University Medical Center of Southern Nevada v. Shalala

• Decision Date: 13 April 1999
• Docket Number: No. 98-5317,98-5317
• Citation: 173 F.3d 438
• Parties: UNIVERSITY MEDICAL CENTER OF SOUTHERN NEVADA, Appellant, v. Donna E. SHALALA, Secretary, United States Department of Health & Human Services, Appellee.
• Court: U.S. Court of Appeals — District of Columbia Circuit

Page 438

173 F.3d 438

UNIVERSITY MEDICAL CENTER OF SOUTHERN NEVADA, Appellant, v. Donna E. SHALALA, Secretary, United States Department of Health & Human Services, Appellee.

No. 98-5317.

United States Court of Appeals District of Columbia Circuit.

Argued March 12, 1999.

Decided April 13, 1999.

Elliott B. Adler argued the cause and filed the briefs for appellant.

Robert D. Kamenshine, Attorney, United States Department of Justice, argued the cause for appellee. With him on the brief were Frank W. Hunger, Assistant Attorney General, Wilma A. Lewis, United States Attorney, and Anthony J. Steinmeyer, Attorney, United States Department of Justice.

Michael E. Anderson was on the brief for amicus curiae National Association of Public Hospitals and Health Systems.

Before: SILBERMAN, GINSBURG, and TATEL, Circuit Judges.

Opinion for the Court filed by Circuit Judge SILBERMAN.

SILBERMAN, Circuit Judge:

University Medical Center of Southern Nevada (UMC) appeals from the district court's dismissal, for lack of standing, of its challenge to the Department of Health and Human Service's administration of a drug discount program. We agree that appellant lacks standing, albeit on different grounds than those relied on by the district court, and affirm the dismissal.

I.

Congress, concerned that many federally funded hospital facilities serving low-income patients were incurring high prices for drugs, enacted section 340B of the Public Health Service Act. 42 U.S.C.A. § 256b (Supp.1998). Section 340B requires a manufacturer of "covered outpatient drugs" to enter into a contract with the Secretary of HHS--a condition for eligibility for Medicaid matching funds--under which the manufacturer agrees to provide these drugs to certain "covered entities" at discounted prices. ¹ A covered entity is one that meets certain statutory criteria; as relevant here, an eligible hospital is one that has a "disproportionate share adjustment" percentage (which is a measure of the number of low-income patients served by the hospital) greater than 11.75 for the most recent cost reporting period, and that does not obtain covered outpatient drugs through a group purchasing organization or other group purchasing arrangement. ² HHS initially interpreted the latter eligibility criterion as barring only "double dipping"--that is, hospitals could participate in both the section 340B discount program and a group purchasing organization provided that the hospital did not receive 340B discounts on the same drugs purchased through the group purchasing organization. As the program matured, however, HHS subsequently changed its interpretation, concluding that participation in a group purchasing organization for the purchase of covered outpatient drugs would, after May 1994, render the hospital ineligible for 340B discounts.

HHS compiled an initial list of qualifying hospitals when the program went into effect on December 1, 1992, and updates the list quarterly based on information (including the hospital's disproportionate share adjustment) contained in cost reports provided to HHS by the hospital's fiscal intermediary. If cost data show that a hospital has become eligible, it is added to the list at the beginning of the next quarter; similarly, if the data show a hospital is no longer eligible, it is removed from the list at the beginning of the next quarter. In other words, the hospital's eligibility status is prospective only. At the start of the program, however, manufacturers did not yet have in place the mechanism to provide the discounts to covered entities at the point of sale. HHS therefore allowed retroactive discounts to allow manufacturers time to integrate the discounts into their drug distribution system while at the same time ensuring that covered entities received the discounts to which they were entitled. If a hospital had been on the initial list, it would be able to get discounts from the manufacturer retroactive to December 1, 1992, and hospitals placed on the list subsequently would be eligible for discounts retroactive to their inclusion on the list, provided the hospitals requested such retroactive discounts from the manufacturers before June 13, 1994. After June 13, 1994, discounts could only be obtained at the time of purchase.

Appellant wished to participate in the 340B program, but it was not included on the initial eligibility list because the cost report submitted by its fiscal intermediary for the most recent cost reporting period reflected a disproportionate share adjustment of less than the required 11.75 percent. When the intermediary completed an audit of UMC's 1991 cost report (in circa August 1993), it discovered that the correct disproportionate share adjustment percentage exceeded that required for eligibility. Both UMC and the intermediary then gave the Health Care Financing Administration and the Office of Drug Pricing, which oversees the 340B program, the corrected numbers, and told them that UMC had a qualifying disproportionate share adjustment percentage. UMC alleged that the government did not respond to any of this correspondence. When the administrative process was complete (following the influence of a congressional "intermediary") and HHS had satisfied itself that UMC did indeed qualify for the 340B program discounts, UMC was placed on the eligibility list on July 1, 1994. This meant UMC could only receive discounts on drugs purchased on or after that date. During the period from December 1992 to June 1994, UMC had continued to purchase certain covered outpatient drugs though its group purchasing arrangement.

UMC then filed a complaint in the district court, seeking a declaratory judgment that HHS was arbitrary and capricious in not putting UMC on the list earlier, and that UMC is entitled to retroactive discounts for covered drugs purchased between December 1, 1992 and June 13, 1994. HHS countered first that UMC lacked standing because the ultimate relief it seeks--retroactive discounts--cannot be gained by a judgment against the government. The district court agreed that UMC did not have standing, but not on the grounds argued by the government. Rather, the district court concluded that the plain language of the statute excludes from 340B eligibility hospitals that participate in group purchasing agreements. Since UMC continued to participate in such a program during the period for which it also claims it should receive retroactive discounts under section 340B, the district court thought UMC is statutorily barred from receiving such discounts. See University Med. Ctr. v. Shalala, 5 F.Supp.2d 4, 8-9 (D.D.C.1998).

II.

UMC makes two arguments: the district court erred in interpreting the statute and therefore erroneously found that UMC lacked standing, and the district court erred procedurally in granting judgment on the pleadings to the government. ³ The government agrees that the district court's interpretation of the group purchasing exclusion in the statute was erroneous and that UMC is not barred from eligibility by virtue of its previous participation in a group purchasing organization. During the time period for which UMC seeks retroactive discounts, participation in a group purchasing arrangement was not a per se bar to participation in the 340B program--only double-dipping was prohibited. It is conceded, therefore, that UMC does not want for standing on this basis. The government alternatively claims--as it did below--that UMC lacks standing because the asserted injury is not redressable. UMC's inability to obtain retroactive discounts from drug manufacturers, the government contends, will not be affected by any judgment against HHS. ⁴

We start, of course, with the jurisdictional question. A party invoking federal jurisdiction must show...