Taxing Opioids to Address Prescription Drug Abuse

Federal and state policy makers struggle to come up with solutions to the ongoing opioid crisis. As with many areas of public policy, political leaders are turning to the tax laws as a possible way to curtail opioid abuse. In the past two years, there have been many proposals to impose special or excise taxes on the sale of opioids. To date none have passed. But we believe that without the implementation of other policies to address the issue, a number of states will impose taxes in the coming year.

In March, West Virginia Senator Joe Manchin introduced a bill (S 523) that would impose a federal excise on opioid sales. The law would impose a one cent per milligram tax on the sale of active opioids by a manufacturer, producer, or importer. Prescription drugs used exclusively for the treatment of opioid addiction as part of a medically assisted treatment effort would be exempt.  The revenue would be earmarked for state run addiction treatment programs. A similar bill was introduced in the House (HR 2038).

More recently, lawmakers in Delaware were the latest to propose the tax. On June 22, the House Majority leader co-sponsored a bill (HB 250) that would impose a ten percent tax on the sellers of opioids. It would apply to manufacturers, producers, importers, and distributors of opioids in the state. It would exempt opioids used to treat opioid addiction. Opioids sold outside of Delaware would also be exempt from tax.  The tax would be imposed at the wholesale level on the first sale into the state.

There have been proposals to tax opioids in seven other states in the past year. The Delaware proposal is a gross receipts tax.  An almost identical tax was proposed in Pennsylvania (SB 1213) and Connecticut (SB 5) although the rate in Connecticut was lower (6.35 percent). Some states have proposed a unit tax or fee on prescription opioids. For example, Washington state lawmakers proposed a .05 cents per dose (HB 1505) while proposals in California (AB 1512), Kentucky (HB 467), Massachusetts (HB 2633), and Minnesota (HF 1440) would set the rate at one cent per one milligram dose. In every state, the revenue would be earmarked for opioid addiction treatment or law enforcement.

There are a myriad of policy and legal issues surrounding the taxation of opioids. The taxes will likely make health care more expensive. And there are Federal laws prohibiting taxation of Medicare Part D prescriptions. There are also many variations of the state tax proposals. From a policy perspective, will the taxing of opioids really impact prescription drug abuse or are lawmakers missing the mark on how to make significant gains in eradicating drug abuse?

Contact David Brunori for additional issues regarding this or other matters involving federal, state or local taxes.


DEA Prevails Over Masters Pharmaceutical, Inc.

On June 30, 2017, the Court of Appeals for the D.C. Circuit issued an order in Masters Pharmaceutical, Inc. v. Drug Enforcement Administration (No. 15-1335). In sum, the Court denied Masters Pharmaceutical, Inc.’s (“Masters”) Petition for Review seeking to overturn the Drug Enforcement Administration’s (“DEA”) revocation of Masters’ DEA registration. This decision has wide-ranging implications for DEA-registered wholesalers, who are required to detect and report suspicious orders of controlled substances.

Here are a few takeaways from the Court’s decision:

