Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Pennsylvania Department of Public Welfare
DATE: January 26, 1996
Docket No. A-95-65
Decision No. 1557
DECISION
In this case, we have consolidated a new appeal by the
Pennsylvania Department of Public Welfare (Pennsylvania)
with an appeal reopened as permitted by the Board's
decision in Pennsylvania Dept. of Public Welfare, DAB No.
1315 (1992). Both appeals involve disallowances by the
Health Care Financing Administration (HCFA) of claims for
federal financial participation (FFP) in certain drug
payments under the Medicaid program. HCFA determined
that Pennsylvania had exceeded the upper limits on those
payments applicable to two separate time periods. The
threshold issue addressed in this decision is how to
determine what constitutes a "reasonable dispensing fee
established by" the Pennsylvania State Medicaid agency,
for purposes of calculating the applicable upper limits.
HCFA argued that, under the regulations and the Board's
prior decision, the dispensing fee amounts Pennsylvania
used in providing assurances that it would not exceed the
upper limit are controlling. Pennsylvania argued that
neither DAB No. 1315 nor the applicable regulations
prohibited Pennsylvania from establishing retroactively
for each period that a greater amount was reasonable as a
dispensing fee, and that it would be unfair to preclude
Pennsylvania from doing so.
For the reasons stated below, we reject Pennsylvania's
arguments. We conclude that the applicable regulations
required Pennsylvania to establish a reasonable
dispensing fee prior to or at the time of providing its
assurances, that the amounts stated in the assurances for
each disallowance period control here, and that it is
irrelevant that a greater amount might also have been
considered reasonable. Accordingly, we uphold the
disallowance for the first period to the extent that
Pennsylvania's payments for these drugs for that period
exceeded the upper limit calculated using $3.50 as the
reasonable dispensing fee. We uphold the disallowance
for the second period to the extent that these drug
payments for that period exceed the upper limit
calculated using $4.50 as the reasonable dispensing fee.
As discussed below, these amounts total $3,681,791.
Background
On June 21, 1991, HCFA disallowed $2,780,538 in federal
funds for Pennsylvania's Medicaid program for 1987-88 on
the ground that Pennsylvania had exceeded the regulatory
upper limit for multiple source drugs. Multiple source
drugs are those drugs which are "marketed or sold by two
or more manufacturers or labelers or a drug marketed or
sold by the same manufacturer or labeler under two or
more different proprietary names or both under a
proprietary name and without such a name." 42 C.F.R.
447.301. 1/ HCFA regulations at 42 C.F.R. 447.304
provide that FFP under Medicaid is available in
expenditures for drug payments that do not exceed the
upper limits. Except for certain brand name drugs,
payments by a State Medicaid agency for multiple source
drugs "must not exceed the amount that would result from
the application of the specific limits established in
accordance with 447.332." That section provides that
HCFA will establish and publish a list identifying set
upper limits for multiple source drugs, identifying the
sources used in compiling these lists. 42 C.F.R.
447.332(a). It further provides that--
the [state Medicaid] agency's payments for multiple
source drugs . . . must not exceed, in the
aggregate, payment levels determined by applying for
each drug entity a reasonable dispensing fee
established by the agency plus an amount established
by HCFA that is equal to 150 percent of the
published price for the least costly therapeutic
equivalent . . . .
42 C.F.R. 447.332(b)(emphasis added).
A state must provide assurances, "at least annually,"
that "[i]n the aggregate, its Medicaid expenditures for
multiple source drugs identified and listed in accordance
with 447.332(a) are in accordance with the upper limits
specified in 447.332(b) . . . ." 42 C.F.R.
447.333(b)(emphasis added). States are required to
maintain and make available to HCFA, upon request, data,
mathematical or statistical computations, comparisons and
any other pertinent records to support their findings and
assurances. 42 C.F.R. 447.333(c).
