Future of State Discount Drug Program in Doubt

By Phyllis Griffin Epps

On January 23, 2003, the United States Supreme Court heard arguments regarding the legality of a Medicaid demonstration project that would require pharmaceutical manufacturers to extend existing rebate agreements to include drugs purchased for low-income persons not eligible for traditional Medicaid coverage in Maine.  Pharmaceutical Research and Manufacturers of America v. Concannon, 249 F. 3d 66 (1st Cir. 2001).  The outcome of this case may well determine the future of initiatives to minimize the costs of prescription drugs for low-income residents in several states.

The Social Security Act provides that states can develop Medicaid “pilot” or “demonstration” projects that implement new ways of providing health care to low-income citizens.  If such a project “assist[s] in promoting the objectives” of the Medicaid system, 42 U.S.C. s 1315(a) (2000), the Secretary of the U.S. Department of Health and Human Services (HHS) may choose to issue a “waiver” exempting that project from certain federal requirements applicable to conventional Medicaid programs.  Id., sec. 1315(a)(1).

The program in Maine was modeled after a demonstration project approved by the federal government for implementation in Vermont. See related story here.   The Vermont program tied some state payments to anticipated manufacturer rebates but a federal appellant court held that such state payments did not constitute payments under a State Medicaid plan within the meaning of the law and declared the program illegal. Pharm. Research and Mfrs. of America v. Thompson, 251 F. 3d 219 (D.C. Cir. 2001).  After this decision, the State of Maine modified its project by arranging to contribute, in addition to the manufacturer’s rebate, two percent toward the cost of the drug paid by the patient. The modified project was named “Healthy Maine”.  On February 25, 2002, the United States District Court for the District of Columbia held that the two-percent payment was lawful as an appropriate Medicaid expenditure. Pharm. Research and Mfrs. of America v. Thompson, 191 F. Supp. 2d 48 (D.D.C. Feb. 25, 2002).

The United States Court of Appeals for the District of Columbia Circuit reversed the decision of the lower court.  Pharm. Research and Mfrs. of America v. Thompson, 313 F.3d 600 (D.C. Cir. Dec. 24, 2002).  The court rejected Maine’s argument that the revisions were consistent with the project approved by HHS and concluded that HHS never formally considered or endorsed the revisions to the project initially submitted by Maine.  Absent HHS approval, the court noted, Healthy Maine is not a lawful Medicaid demonstration project.  The court declined to address the legal merit of the “two percent” revisions:

We have no need to consider questions about the extent to which the Secretary has authority to ‘regard’ a state payment as a Medicaid payment; whether the 2% subsidy is sufficient to trigger the rebate obligations under the Act; or whether the Act requires that all Medicaid ‘payments’ include federal matching funds.  Until the Secretary has made clear his views on these questions, we decline to address these matters.

Several perspectives were argued during the hearing before the Supreme Court.  Carter G. Phillips, a Washington lawyer for the drug makers, argued that the program threatens the health benefits of Medicaid patients by requiring drug companies to get prior state approval for selling specific drugs in the state.  Andrew S. Hagler of Augusta, an assistant state attorney general, defended the program as one benefiting the state Medicaid program by reducing its costs.  Edwin S. Kneedler, a Justice Department lawyer, argued not only that federal officials have the first right to determine the program's validity, but also that the Maine program does not serve any Medicaid purpose and is therefore legally vulnerable.

Twenty-nine states and Puerto Rico submitted arguments in support of Maine’s approach.  Several other states have already adopted versions of the approach taken by Maine. All await a decision that the Supreme Court seems reluctant to reach.  Justices Breyer suggested the option of remanding the issue to the lower courts so that Maine can submit its revised plan for proper consideration by HHS. The situation is complicated – or, from a different perspective, simplified -- by the fact that HHS is not obligated to approve any demonstration project.  The Bush administration has suggested its support of the drug industry’s position by arguing that the Maine program is not consistent with the purposes and objectives of Medicaid.

Lane, Charles. High Court Considers Cost of Prescriptions; Justices Appear Hesitant to Make Political, Economic Tradeoffs in Maine Case, THE WASH. POST, Jan. 23, 2003, at A2.

Denniston, Lyle. Supreme Court Wants Us to Weigh In On Maine Rx Justices Hear Sides on Drug Discounts, THE BOSTON GLOBE, Jan. 23, 2003, at A3.