Although the district court in Mulready adopted similar reasoning in blessing Oklahoma’s pharmacy law to regulate PBMs, the Tenth Circuit disagreed.

Over the past few years and with increased frequency, state legislators have passed numerous statutes, rules and regulations in order to rein in tactics employed by pharmacy benefit managers (PBMs) that are intended to eliminate or minimize competition from independent pharmacies. Recently, the Tenth Circuit in Pharmaceutical Care Management Association v. Mulready veered from the weight of authority allowing state regulations of PBMs and held that ERISA preempted the state of Oklahoma’s Patient’s Right to Pharmacy Choice Act, which had restricted PBMs doing business in that state and afforded independent pharmacies greater opportunities to participate in PBM networks.

In Mulready, Oklahoma’s pharmacy law imposed three major restrictions on PBMs:

1. An “access standard” requiring that PBMs comply with certain geographic criteria, such as concentrating 90 percent of their beneficiaries within certain mileage radii of network pharmacies;
2. A discount provision preventing PBMs from promoting in-network pharmacies to beneficiaries by offering cost-sharing discounts, like reduced co-pays; and
3. An any-willing-provider requirement that PBMs allow all pharmacies that are willing and able to accept the PBMs’ terms and conditions for network participation.[1]

The district court held that none of these restrictions were sufficiently related to ERISA to warrant preemption, and thus concluded that they were legally permissible.

This “relation to” language was discussed at length by the Supreme Court of the United States only three years ago in the seminal case Rutledge v. Pharmaceutical Care Mgmt. Assoc.[2] In Rutledge, the Court reasoned that state laws sufficiently “related to” ERISA employee benefit plans to trigger preemption include “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,” or even state laws imposing “acute, albeit indirect, economic effects [on] an ERISA plan to adopt a certain scheme of substantive coverage.”[3]

In Rutledge, Arkansas passed a law requiring PBMs to reimburse pharmacies at rates equal to or greater than the pharmacy’s wholesale costs to purchase medications.[4] PBM lobbying group Pharmaceutical Care Management Association (PCMA) initiated the action, arguing that ERISA preempted Arkansas’ law because PBMs’ reimbursement rate requirements “related to” employee benefit plans.[5] The Supreme Court, however, held ERISA did not preempt Arkansas’ law because a state law can only be said to “relate to” a covered plan if the law has “a connection with” or “reference to” such a plan.[6] Arkansas’ law had neither. The Court reasoned Arkansas’ law was merely a form of cost regulation, not an exercise by the state to dictate plan administration.

Although the district court in Mulready adopted similar reasoning in blessing Oklahoma’s pharmacy law to regulate PBMs, the Tenth Circuit disagreed. At the appellate level, PCMA argued, and the Tenth Circuit agreed, that Oklahoma’s law violated ERISA by limiting the options employers could use to structure its benefits. By limiting or directing the ways in which employers could structure benefit plans, PCMA argued that the law’s restrictions affected the governance of matters central to plan administration sufficient to trigger ERISA preemption under Rutledge.

Specifically, as to the Oklahoma pharmacy law’s three primary requirements, the court held:

1. The “access standard” required PBMs to physically structure their networks differently than they otherwise may have;
2. The discount prohibition could eliminate any incentive for plans to employ mail-order or specialty pharmacies; and
3. The any-willing-provider requirement forced PBMs to employ even pharmacists on probation because PBMs lacked power to veto an unqualified, albeit willing, provider.[7]

Practical Effect of Mulready

The Tenth Circuit’s decision in Mulready is already in flux. The Oklahoma attorney general has requested an en banc appeal to the Tenth Circuit. Whatever the ruling on the request for an en banc review, the decision will likely then escalate to the U.S. Supreme Court.

Once court proceedings in Mulready are finalized, any such decisions would, at most, be binding in Oklahoma and not in other states. As other states, however, have passed laws similar to Oklahoma’s, legislators, pharmacies, PBMs and others in the pharmacy industry will surely be watching to see how the litigation in Mulready is ultimately decided and to what extent, if any, that decision could lead to challenges of these other states’ laws regulating PBMs.

Duane Morris’ Pharmacy Litigation Group will closely be monitoring these developments.

For More Information

For more information on this Alert, please contact Jonathan L. Swichar, Bradley A. Wasser, Alessandra Mungioli, any of the attorneys in our Pharmacy Litigation Group or the attorney in the firm with whom you are regularly in contact.

Notes

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.