Rite Aid of Pennsylvania, Inc. v. Houstoun
| Decision Date | 22 March 1999 |
| Docket Number | Nos. 98-1823,98-1879 and 98-1880,No. 98-1879,98-1879,s. 98-1823 |
| Citation | 171 F.3d 842 |
| Parties | RITE AID OF PENNSYLVANIA, INC., et al v. Feather O. HOUSTOUN, Pennsylvania Pharmacists Association (Intervenor in D.C.) Rite Aid of Pennsylvania, Inc., Appellant inv. Feather O. Houstoun Pennsylvania Pharmacists Association (Intervenor in D.C.) Rite Aid of Pennsylvania, Inc. v. Feather O. Houstoun Pennsylvania Pharmacists Association (Intervenor in D.C.) |
| Court | U.S. Court of Appeals — Third Circuit |
Raymond P. Pepe (argued) David R. Overstreet, Kirkpatrick & Lockhart, Harrisburg, PA, for appellants in Nos. 98-1879 and 98-1880.
John A. Kane Commonwealth of Pennsylvania, Office of Legal Counsel Department of Public Welfare, Harrisburg, PA, Doris M. Leisch (argued) Peter J. Garcia, Commonwealth of Pennsylvania Department of Public Welfare, Philadelphia, PA, for Appellant in No. 98-1823.
Before: GREENBERG, LEWIS, and BRIGHT, * Circuit Judges.
This appeal concerns a procedural challenge to the Pennsylvania Department of Public Welfare's ("Department") promulgation of revised regulations governing payment rates for prescription drugs and related services provided to Medicaid recipients pursuant to Title XIX of the Social Security Act, 42 U.S.C. §§ 1396-1396v ("Medicaid Act"). 1 The Department appeals from an order and judgment of the United States District Court for the Eastern District of Pennsylvania, entered August 31, 1998, enjoining it from applying revised formulas to pay pharmacies for prescription drugs and related services under the Medicaid program which were to become effective October 1, 1995. Rite Aid of Pennsylvania and the Pennsylvania Pharmacists Association ("PPA") cross-appeal from the district court's order to the extent that it upheld procedures the Department followed in promulgating the regulations. See Rite Aid of Pennsylvania, Inc. v. Houstoun, (E.D.Pa. Aug. 28, 1998). The district court exercised jurisdiction under 28 U.S.C. §§ 1331, 1343 and we exercise jurisdiction under 28 U.S.C. § 1291. For the reasons that follow, we will reverse the order and judgment and dismiss the cross-appeals.
Medicaid is a cooperative state-federal program through which the federal government provides funds to the states to assist the poor, elderly, and disabled to receive medical care. 42 U.S.C. § 1396. See Cleary v. Waldman, 167 F.3d 801, 804 (3d Cir.1999). The Medicaid Act requires states to pay for certain services and allows them to provide additional services. 42 U.S.C. § 1396a(a)(10); 42 C.F.R. §§ 440.210-440.225. The states, in accordance with federal law, establish eligible beneficiary groups, types and ranges of service, payment levels for services, and administrative and operating procedures and make payment for services directly to the individuals or entities furnishing the services. 42 C.F.R. § 430.0. The Department is the state agency responsible for the administration of Pennsylvania's version of Medicaid.
States that choose to participate in Medicaid must submit a State Plan to the United States Department of Health and Human Services ("HHS") for approval. The State Plan describes the policy and methods used to set payment rates for each type of service included in the program. See, e.g., Wilder v. Virginia Hosp. Ass'n, 496 U.S. 498, 502, 110 S.Ct. 2510, 2511, 110 L.Ed.2d 455 (1990). The state also must submit any subsequent proposed amendment (State Plan Amendment, or "SPA") to the HHS for approval. The amendment, of course, must meet federal requirements. 42 U.S.C. §§ 1396a(b); 42 C.F.R. §§ 430.10, 430.12. Pennsylvania law requires that the Pennsylvania Independent Regulatory Review Commission ("IRRC") review and approve the Department's proposed amendments before the Department seeks HHS approval. Pa. Stat. Ann. tit. 71, §§ 745.1 to 745.15 (West 1990).
