Pharmaceutical Research v. Thompson

Decision Date08 June 2001
Docket NumberNo. 01-5029,01-5029
Citation251 F.3d 219
Parties(D.C. Cir. 2001) Pharmaceutical Research and Manufacturers of America, Appellant v. Tommy G. Thompson, in his official capacity as Secretary, United States Department of Health and Human Services, et al., Appellees
CourtU.S. Court of Appeals — District of Columbia Circuit

Appeal from the United States District Court for the District of Columbia (No. 00cv02990)

Allen R. Snyder argued the cause for appellant. With him on the briefs were Darrel J. Grinstead and Jeffrey Pariser.

Ronald A. Shems argued the cause for appellee State of Vermont Agency of Human Services. With him on the brief were Susan R. Harritt and Rebecca Ellis, Assistant Attorneys General, State of Vermont.

Scott R. McIntosh, Attorney, U.S. Department of Justice, argued the cause for the federal appellees. With him on the brief were Wilma A. Lewis, U.S. Attorney at the time the brief was filed, and Barbara C. Biddle, Attorney.

G. Steven Rowe, Attorney General, and Paul Stern, Deputy Attorney General, State of Maine, were on the brief for amicus curiae State of Maine in support of appellee.

Before: Sentelle, Rogers and Tatel, Circuit Judges.

Opinion for the Court filed by Circuit Judge Tatel.

Tatel, Circuit Judge:

The Medicaid statute requires pharmaceutical manufacturers to rebate a portion of the price of their drugs as a condition for participating in Medicaid. In this case, pharmaceutical manufacturers challenge the Department of Health and Human Service's approval of a Vermont demonstration project requiring the manufacturers to rebate a portion of the price of drugs purchased directly by certain individuals who are not otherwise covered by the state's Medicaid program. Because Congress imposed the rebate requirement in order to reduce the cost of the Medicaid program, and because no Medicaid funds are expended under the Vermont demonstration project and thus no Medicaid savings produced by the required rebates, we conclude that the Department lacked authority to approve the project. We therefore reverse the district court's decision to the contrary and remand for further proceedings.

I

Funded jointly by the federal government and the states, Medicaid pays medical expenses for low-income people. Medicaid services are provided pursuant to plans developed by the states and approved by the Secretary of Health and Human Services. 42 U.S.C. 1396a(a)-(b). States pay doctors, hospitals, pharmacies, and other providers of medical goods and services according to established rates. The federal government then pays each state a statutorily established share of "the total amount expended ... as medical assistance under the State plan." Id. 1396b(a)(1). Medicaid beneficiaries cannot be required to contribute more than a "nominal" amount toward the cost of the benefits they receive. Id. 1396o.

Pharmaceutical manufacturers participating in Medicaid rebate to the states a portion of the price of drugs purchased for Medicaid purposes. Manufacturers do this because the Medicaid statute, id. 1396-1396u, permits the federal government to reimburse states only for drugs purchased from manufacturers who have agreed to pay statutorily specified rebates. Id. 1396r-8(a)(1). Rebates equal the number of units of a drug provided by a state's Medicaid program times the greater of (1) the difference between the average price of the drug and the lowest price its manufacturer gives any wholesaler, provider, health maintenance organization, nonprofit, or governmental entity, or (2) 15.1 percent of the average manufacturer price. See id. 1396r-8(c)(1). If the average price of a manufacturer's drug has increased faster than the consumer price index, the manufacturer must pay an additional rebate for each unit of the drug equal to the difference between the average price of the drug and the price of the drug on July 1, 1990 (or the day the drug first entered the market) adjusted to the consumer price index. Id. 1396r-8(c)(2). So calculated, rebates ensure that states get at least the best prevailing wholesale price--and possibly even a much better price--for drugs they purchase for Medicaid beneficiaries. In language central to this case, section 1396r-8 provides that rebate agreements shall require manufacturers to pay rebates on drugs for which "payment was made under the State plan." Id. 1396r-8(b)(1)(A).

The Social Security Act, of which the Medicaid statute is a part, authorizes HHS to approve experimental "pilot" or "demonstration" projects that the Secretary determines are "likely to assist in promoting the objectives of [Medicaid]." Id. 1315(a). Although the Act authorizes the Secretary to waive certain Medicaid requirements for such demonstration projects, it does not authorize him to waive any requirements of section 1396r-8's rebate provision or the requirement that Medicaid beneficiaries contribute no more than a "nominal" amount to the cost of medical benefits they receive. See id. 1315(a)(1).

