Pharm Rsrch Mftr v. Thompson, Tommy G., et al, No. 02-5110 (D.C. Cir. 2002)

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued December 5, 2002 Decided December 24, 2002

No. 02-5110

Pharmaceutical Research and Manufacturers of America,

Appellant

v.

Tommy G. Thompson, in his official capacity as,

Secretary, United States Department of Health

and Human Services, et al.,

Appellees

Appeal from the United States District Court

for the District of Columbia

(No. 01cv01453)

John G. Roberts, Jr. argued the cause for appellant. With

him on the briefs were Jeffrey Pariser and Darrel J. Grin-

stead.

 Daniel J. Popeo and Richard A. Samp were on the brief

for amici curiae Washington Legal Foundation, et al., in

support of appellant.

Sushma Soni, Attorney, U.S. Department of Justice, ar-

gued the cause for federal appellees. With her on the brief

were Roscoe C. Howard, Jr., U.S. Attorney, and Scott R.

McIntosh, Attorney, U.S. Department of Justice.

John R. Brautigam, Assistant Attorney General, State of

Maine, argued the cause for intervenor Kevin W. Concannon

in his capacity as Commissioner of the Maine Department of

Human Services. With him on the brief were G. Steven

Rowe, Attorney General, and Paul Stern, Deputy Attorney

General.

Sarah Lenz Lock, Dorothy Siemon, Bruce Vignery, and

Michael Schuster were on the brief for amicus curiae Ameri-

can Association of Retired Persons, in support of appellee.

Before: Edwards, Henderson, and Randolph, Circuit

Judges.

Opinion for the Court filed by Circuit Judge Edwards.

Edwards, Circuit Judge: Appellant Pharmaceutical Re-

search and Manufacturers of America ("PhRMA"), an associa-

tion of drug manufacturing and research firms, challenges a

Medicaid demonstration project administered by the State of

Maine under the auspices of the Secretary of Health and

Human Services ("Secretary" or "HHS"). Maine's program

offers low-income citizens a discount on prescription drugs,

which is funded in part by manufacturer rebates and in part

by a 2% state subsidy. PhRMA claims that the Maine

program mirrors a demonstration project that was imple-

mented by the State of Vermont, approved by HHS, but then

declared unlawful under the Social Security Act ("Act") by

this court in Pharmaceutical Research and Manufacturers of

America v. Thompson, 251 F.3d 219 (D.C. Cir. 2001)

("PhRMA I"). The District Court rejected PhRMA's chal-

lenge and granted summary judgment for the Secretary. See

Pharm. Research and Mfrs. of Am. v. Thompson, 191 F. Supp. 2d 48 (D.D.C. 2002) (Mem. Op.) ("PhRMA II").

The record shows that Maine's initial version of the disput-

ed demonstration program was explicitly patterned after Ver-

mont's program. Eugene Gessow Deposition ("Gessow

Dep.") at 8, reprinted in Joint Appendix ("J.A.") 58. After

the decision in PhRMA I, officials in Maine decided to modify

that state's program, adding a 2% state contribution to the

manufacturer rebates to avoid the fate of Vermont's program.

However, this modification was never approved by the Secre-

tary. Therefore, to the extent that the modified Maine

program purports to be different from the flawed Vermont

program, it has yet to be considered or approved by the

federal government. The only program from Maine that the

Secretary has endorsed is one identical to the Vermont

program that was found unlawful by the court in PhRMA I.

We therefore reverse the judgment of the District Court and

enter judgment for PhRMA.

We have no need to consider questions about the extent to

which the Secretary has authority to "regard" a state pay-

ment as a Medicaid payment; whether the 2% subsidy is

sufficient to trigger the rebate obligations under the Act; or

whether the Act requires that all Medicaid "payments" in-

clude federal matching funds. Until the Secretary has made

clear his views on these questions, we decline to address

these matters.

I. Background

Under the Social Security Act, states can develop Medicaid

"pilot" or "demonstration" projects that experiment with new

methods of providing health care to low-income citizens. The

Secretary may approve such projects if they will "assist in

promoting the objectives" of the Medicaid system. 42 U.S.C.

s 1315(a) (2000). Upon granting such approval, the Secre-

tary can waive certain federal requirements that would nor-

mally apply to traditional Medicaid programs. Id.

s 1315(a)(1). The Secretary also has authority to "regard"

costs for a demonstration project as an "expenditure" pursu-

ant to that state's Medicaid plan. Id. s 1315(a)(2).

