Pharmaceutical Research & Manufacturers of America v. Walsh, Peter Acting Comm., Maine Dept. of Human Services, et (05/19/2003)

Questions presented: 1. Whether the federal Medicaid statute, 42 U. S. C. 1396 et seq., allows a state to use authority under that statute to compel drug manufacturers to subsidize price discounts on prescription drugs for non-Medicaid populations? 2. Whether a state may circumvent the Commerce Clause prohibition against regulating or taxing wholly out of state transactions by requiring an out-of-state manufacturer, which sells it products to wholesalers outside the state, to pay the state each time one of its products is subsequently sold by a retailer within the state?

BY BEN STEVERMAN, MEDILL NEWS SERVICE

Before 2000, Maine already provided prescription drug discounts to some people of low incomes, but it became clear to lawmakers such as State Senator Susan W. Longley, chair of the legislatures health and human services committee, that rising prescription drug costs were hurting both state finances and people from middle-income groups.

"Year after year we were writing these checks with more and more zeroes," Longley said. "At the same time, the pharmaceutical companies were making money hand over fist."

A series of public meetings around the state gathered support for action from both Republicans and Democrats. A proposed bill relied on strict price controls, much like Maines neighbors did in Canada.

Arguing that price controls violated the Constitutions prohibition against a states regulation of interstate commerce, Maines independent governor, Angus King, threatened to veto the bill. Trying to find a way to control prices in a constitutional way, King and others took the bill and "re-crafted it completely," Longley said. A new bill passed with little opposition, and with the governors signature.

Under the law, Maine uses its control over the Medicaid program to obtain drug discounts from manufacturers. Maines Department of Health Services commissioner negotiates with drug manufacturers to obtain a "rebate" on drug sales. The rebates fund a discount program open to all Maine residents.

If drug-makers dont reach rebate agreements with the state, their drugs are much less likely to be used to treat patients under the states Medicaid program because doctors need "prior authorization" to prescribe them to Medicaid beneficiaries. The possibility of losing thousands of Medicaid patients gives drug makers a strong financial incentive to participate in the program.

The Pharmaceutical Research and Manufacturers of America (PhRMA) sued the state of Maine on Aug. 10, 2000, one day before the law was to take effect. The drug-makers said the Maine statute violated federal Medicaid law by placing extra burdens on doctors and patients in Medicaid.

They also argued that, despite Kings improvements, Maines law still improperly regulated interstate commerce by regulating business transactions between drug manufacturers and distributors that went on outside the state.

U.S. District Judge D. Brock Hornby agreed, finding that the law violated both the Medicaid law and interstate commerce clause.

A unanimous 1st Circuit Court of Appeals panel reversed, writing that Maines efforts to complicate Medicaids prior authorization was "explicitly permitted" by the Medicaid law. Also, while Maines program may decrease drug manufacturers profits, the court found it was not directly regulating those profits. "Ultimately, the Maine Act simply regulates activity that occurs in state," Senior Circuit Judge Hugh H. Bownes wrote. The activities regulated were the purchase of drugs at pharmacies (which trigger the rebate payments to the state), the negotiation of the rebate and the states prior authorization procedures all of which occurred in state.

Because the implementation of Maines law was prevented by the court challenge, problems with the law were much harder to prove because no evidence was available of actual harm to Medicaid users or others. The court did not shut the door to future challenges to the law if it was implemented improperly.

Finally, Bownes wrote of the need to have states experiment, quoting Justice Louis Brandeis, "It is one of the happy incidents of the federal system that a single courageous state may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country."

The Bush Administration, through U.S. Solicitor General Theodore Olson, largely agreed with the 1st Circuit. In an amicus brief, Olson said Supreme Court review of the case would be "premature" but also raised questions about the way program uses the Medicaid law to serve non-Medicaid patients.

In asking for Supreme Court review, PhRMA, represented by Stanford Law School Dean Kathleen Sullivan among others, repeated earlier arguments regarding interstate commerce and conflicts with the Medicaid law. They also argued the 1st Circuit decision conflicted with a D.C. Circuits decision to strike down a prescription drug demonstration project in Vermont. With so many states contemplating prescription drug legislation similar to Maines, PhRMA argued the time for review was now.

"Were this Court to decline review, it would give these dozens of states a green light to copy Maines program, rapidly multiplying the constitutional and commercial harms that the Maine Rx program inflicts, and leading to proliferating litigation in lower courts," their petition said.

On June 28, 2002, on the final day of the Supreme Court's 2001-02 term, the Court accepted the case for review.

On May 19, 2003, the Court sided with the state of Maine, holding that its prescription drug price law does not on its face violate the Constitution's commerce clause, and therefore, can be implemented.

Justice John Paul Stevens wrote the Court's lead opinion on behalf of a majority of six. A key conclusion in the majority opinion was that the law does not constitute an impermissible extraterritorial regulation that discriminates against interstate commerce in order to subsidize in-state retail sales, in that it does not regulate the price of any out-of-state transaction by its express terms or its inevitable effect.

The majority also concluded that Maine's law is not preempted by the federal Medicaid Act in that the Court wasn't persuaded that the law coerces pharmaceutial companies into reducing their prices on non-Medicaid sales.

"We have made it clear that the Medicaid Act gives states substantial discretion to choose the proper mix of amount, scope and duration limitations on coverage," Stevens wrote. "Maine's interest in protecting the health of its uninsured residents provides a plainly permissible justification" for the drug discount program.

Justices Stephen Breyer, Antonin Scalia and Clarence Thomas penned concurrences.

Justice Sandra Day O' Connor filed a dissent for herself, Justice Anthony Kennedy and Chief Justice William Rehnquist. The dissenters would have retained the injunction keeping the law from being implemented.

"The program is open to all Maine residents, rich and poor," O' Connor wrote. "It does not purport to further a Medicaid-related purpose, and it is not tailored to have such an effect. By imposing prior authorization on Maines Medicaid population to achieve wholly non-Medicaid related goals, Maine Rx stands as an obstacle to the accomplishment and execution of the full purposes and objectives of the federal Medicaid Act."

Attorneys: For Pharmaceutical Research and Manufacturers of AmericaDaniel M. PriceSidley Austin Brown & Mood1501 K Street, N.W.Washington, DC 20005202-736-8000For Peter Walsh, et al.:Andrew S. HaglerAssistant Attorney General6 State House StationAugusta, ME 04333207-626-8800Other Attorneys: For Washington Legal Foundation, et al.:Daniel J. PopeoWashington Legal Foundation2009 Massachusetts Ave., N.W.Washington, DC 20036202-588-0302For Chamber of Commerce of the United States:Steven J. Rosenbaum1201 Pennsylvania Ave., N.W.Washington, DC 20004202-662-6000For the U.S.:THEODORE B. OLSONSolicitor General, Counsel of RecordROBERT D. MCCALLUM, JR.Assistant Attorney GeneralEDWIN S. KNEEDLERDeputy Solicitor GeneralLISA SCHIAVO BLATTAssistant to the Solicitor GeneralMARK B. STERNALISA B. KLEIN