Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Oklahoma Department of Human Services
DATE: August 13, 1991
Docket No. 90-164
Decision No. 1271
DECISION
The Oklahoma Department of Human Services (Oklahoma or State) appealed
a
determination of the Health Care Financing Administration, Region
VI
(HCFA), disallowing $848,758 claimed by the State under Title XIX of
the
Social Security Act (Medicaid). The disallowed amount represented
the
federal share of certain prescription drug payments made by the
State
between April 1, 1989 and October 31, 1989, which HCFA said
exceeded
amounts allowable under HCFA regulations and the State's own
Medicaid
State plan.
Based on our review of the record, we conclude that the drug
payments
exceeded amounts allowable under HCFA regulations and we
therefore
uphold the disallowance in principle. We also conclude,
however, that
the amount of the disallowance must be recalculated because
HCFA should
have used as a dispensing fee an amount that corresponded to
the
estimated acquisition cost that HCFA adopted for the disallowance.
I. Background
A. Requirements for drug payments
Section 1902(a)(30)(A) of the Social Security Act requires state
Medicaid
plans to provide methods and procedures "to assure that
payments are
consistent with efficiency, economy, and quality of care."
Rules published in
July, 1987, and in effect throughout the period
involved here, control
payments for drugs under Medicaid. 42 C.F.R.
447.331 et seq. For
some drugs, HCFA lists specific payment limits.
For unlisted drugs and
certain others, all called "other drugs," a
state's payments --
. . . must not exceed in the aggregate, payment levels that
the
[state] agency has determined by applying the lower of the
--
(1) Estimated acquisition costs plus
reasonable
dispensing fees established by the [state]
agency; or
(2) Providers' usual and customary charges to
the
general public.
42 C.F.R. 447.331(b).
Determining "estimated acquisition costs" (EAC) and "reasonable
dispensing
fees" is the subject of this dispute. The EAC is defined in
42 C.F.R.
447.301 as the state's "best estimate" of the price generally
and currently
paid by providers for a drug. If we agree with HCFA that
the
appropriate EAC was selected, the reasonableness of HCFA's choice
for the
dispensing fees added to the EAC becomes an issue.
B. Drug pricing generally
There is a history of concern in the Medicaid program about
controlling
costs of drugs. 1/ One problem was states' use of the
"average
wholesale price" (AWP) of drugs as a measure of acquisition
cost. The
"wholesale" element could be quite misleading, because there
were sales
promotions, allowances and discounts which reduced the actual
prices
pharmacists paid below the AWP.
A federal audit conducted in 1983 in six states (not including
Oklahoma)
showed that pharmacists' drug costs averaged about 16 percent below
the
AWP, and that in only 14 of 3,469 purchases examined did providers
pay
the AWP or higher (and then for extenuating reasons). HCFA's
Appeal
File, Exhibit (Ex.) G, p. 4. In 1984, this report was
distributed to
all state agencies through Medicaid Action Transmittal 84-12,
which
noted that states should "make a greater effort to determine
more
closely the price pharmacists pay for drugs rather than using
AWP."
Id., cover memo.
A subsequent HCFA review of pharmacists' drug costs in Oklahoma in
1984
(using data from an independent pharmacy, a volume discount store and
a
chain store) showed that actual acquisition costs on average were
16.3
percent below the State's EAC, which at that time was based on the
AWP.
2/ State's Appeal File, Ex. 1, p. 4.
Before us, currently, Oklahoma did not dispute HCFA's policy that
"AWP
generally is not an appropriate estimate of acquisition costs."
State's
Reply Brief, p. 5. A court has held that HCFA may properly deny
a
Medicaid state plan amendment which proposes to set a state's EAC at
AWP
in the absence of a showing that AWP is in fact that state's
"best
estimate" of the price generally and currently paid. Louisiana v.
U.S.
Dept. of Health and Human Services, 905 F.2d 877 (5th Cir. 1990).
C. How this dispute arose
From 1983 until recently, Oklahoma's Medicaid State plan had provided
only
that the EAC was "as established by the State." HCFA's Appeal
File, Ex.
A. This provision, of course, merely begged the question.
We
infer that Oklahoma for some time had relied on the AWP as the basis
for
its EAC.
Based on the findings, discussed above, that use of the AWP produced
an
inflated EAC in Oklahoma and elsewhere, HCFA in 1984 recommended
to
Oklahoma that it change its approach and reduce its EAC. State's
Appeal
File, Ex. 1, p. 4. Oklahoma did not do so at the time.
