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AMERICAN SOCIETY OF CONSULTANT PHARMACISTS v. GARNER

August 8, 2001

AMERICAN SOCIETY OF CONSULTANT PHARMACISTS, ET AL., PLAINTIFFS,[FN*]
v.
JACKIE GARNER, HER OFFICIAL CAPACITY AS DIRECTOR OF THE ILLINOIS DEPARTMENT OF PUBLIC AID, DEFENDANT.[FN1]



The opinion of the court was delivered by: Magistrate Judge Sidney I. Schenkier

  On December 15, 2000, Illinois changed the formulas it uses to pay providers of prescription drug services to Medicaid recipients. This rate change, implemented pursuant to an emergency rule, is currently in effect. Anticipating this change, on December 13, 2000, the plaintiffs; the American Society of Consultant Phannacists and 20 pharmacies, filed this lawsuit against the Illinois Department of Public Aid ("IDPA") and its Director, in her official capacity. In earlier decisions in this case, the plaintiffs' requests for a temporary restraining order were denied.*fn3 In addition, in a Memorandum Opinion and Order dated February 27, 2001, this Court dismissed plaintiffs' two supplemental state law claims against all defendants, and their Medicaid Act claim against the IDPA. See ASCP v. Patio, No. 00 C 7821, 2001 WL 19747 (N.D. Ill., Feb. 27, 2001).

What remains in the case, therefore, is plaintiffs' claim against the Director of IDPA in her official capacity, pursuant to 42 U.S.C. § 1983, that the IDPA's new reimbursement formulas violate the Federal Medicaid Act, 42 U.S.C. § 1396a(a)(30)(A). The plaintiffs have moved for a preliminary injunction on this claim (doc. # 24-1), requesting that the Court enjoin the application of the new reimbursement formulas pending a trial on the merits. The parties have agreed to submit the matter for decision on the papers, without the need for in-court testimony. After careful review of the parties' submissions and the oral argument heard on March 26, 2001, the Court finds that the law of this Circuit, as articulated in Methodist Hospitals, Inc. v. Sullivan, 91 F.3d 1026 (7th Cir. 1996), requires the Court to deny the plaintiffs' motion for a preliminary injunction.

The Court sets forth below the findings of fact and conclusions of law that constitute the basis for the denial of plaintiffs' motion for a preliminary injunction. To the extent that any finding of fact constitutes a conclusion of law, the Court hereby adopts it as such, and to the extent that any conclusion of law constitutes in whole or in part a finding of fact, the Court adopts it as such. See Miller v. Fenton, 474 U.S. 104, 113-14 (1985).

I.

For purposes of this preliminary injunction motion, the defendant has stipulated to the allegations in the amended complaint, the exhibits thereto, and the supplements filed by the plaintiffs (see 01/03/01 Tr. 13-14, 18). The defendant has elected not to provide any evidentiary submissions. As a result, the following findings are drawn from the Court's analysis of plaintiffs' submissions.

