Court Opinion

ID: 11927
Source: CourtListenerOpinion
Date Created: 2010-04-25 06:09:03+00
Date Added: 2024-06-11T09:33:23.050416
License: Public Domain

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, Hamlin 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 the Western
District of Texas.

Before REAVLEY, GARWOOD and BENAVIDES, Circuit Judges.

     REAVLEY, Circuit Judge:
     This appeal concerns whether a Texas "any willing provider"

statute applicable to pharmacies is preempted by the Employee

Retirement   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's

     1
      29 U.S.C. §§ 1001-1461.
contractual 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 administrative services only to self-funded

employer health plans.          For participants and beneficiaries of both

types      of    plans—the      employees        and    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 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 furnish
      pharmaceutical services offered or provided by that policy or
      interfere with that person's selection of a pharmacy or
      pharmacist;
       (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    include     "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    plan   ...    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]."5

       2
        TEX. INS.CODE ANN. art. 21.52B, § 2 (West Supp.1997).
       3
        Id. § 1(6).
       4
        Id. § 3.
       5
        Id. § 5.
                               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 and

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 CIGNA

     6
      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).
Healthplan of Louisiana v. Louisiana,11 discussed below, we held

that a Louisiana any-willing-provider statute fell within the

preemption clause.12       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   TPA    argues   that    it

nevertheless is not preempted because of ERISA's savings clause,

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

exempt or relieve 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 provider

     11
      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).
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. Massachusetts16 in deciding whether the statute fell

within the savings clause:

     In [Metropolitan Life ], the Supreme Court delineated the
     requirements that a statute must meet to come within the
     insurance facet of the savings 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 common sense definition of insurance
     regulation. Second, it looked at three factors: (1) Whether
     the practice (the statute) has the effect of spreading the
     policyholders' risk; (2) whether the practice is an integral
     part of the policy relationship 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 to entities
     within the insurance industry." Even though the statute lists
     insurers as one group covered by its terms, it also specifies,

     15
      LA.REV.STAT. ANN. § 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)).
      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 statute 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 savings clause because it is not

limited to entities within the insurance industry.                 Instead, it

also applies to health maintenance organizations (HMOs), preferred

provider organizations (PPOs), and other organizations that provide

health care services.        Indeed, since the statute defines managed

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

provides health care benefits, it applies to ERISA benefit plans

themselves.       The "deemer provision" of ERISA prohibits treating

ERISA employee benefit plans themselves as being engaged 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

exclusively      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 employer

      18
           CIGNA, 82 F.3d at 650.
      19
           29 U.S.C. § 1144(b)(2)(B).
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 company that did not pay for prescriptions,

but wanted to contract with a pharmacy to provide prescription

services outside of the insurance plan, the employer would be

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

"another organization" providing health care benefits and would not

be   self-insured       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, CIGNA 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   insurance    industry."20     This    requirement     would    be

     20
          CIGNA, 82 F.3d at 650;     Tingle, 996 F.2d at 108.
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 subsequent 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 infra) 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.                    We

     21
      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
          TEX. INS.CODE ANN. art. 21.52B note (West Supp.1997).
     23
          TEX. GOV'T CODE § 311.032.
nevertheless conclude that the result in this case is compelled by

the unmistakable breadth of ERISA preemption recognized by the

Supreme 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 apply 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 January 1, 1996."24         Conceivably

there are unexpired contracts covered by the old statute.

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

Under the first step of the Metropolitan 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, among other things, disallowing (1) policies that

prohibit      a   beneficiary   from   selecting   a   pharmacy   of   the

beneficiary'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

request 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,

     24
          TEX. INS.CODE ANN. art. 21.52B note (West Supp.1997).
since     the     statute    directly      regulates   which      pharmacist     the

beneficiary can 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

pharmacies 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 McCarran-

Ferguson 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        whether   the     regulation     concerns   the     "business     of

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

clause preserves the right of States, given by the McCarran-

     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.
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 Texas, 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 prescription, and the

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

hand    the     insured   selected     a    pharmacy    which   did    not   have   an

agreement 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    to     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.31

       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.
      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-Ferguson Act."32 The Court's

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

Agreements are not "between the insurer and the insured,' "33 and

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 Metropolitan 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 Metropolitan Life goes on to state

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

laws regulating the terms of insurance contracts should not be

      32
           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).
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 Royal Drug

distinguishable. Further, we believe that the statute would affect

the spreading of risks among policyholders and therefore meets the

first requirement of the Metropolitan 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   Stuart     Circle      Hospital   Corp.      v.   Aetna     Health

Management.37       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 policyholders' risk to satisfy the Metropolitan

Life test:

     If a PPO unreasonably restricts the providers of treatment,
     even though they meet 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 providers, the Virginia statute spreads the
     cost component of the policyholder's risk among all the
     insureds, instead of requiring the policyholder to shoulder

     36
      Metropolitan Life, 471 U.S. at 744, 105 S.Ct. at 2391
(emphasis in original).
     37
          995 F.2d 500 (4th Cir.1993).
     all or part of this cost when seeking care or treatment from
     an excluded 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 furnish 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.

     38
          Id. at 503-04.
     39
      TEX. INS.CODE ANN. art. 21.52B, § 2(a)(1) (West Supp.1997).
This subsection was not changed by the 1995 amendments.