American Journal of Law & Medicine

The Maine Rx prescription drug plan and the dormant Commerce Clause doctrine: the case of the missing link[age].

I. INTRODUCTION

In the 2002 Term, the U.S. Supreme Court will hear the case of Pharmaceutical Research and Manufacturers of America (PhRMA) v. Concannon, (1) in which PhRMA, the plaintiff-appellant, will argue that the State of Maine's program to supply low-cost prescription drugs to its citizens (the Maine Rx Program) violates the dormant Commerce Clause doctrine. After the Program became law in 2000, PhRMA sought and obtained an injunction from a federal district court preventing the law from going into effect. Shortly thereafter, the First Circuit unanimously reversed the district court and lifted the injunction. In June 2002, the Supreme Court granted certiorari. (2)

This Article argues that the Maine Rx Program violates the dormant Commerce Clause doctrine (3) because it links a facially nondiscriminatory tax with a subsidy in a way that, in combination, burdens out-of-state drug sellers. The Supreme Court has found similar programs to be invalid in past cases, most recently in the 1994 case West Lynn Creamery, Inc. v. Healy. (4) My analysis contributes to the debate over the Program's constitutionality because the "suspect linkage" argument was not raised by PhRMA, was not addressed in Concannon, and has not been noticed in the extant commentary. (5) Viewed from this perspective, it becomes clear that the Maine Rx Program is virtually indistinguishable from similar schemes that the Court has invalidated and that the Court should thus reverse the First Circuit's decision upholding the Program, laudable though its goals might be.

Part II describes the origins and operation of the Maine Rx Program. PhRMA's challenge and the First Circuit's decision are described in Part III. Part IV contains a summary of the Court's linkage decisions, concentrating on West Lynn Creamery v. Healy. Part IV also examines a recent article by Professors Dan Coenen and Walter Hellerstein (6) that offers a deeper explanation of the Court's decisions in this area. Part V analyzes the Maine Rx Program in light of the cases and Coenen and Hellerstein's criteria for determining linkage, while Part VI considers defenses that Maine may offer.

II. THE MAINE RX PROGRAM

In 2000, Maine Governor Angus King signed a bill that created the Maine Rx Program. (7) The Program sought "to make prescription drugs more affordable for qualified Maine residents, thereby increasing the overall health of Maine residents, promoting healthy communities and protecting the public health and welfare." (8) The heart of the Program is a requirement that drug manufacturers and "labelers" (9) selling drugs through state-supported programs that supply drugs to needy residents enter into "rebate agreements" whereby the drug sellers pay a certain percentage of in-state sales of prescription drugs each quarter back to the State, in essence taxing the sale of those drugs. (10) The Commissioner of Maine's Department of Human Services is instructed to obtain a "rebate" better than or equal to that offered by drug sellers to the federal government under Medicaid. (11)

This de facto tax, in turn, is used to reimburse pharmacies, which, under the statute, agree to sell drugs covered under the rebate agreements to Maine citizens at a discount. (12) All "residents of the State who [have] obtained ... a Maine Rx enrollment card" are eligible as "qualified resident[s]" for the Program. (13) The pharmacies are reimbursed by the State for the discounted drugs sold under the Program. (14) The reimbursements are to come from the "Maine Rx Dedicated Fund," established by the Program, into which "revenue from manufacturers and labelers who pay rebates," as well as any other appropriations, are placed. (15) Figure 1, below, illustrates the structure of the Program.

[FIGURE 1 OMITTED]

Though "voluntary," those drug sellers who choose not to participate in the Program face two penalties. First, the Program provides for

the release of the names of non-participating manufacturers and sellers to the public. (16) More importantly, the Program permits, to the extent permitted by federal law, the imposition of "prior authorization" requirements on non-participating manufacturers and sellers (17)--meaning non-participating manufacturers or labelers have to seek approval from the State before their drugs may be dispensed to Medicaid patients.

III. PHRMA'S CHALLENGE

Soon after the Program's enactment, a federal district court granted PhRMA's request for a preliminary injunction. The judge found, inter alia, that the Program violated the dormant Commerce Clause doctrine. The State of Maine appealed, and the First Circuit reversed the district court. (18) After finding that federal law did not preempt the Maine Rx Program, (19) the court turned to the dormant Commerce Clause issue.

On appeal, PhRMA alleged that the Act violated the dormant Commerce Clause doctrine by regulating prices extraterritorially, and argued that the court should subject the Program to a strict scrutiny standard of review. (20) Specifically, PhRMA alleged that the practical effect of the Program was to regulate the price of prescription drugs outside the State of Maine by "regulat[ing] the transaction that occurs between the manufacturer and the wholesaler...." (21)

The First Circuit disagreed with PhRMA's arguments. First, it distinguished the cases on which PhRMA relied. (22)

 
   Unlike ... price affirmation and price control statutes, the Maine 
   Act does not regulate the price of any out-of-state transaction, 
   either by its express purpose or by its inevitable effect. Maine 
   does not insist that manufacturers sell their drugs to a wholesaler 
   for a certain price. Similarly, Maine is not tying the price of its 
   in-state products to out-of-state prices. (23) 

Moreover, the court noted, the Program neither "requires the rebate to be a certain amount dependent upon the price of prescription drugs in other states," nor "impose[s] direct controls on a transaction that occurs wholly out-of-state." (24)

