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The ERISA Edit: Tenth Circuit Hears Argument on PBM Preemption

Employee Benefits Alert

The Tenth Circuit Appears Poised to Hold That ERISA Preempts Oklahoma's PBM Law

Earlier this week, a three-judge panel of the U.S. Court of Appeals for the Tenth Circuit heard argument in PCMA v. Mulready, No. 22-6074 (argument May 16, 2023, 10th Cir.) (previously covered here), an appeal by the Pharmaceutical Care Management Association (PCMA) in its effort to prevent enforcement of Oklahoma's Patient's Right to Pharmacy Choice Act (the Act). PCMA sued the Oklahoma Insurance Department, seeking a declaration that the Act is preempted by ERISA because, according to PCMA, the Act dictates plan design and interferes with central matters of plan administration by restricting ERISA plans from structuring their pharmacy networks in a particular manner. In particular, PCMA challenged the four provisions of the Act that: 

  • Limit use of mail-order pharmacies
  • Require pharmacy benefit managers (PBMs) to permit "any willing pharmacy" to participate in the PBM's preferred network
  • Prohibit cost-sharing discounts
  • Restrict the ability of PBMs to deny or limit pharmacy contracts when a pharmacist is on probation with the state pharmacy board

On cross-motions for summary judgment, the U.S. District Court for the Western District of Oklahoma granted judgment in favor of Oklahoma, holding that the challenged provisions of the Act were not preempted by ERISA.

At oral argument, the Tenth Circuit seemed unconvinced by the state's arguments. Counsel for Oklahoma focused on the Supreme Court's decision in Rutledge v. PCMA, 141 S. Ct. 474 (2020), which held that ERISA does not preempt state laws regulating a PBM's drug reimbursement rates to pharmacies. The Tenth Circuit panel, however, questioned whether Rutledge had any application here, given that, as the judges seemed to suggest, the Act extended past rate-setting and would almost certainly impact plan design and administration. The U.S., which appeared as amicus curiae, agreed with PCMA that three of the challenged provisions were preempted, but maintained that the fourth – the probation prohibition – was not central enough to plan administration to trigger preemption. The panel seemed dubious of this position as well. The panel also engaged with all counsel on the question of whether Oklahoma waived any argument it might have on the application of ERISA's insurance "savings clause" (which saves from preemption state laws that regulate the business of insurance) and ERISA's "deemer clause" (which bars the states from "deeming" an employee benefit plan to be engaged in the business of insurance). One was left with the impression that Oklahoma faces a high hurdle to persuade the judges that its mere mention of the savings and deemer clauses in footnotes in its briefs was sufficient to avoid a waiver.

We'll be sure to revisit the case in the coming months, when the Tenth Circuit issues its decision. Miller & Chevalier submitted an amicus brief in the Tenth Circuit in support of PCMA and ERISA preemption on behalf of the Association of Federal Health Organizations.

DOL Warns Plans Proposed UBS QPAM Exemption May Be Short-Lived 

On May 11, 2023, the U.S. Department of Labor (DOL) published a fast-tracked proposed individual exemption involving UBS AG (UBS) and Credit Suisse Group AG (CSAG). The proposed exemption would provide temporary relief under Prohibited Transaction Class Exemption (PTE) 84-14 for one year following the upcoming merger between the two companies, which is expected to take place at the end of May 2023. The proposal, developed by DOL "primarily on its own motion" after learning of the merger from news reports in March 2023, sets forth new exemption conditions and specifies information that UBS, as the entity surviving the merger, must submit to DOL regarding the merger and the identity and structure of the surviving qualified professional asset managers (QPAMs). The proposal states that UBS and CSAG were unable to provide the QPAM information to DOL with their April 17, 2023 request to modify prior individual exemptions that enabled both companies to continue to use PTE 84-14 despite multiple criminal convictions of both entities and their affiliates. DOL determined that those prior exemptions, issued to minimize disruption to plans and plan participants following the convictions, could not be relied upon following the merger. 

Employers and plan fiduciaries should take note that in the proposal, DOL issued a "Department Warning" to plan fiduciaries using UBS or CSAG-affiliated QPAMs and "strongly cautioned" them that "the Department might not extend this one-year exemption following its expiration due to the significant number of convictions and the seriousness of the underlying conduct of the tainted entities that will now reside together within the UBS corporate umbrella following the Merger." According to DOL, the proposed one-year exemption was designed to permit plans to terminate their relationships with the affiliated QPAMs in an orderly and cost-effective fashion in the event of an additional conviction, which would immediately terminate the exemption, or "a determination by a plan that it is otherwise prudent to do so." Absent the exemption, plans and plan fiduciaries are exposed to potential liability under the prohibited transaction provisions of ERISA Sections 406(a) and (b) and IRS Code Section 4975(c)(1), which prohibit, in relevant part, sales, leases, loans, or the provision of services between a party in interest and a plan (or an entity whose assets are deemed to constitute the assets of a plan), the use of plan assets by or for the benefit of, or a transfer of plan assets to, a party in interest and self-dealing. Comments on the proposal are due May 18, 2023.

DOL Dismisses Investment Advice Fiduciary Appeal

On May 16, 2023, DOL and the American Securities Association filed a joint stipulation voluntarily dismissing DOL's appeal of an unfavorable district court decision that struck down its latest iteration of what is means to be an ERISA investment advice fiduciary (previously covered here). DOL has signaled it is deep into drafting another proposed regulation on this topic, which we expect to see published soon. That proposal will undergo notice and comment before it is finalized, likely early next year. In the meantime, the 1975 five-part regulatory test and PTE 2020-02 remain in effect, as does DOL's interpretive guidance in its April 2021 Frequently Asked Questions (FAQ) relating to documentation requirements when using the exemption. 

Last But Not Least: Fifth Circuit Issues Stay of Braidwood Decision

Although the district court took a pass on staying its rulings in Braidwood Mgmt. Inc. v. Becerra (covered here) while the parties pursue their appeals, the Fifth Circuit stepped in on May 15, 2023, and granted the government's request for a stay of that decision that upended nationwide the Affordable Care Act's (ACA) preventive services mandate. As a result of the stay, the district court's decision has no effect unless and until the Fifth Circuit issues another order lifting the stay. For now, ERISA plans must cover without cost-sharing the preventive services designated by the U.S. Preventive Services Task Force (PSTF). 

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