State of La. v. U.S. Dept. of Health and Human Services

• Decision Date: 13 July 1990
• Docket Number: No. 89-4566,89-4566
• Citation: 905 F.2d 877
• Parties: , Medicare&Medicaid Gu 38,618 The STATE OF LOUISIANA, Petitioner, v. UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES, Respondent.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 877

905 F.2d 877

30 Soc.Sec.Rep.Ser. 192, Medicare&Medicaid Gu 38,618

The STATE OF LOUISIANA, Petitioner, v. UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES, Respondent.

No. 89-4566.

United States Court of Appeals, Fifth Circuit.

July 13, 1990.

Rehearing Denied Aug. 14, 1990.

Jerry L. Phillips, Charles Castille and Robert W. Sawyer, Jr., Gen. Counsel, State of La., Dept. of Health & Hospitals, Baton Rouge, La., for petitioner.

Stephen M. Sullivan and Jack Mark Stolier, New Orleans, La., intervenors.

Donald F. Dickey, Office of Gen. Counsel, Dept. of Health and Human Services, Baltimore, Md., Kermit Fonteno, Dept. of Health and Human Services, Health Care Financing Admin., Dallas, Tex., for respondent.

Appeal from the Final Decision of the Secretary of Health and Human Services Disapproving Louisiana State Plan Amendment No. 87-33.

Before KING, JOHNSON, and HIGGINBOTHAM, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

Louisiana appeals the decision of the Administrator of the Health Care Financing Administration disapproving a proposed amendment to the state's Medicaid plan. The state proposed to estimate participating pharmacists' acquisition costs for certain drugs to be the average wholesale price, as reported by the American Druggists' Bluebook or other national compendia. The Administrator concluded that this method did not sufficiently approximate the pharmacists' actual costs, and thus was inconsistent with the Medicaid statute and applicable regulations. We hold that the Administrator's interpretation of the statute and regulations was permissible, and therefore affirm.

I.

A.

The Medicaid program, Title XIX of the Social Security Act, is a cooperative federal-state program to furnish medical assistance to eligible low-income individuals. 42 U.S.C. Sec. 1396 et seq.; see Atkins v. Rivera, 477 U.S. 154, 106 S.Ct. 2456, 91 L.Ed.2d 131 (1986); Schweiker v. Hogan, 457 U.S. 569, 102 S.Ct. 2597, 73 L.Ed.2d 227 (1982); Harris v. McRae, 448 U.S. 297, 100 S.Ct. 2671, 65 L.Ed.2d 784 (1980). The federal government and the states jointly finance the program, and the states administer it. The program is voluntary, but participants must submit a "state plan" meeting the Medicaid statute and rules of the Secretary of Health and Human Services. 42 U.S.C. Sec. 1396a; see Schweiker v. Gray Panthers, 453 U.S. 34, 101 S.Ct. 2633, 69 L.Ed.2d 460 (1981); Harris v. McRae, 448 U.S. at 301, 100 S.Ct. at 2680; see also, 42 C.F.R. Sec. 430.0 et seq. (1988). The Secretary has delegated his authority to carry out federal duties under the statute to the Administrator of the Health Care Financing Administration, an agency within the Department of Health and Human Services.

If the Administrator approves the state plan, the state is entitled to reimbursement from the federal government for a portion of its payments to providers furnishing services to Medicaid recipients. This reimbursement is known as "federal financial participation" or FFP. 42 U.S.C. Sec. 1396b(a); 42 C.F.R. Sec. 430.30.

The Medicaid statute and the regulations promulgated thereunder charge the Secretary to ensure that state plans, including amendments, originally meet and continue to meet the federal requirements. 42 U.S.C. Secs. 1316(a)(1), 1396a, 1396c; 42 C.F.R. Sec. 430.15. As long as the plans meet federal requirements, the states have considerable discretion to design and operate their individual programs. Lewis v. Hegstrom, 767 F.2d 1371 (9th Cir.1985); District of Columbia Podiatry Society v. District of Columbia, 407 F.Supp. 1259 (D.D.C.1975). If the Administrator determines that a plan or amendment does not meet the federal requirements, he issues a disapproval determination under 42 C.F.R. Sec. 430.15(c). The state may seek administrative and judicial review of these determinations, as Louisiana has done here. See 42 U.S.C. Sec. 1316(a)(2), (c); 42 C.F.R. Secs. 430.18, 430.60 et seq.

