From the Bench
by John H. Eggertsen, Esq. and Michael Friedman, Esq. of SIIA, www.siia.org
I. District of Columbia’s Efforts to Regulate PBMs Preempted by ERISA
In their efforts to combat the ongoing initiatives on the part of several states to regulate the business activities of pharmacy benefit managers (“PBMs”), the PBMs recently won a skirmish. In Pharmaceutical Care Management Association v. District of Columbia, et al. 2009 WL 711771 (D.C.D.C.), a Federal District Court for the District of Columbia held that by regulating the relationship between PBMs and ERISA plans, the District of Columbia’s Access Rx Act of 2004 (the “Act”) “impermissibly intrudes upon a field exclusively reserved for federal regulation,” and thus, is preempted under ERISA.
Anxious about rising prescription drug prices, the Washington D.C. City Council unanimously passed the Act in an effort to control costs. The Pharmaceutical Care Management Association (the “PBM Association”), the PBM trade association, challenged Title II of the Act which imposed fiduciary duties on PBMs and required them to disclose certain financial information, including all information about rebates, discounts, and all other financial arrangements between the PBMs and prescription drug manufacturers or labelers such as formulary management and drug substitution programs, educational support, claims processing and data sales fees.
The PBM Association initially sought to enjoin the defendants from enforcing Title II of the Act, and got preliminary injunctive relief. The City appealed to the D.C. Circuit Court, which remanded the case for considerations in light of the First Circuit’s decision in PCMA v. Rowe, 429 F.3d 294 (1st Cir. 2005), and whether that decision- which rejected a similar challenge by the PBM Association to a Maine statute which sought to regulate PBMs in a similar matter – precluded the PBM Association from challenging the Act on principles of collateral estoppel.
In the Rowe case (2005), the First Circuit found no ERISA preemption because (1) PBMs were not ERISA fiduciaries, (2) the Maine statute did not have sufficient connection with, nor did it reference, ERISA plans, and (3) the Maine statute did not provide an alternative enforcement mechanism for ERISA claims. The District of Columbia District Court determined that because the two cases were so closely aligned in time and subject matter, the “collateral estoppel” judicial doctrine applied, and the PBM Association was, therefore, precluded from challenging the Act.
The PBM Association appealed and on April 18, 2008, the Federal Circuit Court for the District of Columbia reversed, saying that applying collateral estoppel here would “freeze the development of the law in an area of substantial public interest.” In addition, just a few months after the District Court ruled that collateral estoppel applied, the Department of Labor (“DOL”) issued proposed regulations for plan service provider disclosures. Since these rules would require PBMs to disclose similar information to that required by the Act, the Federal Circuit Court thought that the effect of these regulations “may change the legal analysis regarding ERISA preemption.”
The decision we are reviewing here is the District Court’s opinion after the Federal Circuit Court remanded the case back to be decided on the merits. The District of Columbia argued that the Act has no impermissible impact on ERISA plans because it does not bind them to a particular choice, and it does not impose uniform administrative procedures or interfere with a uniform interstate benefit plan design. In contrast, the PBM Association argued that since PBMs that “fall squarely within the zone of preemption,” and that the central role of PBMs in the administration of prescription drug benefits under ERISA plans requires that the Act’s efforts to regulate PBM activity must be preempted.
In addressing the preemption question, the District Court focused on the U.S. Supreme Court case of Ft. Halifax Packing Co. v. Coyne, 482 U.S. 1 (1987) which held that the focus of federal concern under ERISA “is on the administrative integrity of benefit plans.” To the extent, then, that the state laws address ERISA administrative concerns, the District Court here quoted the Ft. Halifax decision where the Court noted that the uniformity desired by Congress would be “difficult to achieve… A plan would be required to keep certain records in some States, but not in others; to make certain benefits available in some States, but not in others; to process claims in a certain way in some States but not in others; and to comply with certain fiduciary standards in some States but not in others (emphasis added by District Court).”
Without determining whether or not PBMs are ERISA fiduciaries – a conclusion urged by the PBM Association – but noting the split among the circuits on the issue, the District Court here held the Act to be preempted because the Act’s requirements that PBMs turn over any benefit or payment that they receive as a result of a prescription drug substitution and that ERISA plans could not disclose certain information disclosed to them without the consent of the PBM or a court order. In the District Court’s view, the Act effectively sought to “manage the relationship between an ERISA plan and a third-party service provider instrumental to the administration of the plan,” and this represents an impermissible intrusion of state regulation into an area exclusively controlled by ERISA.
The District Court found this decision bolstered by the DOL’s proposed regulations with respect to plan service provider contracting. Because PBMs are parties-in-interest under ERISA and they provide serviced that are “necessary for the establishment or operation of the plan,” ERISA § 408(b)(2), The District Court found that, the regulations support the Court’s view that “PBMs provide ERISA plans with essential administrative services which states may not regulate.” Moreover, the proposed regulations expressly require certain disclosures by PBMs as plan service providers, and this shows that the DOL sees the PBMs contractual relationships with ERISA plans as being within the scope of ERISA. Because the Act “‘creates the potential for the type of conflicting regulation of benefit plans that ERISA preemption was intended to prevent,’ the Act must yield to ERISA’s preemptive force (quoting the Ft. Halifax Court).”
This latest decision sets the stage for the PBM Association’s challenge to the efforts of the various states to regulate PBMs to go before the U.S. Supreme Court. Of course, the Federal Circuit Court would have to sustain this decision of the District Court, but from the Circuit Court’s ruling that remanded the case to be decided on the merits, such a result appears to be likely.
