:: PBM’s Prevail In Controversy Over ERISA Preemption Of Disclosure Legislation

In light of the First Circuit’s ruling addressing identical issues pertaining to an almost identical statute, this court determined that Rowe precluded the plaintiff from litigating the validity of the Act, noting that the two cases “are closely aligned in time and subject manner.”

On appeal, the Circuit disagreed, explaining that applying collateral estoppel would “freeze the development of the law in an area of substantial public interest.”  The Circuit also noted that practical considerations counsel against the application of collateral estoppel because eight months after this court issued its decision on collateral estoppel, the Department of Labor (”DOL”) proposed a rule implementing ERISA that would require PBMs to “disclose certain financial information to the plans they serve.”

Observing that this proposed rule would require PBMs to disclose information similar to that required under the Act, the Circuit opined that it “may change the legal analysis regarding ERISA preemption,” “particularly if the proposed rule is promulgated.” Id.

Pharm. Care Mgmt. Ass’n v. D.C., 2009 U.S. Dist. LEXIS 22075 (D.D.C. Mar. 19, 2009) (internal citations omitted)

The PBM industry won a significant victory in PCMA v. D.C. which, if sustained on appeal, may serve as a vehicle for Supreme Court review of ERISA’s preemptive limits on PBM disclosure legislation.

A bit of history is necessary to set the stage for review of the opinion.

The D.C. Council passed Access Rx Act which took effect on May 18, 2004. Title II of the Act imposied fiduciary duties on PBM’s and required disclosure of financial information.

For example, under the Act, PBMs must:

  • disclose to their customers “information showing the quantity of drugs purchased by the covered entity and the net cost to the covered entity for the drugs
  • disclose all rebates, discounts and other similar payments.
  •  disclose to covered entities “all financial terms and arrangements for remuneration of any kind that apply between the [PBM] and prescription drug manufacturer or labeler, including, without limitation, formulary management and drug substitution programs, educational support, claims processing and data sales fees.” Id. § 48-832.01(c)(1)(B).
  •  disclose costs of generic drugs and any benefit or payment directly or indirectly accruing to the [PBM] as a result of substitution.

The PBM industry challenged the Act as preempted by ERISA.  Having previously held the issue foreclosed by the First Circuit’s opinion  (PCMA v. Rowe, 429 F.3d 294 (1 st Cir. 2005)) upholding a near identical regulatory provision, the district court approached the issue once again after being chastened by the Circuit Court of Appeals. PCMA v. District of Columbia, 380 U.S. App. D.C. 418, 522 F.3d 443 (D.C. Cir. 2008).

On the merits, the district court concluded that the Act impermissibly interfered with plan administration.  The arguments shaped up along these lines:

Against Preemption – The defendants asserted that the Act “does not have an impermissible connection with ERISA-covered employee benefit plans, because it does not bind plan administrators to [a] particular choice and thus function as a regulation of an ERISA plan itself, nor does it preclude uniform administrative practice or the provision of uniform interstate benefit package . . . .”

For Preemption – The plaintiff argued that because “PBMs administer prescription drug benefit plans for their customers, [the Act], which imposes mandates on PBM administration of drug benefit plans, falls squarely within the zone of preemption.”

The court agreed with the PBM’s, concluding that:

 By managing the relationship between an ERISA plan and a third-party service provider instrumental to the administration of the plan, 8 the defendants, through the Act, improperly inject state regulation into an area exclusively controlled by ERISA.

Note:  The winning argument, not considered by the First Circuit, was that the nature of PBM services qualified as ERISA administration.  A recent DOL proposed regulation constituted a key factor influencing the court’s decision that such service are a part of ERISA plan administration.

Proposed Rule – The Department of Labor (”DOL”) proposed a rule implementing ERISA that would require PBMs to “disclose certain financial information to the plans they serve.” Id. (citing Reasonable Contract or Arrangement Under  § 408(b)(2)–Fee Disclosure, 72 Fed. Reg. 70,988 (Dec. 13, 2007)).

The Preemption Provisions – ERISA’s preemption provisions contain a savings clause that permits state regulation of the business of insurance.  We saw the savings clause in operation in the recent decision upholding the Michigan prohibition on discretionary clauses in insured disability plans. 

Congress also specifically reacted to the MEWA problem by relaxing the preemption provisions as they pertain to those entities.   Perhaps a better solution than the proposed rule would be an extention of the savings clause to the state regulation of PBM’s