1 29 U.S.C. §§ 1001-1461. 

### REVISED

United States Court of Appeals,

Fifth Circuit.

No. 95-50807.

TEXAS PHARMACY ASSOCIATION, et al., Plaintiffs,

Texas Pharmacy Association, formerly known as Texas

Pharmaceutical Assn., Ron's Apothecary, Inc., Tri Cities' Pharmacy,

Inc., City Pharmacy, Haml in Pharmacy, Anderson Drug, Twelve Oaks

Pharmacy, South Houston Pharmacy, Davila Pharmacy, Medical Center

Pharmacy, Eilers Discount Pharmacy, Professional Pharmacy, Hart

Pharmacy, Hays Hometown Pharmacy, Ward's Pharmacy, Good's Pharmacy,

Klein's Discount Pharmacy, Avondale Pharmacy, Home Care Associates,

Inc., Winn's Pharmacy, Tomball Atrium Pharmacy, Rosebud Pharmacy,

Maxwell Pharmacy, Save-Mor # 1 Pharmacy, McCrory's Pharmacy,

Nichols Southside Pharmacy, Nichols Westwood Pharmacy, Pfenning

Prescriptions Pharmacy, Bel-Aire Drugs, S & L Drug Mart and

Prescription Lab of Spring Branch, Plaintiffs-Appellees,

v.

The PRUDENTIAL INSURANCE COMPANY OF AMERICA, Defendant-Appellant.

Feb. 14, 1997.

Appeal from the United States District Court for th e Western

District of Texas.

Before REAVLEY, GARWOOD and BENAVIDES, Circuit Judges.

REAVLEY, Circuit Judge:

This appeal concerns w hether a Texas "any willing provider"

statute applicable to pharmacies is preempted by the Employee

R etirement Income Security Act (ERISA). 1 The Texas Pharmacy

Association ( TPA) and several pharmacies brought suit in Texas

state court seeking a declaratory judgment that the statute compels

appellant Prudential Insurance Company of America (Prudential) to

contract with any pharmacy in Texas willing to accept Prudential'scontractual terms and conditions. Prudential removed the case to

federal court, claiming that the statute is preempted by ERISA.

The district court ruled by summary judgment that the 1991 statute

is not preempted because it regulates insurance under ERISA's

savings clause. We hold that the current statute is preempted, but

we agree that the statute prior to 1995 amendments is not

preempted.

BACKGROUND

The essential facts are few and undisputed. Prudential offers

group health insurance policies to employers in Texas. It also

contracts to provide administrati ve services only to self-funded

employer health plans. For participants and beneficiaries of both

types of plans—the employees an d their covered family

members—Prudential maintains several health care networks,

including pharmacy networks . In these networks, Prudential

contracts with certain pharmacies and allows participants to fill

their prescriptions at these pharmacies at predetermined dispensing

fees and drug prices. Prudential claims that the networks provide

for quality control and lower prices.

In 1991, the Texas legislature passed an " any willing

provider" statute pertaining to pharmacies. The statute was

amended in 1995 and now provides in part:

Sec. 2. (a) A health insurance policy or managed care plan

... may not:

(1) prohibit or limit a p erson who is a beneficiary of the

policy from selecting a pharmacy or pharmacist of the person's

choice to be a provider under the policy to furnish

pharmaceutical services offered or provided by that policy or

interfere with that person's sele ction of a pharmacy or

pharmacist;2 T EX

. I NS .C ODE A NN . art. 21.52B, § 2 (West Supp.1997).