  • The facts here were not on Masters’ side, making them less than a sympathetic petitioner. In a time where the opioid crisis is now considered an “epidemic” and garnering attention at the highest levels, it was likely difficult for the Court to justify overturning the DEA’s Final Order in a case where the petitioner: distributed large quantities of controlled substances to pharmacies that it knew or should have known were dispensing controlled substances for other than legitimate medical purposes; failed to follow its own policies and procedures; ignored/overlooked questions from its own employees regarding the distributions and allowed the drugs to be shipped anyway; and has been in trouble with the Agency before for similar misconduct.
  • These “bad facts” led to a decision that will have a significant impact on suspicious order detection and reporting across the industry. In affirming the DEA’s decision, the Court interpreted the suspicious order reporting requirement much more broadly than DEA. 21 C.F.R. § 1301.74(b) provides that non-practitioner registrants must design and implement a system to disclose suspicious orders of controlled substances. This regulation defines suspicious orders as “orders of unusual size, orders deviating substantially from a normal pattern, and orders of unusual frequency.” Consistent with DEA’s past guidance, the Court agreed that the criteria listed in DEA’s regulations for determining whether an order is suspicious is not an exhaustive list. The Court, however, then went on to take a less nuanced view on what must be reported to DEA under this regulation. DEA field division offices across the country have historically differed on how they interpret their own regulations. Some offices demand that registrants provide notice of all orders that are flagged by the registrant’s suspicious order monitoring program, while others only want orders reported that are deemed to be suspicious after the registrant has conducted an investigation of the order. The Court’s decision clearly supports the former reporting system. Arguably, the Court left open the possibility that flagging an order and investigating the order before reporting to DEA could satisfy a registrant’s reporting obligations. The Court cautioned registrants that if they “choose to shoulder the burden of dispelling suspicion in hopes of shipping…” then the distributor must conduct a detailed investigation each and every time in attempting to resolve the suspicion. On the contrary, the Court clearly states that “it is not necessary for a distributor of controlled substances to investigate suspicious orders if it reports them to DEA and declines to fill them.” With that said, it is difficult to envision a scenario where the flag and investigate approach would not violate the reporting requirement, especially where the Court’s unanimous view is that all orders that are flagged based on objective mathematical criteria designed to identify unusual volume, pattern, or frequency fall within the “suspicious order” definition of the regulations.
  • While the Masters case was obviously an important win for DEA, there are significant collateral consequences for the Agency. Whether a company utilizes an off-the-shelf product or has developed its own methodology for detecting and reporting suspicious orders, all suspicious order monitoring programs rely on objective mathematical criteria based on historic ordering patterns. As DEA has ramped up enforcement action against distributors the past ten or so years, many registrants have become more conservative in their monitoring of orders and reporting as suspicious orders flagged by their monitoring systems. The Masters decision may result in more registrants simply reporting every order flagged by their monitoring systems instead of conducting an investigation to determine whether the order should really be reported as suspicious. In turn, this could lead to DEA receiving voluminous amounts of suspicious order reports, making it more difficult for the Agency to use the data as a means of investigating potential bad actors within the system.
  • Perhaps the Masters decision will prompt DEA to take meaningful action, by working with the industry it regulates to figure out a better way to monitor for and report suspicious orders. Reporting orders that are truly suspicious provides useful investigative tools for DEA, whereas reporting all orders that are flagged by a mathematical algorithm is a frankly less than helpful exercise. If DEA really wants to make meaningful progress in combating the opioid epidemic, then it should create a working group with subject matter experts and representatives from industry to develop new suspicious order regulations. If DEA continues to be unwilling to do so, then it is going to need a lot more storage space to accommodate the influx of data coming its way.


Disclosure:  The author submitted an amicus brief in this matter on behalf of a client. 

Oregon Adds Suspicious Order Reporting to Wholesale Distributor Requirements

Recently, the Oregon Board of Pharmacy adopted a new rule for wholesale distributors, requiring that they report suspicious orders to the Board for review. The rule goes into effect on July 1, 2017.

The adoption of the new rule followed several recent settlements by wholesale distributors around the country, who are facing severe penalties for failing to report suspicious orders of controlled substances to the Drug Enforcement Administration (DEA). Continue Reading

Pharmacy Law Trends Q&A: Opioids, Specialty Drugs Among Top Issues for Retail Pharmacies

2017 Pharmacy Law Symposium-Art-vAThe opioid crisis in the United States continues to worsen, with the Centers for Disease Control reporting more than 33,000 human deaths by overdose in 2015 – up from about 29,000 in 2014 and quadruple the number in 1999. As in-house counsel from some of the nation’s 65,000 retail pharmacies prepare to meet in Chicago for Quarles & Brady’s 2017 Pharmacy Law Symposium this July, partners Amy Cotton Peterson and Roger Morris discussed the opioid epidemic. The partners also discussed specialty pharmacies, another important and evolving topic for those involved in the sector in 2017.

Q:  Given the severity of the opioid crisis, what are some of the challenges pharmacies are facing?

