Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Indiana Family and Social Services Administration
DATE: August 19, 1992
Docket No. A-92-104
Decision No. 1351
DECISION
The Indiana Family and Social Services Administration (State) appealed
a
determination by the Health Care Financing Administration
(HCFA)
disallowing $3,652,956 in federal financial participation (FFP)
claimed
under title XIX (Medicaid) of the Social Security Act (Act).
HCFA's
disallowance was based on an Office of the Inspector General (OIG)
audit
of Indiana's compliance with upper payment limit requirements
for
multiple source drugs during the period October 29, 1987 through
October
28, 1988. Based on this audit, HCFA determined that Indiana
paid
$5,733,724 ($3,652,956 FFP) for multiple source drugs in excess of
the
aggregate upper payment limit established by regulation.
For the reasons discussed below, we uphold HCFA's disallowance.
Statutory and Regulatory Background
The Medicaid program authorizes FFP in costs incurred by the states
for
providing medical services to eligible low income and medically
needy
persons. Although prescription drugs are an optional Medicaid
service,
Indiana, as does virtually every state, provides this as a
covered
service. Because of the cost of this option, HCFA determined
that one
way to ensure prudent purchasing by provider pharmacies and to
lower
Medicaid costs was to take advantage of savings available in
the
marketplace for multiple source drugs. Multiple source drugs
are
defined as a drug 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.
HCFA established upper payment limits under the authority of
section
1902(a)(30)(A) of the Act. On July 31, 1987, HCFA revised
the
regulations on drug payments at 42 C.F.R. Part 447. 52 Fed. Reg.
28648.
Prior to this revision, specific payment limits applied to
individual
multiple source drugs. Under the revised regulations, HCFA
would
identify multiple source drugs meeting certain specified criteria
(i.e.,
all formulations have been evaluated as therapeutically equivalent
by
the Food and Drug Administration; at least three suppliers list
the
drug), and would establish upper limit amounts for each of these
drugs.
42 C.F.R. ..447.331 and 447.332. The upper limit amount for each
drug
would equal 150% of the published price for the least costly
therapeutic
equivalent that can be purchased by pharmacists in certain
specified
quantities. 42 C.F.R. .447.332.
States were not required to have any particular payment
methodology.
Rather, the regulation provided that a state could not pay more
than an
"aggregate" upper limit. The aggregate upper limit would be
determined
by totaling the dispensing fees paid for the drugs plus the amount
of
the individual upper limits in HCFA's listings for multiple source
drugs
(except that the upper limit would not apply to any prescription
for
which a physician had certified in handwriting that a certain brand
was
medically necessary). The change to an "aggregate" upper limit
provided
each state with greater flexibility to establish a method for
payment
that would most suit its local conditions. 52 Fed. Reg.
28655. This
would allow a state to pay at levels above the listed price
set by HCFA
for some of the designated multiple source drugs, provided that
the
state pays at levels below the listed price for other drugs subject
to
the listings. 52 Fed. Reg. 28651.
The revised regulations also require that each state must make a
finding
and submit assurances at least annually that in the aggregate
its
Medicaid expenditures for multiple source drugs remain in
accordance
with the upper limits. 42 C.F.R. .447.333(b).
Prior to the effective date of these regulations, HCFA distributed to
the
states lists of the multiple source drugs subject to individual
upper limits
and of the upper limits for payments for these drugs. The
regulations
were effective October 29, 1987, three months after
publication. .
Factual Background
On October 28, 1987, the day before the effective date of the
regulations,
Indiana requested an extension until June 1, 1988, for its
implementation of
the revised regulations. State Exhibit (Ex.) 1. By
letter dated
December 29, 1987, HCFA denied the State's request. HCFA
Ex. B.
Indiana subsequently submitted its initial assurance of
compliance with the
upper payment limit provisions to HCFA in a state
plan amendment with an
effective date of December 1, 1989. HCFA Ex. C
at 6. In this
assurance, the State indicated compliance with the upper
limits regulations
since November 1, 1988. HCFA Ex. C at 6.
The OIG audit determined that during the period October 29, 1987
through
October 28, 1988, the State had claimed FFP in payments in excess of
the
aggregate upper limit because the State Medicaid Agency had
delayed
implementing controls to prevent claims from exceeding the
limits. HCFA
disallowed $3,652,956 FFP for non-compliance with the
aggregate upper
payment limit.
The State appealed, arguing that it should have been granted an
extension
since it was impracticable, if not impossible, for the State
to have
implemented the regulation by the effective date.
Analysis
The State asked us here to apply a later effective date of HCFA's
revised
regulations than the date set out in the Federal Register. The
State's
reasons why it needed an extension are not related specifically
to what the
State was required to do in order to comply with the revised
regulations,
however.