3 Id. § 1(6).

4 Id. § 3.

5 Id. § 5. (2) deny a pharmacy or pharmacist the right to participate as a contract provider under the policy or plan if the pharmacy

or pharmacist agrees to provide pharmaceutical services that

meet all terms and requirements and to include the same

administrative, financial, and professional conditions that

apply to pharmacies and pharmacists who have been designated

as providers under the policy or plan;

(3) require a beneficiary of a policy or participant in a plan

to obtain or request a specific quantity or dosage supply of

pharmaceutical products. 2

The emphasized portions of the statute were added by the 1995

amendments. The amendments also added a section broadly defining

a "managed care plan" to incl ude "a health maintenance

organization, a preferred provider organization, or another

organization that, under a contract or other agreement entered into

with a participant in the pl an ... provides health care

benefits...." 3

The parties argue the effect of the 1995 statute in this

appeal and, unless otherwise announced, it is that current statute

we will discuss.

The effect of the statute is that any pharmacist willing to

abide by the terms of a Prudential network contract must be

admitted to the network. The statute declares void any provision

of a health insurance policy or managed care plan that conflicts

with it. 4 The statute does however exempt from the

any-willing-provider requirement "a self-insured employee benefit

plan that is subject to [ERISA]." 56 29 U.S.C. § 1144(a).

7 Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 46, 107 S.Ct.

1549, 1552, 95 L.Ed.2d 39 (1987).

8 Shaw v. Delta Air Lines, Inc., 463 U.S. 85, 96-97, 103

S.Ct. 2890, 2900, 77 L.Ed.2d 490 (1983).

9 Corcoran v. United HealthCare, Inc., 965 F.2d 1321, 1328

(5th Cir.), cert. denied, 506 U.S. 1033, 113 S.Ct. 812, 121

L.Ed.2d 684 (1992).

10 29 U.S.C. § 1002(1)(A). DISCUSSION

A. ERISA's Preemption Clause

Prudential argues that the Texas statute is preempted by

ERISA. We agree that the current statute is preempted. ERISA's

preemption clause provides that it preempts any and all state laws

which "relate to" an ERISA benefit plan. 6 The Supreme Court has

held that this preemption clause is "deliberately expansive" 7 a n d

that a state law relates to an ERISA plan "if it has a connection

with or reference to such a plan." 8 We have held that the

preemption clause "is to be construed extremely broadly." 9

As the district court found and as the TPA concedes, the state

statute relates to ERISA benefit plans under the preemption clause.

Garden variety employer health insurance plans, which are regulated

by the Texas statute, are "employee benefit plans" under ERISA,

defined to include "any plan

... established or maintained by an

employer

... for the purpose of providing

... through the purchase

of insurance or otherwise ... medical, surgical, or hospital care

or benefits, or benefits in the event of sickness...." 10 In CIGNA11 82 F.3d 642 (5th Cir.), cert. denied, --- U.S. ----, 117

S.Ct. 387, 136 L.Ed.2d 304 (1996).

12 Id. at 647-49.

13 Id. at 648.

14 29 U.S.C. § 1144(b)(2)(A). Healthplan of Louisiana v. Louisiana, 11 discussed below, we held

t h at a Louisiana any-willing-provider statute fell within the

preemption cla use. 1 2 As with the Louisiana statute at issue in

CIGNA

, the Texas statute relates to ERISA plans because it

"eliminates the choice of one method of structuring benefits," 13 by

prohibiting plans from contracting with pharmacy networks that

exclude any willing provider.

B. ERISA's Savings Clause

1. The Current Statute

Although the state statute relates to ERISA benefit plans

under ERISA's preemption clause, the T PA argues that it

never theless is not preempted because of ERISA's savings clause,

which provides that "nothing in this title shall be construed to

exempt or rel ieve any person from any law of any State which

regulates insurance...." 14 The TPA contends that the statute, which

exempts employer self-insured ERISA plans, falls within the savings

clause.

We hold that the statute does not fall within the savings

clause, as this result is compelled by our recent decision in

CIGNA, where we held that a Louisiana any-willing-provider statute

did not fall within the savings clause. The Louisiana statute

provided that any willing provider may join a preferred provider15 L A .R EV .S TAT

. A NN . § 40:2202(5)(c) ("No licensed provider ...

who agree to the terms and conditions of the preferred provider

contract shall be denied the right to become a preferred provider

to offer health services within the limits of his license.").