RM: Pharmacies – an important link in the chain that gets products from the manufacturer to the consumer – are continuing to be criminalized for the dispensing of opioids. This generates significant concerns for the pharmacies and their legal counsel, and some might wonder whether it’s worth it to continue selling opioids at all.

While deciding to discontinue carrying opioids would be a drastic step to take, it’s understandable that some pharmacies might at least entertain the notion, given the overall thorny nature of the issue. It’s worth noting that opioids make up only about 10 percent of all prescriptions.

Going deeper, pharmacies are faced with a lot of difficulties – how do they verify the validity of prescriptions? How do they determine if doctors are overprescribing, and what’s the pharmacist’s responsibility when it looks like they are? How do you work across state lines, given the different rules and regulations in each state? How do you work with different sets of records that might be maintained in a myriad of different ways?

We’ll address these questions, and more, at the Symposium in July.

Q. In what ways are pharmacies trying to address these problems?

ACP: Pharmacies, rightfully, have taken a lot of responsibility and initiative to address the epidemic. The steps they’ve taken include “Know Your Client” initiatives, in which pharmacists and wholesalers track suspicious ordering patterns. Some pharmacies are even using technologies like Google Maps to see if certain delivery locations have the potential to be pill mills.

Going a step further, regulatory requirements and state laws tell pharmacists what has to be on a prescription for it to be valid, but a lot falls on pharmacists’ professional judgment. Because there are gray areas – states don’t always make it easy to know what isn’t valid – pharmacies face some potential liability. To counter that, 49 states, the exception being Missouri, have Prescription Drug Monitoring Programs (PDMP), an electronic database that monitors prescriber and patient activity related to controlled substances such as opioids, for example. Some states have even gone as far as to enact regulations (some emergency) as to how PDMPs are monitored.

Arizona extended the reach of its PDMP by agreeing to share information with 22 other states, but there are major differences in how the data is kept in each state and by each pharmacy. Some states gather the data in real time, others daily and a few only weekly. Each state also identifies patients in different ways so that patient John Smith in Arizona might not be easily identified as Johnathan A. Smith Jr. in New Mexico even though they are the same person.

Big picture, the industry should step back and look at the overall processes from a public health perspective as opposed to a law enforcement perspective. Where’s the demand? Where’s the supply coming from? Where do the drugs end up?

Q: We’ve seen a growing trend with specialty pharmacies in recent years. What are the causes and challenges stemming from this growth?

ACP: Specialty pharmaceuticals, which treat complex and often rare diseases, are expensive and hard to handle, and their use is growing at a phenomenal rate. They’re expected to account for 50 percent of pharmacy revenues by 2020, and some estimates say they’ll surpass traditional brand name drug spend in the next few years. A growing number of hospitals and health systems, including the Cleveland Clinic, Rush University Medical Center and others have or are in the process of integrating specialty pharmacies.

RM: But this growth – which is spurred in part by an aging American population, but also innovation – brings with it a host of different licensure and regulatory issues. There’s also a lot of money on the line, as many of these drugs cost between $30,000 and $50,000 a month. This has generated a lot of excitement among manufacturers and developers, but when it comes to those distributing the drugs – pharmacies, among them – we’re really in a sort of “wild west” period when it comes to regulations.

Q: What are some best practices when it comes to specialty pharmacies that would be useful to pharmacies and their legal counsel?

RM: Specialty pharmacies must strictly comply with all pharmacy laws. Failure to be licensed correctly, at the facility or personnel level, can result in false or rejected claims. When prescriptions cost $30,000 each, a single misstep could eliminate any profit in this area for months. Moreover, specialty pharmacies must be vigilant in their compliance with Anti-Kickback and referral laws. Traditional gifts and benefits to prescribers from yesteryear are today’s inappropriate incentives.

To learn more about Quarles & Brady’s 2017 Pharmacy Law Symposium, or to register for the event, click here.

Alabama Battle Over Alprazolam is Done. For Now.

Prescription Medication Medicine Pill TabletsThe battle is over! For now.

