The Supreme Court has not prescribed a standard for determining whether a state law sufficiently constrains an EBP’s decision-making in an area of ERISA concern that the law is pre-empted, but it has indicated a law that “bind[s] plan administrators to any particular choice” is pre-empted. Travelers, 514 U.S. at 659. We need go no further: Sections 48-832.01(a), (b)(1), and (d) bind plan administrators because the “choice” they leave an EBP between self administration and third-party administration of pharmaceutical benefits is in reality no choice at all.

For most if not all EBPs, internal administration of beneficiaries’ pharmaceutical benefits is a practical impossibility because it would mean forgoing the economies of scale, purchasing leverage, and network of pharmacies only a PBM can offer.  By imposing requirements upon third-party service providers that administer pharmaceutical benefits for an EBP, §§ 48-832.01(a), (b)(1), and (d) “function as a regulation of an ERISA plan itself.” Travelers, 514 U.S. at 659. Because these provisions also regulate an area of ERISA concern, they are pre-empted.

Pharm. Care Mgmt. Ass’n v. District of Columbia, 2010 U.S. App. LEXIS 13991 (D.C. Cir. July 9, 2010)

The decision by the D.C. Circuit in PCMA v. D.C. touches on issues that at first glance appear somewhat remote in the average benefits practice, but I think readers will find some useful analysis in the opinion.

On the big picture, the Court of Appeals found that a substantial part of the District’s  law regulating pharmacy benefit mangers (Access Rx Act of 2004, D.C. Code § 48-832.01 et seq.) was preempted.   Some contractual provisions that could be waived by benefit plans survived the preemption challenge.   Additional argument remains for consideration on remand, so the case will likely be around for a while yet.

On a decidedly less rarefied level, we find development of some recurring themes that arise in everyday concerns about which claims are preempted and why.    Of course, in the PCMA case, the key theme was state law preemption.

A state law “relates to” an EBP “if it [1] has a connection with or [2] reference to such a plan.” Egelhoff v. Egelhoff, 532 U.S. 141, 147, 121 S. Ct. 1322, 149 L. Ed. 2d 264 (2001) (quoting Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 97, 103 S. Ct. 2890, 77 L. Ed. 2d 490 (1983)).

The PCMA argued that Title II of the law intruded on plan administration.   As such, the law would be preempted if it had an impermissible effect upon employee benefit plans.   Bypassing the discussion of these legally freighted terms, I think the District’s defense of the statute is really more interesting for my purposes.

The District found itself inconveniently stuck with the fact that its law regulating PBM’s impinged plan benefit administration.  (The law imposes fiduciary responsibilities, disclosure of rebates and pass through of discounts, among other things.)

This point had to be admitted.

The District does not deny the administration of employee benefits is an area of core ERISA concern or that PBMs administer benefits on behalf of EBPs; indeed at oral argument  it conceded as much.

The District sought refuge in case law suggesting that garden variety breach of contract of malpractice claims are not preempted:

Rather, the District argues the various provisions of Title II nonetheless fall within the scope of state law the Congress did not intend to pre-empt with ERISA because they do not regulate “relationships among ERISA entities,” such as a plan and an ERISA fiduciary or a plan and its beneficiaries.

The District points to no support for this limitation upon pre-emption either in ERISA itself or in any Supreme Court case interpreting it. Instead, the District relies upon decisions of other circuits holding ERISA did not pre-empt breach of contract or professional malpractice claims against third-parties who provided services to an EBP.

This argument failed, as the preceding excerpt would suggest.

The Court says that the District read too much into the cases it relied upon.   A law affecting the  ”relationships among ERISA entities,” such as a plan and an ERISA fiduciary or a plan and its beneficiaries is a concern – but that is not a touchstone for preemption.

As the PCMA points out, in none of the cases cited by the District did the state law regulate a third party who administered employee benefits on behalf of a plan. Those cases therefore suggest only that the relationship among ERISA entities is an area of ERISA concern, not that the objective of uniformity in plan administration is for some reason inapplicable simply because a plan has contracted with a third party to provide administrative services.

Given the restrictions the law would impose on plan administrators in their dealings with PBM’s, the Court found an impermissible effect on ERISA plan administration and held Title II preempted.

Note: The non-preempted state law claims relied upon by analogy in the opinion are quite important for benefit practitioners in the prosecution or defense of negligence and contractual cases against plan administrators and other service providers.

A case by a participant against a service provider has at least two strikes against it – #1 the traditional ERISA entities are involved – and #2 the case will likely consist of complaints about administration issues.    Here the Court’s observation distinguishing the cited authorities is of interest:

Indeed, dicta in two cases central to the District’s argument   suggest a state law regulating a third party’s performance of administrative functions on behalf of a plan could be pre-empted. See Gerosa v. Savasta & Co., 329 F.3d 317, 324 (2d Cir. 2003) (noting that although courts are “reluctant to find that Congress intended to preempt state laws that do not affect the relationships among [ERISA entities]” they have “typically” held ERISA pre-empts “state laws that would tend to control or supersede central ERISA functions–such as state laws affecting the determination of eligibility for benefits, amounts of benefits, or means of securing unpaid benefits”); Airparts Co. v. Custom Benefit Servs. of Austin, 28 F.3d 1062, 1066 (10th Cir. 1994) (holding claims for negligence, indemnity, and common-law fraud not pre-empted where defendant “was simply an outside consultant which did not directly perform any administrative act vis-a-vis the plan”).

Furthermore, when actually confronted with a malpractice claim challenging a third party’s performance of administrative services on behalf of a plan, the Third Circuit held the claim was pre-empted by ERISA. See Kollman v. Hewitt Assocs., 487 F.3d 139, 148 (2007) (holding ERISA pre-empts malpractice claim  against non-fiduciary service provider responsible for plan administration; goal of uniformity reflected in ERISA is “equally applicable to agents of employers … who undertake and perform administrative duties for and on behalf of ERISA plans”).

Note, however,  that the plaintiff in Kollman was a plan participant. (#1 above)  Compare: Custer v. Sweeney, 89 F.3d 1156, 1167 (4th Cir. 1996) (trustee’s state law legal malpractice claim against an ERISA plan’s attorney not subject to ERISA preemption), where trustee was plaintiff.

What Is Plan Administration? From the opinion:

Plan administration includes “determining the eligibility of claimants, calculating benefit levels, making disbursements, monitoring the availability of funds for benefit payments, and keeping  appropriate records in order to comply with applicable reporting requirements.” Fort Halifax, 482 U.S. at 9.

Voluntary Provisions Prevail – It was not all downside for the District:

The District’s point is well-taken with regard to the usage pass back provision, § 48-832.01(b)(2), because it expressly provides that it “does not prohibit the covered entity from agreeing by contract to compensate the [PBM] by returning a portion of the benefit or payment,” and with regard to § 48-832.01(c), which requires disclosure (and imposes a corresponding duty of confidentiality) only “[u]pon request by a covered entity.” Those provisions are in essence voluntary provisions for the covered entity.

Circuit Conflict – As the Court observed:

This holding differs from that of the First Circuit in Rowe, which held no part of a nearly identical Maine statute was pre-empted by ERISA. See 429 F.3d at 303. In our view the uniform administrative scheme encouraged by ERISA includes  plan administrative functions performed by a third party on behalf of an EBP.