MINNESOTA PHARMACISTS ASS'N v. Pawlenty

• Decision Date: 10 February 2010
• Docket Number: Civil No. 09-2723 (DWF/RLE).
• Citation: 690 F. Supp.2d 809
• Parties: MINNESOTA PHARMACISTS ASSOCIATION, et al., Plaintiffs, v. Timothy PAWLENTY, not individually, but solely in his official capacity as Governor of the State of Minnesota; Cal Ludeman, not individually, but solely in his official capacity as Commissioner of the Minnesota Department of Human Services; Brian Osberg, not individually, but solely in his official capacity as Director of the Minnesota Medicaid Program; and the Minnesota Department of Human Services, Defendants.
• Court: U.S. District Court — District of Minnesota

690 F.Supp.2d 809

MINNESOTA PHARMACISTS ASSOCIATION, et al., Plaintiffs, v. Timothy PAWLENTY, not individually, but solely in his official capacity as Governor of the State of Minnesota; Cal Ludeman, not individually, but solely in his official capacity as Commissioner of the Minnesota Department of Human Services; Brian Osberg, not individually, but solely in his official capacity as Director of the Minnesota Medicaid Program; and the Minnesota Department of Human Services, Defendants.

Civil No. 09-2723 (DWF/RLE).

United States District Court, D. Minnesota.

February 10, 2010.

David M. Aafedt, Esq., and William A. McNab, Esq., Winthrop & Weinstine, PA; and Amy E. McCracken, Esq., Frederick R. Ball, Esq., Nichols J. Lynn, Esq., and Nina Russakoff, Esq., Duane Morris, LLP, for Plaintiffs.

Patricia A. Sonnenberg, Assistant Attorney General, State of Minnesota, for Defendants.

MEMORANDUM OPINION AND ORDER

DONOVAN W. FRANK, District Judge.

INTRODUCTION

This matter is before the Court on Plaintiffs' motion for a preliminary injunction (Doc. No. 13) and on Defendants' motion for judgment on the pleadings (Doc. No. 17). For the reasons stated below, this Court grants in part and denies in part the motion for judgment on the pleadings and denies the preliminary injunction motion.

FACTUAL AND PROCEDURAL BACKGROUND

In this action against state officials for declaratory and injunctive relief, a variety of plaintiffs — chiefly pharmacies and associations representing pharmacies but also several Medicaid recipients — seek to reverse recent reductions in the reimbursement rates that the State of Minnesota pays pharmacies for brand-name ("single-source") pharmaceutical drugs covered by the State's Medicaid program.¹ The reductions result from two separate actions: (1) the State's amendment, effective July 1, 2009, of its Medicaid plan changing its reimbursement rate from Average Wholesale Price ("AWP") less 14 percent to AWP less 15 percent ("the one-percent cut" or "the July 1 cut"); and (2) the change, effective September 26, 2009, in the computation of AWP, a change which results not from any overt legislative or executive decision of the State but rather from a settlement that the private publisher of AWPs entered into in other litigation in which it agreed to reduce its computation of AWP to Wholesale Acquisition Cost ("WAC") plus 20 percent (rather than 25 percent) ("the four-percent cut" or "the September 26 cut").

Congress created the Medicaid program in 1965 by amending the Social Security Act to add Title XIX. Pub.L. 89-97, Title I, § 121(a), 79 Stat. 244 (codified at 42 U.S.C. Chapter 7, Subchapter XIX); see Pharmaceutical Research and Manufacturers of America v. Walsh, 538 U.S. 644, 650, 123 S.Ct. 1855, 155 L.Ed.2d 889 (2003). Pursuant to its authority under the Spending Clause, Congress thus established a joint federal-state program to provide medical care to certain economically disadvantaged citizens. Although the States are not required to participate in the program, if they elect to do so, their plans must meet certain minimal federal requirements in order to get federal funding.

The federal statute at issue, governing "State plans for medical assistance," first imposes numerous requirements on any State plan. 42 U.S.C. § 1396a(a) (specifying detailed requirements in some 71 enumerated paragraphs). It then provides that the Secretary of Health and Human Services "shall approve any plan which fulfills the conditions specified in subsection (a) of this section, except that he shall not approve any plan which imposes, as a condition of eligibility for medical assistance under the plan," any of three specified conditions not applicable here. Id. § 1396a(b). If the Secretary finds that a State plan fails "to comply substantially with any such provision" of Section 1396a, she shall terminate federal funds to the State. Id. § 1396c.

The particular provision at issue, Section 1396a(a)(30)(A), generally requires that payments under a State plan be "consistent with efficiency, economy, and quality of care" and also be "sufficient to enlist enough providers" so as to provide care and services at least equal to that "available to the general population in the geographic area." Id. § 1396a(a)(30)(A) ("Subsection (30)(A)").

