The Impact of PCMA v. Mulready Decision on Independent Pharmacies
The Tenth Circuit Court of Appeals delivered a disappointing result for both independent pharmacies and state-level efforts to tackle abusive practices by Pharmacy Benefit Managers (PBMs), including efforts to prevent patient “steering.” On August 15, 2023, a three-judge panel of the Tenth Circuit held that the Employee Retirement Income Security Act of 1974 (ERISA) and Medicare Part D preempted certain provisions in Oklahoma’s Patient’s Right to Pharmacy Choice Act. If upheld, the Tenth Circuit’s decision could have devastating effects on independent pharmacies in Oklahoma and elsewhere. PBMs routinely steer patients away from independent pharmacies through, among other abusive tactics, limiting pharmacy participation and forcing patients (directly or indirectly) to fill their prescriptions at PBM-owned or affiliated pharmacies. Patient steering can adversely affect independent pharmacies by forcing them to turn away long-time patients and, in extreme cases, close their doors permanently. Left intact, the Mulready decision threatens the ability for states to regulate anti-competitive behavior of PBMs.
Background
In the absence of federal regulation of PBMs, many states have acted to protect independent pharmacies within their state by passing legislation of their own. In line with this objective, on May 21, 2019, Oklahoma Governor Kevin Stitt signed Oklahoma’s Patient’s Right to Pharmacy Choice Act (“the Act”) into law. The principal purpose of the Act is to promote patient access to providers and prohibit PBMs from curtailing a patient’s right to seek care from the provider of their choosing. One week prior to the Act taking effect, The Pharmaceutical Care Management Association (PCMA), an organization representing PBMs, sought to invalidate four key provisions in the Act on ERISA and Part D preemption grounds. The Tenth Circuit describes those provisions as follows:
- The Access Standards: For the purpose of promoting patient access to providers, the Act imposes retail pharmacy network access requirements. The Act helps to achieve this goal by requiring that a certain percentage of covered individuals (ranging from 70% to 90% depending on the geographic region) are within a certain mile-radius of a retail pharmacy. For example, PBMs must ensure that at least 90% of Covered Individuals residing in urban areas live within two (2) mile radius of a participating retail pharmacy.
- The Discount Prohibition: This provision prohibits PBMs from limiting a patient’s right to seek care from retail or mail-order pharmacies participating in the PBMs network. This prohibition extends to incentives or cost-sharing reductions to entice patients to use one pharmacy (often a PBM-affiliated pharmacy) and not the other (often an independent pharmacy).
- The AWP Provision: This provision prohibits PBMs from denying pharmacies the opportunity to participate in networks as preferred pharmacies so long as those pharmacies are willing and able to meet the terms and conditions of participation.
- The Probation Provision: This provision prohibits PBMs from denying, limiting or terminating a pharmacy’s contract based on the employment status of any employee who has an active license to dispense, despite that employee being placed on “probation” by the State Board of Pharmacy.
Oklahoma passed these provisions with the goal of ensuring parity among and between pharmacy providers, as PBM-affiliated pharmacies are often given an anticompetitive advantage over independents by virtue of their vertical integration with PBMs and Plans. Although recent Supreme Court precedent has indicated that states may have more latitude to pass such laws, ERISA can still pose a challenge to state efforts at PBM regulation.
Understanding ERISA Preemption
The purpose of ERISA is to provide a “uniform body of benefits law” for fully insured or self-insured employee benefit plans. To help those plans avoid conflicting regulatory obligations, ERISA preempts any state law that relates to an ERISA plan. For ERISA preemption to apply, the principal question is whether an “impermissible connection” or a “reference to” an ERISA plan is present. The Tenth Circuit concluded that each provision listed above had an “impermissible connection” with ERISA and was therefore preempted.
The Tenth Circuit characterized the Access Standards, Discount Prohibition and AWP as “Network Restrictions” and determined that each provision had an “impermissible connection” with ERISA plans. In particular, the Tenth Circuit concluded that the Access Standards dictate which pharmacies must be included in a PBMs network; the AWP requires that any willing pharmacy be included in preferred networks; and the Discount Prohibition requires that cost-sharing and copayments be the same for all network pharmacies. In the court’s view, the Network Restrictions “direct[] or forbid[] an element of plan structure or benefit design” and for that reason are preempted.
The court reasoned that without the Network Restrictions, PBMs could use mail-order pharmacies to serve rural Oklahomans and reduce plan costs. In addition, PBMs could reduce expenses by creating limited preferred networks. The Court concluded without reference to the record that requiring PBMs to add more pharmacies in its network increases costs to plans and hinders plans from structuring their benefits as they choose.
The Tenth Circuit attempted to distinguish its decision from Rutledge v. PCMA, where the Supreme Court held that an Arkansas’ law requiring PBMs to reimburse pharmacies based on the pharmacies’ acquisition costs was not preempted by ERISA. There, the Tenth Circuit explained, the law merely regulated costs without forcing plans to adopt any particular scheme of substantive coverage. Here, however, the court concluded—again, without citation to record evidence—that Oklahoma’s law impermissibly goes beyond the Rutledge standard by impeding PBMs from offering preferred pharmacies, mail-order pharmacies, and specialty pharmacies. This conclusion is belied by the fact that the law does not prevent plans from creating preferred networks and reimbursing participating pharmacies at any price they choose; it merely prevents them from offering network access, on the same terms, to some pharmacies but not others. The court also invalidated the Probation Prohibition on the theory that it forced plans to include pharmacies in networks the plans would not otherwise include.
Particularly noteworthy was the court’s refusal to consider an argument under the ERISA “savings clause” based solely on procedural concerns. Indeed, the court did not address the merits of this argument at all, even though the United States made a compelling argument under this clause in its amicus brief. Had the court considered this argument, it could have changed the outcome of the case.
Unraveling Medicare Part D Preemption
The court also held that, to the extent the law sought to regulate plans under Medicare Part D, the law was fully preempted. More surprising, however, was the fact that the court went beyond any other court that previously addressed this question to find that the broad “field preemption,” rather than the narrower “conflict preemption” applies to states under the Medicare statute. If upheld, this could mean that states may not regulate Part D plans under any circumstances, regardless of whether the regulation conflicts with the Part D law.
Practical Implications
The court’s decision has the potential to stifle state efforts to regulate PBMs. More critically, it could embolden PBMs to employ patient steering in Oklahoma by excluding pharmacies from network participation and forcing patients to fill their medications at PBM-owned or affiliated pharmacies.
The Tenth Circuit’s decision has also caused a split among circuits regarding the application of ERISA and Part D to state laws that target PBM conduct. The possibility of Oklahoma appealing this decision to the Supreme Court remains uncertain. However, given the circuit split, the Supreme Court may be inclined to grant certiorari to resolve this issue definitively.
Frier Levitt Can Help
Frier Levitt’s attorneys have years of experience advocating for independent pharmacies and pharmacy associations, including filing amicus briefs on their behalf. The firm also leverages existing state laws to protect independent pharmacies from abusive PBM practices. Contact Frier Levitt to learn more.