Id., Ex. 2.
It is not clear whether HCFA pursued the matter then. However,
Oklahoma
revitalized the issue when it submitted a state plan amendment
in
October, 1987, which, although it made other changes in drug
payment
methodology, specifically would have continued use of an EAC
"as
established by the state." HCFA's Appeal File, Ex. B. HCFA
challenged
the State to describe comprehensively how an EAC (and other
elements of
the payment methodology) were established. Id., Ex. C.
In response, in March, 1988, Oklahoma revised its plan amendment
to
specify that "the Average Wholesale Price (AWP) as provided by a
pricing
resource contractor is accepted as our Estimated Acquisition
Cost
(EAC)." Id., Ex. D. In June, 1988, HCFA disapproved this
amendment,
reiterating that evidence showed that the AWP significantly
overstated
providers' drug costs. Id., Ex. E.
Nevertheless, with the plan amendment disapproved, Oklahoma
reimbursed
pharmacists on the basis of 100 percent of AWP as the EAC,
throughout
the period in question here. HCFA's Brief, pp. 2-3; State's
Brief, p.
12.
Eventually, a plan amendment was retroactively approved which covered
the
period of the disallowance. Following are the circumstances
surrounding
that amendment.
By letter of February 8, 1989, HCFA's Regional Administrator said
the
following to Oklahoma:
As evidenced by the Administrator's disapproval of your
[plan
amendment] and previous correspondence between your agency
and
ours, it continues to be our position that use of
the
non-discounted average wholesale price (AWP) as published
in
national compendia results in significant overpayments
to
pharmacy providers. Therefore, the State of Oklahoma
is
operating its vendor drug program and claiming Federal
financial
participation (FFP) without an approved State Plan which
meets
Federal requirements.
If you have not submitted and implemented an acceptable
State
Plan amendment by April 1, 1989, we will begin to defer
the
Federal share of prescribed drug expenditures . . . .
State's Appeal File, Ex. 4.
In April, 1989, Oklahoma submitted a plan amendment which HCFA
questioned
at first but eventually approved (in March, 1990) with an
effective date of
February 1, 1989. Id., Ex. 5: HCFA's Brief, pp. 3-4.
The
amendment thus was in effect for the period in question here.
State's Brief,
p. 3. This amendment was not self-implementing; it
included the
following provision:
The EAC to be used for the purchase of prescription
drug
products is established at a percentage of the Average
Wholesale
Price (AWP) as defined by the American Druggist Blue
Book. The
percentage is determined by the Rates and Standards
Committee of
the [State's] Department of Human Services after public
hearings
and submission of evidence. The criteria used to
establish the
percentage of AWP includes periodic surveys of pharmacies
to
determine actual acquisition cost . . . . The recommendation
of
the Rates and Standards Committee regarding the EAC
and
dispensing fee is presented to the Commission for Human
Services
for their approval prior to implementing the change.
State's Appeal File, Ex. 5, 3rd page ("page 7") (emphasis added).
The April amendment was submitted with a letter from the State
indicating
that the Rates and Standards Committee was meeting "to
determine an
appropriate percentage" of the AWP to be used in
establishing the EAC.
Id., last document in exhibit. Indeed, in March,
July, October, and
December, 1989, the State's Medical Services Division
made four successive
written presentations to the Rates and Standards
Committee.
The first presentation to the Committee recommended that the EAC be set
at
90 percent of AWP, and the next three recommended an EAC of 89.5
percent of
AWP. There were variations in recommended dispensing fees to
be added
to the EAC; all of the recommended dispensing fees were higher
than the
existing one. Id., Exs. 6, 8, 9 and 10. These presentations
were
all short and similar, even repetitive; the record discloses
little
about what the Committee was doing in response or why it took so
long to
respond. 3/ The March, July and October presentations all noted
the
potential of loss of federal funding if the EAC was not changed, and
the
December presentation noted that deferrals had begun.
In December, 1989, the State notified HCFA that the Rates and
Standards
Committee had submitted, and the Human Services Commission had
approved,
an interim EAC, to be effective November 1, 1989. The new EAC
was 90
percent of the AWP (with a dispensing fee of $4.83). Id., Ex.
11.
Later, in March, 1990, the State reduced the EAC to 89.5% of the
AWP
(with an increase in the dispensing fee to $5.10). Id., Ex.
13. Our
record does not indicate any HCFA challenge to these actions or
their
calculation bases.
HCFA disallowed costs for the period from April through October, 1989.
