Health-Care Reforms Face High-Court Test

Congress is expected to debate health-care reform -- again -- this year, but the Supreme Court is set to decide two crucial issues: whether drug makers can be forced to give lower prices to the uninsured, and whether HMOs can be forced to allow patients to use their favorite doctors.

In both areas, states have pressed ahead with pro-consumer measures while debate in Washington has stalled.

But this month, industry lawyers will urge the high court to block the new state reforms. They say federal law does not allow the states to lead the way on health-care reform.

A case from Maine will test whether states can force discounts on prescription drugs, while a Kentucky case will test whether states can allow patients to see doctors outside their health maintenance organizations. Last year, the court in a 5-4 decision upheld state laws that give patients a right to a second opinion by outside doctors if their HMO refuses to pay for a medical treatment or drug benefit. All 50 states now have such “independent review” laws.

The stakes are just as high in the two new cases. If Maine and Kentucky win in the Supreme Court, other states are sure to follow their lead. California lawmakers have not enacted either reform law.

Skyrocketing prescription drug costs are driving the efforts to change the system. Spending on prescription drugs rose 17% each year from 1997 to 2001, according to a recent national study, and drug costs are projected to rise faster than other medical expenses for the next decade.

An estimated 70 million Americans do not have insurance that covers prescription drugs. Of these, 18 million are seniors. These people find themselves at a double disadvantage when it comes time to fill a drug prescription. Besides having no insurance, they also pay the highest prices.

“They don’t have anyone who negotiates a lower price. So when they go to the drug store, they pay the top retail price,” says Sarah Lock, a lawyer for AARP, the lobby group for seniors.

In contrast, health insurers such as HMOs, Medicaid and Veterans Affairs negotiate large discounts.

For a drug prescription that costs $100 at a retail pharmacy, Medicaid and HMOs pay about $65 on average and the VA pays $46, according to federal data compiled by the Center for Policy Alternatives in Washington, a group that tracks state reform laws.

Three years ago, Maine lawmakers demanded drug makers give its uninsured residents the same price discounts that are given under Medicaid, the joint federal-state program that pays for health care for the poor.

Federal law requires drug makers give Medicaid suppliers the lowest “best price” for pharmaceuticals.

Under the so-called “Maine RX” program, the state sought similar discounts for residents who did not qualify for Medicaid coverage or have private insurance. If the drug makers refused, Maine would bar them from selling to Medicaid suppliers there.

State officials say they are simply seeking fair treatment for their uninsured residents, not special subsidies. About 22% of Maine residents do not have insurance with drug coverage.

“The intent is to allow the state to utilize its market power so as to achieve lower prices for the citizens who now stand alone at the pharmacy counter,” says Andrew S. Hagler, a Maine state lawyer.

But the pharmaceutical industry challenged the law in court and, so far, has prevented it from going into effect.

“We agree it is important for everyone to have access to medicine. We just don’t think the state should use a federal program designed to serve one group of people as leverage to force manufacturers to offer discounts to everyone else in the state,” says Marjorie Powell, a lawyer for the Pharmaceutical Research & Manufacturers Assn. of America.

The group makes two legal attacks on the Maine law. First, it says the state has “hijacked” Medicaid to serve people who are not poor. All Maine residents may obtain a Maine RX discount card to be used at pharmacies, but the lower prices would benefit only those who do not have insurance.

Second, the group says Maine’s law is an unconstitutional regulation of interstate commerce, since it would force out-of-state drug makers to offer discounts in Maine.

The U.S. Court of Appeals in Boston rejected both challenges and upheld the Maine law. But the Supreme Court will hear the challenge Jan. 22 (PhRMA vs. Concannon).

The Bush administration has weighed in on the side of drug makers. U.S. Solicitor General Theodore B. Olson says the Maine law violates Medicaid because it is open to every resident, not just the poor.

However, his brief to the court says a state may be able to extend price discounts to a “narrowly defined class of persons who have a low income” but are above the poverty level. Separately, however, the Bush administration has not granted a waiver that would allow Maine to target people whose incomes are less than three times the poverty rate. In December, a U.S. Court of Appeals in Washington said Maine cannot go ahead without the federal waiver.

Health-care reformers say the Maine RX program will spread nationwide if the Supreme Court upholds it.

The Kentucky case involves so-called “any-willing-provider” laws, which allow patients to use doctors and hospitals that were not part of their managed care networks. Kentucky is one of 25 states with such a law.

The measures were enacted in response to a common complaint of the 1990s. When their employers switched health-care plans, patients often found themselves forced to give up a favorite family doctor or specialist.

The Kentucky law says a “health insurer shall not discriminate against any provider ... who is willing to meet the terms and conditions established by the health insurer.”

The managed care industry has fought these laws, saying they undercut its ability to hold down costs. They say doctors are willing to lower their rates if an HMO can guarantee them a higher volume of business.

“If you can’t promise providers a certain patient volume, they will not be willing to provide the same rates,” said Karen Ignagni, president of the American Assn. of Health Plans, a trade group that represents more than 1,000 HMOs.

The HMOs say the Kentucky law should be thrown out as a regulation of an “employee benefit,” a practice banned by Congress in 1974 when lawmakers worried that states would impose new pension demands on companies.

But the 1974 law also said states could maintain their regulation of insurance, and in the Kentucky case the state argues its “any-willing-provider” law is just that.

The court will hear arguments in the case of Kentucky Assn. of Health Plans vs. Miller on Tuesday. The Bush administration sided with the state in this case, arguing that Kentucky’s law should be upheld as an insurance regulation.