The July Monthly Minute considers the impact of the Supreme Court’s Loper decision in overturning the longstanding Chevron deference standard, along with a district court case awarding penalties for failing to produce plan documents under the Parity Act regulations, and lastly, the FTC’s interim report addressing PBM impact on prescription drug access and pricing.

Supreme Court Upends Chevron Deference

In Loper Bright Enterprises  v. Raimondo, Sec’y of Commerce (Sup. Ct. 2024), the Supreme Court overturned long-standing precedent, Chevron v. Natural Resources Defense Counsel (Sup. Ct. 1984), which had instructed courts to confer considerable weight to an agency’s construction of an ambiguous statute. In its 6-3 ruling, the Loper Court held that the Administrative Procedure Act requires courts to exercise independent judgment in deciding whether an agency has acted within its authority, and courts may not defer to agency interpretation of the law simply because a statute is ambiguous. Under Loper, entities regulated by agency guidance – whether the DOL, IRS, PBGC, or HHS, etc. – may more easily challenge agency regulations in the absence of agency deference. However, it’s also possible that agencies will delay releasing guidance in an effort to ensure its regulations are strong enough to withstand judicial scrutiny. In short, this pivotal ruling this may lead to an increased number of legal disputes, and a decrease in new agency guidance.

KMK Comment: The Loper decision presents a double-edged sword. To the extent that agency regulations provide plan administrators with clarity when faced with ambiguous statutory direction, a resulting chilling effect on the timely promulgation of agency guidance would be unfortunate. However, reasonably interpreting grey areas in statutory provisions can offer flexibility in complex plan administration. The impact of the Loper decision is already playing out in Utah v. Su, No. 23-11097, where the Fifth Circuit is currently wrestling with the application of the Biden-administration’s ESG rules, and in Fed’n of Ams for Consumer Choice, Inc. v. Dep’t of Labor, 2024 BL 255392 (E.D. Tx. July 25, 2024), wherein a Texas district court cited Loper in support of its finding that the court “owes no deference to DOL’s interpretation of ERISA” and related order temporarily blocking the DOL’s 2024 fiduciary rule that expanded the class of retirement advice providers who constitute fiduciaries. We will keep you updated as the impact of these cases unfolds.

Ask and Ye Shall Receive (Plan Documents)

In W.H. v. Allegiance Benefit Plan Mgmt, Inc., 2024 WL 2830792 (D. Mont. 2024), a self-funded medical plan prevailed against plaintiff’s claims that mental health benefits were wrongfully denied but was still saddled with penalties for failing to produce ERISA plan documents. Citing the lack of medical necessity, the plan had denied mental health benefits and confirmed the denial on appeal. The Montana district court upheld the denial by finding that the decision was not arbitrary or capricious. However, plaintiffs separately argued that defendants also violated the Parity Act’s statutory disclosure requirements by failing to disclose certain documents during the administrative appeal process. ERISA plan administrators must, upon written request, provide participants with various plan documents, including the SPD, Form 5500, and “other instruments under which the plan is established or operated.” The Parity Act regulations define “[i]nstruments under which the plan is established or operated,” as “documents with information on medical necessity criteria for both medical/surgical benefits and mental health and substance use disorder benefits, as well as the processes, strategies, evidentiary standards, and other factors used to apply a nonquantitative treatment limitation with respect to medical/surgical benefits.” However, defendants relied on Ninth Circuit authority (which pre-dated the Parity Act regulations) that held “instruments under which the plan is established or operated” refer to “documents that provide individual participants with information about the plan and benefits,” which includes “only legal documents that describe the terms of the plan, its financial status, and other documents that restrict or govern the plan's operation.” While the court acknowledged judicial disagreement over whether to apply the Ninth Circuit’s narrow definition or the Parity Act regulations' expansive definition, ultimately it concluded: “[b]ecause the Parity Act Regulations specifically interpret 29 U.S.C. § 1024(b)(4), they are applied here[,]” and ordered defendants to pay the maximum penalty of $110 per day over 294 days, totaling $32,340.00.

KMK Comment: Overall, this case is an important reminder to carefully review and respond to ERISA document requests. The split of authority as to whether the Ninth Circuit definition or the regulatory definition should have applied makes the court’s award of maximum penalties somewhat surprising. However, given the court’s express reliance on the Parity Act regulations, it may have been decided differently under post-Loper authority, which eliminates deference to agency guidance when interpreting an ambiguous statute.

FTC Sounds the Alarm Over PBM Practices

Earlier this month, the FTC released an interim report of its ongoing study of the impact by pharmacy benefit managers (PBMs) on the access and affordability of prescription drugs. The report describes how PBMs, as middlemen, may be profiting by inflating drug costs and constricting local pharmacies. The report states that PBMs negotiate terms and conditions for access to prescription drugs and the three largest PBMs now manage almost 80% of all prescriptions filled in the United States. Furthermore, PBMs also serve as health plans and pharmacists, and impact the drug supply chain as well. Taken together, the report alleges that PBMs wield outsized power and influence over drug access and pricing. The interim report makes the following specific points, supported by documents and data obtained to date, as well as by publicly available information:

1. The PBM services market has become highly concentrated, and the largest PBMs are also vertically integrated with the largest health insurers and specialty and retail pharmacies.
2. The leading PBMs can exercise significant power over drug access and pricing.
3. Vertically integrated PBMs may have the ability and incentive to prefer their own affiliated businesses.
4. Increased concentration may give the leading PBMs the leverage to enter into complex and opaque contractual relationships.
5. PBMs and brand drug manufacturers sometimes negotiate rebates that are conditioned on limiting access to potentially lower cost generics.

KMK Comment: Pushback from the nation’s leading PBMs in response to the FTC’s critique has been swift, and a dissenting statement was also released by FTC Commissioner Melissa Holyoak, who stated that the report “leaves us without a better understanding of the competition concerns surrounding PBMs or how consumers are impacted by PBM practices[.]” Notwithstanding whether the FTC report offers an airtight analysis of PBM practices and resulting impact on drug pricing and access, it sheds light on the importance of understanding the role that PBMs play in drug pricing and access, which is of primary interest to health plans and participants.