0ci:ober14, 1986

Mr. Marlin W. Johnston OpinionNo. 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 recipientsmay receive a number of freeprescriptions 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-prescribedproduxs and would providepharmacieswith itemfor-item replacements for products dispensed to Medicaid recipients. The departmentwould continue to pay the pharmacies a dispensing fee. You indicate that the advantage sought by the proposal lies in the lower drug prices availableunder direct state contractsas opposed to thehigher prices usuallyp,a:Ld by the retailpharmaciesand reimbursed by the state. The wholesale suppliers allege that the statewould be illegally supplanting them in the market. It has been suggested that the proposed changewould vL)late the federalanti-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 >uholack 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:lfederal funds and state funds through appropriate state agencies to the providers of medical services. includingpharmacies. The ;iuount of payments to providers forvarious services is largelywithin 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 theprogramproposed in your request letterhave been

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upheld. See. e.g., Ostrow Pharmacies,Inc., supra. At issue in most cases is the compliance of ?he state programwith the Social Security Act and its attendant regulations. Id. The effect of federal antitrust laws on these Medicaid drug distributionprograms, however, has not been addressed.
Subsections (a)and (f:, of section 2 of the ClaytonAct, 38 Stat. 730, C. 323, $2 (1914). a; amended by the Robinson-Patman Act, 49 Stat. 1526,C. 592, 61 (193(i) (15U.S.C. $)13(a)and 13(f)),provide:

(a) It shallbe unlawful for any person engaged in commerce, in the: course of such commerce, either directly or indirectly, to discriminate in price between differentpurchasersof commoditiesof 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 shallbe unlawful for any person engaged in commerce, in the course of such commerce, knowingly to induce or receive a discrimination in pricewhich is prohibitedby 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 purchasesby 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 JeffersonCounty,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 retailmarket. 460 U.S. at 154.

The Court emphasized .thatits decision did not reach state purchases for use in "t:raditionalgovernmental 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 questionpresented!, thatwe 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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this case are 'competing pharmacies.' 656 F.2d, at 98.

. . . 460U.S. at 154,n. 7. Beciluse your request involvesdistributionsof 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 toprov:.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-createdconditionswhich tend to foreclose the access of compet:ingsellers to all or part of the market suppliedby the state. But **:ln** the instant case,because the state is providing freeprescriptionr; toMedicaid 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'sproposed 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 ClaytonAct, s?lpta, as ameni.ed

by the Robinson-PatmanAct, sllpra.

As indicatedat the ong1e.t of this opinion, challengesto programs such as the one you propose usually focus on compliance with the Social Security Act and l,tsattendant regulations. You do not indicate whether you anticipate a change in the number of retail pharmacieswhich 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 statutoryright to choose their providers ofmedical 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 enoughretail providers to i;ive Medicaid recipientsreasonableaccess. DeGregoriov. O'Bannon, 500 F. Supp. 541. 547-50; see O'Bannonv. 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 :.ossof reasonable services to Medicaid recipients is a question 0::fact. Pharmacists Society of Milwaukee County, Inc.v. WisconsinDcEartment of Health and Social Services, 79 F.R.D. 405, 411-12 (E.D.Wirx:.1978); see also CaliforniaAssociation 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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over a period of time, the opinionprocess established for this office by article 4399,V.T.C.S.. does not encompass fact-finding.

SUMMARY

A proposed change in theMedicaidVendor 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 thedrug products from the retailpharmacies,would not be in competition with private enterprise. Consequently, the proposed program wot,ldnot 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 (15U.E,.C.$113(a)and 13(f)).

Attorney General of Texas

JACK HIGHTOWKR FirstAssistantAttorney General

MARY KKLLER ExecutiveAssistantAttorney General

RICK GILPIN Chairman,Opinion Committee
Preparedby JenniferRiggs AssistantAttorney General

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