16 471 U.S. 724, 105 S.Ct. 2380, 85 L.Ed.2d 728 (1985).

17 CIGNA, 82 F.3d at 650 (quoting Tingle v. Pac. Mut. Ins.

Co., 996 F.2d 105, 108 (5th Cir.1993)). organization if he agrees to the terms and conditions of the

contract between a preferred provider organization and its health

care providers. 15 We followed the test given in Metropolitan Life

Ins. Co. v. Massachusetts 16 in deciding whether the statute fell

within the savings clause:

In [ Metropolitan Life ], the Supreme Court delinea ted the

requirements that a statute must meet to come within the

insurance facet of the sav ings clause. As we have noted in

prior opinions, the Court took a conjunctive two-step

approach: "First, the court determined whether the statute in

question fitted the c o mmon sense definition of insurance

regulation. Second, it looked at three factors: (1) Whether

the pract ice (the statute) has the effect of spreading the

policyholders' risk; (2) whether the practice is an integral

part of the policy rel ationship between the insurer and the

insured; and (3) whether the practice is limited to entities

within the insurance industry. If the statute fitted the

common sense definition of insurance regulation and the court

answered "yes' to each of the questions in the three part

test, then the statute fell within the savings clause

exempting it from ERISA preemption." Thus, if a statute fails

either to fit the common sense definition of insurance

regulation or to satisfy any one element of the three-factor

Metropolitan Life test, then the statute is not exempt from

preemption by the ERISA insurance savings clause. 17

We held that the statute was preempted because it did not meet

the third requirement of the three-part test, that it apply

exclusively to entities within the insurance industry:

When we begin to apply that test to Louisiana's Any Willing

Provider Statute, we may start and finish with the third

factor of the Metropolitan Life test: On its face,

Louisiana's statute obviously is not "limited t o entities

within the insurance industry." Even though the statute lists

insurers as one group covered by its terms, it also specifies,18 CIGNA, 82 F.3d at 650.

19 29 U.S.C. § 1144(b)(2)(B). in a non-exclusive list, that it applies to "self-funded

organizations, Taft-Hartley trusts, or employers who establish

or participate in self funded trusts or programs," as well as

"health care financiers, third party administrators,

providers, or other intermediaries." As the statute fails to

meet the third factor of the Metropolitan Life test, we affirm

the district court's holding that the s tatute is not saved

from preemption by the insurance exception of § 514(b) of

ERISA. 18

Id.

Applying the same analysis, the Texas statute in the present

case does not fall within the s avings clause because it is not

limited to entities within the insurance indust ry. Instead, it

also applies to health maintenance organizations (HMOs), preferred

provider organizations (PPOs), and other organizations that provide

healt h care services. Indeed, since the statute defines managed

care providers to include HMOs, PPOs or "another organization" that

provides heal th care benefits, it applies to ERISA benefit plans

themselves. The "deemer provision" of ERISA prohibits treating

ERISA employee benefit plans themselves as being engag ed in the

business of insurance. It states that "an employee benefit plan

... [shall not] be deemed to be an insurance company or to be

engaged in the business of insurance

... for purposes of any law of

any State purporting to regulate insurance companies...." 19

Several examples demonstrate that the statute is not directed

exclusi vely to insurers. If an individual, outside of his

employment, signs up with an HMO, he may or may not have insurance,

yet under the statute the HMO would be subject to the

any-willing-provider provision. Similarly, a self-insured employer20 CIGNA, 82 F.3d at 650; Tingle, 996 F.2d at 108.

is not subject to the any-willing-provider provision, but if the

employer signed up with an HMO or PPO, those organizations would be

subject to the statute, even if there is no insurance company

involved. If a group of pharmacies wanted to offer discount

prescription services to an employer or other organization, such a

group would constitute a PPO or "other organization" subject to the

any-willing-provider requirement, whether or not an insurance

company was involved. And if an employer offered a medical plan

through an insurance comp any that did not pay for prescriptions,

but wanted to contract with a pharmacy to provide prescription

services outside of the insurance plan, the emp loyer would be

subject to the statute. Under the statute, the employer would be

"another organization" providing health care benefits and would not

be self-i nsured under the statutory exception to the

preferred-provider-provision.

