Untitled Texas Attorney General Opinion

0ci:ober14, 1986
Mr. Marlin W. Johnston Opinion No. JM-560
COlUlUiSSiOllS~
Texas Department of Human Ser“.'ices Re: Validity of a pilot program
P. 0. Box 2960 under which the Department of
Austin, Texas 78769 Human Services would provide
prescription drugs to eligible
Medicaid recipients
Dear Mr. Johnston:
You ask whether a proposed change in the Medicaid Vendor Drug
Program of the Texas Department of Human Services would violate
certain federal anti-trust laws. You indicate that, under current
policy, Medicaid recipients may receive a number of free prescriptions
per month. The department reimburses the providers of prescriptions
for the cost of the.prescri,ptionsand pays the providers a dispensing
fee. Under the proposed change, the department would contract with
private distributors who would access and maintain a supply of
frequently-prescribed produxs and would provide pharmacies with item-
for-item replacements for products dispensed to Medicaid recipients.
The department would continue to pay the pharmacies a dispensing fee.
You indicate that the advantage sought by the proposal lies in the
lower drug prices available under direct state contracts as opposed to
the higher prices usually p,a:Ld
by the retail pharmacies and reimbursed
by the state. The wholesale suppliers allege that the state would be
illegally supplanting them in the market. It has been suggested that
the proposed change would vL)late the federal anti-trust laws.
Title XIX of the Social Security Act, 42 U.S.C. 11396 et seq.,
establishes the program, lu~wn as "Medicaid," which provides medical
assistance to individuals >uho lack sufficient economic resources to
meet the cost of necessary medical services. Medicaid is a federal
matching-fund program admir.isteredin conjunction with participating
states. The states channc:l federal funds and state funds through
appropriate state agencies to the providers of medical services.
including pharmacies. The ;iuountof payments to providers for various
services is largely within the discretion of the state subject to the
limits established in the Social Security Act and in regulations
promulgated under the act. Ostrow Pharmacies, Inc. V. Beal, 394 F.
SUPP. 22, 25 (E.D. Pa. 1975). Medicaid programs for drug distribu-
tions similar to the program proposed in your request letter have been
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Mr. Marlin W. Johnston - Pa[;e2 (JM-560)
upheld. See. e.g., Ostrow Pharmacies, Inc., supra. At issue in most
cases is the compliance of ?he state program with the Social Security
Act and its attendant regulations. Id. The effect of federal anti-
trust laws on these Medicaid drug distribution programs, however, has
not been addressed.
Subsections (a) and (f:,of section 2 of the Clayton Act, 38 Stat.
730, C. 323, $2 (1914). a; amended by the Robinson-Patman Act, 49
Stat. 1526, C. 592, 61 (193(i) (15 U.S.C. $)13(a) and 13(f)), provide:
(a) It shall be unlawful for any person engaged
in commerce, in the:course of such commerce, either
directly or indirectly, to discriminate in price
between different purchasers of commodities of like
grade and quality, where either or any of the
purchases involved in such discrimination are in
commerce . . . sad where the effect of such
discrimination mqr be substantially to lessen
competition. . . I
. . . .
(f) It shall be unlawful for any person engaged
in commerce, in the course of such commerce, know-
ingly to induce or receive a discrimination in
price which is prohibited by this section.
In Jefferson County Pharmaceutical Association, Inc. v. Abbott
Laboratories, 460 U.S. 150-(1983). the United States Supreme Court
held that sales to and purchases by a state and its agencies are not
immune as a matter of law from the sanctions of subsections (a) and
(f) of section 2. The ISSIX in Jefferson County, however, was narrow.
The Court expressly limited its decision to state purchases made for
the purpose of competing, with price advantages, against private
enterprise in the retail market. 460 U.S. at 154.
The Court emphasized .that its decision did not reach state
purchases for use in "t:raditional governmental functions." -Id.
