A recent federal court decision has the potential to tip the balance in an ongoing series of skirmishes over state regulation of pharmacy benefit managers (PBMs).
In McKee Foods Corp. v. BFP Inc. d/b/a/ Thrifty Med Plus Pharmacy, the US District Court for the Eastern District of Tennessee declared that an “any willing pharmacy” requirement in Tennessee was preempted by the federal Employee Retirement Income Security Act of 1974 (ERISA), as amended. On one side, self-funded group health plans argue that ERISA allows them to comply with a single set of rules nationwide, rather than having to navigate a patchwork of different, overlapping, and sometimes conflicting state laws. On the other side are the states, which have a legitimate interest in ensuring prescription drug reimbursements are fair and reasonable and their citizens are protected from fraudulent, abusive, or misleading PBM practices. However, states have routinely misread a 2020 Supreme Court decision, Rutledge v. Pharmaceutical Care Management Association, to support extensive interference with the design and operation of employer-sponsored group health plans in a manner that may be preempted by ERISA.
In Depth
Enacted in 1974, ERISA made the regulation of employee benefit plans principally a matter of federal concern. The law broadly and generally preempts – or renders inoperative – state laws that “relate to” employee benefit plans. According to the Supreme Court’s Rutledge decision, ERISA preempts “any and all State laws insofar as they may now or hereafter relate to any employee benefit plan covered by ERISA.” To “relate to” an ERISA plan, a law must either have a “connection with” or “reference to” such a plan.
- “Connection with” preemption arises when either a law requires providers to structure benefit plans in particular ways, or acute (albeit indirect) economic effects of the state law force an ERISA plan to adopt a certain scheme of substantive coverage.
- “Reference to” preemption arises in a different set of circumstances, namely where a state’s law acts immediately and exclusively upon ERISA plans or where the existence of ERISA plans is essential to the law’s operation.
Citing Kentucky Association of Health Plans, Inc. v. Nichols, the McKee court held that Tennessee’s “any willing pharmacy” law had an impermissible connection with ERISA plans and was therefore preempted. In so holding, the court rejected the state of Tennessee’s reliance on Rutledge. Critically, Rutledge involved a form of cost regulation, not plan structure. By contrast, pharmacy networks – at issue in McKee – are plan structures.
McKee is consistent with the Tenth Circuit Court of Appeals decision in PCMA v. Mulready (now pending before the Supreme Court), which invalided an Oklahoma law compelling PBMs to comply with certain pharmacy network standards. The Tenth Circuit held that ERISA superseded the Oklahoma law because it generally compelled ERISA plans to structure benefits in certain ways. In reaching its decision, the Mulready court reviewed, summarized, and applied more than 20 years of Supreme Court jurisprudence, which can be summed up as follows: States have wide berth to regulate PBM pharmacy reimbursement rates and acquisition costs, but they may not interfere with plan operation and administration, including the design and structure of pharmacy networks.
Currently, fiduciaries and plan sponsors of self-funded group health plans with multistate operations are confronted with myriad conflicting and burdensome state PBM laws, as well as increased private plaintiff activity. Texas, Florida, and Arkansas are posing particular challenges at the moment; other states will likely follow. While MeKee is encouraging, it is of little help in the short run. To break the logjam, action is required, either by the Supreme Court or Congress.