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Court Rules ERISA Preempts Oklahoma Law Regulating PBMs

by | Sep 29, 2023 |

The U.S. Court of Appeals for the Tenth Circuit, in Pharmaceutical Care Management v. Mulready, has ruled that a state law regulating pharmacy benefit managers (“PBMs”) is preempted by the Employee Retirement Income Security Act of 1974 (“ERISA”).

Background. PBMs are third-party entities that oversee group health plans’ prescription drug benefits. As intermediaries, they contract with manufacturers to negotiate rebates on drugs, contract with health plans to manage the plans’ prescription drug benefits, and contract with pharmacies to design pharmacy networks. PBMs also offer options for health plans to structure their benefits.

Law. ERISA generally preempts “any and all State laws insofar as they may now or hereafter relate to any employee benefit plan.”  A state law relates to an ERISA plan if it has: (1) a “connection with” or (2) a “reference to” an ERISA plan.

The Supreme Court has identified two categories of state laws that have this impermissible connection with ERISA plans: (i) laws that require providers to structure benefit plans in particular ways, “such as by requiring payment of specific benefits or by binding plan administrators to specific rules for determining beneficiary status”; and (ii) laws whose “acute, albeit indirect, economic effects…force an ERISA plan to adopt a certain scheme of substantive coverage.”

Facts. In 2019, Oklahoma’s legislature enacted the Patient’s Right to Pharmacy Choice Act (the “Act”), which sought to regulate PBMs by establishing minimum and uniform access to pharmaceutical providers and imposing standards and prohibitions on restrictions of a patient’s right to choose a provider. Among other things, the law provided that PBMs: (1) cannot restrict access by pharmaceutical providers to the PBM’s network; (2) cannot provide discounts to only certain providers; and (3) cannot deny any provider, including local pharmacies, the opportunity to participate in a network. In response to the Act’s passage, a trade association representing PBMs sued to invalidate the Act, claiming that it was preempted by ERISA.

Tenth Circuit. In reviewing the matter, the Tenth Circuit explained that ERISA preemption prevents state laws from requiring employers to structure their employee benefit plans in a specified manner or to mandate a specific type of benefit structure.

The court initially observed that the Act was impermissibly connected with ERISA plans.  It stated that: “Functionally, the [Act’s] network restrictions mandate benefit structures; they at least ‘eliminate [] the choice of one method of structuring benefits.’ The [Act’s] access standards dictate which pharmacies must be included in a PBM’s network[.]”

The court then opined that the Act’s discount prohibition requires that cost-sharing and copayments be the same for all network pharmacies “whether retail or mail-order; standard or preferred.” Accordingly, it found that this prohibition also directs or forbids an element of plan structure or benefit design.

Next, the court noted that the Act’s provider participation requirement forces plans to “include many more brick-and-mortar pharmacies…. Because adding pharmacies costs plans money, this is a choice that plans might not otherwise make.” It found that this requirement also impermissibly affects plan structure or benefit design.

The court concluded that these three provisions of the Act, while not directly addressing employee benefit plans, have a direct effect on pharmacy networks—the structures through which plan beneficiaries access their drug benefits.  It stated that these provisions “impede PBMs from offering plans some of the most fundamental network designs, such as preferred pharmacies, mail-order pharmacies, and specialty pharmacies.” Based on the foregoing logic, the court determined that Oklahoma was impermissibly attempting to govern plan administration and interfere with nationally uniform plan administration. Consequently, it ruled that all three provisions of the Act were preempted by ERISA.