Long Term Care Pharmacy Alliance v. Ferguson, 03-1895.

CourtUnited States Courts of Appeals. United States Court of Appeals (1st Circuit)
Citation362 F.3d 50
Docket NumberNo. 03-1895.,03-1895.
PartiesLONG TERM CARE PHARMACY ALLIANCE, Plaintiff, Appellee, v. Christine FERGUSON, Director, Commonwealth of Massachusetts Division of Health Care Finance and Policy, Defendant, Appellant.
Decision Date17 March 2004

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362 F.3d 50
Christine FERGUSON, Director, Commonwealth of Massachusetts Division of Health Care Finance and Policy, Defendant, Appellant.
No. 03-1895.
United States Court of Appeals, First Circuit.
Heard January 6, 2004.
Decided March 17, 2004.

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Romeo G. Camba, Assistant Attorney General, with whom Thomas F. Reilly, Attorney General, and William Porter, Assistant Attorney General, were on brief for appellant.

David J. Farber with whom John Rosans, Patton Boggs LLP, Mark E. Robinson, Daniel S. Savrin, Melissa G. Liazos and Bingham McCutchen LLP were on brief for appellee.

Before BOUDIN, Chief Judge, LYNCH and LIPEZ, Circuit Judges.

BOUDIN, Chief Judge.

This is an appeal from a preliminary injunction entered by the district court. That court enjoined the Commonwealth of Massachusetts from implementing an emergency regulation reducing the rates that the state pays under the state's Medicaid program to pharmacies to reimburse them for prescription drugs furnished for the use of Medicaid patients. The background events are as follows.

Medicaid is a federal-state program to assist the poor, elderly, and disabled in obtaining medical care. 42 C.F.R. § 430.0 (2002). Under the Medicaid Act, which is Title XIX of the Social Security Act, 42 U.S.C. §§ 1396-1396v (2000), the federal government provides financial support to states that establish and administer state Medicaid programs in accordance with federal law through a state plan approved by the U.S. Department of Health and Human Services ("HHS"). 42 U.S.C. § 1396 (2000); 42 C.F.R. §§ 430.0, 430.10-.20 (2002). One requirement is that the state have a scheme for reimbursing health care providers. 42 U.S.C. §§ 1396a(a), 1396d(a) (2000).

Massachusetts participates in Medicaid and its plan, known as "MassHealth," is administered by an entity ("the Division") based in the state's Executive Office of Health and Human Services ("the Executive Office"). Mass. Gen. Laws. ch. 118E, §§ 1, 7, 8, 9, 9A, 11 (2002). The Division fixes the rates it will pay to reimburse providers for numerous health services. These include the furnishing by pharmacies of prescription drugs for Medicaid patients. 114.3 C.M.R. §§ 6.00-49.00 (2003).

This reimbursement is calculated separately for the cost of the drug to the pharmacy and for the cost of dispensing it. 114.3 C.M.R. §§ 31.02, 31.04, 31.07 (2003). The former, with which this case alone is concerned, is governed by federal, 42 C.F.R. §§ 447.331, 447.332 (2002), and state formulas of some complexity, 114.3 C.M.R. § 31.04 (2003); but the only method at issue here calls for reimbursement for the pharmacy's "estimated acquisition cost." Massachusetts defines this cost as an estimate of the price "generally and currently paid by eligible pharmacy providers" for the most common package size. Id. § 31.02.

This general and current price is calculated as a percentage of a so-called "wholesaler's acquisition cost" ("WAC") for each drug in question. Although how the WAC numbers are derived is not fully explained by the parties, the Commonwealth says that it is effectively the wholesale catalogue price for the drug but that the real price may often be a few percentage points lower for non-generic drugs (and many points lower for generics) because of common

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discounts (e.g., for speedy payment).1 Whether there may be other pertinent costs not included in WAC, and how profits are provided, is less clear.

In 2002 a new HHS report suggested that a number of states were overpaying for drugs. Office of the Inspector Gen., Dep't of Health & Human Servs., Medicaid Pharmacy — Actual Acquisition Cost of Generic Prescription Drug Products (2002). Massachusetts was then using a WAC plus 10% formula to reimburse pharmacies. The state legislature for fiscal year 2003 ordered a reduction, directing the Division to determine whether WAC minus 2% would suffice to ensure enough participating pharmacies to supply patient needs. The Division held hearings in September 2002 and sought data from Massachusetts pharmacies as to their costs of acquisition of individual drugs. The pharmacies generally refused to provide the data, claiming that such data was proprietary.