A. The Parties.

1. The plaintiff American Society of Consultant Pharmacists ("ASCP") is a national trade association, which is comprised of a group of pharmacies that provide Medicaid services in Illinois. The other named plaintiffs (collectively, "the Medicaid Pharmacies") all are members of the ASCP (Am. Compl. ¶¶ 1-21). The Medicaid Pharmacies in Illinois employ approximately 1533 employees, including over 663 hundred professionals, including 178 pharmacists and 465 pharmacy technicians (Am. Compl. ¶ 79). The plaintiffs include the following individual pharmacies:
a. Enloe Drugs; Enloc Drugs d/b/a Enloe PCI Prescription Center; Enloe Drugs, Inc. d/b/a Omnicare of the Quad Cities; Nihan & Martin, Inc. d/b/a Nihan & Martin Pharmacy; JHC Acquisition, Inc. d/b/a Jacobs Healthcare Systems; Weber Medical Systems, Inc. d/b/a Omnicare Infusion Services; Dixon Pharmacy, Inc. d/b/a Dixon Pharmacy; Dixon Pharmacy, Inc. d/b/a Dixon Main Street Pharmacy; Niv Acquisition Corp. d/b/a Denman Pharmacy; Home Pharmacy Services, Inc. d/b/a Omnicare of Southern Illinois; Home Pharmacy Services; Interlock Pharmacy System, Inc. d/b/a Inerlock Pharmacy Services; Care Pharmaceutical Services, Inc. (these 15 pharmacies are collectively referred to as "Omnicare");
b. Pharmerica Drug Systems, Inc.;
c. SunScript/HRA LLC of Burr Ridge, Illinois; and
d. Neighborcare Pharmacy Services, Inc. d/b/a Neighborcare Elgin; Neighborcare Pharmacy Services, Inc. d/b/a Neighborcare Hickory Hills; Neighborcare Pharmacy Services, Inc. d/b/a Neighborcare Monticello (these three pharmacies are collectively referred to as "Neighborcare").
2. Medicaid pays for pharmaceuticals and related services for approximately 60-65 percent of residents living in Illinois nursing homes, assisted living facilities, and community integrated living arrangements ("CILAs"). Since there are approximately 100,000 residents in Illinois living in those facilities, there are approximately 60,000 to 65,000 of those residents whose care is paid for by Medicaid. The plaintiff pharmacies provide all pharmacy services for approximately 83 percent of these residents, or approximately 50,000-54,000 individuals (Am. Compl. ¶ 20; Pharmacy A Aff. ¶ 19). The record does not disclose what pharmacies service the remaining 17 percent of this Medicaid population, where those pharmacies are located, or what geographic areas they serve.
3. While the plaintiffs in this case have adopted for themselves the label "Medicaid Pharmacies," that is something of a misnomer, because at least some percentage of their businesses also serve private pay individuals. The amount varies from plaintiff to plaintiff. See, e.g., Pharmacy A Aff. ¶ 25 (35 percent of Pharmacy A's business serves non-Medicaid recipients); Pharmacy B's Aff. ¶ 7 (37 percent of Pharmacy B's patients are non-Medicaid recipients); Pharmacy C's Aff. ¶ 6 (15 percent of Pharmacy C's patients are Medicaid recipients). As for Pharmacy D and the non-party specialty pharmacies who serve this Medicaid population, we do not know the breakdown of their business between Medicaid and non-Medicaid recipients.
4. "There is a difference in the population mix served by [plaintiffs] and the traditional retail pharmacies" (Supp. Pharmacy A Aff. ¶ 6c). The traditional retail pharmacies serve a much lower percentage of Medicaid recipients vis-a-vis its total customer base than do the plaintiffs (Id.). Moreover, traditional retail pharmacies serve non-institutionalized Medicaid recipients who require a far lower level of pharmacy services than the institutionalized recipients served by plaintiffs (Id. ¶ 6d). Thus, the cost of services provided by traditional retail pharmacies is much lower than the cost of the services provided by the plaintiffs (Id. ¶ 6e).
5. The defendant is the Director of the Illinois Department of Public Aid ("IDPA"), who is sued in her official capacity only (Am. Compl. ¶ 22). The IDPA administers the Illinois Medical Assistance Program (the "Medicaid Program") and contracts with pharmacies, including the Medicaid Pharmacies, to provide prescription and non-prescription drugs and related products and services to medical assistance beneficiaries (hereafter, "Medicaid recipients") (Am. Comp. ¶ 23).
6. The Medicaid recipients who live in nursing homes, assisted living facilities and CILAs are not parties to this action. However, to the extent that the IDPA's new reimbursement formula may affect their access to the services rendered, these Medicaid recipients have a stake in the outcome of this litigation (Am. Compl. at 2).

