With only about 70 Pharmacy Benefit Managers (PBMs) across the United States, it’s no wonder that their trade group, the Pharmaceutical Care Management Association (PCMA), feels like they’re being picked on by all the other healthcare “big kids.” For a few years now, state and federal governmental regulatory agencies, Congress, pharmaceutical companies, insurance companies, and the buying public have all pointed accusatory fingers at the PBMs for the frequent and seemingly never-ending rise in the cost of prescription drugs. In addition, several lawsuits have arisen due to the alleged opaque manner in which PBMs conduct their business. This leaves us to ask, where does ERISA fit into all this industry infighting?
Part of the answer can be found in Rutledge v. Pharmaceutical Care Management Association. In what many of the nerdiest watchers of SCOTUS, ERISA, and the healthcare industry consider to be the most impactful decision of that year’s session, on December 10th, 2020, the Supreme Court found, in an 8–0 decision that ERISA did not preempt an Arkansas state law establishing statutory minimum and other standards for PBM payments to network pharmacies. (No. 18-540, 2020 WL 7250098, at *2) (U.S. Dec. 10, 2020)
The ruling said ERISA does not pre-empt state rate regulations dealing with cost increases. So, the Rutledge decision now begs the question in the minds of many: Will this ruling lead to further narrowing ERISA preemptions? And then, as if on cue, along comes Mulready.
To understand Rutledge and Mulready, let’s first revisit how ERISA preemption works. ERISA (29 US Code § 1144) generally preempts “any and all state laws” to the extent they relate to employee benefit plans. Only federal courts can ultimately determine whether ERISA preemption applies, though the Department of Labor (DOL) has issued its own preemption guidance from time to time. Courts have acknowledged that Congress intended ERISA alone to regulate private-sector employee benefits and avoid conflicting state and local regulations.
Oklahoma’s “Patient’s Right to Pharmacy Choice Act” (the Oklahoma Act) was enacted on November 1, 2019. It restricted pharmacy benefit companies and health plans from designing plans emphasizing quality and cost-reducing pharmacy networks. The goal was to create uniform access to providers while prohibiting restrictions on a patient’s right to choose a pharmacy provider.
No sooner than the passage of the Act did the PCMA challenge the Oklahoma Act and sued to invalidate it. They alleged that ERISA and Medicare Part D ERISA preempted it. On April 4, 2022, a District Court ruled that ERISA did not preempt the Oklahoma Act finding, “while these provisions may alter the incentives and limit some of the options that an ERISA plan can use, none of the provisions forces ERISA plans to make any specific choices.” Thus, none of Oklahoma’s Patient’s Right to Pharmacy Choice Act provisions are preempted by ERISA, and the State may continue to proceed with enforcement. However, Medicare Part D preempted six of thirteen Oklahoma Act-challenged provisions.
It should surprise no one that PCMA chose to appeal the decision. And—they won, at least for now. On August 15th, 2023, in a unanimous decision, the Tenth Circuit Court of Appeals sustained the PCMA’s challenge, finding the following four key provisions of the Oklahoma Act to be preempted by ERISA:
Thus, in rejecting the three provisions dealing with network restrictions, the Tenth Circuit solidified ERISA's objective to provide consistent and equitable benefits for employees no matter where they live or work. The court unanimously held that state laws requiring benefits to be structured in a particular way or prohibiting employers from structuring benefits in a particular way are preempted by ERISA, even if the statutes directly regulate pharmacy benefit managers. Those state laws potentially undermine the uniformity ERISA strives to achieve.
How should we reconcile the two cases involving PBMs in two different states with two different outcomes? Rutledge was a win for states and a loss for PBMs. When the Supreme Court issued its opinion in the case, many wondered if it was the beginning of the end for ERISA preemption. But if we look closer, the answer may be “not so fast.” In upholding the Arkansas state law in that case, the Supreme Court held that Arkansas’ law was “a mere cost regulation that did not have an impermissible connection with ERISA plans.”
A worthy successor—the Mulready decision reinforces the idea that states may not force ERISA plans to adopt administrative, network, benefit design, or substantive coverage requirements. The holding in Mulready provides examples of impermissible state regulation of PBMs under the framework provided in Rutledge.
In Rutledge, Arkansas’ law increased costs and altered incentives for ERISA plans “without forcing plans to adopt a particular scheme of substantive coverage.” In contrast, the Tenth Circuit in Mulready notes that the Act was “attempting to govern a central matter of plan administration” and “interfere with nationally uniform plan administration.” Thus, the Oklahoma Act was preempted. So, maybe the issue isn’t about whether the PBMs are the “winner” or the “loser.” Perhaps there is one clear winner, and that winner is ERISA.