Pennsylvania's assurances for 1987-88 used $3.50 as the
dispensing fee amount for calculating the upper limit,
but Pennsylvania paid an actual dispensing fee of only
$2.75 per prescription. HCFA calculated the disallowance
by subtracting the total amount which the state Medicaid
agency paid pharmacists for multiple source drugs for
1987-88 from the aggregate total of the federal
regulatory amount for each multiple source drug dispensed
(which HCFA calculated under 42 C.F.R. 447.332(b)),
plus a $2.75 dispensing fee for each prescription.
Pennsylvania argued in its first appeal to the Board that
$3.50 was a reasonable dispensing fee for prescriptions
in Pennsylvania during 1987-88 because it was the median
dispensing fee for all states during that period.
The Board addressed this disallowance in Pennsylvania
Department of Public Welfare, DAB No. 1315 (1992). The
Board concluded that, under the regulations, a state
could establish a reasonable dispensing fee for purposes
of the upper limit that was an amount other than the
actual dispensing fee paid to pharmacists. The Board
further concluded, however, that the mere fact that $3.50
was the median dispensing fee for all states was not
sufficient to show that that amount was a "reasonable"
dispensing fee, established for Pennsylvania in
accordance with the regulations. The Board noted that
states were clearly required to have some documentation
and analysis to show that a state's dispensing fee is in
fact reasonable (that is, reflects actual costs of
dispensing drugs in the state) since states are required
to maintain documentation supporting their assurances.
The Board determined that Pennsylvania had failed during
Board proceedings to provide sufficient documentation to
show that $3.50 was, in fact, a reasonable dispensing
fee, as Pennsylvania had alleged. Absent such evidence,
the Board found that HCFA's use of Pennsylvania's actual
dispensing fee in calculating the disallowance was
reasonable. Thus, the Board upheld the disallowance in
full, subject to a later reduction "if the State
furnishes documentation to HCFA which establishes the
reasonableness of this [$3.50] fee (or some lesser amount
which exceeds the [$2.75] fee actually paid)." DAB
No. 1315 at 2; 13-14. The Board's decision indicated
that Pennsylvania could return to the Board if
Pennsylvania timely submitted documentation which HCFA
rejected in whole or in part.
Subsequent to the Board's decision, Pennsylvania
presented documentation to HCFA which Pennsylvania
asserted showed that an amount in excess of $3.50 was a
reasonable dispensing fee for 1987-88 and that the
disallowance for this period should accordingly be
reduced. HCFA did not find this evidence persuasive and
did not reduce the disallowance. In the meantime and
after several exchanges of documents between the parties,
HCFA proposed to disallow $6,308,053 in FFP for
Pennsylvania's Medicaid program for the following year
(1988-89), on the ground that Pennsylvania had again
exceeded the regulatory limit for multiple source drugs.
2/ HCFA again calculated the disallowance using the
$2.75 per prescription actual dispensing fee. On April
22, 1994, HCFA offered to recalculate the disallowance
for 1988-89 based on acceptance of a $3.50 per
prescription fee. On May 12, 1994, HCFA sent a final
report to Pennsylvania recommending the disallowance; the
cover letter accompanying the report invited Pennsylvania
to provide documentation to HCFA to establish the
reasonableness of a dispensing fee of $4.50, the amount
used in Pennsylvania's assurances for 1988-89. 3/ In
response, Pennsylvania presented documentation to HCFA
which it asserted shows that $6.84 was a reasonable
dispensing fee for the 1988-89 year. HCFA rejected this
evidence and issued a final disallowance for this period.
Pennsylvania appealed this disallowance to the Board and
also sought to reopen its appeal addressed in DAB No.
1315. The Board ruled that Pennsylvania was not
precluded from reopening its appeal, although the ruling
noted that Pennsylvania might be limited by DAB No. 1315
in the issues to be addressed.
Based on evidence which Pennsylvania had not previously
submitted to HCFA but provided for the first time in its
new appeal file, HCFA determined that $3.50 and $4.50
were, in fact, reasonable dispensing fees for the years
1987-88 and 1988-89, respectively. HCFA lowered the
disallowance from $2,780,538 to $1,509,498 for 1987-88
and from $6,757,991 to $2,172,293 for 1988-89. 4/ These
amounts total $3,681,791. Pennsylvania continued to
challenge the reduced disallowances. Pennsylvania sought
an extension of time to permit it to obtain the results
of a new study it had commissioned and an opportunity for
a hearing, but agreed that the Board should address the
threshold legal issues first.
