Mckesson Corp. v. Ariz. Health Care Cost Containment Sys.

• Decision Date: 06 September 2012
• Docket Number: No. 1 CA–CV 11–0457.,1 CA–CV 11–0457.
• Citation: 642 Ariz. Adv. Rep. 9,230 Ariz. 440,286 P.3d 784
• Parties: McKESSON CORPORATION, a Delaware corporation, Plaintiff/Appellee, v. ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM; Tom Betlach, in his capacity as Director of Arizona Health Care Cost Containment System, Defendants/Appellants.
• Court: Arizona Court of Appeals

230 Ariz. 440

286 P.3d 784

642 Ariz. Adv. Rep. 9

McKESSON CORPORATION, a Delaware corporation, Plaintiff/Appellee,

v.ARIZONA HEALTH CARE COST CONTAINMENT SYSTEM; Tom Betlach, in his capacity as Director of Arizona Health Care Cost Containment System, Defendants/Appellants.

No. 1 CA–CV 11–0457.

Court of Appeals of Arizona, Division 1, Department C.

Sept. 6, 2012.

Quarles & Brady LLP By Roger N. Morris and Melody A. Emmert, Phoenix and Morrison & Foerster LLP By Melvin R. Goldman, Pro Hac Vice, James P. Bennett, Pro Hac Vice, Paul Flum, Pro Hac Vice, San Francisco, CA, Co–Counsel for Plaintiff/Appellee.

Hagens Berman Sobol Shapiro LLP By Robert B. Carey and Leonard W. Aragon, Phoenix, Attorneys for Defendants/Appellants.

OPINION

BROWN, Judge.

¶ 1 The Arizona Health Care Cost Containment System (“AHCCCS”) appeals the superior court's determination that AHCCCS lacked jurisdiction and legal authority to bring an enforcement action against McKesson Corporation under Arizona's False Claims Act.¹ As explained below, because AHCCCS adopted administrative rules ² that limited its authority to impose civil penalties only against “providers,” we affirm the decision of the superior court insofar as it determined that AHCCCS did not have the legal authority to impose penalties against McKesson for the time period in which the claims at issue were submitted to AHCCCS.

BACKGROUND

¶ 2 AHCCCS is the state agency responsible for providing health care services, including prescription drugs, to Arizona's eligible indigent population. McKesson is a wholesaler of prescription drugs. In November 2010, AHCCCS issued a Notice of Proposed Civil Monetary Penalty alleging that McKesson and another company engaged in a price inflation scheme that caused AHCCCS and its contractors to overpay pharmacies for Medicaid reimbursement claims in violation of the False Claims Act. Specifically, the notice alleged that as early as 2000, and continuing through 2009, McKesson improperly manipulated the average wholesale price of prescription drugs by 25%, resulting in the submission of false or fraudulent reimbursement claims. Based on claims submitted to AHCCCS between October 2004 and September 2006, AHCCCS sought to impose a civil penalty and assessment of more than $212 million against McKesson, pursuant to A.R.S. § 36–2918 and A.A.C. R9–22–1101.

¶ 3 In February 2011, McKesson petitioned for special action relief in the superior court, seeking a declaration that AHCCCS lacked jurisdiction and legal authority to impose penalties against McKesson. McKesson also sought a permanent injunction against AHCCCS resuming or reinitiating the penalty proceeding. The court accepted special action jurisdiction and entered a final judgment and permanent injunction in favor of McKesson, explaining as follows:

Section 36–2918 authorizes AHCCCS to adopt rules that reach all ‘persons,’ but, in exercising its rulemaking authority delegated by statute, AHCCCS made the determination to limit Article 11 to ‘providers.’ As such, AHCCCS's use of Article 11 to impose penalties and assessments on McKesson, a non-provider, violates the [Administrative Procedures Act].

The court also held that subjecting McKesson to penalties and assessments would violate due process, because AHCCCS failed to give “fair notice” to McKesson that a non-provider was subject to an Article 11 enforcement action. AHCCCS timely appealed.

DISCUSSION

¶ 4 To resolve this appeal, we must determine whether AHCCCS's decision to promulgate rules for enforcing A.R.S. § 36–2918 that apply only to a “provider or non-contracting provider” precludes AHCCCS from bringing an enforcement action against a non-provider. We interpret administrative rules and statutory provisions de novo. Gutierrez v. Indus. Comm'n of Arizona, 226 Ariz. 395, 396, ¶ 5, 249 P.3d 1095, 1096 (2011). “We apply the same rules in construing both statutes and rules.” Smith v. Arizona Citizens Clean Elections Comm'n, 212 Ariz. 407, 412, ¶ 18, 132 P.3d 1187, 1192 (2006). We read administrative rules and statutes in conjunction with each other and harmonize them whenever possible. Thomas & King, Inc. v. City of Phoenix, 208 Ariz. 203, 206, ¶ 9, 92 P.3d 429, 432 (App.2004). We also strive to interpret administrative rules in a manner that yields a fair and sensible meaning. Kimble v. City of Page, 199 Ariz. 562, 565, ¶ 19, 20 P.3d 605, 608 (App.2001).

