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Pharmaceutical Society v. Cuomo

decided: September 2, 1988.


Appeal from an order entered in the United States District Court for the Southern District of New York (Duffy, J.), enjoining appellants from violating a settlement order previously reached with appellees and from enforcing an amended prescription price reimbursement regulation.

Oakes and Miner, Circuit Judges, Pollack,*fn* District Judge. Oakes, Circuit Judge (dissenting). Judge Oakes dissents in a separate opinion.

Author: Miner

MINER, Circuit Judge:

Plaintiffs-appellees Pharmaceutical Society of the State of New York ("the Society"), et al., moved, pursuant to Fed. R. Civ. P. 70, for a temporary restraining order in the United States District Court for the Southern District of New York (Duffy, J.). The purpose of the motion was to compel defendants-appellants Mario Cuomo, as Governor of New York State, and Cesar A. Perales, as Commissioner of the New York State Department of Social Services, to specifically perform the Stipulation of Settlement and Order ("Settlement Order" or "Order") that had been entered in plaintiffs' 1976 action against the state concerning the method of calculating prescription drug prices for Medicaid reimbursement; to enjoin them from either violating the terms of the Settlement Order or enforcing the amended regulation governing drug price calculation, N.Y. Comp. Codes R. & Regs. tit. 18 § 505.3(h)(2)(v) (1988); and to hold defendants in contempt of court for their alleged violations of the Order.

After a hearing, Judge Duffy issued an order restraining defendants from violating the Settlement Order or enforcing the amended regulation until further order of the court. Defendants appeal from the district court's order. We affirm.


Under the Medicaid Program of the Social Security Act, 42 U.S.C. § 1396 et seq. (1982 & Supp. IV 1986), the federal government pays a share of the reimbursable costs of necessary medical care and services provided to individuals qualified to receive Medicaid assistance. This share, known as federal financial participation ("FFP"), is available only to states whose Medicaid plans have been approved by the United States Department of Health and Human Services ("HHS") as meeting the federal requirements. See id. § 1396a(a), (b); N.Y. Soc. Serv. Law § 363-a (McKinney 1983). A participating state's plan may include expenditures for prescription drugs among reimbursable costs. See 42 U.S.C. §§ 1396a(a)(10)(A), 1396d(a)(12).

New York State's plan, administered through the Department of Social Services ("the Department" or "Social Services"), includes prescription drugs among reimbursable costs. See N.Y. Soc. Serv. Law § 365-a(2)(g) (McKinney 1983 & Supp. 1988). In 1976, HHS adopted regulations that placed upper limits on Medicaid reimbursement for prescription drugs. The state agency was not allowed to "pay more for prescribed drugs than the lower of ingredient cost plus a reasonable dispensing fee or the provider's usual and customary charge to the general public." 42 C.F.R. § 447.331(a) (1986). The costs of drugs were determined according to acceptable procedures, or "methodologies," outlined in the regulations. For drugs sold by two or more manufacturers or by the same manufacturer under two or more labels ("multiple source drugs" or "MSDs"), one of two federal methodologies for calculating drug prices was mandated unless another methodology employed by a state yielded a lower price. "Estimated Acquisition Cost" ("EAC") required the state to make its "best estimate" of the price that providers "generally" paid for the drug in "the package size providers buy most frequently," id. § 447.332(c)(2), (3). "Maximum Allowable Cost" ("MAC") was the cost of the drug as established by the Pharmaceutical Reimbursement Board of HHS' Health Care Financing Administration ("HCFA") and published in the Federal Register, see id. § 447.332(a)(1), but could be overridden by a physician's certification that a particular brand of drug was medically necessary, id. § 447.332(b). FFP only was "available in expenditures for payments" to pharmacy providers "for services that d[id] not exceed the upper limits," id. § 447.304(c).

New York adopted N.Y. Comp. Codes R. & Regs. tit. 18 § 505.3(h)(2)(v) (1987)*fn1 to implement HHS' regulations in the state: Maximum Medicaid reimbursement for prescription drugs was based on (1) "the usual and customary price charged to the general public"; (2) MAC; or (3) the EAC "which shall be the price shown on the State EAC list established by the Commissioner of Social Services, plus applicable dispensing fee." The physician override provision of 42 C.F.R. § 447.332(b) was not adopted.

In November 1976, the Society commenced an action against the state in the Southern District of New York, seeking declaratory and injunctive relief relating to the state's administration of the new regulation. The complaint alleged, inter alia, that (1) the initial State EAC list, which was a republication of a federal list, was not the "best estimate" of prices which New York pharmacy providers paid for drugs; (2) the price list was established in violation of the State Administrative Procedure Act and due process; and (3) the dispensing fees under N.Y. Comp. Codes R. & Regs. tit. 18 § 528.2 were confiscatory and violated federal requirements. The action was adjourned after a week and a half of testimony when plaintiffs and the Commissioner of Social Services entered into the Settlement Order.

In the Settlement Order, the state agreed to make updated EAC lists available to enrolled pharmaceutical providers and to determine EAC "by surveying and averaging the prices charged" by wholesalers of drugs in New York. The two key provisions of the Order at issue in this case are paras. 6 and 10. Under para. 6, Social Services must establish a Pharmacy Advisory Committee ("PAC" or "the Committee")

consisting of from nine (9) to fifteen (15) members, a majority of whom shall be pharmacists participating in the Medicaid program in the State of New York. The Department shall meet with this Committee from time to time but not less than quarterly, for purposes of seeking its advice in matters relating to the pharmaceutical industry, including but not limited to all matters encompassed in this stipulation.

Joint Appendix at 28-29 (para. 6). The Order enumerates two particular situations in which Social Services must deal directly with the PAC: "Specifically, the [PAC] shall be consulted by the Department in regard to the procedures set out in paragraph '5' [providing that the EAC for drugs purchased by pharmacists directly from manufacturers will be the price they 'commonly and currently' pay] and notified not less than thirty (30) days prior to the proposed effective date of any proposed changes in pricing or pricing methodology," id. at 29. Proposal of such changes obligates the state to follow a detailed set of procedures:

The Department agrees to present for the Committee's consideration the basis for any such changes. The Committee upon presentation of such information shall have twenty-one (21) days within which to consider the appropriateness of such change[s] and to present its views to the Department[,] and the ...

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