Pfizer Inc. v. Heckler
| Decision Date | 01 June 1984 |
| Citation | 735 F.2d 1502 |
| Court | U.S. Court of Appeals — District of Columbia Circuit |
Appeals from the United States District Court for the District of Columbia (Civil Action Nos. 79-185 & 79-3399).
Elise D. Smith, Atty., Health and Human Services, Washington, D.C., with whom J. Paul McGrath, Asst. Atty. Gen., and Mark W. Pennak, Atty., U.S. Dept. of Justice, and Juan A. Del Real, Gen. Counsel, Health and Human Services, Washington, D.C., were on the brief for appellants. Royce C. Lamberth, R. Craig Lawrence, and Rebecca L. Ross, Asst. U.S. Attys., Washington, D.C., also entered appearances for appellants.
John E. Nolan, Jr., Washington, D.C., with whom Paul S. Miller, Fort Wayne, Ind., and Steven Reed, Washington, D.C., were on the brief for appellee.
Before WRIGHT, WILKEY and SCALIA, Circuit Judges.
Opinion for the Court filed by Circuit Judge WILKEY.
This case arises from a challenge by appellee Pfizer Inc. to the application of a regulation by the Department of Health and Human Services to a patented drug. The regulation establishes procedures whereby a maximum allowable cost ("MAC") may be set for a prescription drug for the purposes of limiting payment or reimbursement from federal funds under the Medicare and Medicaid programs. Pfizer contends that the regulation does not apply to patented drugs. The district court granted summary judgment for Pfizer and enjoined appellant Margaret M. Heckler, Secretary of Health and Human Services, from imposing a maximum allowable cost on government purchases and reimbursement for the patented drug Doxepin Hydrochloride pursuant to the regulation. 1 We reverse.
The Medicare and Medicaid statutes require that the federal government pay providers of medical services the reasonable cost of those services, excluding any part of the incurred cost which is unnecessary to the efficient delivery of health care services. In addition, payments made under federal grants to the states for medical assistance programs must be consistent with efficiency, economy, and quality of care. 2 The statutes provide that regulations shall be issued to establish the particular methods for determining the reasonable allowable cost of public expenditures for health services under those federal health care programs. 3
In 1975 the Secretary of the Department of Health, Education and Welfare 4 issued regulations establishing procedures for determining the reasonable allowable cost of government purchases of and reimbursement for prescription drugs in federally subsidized health care programs under Medicare and Medicaid. Those regulations establish procedures for determining: (1) the maximum limits for federal reimbursement to medical providers and the states for prescribed drugs under the Medicare and Medicaid programs; (2) the allowable costs for drugs purchased with federal funds under projects for health care services; and (3) the allowable costs for drugs purchased directly by the Department. 5 Although the regulations do not fix the actual dollar figures for federal reimbursement or payment, they establish principles for ascertaining the allowable costs for prescription drugs. The regulations provide that the amount the Department will recognize for reimbursement or payment shall not exceed the lowest of: "(1) The maximum allowable cost (MAC) of the drug, if any, established in accordance with Sec. 19.5 plus a reasonable dispensing fee; (2) The acquisition cost of the drug plus a reasonable dispensing fee; or (3) The provider's usual and customary charge to the public for the drug ...." 6 The second and third of these three cost limitations apply to all drugs for which the Department makes reimbursement or payment. The first cost limitation, however, applies only to those particular drugs for which the Department has established a "maximum allowable cost" (MAC) pursuant to specific procedures prescribed in the MAC regulation. 7
The procedures in the MAC regulation for establishing a MAC limit for a particular drug begin with the identification of a drug as a candidate for the MAC program. The MAC regulation establishes the Pharmaceutical Reimbursement Board ("the Board") comprised of six employees of the Department, which identifies the specific drugs for which a MAC limit may be set. The regulation controls which types of drugs may be identified by the Board for MAC limits. It provides: "The Board shall identify those multiple source drugs for which significant amounts of Federal funds are or may be expended ... and for which there are or may be significantly different prices." 8 The regulation defines a "multiple source drug" as "a drug marketed or sold by two or more formulators or labelers or a drug marketed or sold by the same formulator or labeler under two or more proprietary names or both under a proprietary name and without such a name." 9 Thus the Board may identify a particular drug for the establishment of a MAC limit if the drug is marketed or sold by two or more formulators or labelers, provided only that significant amounts of federal funds are expended for the drug and that the drug is available at significantly different prices.
