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Pharmacuetical Research and Manufacturers of America v. Thompson

April 02, 2004


Appeals from the United States District Court for the District of Columbia (No. 02cv01306)

Before: Henderson and Rogers, Circuit Judges, and Williams, Senior Circuit Judge.

The opinion of the court was delivered by: Karen Lecraft Henderson, Circuit Judge

Argued December 12, 2003

Opinion filed for the court by Circuit Judge HENDERSON.

The appellants, the Pharmaceutical Research and Manufacturers of America (PhRMA) and two non-profit organizations, the National Alliance for the Mentally Ill of Michigan (NAMI) and the National Urban Indian Coalition (NUIC) (referred to jointly as Non–Profits),*fn1 appeal the district court's summary judgment rejecting their challenge to the "Michigan Best Practices Initiative" (Initiative), a low-cost state prescription drug coverage program -- for beneficiaries of Medicaid and of two non-Medicaid state health programs -- which was designed by the State of Michigan and approved by the Secretary of the United States Department of Health and Human Services (Secretary, HHS). Under the Initiative, if a drug manufacturer does not sign each of two specified rebate agreements with Michigan -- one to provide rebates for drugs the state purchases for Medicaid recipients and the other to provide identical rebates for drugs the state purchases for the two non-Medicaid state health programs -- the drug will be covered under the programs subject to "prior authorization." The appellants argue, as they did below, that the Initiative violates (1) the "formulary"*fn2 provision of the Medicaid outpatient drug payment statute, 42 U.S.C. § 1396r–8(d)(4), because it excludes from its drug formulary those drugs for which prior authorization is required; (2) the general statutory mandate that Medicaid services be provided in a manner consistent with the best interests of the recipients, 42 U.S.C.A. § 1396a(a)(19); and (3) the Commerce Clause of the United States Constitution because it requires manufacturers to charge the same prices both within and without Michigan. Because the district court correctly rejected each of these arguments, we affirm the summary judgment.*fn3


The Medicaid program, jointly funded by the federal government and the states, pays for medical services to low-income persons pursuant to state plans approved by the Secretary. See 42 U.S.C. § 1396a(a)-(b). The statutory rebate provisions require that, in order for a state to receive Medicaid payments for a covered outpatient drug, the drug's manufacturer must have entered into an agreement to rebate a specified portion of the drug's price pursuant to a state plan approved by the Secretary. 42 U.S.C. § 1396r–8(a)(1). In recent years, some states have gone beyond the required Medicaid rebate agreement and "have enacted supplemental rebate programs to achieve additional cost savings on Medicaid purchases as well as for purchases made by other needy citizens." PhRMA v. Walsh, 123 S. Ct. 1855, 1860 (2003). The Initiative is one such supplemental program.

The Initiative began in October 2001 when Michigan's governor convened the Pharmacy & Therapeutics Committee (Committee), made up of physicians and pharmacists, with instructions to review the "Michigan Pharmaceutical Product List" (MPPL), a listing of all drugs covered by any program operated by Michigan's Department of Community Health (DCH), including those requiring prior authorization. The Committee studied 40 therapeutic drug classes and in each class designated two or more as "Therapeutically Advantageous," that is, as having a clinical advantage over other drugs in the class without regard to cost. Declaration of David Viele, Deputy Director of DCH (Viele Decl.) ¶ ¶ 15–17. These "best in class" drugs were designated as "Preferred Drugs" and were included on the MPPL for automatic reimbursement under the Initiative. The best-in-class drug available at the lowest cost anywhere in the United States (taking into account the mandatory Medicaid rebate) was designated as the "reference drug" and all drugs in the class priced comparably with it were also listed on the MPPL as Preferred Drugs for automatic reimbursement. Id. ¶ ¶ 20–21. All remaining drugs were labeled "non-preferred drugs" and were listed on the MPPL with an asterisk signifying required prior authorization for reimbursement -- unless the manufacturer signed both a "Supplemental Drug–Rebate Agreement" (Medicaid Agreement) requiring the manufacturer to rebate to the state the difference between the price of the drug and the price of the reference drug for Medicaid purchases and a "Non–Medicaid State Funded Rebate Agreement" (Non– Medicaid Agreement), extending the additional rebate to Michigan's non-Medicaid state prescription drug programs. Id. ¶ ¶ 22, 24–25, 29.

