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January 18, 2001


The opinion of the court was delivered by: Urbina, District Judge.


Denying the Plaintiff's Motion for a Preliminary Injunction; Dismissing the Complaint Sua Sponte as to Prescription Programs of States Not Named


This matter comes before the court on a complaint and motion for preliminary injunction filed by the Pharmaceutical Research and Manufacturers of America ("PHARMA")*fn1 PHARMA seeks to enjoin the State of Vermont ("Vermont") from implementing its Pharmacy Discount Program ("PDP" or "the program"), a prescription-drug subsidy plan that the State put into effect on January 1, 2001 under the auspices of its Medicaid program.*fn2 The program is an expansion of an existing "pilot project" that Vermont has operated, with the permission of the federal government, since 1996.

PHARMA contends the program violates Title XIX of the Social Security Act ("SSA"), 42 U.S.C. § 1396 et seq. ("the Medicaid statute") because it costs the state nothing but requires drug companies to cover 18 percent of the cost of covered prescription drugs. PHARMA contends this feature violates the statutory requirement that a Medicaid plan include some "payment under a state plan" of the cost of "medical assistance." PHARMA also contends the program violates the requirement in 42 U.S.C. § 1396o that states charge Medicaid beneficiaries no more than a "nominal" copayment. Consequently, PHARMA urges the court to rule that the federal government violated the Administrative Procedure Act in approving the program.

The defendants named in the complaint, the Secretary of the U.S. Department of Health and Human Services and the Admmistrator of the Health Care Financing Administration (collectively, "HHS") have filed an opposition to the plaintiff's motion. The intervenor-defendant, Vermont,*fn3 has filed its own opposition to the plaintiff's motion.*fn4

For the reasons set forth below, the court will deny the plaintiff's motion for a preliminary injunction.


A. The Medicaid Program

The federal government enacted the Medicaid program in 1965 as a cooperative undertaking between the federal and state governments to help the states provide medical care to lower-income individuals. The primary objective of the Medicaid program is "to furnish (1) medical assistance on behalf of families with dependent children and of aged, blind, or disabled individuals, whose incomes are insufficient to meet the costs of necessary medical services, and (2) rehabilitation and other services to help such families and individuals attain or retain capability for independence or self-care." 42 U.S.C. § 1396.

Each state administers its own Medicaid program, but the states' programs are governed by federal statutes, regulations and guidelines. Medicaid is funded jointly by the federal and state governments. Each state prepares a Medicaid State Plan that describes the medical assistance the state has elected to make available and specifies who will be the beneficiaries among those eligible under federal law. See 42 U.S.C. § 1396a (requirements for state Medicaid plans). Under Medicaid, the state pays providers and suppliers of medical goods and services according to established rates to cover the cost of services provided to individuals who are covered by the state plan. The federal government then pays the state a statutorily established federal 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 Program ("PDP")

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 waiver authority).


A. Preliminary Injunctive Relief

This court may issue a preliminary injunction only when the ...

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