                         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




                             p. 2488
    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




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