In January 2001, the State of Maine received the Secre-

tary's authorization to create a demonstration project for a

prescription drug benefit. See Secretary's Approval Letter

to Maine Department of Human Services (Jan. 18, 2001)

("HHS Letter"), reprinted in J.A. 101-03; Health Care Fi-

nancing Administration Special Terms & Conditions ("Terms

and Conditions"), reprinted in J.A. 105-21. Through its

Prescription Drug Discount Program ("PDDP"), Maine gives

a discount on drug purchases to a specified category of people

who are not otherwise eligible for Medicaid assistance. HHS

Letter at 1, J.A. 101. The State's administrators expressly

patterned this demonstration project after one administered

by the State of Vermont. See Maine Department of Human

Services Proposal Letter to HHS (Jan. 5, 2001) ("Maine

Proposal"), reprinted in J.A. 75-104 at 76; Gessow Dep. at 8,

J.A. 58. A central goal of Maine's project design was to

provide a prescription drug benefit without creating net costs

for the State. Gessow Dep. at 8, J.A. 58; Maine Proposal,

J.A. 76-77, 98. Maine thus proposed that the funding for

PDDP would come from special rebates paid by drug compa-

nies. See Healthy Maine Prescriptions Operational Protocol

("Operational Protocol"), reprinted in J.A. 125-60. As a

condition of participating in Medicaid, the drug companies

have a duty under the Social Security Act to offer rebates so

that state purchasers pay the best available rates for pharma-

ceutical products. See 42 U.S.C. s 1396r-8(b)(1)(A). Maine

sought to piggyback on this requirement to fund its PDDP.

Operational Protocol at 126.

On June 8, 2001, soon after Maine implemented PDDP, this

court issued PhRMA I. The court held that Vermont's

program was impermissible under the Act, because there was

no "net expenditure of funds for Medicaid purposes in an

amount determined independently of the amount of the re-

bates." PhRMA I, 251 F.3d at 225. The court found that

the State merely acted as a "conduit" in the discount pro-

gram, recouping all of its spending from drug company

rebates. See id. at 223.

Maine reacted to PhRMA I by adopting several revisions

to PDDP (renamed the Healthy Maine Prescription Pro-

gram). Eugene Gessow Declaration at 4-5, J.A. 68-69. The

change most relevant to this appeal is the State's decision to

contribute 2% of the annual costs of PDDP. Gessow Dep. at

41, J.A. 63. Maine's so-called "two-percent solution" comes

from state appropriations that are not matched by federal

dollars. The contribution is not mandated by state law and

the amount and frequency of state contributions are not

otherwise guaranteed. And, most significantly, Maine's re-

vised program was never submitted to the Secretary for

consideration or approval. See id. at 59-60.

PhRMA filed suit in the District Court, charging that

Maine's program was illegal under the Social Security Act

and, consequently, the Secretary's approval of the program

was unreasonable under the Administrative Procedure Act

("APA"). See PhRMA II, 191 F. Supp. 2d at 51-52. Appel-

lant first argued that because the Secretary had never ap-

proved the "two-percent solution," Maine's program was iden-

tical to the rebate scheme rejected in PhRMA I. Second,

PhRMA claimed that even if the revisions had been autho-

rized, the State expenditure did not qualify as a Medicaid

"payment," because the amount was de minimis and the

money was not matched by federal funding. Third, appellant

claimed that the program exceeded the Social Security Act's

"nominal" limits for all co-payments in state Medicaid pro-

grams. See 42 U.S.C. s 1396o(b)(3). Finally, PhRMA

claimed that, by allowing an illegal demonstration program to

proceed, the Secretary violated the terms of the APA.

