The Arkansas General Assembly passed Act 900 earlier this year, drawing praise from some Arkansas pharmacists and sharp criticism from pharmacy benefit managers. The lawsuit that this legislation triggered raises compelling and timely questions of both public policy and constitutional law.
Act 900 is the first law of its kind in the nation: It requires pharmacy benefit managers to reimburse every penny that pharmacists spend when they buy generic drugs from wholesalers.
Before Act 900, pharmacists complained that they regularly lost money on generic-drug prescriptions because they were not fully reimbursed. Now pharmacy benefit managers complain that Act 900 removes any incentive for pharmacists to comparison-shop; they claim the act creates a vast new subsidy for pharmacists that will drive up drug prices for consumers.
Benefit managers haven't just complained; they've also sued the state, arguing that Act 900 is unconstitutional.
In light of Act 900's unique approach and the strident national debate over the costs of health care, this lawsuit will draw attention from around the country. The challengers raise four serious questions of national importance about the limits of state power in our federal system of dual sovereignty.
First, has the federal government "occupied the field," preventing Arkansas from establishing this regulation of pharmacy benefit managers? Plaintiffs rest their argument on the theory of "pre-emption": that Congress already has regulated health benefits so as to exclude the General Assembly from sharing in oversight power.
Pre-emption law is notoriously unsettled. In December, the U.S. Supreme Court will hear arguments in another case about health care and pre-emption, testing the constitutionality of a Vermont law that mandates health-care data reporting to a state database. Past pre-emption cases have fractured the Supreme Court, and not always along familiar lines. So outcomes on these questions are especially hard to predict.
Second, is Act 900 "naked economic protectionism," or does it further legitimate state policy? The federal Constitution's Commerce Clause has been understood to prohibit states from excessively burdensome regulation of interstate commerce. On that theory, the plaintiffs argue that Act 900 gives the government an unfair market advantage over private actors by exempting the state's Medicare plans from compliance with the reimbursement rules. They also argue that Act 900 will benefit in-state pharmacies to the detriment of their out-of-state competitors.
Similar conditions have undone state legislation in the past under the Commerce Clause. But the federal circuit courts are now in disarray over the proper test for this problem. So the question of Act 900's constitutionality would be a jump ball in today's U.S. Supreme Court.
Third, does Act 900 rewrite established contracts? The Constitution's Contract Clause prevents states from blocking the enforcement of past contracts. According to the plaintiffs, Act 900 requires the retroactive restructuring of already-existing and agreed-upon contracts between pharmacies and benefit managers. Plaintiffs argue that maybe the state can reshuffle the deck, but it can't replay past hands. If the act does rewrite established creditor-debtor relationships, then the Contract Clause theory holds water.
Fourth, does Act 900 permit pharmacists artificially to inflate invoices and rake in windfall profits from benefit programs? According to the plaintiffs, benefit managers under Act 900 will not be able to predict their contractual obligations in advance because they have to reimburse pharmacy invoice rates--no matter what those rates are. If Act 900 does in fact allow pharmacists to rig the game by inflating invoices, then the plaintiffs make out a colorable claim that the act violates their state and federal guarantees of due process of law.
In a glib motion to dismiss filed in late September, state Attorney General Leslie Rutledge fired off a series of denials that the plaintiffs' claims had constitutional merit. Nonetheless, the plaintiffs have raised weighty constitutional questions that resonate well beyond a narrow sector of one state's economic policy.
Yesterday, their arguments were examined in a federal courtroom in Little Rock. We can expect trial and appellate courts to take some time turning over the questions raised by Act 900.
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Before becoming a professor at the University of Massachusetts Law School, Richard J. Peltz-Steele taught constitutional law at UA's Bowen Law School.
Editorial on 11/05/2015