PBM Regulation In Maine Blocked By Federal Court; ERISA Preempts State

Judge Woodcock sides with Pharmaceutical Care Management Association on two of three arguments against Maine law that sought to define the relationship between PBMs and "covered entities" as fiduciary and thereby require further transparency from PBMs.

Maine's attempt to regulate the pharmacy benefit management industry is preempted by the Employee Retirement Income Security Act, Maine federal court Judge John Woodcock ruled March 9.

Woodcock's ¹ decision granted the Pharmaceutical Care Management Association's motion for preliminary injunction against Maine's "Act to Protect Against Unfair Prescriptive Drug Practices" (UPDPA).

The law, which was enacted in June, sought to define the relationship between PBMs and "covered entities" as fiduciary, thereby requiring further transparency from PBMs in those relationships.

PCMA argued the law violates the Commerce and Takings Clauses of the U.S. Constitution and that it is preempted by ERISA. Woodcock agreed with PCMA's Takings Clause and ERISA arguments.

"ERISA itself has become such an all-encompassing part of our legal lexicon that it is virtually impossible to wade into health care regulatory waters without referring, intentionally or not, to ERISA terminology," Woodcock opined.

Under the Maine law, PBMs would owe a fiduciary duty directly to the covered entity. Therefore, "if the PBM acts in the best medical interest of the patient over the best financial interest of the covered entity, the UPDPA virtually invites litigation through its notice and enforcement provisions," the decision states.

Such an outcome directly contests the intended purpose of ERISA, the opinion says. "When Congress enacted ERISA, it made manifest its intentions to 'protect...the interests of participants in employee benefit plans and their beneficiaries...by establishing standards of conduct, responsibility, and obligation for fiduciaries of employee benefit plans, and by providing for appropriate remedies.'"

Therefore, "UPDPA and its enforcement mechanisms intrude too far into the ambit of federal regulation of health benefits by ERISA plans," the decision states. The law "has an impermissible 'connection with' ERISA."

The court also agreed with PCMA that the Maine law violates the Takings Clause by requiring PBMs to submit trade secrets to covered entities without provisions to protect further spread of the proprietary information.

"PCMA contends that PBMs derive 'independent economic value' from the specific contract terms each PBM has been able to negotiate with its drug suppliers and pharmacies," the decision recounts.

The association argued that "precise information about rebates, if made generally known, would cripple the PBMs' ability to negotiate rebates with drug manufacturers and pharmacies and 'destroy the value of this trade secret information.'"

Woodcock agreed that rebate information constitutes a trade secret, requiring the government to compensate the former owner when taking such information.

Furthermore, the law "not only mandates disclosures of information that goes to the heart of what the PBMs contend are trade secrets, but it also fails to protect that information from further disclosure," the decision states.

The Maine law does not, however, violate the Commerce Clause, Woodcock decided. "PCMA argues the UPDPA would impermissibly regulate PBM services outside of Maine, since it requires disclosures of PBM contracts with drug manufacturers even if the contracts do not relate to Maine 'covered entities,'" the opinion says.

However, the judge found that "the UPDPA clearly ties its reach to Maine" by limiting PBM obligations to a covered entity, defined as those licensed by the state, administered by the state, organized in the state, or providing health coverage to covered individuals who are employed or reside in the state, Woodcock said.

- Adam Eckstein