The TPA, in the final footnote of its brief, suggests that if

the statute is preempted because it does not apply exclusively to

insurers, then we should find preemption only insofar as the

statute regulates non-insurers. Stated another way, the TPA

suggests that the preempted portions of the statute are severable.

We reject this argument for three reasons. First, C IGNA implicitly

rejected this argument. It did not hold the statute valid as to

PPOs offered by or affiliated with insurers. Second, our court has

recognized as an independent requirement for the applicability of

the savings clause that the state statute "be limited to entities

within the in surance industry." 2 0 This requirement would be21 United States Dep't of Treasury v. Fabe, 508 U.S. 491,

508-10 & n. 8, 113 S.Ct. 2202, 2212 & n. 8, 124 L.Ed.2d 449

(1993).

22 T EX

. I NS .C ODE A NN . art. 21.52B note (West Supp.1997).

23 T EX

. G OV ' T C ODE § 311.032. meaningless if a court could simply sever out those portions of the

statute which applied to noninsurance entities.

Third, the Texas statute is not severable because it so

states. Whether portions of a state statute found to contravene

federal law are severable is a question of state law. 21 The Texas

statute, as originally enacted in 1991, provides that "[i]f any

provision of this Act or if application to any person or

circumstance is held invalid, this entire Act is invalid and to

that end the provisions of this Act are not severable." 22 There is

no indication in subs equent amendments to the statute that this

provision does not continue to express the intention of the Texas

legislature. Under the Texas Code Construction Act, a Texas

statute should be deemed severable if the invalidity of one

provision does not affect the other provisions, unless it has an

express provision for severability or nonseverability. 23 Here there

is an express nonseverability provision.

We note an irony in the result reached. Insurance companies

were no doubt the principal proponents of the McCarran-Ferguson Act

( disguised i nfra ) and the ERISA savings clause, because they did

not want federal regulation of their industry. Here, however, the

insurance company is arguing against state regulation and in favor

of federal preemption. There is room to doubt if ERISA's drafters

intended that it would preempt any-willing-provider statutes. We24 T EX

. I NS .C ODE A NN . art. 21.52B note (West Supp.1997).

nevertheless conclude that the result in this case is compelled by

the unmistakable breadth of ERISA preemption recogn ized by the

S upreme Court. A different result will require further guidance

from the Supreme Court or further action from Congress.

2. The Prior Statute

We question whether a ruling on the validity of the old

statute is of much value to the parties, but note that the 1995

amendments ap ply only to "an insurance policy or evidence of

coverage under a managed care plan that is delivered, issued for

delivery, or renewed on or after Janua ry 1, 1996." 2 4 Conceivably

there are unexpired contracts covered by the old statute.

We conclude that the old statute is not preempted by ERISA.

Und er the first step of the M etropolitan Life test, discussed

supra, we are satisfied that the statute fits within the common

sense definition of insurance regulation. It directly regulates

the terms of health insurance policies that can be offered in

Texas, by, am ong other things, disallowing (1) policies that

prohibit a beneficiary from selecting a pharmacy of the

b eneficiary's choice, (2) policies that deny willing pharmacists

from participating as a contract provider under the policy, and (3)

policies that require a beneficiary of a policy to obtain or

reque st a specific quantity or dosage supply of pharmaceutical

products.

The second step in Metropolitan Life looks to three factors.

The second factor—whether the statute regulates an integral part of

the policy relationship between the insurer and the insured—is met,25 440 U.S. 205, 99 S.Ct. 1067, 59 L.Ed.2d 261 (1979).

