0ci:ober 14, 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,ptions 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 produxs and would provide pharmacies with itemfor-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.istered in 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 ;iuount 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 

13. 2487 
Mr. Marlin W. Johnston - Pa[;e 2 (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 antitrust 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, 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 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 

p. 2488 
. 

Mr. Marlin W. Johnston - Pal;e 3 ,(JM-560) 

this case are 'competing pharmacies.' 656 F.2d, 

at 98. . . . 

460 U.S. at 154, n. 7. Beciluse 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 deI,artment's Medicaid Vendor Drug Program is 

to enable the state to prov:.de medical 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 foreclose the access of compet:ing sellers 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~;tributions under 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.ed by 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;ive Medicaid 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 

p. 2489 
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~zpartment 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 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