B. The Medicaid Program.

7. The State of Illinois provides medical assistance to Medicaid recipients enrolled in the Medicaid Program pursuant to the provisions of Title XIX of the Social Security Act, 42 U.S.C. § 1396-1396v (the "Medicaid Act") (Am. Compl. ¶ 30). The Medicaid Program is a cooperative state and federal program whereby the federal government provides funds to the states to assist the poor, elderly, and disabled to receive medical care, prescription and non-prescription drugs, and related services (Id., ¶ 28). States may elect to opt in or out of the Medicaid Program. States that opt into the program must submit a State Plan ("Medicaid State Plan") to the United States Department of Health and Human Services ("DHHS") for approval, describing the policies and methods used to set reimbursement rates for each type of service included in the program. The provision of drugs, pharmaceuticals, and related services are one such type of service. A state must also submit for approval to the DHHS any proposed amendments. Both the Medicaid State Plan and any amendments must meet federal requirements. 42 U.S.C. § 1396a(a) and (b); 42 C.F.R. § 430.10, 430.12 (Id., ¶ 29).
8. The IDPA is the designated state Medicaid agency and, as such, it is responsible for administering, adopting, implementing, and amending the Illinois Medicaid State Plan in accordance with the requirements of the Medicaid Act (Am. Compl. ¶ 31). Illinois has opted to cover prescription and non-prescription drugs and related services in its Medicaid State Plan (Id., ¶ 35).
9. Medicaid prescription drug reimbursement to pharmacies like the Medicaid Pharmacies is a function of two components: a formula to cover the cost of the prescription drug product and a dispensing fee (Am. Compl., ¶ 36). The drug product component cost is the cost of the drug as determined by a Medicaid formula which estimates the acquisition cost (Am. Compl. ¶ 38). For some providers, such as Omnicare, the dispensing fee takes into account the costs associated with filling the prescription such as unit dose packaging, pharmacists' review, delivery, pharmacy overhead, and other ancillary and related services. The dispensing fee does not include the cost of the drug product, corporate overhead, or profit (see Supp. Pharmacy A Aff. ¶ 60. Federal law requires that the dispensing fee paid to pharmacies be reasonable (Id., ¶ 39) (citing 42 C.F.R. § 447.331(b)(1)).
10. The Medicaid Pharmacies participate in the Medicaid Program pursuant to provider agreements executed with the IDPA (a sample may be found at Ex. B to the Amended Complaint). That form seems to be applicable to any provider that participates in the Medicaid Program; it is not tailored specifically to pharmacies. The form agreement provides that the provider "shall receive payment based on the Department's reimbursement rate which shall constitute payment in full" (Am. Compl., Ex. B, ¶ 6). Thus, although it does not say this explicitly, the form agreement provides for reimbursement for the drugs and related services that plaintiffs provide (Am. Compl. ¶ 42). And, a fair reading of the agreement is that it provides - as it must - that the payments will be in accordance with the requirements of the Medicaid Act (see Am. Compl., Ex. B, ¶ 1) (stating that certain notice is required for changes in policy except if, among other things, the changes are "to comply with . . . Federal law or regulation").
11. The form provider agreements between IDPA and the Medicaid Pharmacies do not provide for an expiration date, or set forth the manner by which the agreements may be terminated. But, at oral argument the IDPA stated - without contradiction by plaintiffs - that those provider agreements are terminable by a provider at will as of the end of a given calendar month, on advance notice by the provider (no details were given as to the amount of advance notice necessary). In addition, although not disclosed in the written evidentiary submissions, at oral argument the plaintiffs stated - without contradiction by defendant - that they have separate provider agreements with the nursing homes and other facilities, which cover their services to both Medicaid and non-Medicaid patients. The plaintiffs have not provided copies of those agreements, or any evidence concerning the procedures for terminating them, or the notice required for termination.

