A big win for PBMs (and self-funded health plans) in Oklahoma appeals court ruling

Legal analysists are calling a recent court ruling a win for pharmacy benefit managers (PBMs) and self-funded health insurance plans, with an appeals court ruling that PBM structures such as requiring the use of mail-order pharmacies cannot be restricted by state law.

The case, Pharmaceutical Care Management Association (PCMA) v. Mulready, centered on Employee Retirement Income Security Act of 1974 (ERISA) and its preemption of state laws. ERISA allows the federal government to set uniform standards for retirement and health plans in the country, avoiding a patchwork quilt of health care regulations.

However, there is debate on how much ERISA covers in the complex field of health care regulation, and states have been fighting to impose some regulations in areas where innovations have taken place, such as the partnerships between self-funded plans and PBMs. In an earlier ruling, the U.S. District Court for the Western District of Oklahoma had ruled that the challenged provisions of Oklahoma’s 2019 Patient’s Right to Pharmacy Choice Act were not preempted by ERISA.

As the law’s name suggests, the Oklahoma statute was aimed at providing more options for consumers, especially those in rural areas, who might prefer bricks-and-mortar pharmacies to mail-order services. In the challenge, the PCMA sought to overturn limitations on the use of mail-order pharmacies, allow “any willing pharmacy” to participate in a preferred network, prohibit cost-sharing discounts, and restrict the ability of PBMs to deny or limit contracts with pharmacists who are on probation with the state board.

On Aug. 15, the U.S. Court of Appeals for the Tenth Circuit overruled the lower court decision, saying that the new law fell into ERISA territory. The finding said the law effectively abolishes cost-containment strategies used by PBMs, “and oblige PBMs to embrace every pharmacy into the fold.”

“After these three provisions have run their course, PBMs are left with a cramped capacity to craft customized pharmacy networks for plans,” the ruling said. “As we see it, all PBMs could offer Oklahoma ERISA plans is a single-tiered network with uniform copayments, unrestricted specialty-drug access, and complete patient freedom to choose a brick-and-mortar pharmacy. These network restrictions are quintessential state laws that mandate benefit structures.”

Reaction to the ruling

There are questions on what the new ruling will mean for consumers, but various pharmacy associations were quick to criticize the ruling. “The Tenth Circuit decision is inconsistent with what other federal courts have decided, and it departs from the Supreme Court’s unanimous Rutledge decision, which clearly held that PBMs can’t hide behind ERISA. It must be overturned,” said B. Douglas Hoey, CEO of the National Community Pharmacists Association.

The president of the Oklahoma Pharmacists Association, which supported the new law, said his group hoped the ruling would be overturned by the U.S. Supreme Court. “This decision is a departure from other decisions made in federal court, as well as the unanimous decision of the Supreme Court in the Rutledge decision,” he said. “We are currently reviewing all options available to the state of Oklahoma on this matter and will not stop advocating for the citizens of the great state of Oklahoma to make their own decisions as to where and who they choose to provide their medication needs.”

Other employee benefits experts supported the ruling. Douglas Dahl, the chair of the employee benefits practice group at Bass, Berry & Sims, a legal firm based in Nashville, said the ruling would help protect self-insured businesses trying to hold down pharmacy costs. “The PBM law at issue in the 10th Circuit Case would almost certainly have increased the cost to employers of providing pharmacy benefits in the state of Oklahoma.  So, this decision essentially keeps in place the status quo for most of the existing cost-savings structures (such as affiliated pharmacies, mail order pharmacies, etc.) for employers that are governed by 10th circuit law,” he said.

Related: Bringing down drug prices: States target PBMs

He also noted that the ruling could help small businesses, which have increasingly turned to self-insured arrangements to reduce costs. He noted that such employers might have fewer options if PBMs were discouraged from offering plans in certain markets by laws such as the one in Oklahoma.

“It’s a win for both PBMs and employers that operate self-funded plans.  The patchwork of state pharmacy laws was already forcing employers with operations in multiple states to weigh compliance with the various differing laws against a uniform plan design across their entire populations and significant pharmacy cost increases,” he said, adding that employers and PBMs were likely to continue to innovate on cost-cutting ideas. “This decision will not stop employers from exploring other ways to keep RX costs at a manageable level, even if that means alternative arrangements that don’t look exactly like the common PBM arrangements that exist now,” he said.