26 Pilot Life Ins. Co. v. Dedeaux, 481 U.S. 41, 48, 107 S.Ct.

1549, 1553, 95 L.Ed.2d 39 (1987).

27 15 U.S.C. § 1012. since the statute directly regulates which pharmacist the

beneficiary c an select, and the quantity or dosage supply of

pharmaceutical products. The third factor is also met, since,

unlike the statute in CIGNA, the old statute is limited to

insurance policies. It does not regulate entities outside the

insurance industry. The first factor—whether the practice has the

effect of spreading the policyholders' risk—requires further

analysis. Prudential argues that this requirement is not met,

particularly in light of the Supreme Court's decision in Group Life

& Health Ins. Co. v. Royal Drug Co. 25

In Royal Drug, an appeal from the Fifth Circuit, the plaintiff

pharm acies sued Blue Shield, an insurance company, for antitrust

violations. Blue Shield claimed that its actions were exempt from

the antitrust laws under the McCarran-Ferguson Act.

In determining the scope of the ERISA savings clause, the

Supreme Court has turned to case law interpreting the McCarranFerguson Act. 26 This Act provides that state laws "regulating the

business of insurance" are not preempted by federal law. 27 We have

held that deciding whether ERISA's savings clause exempts insurance

regulation from preemption involves the same analysis used in

deciding wh ether the regulation concerns the "business of

insurance" under the McCarran-Ferguson Act. " The [ERISA] savings

clause preser ves the right of States, given by the McCarran-28 Gahn v. Allstate Life Ins. Co., 926 F.2d 1449, 1453 (5th

Cir.1991) (citations omitted).

29 Royal Drug, 440 U.S. at 209, 99 S.Ct. at 1072.

30 Id. at 214, 99 S.Ct. at 1075.

31 Id. at 215-216, 99 S.Ct. at 1075-1076. Ferguson Act, to regulate the "business of insurance.'

Consequently, to determine whether a State law is exempt from ERISA

preemption, a court should examine the meaning of the phrase

"business of insurance' in the McCarran-Ferguson Act." 28

In Royal Drug, Blue Shield had entered into pharmacy

agreements with participating pharmacies in T exas, as Prudential

has done in the present case. The agreements fixed prices and the

method of reimbursement to the pharmacies. Insureds who went to

participating pharmacies paid only $2 per presc ription, and the

pharmacies were then reimbursed by Blue Shield. If on the other

hand the insured selected a pharmacy which did not have an

agree ment with Blue Shield, he was required to pay the full cost

and then seek reimbursement from Blue Shield under a fixed formula.

Blue Shield offered the pharmacy agreements t o all licensed

pharmacies in the state. 29

The Court held that these agreements were not the business of

insurance since they "do not involve any underwriting or spreading

of risk, but are merely arrangements for the purchase of goods and

services by Blue Shield." 30 The Court further reasoned that "the

business of insurance relates to the contract between the insurer

and the insured," and that the agreements in issue were separate

contractual arrangements between Blue Shield and pharmacies. 3132 Id. at 210, 99 S.Ct. at 1072.