C. The IDPA Budget Appropriations For Medicaid Expenses.

12. For Fiscal Year ("FY") 1999, the IDPA's appropriation budget for Medicaid prescription drugs was $668,412,900, and the actual Medicaid expenditures for these drugs was $678,224,794. For FY 2000, the IDPA's appropriation budget for prescription drugs was $757,689,400, and (at the time the amended complaint was filed) "the estimated Medicaid expenditures for prescription drugs [was] $784,655,800" (Am. Compl. ¶ 47). For FY 2001, the appropriation budget for prescription drugs is $958,780,300 (Id., ¶ 48).
13. Drug manufacturers negotiate with the State of Illinois and pay directly to the state money rebates for drugs dispensed through the Medicaid Program. One half of the rebate amount goes to the State of Illinois and the other half goes to the federal government (Am. Compl. ¶ 53). During the past five years, the amount of rebate dollars has increased significantly from approximately $85 million for FY 1996-1997, to approximately $182 million for FY 2000-2001, or $91 million for Illinois and $91 million for the federal government (Id.). Thus, Illinois' estimated share of rebates in FY 2001 will be approximately $91 million (Id., ¶ 48).
14. Illinois' rebates are deposited into the general revenue fund, and are not credited to the IDPA's budget (Am. Compl. ¶ 54). That is also the procedure followed in 19 other states (Id., Ex. F). In contrast, 13 states credit their portion of the rebates directly into their Medicaid Drug Budgets, with the remaining 17 states crediting these rebates to other more general Medicaid budgets (Id.).*fn4

D. Rising Costs of Pharmaceuticals and Related Services.

15. Prior to December 15, 2000, IDPA reimbursed plaintiffs for the drugs and related services provided to Medicaid recipients under the following formulas:
(a) Brand Name Prescription Drug Reimbursement: Brand name prescription drugs are those with no available generic equivalent (Supp. Pharmacy A Aff. ¶ 11 a). Medicaid Pharmacies received an amount equal to the lesser of (1) average wholesale price ("AWP") for drugs where that price is based on actual market wholesale price plus the established dispensing fee, or (2) AWP less 10 percent for each prescription dispensed, plus the established dispensing fee (Pls.' Ex. J).*fn5 If the cost of the brand name prescription drug was at or less than $34.50, the dispensing fee would be $3.45 per prescription; if the cost was greater than $34.50, the dispensing fee increased up to a maximum of $15.40 for each prescription dispensed (Am. Compl. ¶ 58). As of the time of the recent change to the formula, this methodology resulted in reimbursement based on the AWP less 10 percent formula.
(b) Generic Prescription Drug Reimbursement: Generic drugs are chemically equivalent to brand name drugs, and are available from more than one manufacturer (Supp. Pharmacy A Aff. ¶ 13a). The Medicaid Pharmacies were reimbursed for generic prescription drugs at an amount equal to the lowest of: (1) the pharmacy's prevailing charge to the general public; (2) AWP less 12 percent, plus the established dispensing fee; (3) the AWP where that price is based on actual market wholesale price, plus the established dispensing fee; (4) the maximum allowable cost ("MAC"); or (5) the federal upper limit ("FUL") mandated by HCFA (Pls.' Ex. J) The established dispensing fee was $3.75 for drugs with a cost of $37.50 or less; if the cost of the generic prescription drug was greater than $37.50, the dispensing fee would increase up to a maximum of$15.70 (Am. Compl. ¶ 59). As of the time of the recent change to the formula, this methodology resulted in reimbursement being based on the AWP less 12 percent formula.
(c) OTC Reimbursement: The Medicaid Pharmacies were reimbursed for OTC drugs > at the lower of (1) the prevailing charge to the public, or (2) the wholesale acquisition cost ("WAC") plus a percentage established by the IDPA - which at the time was 50 percent (Pls. Ex. J).*fn6 See also 89 Ill. Adm. Code 140.446. As of the time of the recent change to the formula, this methodology resulted in reimbursement being based on the WAC plus 50 percent formula. We note that plaintiffs assert that the pre-December 15, 2000 formula for OTC reimbursement was based on AWP, not WAC (Supp. Pharmacy A Aff. ¶ 15a). But that assertion conflicts with the documentary evidence supplied by plaintiffs: a redlined version of the OTC reimbursement formula, showing how it was altered as of December 15, 2000 (Pls.' Ex. J). In the face of this discrepancy, we rely on the documents rather than plaintiffs' interpretation of them.
17. By June 2000, the IDPA knew that it would experience a budgetary shortfall for Medicaid prescription drugs, and revised its budget for FY 2001 from an initial budget of $958,780,300 to approximately $1,015,000,000. IDPA's budget calculations did not include provisions for any rebates from drug manufacturers (Am. Compl. ¶ 50).
18. On November 21, 2000, Director Patla announced that money was needed within the next six months to address the IDPA's anticipated financial shortfall for FY 2001 (Am. Compl. ¶ 51). On November 30, 2000, the State of Illinois announced "that a dramatic upsurge in Medicaid costs would require tens of millions of dollars of cutbacks in payments to hospitals and pharmacies" (Id., ¶ 52). Specifically, the State announced that it was proposing to cut $50 to 60 million in payments to Medicaid pharmacists and pharmacies over an 18-month period ending on June 30, 2002 (Id., ¶ 52).

