Massachusetts State Pharmaceutical Ass'n v. Rate Setting Com'n

• Decision Date: 09 August 1982
• Citation: 438 N.E.2d 1072,387 Mass. 122
• Parties: MASSACHUSETTS STATE PHARMACEUTICAL ASSOCIATION et al. 1 v. RATE SETTING COMMISSION (and a companion case 2 ).
• Court: United States State Supreme Judicial Court of Massachusetts Supreme Court

Page 1072

438 N.E.2d 1072

387 Mass. 122

MASSACHUSETTS STATE PHARMACEUTICAL ASSOCIATION et al. ¹ v. RATE SETTING COMMISSION (and a companion case ²).

Supreme Judicial Court of Massachusetts,

Suffolk.

Argued May 3, 1982.

Decided Aug. 9, 1982.

Jeffrey M. Smith, Chestnut Hill, for plaintiffs.

Stephen S. Ostrach, Asst. Atty. Gen. (Carl A. Valvo & Maureen L. Fox, Asst. Attys. Gen., with him), for defendants.

Before HENNESSEY, C. J., and WILKINS, NOLAN, LYNCH and O'CONNOR, JJ.

WILKINS, Justice.

We have before us two appeals arising from challenges, on both procedural and substantive grounds, to a Statewide dispensing fee for pharmacies that provide prescription drugs to persons eligible for benefits under Medicaid. The fee was set forth in a regulation (114.3 Code Mass.Regs. 31.00) issued on September 6, 1978, by the defendant Rate Setting Commission (commission). See G.L. c. 6A, § 32, third par. The plaintiff pharmacies and pharmacists and the Massachusetts State Pharmaceutical Association (association) claim that the regulation, fixing a single dispensing fee of $2.70, was not adopted according to proper procedures and was fixed at a level that is contrary to law. In certain circumstances, the dispensing fee is to be used in determining the rate of reimbursement to pharmaceutical providers. ³

A complaint for a declaratory judgment was filed on November 10, 1978, in the Superior Court in Suffolk County as a direct judicial challenge to the regulation. See G.L. c. 30A, § 7, and G.L. c. 231A. The second action was an appeal to the Superior Court from a decision of a hearing officer of the Division of Hearings Officers (division) (established pursuant to G.L. c. 7, § 4H) dismissing an administrative challenge to the commission's regulation. The administrative appeal to the division raised the same issues, in the form of a purported class action, as did the direct judicial challenge entered in the Superior Court. The division dismissed the administrative appeal in its entirety, on motion of the commission, on the ground that the division had no authority to consider class actions. ⁴

The two actions were tried together in the Superior Court. The judge ruled, in the declaratory judgment action, that the plaintiffs had "failed to show that there [were] no conceivable grounds upon which the final rate established by the Commission could be upheld." He made no rulings on the plaintiffs' challenges to the methods and procedures used by the commission in setting the rate, concluding that to do so was beyond the proper scope of judicial review. He concluded that the regulation was not void on its face and ordered judgment for the commission. The plaintiffs and the commission appealed from that judgment. ⁵

On the plaintiffs' appeal from the division's dismissal of their purported class action, the judge concluded that the division improperly dismissed the administrative appeal of the individual pharmacies and remanded the matter to the division for consideration of the individual pharmacies' appeals. He agreed with the division's conclusion that a class action could not be maintained before it. As to the individually named pharmacies, the judge took the view that the reasonableness of the dispensing fee and the methods and procedures by which it was adopted were open for consideration before the division. He directed that, on remand, the division should hold an adjudicatory hearing "to consider all factors relating to the promulgation of the rates, including the appropriateness and effectiveness of the methods and procedures used by the Rate Setting Commission in establishing the rate. The Division is to determine the adequate, fair and reasonable rate [of] reimbursement for each provider." The plaintiffs appealed from this judgment. The commission also appealed from this judgment, but only to challenge the scope of the directions to the division as to what it must do on remand. We granted the plaintiffs' application for direct appellate review of the consolidated appeal. On the central issue in contention, we reject the plaintiffs' challenge to the regulation.

The Declaratory Judgment Action

We consider first the plaintiffs' appeal in the declaratory judgment action in which the judge dismissed their direct judicial challenge to the commission's dispensing fee regulation. We begin by setting forth a brief statement of guiding principles concerning challenges to agency regulations. In a declaratory judgment proceeding (see G.L. c. 30A, § 7, and G.L. c. 231A), a provider may maintain a direct judicial challenge to a general regulation, both on the ground that the general regulation was not validly adopted (see Purity Supreme, Inc. v. Attorney Gen., --- Mass. ---, ---, Mass.Adv.Sh. [1980] 1349, 1368 407 N.E.2d 297; Palm Manor Nursing Home, Inc. v. Rate Setting Comm'n, 359 Mass. 652, 655, 270 N.E.2d 823 [1971] ), and on the ground that the general regulation is substantively defective, that is, inadequate (see Murphy Nursing Home, Inc. v. Rate Setting Comm'n, 364 Mass. 454, 457, 305 N.E.2d 837 [1973] ); Massachusetts Gen. Hosp. v. Rate Setting Comm'n, 359 Mass. 157, 166, 269 N.E.2d 78 [1971] ). The commission agrees that the plaintiffs may maintain this action pursuant to G.L. c. 30A, § 7.