In Fall 2001 DCH submitted to the Secretary a proposed State Plan Amendment to Michigan's State Medicaid Plan incorporating the Initiative's provisions for approval pursuant to 42 U.S.C. § 1396. The Secretary approved use of the Medicaid Agreement in a letter dated January 24, 2002 and of the additional Non–Medicaid Agreement in a letter dated December 5, 2002 (Non–Medicaid Approval Letter). The Secretary limited approval of the non-Medicaid rebate program, however, to only two of the four Michigan health programs for which it was proposed: the Elder Prescription Insurance Company Program (EPIC), which provides prescription drug coverage to low-income seniors, and the Maternity Outpatient Medical Service (MOMS), which provides prenatal care, including drug coverage, to low-income, adolescent and incarcerated females and to Medicaid beneficiaries eligible for emergency services only.

On June 28, 2002 PhRMA filed this action challenging the Secretary's approval of the prior authorization provisions in both the Medicaid Agreement and the Non–Medicaid Agreement. DCH intervened on the side of the Secretary and the Non–Profits intervened in support of PhRMA. In a decision dated March 28, 2003 the district court granted summary judgment in favor of the Secretary and DCH. PhRMA and the Non–Profits filed timely appeals.

After the district court entered judgment, the United States Supreme Court issued its decision in PhRMA v. Walsh, 123 S. Ct. 1855, 1860 (2003), which affirmed the First Circuit's vacatur of a preliminary injunction preventing implementation of Maine's Medicaid-covered outpatient drug program which, like Michigan's, requires prior authorization for a Medicaid drug if its manufacturer has not agreed to provide rebates both for Medicaid and for non-Medicaid state prescription drug programs.*fn4 In Walsh the Supreme Court expressly rejected PhRMA's challenges to Maine's program based on Medicaid's "best interests" requirement, albeit without a majority opinion, and, by a majority, on the Commerce Clause. The analyses in Walsh enlighten ours here.


We review the district court's grant of summary judgment de novo pursuant to the Administrative Procedure Act and therefore will uphold the Secretary's decision unless it is "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law," 5 U.S.C. § 706(2)(A). See Arizona v. Thompson, 281 F.3d 248, 253 (D.C. Cir. 2002) (citing Indep. Petroleum Ass'n of Am. v. DeWitt, 279 F.3d 1036 (D.C. Cir. 2002); Dr. Pepper/Seven-Up Cos. v. FTC, 991 F.2d 859, 862 (D.C. Cir. 1993)). There is some question, however, what level of deference the court should accord the Secretary's interpretation of the Medicaid drug payment statute. Ordinarily we review an agency's interpretation of a statute it is charged with implementing under the familiar and deferential two-part framework of Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). The appellants assert, however, that the Secretary's decisions approving the Initiative are due only minimal deference, if any, under a line of Supreme Court decisions beginning with Skidmore v. Swift & Co., 323 U.S. 134 (1944), and culminating in United States v. Mead, 533 U.S. 218 (2001). Cf. PhRMA v. Thompson, 251 F.3d 219, 224 (D.C. Cir. 2001) (finding it unnecessary to decide whether Secretary's approval of Vermont Medicaid plan is entitled to Chevron deference). We disagree and conclude the Secretary's decisions are entitled to Chevron deference. Accord Texas v. HHS, 61 F.3d 438, 440 (5th Cir. 1995); Georgia v. Shalala, 8 F.3d 565, 1573 (11th Cir. 1993).

The appellants contend that the Secretary's decisions do not qualify for Chevron deference because they do not carry the force of law. In particular, the appellants assert the Secretary's statutory interpretations here are not the result of a formal administrative process, do not involve agency expertise, are inconsistent with previous HHS interpretations and were developed solely in response to this lawsuit. Thus, the appellants argue, the Secretary's interpretations are akin to " 'interpretations contained in policy statements, agency manuals, and enforcement guidelines,' " which are "beyond the Chevron pale." Mead, 533 U.S. at 234 (quoting Christensen v. Harris County, 529 U.S. 576, 587 (2000)). This argument overlooks the nature of the Secretary's authority. This is not a case of implicit delegation of authority through the grant of general implementation authority. In the case of the Medicaid payment statute, the Congress expressly conferred on the Secretary authority to review and approve state Medicaid plans as a condition to disbursing federal Medicaid payments. See 42 U.S.C. § 1396 ("The sums made available under this section shall be used for making payments to States which have submitted, and had approved by the Secretary, State plans for medical assistance."). In carrying out this duty, the Secretary is charged with ensuring that each state plan complies with a vast network of specific statutory requirements, see generally 42 U.S.C. 1396a, including the prescription rebate agreement provision in section 1396r–8. Through this "express delegation of specific interpretive authority," Mead, 533 U.S. at 229, the Congress manifested its intent that the Secretary's determinations, based on interpretation of the relevant statutory provisions, should have the force of law. The Secretary's interpretations of the Medicaid Act are therefore entitled to Chevron deference. See Mead, 533 U.S. ...

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