Legal Alert: Tenth Circuit Court of Appeals Hands Down a Big Win for ERISA Preemption

After several failed attempts by pharmacy benefit managers (“PBM”) to challenge state laws regulating PBMs, the Tenth Circuit Court of Appeals (in Pharmaceutical Care Management Association v. Mulready) handed down a big win for PBMs and, by extension, self-funded ERISA plans, when it held that provisions under an Oklahoma insurance law that established strict network adequacy standards and over-broad “any willing provider” requirements for PBMs were preempted by ERISA. Certain provisions of the law were also successfully challenged as being preempted by Medicare Part D; however, the scope of this alert is limited to the portions of the Tenth Circuit’s opinion related to ERISA preemption. The Oklahoma PBM law at issue in the case does the following:

1. Sets forth stringent geographic parameters for making brick and mortar pharmacies available to plan participants;
2. Limits the use of mail order pharmacies as a replacement for brick and mortar pharmacies;
3. Bars PBMs from promoting in-network pharmacies by offering financial incentives such as copay reductions;
4. Requires PBMs to admit any provider willing to accept the PBM’s network terms; and
5. Prohibits PBMs from refusing to allow pharmacies with pharmacists on probation with the state regulatory agency from being in the PBMs’ network.

When challenged at the district court level, the lower court determined that none of these provisions impacted plan design or choices for plan administrators and upheld the law.  However, on appeal, the Tenth Circuit wholeheartedly disagreed, finding that these restrictions, among other things, infringe upon central matters of plan administration. The court recognized that the Oklahoma PBM law network restrictions, “home in on PBM pharmacy networks – the structures through which plan beneficiaries access their drug benefits. They also impede PBMs from offering plans some of the most fundamental network designs, such as preferred pharmacies, mail order pharmacies and specialty pharmacies.” Further, the court recognized that restricting PBMs from denying, limiting or terminating a plan’s pharmacy contract because of licensure issues essentially forces the PBM to consider all pharmacies over any safety concerns the plan may choose to impose. An example of this would be allowing them to limit the network when a pharmacy has a pharmacist who is on probation with the state licensure agency. While the Oklahoma law does not directly regulate ERISA plans, but rather PBMs, the court recognized that ERISA plans are virtually compelled to use PBMs to administer their prescription drug benefits and, therefore, held that the Oklahoma law is preempted by ERISA as it impermissibly impacts and/or relates to ERISA plans by interfering with plan administrators’ ability to administer their plans uniformly. Conclusion PMBs have been a target of state regulation for some time, and we don’t anticipate that this decision will discourage them further, particularly in states outside the purview of the Tenth Circuit.  In the meantime, it’s possible the case could ultimately be appealed to the U.S. Supreme Court.  We will continue to monitor state PBM laws and the progress of this case.   About the Author.  This alert was prepared for Alera Group by Barrow Weatherhead Lent LLP, a national law firm with recognized experts on the Affordable Care Act.  Contact Stacy Barrow or Nicole Quinn-Gato at sbarrow@marbarlaw.com or nquinngato@marbarlaw.com. The information provided in this alert is not, is not intended to be, and shall not be construed to be, either the provision of legal advice or an offer to provide legal services, nor does it necessarily reflect the opinions of the agency, our lawyers or our clients.  This is not legal advice.  No client-lawyer relationship between you and our lawyers is or may be created by your use of this information.  Rather, the content is intended as a general overview of the subject matter covered.  This agency and Barrow Weatherhead Lent LLP are not obligated to provide updates on the information presented herein.  Those reading this alert are encouraged to seek direct counsel on legal questions. © 2023 Barrow Weatherhead Lent LLP.  All Rights Reserved.