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PHARMACEUTICAL RESEARCH AND MANUFACTURERS v. THOMPSON
February 25, 2002
PHARMACEUTICAL RESEARCH AND MANUFACTURERS OF AMERICA, PLAINTIFF,
TOMMY G. THOMPSON ET AL., DEFENDANTS, AND KEVIN W. CONCANNON, INTERVENOR-DEFENDANT.
The opinion of the court was delivered by: Ricardo M. Urbina, United States District Judge.
M E M O R A N D U M O P I N I O N
GRANTING THE DEFENDANTS' MOTION FOR SUMMARY JUDGMENT;
GRANTING THE INTERVENOR-DEFENDANT'S MOTION FOR SUMMARY JUDGMENT;
DENYING THE PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
The plaintiff challenges the State of Maine's Medicaid demonstration
project, known as the Healthy Maine Prescription ("HMP"), which the HHS
Secretary approved on January 18, 2001. See Defs.' Mot. for Summ. J. at
7. Maine put the HMP into effect on June 1, 2001, intending "to do
something about the lack of a prescription drug benefit for its
low-income citizens" by expanding "Medicaid eligibility for prescription
drugs to all individuals with household income up to 300 percent of the
Federal Poverty Level." Administrative Record ("Admin. R.") at 5.
Defendant Tommy G. Thompson, the HHS Secretary, is charged with the
responsibility to implement the provisions of Title XIX of the SSA, as
amended 42 U.S.C. § 1396 et seq. (the "Medicaid statute"). See
Compl. ¶ 13. The HHS Secretary administers the Medicaid program
through CMS, a component of HHS. See id. The Secretary is sued in his
official capacity only. See id.
The plaintiff challenges the January 18, 2001 decision by the HHS
Secretary approving a Medicaid demonstration to be conducted by Maine and
allowing Maine to pursue the HMP. See Compl. ¶ 2. The Secretary's
"reason for approving the project was `not to restrict Maine's ability to
invest state funds in the health of its citizens,' but to achieve
`expanded access to medically necessary drugs' by making them `more
affordable to primarily low-income Maine residents who are not eligible
for Medicaid.'" See Defs.' Mot. for Summ. J. at 17 (quoting Admin. R. at
The HMP uses a manufacturer-rebate mechanism set forth in
42 U.S.C. § 1396r-8. See Compl. ¶¶ 24-25. Under the HMP, Maine
collects rebates from manufacturers quarterly and deposits the rebates
into a revolving fund. See Compl. ¶ 26. Providers charge the HMP
beneficiaries prices for prescriptions that equal the Medicaid price for
a prescription, (i.e., the price that Maine has agreed to pay pharmacies
for prescriptions filled under Medicaid) minus a fixed percentage subsidy
of 18 percent. See Compl. ¶ 38. Specifically, beneficiaries
receive a 14-percent reduction off the available prescription price,
calculated by reducing the manufacturers' rebate of 18 percent by the
four percent Maine estimates it would cost on a per-prescription basis to
administer the HMP. See Admin. R. at 176-177.
Under the rebate program described in 42 U.S.C. § 1396r-8(a)(1),
for a state to receive federal funds to pay for any manufacturer's
drugs, the manufacturer must enter into an agreement with the HHS
Secretary to pay a rebate to every state on all of its covered outpatient
drugs paid for by Medicaid. See Compl. ¶ 24. The plaintiff
contends this program violates the SSA because it costs Maine nothing,
but requires drug companies to cover 15 to 18 percent of the cost of
covered prescription drugs. See Compl. ¶¶ 39-41, 45-46, 73. The
plaintiff claims this feature violates the statutory requirement that a
plan include some "payment under a state plan" of the cost of
"medical assistance." See 42 U.S.C. § 1396r-8, (a); Compl. ¶¶
4, 44-54. In addition, the plaintiff avers the defendants fail to
satisfy the requirement in 42 U.S.C. § 1396o, which provides that
states not charge Medicaid beneficiaries more than a "nominal"
co-payment. See Compl. ¶¶ 4, 44-54; Mem. of Law in Supp. of Pl.'s
Mot. for Summ. J. at 5, 26-28. The plaintiff argues that HMP
beneficiaries are paying more than 80 percent of the cost of each
prescription they fill. See id. Thus, the plaintiff concludes that such
copayments imposed by Maine clearly exceed the "nominal" limit set forth
in 42 U.S.C. § 1396o. See id.
To support these arguments, the plaintiff relies on a recent D.C.
Circuit decision that addresses a similar program instituted by the State
of Vermont. See Pharm. Research and Mfrs. of America v. Thompson
("PhRMA"), 251 F.3d 219 (D.C. Cir. 2001); Compl. ¶¶ 1, 5; Mem. of Law
in Supp. of Pl.'s Mot. for Summ. J. at 1-5, 8, 13-19, 21, 23-25, 28.
In PhRMA, the plaintiff states that the D.C. Circuit struck down a plan
"essentially identical" to the Maine HMP, known as the Vermont Pharmacy
Discount Program ("PDP"). See Compl. ¶¶ 1, 5. The D.C. Circuit held
that the purchases of drugs under the portion of the project designed to
be equal to the anticipated manufacturer rebate could not be deemed
purchases for which a "payment" was made by Vermont, as that term is
defined under 42 U.S.C. § 1396r-8(b)(1)(A) because "payments are
fully reimbursed by manufacturer rebates" and therefore "the rebates
produce no savings for the Medicaid program." See Defs.' Mot. for Summ.
