share of "the total amount expended . . . as medical assistance under the
State plan . . . ." SSA § 1903(a)(1), 42 U.S.C. § 1396b(a)(1).
This federal-to-state payment is known as federal financial participation
("FFP"). The Medicaid statute prohibits state governments from charging
the beneficiaries more than a "nominal" copayment for prescription drugs
and other benefits. PHARMA claims that current Medicaid prescription-drug
sales nationwide amount to approximately $20 billion annually. See
Compl. ¶ 29.
B. Medicaid Prescription-Drug Rebate Agreements
Currently, the federal Medicaid statute includes a prescription-drug
rebate program. The rebate program requires each pharmaceutical company
to reimburse the federal and state governments for a portion of the
governments' expenditures in providing that company's drugs to Medicaid
beneficiaries. See 42 U.S.C. § 1396r-8. The federal government will
not pay the state anything towards the cost of a manufacturer's drugs
unless that manufacturer enters an agreement with HHS to pay a rebate to
every state on all of its outpatient drugs that are covered by Medicaid
("rebate agreements"). See 42 U.S.C. § 1396r-8 (a)(1).
Under these rebate agreements, each company pays a
statutorily-specified rebate amount directly to each state on a quarterly
basis. The amount paid to each state is based on the number of units of a
manufacturer's drugs that are dispensed to Medicaid beneficiaries and
paid for by the state under the state's Medicaid plan. See
42 U.S.C. § 1396r-8 (b) and (c); 56 Fed.Reg. 7049 at Sections II (a)
and II (b) (1991). PHARMA states that its members participate in the
Medicaid drug-rebate program and have entered into the requisite rebate
agreements with HHS, and the defendants do not contest this statement.
See Compl. ¶ 31.
By statute, manufacturers need pay rebates only on drugs "for which
payment was made under the State [Medicaid] plan." See Compl. ¶¶ 46 and
63 (citing SSA § 1927(b)(1)(A), 42 U.S.C. § 1396r-8 (b)(1)(A)).
As will be discussed in more detail below, this qualifier becomes a
central point of contention between the parties. In brief, PHARMA
contends that because the 18 percent discount on drugs dispensed under
the PDP is later defrayed by the manufacturers' rebates to Vermont, it
cannot be said that those drugs are drugs "for which payment [is] made
under the State plan." See Compl. ¶¶ 47-48. Therefore, PHARMA
contends, Vermont cannot require the manufacturers to pay rebates on
drugs dispensed under the PDP unless HHS waives the statutory requirement
of payment under the State plan. See id. ¶¶ 49 and 64. PHARMA further
contends that HHS never waived that requirement and has no authority to
grant such a waiver in any event. See id. ¶¶ 50-52 and 65; see also
id. ¶¶ 53-56 and 70-76 (Medicaid's purpose is to provide "medical
assistance," defined by 42 U.S.C. § 1396d(a) as "payment of part or
all of the cost of" medical services, so the PDP does not meet the
statutory definition of medical assistance).
C. Waivers and Medicaid "Pilot" Programs
Section 1115 of the Social Security Act permits HCFA to waive certain
statutory requirements for experimental "pilot" projects that HHS
determines are likely to help promote the objectives of Medicaid. See
42 U.S.C. § 1315. This waiver authority offers a means by which
states are permitted to test whether certain permitted variations from
the state Medicaid plan requirements would provide a more efficient
or effective means of accomplishing the objectives of the Medicaid
statute. Specifically, section 1315(a) provides, in pertinent part,
In the case of any experimental, pilot, or
demonstration project which in the judgment of the
Secretary, is likely to assist in promoting the
objectives of [the Medicaid statute and other
statutes] . . . in a State or States —
(2)(A) costs of such project which would not
otherwise be included as expenditures under section
306, 655, 1203, 1353, 1383, or 1396b of this title,
as the case may be . . . shall, to the extent and
for the period prescribed by the Secretary, be
regarded as expenditures under the State plan . . . .
42 U.S.C. § 1315 (a)(2)(A) (emphasis added).
Moreover, HCFA regulations require a state to show that any pilot
project will be "budget neutral," i.e., that the federal government's
costs over the life of the project will not exceed the contribution the
federal government would make to the state under the state Medicaid plan
in the absence of the waiver. See 59 Fed.Reg. 49249, 49250 (1994).
