During the 2023 legislative session, legislation (HB 2021) was introduced requiring a pharmacy benefit manager (PBM) contracted to administer a self-funded, employer-sponsored employee benefit plan governed by the Employer Retirement Income Security Act of 1974 (ERISA) (29 U.S.C. § 1001 et seq.) to comply with certain state statutes and regulations, If it had passed, HB 2021 would have certainly faced a legal challenge over whether it crosses the line into federal preemption territory. At the time, while we cautioned that it is always treacherous to try to predict what a federal court might do if presented with a challenge to this or similar legislation, we strongly asserted our opinion that HB 2021 crossed that line. On August 15, 2023, the U.S. 10th Circuit Court of Appeals, considering similar legislation enacted by the Oklahoma Legislature in 2019, confirmed that opinion.
In Pharmaceutical Care Management Association v. Glen Mulready, in his official capacity as Insurance Commissioner of Oklahoma; Oklahoma Insurance Department (No. 22-6074; filed August 15, 2023), the 10th Circuit reviewed an Oklahoma federal district court decision holding that certain requirements of the “Oklahoma’s Patient’s Right to Pharmacy Choice Act,” Okla. Stat. tit. 36, § 6958 et seq., escaped ERISA pre-emption. Among other things, the statute regulates the relationship between a PBM and its network pharmacists, prohibits a PBM from restricting an individual’s choice of an in-network pharmacy, bars a PBM from requiring an individual to use an affiliated pharmacy, and requires a PBM to meet certain access standards. The district court held that none of these changes had a “connection with” an ERISA plan because they did not “interfere with plan design or administration.” Rather, the provisions “may alter the incentives and limit some of the options that an ERISA plan can use, [but] none of the provisions force[d] ERISA plans to make any specific choices.” PCMA appealed the court’s decision to the 10th Circuit Court of Appeals. Several states, including Texas, joined in an amicus curiae brief defending the Oklahoma statute. The United States filed an amicusbrief taking the position that ERISA pre-emption applied.
In an opinion by Judge Gregory A. Phillips, joined by Senior Judge Michael R. Murphy and Judge Veronica S. Rossman, the court reversed the district court. Under 29 U.S.C. § 1144(a), ERISA pre-empts “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” (citing Rutledge v. Pharmaceutical Care Management Association, 141 S. Ct. 474, 479 (2020), which involved a challenge to a 2015 Arkansas statute that required pharmacy benefit managers (PBMs) to reimburse pharmacies at or above the pharmacies’ cost to obtain a covered drug from a wholesaler). As SCOTUS likewise reminded everyone in Rutledge, “two categories of state laws [] have this impermissible connection with ERISA plans: ‘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 laws whose ‘acute, albeit indirect, economic effects . . . force an ERISA plan to adopt a certain scheme of substantive coverage.” 141 S. Ct. at 480. In other words, the question is whether the state law “govern[s] a central matter of administration or interfere[s] with a nationally uniform plan administration”?
Noting that PCMA made only the “connection with” argument (the Oklahoma law, like HB 2021, assiduously avoided a direct “reference” to ERISA plans), the court first turned to Oklahoma’s argument that ERISA did not pre-empt the statute “because it regulates PBMs, not health plans.” In other words, the state asserted, since “PBMs are not plans, nor fiduciaries to plans” and such “plans need not contract with PBMs,” ERISA did not apply. This argument, which in our mind is naïve at best and disingenuous at worst, did not persuade the court. First, nothing in ERISA jurisprudence says that a state law has to expressly attack ERISA plans in order to invoke pre-emption. Rather, the inquiry goes to “the nature of the effect of the state law on ERISA plans” (citing Cal. Div. of Lab. Standards Enf’t v. Dillngham Constr., N.A., 519 U.S. 316, 325 (1997)), whether it “nominally” regulates them or not. Second, SCOTUS has explicitly held that “state laws can relate to ERISA plans even if they regulate only third parties.” In illustration, the 10th Circuit summarized two SCOTUS decisions, Metropolitan Life Insurance Co. v. Massachusetts, 471 U.S. 724 (1985) (holding that a state law requiring insurers to provide mental health benefits was subject to ERISA) and Rush Prudential HMO, Inc. v. Moran, 536 U.S. 355 (2002) (holding that a state law regulating HMOs was subject to ERISA). Third, the court had no trouble finding that the logic of these decisions squarely applies to PBMs. Observing that PBMs administer pharmacy benefits for about 270 million Americans and that, at the admission of Oklahoma’s pharmacist expert, pharmacies commonly rely on PBMs for up to 95% of their business, the court concluded that “[b]ecause a plan’s choice between self-administering its benefits and using a PBM ‘is in reality no choice at all,’ regulating PBMs ‘function[s] as a regulation of an ERISA plan itself’” (citations omitted).
