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The ERISA Edit: Supreme Court Asked to Address Circuit Split on Preemption of State PBM Laws

Employee Benefits Alert

Oklahoma Seeks Reversal of Tenth Circuit's ERISA Preemption Ruling

On May 10, 2024, Oklahoma's insurance department asked the U.S. Supreme Court to review the Tenth Circuit's decision in PCMA v. Mulready, 78 F.4th 1183 (10th Cir. 2023), which held that parts of an Oklahoma law regulating pharmacy benefit managers (PBMs) were preempted by ERISA and by Medicare Part D. In its petition, the state says that Mulready "is irreconcilable with [the Supreme Court's] unanimous decision in Rutledge [v. Pharmaceutical Care Management Association, 592 U.S. 80 (2020)]," and that Mulready also created a "textbook" circuit split with the Eighth Circuit.

In Rutledge, the Supreme Court concluded that Arkansas's PBM law was not preempted by ERISA. In that case, the Court applied long-standing precedent that "[a] state law relates to an ERISA plan" and is preempted by ERISA "if it has a connection with or reference to such a plan." The Court held that the Arkansas law, which effectively required PBMs to reimburse Arkansas pharmacies at a price equal to or higher than the pharmacy's wholesale cost, had neither of those impermissible relationships. According to the Court, the law did not have an impermissible connection with an ERISA plan because it was a mere rate regulation that did not dictate plan choices, and it did not refer to ERISA because it did not act immediately and exclusively upon ERISA plans.

According to the state's petition in Mulready, although the Supreme Court made clear in Rutledge that "ERISA's express preemption is broad," ERISA preemption targets only those "state laws that actually regulate ERISA plans." In contrast, the state argues, "[e]fforts to regulate entities like PBMs that contract with ERISA plans along with many others… stand on very different footing" because PBMs are mere middlemen that act as intermediaries between prescription drug plans and the pharmacies that beneficiaries use.

The state says that in PCMA v. Wehbi, 18 F.4th 956 (8th Cir. 2021), the Eighth Circuit got it right when it "faithfully" applied Rutledge and upheld North Dakota's PBM law, including provisions that prohibit PBMs from conditioning a pharmacy's participation in their networks on satisfying "accreditation standards or recertification requirements…more stringent than, or in addition to[,]…state requirements for licensure." According to the Eighth Circuit, those statutory provisions did not have an impermissible connection with ERISA plans because they "merely limit the accreditation requirements that a PBM may impose on pharmacies as a condition for participation in its network" and thus constitute "regulation of a noncentral 'matter of plan administration' with de minimis economic effects." The Tenth Circuit expressly disagreed with Wehbi and held that a similar provision in Oklahoma's law, which forbids a PBM from terminating its contract with a pharmacy based on a pharmacist's active probation status, dictated "which pharmacies must be included in a plan's PBM network." According to the Tenth Circuit, such a provision implicates "a central matter of plan administration" and is therefore preempted by ERISA.

Oklahoma further argues that the Tenth Circuit's decision creates a separate circuit split with respect to Medicare Part D. The Eighth Circuit previously held that Part D preemption turns on "whether Congress or [Centers for Medicare & Medicaid Services (CMS)] has established 'standards' in the area regulated by the state law and whether the state law acts 'with respect to' those standards." Yet, in Mulready, the Tenth Circuit held that Medicare's preemption clause "is 'akin to field preemption' and precludes States from regulating Part D plans except for licensing and plan solvency." Because Oklahoma's "Any Willing Provider Provision," which requires PBMs to accept into their preferred pharmacy networks all pharmacies willing to accept the network terms and conditions, "is not a licensing law or law relating to plan solvency," the Tenth Circuit was satisfied that it did not need to identify any "specific federal-state overlap." Although this aspect of Mulready impacts only Part D plans, the state says in its petition that "the combined effect of the Tenth Circuit's ERISA and Medicare holdings is to invalidate the heart of Oklahoma's effort to address some of the worst abuses of PBMs."

The state's petition was formally docketed as Case No. 23-1213. PCMA’s deadline to file its brief in opposition (if any) is June 14, 2024.

Supreme Court Declines to Clarify When a Transaction between a Plan and a Service Provider Falls within ERISA's Prohibited Transaction Rules

In other Supreme Court news, on May 13, 2024, the Supreme Court denied a petition for a writ of certiorari that had raised the question whether initial contracts with plan service providers fall within ERISA's prohibited-transaction provisions. D.L. Markham DDS, MSD, Incorporated 401(K) Plan v. Variable Annuity Life Ins. Co., No. 23-1025, 2024 WL 2116327 (U.S. May 13, 2024). By denying the petition, the Court allowed the Fifth Circuit's decision in favor of plan administrator Variable Annuity Life Insurance Company (VALIC) to stand and  leaves in place a circuit split over the scope of the definition of a "party in interest" for purposes of the prohibited transaction rules in ERISA §§ 406 and 408.