One federal requirement is that the state plan "provide such methods and procedures relating to the utilization of, and payment for, care and services available under the plan ... as may be necessary ... to assure that payments are consistent with efficiency, economy, and quality of care." 42 U.S.C. Sec. 1396a(a)(30)(A). The portion of Louisiana's plan at issue here, prescription drug coverage, is of course subject to this requirement, and Louisiana's payments to pharmacists had to meet this standard. See Arkansas Pharmacists Association v. Harris, 627 F.2d 867 (8th Cir.1980). The Secretary has, on three occasions, promulgated regulations governing the maximum amounts of state expenditures for prescription drugs that the Administrator of the Health Care Financing Administration will recognize in paying FFP.

In 1969, the Secretary provided that the upper limit on state prescription drug expenditures would be the lower of (1) the cost of the drug to the pharmacist as defined by the state, plus a dispensing fee, or (2) the pharmacists' reasonable customary charges. 45 C.F.R. Sec. 250.30(b)(2) (1970). In 1975, the Secretary revised this regulation to establish specific requirements governing the states' determination of the cost of the drug to the pharmacist, under the cost plus dispensing fee formula. These new requirements distinguished between certain commonly dispensed multiple-source drugs and all other drugs. Multiple-source drugs are those available under different brand names or both under brand name and in generic form.

The Secretary defined the cost of multiple-source drugs as the lower of the maximum allowable cost (MAC) and the estimated acquisition cost (EAC). The MAC is the lowest price at which a drug product is widely and consistently available for pharmacists, as determined by a Pharmaceutical Reimbursement Board under procedures set forth in 45 C.F.R. Sec. 19.5 (1986). The EAC is the state's closest estimate of the price generally and currently paid by pharmacists for the drug product. For the "all other drugs" category, the Secretary defined the cost simply as the EAC. The issue in this case is the application of the EAC cost limit in the all other drugs category.

In 1987, the Secretary revised these regulations one more time. For the all other drugs category, the formula remained the same--EAC plus dispensing fee or customary reasonable charges--but applied on an aggregate rather than a drug-specific basis. 42 C.F.R. Sec. 447.332 (1988). This means that a state's EAC formula may overestimate the cost of some specific drugs, as long as the formula produces the closest, best estimate of the price pharmacists generally and currently pay for this category as a whole. The 1987 regulations also required the state to (1) describe comprehensively its cost calculation method, (2) make a finding for each of the two drug categories that its reimbursements will not exceed the aggregate upper limit the regulations set for the category, (3) assure the HCFA that it has made these findings, and (4) maintain and make available to HCFA, upon request, documentary evidence to support the findings. 42 C.F.R. Sec. 447.333 (1988). This documentary evidence must include data, mathematical and statistical computations, comparisons, and any other pertinent records. 42 C.F.R. Sec. 447.333(c). The state's assurance confers presumptive validity on its findings, but the Administrator may of course determine otherwise. Id.

B.

Louisiana submitted amendment No. 87-33 to the Health Care Financing Administration to comply with the 1987 revision. The amendment defined EAC as the average wholesale price (AWP) of the drug dispensed, as reported by the American Druggists' Blue Book or other national compendia of drug prices. There has been considerable doubt for a number of years whether AWP provides the closest estimate of the price generally and currently paid by pharmacists for drugs.

The dissatisfaction was apparent while the 1969 regulations were still in place and states' definitions of cost were not controlled by explicit federal regulations. The Social and Rehabilitation Service, which at the time administered the Medicaid program on behalf of the Secretary, adopted the 1975 modifications, including establishing EAC, because it determined that most states defined cost as AWP or other standard prices that were "frequently in excess of actual acquisition costs to the retail pharmacist." 39 Fed.Reg. 41,480 (November 27, 1974). The SRS originally wished to force states to determine actual acquisition costs, but settled for EAC because determining actual costs would be too expensive. Several commenters suggested that AWP would be a good measure, but the Secretary and SRS rejected this because "AWP data are frequently inflated." 40 Fed.Reg. 34,518 (August 15, 1975).

In December 1977, the Department sent an "action transmittal" to the states, telling them that although they did not have to determine actual acquisition cost, the EAC required them to give their closest estimate, and that the Department was not convinced that those states still using AWP had made a "real effort" to do that. The Department suggested that these states might make their EACs more accurate by reducing the AWP by a percentage or by using the direct prices of certain manufacturers. The direct price is the price at which a manufacturer will sell directly to the retail pharmacist, bypassing the wholesaler.

In June 1984, the Office of Inspector General published a lengthy report of an audit of pharmacy drug purchases in six states. The report found that 99.6% of these purchases were made at prices averaging approximately 15.93% below AWP. The prices were below AWP because of purchase and trade discounts routinely available to purchasing pharmacies, regardless of their locations (small or large towns) or their type of ownership (chain or independent). Noting that 27 states still used AWP as their primary measure of EAC, and that 20 more used it to a great extent, the report concluded...