Despite this decision, the trend of various states attempting to regulate pharmacy benefit managers is expected to continue
On August 15, 2023, the Tenth Circuit Court of Appeals issued its decision in Pharmaceutical Care Management Association (PCMA) v Mulready, striking down the Oklahoma position that pharmacy network requirements are not preempted by the Employee Retirement Income Security Act (ERISA) and overturning a federal district court decision.1 PCMA v Mulready is a case that has been tracked for awhile by interested parties such as plan sponsors, pharmacy benefit managers (PBMs), insurance companies, and third-party administrators. It is relevant to PBM regulation by the various states and the issue of ERISA preemption, which surfaced in the Supreme Court case Rutledge v PCMA.
ERISA’s preemption language prevents states from regulating ERISA covered plans if the state law includes reference to or a connection with an ERISA plan. Courts may find an impermissible reference to an ERISA plan when state law directly regulates the plan terms or where an ERISA plan is required to operate the state law. Additionally, state law cannot dictate plan design, disrupt plan administration, or impose requirements on plan administration otherwise dictated by ERISA. Most recently, the Supreme Court held in Rutledge v PCMA that a state law regulating PBM costs was not preempted by ERISA.2
PCMA V MULREADY
In the PCMA v Mulready case, PCMA challenged an Oklahoma law that regulated PBMs in various ways, arguing ERISA preemption. The Oklahoma federal district court stated that none of the Oklahoma laws were preempted by ERISA. The district court’s opinion compared the Oklahoma law’s pharmacy network provisions to the cost regulation at issue in Rutledge v PCMA, and PCMA appealed.3
Four provisions of the Oklahoma law were appealed: a network adequacy provision imposing geographic requirements; a provision prohibiting denying, limiting, or terminating a contract with a pharmacy because a pharmacist employed with the pharmacy is on probationary status with the State Board of Pharmacy; an “any willing provider” (AWP) provision requiring admission of pharmacies that meet network requirements; and a provision prohibiting requiring or incentivizing the use of a particular in-network pharmacy (including via discounts in cost-sharing or reduction in co-pay).3
THE TENTH CIRCUIT
In PCMA v Mulready, the court overturned the district court case and in doing so rejected Oklahoma’s argument based on 3 factors. Firstly, PCMA argued for “connection-with” preemption, which concerns “the nature of the effect of the state law on ERISA plans,” and not for “reference-to” preemption, which only concerns laws that directly target an ERISA plan. Secondly, the Supreme Court had not recognized a distinction between ERISA plans and third parties as to connection-with preemption. Finally, PBMs “predominate in the prescription-drug-benefits field,” therefore it was “practically impossible” for an ERISA plan to manage its own pharmacy benefits and not use a PBM.3
The PCMA v Mulready court split its analysis first considering 3 of the challenged provisions together (the geographic access standard, the AWP provision, and the discount prohibition) and referring to them as “Network Restrictions,” and it considered the probation provision in isolation. The court found that the Network Restrictions impermissibly require benefit structures and therefore prevent the uniform national application of ERISA plan terms. The court analyzed the probation prohibition separately and found that it also mandated benefit design and was therefore preempted.3
The court rejected Oklahoma’s argument stating laws with a minor effect on a plan’s design were exempted from preemption, as its argument applied to minor economic effects rather than minor effects on the design of the plan.3
The case has been sent back to the district court that originally heard the case for more proceedings.1 Although difficult to predict, it is likely that there will be more litigation related to the PCMA v Mulready case as it snakes its way through various levels of appeal that could eventually land it before the Supreme Court.
In statements released after the Tenth Circuit decision, Oklahoma Insurance Commissioner Glen Mulready stated, “[T]he decision from the Tenth Circuit bolstering the power of PBMs in the prescription drug market is disappointing and will be appealed.”1
Attorney General Gentner Drummond added, “I believe it is in the best interests of Oklahomans to appeal this ruling. [Although] I respect the Tenth Circuit Court of Appeals, I disagree with their decision in this matter. I believe it is clear that the US Supreme Court’s unanimous decision in Rutledge v PCMA allows states to regulate [PBMs] and hold them accountable when appropriate.”1
Many states have passed PBM regulations imposing requirements like Oklahoma’s law, with some states being even more restrictive. Notwithstanding the Tenth Circuit decision, the trend of the various states to regulate PBMs is expected to continue. Although the Tenth Circuit opinion may have a chilling effect on the states within its jurisdiction, it would not be binding to all 50 states at this time. This area of the law continues to evolve as the battle between states and PBMs takes on new twists and turns in the various courts.
About the Author
Ned Milenkovich, PharmD, JD, is chair of the health care law practice at Much Shelist PC in Chicago, Illinois, and is the former vice chairman of the Illinois State Board of Pharmacy.