HCFA's revised regulations accomplish two things: 1) they provide
that
no FFP will be available in state payments that exceed the
aggregate
upper limit; and 2) they permit states the flexibility to use
whatever
payment methodology the state chooses, so long as the state
provides
assurances that the payments will not in the aggregate exceed
the
aggregate upper limit. To ensure that its claims for FFP did not
exceed
the amount allowable under the new regulations, the State needed only
to
have a computer program which would aggregate the listed upper
payment
limits for each of the drugs provided and compare that with the
total
amount paid by the State for listed drugs. The State had notice
as of
July 31, 1987 that it would need to make the required comparison
of
aggregate payments to ensure it was not claiming unallowable FFP.
HCFA
first published the list in August 1987 and made only minor
amendments
in September 1987. See State Ex. 3.
In its brief here, the State argued that it had first received HCFA's
drug
lists on September 14 and October 4, 1987. The State said:
Upon receipt of the lists, it was necessary for Indiana's
drug
price file contractor, Redbook, to complete an analysis of
the
drug list and make appropriate modifications to their
data
bases. As of October 28, 1987, Indiana's fiscal contractor
had
not been able to test the system to ensure that
proper
reimbursement would occur. . . . The importance of
developing
and testing the system to accommodate the new . . .
limits
cannot be underestimated.
State's Brief at 2. 1/
However, in its October 28, 1987 letter to HCFA requesting an
extension,
the State indicated that Redbook had already developed a computer
tape
listing the covered drug codes, had provided that tape to the
fiscal
contractor (apparently Blue Cross/Blue Shield), and was to provide
to
Blue Cross/Blue Shield a separate tape containing the appropriate
upper
limits for these drugs, by October 28, 1987. While Blue
Cross/Blue
Shield perhaps needed to test the system after that, the State did
not
explain how long this took, nor why the State could not have
protected
itself by simply delaying payments to pharmacists until the testing
was
completed. HCFA said that such delays would have been authorized
under
the regulations. HCFA Brief at 11, citing 42 C.F.R.
..447.45(d)(4),
447.45(e).
The major administrative difficulties and concerns which the
State
described in its extension requests and briefs here arise only
because
the State was apparently planning on changing its payment
methodology.
The HCFA letter denying the extension request pointed out that
the
regulation gave the State flexibility in establishing a payment
method
and that the State would be required to change from its current
method
only if it could not provide the requisite assurances using that
method.
HCFA's letter pointed out that it was not clear from the State's
letter
"that Indiana's current payments would exceed the aggregate upper
limit
standard." HCFA Ex. B.
HCFA's letter also pointed out that one of the major reasons the
State
gave for needing an extension had no merit. The State had said
there
was a conflict between Indiana law and the requirement that
the
prescribing physician indicate a notation like "brand necessary" in
his
own handwriting to override the upper limit for a drug item. State
Ex.
1, p. 2. HCFA responded that there was no difference in the new
rules
and the prior rules with respect to the requirement that the term
"brand
medically necessary" or words to that effect must be written on
the
prescription in order for the pharmacist to receive compensation for
the
more costly brand name product, so that it would not be necessary
for
the Indiana law to be changed. HCFA Ex. B. The State did not
dispute
HCFA's response.
Finally, HCFA expressed its concern that, during times of
fiscal
constraint, it needed a "straightforward implementation of a
program
with such savings potential for both the State and Federal
Governments."
HCFA Ex. B.
Under the circumstances, HCFA's denial of the State's extension
request
was reasonable. The State's justification was based in part on
its
erroneous interpretation of the "brand medically necessary"
requirement
and in part on its own choice to consider a new payment
methodology.
The new payment methodology may have required further study
since the
State was contemplating paying more than the listed amounts for
some
drugs and less for others if necessary because of the particular
needs
in Indiana. However, the State never satisfactorily explained why
it
could not have implemented some interim payment method (such as
paying
the amounts HCFA listed as the upper limits for specific drugs)
which
would have enabled the State to provide the requisite
assurances.
Instead, the State (without attempting to appeal HCFA's denial)
chose to
proceed with its study of a new payment methodology, which the State
did
not implement until November 1, 1988 (five months after the June 1,
1988
implementation date the State had requested). .In any event,
having
been told by HCFA that the aggregate upper limit would apply as
of
October 29, 1987, the State was obliged to take some immediate steps
to
ensure that its claims for FFP did not exceed the amount
determined
allowable by applying the aggregate upper limit. It is the
State's
failure to take such steps which resulted in its claiming more FFP
than
allowed under the regulation.
Conclusion
Accordingly, we uphold the disallowance in the amount of $3,652,956.
_____________________________ Donald F. Garrett
_____________________________ Norval D.
(John)
Settle
_____________________________ Judith A.
Ballard
Presiding Board Member
1. The State also said: "It was also necessary to place a
`stop' date
for those old drug entities that were not subject to the [upper]
limits
according to the official listing." Id. Since unlisted
drugs are not
subject to the aggregate upper limit, we do not see how the
need for
"stop" dates for such drugs is relevant