PA. PHARMACEUTICAL ASS'N v. Dept. of Public Welfare, Civ. A. No. 80-1790.

• Decision Date: 09 July 1982
• Docket Number: Civ. A. No. 80-1790.
• Parties: PENNSYLVANIA PHARMACEUTICAL ASSOCIATION, a Pennsylvania Non-Profit Corporation, et al., Plaintiffs, v. The DEPARTMENT OF PUBLIC WELFARE OF the COMMONWEALTH OF PENNSYLVANIA, et al., Defendants.
• Court: U.S. District Court — Eastern District of Pennsylvania

542 F. Supp. 1349

PENNSYLVANIA PHARMACEUTICAL ASSOCIATION, a Pennsylvania Non-Profit Corporation, et al., Plaintiffs, v. The DEPARTMENT OF PUBLIC WELFARE OF the COMMONWEALTH OF PENNSYLVANIA, et al., Defendants.

Civ. A. No. 80-1790.

United States District Court, W. D. Pennsylvania.

July 9, 1982.

Richard Thomas, Pittsburgh, Pa., for plaintiffs.

John G. Knorr, III, Atty. Gen., Harrisburg, Pa., William Webb, Deputy Atty. Gen., Pittsburgh, Pa., for defendants.

OPINION

DIAMOND, District Judge.

Presently before the court is the defendants' motion for partial judgment on the pleadings, which will be granted.

I.

The plaintiffs in this action are the Pennsylvania Pharmaceutical Association, an association of 2500 pharmacies; seven incorporated pharmacies; the owners-pharmacists of these pharmacies (collectively referred to as the pharmaceutical plaintiffs); and two Medicaid recipients. Plaintiffs brought this suit against the Pennsylvania Department of Public Welfare (DPW); Helen O'Bannon, the Secretary of DPW; and Gerald F. Radke, the Deputy Secretary for Medical Assistance, for alleged violations of the Federal Medicaid program.¹ The plaintiffs contend that the State's reimbursement to pharmacists for prescription drugs purchased by Medicaid recipients fails to comply with the Federal statute establishing the Medicaid program, 42 U.S.C. § 1396a (1974), and the regulations promulgated by the Secretary of Health and Human Services to implement the Medicaid program. See 42 C.F.R. § 447.204 (1980); 42 C.F.R. 447.331 et seq. (1980). The defendants maintain that the State's reimbursement program fully complies with federal mandates.

A.

Through Title XIX of the Social Security Act, 42 U.S.C. § 1396 et seq. (1974), commonly referred to as the Medicaid program, Congress devised a cooperative federal-state venture to deliver health care services to the poor. King v. Smith, 392 U.S. 309, 88 S.Ct. 2128, 20 L.Ed.2d 1118 (1968). Participation by an individual state is entirely voluntary. Harris v. McRae, 448 U.S. 297, 100 S.Ct. 2671, 65 L.Ed.2d 784 (1980). However, once a state opts to participate it must comply with the requirements of the Medicaid Act. Id.

A state that elects to join the Medicaid program must submit a "state plan" to the Secretary of Health and Human Services for his approval. 42 U.S.C. § 1396 (1974). To comply with the Congressional requirements of the Medicaid act, the state plan must provide for medical assistance to those termed "categorically needy", 42 U.S.C. § 1396a(a)(10)(A) (Supp.1982), and to those found to be "medically needy". 42 U.S.C. § 1396a(a)(10)(C) (Supp.1982). The state plan must offer these individuals inpatient hospital services, outpatient hospital services, laboratory and X-ray services, nursing facilities, physician care, and other medical care deemed necessary by the Secretary. 42 U.S.C. § 1396a(a)(10) (Supp.1982). In addition to those mandatory requirements, a state plan may offer to underwrite the cost of drugs prescribed for Medicaid recipients. 42 U.S.C. § 1396d(a)(12) (1974). To facilitate the implementation of the Medicaid program, Congress authorized the Secretary to promulgate regulations necessary to promote the "efficient administration" of programs assigned to his agency. 42 U.S.C. § 1302 (1974).

At the time this action was brought, the Medicaid Act required that a state plan for medical assistance:

(30) provide such methods and procedures relating to the utilization of, and the payment for, care and services available under the plan (including but not limited to utilization review plans as provided for in section 1396b(i)(4) of this title) as may be necessary to safeguard against unnecessary utilization of such care and services and to assure that payments (including payments for any drugs provided under the plan) are not in excess of reasonable charges consistent with efficiency, economy, and quality of care; 42 U.S.C. § 1396a(a)(30) (1974)²

Pursuant to this section and the overall purpose of the Act, the Secretary has issued several regulations to control the cost of prescription drugs. In a section of those regulations titled "Drugs: Upper limits of payments", states are directed "not to pay more for prescribed drugs than the lower of ingredient cost plus a reasonable dispensing fee or the provider's usual and customary charge to the general public." 42 C.F.R. § 447.331(a) (1980). The ingredient cost is further defined as the lesser of a predetermined sum established by the Secretary, known as the maximum allowable cost (MAC), 42 C.F.R. § 447.332(a)(1) (1980), or the estimated acquisition cost (EAC), which "means the state's best estimate of what price providers generally are paying for a drug." 42 C.F.R. § 447.332(c)(2) (1980). The regulations also permit a state to pay pharmacies a dispensing fee based on a survey of a statewide pharmacies' costs that are composed of allocated overhead and profit. 42 C.F.R. § 447.333 (1980). These regulations have been retained verbatim in the 1981 regulations. See 46 F.R. 48560, October 1, 1981.

