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Drug Middlemen Shift Arguments to Escape Liability, State Laws

Dec. 9, 2020, 8:22 PM

Courts have been letting powerful pharmacy drug middlemen use federal protections for employee benefit plans as both a sword and a shield.

Pharmacy benefit managers, which administer drug benefit programs in employee health plans, have won cases in recent months by using the Employee Retirement Income Security Act (ERISA) to wipe out state regulations and escape liability for plan losses. PBMs have been enjoying the benefits of the law without paying the costs, attorneys say.

OptumRx, a subsidiary of UnitedHealth Group; CVS Caremark, a subsidiary of CVS Health; and Express Scripts, a subsidiary of Cigna Corp., are the three largest PBM companies in the marketplace.

So far PBMs have successfully been able to use the good parts of ERISA for their benefit while not having to take on what would be considered its bad parts like taking on the fiduciary duties ERISA requires, said Michael Graham, counsel in Willkie Farr & Gallagher LLP’s Chicago office.

“That’s a pretty high-wire act to play,” he said.

The recent wins make it harder for states to rein in prescription drug costs and bring more transparency to the price-setting process. They’ve also weakened the protections ERISA put in place to prevent beneficiaries from having to pay inflated drug prices. ERISA requires fiduciaries—those who manage a plan or its assets—to act in the best interest of the plan and its participants to prevent plan assets from being mismanaged and abused.

ERISA Shield

Express Scripts, which supplies PBM services to Anthem, fended off a potential class action this week that accused the companies of working together to inflate prescription drug prices. Express Scripts argued it didn’t act as an ERISA fiduciary when it negotiated with Anthem to be the exclusive provider of PBM services for the company or when it adhered to the terms of that agreement.

The U.S. Court of Appeals for the Second Circuit agreed. In a summary order Dec. 7, the court said a PBM is’n’t exercising discretionary authority and therefore not acting as an ERISA fiduciary when it sets prices for prescription drugs under the terms of a contract.

Meanwhile, the Pharmaceutical Care Management Association (PCMA), the trade group for PBMs, has been using ERISA to take down state regulations meant to rein in their reimbursement practices.

The association won a fight against an Arkansas law in the U.S. Court of Appeals for the Eighth Circuit by arguing the law is preempted by ERISA because it directly regulates the administration of prescription-drug benefits.

ERISA prohibits states from passing laws that reference an ERISA plan or have an impermissible connection to an ERISA plan.

The Arkansas law “‘relates to’ ERISA plans, and is preempted, because it regulates central matters of plan administration, interferes with nationally uniform plan administration, and impermissibly refers to ERISA plans,” PCMA argued in a brief to the U.S. Supreme Court. “In doing so, it contravenes ERISA’s fundamental purpose of minimizing administrative costs to encourage the formation of benefit plans.”

Arkansas appealed the Eighth Circuit’s ruling to the U.S. Supreme Court, and a decision could come any time.

“PBMs and a lot of the insurance companies have figured out how to use ERISA as a shield from liability,” said Julie Selesnick, of counsel at Cohen Milstein.

“The PBMs will go into court and say ‘You can’t sue me for state law violations on price gouging because you are preempted by ERISA,’ and then as soon as you bring an ERISA case they say, ‘We’re not fiduciaries,’” she said.

Shifting Argument

PCMA said it couldn’t comment on the case in the Second Circuit that was brought against Express Scripts and Anthem. A spokesperson for Express Scripts said the company has no comment.

“PBMs are not taking advantage of ERISA,” said Al Holifield, founding member of Holifield & Janich PLLC, who is representing a third-party administrator in a similar dispute in the U.S. District Court for the Western District of Texas. “ERISA defines what fiduciary conduct is.”

“If you’re suing third-party administrators, which I would equate a pharmacy benefit manager to be, you’ve got to show conduct beyond the contract to be fiduciary conduct,” he said. “If I abide by the terms of my contract, then I’m doing what the contract says. That does not make me a fiduciary.”

Some attorney say what PBMs are arguing is entirely consistent with the purpose of ERISA’s preemption and fiduciary rules.

“ERISA’s preemption provisions protect participants by ensuring that plans and their non-fiduciary service providers are not subject to multiple, and divergent, layers of local, state, and federal regulation,” Andrew Holly, who represents PBMs and serves as co-chair of the ERISA litigation practice group at Dorsey & Whitney LLP, said in an email.

The laws at issue in Arkansas’s case at the Supreme Court “are exactly those kinds of laws—they would ultimately increase costs to plans and thus participants,” he said. “Nothing about that is inconsistent with arguing that a PBM is not fiduciary when it engages in tasks that don’t fit within ERISA’s definition.”

But other attorneys say PBMs continue to shift their argument when it comes to ERISA.

They contend state laws trying to place requirements on the pharmacy drug middlemen are preempted by ERISA while at the same time successfully arguing in most courts that they never do anything that reaches the level of a fiduciary action under ERISA, Graham said.

“PBMs so far with respect to ERISA have been pretty successful trying to be nothing for everybody,” he said.

—With assistance from Jacklyn Wille

The cases are Doe 1 v. Express Scripts, Inc., 2d Cir., No. 18-00346, unpublished opinion 12/7/20 and Rutledge v. Pharm. Care Mgmt. Ass’n, U.S., No. 18-540.

To contact the reporter on this story: Lydia Wheeler in Washington at lwheeler@bloomberglaw.com

To contact the editors responsible for this story: Fawn Johnson at fjohnson@bloombergindustry.com; Brent Bierman at bbierman@bloomberglaw.com

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