Tenth Circuit Holds Oklahoma’s Regulation of Pharmacy Benefit Managers Preempted by ERISA

ERISA’s notorious preemption clause is no more than a few lines of text. But it has a dramatic effect on the trillions of dollars flowing through ERISA pension and health plans in any given year. The U.S. Supreme Court has been asked to define the scope and meaning of this clause numerous times since ERISA was passed in 1974. Most recently, in Rutledge v. Pharmaceutical Care Management, the Court held that an Arkansas statute that regulated the contractual relationship between pharmacy benefit managers and pharmacies survived ERISA preemption.

Just days ago, in Pharmaceutical Care Management Association v. Mulready, the Tenth Circuit applied the Rutledge decision to an Oklahoma statute, the Patient’s Right to Pharmacy Choice Act. Passed in 2019, the statue attempts to bolster the negotiating power of smaller (often rural) pharmacies with respect to pharmacy benefit manager. The Act does so through four relevant provisions: (1) it mandates that PBM’s must ensure that its members have ready access to brick and mortar network pharmacies; (2) it precludes PBMs from incentivizing members to use mail order pharmacy deliveries; (3) it includes an “any willing pharmacy” clause that requires PBMs to allow any pharmacy to participate in its network on terms generally applicable to other network pharmacies, and (4) it precludes PBMs from terminating a pharmacy simply because one of the pharmacists may be on probation with the State Pharmacy Board.

The Tenth Circuit held that all four provisions were preempted by ERISA. Initially, it rejected the argument that the Act was immune from preemption simply because it regulated PBMs, and not ERISA plans themselves. Drawing on prior Supreme Court precedent, the court held that a statute that only purported to regulate PBMs could still be preempted if, as a practical matter, it mandated that ERISA plans adopt certain benefit structures or otherwise precluded plan administrators from administering their plans in uniform ways. The court ultimately concluded that each of the four regulations did just that—mandating that group health plans adopt certain benefit structures. For example, the prohibition on discounts for mail order pharmacies would, again as a practical matter, hamper ERISA plans from offering lower copays for the use of mail order pharmacies and require them to have more brick-and-mortar pharmacies in their network. The court distinguished Rutledge as involving regulations that only affected the price benefit plans would have to pay to provide drugs to participants, while the Act effectively mandated certain benefit plan structures.

So unlike Rutledge, the Act does not survive ERISA preemption. It will certainly not be the last time that state attempts to regulate the relationship between pharmacies and PBMs will face the preemption gauntlet.

Andrew Holly

Andrew represents clients in a wide range of complex civil matters.

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