The question then became whether the Oklahoma statute “preclude[d] the ability of plan administrators to administer their plans in a uniform fashion.” Specifically, the court examined the law’s “network restrictions,” which include access standards, discount prohibition, and any willing provider provisions, and its “integrity and quality restriction,” that is a probation provision. Briefly, the access standards require a PBM to construct its pharmacy network so that most enrollees reside within a certain number of miles of a preferred pharmacy, based on whether they live in urban, suburban, or rural areas. They also bar a PBM from using mail-order pharmacies to meet the standards. The discount prohibition blocks a PBM from offering cost-sharing discounts, such as reduced copayments, to incent enrollees to use in-network pharmacies. The any willing provider provision requires a PBM to accept any pharmacy into its preferred provider network if it agrees to network terms. Finally, the probation provision blocks a PBM from denying, limiting, or terminating a pharmacy’s contract because one of its pharmacists is on probation with the State Board of Pharmacy.
The court determined that ERISA pre-empts each of these provisions because each goes directly to benefit design, a “central matter of plan administration.” Regarding the network restrictions, the court looked to decisions from the 5thand 6th Circuits that rejected any willing provider laws on the basis that “ERISA plans that choose to offer coverage by PPOs are limited by the statute to using PPOs of a certain structure—i.e., a structure that includes every willing provider” (citing CIGNA Healthplan of La., Inc. v. Louisiana ex rel. Ieyoub, 82 F.3d 642 (5th Circ. 1996). In other words, the court observed, “the law prohibited ERISA plans from choosing a PPO that did not include all willing providers.” In response to Louisiana’s argument that its law did not mandate PBMs to use PPOs, the 5th Circuit replied that “Louisiana’s law ensured that ERISA plans that chose to use a PPO had to ‘purchase benefits of a particular structure,’ so it was pre-empted.” Oklahoma’s network restrictions similarly foreclosed an employer’s option to “choose a PPO that did not include all willing providers.” As the 10th Circuit opinion puts it, “the network restrictions mandate benefit structures; they at least ‘eliminate[] the choice of one method of structuring benefits.”
Specifically, the court ruled, the Oklahoma law’s access standards, any willing provider provisions, and discount prohibitions work together to “either direct[] or forbid[] an element of the plan structure or benefit design,” i.e., the scope of the pharmacy network and differential cost-sharing for the benefit of enrollees (even the State of Oklahoma was forced to admit this). The court looked at the implications of the case from a broader perspective as well. “Consider how the network provisions change the landscape for PBM networks in Oklahoma,” the court posed. “Before 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.” The court made a similar point regarding the any willing provider provisions, which it observed would functionally collapse a two-tiered system designed to save employers and enrollees money to a one-tiered system that would cost everybody more money. In the words of the court, “[e]ach network restriction winnows the PBM-network design options for ERISA plans, thereby hindering those plans from structuring their benefits as they choose.” The court likewise determined that the probation provision was pre-empted because it requires a plan to accept allpharmacists into its network, even those subject to state discipline. When coupled with the any willing provider provision, the probation provision dictates which pharmacies must be included in the network, just like the network restrictions.
The court easily distinguished the Rutledge decision. “Unlike Arkansas’s reimbursement-rate regulations,” the court wrote, “Oklahoma’s network restrictions do more than increase costs. They home in on PBM pharmacy networks—the strcutures through which plan beneficiaries access their drug benefits. And they impede PBMs from offering plans some of the most fundamental network designs, such as preferred pharmacies, mail-order pharmacies, and specialty pharmacies.” The court dismissed out-of-hand various arguments advanced by the State of Oklahoma, to wit: the network restrictions are “narrower than they seem” (how?); the restrictions also apply to non-ERISA plans (as if that excuses the law from pre-emption); since ERISA doesn’t contain network restrictions, the state can impose them; the restrictions do not require plans to provide any particular benefits (it just takes away those benefits). The court did not belabor any of these because, candidly, they’re simply not serious legal arguments based on the pre-emption jurisprudence. The very brevity of the 10th Circuit’s discussion of them speaks volumes.
HB 2021 would have created exactly the same situation. By eliminating cost-sharing discounts and other incentives to use affiliated providers (or really event communicating with enrollees about it), restricting the use of mail-order pharmacies, effectively establishing a single-tier network, and requiring plans to accept pharmacists subject to state discipline, the bill would have forced employers into (more expensive) plan choices that they would otherwise have made. This employer choice is the quintessence of ERISA, which, after all, is designed to permit employers the most cost-effective benefit packages for their employees. Restricting those choices and running up the cost of ERISA plans, which HB 2021 would and bills like it would certainly do, undermine the whole purpose of ERISA. We said that during the session, and thanks to the 10th Circuit, we have a federal appellate decision directly on point saying the same thing.
We hope that this decision puts to rest efforts to revive HB 2021 or similar legislation in future sessions. It remains to be seen whether the State of Oklahoma will take the decision up to SCOTUS, but in view of the large number of states with an interest in the issues, it seems likely. In that event, we will await a definitive decision of the highest court in the land.