The court disputed PhRMA's contention that the Program effectively regulated out-of-state transactions between wholesalers and manufacturers. The Program, according to the court, was a "voluntary" one, providing for "negotiated rebate agreements" between the State and those selling drugs in-state. (25) It refused PhRMA's invitation to be suspicious of the State's motive in passing the Program, at least before the Program was operational. (26) While the court considered the effect on interstate commerce if other states passed similar legislation, it concluded that "[t]he most apparent effect would be a loss in profits for manufacturers. It does not appear ... that statutes similar to the Maine Act ... would result in manufacturers having inconsistent obligations to states or in creating a `price gridlock.'" (27) The court concluded, "Therefore[,] ... there is no evidence that adverse effects on interstate commerce will occur...." (28)

Having found that the Program lacked the extraterritorial effects that would render it per se invalid, the court analyzed the Program under the more lenient Pike balancing test. (29) Accordingly, it considered whether the putative local benefit was clearly exceeded by the burden the Act placed on interstate commerce. As the court noted, "the only burden placed on interstate commerce by the Maine Act is its possible effects on the profits of individual manufacturers." (30) On the other hand, the court considered the local benefits to be substantial: "The Maine Rx Program will potentially provide prescription drugs to Maine residents who could not otherwise afford them. The Maine Legislature has decided that without the Maine Rx Program, needy Maine citizens will continue to be deprived of necessary medical care because of rising drug costs." (31) The court found insufficient evidence that the burdens were clearly excessive in light of the potential public benefits and the Program survived the dormant Commerce Clause challenge. (32) PhRMA subsequently petitioned the U.S. Supreme Court for a writ of certiorari, which the Court granted in June 2002.

IV. "SUSPECT LINKAGES": THE MISSING ARGUMENT

For the purposes of this Article, I assume that the Court was correct, and that the Maine Rx Program does not present any obvious extraterritoriality problems. (33) Likewise, I assume that the Program could pass the lenient Pike balancing test. Is there then no problem under the dormant Commerce Clause doctrine? Not necessarily. This section argues that the Supreme Court should use the concept of "suspect linkages" to invalidate the Program. In brief, the Maine Rx Program seeks to impose a de facto tax on (mostly out-of-state) pharmaceutical companies and drug sellers to fund a drug subsidy for its residents. The Supreme Court has, in the past, invalidated similar schemes and could easily do so now through a straightforward application of current dormant Commerce Clause doctrine.

A. WHY LOOK FOR LURKING LINKAGES?

Before outlining the linkage argument, this section will explain why it matters that extraterritoriality arguments, like the one offered by PhRMA in the court below, should be abandoned in favor of the suspect linkage argument described in subsequent sections. The linkage argument is attractive for several reasons. As PhRMA conceded, the statute is neutral on its face, (34) and its discriminatory effects are difficult to predict, particularly when the statute had not gone into operation before PhRMA brought its challenge. For PhRMA to obtain some other form of strict judicial scrutiny, therefore, it had to base an argument on either extraterritoriality or suspect linkage. PhRMA's decision to argue extraterritoriality was not the best choice.

While the statute might have some effects outside the State of Maine or otherwise influence out-of-state parties' conduct, the statute does not clearly attempt to tie in-state conduct with conduct occurring outside the State or the country. (35) Significantly, in response to precisely those constitutional concerns, the original plan was amended to eliminate a provision that computed the discount price of Maine's drugs based upon drug prices in Canada. (36) Had that provision remained, the Program would have more closely resembled programs in which a state tried to tie in-state prices to the prices at which goods were sold out-of-state, and the case for extraterritoriality would have been stronger. (37) Its absence, however, severely undermined PhRMA's extraterritoriality argument.

Furthermore, extraterritoriality is an underdeveloped aspect of the dormant Commerce Clause doctrine. (38) Since the Program did not seem to closely track one of the paradigm extraterritoriality cases (39) and had not been implemented (thus depriving a court of evidence about the Program's operation), a court could understandably be reluctant to invalidate a state law on the dubious ground that it would produce unspecified (but malevolent) effects in other states. Extension of the extraterritoriality cases beyond their facts could call into question a number of state laws heretofore presumed valid. In the Internet Age and the age of multi-state businesses, what state laws do not have some extraterritorial effects? A decision invalidating the Maine Program on a portion of a doctrine that some individual justices regard as dubious, as well as one that might have unintentional consequences for traditional state regulatory authority, might be received with considerable skepticism by the present Supreme Court. (40)

Disposing of the case on a "suspect linkage" analysis, by contrast, has several advantages. A substantial majority of the Court has recently endorsed the linkage theory. (41) The theory, which calls for the linkage of taxing and spending programs in order to analyze their effect as a whole, provides the Court with an opportunity to apply the dormant Commerce Clause doctrine's venerable antidiscrimination principle in a way that would preclude clever attempts by a state to avoid it. The Maine Rx Program, moreover, is closely analogous to a program the Court invalidated in West Lynn Creamery using a linkage analysis. (42) Because of the similar factual situations, the Court could dispose of this case on linkage grounds without expanding its prior precedent and without breaking new theoretical ground. The same would not be true if the Court had to articulate a theory of extraterritoriality covering the Maine Program.

Finally, presuming that Congress does not act to authorize programs such as the Maine Rx Program, (43) invalidation under a linkage theory still leaves Maine free to go back to the drawing board and try something else--perhaps a tax increase, price controls, or even funding the subsidy out of general tax revenues. A decision invalidating the Program on a new and vaguely delimited extraterritoriality ground would leave Maine with less flexibility. If the State enacted outright price controls, would that possibly raise prices in neighboring states? Would those extraterritorial effects pass muster under any new test? Who knows? It might take further litigation to sort out remaining questions, leaving states frustrated and confused in the meantime as they grope toward a solution.

B. THE SUSPECT LINKAGE CASES

Hornbook law holds that nondiscriminatory taxes generally do not violate the dormant Commerce Clause doctrine. …

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