On cross-motions for summary judgment, the District

Court ruled against PhRMA on all counts and granted sum-

mary judgment for appellees. PhRMA II, 191 F. Supp. 2d at

51. The court rejected each of appellant's claims that PDDP

was impermissible. The judge found PhRMA I distinguish-

able because of Maine's 2% contribution toward the prescrip-

tion discount costs. Id. at 63. The court also determined

that the Secretary had reasonably exercised his authority to

approve Maine's payments "as Medicaid expenditures," which

were also sufficient to trigger the manufacturer rebate re-

quirement in the statute. Id. at 64-66. Finally, the court

found that PhRMA did not have standing to assert claims

that the co-payments in Maine's program exceed the "nomi-

nal" limits set forth in the Social Security Act. Id. at 59-61.

PhRMA appeals the decision below and renews each of

these claims.

II. Analysis

We limit our discussion to PhRMA's first argument - that

the demonstration project is illegal under the Social Security

Act in light of PhRMA I. This issue is dispositive, so we

reach no other.

The District Court's decision hinges on its finding that a

2% subsidy is a part of Maine's demonstration project. This

finding cannot carry the day. Under the original proposal

that the Secretary approved in January 2001, the single

source of revenue for the program was to be the rebate from

drug companies. As PhRMA I holds, Maine cannot impose a

rebate obligation on drug companies where neither the State

nor the federal government makes a Medicaid "payment."

251 F.3d at 224-25.

Maine insists that the revised program cures the flaws

uncovered in the Vermont program. This is far from clear on

the record before us. Under the revised program, although

Maine presently has volunteered to contribute 2% of the

project's costs, this contribution is not guaranteed by state

law. In other words, it is not an official component of PDDP.

The amount can be changed and the contribution can be

discontinued at any time. This does not appear to be mean-

ingfully different from the Vermont program.

We need not reach this issue, however. The Social Securi-

ty Act requires HHS to approve all Medicaid demonstration

projects, see 42 U.S.C. s 1315(a). However, all parties agree

that the Secretary has never formally considered or endorsed

Maine's revised program that includes the 2% contribution.

Therefore, the revised program is not properly before this

court for review.

Appellees nonetheless claim that the "two percent solution"

is consistent with the original terms that the Secretary did

approve. But the record simply does not support this argu-

ment. In reviewing Maine's program, the Secretary merely

indicated that the State could not look to the federal govern-

ment to cover funding shortfalls:

If, in any quarter, the State believes subsidies are

likely to exceed rebates collected, the State will not

request [federal money] for the estimated difference

between subsidies paid and anticipated rebates col-

lected. The state will perform an annual reconcilia-

tion of subsidies paid and rebates received 180 days

after the end of each demonstration year. The state

will return to [HHS] the Federal share of any

subsidies claimed in excess of applicable rebates.

Rebates collected in excess of subsidies paid to

pharmacies in any given year will be considered in

the calculation of the pharmacy subsidy percentage

for the next demonstration year.



Terms and Conditions at 11, J.A. 115. This language, which

is repeated in the State's Operational Protocol, see Operation-

al Protocol at 10, J.A. 134, merely affirms Maine's duty to

reconcile any budgetary shortfalls if they occur in PDDP.

There is nothing in the record to indicate that HHS consid-

ered and approved Maine's revised program which is founded

on an unguaranteed 2% contribution.

Appellees also suggest that federal approval is implied in a

June 1 letter from the Secretary that acknowledges a modifi-

cation to PDDP. But the only programmatic change dis-

cussed in that document pertains to the project's scope and

not its source of funding. See HHS Letter to Maine Dep't of

Human Services (June 1, 2001), reprinted in J.A. 299-300

(approving a modification "to include coverage for all individ-

uals under 300 percent of the [poverty line] - rather than for

adults only - as was inadvertently approved."). This commu-

nication occurred before PhRMA I and Maine's revisions, and

its language does not endorse a limited state contribution to

assist in the funding of PDDP.

Maine's only federally approved version of PDDP mirrors

Vermont's legally flawed program, i.e., one in which all costs

are covered by drug discount rebates, with no required state

or federal "payments" under Medicaid. This approach is

clearly forbidden under the Social Security Act for the rea-

sons stated in PhRMA I.

III. Conclusion

For the aforementioned reasons, the judgment of the Dis-

trict Court is hereby reversed and summary judgment is

entered for appellant.