Pharmblue Cal. v. Dep't of Health Care Servs.

• Decision Date: 19 January 2023
• Docket Number: B313600
• Parties: PHARMBLUE CALIFORNIA LLC, Plaintiff and Appellant, v. DEPARTMENT OF HEALTH CARE SERVICES et al., Defendants and Respondents
• Court: California Court of Appeals Court of Appeals

PHARMBLUE CALIFORNIA LLC, Plaintiff and Appellant,
v.
DEPARTMENT OF HEALTH CARE SERVICES et al., Defendants and Respondents

B313600

California Court of Appeals, Second District, Third Division

January 19, 2023

NOT TO BE PUBLISHED

APPEAL from a judgment of the Superior Court of Los Angeles County No. 20STCP02262, James C. Chalfant, Judge. Affirmed.

Athene Law, Long X. Do, Felicia Y. Sze, and Kyle R. Brierly for Plaintiff and Appellant.

Rob Bonta, Attorney General, Cheryl L. Feiner, Assistant Attorney General, Gregory D. Brown, Bejan E. Atashkar, Neo Khuu, and Emmanuelle S. Soichet, Deputy Attorneys General, for Defendants and Respondents.

Hanson Bridgett and Kathryn E. Doi for Amicus Curiae Foothill Aids Project on behalf of Plaintiff and Appellant.

LAVIN, J.

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INTRODUCTION

PharmBlue California LLC doing business as Arena Pharmacy (PharmBlue) contracted with two healthcare clinics that qualify as covered entities under the federal Medicaid program to dispense to the clinics' patients discounted drugs purchased under section 340B of the Public Health Services Act (340B Program) (42 U.S.C. § 256b). Under California law, a covered entity must bill the State's Medi-Cal program no more than the actual acquisition cost of drugs purchased through the 340B Program. After acquiring discounted 340B drugs for the clinics, PharmBlue billed Medi-Cal at the pharmacy's usual and customary rate for purchasing drugs, a rate that was higher than the actual acquisition cost of the 340B drugs. The California Department of Health Care Services (Department) later audited PharmBlue's billing practices, finding that PharmBlue was reimbursed nearly $2.5 million more than the pharmacy was entitled to receive for the 340B drugs.

After losing an administrative appeal of the Department's audit adjustment reducing its reimbursement for 340B drugs, PharmBlue filed a petition for writ of mandate in the trial court. The court denied the petition and entered judgment in the Department's favor, concluding PharmBlue overbilled the MediCal program for its purchase of 340B drugs.

PharmBlue appeals the court's judgment, which we affirm.

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BACKGROUND

1. Statutory and Regulatory Background

1.1. Medicaid and 340B Program

"The federal Medicaid program is a cooperative federal-state assistance program designed to expand access to medical care for low income persons." (Family Health Centers of San Diego v. State Dept. of Health Care Services (2021) 71 Cal.App.5th 88, 92 (Family Health Centers).) Under the Medicaid program, "the federal government provides financial assistance to states so that they may furnish medical care to qualified indigent persons." (Robert F. Kennedy Medical Center v. Belshe (1996) 13 Cal.4th 748, 751.)

The 340B Program, which is tied to the Medicaid program, "imposes ceilings on prices drug manufacturers may charge for medications sold to specified health-care facilities" known as "covered entities." (Astra USA, Inc. v. Santa Clara County (2011) 563 U.S. 110, 113-114 (Astra); see also 42 U.S.C. § 256b.) Covered entities include federally-funded "providers of safety net services to the poor." (Astra, at p. 113.)

If a drug manufacturer is enrolled in the 340B Program, it must offer drugs "for purchase at or below the applicable ceiling price" to a covered entity "if such drug is made available to any other purchaser at any price." (42 U.S.C. § 256b(a).) The purpose of the 340B Program is to" 'stretch scarce Federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.'" (Pharm. Research &Mfrs. of Am. v. United States HHS (D.D.C. 2015) 138 F.Supp.3d 31, 34.)

The 340B Program is administered by the Health Resources Services Administration (HRSA), a federal agency

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within the Department of Health and Human Services. (Astra, supra, 563 U.S. at p. 113.) The HRSA has issued a series of guidelines interpreting the 340B Program. In 1996, the HRSA issued guidelines allowing covered entities to contract with outside pharmacies to receive shipments of 340B drugs, dispense those drugs to the covered entities' patients, and place orders to refill the covered entities' inventories of those drugs. (See Notice Regarding Section 602 of the Veterans Health Care Act of 1992; Contract Pharmacy Services, 61 C.F.R. 43549 (Aug. 23, 1996).) In a published notice "inform[ing] interested parties of final guidelines regarding contract pharmacy services," the HRSA explained that a pharmacy that contracts with a covered entity under the 340B Program "act[s] as an agent of the covered entity, in that it would not resell a prescription drug but rather distribute the drug on behalf of the covered entity. This situation is akin to a covered entity having its own pharmacy." (Id., p. 43550.)

In 2010, the HRSA issued additional guidelines defining a covered entity's relationship with an outside pharmacy under the 340B Program. (See Notice Regarding 340B Drug Pricing Program-Contract Pharmacy Services, 75 C.F.R. 10272 (Mar. 5, 2010).) Specifically, the HRSA required a covered entity to "have a written contract in place between itself and a specified pharmacy." (Id., p. 10277.) The agency also identified several "essential elements to address in contract pharmacy arrangements," including requiring the covered entity to "purchase the [340B Drug] [and] maintain title to the drug" and to follow a" 'ship to, bill to' procedure [where] the covered entity purchases the drug[, and] the manufacturer/wholesaler [bills] the covered entity for the drug that it purchased[] but ships the drug

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directly to the contract pharmacy." (Ibid.) The HRSA also provided suggested terms to be included in a contract between a covered entity and an outside pharmacy, including one that states:" 'The covered entity owns the covered drugs and arranges to be billed directly for such drugs. ... The covered entity will make timely payments for such drugs delivered to the pharmacy." (Id., p. 10279.)

1.2. California's Medi-Cal Program

California participates in the Medicaid program through its California Medical Assistance Program, or the "Medi-Cal" program. (Family Health Centers, supra, 71 Cal.App.5th at p. 92; Welf. &Inst. Code, § 14000 et seq.) The Department is tasked with administering the Medi-Cal program "in compliance with the state Medicaid plan and applicable federal and state Medicaid laws and regulations." (Family Health Centers, at p. 92.) Federal law requires California to reimburse health care providers...