The MAC regulation requires the Board to notify the Food and Drug Administration ("the FDA") of each drug identified for a MAC limit. The purpose of the Board's notification is to obtain the FDA's judgment about the bioequivalency of the multiple source drug as well as its advice on other considerations relevant to the marketability of the drug. If the FDA does not advise delaying the establishment of a MAC, the Board proceeds to establish a proposed maximum allowable cost for the particular drug that has been identified.
The MAC regulation provides that price competition in the market shall be the basis upon which the MAC limit is set. The regulation states, "[T]he Board shall make an initial determination of the lowest unit price at which the drug is widely and consistently available from any formulator or labeler." 10 After the Board determines the lowest unit price, it decides whether that price should be proposed as the MAC for the particular multiple source drug. The Board then publishes a proposed MAC limit, with the reasons therefor, in the Federal Register for notice and comment, and holds a public hearing. If, at the conclusion of the notice and comment period and the public hearing, the Board determines that a MAC should be set for the particular drug, it proposes a final MAC. Approval by the Administrator of the Health Care Financing Administration within the Department is required before the proposed MAC determination becomes final. The final MAC together with a statement of the Board's reasons are published in the Federal Register. 11
The Pharmaceutical Reimbursement Board identified Doxepin HCl ("Doxepin")--an antidepressant drug--as a MAC candidate in 1977. Doxepin is marketed by two different suppliers in the United States: appellee Pfizer Inc., and Pennwalt Corporation, which is not a party in this litigation. Pfizer obtained a patent on Doxepin in 1969 and markets the drug under the trademark name "Sinequan." Pennwalt Corporation markets the drug under the trademark name "Adapin," pursuant to a license issued to Pennwalt by a Pfizer subsidiary. The Board's identification of Doxepin for the establishment of a MAC was based on its determination that Doxepin was a multiple source drug, because both Pfizer and the Pennwalt Corporation market the chemically equivalent drug.
The Board determined that the lowest unit price at which Doxepin was widely and consistently available corresponded to the prices charged by the licensee, Pennwalt Corporation, as opposed to the patent holder, Pfizer, for specified capsule dosages of Doxepin. The Board published a notice in the Federal Register proposing MAC limits that were based on Pennwalt's lower prices for Doxepin capsules of 10, 25 and 50 milligrams. 12 Pfizer filed written comments with the Board and opposed the proposed MAC limits for Doxepin at the public hearing. 13 Pfizer objected to the MAC limits proposed for Doxepin on the ground, among others, that the MAC regulation does not apply to patented drugs and that, therefore, the Board could not establish a MAC for Doxepin.
After the public hearing, the Board published slightly modified, final MAC limits for 10, 25 and 50 milligram capsules of Doxepin in December 1978. 14 The Board responded to Pfizer's contention that the MAC regulation does not apply to patented drugs in a statement published with the MAC limit for Doxepin in the Federal Register:
The MAC regulations provide that the Board is to identify those multiple-source drugs for which significant amounts of Federal funds are expended and for which there are significant different prices. The Board is then to determine the lowest unit price at which the drug is widely and consistently available. The MAC regulations make no mention of patents. The Board, of course, could not MAC a patented drug where the patentholder had retained his legally protected monopoly and distributes only one form of the drug. In such a case, the drug product would not be a "multiple-source drug." Where, however, a patentholder has licensed another, and the licensee is producing and distributing the drug, the drug becomes "multiple-source" and thus becomes a candidate for MAC limits. In this instance, Pfizer has licensed Pennwalt, and it is the Pennwalt product upon which the MAC price is based. 15
Subsequently the Board also set a final MAC limit for 100 mg. dosage capsules of Doxepin in 19...
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