E. The Reimbursement Methodology in Illinois.

19. According to plaintiffs, prior to December 15, 2000, the reimbursement formula set forth in paragraph 15 above had been in effect - in essentially that form - for some 10 years (Am. Compl. at 4 (Nature of the Case)).*fn7 As of December 15, 2000, IDPA altered the reimbursement formula. In the course of doing so, IDPA issued three Legal Notices soliciting public comment (Id. ¶ 77 and Ex. G). Those three notices are undated, but according to plaintiffs, they were issued on November 21, December 7 and December 11, 2000 (Id.).*fn8
20. The November 21 notice proposed changes in the methodology for reimbursement for brand name, generic, and OTC drugs. That notice proposed (a) to add as an alternative reimbursement approach for brand name drugs WAC plus 8 percent, and a flat dispensing fee of $3.00 per prescription; (b)to add as an alternative reimbursement approach for generic drugs WAC plus 12 percent, and a flat dispensing fee of $3.58; and (c) to add as an alternative reimbursement approach for OTC drugs AWP plus up to 25 percent. The notice stated that these changes were expected to decrease annual Medicaid expenditures by approximately $65 million, and were planned to go into effect for services provided after December 11, 2000. Neither party has offered any evidence concerning what discussions, if any, IDPA representatives had with the pharmacies providing Medicaid services prior to issuing the first notice, or what investigation the IDPA did, if any, prior to proposing the revisions set forth in that notice.
21. The December 7 notice set forth the same proposed revision to the reimbursement for OTO, but changed the proposed reimbursement approach for brand name and generic drugs by increasing the flat dispensing fee to $4.17 for each type of drug. The notice stated that with this change, the new reimbursement formulas would go into effect for services provided on or after December 15, 2000, and that the new reimbursement formulas would decrease annual Medicaid expenditures by some $52 million. The notice stated that the changes were made "as a result of the comments received" in response to the November 21 notice - but no evidence has been offered as to what comments were made, or by whom.
22. The December 11 notice repeated, in substance, the reimbursement formulas as set forth in the December 7 notice for brand name, generic, and OTC drugs. The notice again stated (without elaboration) that the changes took account of comments to the November 21 notice by "interested parties." Moreover, this notice projected the annual savings in Medicaid expenditures to be $70 million-no explanation is offered in the notice (or in defendant's briefing) as to why the estimated savings were changed from $52 million in the December 7 notice to $70 million in the December 11 notice, even though the notices set forth the same revised reimbursement formulas.
23. The December 11 notice stated that the revised reimbursement formulas would become effective on December 15, 2000 (which is what occurred).*fn9 The notice nonetheless invited further public comment on the revised formulas, to be submitted by December 26, 2000. The Court has not been provided with evidence of what further public comment, if any, has been received in response to this notice.*fn10
24. The following table illustrates the practical difference between the old rule and the new rule:*fn11
Old Rule New Rule
Brand 25. AWP - 10% $3.45 WAC 8% $4.17 dispensing fee dispensing fee
2. If drug cost higher than $34.51. then the dispensing fee increased to maximum of $15.40 per prescription ("sliding scale")
Generic 1. AWP - 12% $3.75 WAC 12% $4.17 dispensing fee. dispensing fee.
2. If drug cost higher than $37.51, then the dispensing fee increased to max. of ...

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