In any challenge to a regulation, the plaintiff has the burden of showing that the regulation is invalid or illegal. See Consolidated Cigar Corp. v. Department of Pub. Health, 372 Mass. 844, 851, 364 N.E.2d 1202 (1977). Where the plaintiff asserts that a regulation is illegal on the basis of particular facts, the factual showing must be made in the judicial proceeding itself. Grocery Mfrs. of America, Inc. v. Department of Pub. Health, 379 Mass. 70, 81, 393 N.E.2d 881 (1979). Thus, in the absence of a contrary statutory direction, a court reviewing a regulation is not concerned with whether there was substantial evidence in a record before the agency, but rather it must consider whether, based solely on the record made in court, the adoption of the agency regulation was illegal, arbitrary, or capricious. See Purity Supreme, Inc. v. Attorney Gen., --- Mass. ---, ---, ---, Mass.Adv.Sh. (1980) 1349, 1355, 1363, 407 N.E.2d 297; Greenleaf Fin. Co. v. Small Loans Regulatory Bd., 377 Mass. 282, 293, 385 N.E.2d 1364 (1979). Contrast New England Tel. & Tel. Co. v. Department of Pub. Utils., 371 Mass. 67, 80, 354 N.E.2d 860 (1976), a case involving an adjudicatory proceeding. We accord to a regulation, including a rate regulation, the same deference we extend to a statute. Greenleaf Fin. Co. v. Small Loans Regulatory Bd., supra, 377 Mass. at 293-294, 385 N.E.2d 1364. Barring a specific statutory requirement, an agency is not obliged to provide a statement of reasons in support of its adoption of a regulation. See Purity Supreme, Inc. v. Attorney Gen., supra, 380 Mass. at ---, at 1368, 407 N.E.2d 297.

We disagree in part with the Superior Court judge, who concluded that the question of the propriety of the methods and procedures used by the commission in setting the dispensing fee was beyond the proper scope of judicial review of the regulation. His conclusion was wrong as to the plaintiffs' procedural challenges to the regulation but correct as to their substantive challenges. As we have just indicated, a challenge to a general regulation may be brought directly to a court pursuant to G.L. c. 30A, § 7, and G.L. c. 231A. Thus, the judge's conclusion that he could not consider procedural objections to the methods and procedures used by the commission in adopting the regulation is not consistent with established authority. As to the plaintiffs' substantive challenge to the dispensing fee, however, the judge was basically correct because the lawfulness of the level of the dispensing fee is not to be determined on the basis of the propriety of "the methods and procedures used by the Commission." Instead, the lawfulness of the rate level is to be determined on the basis of a record made in the judicial proceeding. The judge did not engage in any analysis of either the procedural or the substantive challenge to the dispensing fee regulation, except to rule that the regulation was facially valid.

Because the judge did not consider the plaintiffs' challenges based either on procedural or on substantive grounds, except to determine that the regulation was not "void on its face," we have no findings of fact on various contested issues. On a review of the record, we have concluded that we can deal adequately with the various challenges raised by the plaintiffs. Most significant facts are not in dispute, and in each area in which we lack findings, we conclude that the evidence most favorable to the plaintiffs does not warrant a decision in their favor.

1. Procedural objections. We turn first to the plaintiffs' arguments that the commission failed to adhere to certain procedural requirements for the adoption of the regulation and that, therefore, the regulation is invalid. We shall then consider the plaintiffs' claims that the dispensing fee is defective substantively, even if it was properly adopted.

(a) The plaintiffs argue that the regulation is invalid because the commission failed to determine rates annually as required by G.L. c. 6A, § 32, third par. It is clear that the rates in effect prior to the 1978 rates (those involved in this case) were promulgated in 1975, and, therefore, the commission did not determine rates "at least as often as annually." See G.L. c. 6A, § 32, as amended through St.1979, c. 675, § 1. ⁶ Moreover, the commission was required to establish regulations consistent "with the principles of reimbursement for provider costs in effect from time to time under Titles XVIII and XIX of the Social Security Act" (G.L. c. 6A, § 32, tenth par.). Also, Federal Medicaid requirements obliged the State to conduct a complete survey of pharmacy costs "at least once every three years, as long as inflation factors are considered...