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5500 Preparer's Manual for 2012 Plan Years
The premier resource in the field of Form 5500 preparation, 5500 Preparer's Manual will help you handle the required annual Form 5500 filings for both pension benefits and welfare benefit plans.
from Spencer’s Benefits Reports: Parts of a District of Columbia (the District) law regulating and treating pharmacy benefit managers (PBMs) as fiduciaries of employee benefit plans is preempted by ERISA, according to the U.S. Court of Appeals for the District of Columbia Circuit. The court also ruled that applying fiduciary functions to PBMs is preempted by ERISA. This was the decision in Pharmaceutical Care Management Association v. District Of Columbia, et al. (No. 09-7042).
The Pharmaceutical Care Management Association (PCMA) is a national trade association representing PBMs. In the case, the District appealed the decision of the U.S. district court for the District of Columbia, which had ruled that the entire Title II law was preempted by ERISA, and granted summary judgment for the PCMA.
The PCMA initially sought an injunction against the enforcement of the District of Columbia’s AccessRx Act of 2004. Title II of the AccessRx Act requires, among other things, that PBMs to act as fiduciaries, disclose the content of their contracts with pharmacies and manufacturers, and pass on any payments or discounts they receive from pharmacies or manufacturers. Title II applies to PBMs working with both employee-based and nonemployee-based health benefit providers.
Claiming that ERISA preempted Title II and that Title II was otherwise unconstitutional, the PCMA obtained a preliminary injunction. However, in 2004, the First Circuit upheld a Maine law that is similar to Title II. In addition, the Appeals Court’s previous remand to the lower court was due to the fact that the PCMA was the losing party in Pharm. Care Mgmt. Ass'n v. Rowe, 429 F.3d 294, 297 (Rowe) in Maine.
The District challenged the district court’s summary judgment favoring PCMA “on the grounds that Title II does not regulate relationships among ERISA entities but merely giv[es] rights and benefits to plans, and is not qualitatively different from state laws [regulating lawyers, accountants, and securities dealers].”
Although “a dictum in Egelhoff suggests there may be an exception to preemption under ERISA for long-standing and widely observed state laws,” such as those regulating accountants, lawyers, and dealers in securities, this exception does not apply to the District’s Title II because “laws regulating PBMs are not the embodiment of long-standing and widely observed principles.” Although the Appeals Court does not recognize this in its opinion, the lack of “long-standing laws” and “widely observed principles” for PBMs is because PBMs are relatively new employee benefit plan service providers and only in the past few years have employee benefit plan sponsors and legal authorities discovered PBM activities that work against plan beneficiaries and employee benefit plans.
The Appeals Court recognized that “A health benefit provider may find it difficult to judge the value of a pharmacy benefit manager’s services without information about the relationships between the manager and manufacturers or pharmacies... For example, a pharmacy benefit manager could work against the health benefit provider’s interest by substituting a more expensive drug than the one prescribed in order to receive a rebate from the manufacturer that is not passed on to—or shared with—the health benefit provider.” (A previous expert analysis revealed that large PBMs retained between 30% and 65% of rebate payments in 2003).
“ERISA expressly preempts any and all state laws insofar as they ... relate to any employee benefit plan,” the Appeals Court found. A state law relates to an employee benefit plan if it [1] has a connection with or [2] reference to such a plan.
The Appeals Court said that it decided to consider first “whether the provisions of Title II affect an area of ERISA concern, and then evaluate the nature of any such effect. The PCMA argues Title II intrudes into areas of express ERISA concern because it regulates a PBM’s administration of benefits on behalf of an employee benefit plan. The administration of employee benefits clearly is an area of core ERISA concern.
“We think it obvious the D.C. Council, concerned that contracts between an employee benefit plan and a PBM should adequately protect the interests of plan beneficiaries, enacted Title II in order to protect those beneficiaries with rules that, except as expressly provided, could not be waived by contract.
The District argues that Title II’s provisions deeming a PBM a plan fiduciary, with the responsibilities that entails, and requiring that PBMs disclose to the employee benefit plan when it substitutes a more expensive drug than the prescribed drug the cost of both drugs and any benefit the PBM received for the substitution “nonetheless leave plan administrators with a free hand to structure the plans as they wish because Title II does not force plans to do anything. Plans remain free to employ PBMs in any manner they see fit.” The Appeals Court disagreed because the District’s law “constrains an employee benefit plan by forcing it to decide between administering its pharmaceutical benefits internally upon its own terms or contracting with a PBM to administer those benefits upon the terms laid down in” the law.
“The Supreme Court has not prescribed a standard for determining whether a state law sufficiently constrains an employee benefit plan’s decision-making in an area of ERISA concern that the law is preempted, but it has indicated a law that binds plan administrators to any particular choice is preempted.... We need go no further: Secs. 48-832.01(a), (b)(1), and (d) bind plan administrators because the choice they leave an employee benefit plan between self administration and third-party administration of pharmaceutical benefits is in reality no choice at all. For most if not all employee benefit plans, 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 employee benefit plan, Secs. 48-832.01(a), (b)(1), and (d) function as a regulation of an ERISA plan itself.
“As the Supreme Court has explicated the phrase, a law makes reference to a plan [w]here [it] acts immediately and exclusively upon ERISA plans ... or where the existence of ERISA plans is essential to the law’s operation. Because Title II applies to any PBM that contracts with a covered entity, defined as [a]ny hospital or medical service organization, insurer, health coverage plan, or [HMO] ... that contracts with another entity to provide prescription drug benefits for its customers or clients, Secs. 48-831.02(4)(A), 48-832.01(b)(2), and (c) do not act exclusively upon employee benefit plans; the existence of ERISA plans ... is [not] essential to [their] operation” those provisions are not preempted.
Among these non-exempt provisions is the requirement that PBMs pass on in full to the covered entity any payment of benefit from a drugmaker, although the covered entity may by contract return a portion of the benefit to the PBM. Another two such provisions require that when the covered entity requests it, the PBM must disclose the amount of drugs the covered entity purchased and the net cost to the covered entity for the drugs; and the terms and arrangements for compensation between the PBM and drug makers.
In conclusion, the Appeals Court upheld the District Court’s decision on ERISA exemption for Title II’s fiduciary requirements and other provisions solely affecting employee benefit plan administration, but remanded the case to the district court to consider PCMA’s constitutional challenges to the provisions deemed not preempted.
For more information on this and related topics, consult the CCH Pension Plan Guide, CCH Employee Benefits Management, and Spencer's Benefits Reports.
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