Yesterday, Alabama lawmakers blocked the proposal to move Alprazolam into Schedule II, as well as blocking the other proposed changes described in this series of client updates. See here and here. The pharmacy community in Alabama took an active role in opposing these changes. According to this article from Alabama Live, members of the Alabama Pharmacy Association opposed this change and as noted in our most recent update, the Alabama Board of Pharmacy was also encouraging pharmacists to reach out to their legislators to share their concerns. It looks like all of this hard work has paid off. Will this come back? Hard to tell, but we will continue to watch how Alabama and other states try to manage and prevent the abuse of prescription medications.

Alabama Continues Efforts to Make Alprazolam a Schedule II Drug

As an update to our January 9, 2017 blog post, the Alabama Department of Public Health (ADPH) has continued with its efforts to make Alprazolam a Schedule II drug, along with rescheduling all other benzodiazepines from Schedule IV to Schedule III. The rule change would also reschedule pregabalin from Schedule V to Schedule IV and reschedule zolpidem from Schedule IV to Schedule III. The proposed rule was passed by the State Committee of Public Health and is currently scheduled to be effective on June 15, 2017.

But don’t change your systems yet. Because the rule change has not yet undergone legislative review, it is possible that the committee could vote against the rule, send it back to the state committee for reconsideration, or change the effective date.

We will provide an update when the legislative committee takes action. Read more in our alert.

DEA Decisions: In the Matter of Wesley Pope, M.D.

An Oklahoma doctor wrote 19 Schedule II controlled substance prescriptions for a patient with low back pain over eight months without thoroughly documenting the patient’s history, confronting the patient over aberrant drug tests, or talking to other doctors who were prescribing the patient controlled substances. The Chief Administrative Law Judge felt the doctor should be granted a new registration, but placed on probation for one year. Acting Administrator Chuck Rosenberg disagreed. He reviewed the case and concluded that DEA proved that the doctor knew the patient was abusing or diverting the drugs and prescribed anyway.  Dr. Wesley Pope’s application for a new DEA registration was denied as inconsistent with the public interest. Continue Reading

Washington Post Article Highlights Alleged Improper Drug Practices By NFL Teams

The Washington Post reported last week that it obtained sealed court documents describing how National Football League teams have violated federal prescription drug laws regarding the storage, tracking, transportation, and distribution of controlled substances. The documents—prepared by lawyers representing more than 1,800 former professional football players—include testimony and records that implicate all 32 NFL teams and a number of league personnel.

Plaintiffs filed Evans v. Arizona Cardinals Football Club, LLC in the U.S. District Court of Northern California in May 2015, after a federal judge dismissed a similar claim filed in state court (Dent v. Natl. Football League) on preemption grounds. Although the basis of the claims have long been public knowledge, the sealed documents cited in the article have renewed public interest by painting a detailed picture of alleged improper dispensing and overprescribing.

Continue Reading

DEA Reverses Decision to Change Registration Policy

a rural mailbox chocked full of mail

We recently reported that the Drug Enforcement Administration (DEA) was changing its longstanding policy of allowing for a grace period for registrants who file an untimely application for renewal. This notice was posted on the homepage of DEA’s Office of Diversion Control’s website.

A Revised Announcement Regarding Renewal Applications is now posted on DEA’s website indicating that, except for one minor change, DEA is retaining its current policy and procedures regarding registration renewals. The announcement now reads:

Starting January 2017, DEA will no longer send its second renewal notification by mail. Instead, an electronic reminder to renew will be sent to the email address associated with the DEA registration. Continue Reading

DEA Decisions: Evidence of “Red Flags” of Drug Diversion

On November 10, 2016, the DEA issued its final decision and order in the case against Jones Total Health Care Pharmacy, L.L.C. (“Jones Pharmacy”) and SND Health Care L.L.C. (“SND”). The
Administrator ordered that the DEA deny Jones Pharmacy’s registration renewal application and also deny SND’s pending registration application. These orders were consistent with the Administrative Law Judge’s (“ALJ’s”) recommendations, which were largely based on circumstantial evidence that Jones Pharmacy ignored “red flags” that prescriptions it dispensed were not for a “legitimate medical purpose.” The Administrator also agreed with the ALJ’s determination that the “unlawful” dispensing practices at Jones Pharmacy should impact SND’s application request because the two pharmacies were “one integrated enterprise” under common individual ownership and operation.