33 Id. at 216, 99 S.Ct. at 1075.

34 Id. at 230 n. 37, 99 S.Ct. at 1082 n. 37.

35 Metropolitan Life, 471 U.S. at 744, 105 S.Ct. at 2391

(quoting SEC v. National Securities, Inc., 393 U.S. 453, 460, 89

S.Ct. 564, 568-69, 21 L.Ed.2d 668 (1969); emphasis supplied in

Metropolitan Life); Royal Drug, 440 U.S. at 215-16, 99 S.Ct. at

1075). We conclude that Royal Drug is distinguishable. The focus of

the Court in Royal Drug is clear: "The only issue before us is

whether the Court of Appeals was correct in concluding that these

Pharmacy Agreements are not the "business of insurance' within the

meaning of s 2(b) of the McCarran-Ferguso n Act." 3 2 The Court's

ruling, in our view, turned on the fact that "[t]he Pharmacy

Agreements are not "between the insurer and the insured,' " 3 3 a n d

the Court explained that "[t]his is not to say that the contracts

offered by Blue Shield to its policyholders, as distinguished from

its provider agreements with participating pharmacies, may not be

the "business of insurance' within the meaning of the Act." 34

Unlike the third-party pharmacy agreements in Royal Drug, the

prior Texas statute directly regulated the terms of the insurance

policy between the insurer and the insured. Both M etropolitan Life

and Royal Drug explain that in enacting the McCarran-Ferguson Act

Congress was concerned with: "The relationship between the insurer

and insured, the type of policy which could be issued, its

reliability, interpretation, and enforcement—these were the core of

the "business of insurance.' " 35 M etropolitan Life goes on to state

that "[n]or is there any contrary cas e authority suggesting that

laws regulating the terms of insurance contracts should not be36 Metropolitan Life, 471 U.S. at 744, 105 S.Ct. at 2391

(emphasis in original ).

37 995 F.2d 500 (4th Cir.1993). understood as laws that regulate insurance." 36

The prior Texas statute regulated the type of policy which an

insurer could offer in Texas. On this basis we find R oyal Drug

distinguishable. Further, we believe that the statute would affect

the spreading of risks among policyholders and therefore meets the

first requirement of the M etropolitan Life three-part test. By

requiring policies to give the beneficiary the option of obtaining

pharmaceutical services from any pharmacy, and requiring pharmacy

networks to admit any willing provider, we believe that the prior

statute influenced which costs were ultimately borne by the insurer

and which were borne by the beneficiary, and whether insurers would

be willing to offer pharmacy coverage at all.

In this regard, we agree with the reasoning of the Fourth

Circuit in S tuart Circle Hospital Corp. v. Aetna Health

Man agement. 3 7 In that case the court held that a Virginia

any-willing-provider statute regulating PPOs was not preempted by

ERISA. The court held that the statute had a sufficient effect on

the spreading of policyholder s' risk to satisfy the M etropolitan

Life test:

If a PPO unreasonably restricts the providers of treatment,

even though they me et the insurer's standards, it denies an

insured the choice of doctor or hospital that may best suit

the insured's needs, unless the insured is willing and able to

pay all or part of the cost of the doctor or hospital that is

not preferred by the insurer. This is a restriction of the

insured's benefits. By its prohibition against unreasonable

restriction of pr oviders, the Virginia statute spreads the

cos t component of the policyholder's risk among all the

insure ds, instead of requiring the policyholder to shoulder38 Id. at 503-04.

39 T EX

. I NS .C ODE A NN . art. 21.52B, § 2(a)(1) (West Supp.1997).

This subsection was not changed by the 1995 amendments. all or part of this cost when seeking care or treatment from

an exclu ded doctor or hospital of his or her choice....

[A]lthough facially the statute only directly affects

providers, it indirectly affects the insured's choice of

provider and the consequent cost to the insured if he or she

deems an excluded provider to be better qualified for

treatment of a specific illness or accident. In this way it

affects the risk that an insured must bear. 38

We agree with this analysis, and note that the prior Texas statute

had an even more direct effect on the policyholder's choice of

provider. Unlike the Virginia statute, the Texas statute expressly

mandated that insurance policies cannot "prohibit or limit a person

who is a beneficiary of the policy from selecting a pharmacy or

pharmacist of the person's choice to be a provider under the policy

to furnis h pharmaceutical services offered or provided by that

policy or interfere with that person's selection of a pharmacy or

pharmacist." 39

CONCLUSION

The judgment of the district court is affirmed insofar as it

held that the statute, prior to the 1995 amendments, was not

preempted by the federal ERISA statute. For the reasons explained

above, however, we hold that the current version of the statute is

preempted.

AFFIRMED AS MODIFIED.