Further, the Court stated:
Special solicitude for the plight of indigents
is a tradition&l concern of state and local
governments. If, in special circumstances, sales
were made by a State to a class of indigents, the
question presented!,that we need not decide, would
be whether such sales are 'in competition' with
private enterprise. The District Court correctly
assumed that the private and state pharmacies in
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Mr. Marlin W. Johnston - Pal;e3 ,(JM-560)
.
this case are 'competing pharmacies.' 656 F.2d,
at 98. . . .
460 U.S. at 154, n. 7. Beciluseyour request involves distributions of
drug prescriptions to Medicaid recipients, the issue at hand is
whether such distributions are "in competition" with private enter-
prise.
The purpose of the deI,artment'sMedicaid Vendor Drug Program is
to enable the state to prov:.demedical assistance to needy individuals
and to enable the state to obtain all benefits for those persons
authorized by federal law. See Rum. Res. Code 932.001 et seq. The
federal anti-trust sanctions of subsections (a) and (f) of section 2
prohibit state action or state-created conditions which tend to fore-
close the access of compet:ingsellers to all or part of the market
supplied by the state. But :ln the instant case, because the state is
providing free prescriptionr;to Medicaid recipients, competing sellers
seek the money held by the real buyer -- the state. No one contends
that competing sellers wish to shoulder the burden of supplying free
medication to indigents. Di~;tributionsunder the department's proposed
change in the Medicaid Vendor Drug Program are therefore not "in
competition" with private anterprise. Consequently, the proposed
change would not violate subsections (a) and (f) of section 2 of the
Clayton Act, s?lpta,as ameni.edby the Robinson-Patman Act, sllpra.
As indicated at the ong1e.t
of this opinion, challenges to programs
such as the one you propose usually focus on compliance with the
Social Security Act and l,ts attendant regulations. You do not
indicate whether you anticipate a change in the number of retail
pharmacies which distribute drugs to Medicaid recipients. The change
would affect primarily thl! wholesale suppliers. It is therefore
unnecessary to decide whether the proposed change would impair the
Medicaid recipients' federal.and state statutory right to choose their
providers of medical services. See 42 U.S.C. §1396a(a)(23); 42 C.F.R.
9447.204; Hum. Res. Code §3i..027(a).
Moreover, a challenge based on loss of access can be sustained
only if a state's dispensing fee structure actually fails to enlist
enough retail providers to i;iveMedicaid recipients reasonable access.
DeGregorio v. O'Bannon, 500 F. Supp. 541. 547-50; see O'Bannon v. Town
Court Nursing Center, 447 lJ.S. 773 (1980). Whxer reimbursement
rates for dispensing drugs under a Medicaid program are so low that
they cause participating pharmacists to eventually drop out of the
program, thereby causing :.oss of reasonable services to Medicaid
recipients is a question 0:: fact. Pharmacists Society of Milwaukee
County, Inc. v. Wisconsin DcEartment of Health and Social Services, 79
F.R.D. 405, 411-12 (E.D. Wirx:. 1978); see also California Association
of Bioanalysts v. Rank, 577 F. Supp. 1342, 1359-60 (C.D. Cal. 1983).
Apart from the fact that thjs long range effect can only be determined
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Mr. Marlin W. Johnston - Page 4 (24-560)
over a period of time, the opinion process established for this office
by article 4399, V.T.C.S.. does not encompass fact-finding.
SUMMARY
A proposed change in the Medicaid Vendor Drug
Program of the Texas Department of Human Services
under which the d~zpartmentwould purchase certain
drug products for free distribution to Medicaid
recipients and pay a distribution fee to pharma-
cies rather than purchasing the drug products from
the retail pharmacies, would not be in competition
with private enterprise. Consequently, the pro-
posed program wot,ld not violate subsections (a)
and (f) of section 2 of the Clayton Act, 38 Stat.
730, as amended by the Robinson-Patman Act, 49
Stat. 1526 (15 U.E,.C.$113(a) and 13(f)).
Attorney General of Texas
JACK HIGHTOWKR
First Assistant Attorney General
MARY KKLLER
Executive Assistant Attorney General
RICK GILPIN
Chairman, Opinion Committee
Prepared by Jennifer Riggs
Assistant Attorney General
p. 2490