The
amount disallowed apparently represented the difference between the
AWP and
the AWP discounted by ten percent. 4/
HCFA's position basically was that an undiscounted AWP had been
impeached
and was unreasonable throughout this period in the absence of
any evidence
showing otherwise, and that the State had adopted a
discounted AWP under a
plan provision submitted in April, 1989 and
subsequently approved effective
as of February, 1989. Thus, said HCFA,
payments at the undiscounted AWP
level between April 1, 1989 and October
31, 1989 (when Oklahoma began using
the discounted AWP) were
unreasonable and not in compliance with 42 C.F.R.
447.331(b).
II. Analysis
A. Issues related to the EAC
Oklahoma argued that the provision in its approved state plan
amendment
setting the EAC at a "percentage" of the AWP effective April 1,
operated
as it was supposed to, and reasonably could be read to authorize
payment
of the full AWP amount because the term "percentage" may include
100
percent. The State argued essentially that we should accept the
State's
interpretation of its own plan, consistent with Board
precedent. HCFA
argued that the provision strongly implied, if not
compelled, payment of
a lower amount than 100 percent of AWP. State's
Reply Brief, p. 7;
HCFA Brief, p. 13.
We find that the State plan does not compel overturning the
disallowance,
on the following bases:
1. It is true that the Board generally will afford
some
deference to a state's reasonable interpretation of its own
plan
provisions. See, e.g., South Dakota Dept. of Social
Services,
DAB No. 934 (1988). There is, of course, nothing in
Board
precedents which holds that a state's strained or
unreasonable
interpretation has precedence over a reasonable and
well-founded
interpretation by the federal administering agency.
We find
Oklahoma's reading to be quite strained. In terms of
ordinary
usage, common sense, and -- most important -- the history
and
context in which the plan provision was developed and
operated,
it is considerably more reasonable to read the language
as
contemplating an EAC of less than the full AWP. The reason
the
plan provision was developed in the first place was to
respond
to substantial evidence, coupled with longtime urging from
HCFA,
about the need to discount the AWP in the absence of
particular
evidence showing that a 100 percent AWP was the State's
"best
estimate" of drug prices.
2. In any event, the clear language of the State plan did
not
actually set any figure as the EAC; it established a process
for
setting a figure. Reaching that result, however, took a
long
time. HCFA's regulations required a "best estimate" of the
EAC,
and mere leisurely implementation of a process was not
a
permissible end in itself. HCFA's letter of February 8,
1989
(State's Ex. 4) had demanded that a revised plan amendment
be
developed and implemented by April, and the objective was
to
produce an acceptable EAC.
3. Developing a "best estimate" of an EAC clearly requires
at
least some minimal assessment and determination of actual
drug
costing practices. We note that 42 C.F.R. 447.333,
effective
October 29, 1987, required each state to make findings
and
assurances that its expenditures are in accordance with
447.331
and to maintain records to support its findings and
assurances.
Oklahoma presented no evidence that it had meaningfully
or
systematically reviewed drug pricing for years, if ever,
prior
to late 1989; even in 1984, when Oklahoma rejected HCFA's
call
for a discounted AWP, the State provided no more than
conclusory
disagreement based largely on historical patterns elsewhere
that
HCFA had already impeached. Thus, Oklahoma was not
using
anything reasonably close to a "best estimate" of the EAC,
and
the record shows no more than a passive and
recalcitrant
reliance on the AWP.
4. Beginning in March, 1989, almost a month before
HCFA's
deadline, the State's Medical Services Division urged an EAC
of
90 percent of AWP, providing a basis for the figure and
warning
of consequences if action was not taken. The urging and
warning
were repeated thereafter. All of this occurred in a
context
where the need for a revised determination on the EAC had
been
clear to the State for months, if not years. HCFA had
stated
its demand for a determination, and the potential
consequences,
clearly. The delay certainly was associated with
the
organizational bifurcation of the State's EAC
decision-making
process. There is nothing in the record to show
that the Rates
and Standards Committee was performing any substantial
rate
review activities which justified the delay. In fact,
the
record suggests that the Committee was rather passive,
merely
taking the position that it did not have sufficient
information
to mandate use of a discounted AWP. State's Brief, p.
12. This
hardly is consistent with the obligation under
regulations to
produce a "best estimate" of costs and the obligation
under the
State plan to determine the percentage of the AWP.
Furthermore,
HCFA need not be placed entirely at the mercy of internal
state
bureaucratic divisions, processes and unjustified delays
over
which HCFA has no control. There was also no contention
that
the State could not have implemented the
Committee's
recommendation retroactively.
