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Pharmaceutical Research and Manufacturers of America v. Thompson

February 25, 2002


The opinion of the court was delivered by: Ricardo M. Urbina United States District Judge

Document Nos.: 8, 10, 17, 18




This case concerns one state's use of a manufacturer-rebate scheme to act as a solution for the lack of a prescription drug benefit program for low-income citizens. By bringing the present action, Pharmaceutical Research and Manufacturers of America ("the plaintiff") challenges the approval of the State of Maine's Medicaid demonstration project by the Centers for Medicare and Medicaid Services ("CMS"), under the U.S. Department of Health and Human Services ("HHS"). As such, the target defendants in the case are the HHS Secretary and the CMS Administrator (collectively, "the defendants"). The plaintiff alleges violations of Title XIX of the Social Security Act ("the SSA"), as amended 42 U.S.C. § 1396 et seq., and the Administrative Procedure Act, ("the APA") as amended 5 U.S.C. § 701 et seq. Before the court are the parties' cross-motions for summary judgment. After consideration of the parties' submissions and the relevant law, the court grants the defendants' motion for summary judgment and denies the plaintiff's motion for summary judgment. In addition, the court grants the intervenor-defendant's motion for summary judgment.


A. Factual Background

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 28).

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 Medicaid 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.

1. 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 low-income individuals. See Compl. ¶ 17. Medicaid provides services pursuant to plans developed by the states and approved by the HHS Secretary. See 42 U.S.C. §§ 1396a(a)-(b); Compl. ¶ 17. States pay doctors, hospitals, pharmacies, and other providers of medical goods and services according to established rates. See 42 U.S.C. §§ 1396b(a)(1), 1903(a)(1); Compl. ¶ 22. The federal government then pays each state a statutorily established share of "the total amount expended . . . as medical assistance under the State plan . . . ." See 42 U.S.C. § 1396b(a)(1); Compl. ¶ 22. This federal-to-state payment is known as federal financial participation. See Compl. ¶ 20. The Medicaid statute prohibits state governments from charging the beneficiaries more than a "nominal" copayment for prescription drugs and other benefits. See 42 U.S.C. §§ 1396o(a)(3), (b)(3); Compl. ¶ 23. The plaintiff claims that current Medicaid prescription drug sales nationwide total about 20 billion dollars per year. Compl. ¶ 28. About 10 percent of all prescription drugs in the United States are purchased by Medicaid recipients. See Defs.' Mot. for Summ. J. at 5.

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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