Analysis
The major issue to be addressed here is whether, in
determining what constitutes a "reasonable dispensing fee
established" by the Pennsylvania State Medicaid agency,
Pennsylvania is limited to the $3.50 and $4.50 amounts
used in its assurances, or should be permitted to provide
evidence to show that actual costs of dispensing drugs in
Pennsylvania support higher amounts as reasonable.
Pennsylvania argued that the Board's decision in DAB No.
1315 did not address the issue raised here, that nothing
in the regulations prohibited Pennsylvania from now
establishing that higher amounts than what it gave in its
assurances were reasonable, and that it would be unfair
to preclude Pennsylvania from providing evidence of the
reasonableness of higher amounts, under the circumstances
here.
We address each of these arguments below and state why we
conclude that none of these arguments has merit.
1. DAB No. 1315 read the regulations as requiring that
a state establish a reasonable dispensing fee amount
prior to or at the time of providing its assurances.
The Board did not directly address in DAB No. 1315 the
question raised here. The major issue addressed in that
decision was whether the upper limit had to be calculated
using the $2.75 prescription fee actually paid, as HCFA
had alleged. Pennsylvania had argued that the
calculation should be made using instead the $3.50, and
had presented evidence that Pennsylvania had used this
amount as a reasonable dispensing fee amount in providing
its assurances. DAB No. 1315, at 4. Pennsylvania did
not argue then that it had established, or could
establish, a higher amount as reasonable. 5/
In DAB No. 1315, the Board stated that the regulation
implies "that there has been some formal determination of
an appropriate dispensing fee." DAB No. 1315, at 9. The
Board rejected HCFA's position that the dispensing fee
must be the amount paid, holding that the "submission of
assurances which adopt another dispensing fee for
purposes of calculating the upper limit can also be
viewed as establishing a reasonable dispensing fee." Id.
The Board's analysis, however, clearly indicated that
substitution of the $3.50 for the $2.75 would be
warranted only if Pennsylvania had both used that amount
in its assurances, and had established that amount as a
reasonable dispensing fee amount by documenting that it
was reasonable based on actual dispensing costs. The
Board pointed to the recordkeeping requirement at
447.333(c) of the regulations as requiring documentary
support for a state's findings and assurances, including
the reasonableness of the dispensing fee amount
established. Implicit in this analysis was the
conclusion that the reasonable dispensing fee had to have
been established prior to or at the time the assurances
were provided.
The Board's decision clearly contemplated that the
limited opportunity given to Pennsylvania to provide
documentation on the reasonableness issue related to the
reasonableness of the $3.50 figure used in Pennsylvania's
assurances. Moreover, the Board's decision accepted
Pennsylvania's position that the $3.50 might qualify as a
"reasonable dispensing fee established by" Pennsylvania,
within the meaning of 447.332(b), only because that
amount had arguably been determined reasonable by
Pennsylvania in advance. The Board noted:
A different situation would be presented if the
State had not suggested a $3.50 dispensing fee until
it became apparent that the State had exceeded the
upper payment limit using the $2.75 actually paid.
We agree with HCFA that it would be inappropriate
under these circumstances . . . to view the $3.50 as
the dispensing fee "established" by the State.
DAB. No. 1315 at 9-10, n. 8. This clearly implies that
the Board would view an attempt to establish a reasonable
dispensing fee amount after a disallowance was taken as
inconsistent with the regulations.
Thus, we agree with HCFA that Pennsylvania's attempt here
to adopt an amount higher than $3.50 as a "reasonable
dispensing fee established" by Pennsylvania for 1987-88
is inconsistent with DAB No. 1315.
2. Pennsylvania's position here is inconsistent with
the regulations.
