Oklahoma can’t regulate PBMs’ pharmacy networks: federal appeals court

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An Oklahoma law aiming to regulate pharmacy benefit managers’ retail networks and pharmacist contracts is unconstitutional, the U.S. Court of Appeals for the 10th Circuit ruled.

The three-judge panel on Tuesday invalidated four provisions of an Oklahoma law targeting PBMs, third-party intermediaries that negotiate drug prices on behalf of insurers.

In April 2019, the Oklahoma legislature unanimously passed the Patient’s Right to Pharmacy Choice Act. The law sought, among other provisions, to regulate PBMs’ pharmacy networks and bar PBMs from offering discounts to consumers who shop at preferred pharmacies, declining to work with willing providers and refusing to contract with pharmacists under state disciplinary review.

The Pharmaceutical Care Management Association, a PBM trade group, sued Oklahoma Insurance Commissioner Glen Mulready (R) in federal court a week before the act was set to go into effect in October 2019, arguing the law oversteps the state’s authority and violates employers’ rights dictated under the Employee Retirement Income Security Act of 1974 and Medicare Part D provisions.

ERISA forbids states from requiring employers to structure their benefits in a particular way, while Medicare Part D offers federal guidelines for how carriers must structure Medicare prescription drug plans.

The United States, attorneys general from 34 states and the District of Columbia, the American Pharmacists Association and the National Association of Chain Drug Stores submitted amicus briefs in support of the Oklahoma law.

The 10th Circuit sided with PCMA and reversed a previous decision by the U.S. District Court for the Western District of Oklahoma. The case will now be sent back to the district court, where a judge will enter the 10th Circuit’s opinion.

“The Constitution ordains a federal system under which the federal and state governments share power,” the opinion said. “But when federal and state laws collide, the Constitution is clear: Federal law wins.”

In April 2022, the district court ruled that ERISA did not preempt the Oklahoma law’s provisions, but that Medicare Part D superseded some of the act’s requirements. PCMA appealed, and the case was sent to the 10th Circuit.

In court documents from May 2022, Oklahoma argued that PBMs are not subject to ERISA, which governs employer-sponsored health insurance.

But the 10th Circuit wrote in its Tuesday opinion that regulating PBMs was the same as regulating employers’ benefits, because it would be “practically impossible” for an ERISA plan to manage its own pharmacy benefits and achieve PBMs’ same economies of scale. More than 80% of the PBM market nationwide is controlled by CVS Health’s Caremark, Cigna Group’s Express Scripts and UnitedHealth’s OptumRx.

“Because a plan’s choice between self-administering its benefits and using a PBM is in reality no choice at all, regulating PBMs function[s] as a regulation of an ERISA plan itself,” the opinion said.

Mulready did not immediately respond to an interview request.

CVS Health may be able to recoup $4.8 million in settlement funds it paid to the state and local pharmacies in January 2022 for allegedly violating the act. CVS did not immediately respond to an interview request.

PCMA applauded the court decision.

“It is clear that ERISA and Medicare Part D are the law of the land for benefits organized under these federal programs,” Jack Linehan, PCMA general counsel, said in a news release. “Importantly, the ruling confirms the breadth of ERISA preemption, which has been the linchpin for employer- and union-sponsored benefits in America. It has allowed multi-state businesses to offer affordable, uniform and equitable health coverage–including prescription drugs–for their beneficiaries, regardless of where they live.” 

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