Pennsylvania has opted to cover prescription drugs and related services in its State Plan. 42 U.S.C. § 1396d(a)(12); 42 C.F.R. § 440.120(a). Federal legislation controls program costs for Medicaid prescription drug benefits by establishing upper limits, or Maximum Allowable Costs ("MACs"), for certain drugs. Certain generic drugs are reimbursed at the Federal Upper Limit ("FUL") as mandated by the Health Care Financing Administration ("HCFA") of the HHS. 2 For brand name drugs, states reimburse for the lower of the pharmacy's "usual and customary charges" or the Estimated Acquisition Cost ("EAC"), which is the state's best estimate of the price generally and currently paid by providers for a drug marketed or sold by a particular manufacturer. See 42 C.F.R. § 447.301. Prior to the adoption of the revisions at issue here, the Department defined the EAC as the full Average Wholesale Price ("AWP") for the drug as found in the Department's pricing services.
Rite Aid and members of the PPA voluntarily participate as enrolled providers in the Pennsylvania Medical Assistance Program pursuant to provider agreements executed with the Department. See 55 Pa.Code. § 1121. The agreements provide for the Department to reimburse Rite Aid and other pharmacies for prescription drugs and related services in accordance with applicable federal and state laws and regulations. We detail here only those laws and regulations material to this appeal.
Among such federal laws is 42 U.S.C. § 1396a(a)(30)(A) ("section 30(A)"), which instructs that State Plans must
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 are consistent with efficiency, economy, and quality of care and are sufficient to enlist enough providers so that care and services are available under the plan at least to the extent that such care and services are available to the general population in the geographic area ...
If a state chooses to amend its State Plan, federal regulations require it to consult with a "medical care advisory committee" ("MAAC"), which will advise the state agency director. See 42 C.F.R. § 431.12(b). The committee must "have an opportunity for participation in policy development and program administration, including furthering participation of recipient members in agency programs." Id. § 431.12(e). As set forth above, the state also must submit an SPA for approval by the HHS through the HCFA. See 42 C.F.R. § 430.12(c)(ii). The HCFA must act on the SPA within 90 days of submission or it is approved automatically. See 42 U.S.C. § 1396n(f)(2); 42 C.F.R. § 430.16. Federal statutes and regulations establish the criteria for the HCFA to make its decision. See 42 C.F.R. § 430.15(a).
Among other regulations affecting state payment rates under section 30(A) is a requirement for public notice for changes in "methods and standards for setting payment rates for services" before the effective date of the change. 42 C.F.R. § 447.205. The regulation requires notice of both the "proposed change" and of the final change within 60 days of its becoming effective, providing a period for public comment and criticism. Id. Pennsylvania regulations require a 60-day public comment period in accordance with 42 C.F.R. § 447.205. See 55 Pa.Code § 1101.70. 3
The Department must create formulae and rates to govern two components of prescription drug and services reimbursement. First, it determines what the pharmacies will receive for the ingredient cost of the drugs; second, it determines a "dispensing fee": a per-prescription payment which compensates pharmacies for the costs associated with dispensing a prescription to a Medicaid recipient.
Prior to the October 1, 1995 rate revisions, the Department reimbursed pharmacies for the ingredient cost for brand name drugs at the AWP. For generic drugs, the formula follows the state MAC guidelines. (The pre-1995 state MAC guidelines were set at the 70th percentile price of those drugs found in the United States Department of Health Generic Drug Formulary, an instrument which no longer exists.) The dispensing fee was $3.50 per-prescription.
Pennsylvania had good reason to revise these rates. For several years prior to 1994, the HCFA had been advising the Department that its reimbursement rates were high, given, among other reasons, changes in the drug marketplace. See, e.g., letter from HCFA to Secretary of Public Welfare, John F. White, Jr., (Nov. 27, 1990). App. at 1881. The HCFA informed the Department that it would not accept AWP levels for "EAC without a significant discount being applied," unless the Department provided documentation that the actual acquisition cost equaled the full AWP. Id. 4 Furthermore, at the end of 1994, a three-year moratorium imposed by federal law which prevented the Department from amending its pharmacy reimbursement formulae was due to expire. See 42 U.S.C. § 1396r-8(e)(1).
Thus, in September 1994, the Department proposed to modify pharmacy reimbursements by requiring pharmacies to charge the Department the lowest rate they charged any other third-party payor, including private insurers. The proposal was forwarded to the pharmacy subcommittee of the MAAC, and sent to the Governor's Budget Office as a plan to save the State approximately $21.4 million for the fiscal year 1995-96 (July 1-June 30). The Governor included the projected savings in the State's budget, although the Department had not yet secured approval for the change from the State or federal bodies responsible for such review.
Not surprisingly, pharmacies were concerned about the impact of the proposed cuts, and...
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