5. Oklahoma argued that HCFA's approach here would have
a
chilling effect on a state studying or recommending an
increase
in the discount against AWP. State's Brief, pp.
13-14. We
believe, however, that such a fear would be
unwarranted. The
circumstances here are unusual and perhaps
unique, reflecting as
they do a particular plan provision and
history.
Thus, we reject Oklahoma's argument that its plan provision
reasonably
required payment of 100 percent of AWP during the period in
question.
B. Issues related to the dispensing fee
The State also argued that, even if its use of AWP as EAC
violated
applicable regulations because it was not its "best estimate" of
EAC, it
was still possible that the State's reimbursement level did not
exceed
the "upper limit" requirements of section 447.331(b). (The upper
limit
is the payment derived by paying the lower of either EAC plus
a
reasonable dispensing fee or the usual and customary charge.) The
State
maintained that HCFA had implicitly recognized that there
was
necessarily a connection between the EAC and the "reasonable"
dispensing
fee, such that states and providers could understandably expect
that
adoption of a lower EAC would correspond to a higher dispensing fee
to
cover, e.g., overhead expenses that had been previously included in
EAC
when it was set at undiscounted AWP. The State produced several
studies
prepared to support the discount ultimately selected by its
Commission,
all of which supported a higher dispensing fee than the $3.55
used by
HCFA in calculating the disallowance. Oklahoma argued that the
most
appropriate EAC plus dispensing fee to be applied in this case
assuming
that a different rate had to be set for this period, was 89.5
percent
AWP plus $5.10, the reimbursement rate adopted as of March 1990; at
this
rate, the State's expenditures for other drugs during the
disallowance
period would have exceeded the amount actually paid. Thus,
the State
contended that this amount was the "upper limit," and that
therefore no
disallowance was warranted here.
Since HCFA did not respond directly to this argument in its
response
brief, and since the disallowance letter did not specify HCFA's
reasons
for choosing the dispensing fee of $3.55, the Board issued an Order
to
Develop the Record directing HCFA to explain its choice of
dispensing
fees. Specifically, we suggested to HCFA that it might be
appropriate
to use the dispensing fee of $4.83 that was adopted by the
State
effective November 1989 and thus corresponded to the EAC that HCFA
used
in its disallowance. HCFA's reply was that there was no authority
for
use of any dispensing fee other than the one that was specifically
in
effect during the period (despite the fact that HCFA had used an
EAC
that was not specifically in effect during the period).
HCFA's
Response to Order to Develop Record, pp. 2-3. HCFA did not,
however,
counter any of the State's arguments that EAC and dispensing fee
were
meant to be considered together. It appears inconsistent and
arbitrary
for HCFA to chose to implement only one-half of the reimbursement
rate
adopted by the State at the end of the disallowance period.
Oklahoma reacted to the Board's order and HCFA's reply with a
reiteration
of its contention that the appropriate method for
recalculating the upper
limit of drug reimbursement in this case was to
use 89.5 percent AWP plus a
$5.10 dispensing fee.
As discussed above, we agree with HCFA's decision to use the first
duly
adopted discount rate for the period immediately preceding it.
That
rate was established in October 1989, effective November 1989.
State's
Appeal File, Tab B, para. 6. We do not agree with the State
that the
rate adopted in March 1990 should be implemented instead. For
the
reasons stated above for use of the November 1989 EAC, and for
the
reasons stated below, we conclude that the more appropriate solution
is
to adopt the corresponding reasonable dispensing fee finally chosen
by
the State at the same time -- $4.83.
As noted, HCFA essentially left undisputed Oklahoma's strong showing
that
it was logical and even expected by HCFA that these two pricing
components
would be linked. State's Appeal Br., pp. 15-23; State's
Appeal File,
Ex. 12. For example, HCFA did not even discuss the State's
evidence
that the undiscounted AWP had effectively accounted for certain
overhead
costs that could appropriately be included in the dispensing
fee component of
the reimbursement rate. See Id., Tab C. The terms of
the State
plan clearly provide that both pricing components would be set
by the same
entity at the same time. The record shows that the
State's
recommendations to its Committee and the Committee's
actions
consistently linked the two components. Having chosen the
recommended
and adopted EAC, HCFA bore a burden of showing a reasonable basis
for
refusing to use the dispensing fee recommended and adopted
as
"reasonable" in conjunction with that EAC. Furthermore, the
dispensing
fee adopted by HCFA had not been changed since 1981. Id.,
Ex. 1, p. 2.