B.

The complaint in the case sub judice consists of three counts. Count one charges that the dispensing fee of $2.25 paid by the State pursuant to State regulation 55 Pa. Code § 1121.55 is not supported by a recent survey. Thus, the plaintiffs argue that the dispensing fee is unreasonably low. Count two attacks the State's method of computing the EAC of a drug. State regulations limit reimbursement for the cost of legend drugs to the arithmetic average cost of the six largest drug wholesalers that are willing to provide cost data to the State. 55 Pa. Code § 1121.56(a). Nonlegend drugs may be reimbursed "based on the current average wholesale price appearing in the Drug Topics Red or its bi-monthly and quarterly supplements." 55 Pa.Code § 1121.56(b). Plaintiffs contend that these regulations result in payment to pharmacies below their costs for the drugs. Count three alleges that the State's reimbursement schedule has discouraged so many pharmacies from participating in the Medicaid program that recipients of Medicaid do not have adequate access to pharmacies as required by federal regulations. 42 C.F.R. § 447.204 (1980).

State contends that the Medicaid program and the Medicaid regulations only place caps on the reimbursement level that a state may authorize for drugs and that the Medicaid program imposes no duty on a state to pay these maximum reimbursement figures. Thus, State argues that its only duty under the Medicaid program is to pay no more than the maximum levels authorized by the regulations. To determine these maximum levels the State must use surveys of typical dispersing fees and drug costs. However, if the State chooses to pay less than the maximum level, its reimbursement fee can be challenged only if the reimbursement fee is so low that Medicaid recipients are effectively denied access to pharmacies because they refuse to participate in a program that provides inadequate remuneration for their services. Although State recognizes that it has a duty to provide adequate access for Medicaid recipients to pharmaceutical services, it argues that only Medicaid recipients have standing to raise this issue.

C.

State acknowledges that once it chooses to participate in the Medicaid program it must abide those Federal duties imposed upon state participants. McRae, supra, King, supra. These duties imposed upon states for participation in a cooperative funding scheme are the quid pro quo for the receipt of federal money. Pennhurst State School v. Halderman, 451 U.S. 1, 101 S.Ct. 1531, 67 L.Ed.2d 694 (1981); See also Hendrick Hudson Central School District Board of Education v. Rowley, ___ U.S. ___, ___ fn. 26, 102 S.Ct. 3034, 3049 fn. 26, 73 L.Ed.2d 690 (1982). But these duties must be set forth unambiguously by Congress and the court must construe the duties strictly. Pennhurst, supra.

In this action the plaintiffs bear the burden of isolating some duty imposed by the Medicaid Act and the regulations promulgated thereunder upon the State for the benefit of the plaintiffs with which the State has failed to comply. Cf. Texas & Pacific Railway Company v. Rigsby, 241 U.S. 33, 36 S.Ct. 482, 60 L.Ed. 874 (1916); Eder v. Beal, 609 F.2d 695 (3rd Cir. 1979). In this regard, the plaintiffs contend that the Medicaid program imposes two positive duties on the State. First, plaintiffs argue, the Medicaid program requires the State to conduct periodic surveys to determine an appropriate dispensing fee for, and the cost of drugs to, pharmacies. 42 C.F.R. § 447.332, 333 (1980). Second, plaintiffs contend that State must provide sufficient remuneration to its health care providers to ensure that their "services ... are available to recipients at least to the extent that those services are available to the general population." 42 C.F.R. § 447.204 (1980). We consider these arguments below.

II.

In Counts I and II of their complaint, the plaintiffs take the position that the language of the federal regulations mandates that a state undertake efforts to obtain its "best estimate of what price providers generally are paying for a drug." 42 C.F.R. § 447.332(c)(2) (1980), and in addition, also to "periodically survey pharmacy operations including — (1) operational data, (2) professional services data; (3) overhead data; and (4) profit data." 42 C.F.R. § 447.333(a) (1980).

The court cannot accept an interpretation of these two regulations that places a routine positive duty on the states to conduct periodic surveys. The plaintiffs have isolated two passages out of the two regulations that define the terms "cost" of drugs and "dispensing fee" as they are used in a preceding regulation, 42 C.F.R. § 447.331 (1980). This regulation sets the maximum payment a state may make to pharmacies for prescription drugs. The regulation prohibits states from paying more for "prescribed drugs than the lower of ingredient cost plus a reasonable dispensing...