The State of Minnesota participates in the program pursuant to its State plan as approved by the Secretary of Health and Human Services. Minnesota law provides that reimbursement of Medicaid providers of prescription drugs cannot exceed the lowest of three amounts: (1) the actual acquisition costs ("AAC") of the drugs plus a fixed dispensing fee; (2) the maximum allowable costs set by the federal government or by the Commissioner of the DHS plus a fixed dispensing fee; or (3) the usual and customary price charged to the public. Minn.Stat. § 256B.0625, subd. 13e(a). The State does not attempt to base reimbursement on the actual acquisition cost of each individual prescription filled for Medicaid recipients. Rather, it relies on estimates of such costs.

Until July 2009, the AAC was estimated as the AWP minus 14 percent. Id. To calculate the AAC, the State uses data from First DataBank, Inc., a private clearinghouse of pharmaceutical data, which publishes the AWP of numerous prescription drugs.

Recently, however, Minnesota, by statute duly enacted by the legislature and signed by Governor Pawlenty, changed its law governing the reimbursement rate it would pay Medicaid providers for prescription drugs and amended its State Medicaid plan accordingly. The State changed its reimbursement rate from AWP minus 14 percent to AWP minus 15 percent, effective July 1, 2009. The Secretary of Health and Human Services approved Minnesota's plan amendment on November 18, 2009.²

Independent of this state legislative change in the reimbursement rate, Plaintiffs also challenge a separate reduction that stems from a change in a component of the formula that Minnesota, along with many other states, uses to calculate the applicable AAC of a particular prescription drug. That change results from a settlement that First DataBank entered in other litigation, by which, as relevant here, it agreed to reduce "its published AWP figures for all drug products ... with a mark-up higher than 1.2 down to a 1.2 mark-up." National Ass'n of Chain Drug Stores v. New England Carpenters Health Benefits Fund, 582 F.3d 30, 37 (1st Cir. 2009). The First Circuit has summarized the drug pricing system as it operates generally, that is, not just in the Medicaid context:

Drug manufacturers typically sell to drug wholesalers at a list price — called in the industry the "wholesale acquisition cost" ("WAC") — although discounts may be provided to the wholesaler....

Wholesalers add a mark-up in selling the drugs to retail pharmacies.... Pharmacies then add a mark-up of their own when they sell the drugs to consumers.

... The insurer or its agent typically contracts with the pharmacy to reimburse the latter for the drugs it supplies to the beneficiary based on a discount (which will vary) from a notional benchmark price called the "average wholesale price" ("AWP"). The AWP figure is usually derived by applying a multiplier to the WAC for the drug, and publishers of AWP lists normally obtained their AWP figures from manufacturers or wholesalers. Historically, AWPs were derived by applying different mark-ups to different drugs, the most common multiplier being 1.2 or 1.25 — percentage mark-ups of 20 and 25 percent, respectively.

Contracts between pharmacies and a Third Party Payor or Pharmacy Benefit Manager typically incorporate AWP prices by reference. Because the TPP or PBM normally contracts to reimburse pharmacies at a discount from AWP figures, the AWP supplied by a publisher for a drug is likely to be higher than the reimbursement paid by any TPP or PBM; but, given the pharmacy-TPP (or pharmacy-PBM) contract incorporating the AWP as the starting point, an increase in the published AWP means that the TPPs will pay more and the pharmacy will receive more.

Id. at 36. Following the First DataBank settlement, the State informed prescription drug providers participating in the Medicaid program that it would continue to reimburse them using the "revised AWP values." (Doc. No. 1, Ex. A.)

Plaintiffs' Complaint thus asserts the following claims: (1) a Section 1983 claim seeking declaratory relief for violation of their purported rights under Subsection (30)(A) (Count I); (2) a Supremacy Clause claim for injunctive relief regarding the July 1 cut (Count II); (3) a Supremacy Clause claim for injunctive relief regarding the September 26 cut (Count III); (4) a Supremacy Clause claim for declaratory relief regarding the July 1 cut (Count IV); (5) a Supremacy Clause claim for declaratory relief regarding the September 26 cut (Count V); (6) a state-law claim that Defendants breached the Provider Agreement via the September 26 cut (Count VI); (7) a state-law claim seeking a declaration that Defendants violated the Minnesota Constitution by breaching the Provider Agreement via the July 1 cut (Count VII); and (8) a state-law claim that Defendants' August 27, 2009 Provider Update violated the Minnesota Constitution's Separation of Powers Clause by changing reimbursement rates without legislative approval (Count VIII). (Doc. No. 1, ¶¶ 61-109.)

Plaintiffs then promptly moved for a preliminary injunction. (Doc. No. 13.) After filing a joint Answer (Doc. No. 16), Defendants moved for judgment on the pleadings (Doc. No. 17). Finally, the United States of America has filed a Statement of Interest, contending that there is no requirement that the State submit a plan amendment to obtain approval of the four-percent cut resulting from the AWP settlement. (Doc. No. 66.)

DISCUSSION

In seeking a judgment on the pleadings, the State contends that (1) all claims against DHS are barred by the Eleventh Amendment; (2) the state-law claims (Counts VI, VII, &...