We have followed Markham through proceedings in the district court and in the Fifth Circuit, as the case posed the significant question of when a service provider to a plan is a "party in interest" subject to prohibited transaction restrictions. In Markham, the plaintiffs alleged that VALIC, as a service provider to a dental practice's retirement plan, violated 29 ERISA § 406(a)(1)(C), which bars certain "transactions" that "constitute[] a direct or indirect furnishing of goods, services, or facilities between the plan and a party in interest" unless the transaction meets § 408(b)(2)'s exemption for "reasonable" arrangements, by charging an unreasonable surrender fee provided for in the parties' original service contract. The plaintiffs lost in the district court and the Fifth Circuit affirmed, finding that VALIC was not a party in interest when it entered into the service contract because the plan and VALIC did not have a "pre-existing relationship." Further, the Fifth Circuit found that payments pursuant to an existing service contract do not constitute "transactions" for purposes of § 406, because that term is best understood as referring "to the establishment of rights and obligations between the parties – not the payment of funds pursuant to an existing agreement."

The plaintiffs urged the Supreme Court to address when a "transaction" is covered by §§ 406 and 408 and thereby resolve the circuit split on the issue and to cure what they characterized as the "particularly problematic" approach taken by the Fifth Circuit. According to the petition, on one side of the split is the "expansive view" of the Second, Eighth, and Ninth Circuits, which holds that ERISA's "plain and unambiguous language" does not exempt initial service contracts from the definition of a "party in interest." On the other side is the "narrow view" of the Third, Fourth, Fifth, Seventh, and Tenth Circuits, which holds that there must be some pre-existing relationship between the plan and the party in interest for the prohibited transaction provisions to apply. The petition also noted a split among the "narrow view" circuits on the definition of "transaction," as the Third, Fourth, and Seventh Circuits, unlike the Fifth Circuit's opinion below, have found that a service provider may be a party in interest when it is paid fees pursuant to a service contract, even if it was not considered a party in interest when it initially entered into that contract. The petition urged the Court to overturn the Fifth Circuit's "bright line" holding that would exempt all initial service contracts, no matter how "unreasonable, long-term, disadvantageous, and otherwise contrary to ERISA's purpose." VALIC waived its right to respond to the petition.

Even though the Supreme Court declined to dive into this particular issue, two other petitions that concern a related circuit split on prohibited transaction pleading standards remain pending before the Court: Bugielski v. AT&T Servs., Inc. (No. 23-1094) and Cunningham v. Cornell University (No. 23-1007). Those petitions leave open the possibility that the Court may yet address the scope of ERISA §§ 406 and 408 in the coming term.

Aetna Faces Another Plan Sponsor Lawsuit Over Claims Processing, Fees, and Claims Data

On May 10, 2024, W.W. Grainger, Inc. and three of its self-funded group health plans covering more than 20,000 employees and their family members (collectively, Grainger) filed a lawsuit against Aetna Life Insurance Company (Aetna), the plans' third-party administrator (TPA), alleging an assortment of ERISA violations relating to Aetna's claims processing and other TPA services. W.W. Grainger v. Aetna Life Ins. Co., No. 24-cv-352 (E.D. Tex. May 10, 2024). This lawsuit adds to the growing number of cases where health plan sponsors, facing their own risk of ERISA litigation targeting their interactions with plan service providers, are suing their health plan TPAs seeking to recover amounts allegedly paid in error to providers or to the TPAs themselves as undisclosed fees and claiming the TPAs' failures to adhere to contract terms with plans constitute ERISA violations. 

In its complaint, Grainger alleges that it entered into a service agreement with Aetna in 2019 that rendered Aetna a plan fiduciary responsible for processing and reviewing claims for health benefits, including determining eligibility for benefits, approval and payment of claims, recovery of overpayments, fraud detection and remediation, and subrogation and reimbursement, among other things. It asserts fiduciary breaches and prohibited transactions under ERISA based on allegations that Aetna caused Grainger to pay thousands of improper, false, or fraudulent claims and that Aetna paid providers less than the amounts the plans paid to Aetna for the involved claims and retained the difference. The complaint further asserts that Aetna engaged in the payment practice of cross-plan offsetting that benefited Aetna to the detriment of the plans, in breach of Aetna's fiduciary obligations. It also faults Aetna for not turning over transaction data sets for the medical claims it processed for Grainger and for employing less rigorous fraud detection standards to the self-funded plan claims it administers, like those arising from the Grainger plans, compared to the standards it uses when adjudicating claims for its own insured plans.

The plaintiffs seek to recover losses resulting from the Aetna's alleged fiduciary breaches and prohibited transactions, disgorgement of profits Aetna made through the alleged misconduct, as well as a preliminary injunction compelling Aetna to provide claims data. While the complaint asserts that Grainger and Aetna have their principal places of business in Illinois and Connecticut, respectively, the lawsuit was filed in the Eastern District of Texas, where Grainger contends Aetna can be sued given its contacts with and business dealings in Texas. Notably, the same district court recently ruled against Aetna in a similar case in which Aramark Services, Inc., alleged fiduciary breaches related to Aetna's TPA services. In that case, Aetna moved to stay the proceedings, arguing that Aramark's claims were subject to mandatory arbitration. The district court disagreed and held that Aramark's ERISA claims seeking equitable relief were not subject to the arbitration provision in the parties' master services agreement. Aramark Services, Inc. v. Aetna Life Ins. Co., No. 2:23-cv-446 (April 26, 2024, E.D. Tex).

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