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PHARMACEUTICAL SOC. v. CUOMO

September 17, 1991

PHARMACEUTICAL SOCIETY OF THE STATE OF NEW YORK, INC., STILL'S PHARMACY, INC., RIIS-WALD PHARMACY, INC., AND M.F.K. DRUG CO., INC., PLAINTIFFS,
v.
MARIO CUOMO, GOVERNOR OF THE STATE OF NEW YORK, AND CESAR A. PERALES, COMMISSIONER, NEW YORK STATE DEPARTMENT OF SOCIAL SERVICES, DEFENDANTS.



The opinion of the court was delivered by: Kevin Thomas Duffy, District Judge:

MEMORANDUM & ORDER

Plaintiff, the Pharmaceutical Society of the State of New York, Inc., Still's Pharmacy, Inc., Riis-Wald Pharmacy, Inc., and M.F.D. Drug Co., Inc. (collectively, the "Pharmaceutical Society") commenced this action in 1976 against defendants Governor of the State of New York, and the Commissioner of New York State's Department of Social Services ("DSS") (collectively "the State"), challenging New York State's promulgation of regulations implementing a new Medicaid pharmacy reimbursement methodology. All parties to the action entered into a Settlement Agreement on July 5, 1978. This post-settlement action continues from a dispute as to whether the new methodology violated federal Medicaid reimbursement regulations promulgated by the United States Department of Health and Human Services ("HHS") and administered by the Health Care Financing Administration ("HCFA"). The following outlines a more detailed history of the post-settlement action.

PROCEDURAL HISTORY

On July 5, 1978, as part of a comprehensive settlement agreement ("Settlement Order"), the parties Stipulated ("the Stipulation") to a new methodology for drug reimbursements to pharmacies in New York State. The stipulation was so ordered by the court. In 1987, the State defendants unilaterally departed from the methodology outlined in the Stipulation, claiming that Federal law mandated the departure. Specifically, the federal government revised its pharmacy reimbursement regulations to implement aggregate upper limits ("AUL")*fn1 on medicaid reimbursements for certain defined medications. This meant that the State (and pharmacies) would be subject to a cap or ceiling on reimbursements. Additionally, federal subsidy could be severed were the State to formulate reimbursement calculations in excess that of the 1987 cap.

Subsequently, the State attempted by administrative regulation, to circumvent the reimbursement methodology required by the Stipulation. In response, the Pharmaceutical Society moved to compel compliance with the terms of the Stipulation. On February 28, 1988, I issued an injunction on behalf of Pharmaceutical Society, enjoining the State from implementing new methodologies not provided for by the terms of the Stipulation. Additionally, I found that new federal regulations merely established a reimbursement "cap," which the State could not exceed, and accordingly directed the State to abide by the terms of the Settlement Order.

The Second Circuit affirmed the injunction on September 2, 1988, stating that the Settlement Order required the State to consult with a pharmacy advisory committee ("PAC")*fn2 before implementing new regulations pursuant to the AUL method. However, the Circuit court did not preclude the State from formally moving to modify the Settlement Order. Familiarity with background and procedures to that date is assumed. For further explanation of the background in this case, see Pharmaceutical Soc. of New York, Inc. v. Cuomo, 856 F.2d 497 (2d Cir. 1988).

Pharmaceutical Society then moved pursuant to Fed.R.Civ.P. 70 for contempt relief against the State due to its continued failure to comply with the Stipulation. At a hearing held before me on September 19, 1989, the State was found to be in contempt of the Stipulation and 1988 injunction. I further ordered expedited discovery and that the governor be produced in order to determine which State officials were responsible for the contempt. As a result of my finding that it was in violation of the 1988 injunction, the State returned to the use of the reimbursement methodology mandated by the terms of the Stipulation. The State further agreed to make retroactive reimbursement to pharmacists in order to cure any violation of the injunction up until the hearing date. Subsequently, the State moved pursuant to Fed.R.Civ.P. 60(b), and 70 to modify the Stipulation in order to permit them to implement an upper limits or AUL methodology for multiple source drugs,*fn3 and to dissolve the 1988 injunction.

Pharmaceutical Society cross-moved pursuant to Fed.R.Civ.P. 60(b) for modification of certain provisions in the Stipulation. In addition, Pharmaceutical Society seeks attorney's fees and sanctions pursuant to Fed.R.Civ.P. 11.

On January 31, 1991, the Pharmaceutical Society again moved to enforce particular provisions of the Stipulation which it perceived the State as violating. On February 11, 1991, the State filed a motion pursuant to Fed.R.Civ.P. 19 for joinder of the Secretary of Health and Human Services ("HHS") and the Administrator of the Health Care Financing Administration ("HCFA") as indispensable parties to this litigation. In response to the motion for joinder, HHS asserted that it did not wish to be joined, but requested leave of court to submit an amicus curiae memorandum. I granted such leave, and HHS submitted its amicus memorandum on April 26, 1991.

DISCUSSION

The Medicaid program established by Title XIX of the Social Security Act is a cooperative federal-state program which was developed in order to furnish medical assistance to eligible low-income individuals. 42 U.S.C. § 1396 et seq. The program is jointly financed by the federal and state governments and is administered by the states. If a State chooses to participate in the federally created Medicaid program, it is enabled to include expenditures for prescription drugs among costs reimbursable by the federal government. 42 U.S.C. § 1396a(10)(A), 1396a(12). The federal share of Medicaid is known as federal financial participation ("FFP") and is only available if the Medicaid plan of a participating state has been approved by the HHS Secretary. Id.

A state can revise its state plan by submitting a proposed amendment for the Secretary's consideration. 42 U.S.C. § 1316(a)(2) and (3). While the Medicaid program is voluntary, states choosing to participate must submit a "state plan" that fulfills the requirements imposed by the Medicaid statute. Furthermore, the state plan must be approved by the HHS secretary. 42 U.S.C. § 1316(a)(1), 42 C.F.R. § 430.15. Thus, although states have considerable discretion to design and operate their individual programs, they must maintain their plans in compliance with federal requirements in order to insure federal funding. State of Louisiana v. HHS, 905 F.2d 877, 878 (5th Cir. 1990). Upon approval of the state plan, the state becomes entitled to its FFP reimbursement, a portion of which constitutes remuneration to pharmacies and other direct providers of services to Medicaid recipients. 42 U.S.C. § 1396b(a).

Detailed regulations exist for determining whether a state's plan complies with federal law and whether certain federal funding should be disallowed in the event of noncompliance. I am informed that in 1969, regulations were first promulgated governing the maximum expenditure for prescription drugs which a state may claim for the purpose of receiving certain participatory funding by the federal government. The upper limit was set as the lower of either (1) the cost of the drug to the pharmacist as defined by the state, plus a dispensing fee; or (2) the pharmacists' reasonable customary charges. 45 C.F.R. § 250.30(b)(2) (1970)

In 1976, the Secretary amended these regulations, which were in effect until 1986. The amended regulations recognized a distinction between drugs which are commonly dispensed through "multiple sources" or are available in generic form, and drugs which are described as "all others." For "all other drugs," reimbursement was predicated solely upon the estimated acquisition cost ("EAC"). 42 C.F.R. ยง 447.332(c)(1) (1986). EAC was defined by the Secretary as the participating state's best estimate of what price providers generally pay for a drug. On the other hand, reimbursement for multiple source drugs ...


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