Can a state Medicaid program buy prescription drugs directly and give them to recipients without violating federal antitrust law?

Texas AG Opinion JM-560: Medicaid Drug Program

Plain-English summary

The Commissioner of the Texas Department of Human Services asked whether the agency could change how its Medicaid Vendor Drug Program buys prescription drugs. Under the existing setup the state reimbursed pharmacies for the cost of a Medicaid recipient's free prescriptions and paid a dispensing fee. The proposal was to contract with private distributors who would keep a stock of common drugs and hand pharmacies item-for-item replacements for what they dispensed, while the state kept paying pharmacies a dispensing fee. The appeal was price: the state can buy drugs more cheaply under direct contracts than by reimbursing retail prices. Wholesale suppliers complained that the state would be pushing them out of the market and argued the change would break federal antitrust law. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0560.pdf

The AG said it would not. The federal price-discrimination rules in section 2(a) and (f) of the Clayton Act, as amended by the Robinson-Patman Act, aim at conduct that forecloses competing sellers from a market. The U.S. Supreme Court in Jefferson County Pharmaceutical Association, Inc. v. Abbott Laboratories held that a state's purchases are not automatically immune, but it limited that ruling to purchases made to compete, at a price advantage, against private business in the retail market, and it expressly reserved the question of sales to indigents. Here the state buys drugs and gives them away free to Medicaid recipients, so the competing sellers are really after the state's money as the buyer, not fighting the state for retail customers. That is not competition "with private enterprise," so the change would not violate the statute. The AG added that it could not decide fact questions, such as whether dispensing fees are set so low that pharmacies would drop out and cut off recipients' access, because the opinion process does not include fact-finding. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0560.pdf

Currency note

This opinion was issued in 1986. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Federal Medicaid drug-rebate law and Texas program rules have changed substantially since then. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule mentioned here.

Common questions

Why isn't the state competing with drug wholesalers when it buys drugs directly?

Because the drugs go to Medicaid recipients for free, and the state is the one paying. The AG reasoned that competing sellers are trying to get the state's money as the buyer, not trying to sell to the same retail customers the state is selling to. No private seller wants to shoulder the burden of giving free medication to indigents. So the state's purchases are not "in competition" with private enterprise. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0560.pdf

Doesn't the Supreme Court's Abbott Laboratories case say states can be sued under antitrust law?

It says states are not automatically immune, but the AG stressed how narrow that ruling was. Jefferson County Pharmaceutical Association, Inc. v. Abbott Laboratories reached only state purchases made to compete, using price advantages, against private business in the retail market. The Court specifically did not decide whether sales to a class of indigents count as competition. The Texas proposal falls in that reserved area. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0560.pdf

Could the change still be challenged some other way?

Possibly. The AG noted that challenges to programs like this usually turn on whether they comply with the Social Security Act and its regulations, not antitrust law. A loss-of-access challenge could also succeed if dispensing fees were so low that too few pharmacies stayed in the program to give recipients reasonable access. But whether that would actually happen is a fact question, and the AG opinion process does not do fact-finding. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0560.pdf

Background and statutory framework

Medicaid is the Title XIX program of the Social Security Act (42 U.S.C. § 1396 et seq.), a federal matching-fund program run with participating states that channel federal and state money to medical providers, including pharmacies. How much a state pays providers is largely its own call within the limits of the Act and its regulations, as noted in Ostrow Pharmacies, Inc. v. Beal, and courts have upheld state drug-distribution arrangements resembling the one proposed here. The antitrust question the Commissioner raised had not been squarely addressed in those cases, which mostly turned on Social Security Act compliance. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0560.pdf

The antitrust text at issue is section 2 of the Clayton Act as amended by the Robinson-Patman Act (15 U.S.C. § 13(a), (f)), which makes it unlawful to discriminate in price between purchasers of like goods where the effect may be to substantially lessen competition, and to knowingly induce or receive such a discrimination. The AG read the U.S. Supreme Court's decision in Jefferson County Pharmaceutical Association, Inc. v. Abbott Laboratories as limited to state purchases aimed at competing in the retail market, and quoted the Court's footnote reserving the indigent-sales question. Because Texas would be distributing free drugs to Medicaid recipients rather than competing for retail sales, the AG found no violation. On the separate access concern, the AG cited DeGregorio v. O'Bannon and O'Bannon v. Town Court Nursing Center for the point that a loss-of-access claim depends on whether fees actually drive providers out, a fact question also discussed in Pharmacists Society of Milwaukee County, Inc. v. Wisconsin Department of Health and Social Services and California Association of Bioanalysts v. Rank; under V.T.C.S. article 4399, the opinion process does not encompass such fact-finding. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0560.pdf

Citations and references

The opinion cited the following authorities. Source: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0560.pdf

Statutes and regulations:

• Clayton Act § 2(a), (f), 38 Stat. 730, c. 323, § 2 (1914), as amended by the Robinson-Patman Act, 49 Stat. 1526, c. 592, § 1 (1936) (15 U.S.C. § 13(a), 13(f))
• 42 U.S.C. § 1396 et seq. (Title XIX, Social Security Act, "Medicaid")
• 42 U.S.C. § 1396a(a)(23) (recipient's right to choose providers)
• 42 C.F.R. § 447.204
• Tex. Hum. Res. Code § 32.001 et seq.; § 32.027(a)
• V.T.C.S. art. 4399 (attorney general opinion process)

Cases:

• Ostrow Pharmacies, Inc. v. Beal, 394 F. Supp. 22 (E.D. Pa. 1975)
• Jefferson County Pharmaceutical Association, Inc. v. Abbott Laboratories, 460 U.S. 150 (1983)
• DeGregorio v. O'Bannon, 500 F. Supp. 541
• O'Bannon v. Town Court Nursing Center, 447 U.S. 773 (1980)
• Pharmacists Society of Milwaukee County, Inc. v. Wisconsin Department of Health and Social Services, 79 F.R.D. 405 (E.D. Wis. 1978)
• California Association of Bioanalysts v. Rank, 577 F. Supp. 1342 (C.D. Cal. 1983)

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/jim-mattox/jm-0560
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1986/jm0560.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain; the linked PDF is authoritative.

October 14, 1986

Mr. Marlin W. Johnston
Commissioner
Texas Department of Human Services
P. O. Box 2960
Austin, Texas 78769

Opinion No. JM-560

Re: Validity of a pilot program under which the Department of 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 prescriptions and 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 products 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 paid 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 violate the federal anti-trust laws.

Title XIX of the Social Security Act, 42 U.S.C. § 1396 et seq., establishes the program, known as "Medicaid," which provides medical assistance to individuals who lack sufficient economic resources to meet the cost of necessary medical services. Medicaid is a federal matching-fund program administered in conjunction with participating states. The states channel federal funds and state funds through appropriate state agencies to the providers of medical services, including pharmacies. The amount of 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 distributions similar to the program proposed in your request letter have been upheld. See, e.g., Ostrow Pharmacies, Inc., supra. At issue in most cases is the compliance of the 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), as amended by the Robinson-Patman Act, 49 Stat. 1526, c. 592, § 1 (1936) (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 . . . and where the effect of such discrimination may be substantially to lessen competition. . . .

. . . .

(f) It shall be unlawful for any person engaged in commerce, in the course of such commerce, knowingly 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 issue 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 "traditional governmental functions." Id. Further, the Court stated:

Special solicitude for the plight of indigents is a traditional 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 this case are 'competing pharmacies.' 656 F.2d, at 98. . . .

460 U.S. at 154, n. 7. Because your request involves distributions of drug prescriptions to Medicaid recipients, the issue at hand is whether such distributions are "in competition" with private enterprise.

The purpose of the department's Medicaid Vendor Drug Program is to enable the state to provide medical assistance to needy individuals and to enable the state to obtain all benefits for those persons authorized by federal law. See Hum. Res. Code § 32.001 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 foreclose the access of competing sellers to all or part of the market supplied by the state. But in the instant case, because the state is providing free prescriptions 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. Distributions under the department's proposed change in the Medicaid Vendor Drug Program are therefore not "in competition" with private enterprise. Consequently, the proposed change would not violate subsections (a) and (f) of section 2 of the Clayton Act, supra, as amended by the Robinson-Patman Act, supra.

As indicated at the outset of this opinion, challenges to programs such as the one you propose usually focus on compliance with the Social Security Act and its 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 the 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. § 447.204; Hum. Res. Code § 32.027(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 give Medicaid recipients reasonable access. DeGregorio v. O'Bannon, 500 F. Supp. 541, 547-50; see O'Bannon v. Town Court Nursing Center, 447 U.S. 773 (1980). Whether 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 loss of reasonable services to Medicaid recipients is a question of fact. Pharmacists Society of Milwaukee County, Inc. v. Wisconsin Department of Health and Social Services, 79 F.R.D. 405, 411-12 (E.D. Wis. 1978); see also California Association of Bioanalysts v. Rank, 577 F. Supp. 1342, 1359-60 (C.D. Cal. 1983). Apart from the fact that this long range effect can only be determined 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 department would purchase certain drug products for free distribution to Medicaid recipients and pay a distribution fee to pharmacies rather than purchasing the drug products from the retail pharmacies, would not be in competition with private enterprise. Consequently, the proposed program would 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.S.C. § 13(a) and 13(f)).

Very truly yours,

Jim Mattox
Attorney General of Texas

JACK HIGHTOWER
First Assistant Attorney General

MARY KELLER
Executive Assistant Attorney General

RICK GILPIN
Chairman, Opinion Committee

Prepared by Jennifer Riggs
Assistant Attorney General