¶ 5 Section 36–2918 provides in pertinent part:

A. A person may not present or cause to be presented to this state or to a contractor:

1. A claim for a medical or other item or service that the person knows or has reason to know was not provided as claimed.

2. A claim for a medical or other item or service that the person knows or has reason to know is false or fraudulent.

....

B. A person who violates a provision of subsection A is subject, in addition to any other penalties that may be prescribed by federal or state law, to a civil penalty of not to exceed two thousand dollars for each item or service claimed and is subject to an assessment of not to exceed twice the amount claimed for each item or service.

C. The director or the director's designee shall make the determination to assess civil penalties and is responsible for the collection of penalty and assessment amounts. The director shall adopt rules that prescribe procedures for the determination and collection of civil penalties and assessments.

(emphasis added). The rules referenced in A.R.S. § 36–2918(C) are found in Article 11. SeeA.A.C. R9–22–1101 to –1112. During the time frame in which alleged false or fraudulent claims were submitted to AHCCCS, its enforcement rules expressly limited Article 11's scope to providers:

R9–22–1101. Basis for Civil Monetary Penalties and Assessments for Fraudulent Claims; Definitions

A. Scope. This Article applies to a provider or non-contracting provider who meets the conditions under this Article and who submits a claim under Medicaid ..., KidsCare ..., or the Health Care Group[.]

B. Purpose. This Article describes the circumstances AHCCCS considers and the process that AHCCCS uses to determine the amount of a penalty, assessment, or penalty and assessment as required under A.R.S. § 36–2918. This Article includes the process and time-frames used by a provider or non-contracting provider to request a State Fair Hearing.

C. Definitions. The following definitions apply to this Article:

1. “Assessment” means a monetary amount that does not exceed twice the dollar amount claimed by the provider or non-contracting provider for each service.

2. “Claim” means a request for payment submitted by a provider or non-contracted provider for payment for a service or line item of service.

....

5. “Penalty” means a monetary amount, based on the number of items of service claimed, that does not exceed two thousand dollars times the number of line items of service.

A.A.C. R9–22–1101 (eff. Sept. 11, 2004) (emphasis added).

¶ 6 AHCCCS amended and restructured Article 11 in September 2004, adding, among other things, the “scope” provision with the “provider or non-contracting provider” limitation. 10–32 Ariz. Admin. Reg. 3061 (Aug. 6, 2004). Prior versions of Article 11, in effect since 1986, did not contain a “scope” provision and applied to any “person.” SeeA.A.C. R9–22–1101 (adopted eff. Oct. 1, 1986 (Supp. 86–5); amended eff. May 30, 1989 (Supp. 89–2); amended eff. Sept. 29, 1992 (Supp. 92–3)). In the Notices of Final Rulemaking accompanying the 2004 amendments to Article 11, AHCCCS stated that “the proposed rule language is intended to streamline and clarify the existing rules and process, which relate only to providers and non-contractingproviders.” 10–32 Ariz. Admin. Reg. 3057.³

¶ 7 The parties do not dispute that (1) McKesson is a “person” as statutorily defined by A.R.S. § 36–2918; (2) AHCCCS's factual allegations against McKesson, if true, would support a finding that McKesson violated A.R.S. § 36–2918(A); and (3) McKesson is not a “provider or non-contracting provider” within the scope of Article 11. The relevant question, then, is whether AHCCCS's rules that apply only to a “provider or non-contracting provider” preclude the assessment of penalties against a non-provider such as McKesson.

¶ 8 AHCCCS acknowledges that the 2004 amendments narrowed the scope of Article 11, but asserts nonetheless that AHCCCS can pursue an enforcement action against a non-provider under the express terms of § 36–2918. AHCCCS argues that § 36–2918 sets forth the prohibited conduct, the persons it applies to, and the consequences for violating the statute. And, as the agency authorized to enforce the False Claims Act, AHCCCS contends that its interpretation should be entitled to deference.

¶ 9 We recognize that an administrative agency's interpretation of statutes and its own regulations is ordinarily entitled to great weight. Capitol Castings, Inc. v. Ariz. Dep't of Econ. Sec., 171 Ariz. 57, 60, 828 P.2d 781, 784 (App.1992). However, an agency interpretation developed in litigation is not entitled to judicial deference. See Landmark Legal Found. v. IRS, 267 F.3d 1132, 1135–36 (D.C.Cir.2001); cf. Scenic Ariz. v. City of Phoenix Bd. of Adjustment, 228 Ariz. 419, 431, ¶ 37, 268 P.3d 370, 382 (App.2011) (declining to give judicial deference to the Arizona Department of Transportation's informal positions as to whether electronic billboards were permitted by statute). Nothing in the record before us supports the view that by adopting the 2004 rule changes, AHCCCS intended to do anything other than to limit the class of persons against whom it would seek to enforce the False Claims Act. Moreover, as a general principle of administrative law, “an agency must follow its own rules and regulations; to do otherwise is unlawful.” Clay v. Ariz. Interscholastic Ass'n, 161 Ariz. 474, 476, 779 P.2d 349, 351 (1989) (citations omitted); see also Tiffany ex. rel. Tiffany v. Ariz. Interscholastic Ass'n, 151 Ariz. 134, 139, 726 P.2d 231,...