The Eighth Circuit Court of Appeals rejected a challenge by a local tobacco manufacturer to an Arkansas law that increased its escrow payments to the Medicaid agency. The payments are required under a state law enacted pursuant to the settlement of the nationwide lawsuit by Medicaid agencies against tobacco manufacturers (the Master Settlement Agreement) (see Report No. 1033).
Basis for payment requirement
The settlement required makers of tobacco products to make payments to state Medicaid agencies to offset the agencies' expenditures for the treatment of tobacco-related illnesses. Only the major manufacturers who were parties to the lawsuits were bound by the settlement agreement, and their payments are based on their share of the market. However, to assure that other manufacturers also pay a share of the costs of their products, states enacted laws requiring other manufacturers to make payments in escrow based on their sales in the state. Unused payments are to be returned after 25 years. Originally the law provided for early release of the escrow to the extent that a manufacturer's payments exceeded the payments it would have been required to make if it had been a party to the Master Settlement Agreement.
The laws gave an advantage to local and regional manufacturers whose market share was significant in one or a few states but was quite small when compared to the national market. In 2005, Arkansas amended its law to delete the early release provision and to eliminate the comparison to the national market. Each manufacturer's payments would be determined solely by the number of cigarettes it sold in the state.
A local manufacturer sued to enjoin implementation of the amendment, called the allocable share amendment, claiming violations of the antitrust laws and the Commerce and Equal Protection Clauses of the United States Constitution. The district court rejected these contentions, and the Court of Appeals agreed.
The manufacturer argued that state law violated the Sherman Antitrust Act by forcing it to raise its prices and attempting to drive it out of the market. However, the court held that the law did not violate the Antitrust Act because it did not compel a manufacturer to raise prices, authorize anti-competitive conduct in all cases, or regulate prices or costs in any way. The antitrust laws do not apply to the state acting as sovereign, articulating a clear policy and supervising its administration; the legislation met those requirements.
The state's escrow law also did not violate the Commerce Clause of the United States Constitution because it did not discriminate against out-of-state businesses and neither burdened interstate commerce nor affected transactions outside the state. It did not violate the Equal Protection Clause because it was rationally related to the legitimate state purpose of providing care for the sick, and it placed no greater burdens on nonparticipating manufacturers than on the participating manufacturers.
Grand River Enterprises Six Nations, Ltd. v. Beebe, 8th Cir., Aug. 4, 2009, ¶302,945
For more information on this and related topics, consult the CCH® Medicare and Medicaid Guide.
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