DEA Red Flags Test

The ALJ’s recommendations in this case were largely based on evidence that Jones Pharmacy failed in its responsibility to address “red flags” based on the DEA’s three-part test set forth in Holiday CVS, LLC d/b/a CVS Pharmacy Nos. 219 and 5195.

Under the Holiday CVS “red flags” test, the DEA must prove that:

  1. The registrant dispensed a controlled substance;
  2. A red flag was or should have been recognized at or before the time the controlled substance was dispensed; and
  3. The question created by the red flag was not resolved conclusively prior to the dispensing of the controlled substances.

The Administrator agreed with the ALJ’s determination that Jones Pharmacy knew or should have known that it was dispensing controlled substances that were not for a legitimate medical purpose in violation of 21 C.F.R. § 1306.04 based on the following red flags: (1) patients traveled long distances for filling prescriptions, often from out of state; (2) prescriptions were filled for common “cocktail medications,” (i.e., short term pain relief); (3) prescriptions were issued by doctors prescribing outside their scope of practice; (4) prescriptions were dispensed on the same day to patients with the same out-of-state address for the same controlled substance; and (5) such prescriptions dispensed were paid for in cash.

The ALJ’s initial analysis focused on whether the red flags were “resolved” prior to dispensing the controlled substances in question. Based on expert testimony that the prescriptions at issue presented multiple red flags that were “unresolvable” on their face, and Jones Pharmacy’s failure to rebut this presumption, the ALJ determined that Jones Pharmacy failed to resolve the red flags. The ALJ also decided that because Jones Pharmacy did not “unequivocally” accept responsibility for the dispensing of prescriptions with red flags present, the ALJ would not consider the “remedial efforts” that Jones Pharmacy took. The Administrator agreed.

Key Takeaways: Red Flags Analysis

In adopting the ALJ’s conclusions that Jones Pharmacy knew or should have known of red flags of drug diversion, the Administrator made the following key observations that registrants should keep in mind when conducting a red flags analysis:

  • Circumstantial evidence, just like in Holiday CVS, can be enough to prove that a registrant ignored red flags even if no witness testifies that he or she had “personal knowledge” that drugs were being diverted;
  • DEA does not “have the resources to personally brief” every registrant on “red flags” following its discovery of new patterns of drug diversion;
  • Patients frequently traveling long distances from out-of-state and presenting multiple prescriptions for controlled substances, such as oxycodone, and paying in cash creates an “obvious and compelling” level of suspicion that the prescriptions lack a legitimate medical purpose;
  • Certain circumstances should raise “red flags” for a registrant, such as those described above, even prior to the DEA expressly stating in an agency opinion that such circumstances are red flags (i.e., Jones Pharmacy could not rely on the fact that the DEA did not identify cash payments as a “red flag” until its decision in East Main Street Pharmacy on October 27, 2010, for dispensing that occurred at Jones Pharmacy prior to that date);
  • When prices a pharmacy charges for controlled substances far exceed those charged by other pharmacies, the DEA may infer that the pharmacy is charging higher prices due to the fact that it is knowingly supplying the drugs to individuals seeking to abuse or divert controlled substances.

Additionally, this case provides another example that the DEA may view prescriptions with multiple red flags as per se “unresolvable,” consistent with the Administrator’s opinion in Holiday CVS. 77 Fed. Reg. 62,316, 62,317. In such cases, the registrant will be required to present evidence to rebut the presumption that it has failed the third prong of the Holiday CVS red flags test. Finally, this case serves as a reminder that when the DEA disciplines a registrant, it may also choose to take adverse action against another entity that is owned and operated by the same individual owner.

By: Sam Magnuson, Associate, Milwaukee Office