Tenth Circuit Holds ERISA Preempts Oklahoma Pharmacy Benefit Manager Law

On August 15, 2023, in PCMA v. Mulready, the Tenth Circuit Court of Appeals (Tenth Circuit) held that Oklahoma's Patient's Right to Pharmacy Choice Act (the Act) is preempted by ERISA, reversing a ruling by the US Western District Court of Oklahoma. The case was remanded with instructions to the district court to enter judgment consistent with the Tenth Circuit’s opinion.

As background, ERISA is federal law that generally preempts (i.e., supersedes) conflicting state laws that regulate employer-sponsored employee benefit plans. One of the goals of ERISA was to promote centralized, uniform benefit administration so employers operating in multiple states do not have to comply with various state laws. However, whether a particular state law regulates an ERISA plan by an impermissible reference to or connection with such plan is often highly debated, particularly in the context of state pharmacy benefit laws.

The Act at issue in this case was passed by the Oklahoma legislature in 2019 amidst growing concerns about pharmacy benefit managers (PBMs) and their influence over independent pharmacies. PBMs are third-party intermediaries that oversee health plans’ prescription drug benefits and negotiate with pharmacies and drug manufacturers to structure plan benefits and lower costs. The Act significantly impacted PBMs and their ability to design plan pharmacy networks.

Accordingly, the Pharmaceutical Care Management Association (PCMA), which represents PBMs, sued the Oklahoma Insurance Department and Commissioner Mulready (Oklahoma) to invalidate the Act due to ERISA preemption. The district court ruled that ERISA did not preempt the Act and granted summary judgment to Oklahoma. The PCMA appealed the district court ruling to the Tenth Circuit.

On appeal, the Tenth Circuit rejected Oklahoma’s argument that the Act escapes ERISA preemption because it regulates PBMs, not health plans. First, the Tenth Circuit explained that a state law can be subject to preemption based upon the law’s effect on employee plans, even if the law does not specifically target such plans. Second, the Tenth Circuit noted that the US Supreme Court has ruled that state laws can relate to ERISA plans even if they regulate only third parties. Third, the Tenth Circuit emphasized the power of PBMs in the pharmacy sphere, making it difficult for an ERISA plan not to engage a PBM to administer plan benefits.

The Tenth Circuit then addressed the central question of whether the Act had an impermissible connection to an ERISA plan by governing a central matter of plan administration or interfering with nationally uniform plan administration. Focusing first on three of the Act’s network restrictions, the Tenth Circuit observed that:

1. The Act’s Access Standards outline various geographic parameters that PBMs must satisfy in designing their Oklahoma pharmacy networks. These standards require PBMs to include more brick-and-mortar pharmacies to serve rural areas, thus reducing a plan’s ability to rely on mail-order pharmacies to control costs.
2. The Act’s Discount Prohibition bars PBMs from promoting less expensive in-network pharmacies to plan participants by offering cost-sharing discounts, such as reduced copayments.
3. The any-willing-provider (AWP) provision requires PBMs to admit every pharmacy that is willing to accept the PBM’s preferred-network terms into that network, so employers cannot choose a plan network that excludes AWPs.

The Tenth Circuit concluded that by limiting an ERISA plan’s network design and dictating which pharmacies are included in a network, the network restrictions impermissibly mandated benefit structures and thus were preempted by ERISA.

Next, the Tenth Circuit addressed the Probation Prohibition provision, which bars PBMs from denying, limiting, or terminating a pharmacy’s contract because one of its pharmacists is on probation with the Oklahoma State Board of Pharmacy. The Tenth Circuit ruled that this provision was also preempted by ERISA because it required plans that hire PBMs to include pharmacists on probation in their networks regardless of plan safety and quality assurance standards, thus interfering with the plan’s choice of benefit design and administration.

Finally, the Tenth Circuit declined to address arguments raised in an amicus brief filed by the Department of Justice and DOL, which would appear to broaden the scope of insurance laws saved from preemption under ERISA’s “savings clause” and narrow the application of the “deemer clause,” which prevents states from regulating self-insured plans as insurers, because Oklahoma waived such arguments.

The Tenth Circuit’s opinion reinforces the scope of ERISA preemption. However, Oklahoma could eventually seek to appeal the adverse ruling to the US Supreme Court. Additionally, challenges to similar PBM laws enacted by other states may face different outcomes in other circuit courts. Accordingly, employers should be aware of the decision and monitor developments in this unsettled area of the law. For specific advice regarding the impact of state laws on their plan’s pharmacy benefits, employers should consult with legal counsel.

PCMA v. Mulready, et al. »