J. at 10 (quoting PhRMA, 251 F.3d at 225).
Shortly after the D.C. Circuit issued its PhRMA decision, Maine
initiated a policy in which the State makes a contribution of two percent
toward the cost of HMP beneficiaries' prescriptions using "State-only"
money (i.e., money for which no federal-matching funds are paid). See
Mem. of Law in Supp. of Pl.'s Mot. for Summ. J. at 13. The plaintiff
argues that the Maine HMP is indistinguishable from the Vermont PDP and
CMS lacks the authority to approve the HMP, thereby violating Section
1927 of the SSA (42 U.S.C. § 1396r-8). See Compl. ¶¶ 4-5,
60-66. Consequently, the plaintiff urges this court to rule that the
defendants' approval of the program violates the APA,
5 U.S.C. § 706(2)(A), (C). Compl. ¶¶ 7, 59, 64, 74, B.
Specifically, the plaintiff requests a declaration, pursuant to
28 U.S.C. § 2201, that CMS approval of the HMP violates Sections
1927, 1901 (as defined in section 1905(a)), 1916(b), and 1115 of the
SSA, and, along those same lines, that CMS approval, or any like approval
in the future, is unlawful under the APA. See Compl. ¶ B.
Additionally, the plaintiff seeks "preliminary and permanent injunctive
relief enjoining the Secretary of HHS from granting approval of a
Medicaid demonstration program in Maine or any other state that contains
any or all of the features of the Maine HMP, including: (1) purporting
to require rebates from prescription drug manufacturers even though no
payments are made by the state under that state's plan; (2) failing to
provide `medical assistance' under the SSA, and; (3) requiring copayments
by Medicaid beneficiaries that exceed the `nominal' limit allowed under
Medicaid." Compl. ¶ C.
2. Medicaid Prescription Drug Rebate Agreements
Pharmaceutical manufacturers participating in Medicaid programs rebate
to the states a portion of the price of drugs purchased for Medicaid
purposes. See 42 U.S.C. § 1396r-8(a)(1); Compl. ¶¶ 24-25.
Manufacturers do this because the Medicaid statute,
42 U.S.C. § 1396a-u, permits the federal government to
reimburse states only for drugs purchased from manufacturers who have
agreed to pay statutorily specified rebates to those states. See
42 U.S.C. § 1396r-8(a)(1); Compl. ¶¶ 24-26, 28.
Thus, pharmaceutical manufacturers that want their drugs available to
Medicaid beneficiaries under the Medicaid program must enter into agreements
with the HHS Secretary to provide rebates to states in order to reduce the
cost of prescription drug coverage. See 42 U.S.C. § 1396r-8(a)(1);
Compl. ¶ 25. Specific rebate amounts are based on state reports on the
utilization of each manufacturer's covered outpatient drugs by Medicaid
beneficiaries in the state. See 56 Fed. Reg. 7049, Section II(a); Compl.
¶ 26. In language central to this case, Section 1396r-8 provides that
rebate agreements shall require manufacturers to pay rebates on drugs for
which "payment was made under the State plan." See
42 U.S.C. § 1396r-8(b)(1)(A); Compl. ¶¶ 4, 44-45.
3. Waivers and Medicaid "Pilot" or "Demonstration" Projects
The relevant Medicaid statute authorizes HHS to approve experimental
"pilot" or "demonstration" projects that the HHS Secretary determines are
"likely to assist in promoting the objectives of [Medicaid]."
42 U.S.C. § 1315(a); see Compl. ¶¶ 31-33; Defs.' Mot. for Summ.
J. at 3-4. The SSA authorizes the Secretary to waive certain Medicaid
requirements for such demonstration projects. See id. With respect to
such projects, the Secretary is empowered to take two separate actions.
See Defs.' Mot. for Summ. J. at 3-4. First, the Secretary may waive
compliance with certain Medicaid provisions to the extent and for the
period that the Secretary finds necessary to facilitate the project. See
42 U.S.C. § 1315(a)(1); Defs.' Mot. for Summ. J. at 4. Second, the
Secretary may designate that state expenditures, "which would not
otherwise be included as expenditures" under the state plan, "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); see also
Defs.' Mot. for Summ. J. at 4. In this case, the Secretary's approval
letter states that all "expenditures for extending pharmacy-only
benefits" under the HMP "shall be regarded as expenditures under the
State's [Medicaid] plan," subject to the condition that the State will be
eligible for federal financial participation only to the extent that
those expenditures do not exceed average rebate amounts (as reconciled on
a quarterly basis). See Admin. R. at 29, 41.
According to the defendants, expenditures that generate federal
financial participation and "State only" expenditures that do not
generate federal financial participation are therefore both "regarded" as
being made "under the State plan," for purposes of determining whether a
rebate obligation attaches under 42 U.S.C. § 1396r-8(b)(1)(A). See
42 U.S.C. § 1315(a)(2); Defs.' Mot. for Summ. J. at 16. The SSA,
however, does not authorize the Secretary to waive any requirements of
Section 1396r-8's rebate provision or the requirement that Medicaid
beneficiaries contribute no more than a "nominal" amount to the cost of
medical benefits they receive. See 42 U.S.C. § 1315(a)(1); Compl.
¶¶ 33, 48, 63. Moreover, CMS 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 Demonstration
Proposals Pursuant to § 1115(a) of the Social Security Act, 59 Fed.
Reg. 49,249, 49,250 (Sept. 27, 1994); Compl. ¶ 34.
In contrast, the defendants argue "it was not necessary for the
copayment statute to be `waived' to facilitate the HMP, because the
copayment statute is not applicable to persons who are not eligible for
Medicaid to begin with." Defs.' Mot. for Summ. J. at 25. The defendants
aver that "HMP participants may receive Medicaid-like benefits, but ...
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