At the hearings, chain pharmacies such as Brooks and CVS conceded that they usually obtained branded drugs at WAC minus 2% for prompt payment (and paid even less for generics), but the three largest chains said they would no longer serve MassHealth if payment were reduced to WAC minus 2%. They claimed inter alia that MassHealth prescriptions involved extra work and that certain costs like overhead and storage were not included in the WAC figures. In sum, they said that they would lose money if they continued at the proposed reduced rate.

In a report issued in October 2002, the Division concluded that the pharmacies acquired the branded drugs at WAC and generics at less and that while other costs were incurred the Massachusetts pharmacies had not documented them. Div. of Health & Human Servs., Commonwealth of Massachusetts, Report to the General Court Reimbursment for Prescribed Drugs 15 (2002). The recommendation was to reduce payments to WAC plus 6% partly to cover other (unquantified) costs and partly to "ensure that MassHealth members will have sufficient access to prescribed drugs." Id. This new WAC plus 6% rate was implemented immediately and is not at issue in this case.

On March 14, 2003, the Division adopted emergency amendments to its regulations, lowering the rate to WAC plus 5% effective April 1, 2003. According to the Division, only one pharmacy had dropped out of MassHealth under the WAC plus 6% rate, persuading the Division that a small further reduction would save money and not curtail supply. The notice adopting the new change, and other changes not here involved, proposed a public hearing in May 2003 but made clear that the Division believed it was entitled to implement the new WAC plus 5% rate in advance of any hearing.

To challenge that contention and the proposed lower rate, the Long Term Care Pharmacy Alliance ("Long Term") brought the present action in the district court. Long Term represents a set of "closed" pharmacies that provide drugs not to the general public but only to nursing home and other institutional patients. Seeking a preliminary injunction, Long Term claimed that the Division's failure to provide a

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prior hearing violated one provision of the Medicaid Act and its 1% reduction within five months and without new evidence or findings violated another provision of the statute. The respective statutory provisions are 42 U.S.C. § 1396a(a)(13)(A) (2000) and 42 U.S.C. § 1396a(a)(30)(A) (2000).

In a nutshell, the first of these Medicaid Act provisions — which we will call subsection (13)(A) — requires inter alia that a "public process" be used to set "rates of payment ... for hospital services, nursing facility services, and services of intermediate care facilities for the mentally retarded," in which "providers," among others, can comment on "proposed" rates. The second provision, subsection (30)(A), in substance requires inter alia that rates for services in general be "sufficient to enlist enough providers to provide services similar to those generally available in the area."2

The district court granted the preliminary injunction on April 1, 2003. Long Term Care Pharmacy Alliance v. Ferguson, 260 F.Supp.2d 282 (D.Mass.2003). It directed that the reduced WAC plus 5% rate not be applied to prescription drugs supplied to MassHealth nursing home patients until after notice and comment rulemaking under subsection (13)(A) and not be applied to such drugs provided to any MassHealth patient until, following the rulemaking, the Commonwealth made findings satisfying the subsection (30)(A) requirements. Id. at 295. The Commonwealth appealed from this preliminary injunction which remains in effect today.

Because the Division gave notice of the new rates shortly before adoption and thereafter held public hearings, the question arises whether this case is moot. Neither party argues for mootness, but in a footnote the Commonwealth anticipates a mootness objection and argues against it. If the controversy were now academic, this would hazard our Article III jurisdiction, Mangual v. Rotger-Sabat, 317 F.3d 45, 60 (1st Cir.2003), requiring us to dismiss sua sponte, Allende v. Shultz, 845 F.2d 1111, 1115 n. 7 (1st Cir.1988), unless the case fell within the exception for issues that are "capable of repetition, yet evading review." S. Pac. Terminal Co. v. ICC, 219 U.S. 498, 515, 31 S.Ct. 279, 55 L.Ed. 310 (1911).

The case is not moot. Although notice and opportunity for comment have both now been provided, the Division has not adopted a final (non-emergency) version of the rate based on the finding under subsection (30)(A) deemed by the district court to be required. Possibly, the Division has withheld a post-hearing order and made no finding precisely because it wants to vindicate its authority for use in the future. Still, the injunction currently precludes the Division from implementing the reduced WAC plus 5% rate; and it does so based on an alleged violation of subsection (30)(A) not yet cured. And, if subsection (13)(A) applied, even more specific findings would also be required by regulations pertaining to services covered by that section. See note 2, above. The "controversy" is therefore not moot and we need not consider whether the recurring issues exception would otherwise apply.

Turning then to the district court's decision to issue the injunction, there is no reason to repeat the familiar four-part test for preliminary injunctions, New Comm Wireless Servs., Inc. v. SprintCom, Inc., 287 F.3d 1, 8-9 (1st. Cir.2002), or parse the various standards of review that may be implicated. Water Keeper Alliance v. U.S. Dept. of Defense, 271 F.3d 21, 30 (1st

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Cir.2001). In...

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