Opioid Settlement Funds and Supplantation in an Uncertain Budget Climate

By Abigail Winiker and Lillian Williams

Faced with looming cuts to the Department of Health and Human Services budget, lawmakers have begun to look for ways to continue funding essential services. In this context, one revenue source that some state and local lawmakers have turned to is opioid settlement funds. While this may seem appealing, we urge caution, intentionality, and transparency in the use of these funds to avoid opioid settlement fund misuse and supplantation.

What Constitutes Misuse of Settlement Funds?

The settlement agreements allow for 15% of funds to go towards non-opioid remediation expenses. Beyond this amount, use of settlement funds for purposes not associated with opioid abatement constitutes misuse of these funds. This includes expenditures such as filling budget holes, supplementing general funds, or supporting programs that target the general population.

What is Supplantation?

Supplantation occurs when policymakers decrease allocations of state or local funds or replace existing funding in favor of using settlement payouts for these programs or activities.

Why is Supplantation Problematic?

Opioid settlement funds, the result of litigation brought against pharmaceutical manufacturers, distributors, and pharmaceutical companies, are intended to mitigate opioid-related harms and allow states to better meet the demands of the catastrophic opioid crisis. Supplantation can reduce the overall resources available to address the original problem, undermining the purpose of the new funding stream by eliminating its additive nature. When new funding replaces what is already there, the end result will be no increase in capacity. In the case of the opioid settlements, this means that the funds should not go to efforts that would exist regardless of settlement fund allocations.

What is the Legal Status of Supplantation?

Supplantation of opioid settlement funds is not prohibited under the terms of the national opioid settlement agreements, most of which do not address it explicitly. The settlement agreements do, however, designate that at least 70% of funds must be used to fund “future opioid-remediation efforts.” This means financing programs that states, counties, and municipalities previously would not have had the means to implement, researching and developing new interventions, or supplementing existing approaches to expand their impact.

How Are States Protecting Against Supplantation?

To date, 13 states and D.C. have taken steps to prohibit supplantation of funds. Connecticut, Kansas, Michigan, Nevada, New York, and Vermont have legislative restrictions on their settlement funds that require they be spent on enhancing or creating programs for opioid remediation. Other states have prohibited supplantation through other means. Massachusetts, for instance, restricts supplantation through its State-Subdivision Agreement and Abatement Terms. Yet few enforcement mechanisms are in place.

Is Using Settlement Funds to Replace Eliminated Federal Funding for Substance Use Programming Supplantation?

Cuts to Department of Justice grants, and COVID-19-era recovery funds have already reduced states’ funding for substance use-related programming by millions of dollars. The proposed Department of Health and Human Services budget would further slash funding for crucial substance use and mental health services across states.

The use of settlement funds to replace federal funding streams that were supporting substance use-related programming is not supplantation. However, this does not mean that states should immediately seek to use their settlement funding to fill holes left from federal cuts.

What are the Drawbacks to Using Settlements Funds to Replace Lost Federal Funds?

Settlement funds are insufficient: Settlement funds are inadequate to fill the deep budget holes state and local governments may face. Settlement funds total $56 billion and will be distributed over an 18-year period. While substantial, these amounts aren’t nearly enough to fill the gaps left behind if Medicaid and other federal programs are drastically cut: In FY 2022, more than $6.7 billion was appropriated at the federal level for opioid-related programs, and Medicaid spent an estimated $23 billion to cover opioid-related treatment.
Settlement funds can have a greater impact when used to enhance efforts, not replace federal dollars. States and localities can support efforts ineligible for federal funds and can add requirements, such as matching, to leverage settlement funds for even greater impact.

How Should States Decide Whether use of Settlement Funds is Appropriate for Defunded Federal Substance Use Related Programming?

This is a tricky question, because there is no clear, black-or-white answer here. If states lose federal funding for evidence-based programming that falls within the scope of “opioid remediation efforts,” it may be a legitimate use of settlement funds to support these programs. However, this does not mean that states should immediately turn to settlement funds. Other options are available and should be explored first. These include:

Increasing excise taxes on specific items. For example, taxes on alcohol can directly fund public health programs that prevent and treat alcohol use disorder. Maryland accomplished this by increasing their alcohol tax, which both raised revenue, while also reducing alcohol-related harms such as incidences of driving under the influence.
Re-allocate money from ineffective programs. States should critically examine current spending and reallocate funding from programs that are not realizing their designated impact or are not based in evidence.
Using “Rainy Day” funds to pay for essential services for short periods or transitions. Unlike settlement funds, these reserves are specifically intended to help states with unexpected budgetary needs. According to the National Association of State Budget Officers, “As of the end of fiscal 2024, states held $155 billion in their rainy day funds, and this level is projected to tick up in fiscal 2025.”

When deciding whether to turn to settlement funds, we urge states to adopt the following practices:

Define supplantation and create clear, explicit guidance on what constitutes supplantation. Make this publicly available. Here is an example from the Colorado Opioid Abatement Council.
Create a process for determining which federally-funded programs are at risk that provide opioid remediation-related services and would fall within the scope of an appropriate use of opioid settlement funds.
Consider all other available options before using settlement funds to support programs that lose federal funding.
Prioritize transparency – all settlement fund spending decisions should be reported and made publicly available.

Conclusions

Despite uncertainties regarding federal spending in the coming fiscal year, state and local governments must continue to ensure appropriate use of their opioid settlement funds. They can do so by defining and restricting supplantation, creating clear rules to guide decision-making when considering the use of settlement funds, and ensuring transparent reporting of all opioid settlement fund spending. Millions of lives have been disrupted by the opioid crisis. It is imperative that these dollars are used for their intended purpose, to save lives, remediate harm, and support the communities that have suffered the consequences of the opioid epidemic.

Lillian Williams is completing her Master of Science in Addiction Policy and Practice at Georgetown University and is currently a state policy intern at Shatterproof. She also holds a bachelor’s degree in cognitive science from McGill University. She is particularly committed to advancing policies that ensure the responsible governance and effective use of opioid settlement funds

Abigail Winiker, PhD, is the Program Director for the Bloomberg Overdose Prevention Initiative.