “[b]efore the Act, PBMs could help plans reduce expenses by crafting a limited preferred network. Now, to comply with the AWP Provision, PBMs must allow all pharmacies to join their preferred networks. Plus, PBMs that have preferred specialty networks must allow even the smallest pharmacy to dispense costly specialty drugs. This rule hurts the cooperative relationship between plans, which want to save money, and preferred pharmacies, which want the increased business that preferred status affords.”
- Cost-Sharing Discount Provision: The decision provides, “[b]efore the Act, PBMs could use cost-sharing discounts to encourage plan beneficiaries to use cheaper pharmacies. Now, to comply with the Discount Prohibition, PBMs are forbidden from doing just that. Each network restriction winnows the PBM-network design options for ERISA plans, thereby hindering those plans from structuring their benefits as they choose. See Black & Decker, 538 U.S. at 833.”
The Court concludes ERISA forbids state laws that mandate benefit structures. The decision provides, “[t]ogether, these three provisions effectively abolish the two-tiered network structure, eliminate any reason for plans to employ mail-order or specialty pharmacies, and oblige PBMs to embrace every pharmacy into the fold. After these three provisions have run their course, PBMs are left with a cramped capacity to craft customized pharmacy networks for plans. As we see it, all PBMs could offer Oklahoma ERISA plans is a single-tiered network with uniform copayments, unrestricted specialty-drug access, and complete patient freedom to choose a brick-and-mortar pharmacy. These network restrictions are quintessential state laws that mandate benefit structures.”
Ultimately, the Court held “that ERISA preempts the Access Standards, Discount Prohibition, AWP Provision, and Probation Prohibition as applied to ERISA plans. And we also hold that Medicare Part D preempts the AWP Provision as applied to Part D plans. We reverse and remand with instructions to the district court to enter judgment consistent with this opinion.”