Analysis of the applicable regulations and their history
supports the conclusion implicit in DAB No. 1315 that the
upper limit should be calculated using a reasonable
dispensing fee amount established prior to or at the time
of a state's assurances.
The upper limit regulations serve two purposes. First,
the regulations limit payments made for multiple source
drugs under Medicaid, to ensure that those payments are
consistent with efficiency, economy, and quality of care,
as required by section 1902(a)(30) of the Social Security
Act. See 42 C.F.R. 447.300, 447.304(a). States are
given some flexibility to set payment levels. The limit
on payments is accomplished through requiring states,
when developing their payment systems, to make findings
and assurances, including that the payments in the
aggregate will not exceed the applicable upper limit.
Since the upper limit calculation has two components --
ingredient costs established by HCFA's listing of
multiple source drugs and a reasonable dispensing fee, a
necessary part of making the requisite findings is
determining what is the reasonable dispensing fee to be
used in calculating the limit.
Indeed, prior to 1987, the regulations specifically
required each state to set a reasonable dispensing fee
amount by conducting periodic surveys of pharmacy
operations and listed certain factors which could justify
variations in the dispensing fee. See 42 C.F.R.
447.333 (1986). In 1987, HCFA deleted the requirement for surveys, explaining
this decision in the preamble to
the final rule, as follows:
In the interest of State flexibility and to avoid
imposing unnecessary Federal procedural requirements
as to how State agencies establish such fees, we are
deleting the current requirement at 447.333
regarding dispensing fees. State agencies will
still be required to determine reasonable dispensing
fees or, if dispensing fees are not paid separarely
[sic], to impute an amount equivalent to a
reasonable dispensing fee, in order to include those
amounts in the calculations and comparisons they
make to meet the upper limit standard for FFP. We
expect that most States will continue their present
activities to establish a reasonable dispensing fee
level and will document these and any new activities
in their State plan. Such activities could include:
(1) Audits and surveys of pharmacy operational
costs; (2) compilation of data regarding
professional salaries and fees; and (3) analysis of
compiled data regarding pharmacy overhead costs,
profits, etc.
52 Fed. Reg. 28,648 at 28651-52 (July 31, 1987). As
mentioned above, states were required to maintain and
make available to HCFA, upon request, data, mathematical
or statistical computations, comparisons, and any other
pertinent records to support the findings and assurances.
Pennsylvania's position here -- that it should be
permitted to establish now a different reasonable
dispensing fee amount than the amount used for its
findings and assurances -- is inconsistent with this
approach explained in the preamble to the 1987
regulations and embodied in the regulations.
Permitting a state to come up with a new reasonable
dispensing fee amount at any time would also be
inconsistent with the second purpose of the upper limit -
- serving as a limit on FFP. Under 447.304(c), FFP is
available only in expenditures for payments that do not
exceed the upper limits. In order for states and HCFA to
ensure that FFP claims are proper, they would have to
know what the upper limits are for any given period.
Doing the requisite calculations requires knowledge of a
reasonable dispensing fee in a set amount. Since a range
of dispensing fees might be reasonable, a state must
establish the reasonable dispensing fee amount to be
used, or the upper limits would be unworkable.
Thus, while the regulations do not specifically prohibit
establishing a reasonable dispensing fee the way
Pennsylvania proposes to do so here, the regulations read
as a whole clearly contemplate that the reasonable
dispensing fee will be set prior to or at the time a
state provides its assurances that the upper limit will
not be exceeded. Pennsylvania pointed to nothing in the
regulations or elsewhere that would permit establishing
reasonable dispensing fee amounts in excess of the
amounts used for Pennsylvania's findings and assurances.
In our view, Pennsylvania could not (and did not)
reasonably read the regulations as permitting this.
3. It is not unfair to Pennsylvania to preclude it from
now documenting higher dispensing fee amounts.
Pennsylvania argued in effect that it was unfair to
preclude Pennsylvania from providing evidence that
higher amounts than $3.50 and $4.50 were reasonable
dispensing fees for 1987-88 and 1988-89, respectively.
