Public Employees Claim Breach of Contract to Cover Medication Costs

Joseph L. Fink III, JD, DSC (Hon.), BSPHARM, FAPhA;

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August 22, 2024

Pharmacy Times

August 2024

Volume90

Issue 8

Public Employees Claim Breach of Contract to Cover Medication Costs

Author(s):

Joseph L. Fink III, JD, DSC (Hon.), BSPHARM, FAPhA

The legal question was whether a statute created an enforceable contract

Facts of the Case

This case was rooted in a state’s offering of retirement benefits to state employees and retirees. The specific focus of the dispute was the program, created through the enactment of a state statute, to provide retirees with coverage of prescription medications as part of the overall retirement benefits package.

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The legal challenge was launched in 2018 when the retirees questioned the state’s plan to transition their prescription medication coverage onto Medicare Part D from the existing state plan. Medicare’s expanded coverage to include outpatient prescription medication was authorized as part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, with an effective date of January 1, 2006.

The employee group based its arguments on its conclusion that 2 statutes enacted by the legislature created a contractual obligation to provide coverage for prescription medication as part of the retirement subsidy. The first statute was enacted in 2004 and was the first mention of retiree prescription drug benefits in state law. That statute remained in effect until a 2011 enactment made it clear that the state would discontinue the program.

About the Author

Joseph L. Fink III, BSPharm, JD, DSc (Hon), FAPhA, is emeritus professor of pharmacy law and policy and former Kentucky Pharmacists Association Professor of Leadership at the University of Kentucky College of Pharmacy in Lexington.

The federal trial court where the case was filed had reviewed the wording of the statutes and concluded that the provisions in those enactments had indeed created a contractual obligation for the state to provide the retirees’ prescription drug benefit as part of the overall retirement benefit plan. This lower-level federal court focused on the use of the word entitled in the statute to conclude that the state had intended to establish a contract with the retirees. The use of that term appeared in a portion of the statute stating which benefits employees were qualified for based on their years of service.

The trial court dismissed the labor union from the lawsuit because the judge had concluded that the wording of the statute created a unilateral contract outlining prescription benefits that “vested upon retirement.” Thus, members of the union who were active—not retired—employees were not entitled to be part of the legal claim. The court emphasized that the promised benefits “do not vest until an employee retires with sufficient years of service.”

The labor union appealed this dismissal to the relevant US Court of Appeals. The appellate court affirmed the trial court’s decision to dismiss the labor union from the lawsuit.

The Court’s Reasoning

On appeal, the court readily identified the pivotal issue as being whether the state “contracted, through statute, to provide retirees with prescription drug benefits as part of their retirement subsidy.” A state statute enacted in 1993 created a comprehensive health benefits plan for state employees but it did not specify the amount of subsidy or the benefits that would be available to retirees.

The lower court concluded that the availability of subsidized benefits required 3 facts: Firstly, the individual must have commenced service on or before June 30, 2011. Secondly, the person must be retired. And thirdly, the former employee must have accrued at least 5 years of “creditable service.” Based on those criteria, currently employed members of the labor union had “no vested entitlement to the prescription drug benefits.”

The Court of Appeals affirmed the dismissal of the union’s claim, basing that decision on the 3-judge panel’s conclusion that several legislative enactments had not created a legally enforceable contract with the members of the labor union still actively employed. Although the basis for dismissal differed from that which had been the focus of the District Court, the outcome was identical: The labor union’s portion of the lawsuit was dropped.