Whether any of these state efforts will have the intended results of reducing prescription drug costs through greater required disclosures of financial arrangements PBMs have with drug manufacturers and greater regulation of drug substitution programs remains to be seen. PBMs likely would argue that the cost savings from their efforts to press generic drug alternatives saves far more than the rebate and pricing arrangements they have with drug manufacturers that are the target of the state’s regulatory efforts. What is clear, however, is the intensity with which the PBMs are seeking to avoid state regulation. In their challenges they have done what few plan service providers have done – i.e., consistently embraced being designated ERISA fiduciaries to support their arguments that ERISA preempts their contractual relations not only with ERISA plans, but also with drug manufacturers and others, thus avoiding all state efforts to regulate their business.
Finally, it will be worth watching to see whether the nascent efforts at health care reform being pressed by the Obama administration will serve to mute or minimize this particular locus of the prescription drug cost debate so that by the time the Supreme Court is face with the issue (if indeed that day comes), this issue of prescription drug costs may be less significant in the overall scheme of health care cost control than it now appears to be. That may be wishful thinking on our part, but then we probably wait and watch as this particular struggle wends its way to the soon to be re-constituted Supreme Court.
II. Court Upholds DOL in Finding That TPA Controls a Plan Asset- the Right to Sue
Is an employer’s obligation to provide funding to an ERISA plan, an asset of that ERISA Plan? If so, does a TPA of that Plan have a duty to force the employer to pay up? While these important questions arose in a recently decided case involving a TPA of a 401(k) Plan subject to ERISA, the primary ERISA principle involved applies equally to TPAs of ERISA welfare plans – namely, are past-due employer contributions assets of the ERISA plan?
ERISA imposes strict duties on those that manage plan assets. Indeed, when it comes to plan assets, discretionary authority is not a requirement for fiduciary obligations to be imposed. Though “plan assets” are nowhere defined under ERISA, we often assume that we understand the term, and usually construe it to mean money, securities, investments, real property, etc. In short, a common sense understanding of the term. A recent case, underscores, however, that the term has broader applications, and TPAs and others ignore this broader construction at their peril.
Professional Benefit Services (“PBS”) was the TPA in this litigation, but was also the sponsor of a Master Pension Plan that provided benefits to over 1,100 participating retirement plan under either a 401(k) profit sharing plan or a money purchase plan. All participating employers provide benefits to employees who work under public contracts subject to the Davis-Bacon Act, the Service Contract Act or other federal, state or municipal prevailing wage laws that require the employers to provide certain fringe benefits to their employees. In addition to the Master Plan, there was a Master Trust established into which the employer contributions were to be deposited. PBS had the authority to amend the master Plan, the Trust Agreement and the Adoption Agreements entered into with participating employers. It also had the authority to appoint the Trustees.
The disputed issue in Hilda Solis (in her capacity as Secretary of the Department of Labor) v. Plan Benefit Services, Inc., 2990 WL 789092 (D.C. MA), was whether PBS had breached its fiduciary duty by seeking to relieve the master Trustee from its ERISA obligations when PBS inserted an “exculpatory” clause in both the Plan document and the Trust Agreement that stated that the Trustee had no duty to require that employer contributions be made. The significance of this case for our purposes, however, is the Court’s analysis of when and if employer contributions become plan assets and the TPA’s or Trustee’s responsibilities with the respect to that asset.
The parties disputed whether the master Plan’s right to collect employer contributions was in fact a “plan asset,” and the DOL’s regulations does not speak directly to the right to collect employer contributions. In Field Action Bulletin No. 2008-01 (Feb. 1, 2008), however, the DOL stated that a plan had a claim against an employer for unpaid contributions and that this claim was an asset of the plan. The Court did not find that the Bulletin was an authoritative determination requiring courts to defer to the DOL’s, but the Court undertook an independent analysis that reached a conclusion that comported with the DOL’s position.
Under traditional notions of property rights, a chose in action is the “right to bring an action to recover a debt, money or thing,” and a chose in action constitute property. Under trust law, trust property includes choses in action. Thus, “a legal interest can include a chose in action as an ‘asset,’” and the Court held that “under the ordinary notions of property rights, plan assets include the right to collect unpaid employer contributions.”
The remaining questions before the Court are of little interest to us because the Court never got to the issue of whether the TPA or the Trustee could have sued the employers whose contributions were overdue. Rather, the Court simply invalidated the exculpatory clauses in the plan document and master Trust Agreement.
The result here is cautionary, and significant for what the Court did not say. The dispute here was whether a legal claim on the part of an ERISA plan is a Plan asset, and the Court here held that it was. While not a focus of the decision itself, the Court’s holding raises the issue of what a fiduciary’s obligations might be with respect to such a plan asset? In a section of Memorandum and Order the court speculated on the implications of its own order – How rapidly must a plan asset fiduciary pursue such claims? When may a plan asset fiduciary exercise its discretion to abandon such claims? In short, how should fiduciaries function so as to meet their obligations without imposing excessive administrative costs? Indeed, the Court noted that “[p]roviding a proper balance through rule-making is now an obligation of the Secretary.
Without waiting for such rule making TPAs, whether of pension of welfare plans, will be confronted with the questions posed by the Court. To the extent choses in action are plan assets, a TPA who has the power to pursue such claims may be a plan fiduciary, regardless of whether it intended to assume this obligation. For example, TPAs often have the authority to sue under their service agreements for fees or for unpaid employer contributions. If so, the questions raised above by the Court come into play (as well as numerous others). Waiting for the Secretary of Labor to provide a road map will probably not be a valid defense. The point here is to be aware that the term “plan assets” is more expansive than the common sense meaning of the term. When contracting for plan services and when administering ERISA plans, TPAs need to be aware that their decisions as to enforcing the plan’s legal interests could implicate ERISA’s fiduciary regime, and their decisions may well be judged accordingly.
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