Tenth Circuit Rules ERISA Preempts Oklahoma PBM-Reform Law - Update

Bass, Berry & Sims PLC

Bass, Berry & Sims PLC

NOTE: This post was originally written August 29, 2023, and was updated on September 27, 2023.

Breaking news: On September 19, 2023, the Oklahoma Attorney General filed a Petition for En Banc Rehearing, challenging the Tenth Circuit panel’s decision in this case and requesting a rehearing before the full Tenth Circuit bench. The Oklahoma Attorney General argued in his Petition that the panel’s decision contradicted established Supreme Court precedent and recent circuit court decisions regarding the scope of ERISA preemption, failed to address the ERISA “savings clause,” and was overbroad in its articulation of Medicare Part D preemption. On September 25, 2023, the Tenth Circuit ordered PCMA to respond to the Petition. We will provide further updates as this matter develops.

In a win for self-funded (i.e., self-insured) health plans subject to the Employee Retirement Income Security Act of 1974, as amended (ERISA), the Tenth Circuit recently ruled that ERISA preempts provisions of an Oklahoma law regulating pharmacy benefit managers (PBMs) and pharmacy networks. The states in the Tenth Circuit are: Colorado, Kansas, New Mexico, Oklahoma, Utah, and Wyoming.

Over the last several years, there has been an increase in state legislation seeking to regulate PBMs. Some of these state PBM-reform laws also purport to apply to ERISA self-funded plans that contract with PBMs to oversee the plans’ prescription drug benefits.

This creates an inherent conflict, however, between federal and state law. Self-funded plans generally benefit from ERISA preemption, meaning that federal law generally applies to them instead of state laws that would otherwise apply to employee benefit plans (with some exceptions). For employer plan sponsors that operate in multiple states, being subject to these various state PBM-reform laws can create a patchwork of plan administration, which ERISA was enacted, in large part, to avoid. The Tenth Circuit decision, explained below, is a big step in reaffirming ERISA preemption and safeguarding the ability of self-funded plans to be administered in a nationally uniform way.

Tenth Circuit Decision: PCMA v. Mulready

The Tenth Circuit appeals court in Pharmaceutical Care Management Association (PCMA) v. Mulready examined Oklahoma’s Patients’ Right to Pharmacy Choice Act (the Act), which was enacted in 2019. The Act is one of many similar state laws attempting to restrain the power of PBMs to control where and how prescriptions are filled. Specifically, the Act imposes “network restrictions” that do the following:

  1. Establish geographic parameters for PBM networks.
  2. Prohibit PBMs from steering beneficiaries to certain in-network pharmacies by offering cost-sharing discounts, such as reduced copayments.
  3. Require PBMs to admit any pharmacy willing to accept the PBM’s terms into its preferred network.

The Act also prevents PBMs from denying or terminating a pharmacy’s contract because one of its pharmacists is on probation with the Oklahoma State Board of Pharmacy.  

In Mulready, PCMA, a trade association representing PBMs, challenged the Act, arguing that it unlawfully regulates ERISA plans by mandating benefit plan structures and precluding plan administrators from administering their plans in a nationally uniform fashion, even though the Act ostensibly applied only to PBMs and not self-funded plans themselves. The court ultimately agreed with PCMA and explained that the network restrictions under the Act would “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.” The court reasoned that the Act’s network restrictions govern central matters of plan administration and thus have an impermissible connection with ERISA plans. The court also explained that the probation provision of the Act essentially dictates which pharmacies must be included in a plan’s PBM network since PBMs could not object to those employing pharmacists on probation. Thus, the court held that ERISA preempted the network restrictions and the probation provision. 

What’s Next?

Unfortunately, the issue of ERISA preemption with respect to state PBM-reform laws remains unsettled. As mentioned, several states have recently adopted PBM-reform laws that impose requirements similar to Oklahoma’s, but some impose even broader restrictions on PBMs and self-funded plans. However, the court’s decision in Mulready is a well-reasoned application of prior precedent and will likely be cited in a number of lawsuits going forward despite not having a binding effect outside the Tenth Circuit. We will continue to monitor ongoing litigation and any statements by the Department of Justice or Department of Labor regarding their position on ERISA preemption in this context.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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