The $4.83 figure adopted by Oklahoma in December 1989 reflected
an
adjustment to that old rate based on the consumer price index. Id.,
Tab
B, para. 6.
On the other hand, although the State ultimately adopted the
dispensing
fee and a discount level that is now urged by the State as the
correct
reimbursement rate for the period, that rate was not adopted until
a
year after the beginning of the period in question, a full year
after
HCFA demanded that the State bring itself into compliance. Again,
we do
not wish to tax HCFA with the costs of the State's
unexplained
bureaucratic delay. In addition, adoption of the first
reimbursement
rate chosen by the State after the disallowance period would
avoid both
the possible "chilling effect" on states changing their
reimbursement
rates, which the State suggested would result from HCFA's
adoption of a
new rate for an earlier period, and the potential harm caused
by
acceptance of the State's leisurely pace of change.
We therefore conclude that the appropriate dispensing fee for the
period
in question here is $4.83.
Conclusion
Based on the analysis above, (a) we uphold HCFA's disallowance
in
principle, finding that HCFA reasonably established the EAC for
the
disallowance period at 90% of AWP; but (b) we also find that HCFA
should
have established the accompanying dispensing fee at the
level
corresponding to the 90% EAC, which was $4.83. Therefore, we
remand
this case to HCFA for a determination of the amount of the
disallowance
which remains after this reduction. If the State disagrees
with how
HCFA recalculated the disallowance amount, the State may return to
the
Board, within 30 days after receiving HCFA's notice, on the
limited
question of the recalculation.
_____________________________ Judith A. Ballard
_____________________________ Alexander G. Teitz
_____________________________ Norval D. (John) Settle
Presiding
Board Member. 1. Rules limiting drug expenditures were
first
promulgated in 1969. See discussion in HCFA's Brief, p. 4.
In the
mid-1970's, HCFA had proposed to limit payment to actual
acquisition
costs, apparently to counter the practice of using the average
wholesale
price in national drug pricing publications. Determining
actual costs
was burdensome, however, and the agency ultimately decided to
specify
use of estimated costs in its regulations (but HCFA rejected
the
suggested use of the average wholesale price, on the basis it
produced
an inflated figure). Disallowance Letter, pp. 1-2;
HCFA's Brief, p. 7
and cited materials. In 1987, the current
rules were adopted; among
the changes, the rules applied limits on an
aggregate rather than
drug-specific basis.
2. At the time, the State responded that this survey was
misleading
because the pharmacies reviewed were all in the metropolitan area
of
Oklahoma City and thus did not represent rural areas. State's
Appeal
File, Ex. 2, p. 2. However, while the location of the pharmacies
might
perhaps have affected the size of discounts offered, there was
no
question that discounts were generally available. The federal
auditors'
review of this issue in six other states had concluded that:
. . . neither the location nor size of the towns in which
the
pharmacies were located, nor the types of ownership,
affected
the availability of the discounts. Purchase discounts
were
available and were taken by pharmacies in all areas of
the
selected states, regardless of population, by both
chain-owned
and independently-owned pharmacies.
HCFA's Appeal File, Ex. G, p. 4.
3. The State presented an affidavit from the person who was head of
the
State's Committee on Rates and Standards during the period in
question.
He stated that, in response to the State's first two presentations
in
March and July 1989, the Committee "determined there was
insufficient
information to justify a change," and that "we were also aware"
that
HCFA's earlier conclusion that AWP was inflated "had looked at a
very
limited and uncharacteristic sample of pharmacies." State's
Appeal
File, Tab B, Para. 4 (As described in footnote 2 above, HCFA
presented
observations to the contrary at the time.). In October, 1989,
the
Committee decided to recommend a discounted AWP because of surveys
in
other states showing that pharmacies were receiving discounts in
the
range of ten percent. Id., Para. 6. Also, the Committee heard
that in
August, HCFA had revised the State Medicaid Manual to prohibit use
of
AWP without a significant discount. State's Brief, pp. 5-6.
Later, the
ten percent figure was changed to 10.5 percent, apparently in
response
to a report by an accounting firm. State's Appeal File, Tab B,
Para. 7.
4. The actual amount disallowed represents the federal share of
about
six percent of the total spent by the state for other drugs during
the
period in question. Disallowance Letter, last page. It is not
clear
how this amount relates to the EAC which HCFA attributed to the
period
(presumably, the total of drug payments included payments for some
drugs
which were listed or otherwise not included among "other drugs" to
which
the EAC would be applicable). In any event, the State did not
contest
the actual