10th Circuit Invalidates Oklahoma Pharmacy Network Law as Applied to ERISA and Medicare Part D Plans

Key Takeaways

• The U.S. Court of Appeals for the 10th Circuit issued a sweeping decision that (1) maintains long-standing federal protections for employer and union-sponsored health plans to design their health benefit plans, including provider networks, and (2) clarifies that regulation of Medicare Advantage and Medicare Part D plans is the exclusive domain of the federal government, free from state regulation with only limited exceptions.
• Oklahoma cannot enforce the Patient’s Right to Pharmacy Choice Act’s restrictions on the design and structure of pharmacy networks against employer and union-sponsored health plans or Medicare Part D prescription drug benefit plans.
• ERISA preempts state laws that restrict even one method of structuring benefits. Because all four challenged provisions do so, they have an impermissible connective with ERISA.
• Medicare Part D’s preemption provision is akin to field preemption. Because Oklahoma’s Any Willing Provider provision establishes a rule that governs PBM pharmacy networks for Part D plans, it is preempted under Medicare Part D.

The Oklahoma Patient’s Right to Pharmacy Choice Act

• In 2019, the Oklahoma legislature passed the Patient’s Right to Pharmacy Choice Act (the “Act”). The Act restricts the ability of health plans and their pharmacy benefit managers (“PBMs”) to select from which pharmacies and at what cost-sharing amounts plan beneficiaries can use their prescription drug benefits (known as the “pharmacy network”).
• Among other requirements that were not subject to this appeal, the Act:
  • Requires the pharmacy networks, including preferred pharmacy networks, meet certain geographic access standards that could only be satisfied by brick-and-mortar pharmacies (“Access Provision”).
  • Requires plans to accept any willing pharmacy into their preferred pharmacy networks (“AWP Provision”).
  • Prohibits plans from using discounts to incentivize the use of any particular in-network pharmacy (“Discount Prohibition”).
  • Prohibits restrictions on pharmacies that employ pharmacists who are on probation with the State Board of Pharmacy (“Probation Prohibition”).
• These four provisions operate independently and together to either prohibit or render impossible certain commonly-used pharmacy network designs, including lower-cost, smaller preferred pharmacy networks, exclusive specialty pharmacy networks, and discounts in cost-sharing for the use of mail-order pharmacies.

The District Court Litigation and the Appeal

• Plaintiff Pharmaceutical Care Management is the trade association for PBMs. It sued to invalidate the Act in October 2019. In 2022, the Western District of Oklahoma ruled on the parties’ cross motions for summary judgment. The district court held that six provisions of the Act (including the Access Provision and the Discount Prohibition) were preempted by Medicare Part D, but that none of the Act was preempted by ERISA.
• PCMA appealed the district court decision, arguing that the four provisions described above were preempted by ERISA and the AWP Provision is preempted by Medicare Part D.
• Both sides had amici support. PCMA’s arguments were supported by the trade association for federal employee benefit plans. Several employer and union groups also filed amicus briefs in favor of PCMA, but those briefs were not accepted by the 10th Circuit. Both community pharmacies and a consortium of State Attorneys General supported Oklahoma. Significantly, an eleventh-hour request from the 10th Circuit resulted in the United States Departments of Labor and Health and Human Services submitting an amicus brief largely supporting PCMA’s arguments.

The 10th Circuit Decision

• On August 15, 2023, the 10th Circuit issued its opinion, which ruled for PCMA in all respects. The 10th Circuit held that all four challenged provisions were preempted by ERISA and the AWP Provision was preempted by Medicare Part D. See Foley Hoag press release here.
• The Court’s ERISA holding included the following key points:
  • ERISA preemption depends on whether the state law “precludes the ability of plan administrators to administer their benefits in a uniform fashion,” without regard to whether the state law is directed to PBMs or plans directly.
  • Similar to provisions that were preempted in cases before the 5th and 6th Circuits, and relying on the reasoning of Rutledge, the challenged provisions of the Act are impermissibly connected with ERISA plans because “[f]unctionally, the network restrictions mandate benefit structures” by “eliminating the choice of one method of structuring benefits.”
  • The scope and differentiation of a pharmacy network are “key benefit designs for an ERISA plan,” and the Access Provision, AWP Provision and Discount Provision “hurt the cooperative relationship between plans, which want to save money, and preferred pharmacies, which want the increased business that preferred status affords.”
  • The Court concludes that “[t]ogether, these three provisions effectively abolish the two-tiered network structure, eliminate any reason for plans to employ mail-order or specialty pharmacies, and oblige PBMs to embrace every pharmacy into the fold.”
  • The Probation Provision also has an impermissible connection with ERISA because “much like the AWP Provision, this provision forces PBMs to capitulate to all pharmacies, even those employing pharmacists on probation.’’
  • The Court also rejects a novel argument advanced by the United States that laws with “de minimis” effects on plan design are not preempted, finding that the argument had “no footing” in ERISA’s significant decisional law.
  • Finally, the Court held that Oklahoma had waived any argument that the law was saved from preemption by the Saving Clause.
• Regarding Medicare Part D preemption, the Court held:
  • Part D’s preemption clause preempts all state laws concerning Part D plans, except for those addressing licensure and solvency and laws of general applicability. The Court agreed with PCMA that Part D preemption is “akin to field preemption.”
  • Part D preemption does not require that the state and federal law overlap.
  • The AWP provision is preempted under this standard. Simply put “The AWP Provision regulates ‘with respect to [Part D plans]’ because it establishes a rule that governs PBM pharmacy networks for Part D plans. 42 U.S.C. § 1395w-26(b)(3). And because it is not a licensing law or a law relating to plan solvency, the AWP Provision is preempted.”

Conclusion

• The 10th Circuit decision clarifies the limits of the Supreme Court’s decision in Rutledge, maintaining the decades-old distinction in ERISA between laws that primarily regulate a cost (which states are permitted to enact) and those that primarily regulated the design and structure of benefits (which are preempted). In so doing, the 10th Circuit secured the scope of ERISA preemption, which has been a lynchpin in protecting and facilitating employer-sponsored benefits in the United States for nearly 50 years.
• With respect to Medicare, the 10th Circuit clarifies that, absent a limited exception for state laws regulating licensing or plan solvency, regulation of Medicare Advantage and Medicare Part D plans is an exclusively federal concern.
• Going forward, the Mulready decision is likely to serve as a warning to the increasingly large number of states that are aggressively regulating employee-benefit plans and Medicare Plans.