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Executive Summary

Estimated Acquisition Cost (EAC) rates for reimbursing Medicaid Rxs should continue to be set by the states through formal rulemaking procedures, seven pharmacy and pharmaceutical assns. argued in a lawsuit filed Sept. 16, against HHS and the Health Care Financing Administration (HCFA). The complaint was filed in D.C. Federal Court by PMA, the American Pharmaceutical Assn. (APhA), the Natl. Assn. of Chain Drug Stores (NACDS), the Natl. Whsle. Druggists' Assn. (NWDA), the Natl. Assn. of Retail Druggists (NARD), the American Society of Hospital Pharmacists (ASHP), and the American Society of Consultant Pharmacists (ASCP). The complaint asks for a court order enjoining HHS and HCFA from causing the states to implement new reimbursement formulas on Oct. 1. A motion filed with the complaint requests that the govt. be made to reply within a week, by Sept. 23, so that oral arguments and a court decision can follow during the last week of September. HCFA's regional offices have told Medicaid agencies in several states to change their AWP-based reimbursement levels by Oct. 1 ("The Pink Sheet" July 22, T&G-9). A directive from HCFA to seek the changes followed an audit report by the HHS Inspector General last fall; the report concluded that the federal Medicaid program could save $128 mil. annually in matching grants if nine states reduced EAC formulas from AWP (average wholesale price) to direct cost or AWP minus a percentage ("The Pink Sheet" Oct. 29, T&G-2). In response to the suit, at least one HCFA regional office has deferred the Oct. 1 deadline. In a Sept. 18 letter to states in his region, HCFA's Region VI Administrator J.D. Sconce said federal matching grants would not be withheld for AWP-based reimbursements made between Oct. 1 and Dec. 31, 1985. "A lawsuit has been filed against the HCFA nationally, challenging implementation of the regulation governing drug ingredient EAC," Sconce wrote. "Because of this suit we do not intend to defer or disallow federal financial participation in payments made by states for drug ingredients' EAC for the October-December quarter. This rescinds our earlier stated intention of challenging federal financial participation for payments made using AWPs, beginning Oct. 1, 1985." Seven-Assn. Coalition Is Outgrowth Fruit Of Recent Cooperation Among Pharmacy Assns., PMA Key to the suit v. HCFA is the question of whether recent directives from HCFA to state Medicaid programs constitute a "rule" as defined by federal law. "The new federal formulas were preceded neither by prior publication in the (ITALICS)Federal Register of a notice of proposed rulemaking nor by the affording of interested persons the opportunity to participate in the rulemaking by submission of written data, views, or arguments prior to promulgation," the complaint says. "The new federal formulas are therefore unlawful." The Medicaid program's "published regulations do not establish a federal formula for EAC. To the contrary, EAC is specifically left to be determined by each state, as it has been since the inception of the Medicaid program," the assns. contend in their suit. By dictating new reimbursement formulas to states, HCFA is establishing a "rule" under the Administrative Procedures Act (APA), which requires "that an agency publish general notice of proposed rulemaking in the Federal Register and" allow opportunity for comment "prior to promulgation of a rule," the complaint states. The litigation marks an unusual unanimity among the various pharmacy and pharmaceutical assns. The groups have been working more closely in recent years, and their legal coalition represents the fruit of those preliminary cooperative efforts. In a memorandum accompanying the complaint, the assns. maintain that "an examination of the language of the APA itself . . . makes it clear that the changes set forth in HCFA's letters to the states constitute a rule." The memo points out that APA's definition of a rule includes the "prescription for the future of rates . . . prices . . . services, or allowances therefor, or the valuations, costs, or accounting or practices bearing on any of the foregoing." By requiring states to change from EAC to actual acquisition costs, HHS and HCFA "ignored the APA and imposed its decision on the states and on providers," the assns. said. Furthermore, it is clear that the federal formulas are "binding on the states," the memo asserts. "Any state daring enough to continue to use is own methodology, and to reimburse providers at a rate higher than AWP-minus or direct pricing, will find itself minus its share of federal funds for monies already disbursed." HCFA's regional offices recently informed state agencies that federal matching grants will be reduced if the states do not change their AWP-based formula; the regions said the reduction would equal the difference between the AWP and the actual cost of each Rx. Two times previously, HHS has proposed a federal definition for drug ingredient cost, the complaint points out: initially, when the Medicaid regulations were published in 1969; subsequently, when they were amended in 1974. Each time, after notice-and-comment rulemaking procedures, "the use of a federal formula based on actual acquisition cost" was rejected, and the states were ordered to determine ingredient costs, the assns. said. The complaint specifically asks the court for an order "(1) declaring the new federal formulas set forth in the HCFA letters to be a rule, and unlawful because adopted without prior notice and comment; (2) preliminarily, and permanently enjoining defendants from adopting, enforcing, or implementing the new federal formulas . . .; (3) ordering defendants to notify all the states which have previously received the HCFA letters that the new federal formulas need not be implemented; and (4) granting such other and further relief as the court may deem just and proper." Assns.' Lawyer Buc Distinguishes Court Effort (On Procedure) From Legislative Effort (On Merits) The assns. announced the complaint at a Sept. 17 press conference, and execs of the organizations were seated together on a dais when the question was raised as to whether the sevenassn. coalition was a first. ASHP Exec VP Joseph Oddis, the senior panel member in tenure at his assn., replied: "As far as I am aware, this is the first time in my memory that pharmacy is united in this fashion -- - pharmacy being in this case not only practitioner organizations, but industry as well." However, Oddis added, "it's not a difficult thing to unite on; it's a matter of principle." Nancy L. Buc of the D.C. law firm Weil Gotshal & Manges was introduced at the conference as the lead attorney in the complaint. The former FDA chief counsel said that pharmacy's effort to win injunctive relief in court is separate from its search for legislative relief in Congress. "We're not arguing in this lawsuit about what the law is with regard to what HCFA should be doing"; that tack is being tried in Congress, Buc said. "We're arguing ]in court[ about whether they should hold a rulemaking. That's quite a different issue, and I think both the judge and the Congress generally will understand that they're separate issues and that the one needn't influence the other necessarily." Since early in the year, pharmacists and state assns. have been contacting local congressmen to explain how HHS-proposed changes in reimbursement formulas would hurt the profession. Senators and representatives from states in HCFA Regions VI and VIII have been the prime focus of lobbying by pharmacy. During a recent Senate Appropriations Cmte. markup Sens. Bumpers (D-Ark.) and Johnston (D-La.) sponsored report language which was passed and indicated that HCFA should now disallow AWP-based EACs by states for reimbursement. Arkansas and Louisiana are Region VI states. In response to a question, Buc disputed the contention that the formula changes are legal under regulations requiring EACs to be based on prices providers actually pay for Rx drugs. If HCFA "had taken the Inspector General's report and asked each of the states to take a look -- as they're required to do when they set reimbursement rates -- by holding a rulemaking of their own, I think we would have had then to go and participate in whatever rulemakings they had," she said. "But they didn't do that," Buc continued. "Instead, they just ordered the states to use a new formula. That's something they can't do."

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