Pennsylvania's fairness argument is based primarily on
Pennsylvania's assertion that HCFA was arbitrary in
rejecting the documentation Pennsylvania first submitted
to support the $3.50 and $4.50 amounts and that, as a
result, Pennsylvania had incurred more legal fees and
felt compelled to commission a study to develop new
information on actual dispensing costs during the
disallowance periods. Pennsylvania also argued, based on
a HCFA letter, that HCFA had acted in bad faith in
rejecting its documentation.
Pennsylvania provided no rationale that would justify
ignoring the requirements of the regulations and
permitting FFP in payments in excess of an upper limit
calculated as contemplated by the regulations, solely
because of HCFA's actions or steps Pennsylvania took
subsequent to the disallowances. In any event,
Pennsylvania did not establish either that HCFA was
arbitrary or that HCFA acted in bad faith.
Pennsylvania's assertion that HCFA was arbitrary is based
in part on the fact that HCFA itself had done a survey of
drug costs which Pennsylvania said would support a
dispensing fee of over $5.00. However, at the time
Pennsylvania first submitted its documentation in
May 1992, the report on the study would not have been
available. The study report was not issued until 1994.
Moreover, the study used data from 1991 and therefore
does not directly address dispensing costs for earlier
periods. State Ex. M.
In any event, we do not think that HCFA was ever required
to consider the HCFA study as part of Pennsylvania's
required documentation. The documentation to be provided
to HCFA upon request is supposed to be documentation
about data, calculations, and computations used in making
a state's findings and assurances and maintained by the
state. Since the HCFA study was not performed until
after 1991, it could not have been part of the
documentation maintained by Pennsylvania to support its
findings and assurances for either 1987-88 or 1988-89.
We also reject Pennsylvania's assertion that HCFA acted
in bad faith, as evidenced by a 1994 letter referring to
HCFA's policy position as being contrary to the Board's
decision in DAB No. 1315. Pennsylvania ignored the fact
that that letter indicated that HCFA would settle the
case based on a $3.50 dispensing fee, even though HCFA
was not entirely satisfied with Pennsylvania's
documentation. See State Ex. H. Thus, we do not agree
with Pennsylvania that HCFA was making no effort to honor
the Board's ruling.
In sum, we find no merit to Pennsylvania's fairness
arguments.
Conclusion
For the reasons stated above, we uphold the disallowances
of $1,509,498 and $2,172,293, for 1987-88 and 1988-89
respectively, for a total disallowance of $3,681,791.
_____________________________
Donald F. Garrett
_____________________________
Norval D. (John) Settle
_____________________________
Judith A. Ballard
Presiding Board Member
1. Except as otherwise indicated, our
citations are to the regulations as published July 31,
1987, which were in effect during the entire period
relevant here.
2. The entire disallowance for 1988-89 totalled
$6,757,991. The other $449,938 related to alleged
excessive payments for drug claims that were improperly
processed as "brand medically necessary." This latter
part of the disallowance is not addressed by this
decision.
3. By letter dated January 26, 1989, Pennsylvania
submitted its annual assurances for multiple source drugs
in accordance with the requirements of 42 C.F.R.
447.333. In the letter, Pennsylvania explained why its
actual dispensing fee of $2.75 was not a reasonable
dispensing fee and stated that Pennsylvania was defining
as a reasonable dispensing fee, for purposes of the upper
limit, the $4.50 established by the Medicare Catastrophic
Coverage Act. DAB No. 1315, at 5, n.5.
4. In its brief at page 6, HCFA
identified the reduced disallowance amount for 1988-89 as
$2,402,813. This amount, however, includes the
disallowance for allegedly erroneous claims for "brand
medical necessary" drugs, calculated as $230,520 if the
$4.50 dispensing fee is used. See State Ex. G at 11.
Pennsylvania did not challenge HCFA's calculations of the
reduced multiple source drug disallowances.
5. Pennsylvania had apparently thought
that use of the $3.50 amount would eliminate the
disallowance entirely. See DAB No. 1315, at 4.