D. Vermont's Pilot Project: the Vermont Health Access Plan ("VHAP")
On July 28, 1995, HCFA approved a waiver of Vermont's Medicaid state
plan requirements to permit Vermont to institute a pilot project known as
the Vermont Health Access Plan. The waiver included approval to extend
pharmacy supplemental benefits to elderly or disabled beneficiaries who
have incomes up to 150 percent of the federal poverty level ("FPL"), as
well as uninsured adults with incomes up to 150 percent FPL who are
provided a comprehensive insurance program with a prescription-drug
benefit. In addition, beginning in April 1999, the Vermont Health Access
Plan provided "maintenance" medicines for elderly or disabled
beneficiaries with incomes between 150 percent and 175 percent of the
FPL. The Health Access Plan imposed a 50 percent copayment on
beneficiaries for prescription-drug purchases. See Intervenor-Defendant
State of Vermont's Memorandum in Support of its Motion to Dismiss the
Complaint ("Vermont's Mot. to Dis.") at 1-2. On June 5, 2000, HCFA
extended Vermont's Health Access Program through the end of 2003. See
id. at 2.
E. The Challenged Expansion of the Pilot Project: the Pharmacy Discount
1. Vermont Seeks Approval of the PDP
On March 17, 2000, Vermont wrote to HCFA seeking approval for a
proposed expansion of the State's prescription-drug pilot project ("the
waiver request letter"). See Compl. ¶ 36. The expansion extends
Medicaid pharmacy benefits to approximately 70,000 Vermont residents who
otherwise would not be eligible for such benefits. See id.; Bantham
Dec., Ex. B. Specifically, the PDP would extend prescription-drug
benefits to two additional groups of Medicaid beneficiaries: "(1)
Medicare-covered individuals with incomes above 150 percent of the
Federal Poverty Level (FPL) without drug coverage, and (2) all adults
with incomes at or below 300 percent FPL who do not have a benefit
program that includes drug coverage." See Waiver Letter at HCFA Special
Terms and Conditions 13-14.
Under the PDP, Vermont pharmacies will charge the new Medicaid
beneficiaries discounted*fn5 prices for prescription drugs.
The PDP price for a prescription drug will equal the difference of (1)
the Medicaid price for a prescription, i.e., the price the state has
agreed to pay pharmacies for prescriptions filled under Medicaid, minus
(2) a fixed-percentage rebate initially set at 17.5 percent of that
price.*fn6 Vermont implemented the PDP effective Monday, January 1,
2001. See Compl. ¶ 44; Waiver Request Letter, Mot. for PI, Ex. A
("Beneficiaries would have the ability to purchase drugs at a price that
is equivalent to the price that Medicaid pays net of the manufacturers'
rebate available to the Medicaid program.").
A Medicaid beneficiary enrolled in the PDP is required to make a
copayment equal to 82.5 percent of a drug's Medicaid price. See Compl.
¶ 40. The State of Vermont will pay the pharmacy the remaining 17.5
percent of the drug's price. Then, "Vermont will bill manufacturers to
collect the combined rebate amount quarterly, and will pass through the
PDP discount to the pharmacies that sold the drugs to the beneficiaries."
Compl. ¶ 41. As Vermont's waiver request explains, "Rebates collected
from manufacturers will be deposited into a revolving fund and used to
pay the subsidy. Initially, State funds, which have been included in the
House Appropriations bill, will be provided to meet the cash flow needs
of the program." Waiver Request Letter, Mot. for PI, Ex. A. In common
parlance, the parties agree that Vermont will "front" the 17.5 percent.
Vermont will be out of pocket for the 17.5 percent until it receives the
corresponding manufacturer rebate. See Mot. for PI at 15 n. 4.
Nonetheless, because Vermont will eventually recoup its advance when it
receives the rebate, PHARMA contends that "[n]o state funds will be
expended."*fn7 See Compl. ¶ 41 (citing Waiver Request Letter at 2).
2. HHS Approves the PDP
The Secretary of HHS approved the Vermont PDP by letter dated November
3, 2000 ("the waiver approval letter"). See Compl. ¶ 36. In reaching
this decision, the Secretary determined that the PDP was "likely to
assist in promoting the objectives" of the Medicaid Act. See Reply of HHS
and HCFA in Support of Motion to Dismiss, or in the Alternative for
Summary Judgment ("HHS Reply") at 2 (citing 42 U.S.C. § 1315 (a)).
The Secretary also determined that, for the life of the project,
Vermont's PDP costs — which apparently were not otherwise eligible
for federal matching funds — would be "regarded" as expenditures
made "under the state [Medicaid] plan." See HHS Reply at 2;
42 U.S.C. § 1396 (b) (defining state expenditures which are eligible
for federal matching funds); 42 U.S.C. § 1315 (a)(2)(A) (Secretary's
III. LEGAL STANDARD
A. Preliminary Injunctive Relief
This court may issue a preliminary injunction only when the movant
(1) there is a substantial likelihood plaintiff will
succeed on the merits; (2)
plaintiff will be irreparably injured if an injunction
is not granted; (3) an injunction will not
substantially injure the other party; and (4) the
public interest will be furthered by an injunction.
Davenport v. international Brotherhood of Teamsters,