For several years, Vermont has administered demonstration projects that extend pharmaceutical benefits to classes of individuals not otherwise covered by Medicaid. By letter dated March 17, 2000, Vermont sought HHS approval to "extend the Medicaid ... rebate structure" to nearly 70,000 new demonstration project beneficiaries, thus requiring pharmaceutical manufacturers to pay rebates on drugs purchased by this group. Known as the Pharmacy Discount Program, or "PDP," the expanded services would be funded as follows: Pharmacies would charge new beneficiaries the Medicaid price of a given drug minus the estimated average rebate Vermont receives for all drugs (approximately eighteen percent in 2000). Vermont would pay the pharmacies the eighteen percent and then bill manufacturers for that amount. As a result, PDP benefits would be paid not with funds appropriated by Congress and the states for Medicaid services, but by beneficiaries (eighty-two percent) and drug manufacturers (eighteen percent). By letter dated November 3, 2000, HHS approved the PDP.

Appellant, the Pharmaceutical Research and Manufacturers of America, whose members have entered into Medicaid rebate agreements and so would be required to pay rebates under the PDP, filed suit in the United States District Court for the District of Columbia claiming that the program violated two provisions of the Medicaid statute. First, the manufacturers argued that because the federal government and Vermont pay nothing under the PDP, the program violates the provision under which pharmaceutical manufacturers owe rebates only for drugs "for which payment was made under the State plan." Id. 1396r-8(b)(1)(A). Second, pointing out that program beneficiaries would pay for approximately eighty-two percent of the price of their prescriptions, the manufacturers argued that the PDP violates the requirement that states charge Medicaid beneficiaries no more than a "nominal" amount. Id. 1396o. Seeking a preliminary injunction, the manufacturers argued that if they refused to make payments under the PDP, HHS could terminate their eligibility to participate in the entire Medicaid program, but if they made such payments, Vermont's sovereign immunity would preclude them from recovering their money should they ultimately prevail in the litigation.

The HHS Secretary, along with the Secretary of Vermont's Agency of Human Services, who intervened as a defendant, responded that "payment" means payment, and that even though Vermont is reimbursed by manufacturers, it has still made a payment under the ordinary understanding of that word. As to the manufacturers' nominal copayment claim, the HHS Secretary argued that the manufacturers lacked standing to represent the interests of PDP beneficiaries. The Secretary did not deny that manufacturers refusing to make PDP rebate payments risked losing Medicaid eligibility nationwide nor did the Vermont Secretary deny that sovereign immunity would bar recovery of any rebates paid.

On January 17, 2001, sixteen days after Vermont began implementing the PDP, the district court, concluding that the manufacturers were unlikely to succeed on the merits, denied their request for a preliminary injunction. Pharm. Research & Mfrs. of Am. v. United States, No. 2000-2990 (D.D.C. Jan. 17, 2001) (order denying preliminary injunction); see also Pharm. Research & Mfrs. of Am. v. United States, 135 F. Supp. 2d 1 (D.D.C. 2001). Renewing the arguments they made in the district court, the manufacturers appeal.

II

According to the Vermont Secretary of Human Services, "[p]rescription drug prices can place an enormous burden on working Vermonters." Intervenor's Br. at 58. "The uninsured and under-insured," she explains, "are often unable to obtain drugs because of the high cost.... Without the assistance of the PDP, these individuals might forego obtaining these medicines, reduce the amount or frequency of their prescriptions for financial reasons, or elect to obtain medicines by sacrificing other necessities." Id. (internal quotation omitted). Our task, however, is neither to evaluate the PDP's policy justification nor to determine whether the program best serves the pharmaceutical needs of the poor. Cf. Robert Pear, States Creating Plans to Reduce Costs for Drugs, N.Y. Times, Apr. 23, 2001, at A1 (describing various state programs to help low-income elderly people buy prescription drugs). We face a straightforward legal issue: Did the Department exceed its statutory authority by authorizing Vermont to require pharmaceutical manufacturers to make rebates under the PDP?

The manufacturers argue that the Department lacked authority to approve the PDP because, as they interpret the statute, the payments Vermont makes to pharmacies are not "payment[s] ... made under the State plan." As they see it, Vermont merely acts as a conduit for money received from drug manufacturers, which could not possibly be what Congress meant by ...

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