Case: 20-60213 Document: 00515808162 Page: 1 Date Filed: 04/05/2021
`
`United States Court of Appeals
`for the Fifth Circuit
`
`
`No. 20-60213
`
`
`Louisiana Department of Health,
`
`
`United States Court of Appeals
`Fifth Circuit
`
`FILED
`April 5, 2021
`
`Lyle W. Cayce
`Clerk
`
`Petitioner,
`
`
`
`versus
`
`
`United States Department of Health and Human
`Services; Xavier Becerra, Secretary, U.S. Department
`of Health and Human Services, in his official capacity
`as Secretary of the U.S. Department of Health and
`Human Services,
`
`
`Respondents.
`
`
`
`
`Petition for Review of the Final Determination of the United States
`Department of Health & Human Services
`Agency No. 15-02
`
`
`
`Before Owen, Chief Judge, and Graves and Ho, Circuit Judges.
`Per Curiam:*
`
`The Louisiana Department of Health petitions for review of a final
`decision from the Secretary of the Department of Health and Human
`
`
`
`* Pursuant to 5th Circuit Rule 47.5, the court has determined that this
`opinion should not be published and is not precedent except under the limited
`circumstances set forth in 5th Circuit Rule 47.5.4.
`
`

`

`Case: 20-60213 Document: 00515808162 Page: 2 Date Filed: 04/05/2021
`
`No. 20-60213
`
`Services, via the Administrator for the Centers for Medicare and Medicaid
`Services (“CMS”), denying a proposed state plan amendment for
`reimbursing pharmacists’ Medicaid costs. We DENY the petition for
`review.
`
`I.
`
`The Medicaid program, enacted as Title XIX of the Social Security
`Act, is a cooperative federal-state program that provides medical assistance
`to low-income individuals. See 42 U.S.C. § 1396; Atkins v. Rivera, 477 U.S.
`154 (1986). The federal government and the states together finance the
`program, while the states administer it. “In theory, this arrangement
`incentivizes states to keep rates at efficient levels, because they share
`financial responsibility for Medicaid costs with the federal government.”
`Alaska Dep’t of Health & Soc. Servs. v. Ctrs. for Medicare & Medicaid Servs.,
`424 F.3d 931, 935 (9th Cir. 2005). The program is voluntary but, to be eligible
`for federal funds, participating states must submit a “state plan” satisfying
`the Medicaid statute and rules from the Secretary of the Department of
`Health and Human Services. 42 U.S.C. § 1396a.
`
`Under the Medicaid statute, the Secretary is responsible for ensuring
`that state plans meet federal requirements. See Id.; Louisiana v. U.S. Dep’t of
`Health & Human Servs., 905 F.2d 877, 878 (5th Cir. 1990). The Secretary has
`delegated authority to carry out federal duties under the statute to the
`Administrator of CMS, an agency within the Department. § 1396a. When the
`Secretary, through CMS’ Administrator, approves a state’s plan, the federal
`government reimburses a percentage of the state’s Medicaid expenses. 42
`U.S.C. § 1396b(a)(1). “As long as the plans meet federal requirements, the
`states have considerable discretion to design and operate their individual
`programs.” Louisiana, 905 F.2d at 878 (citing Lewis v. Hegstrom, 767 F.2d
`1371 (9th Cir. 1985)). Accordingly, CMS, “on behalf of the Secretary, is
`required to approve a state plan amendment that complies with all applicable
`
`2
`
`

`

`Case: 20-60213 Document: 00515808162 Page: 3 Date Filed: 04/05/2021
`
`No. 20-60213
`
`statutes and regulations.” La. Dep’t of Health & Hosps. v. Ctr. for Medicare &
`Medicaid Servs., 346 F.3d 571, 572 (5th Cir. 2003). If the Administrator
`determines that a state’s plan or amendment does not meet the federal
`requirements, he or she issues a disapproval determination under 42 C.F.R.
`§ 430.15(c). The state may seek administrative and judicial review of these
`determinations, as Louisiana has done here. See 42 U.S.C. § 1316(a)(2), (c);
`42 C.F.R. §§ 430.18, 430.60.
`
`The regulations at issue in 2012, when Louisiana sought CMS’
`approval for the state plan amendment at issue in this case, referred to two
`components for reimbursements paid to pharmacies for prescription drugs: a
`drug’s ingredient cost and its dispensing fee. 42 C.F.R. § 447.512(b) (2012).
`Section 447.512(b) addressed how states should determine payment
`methodology for certain drugs. The provision stated, in pertinent part, that:
`The agency payments for brand name drugs certified in
`accordance with paragraph (c) of this section and drugs other
`than multiple source drugs for which a specific limit has been
`established must not exceed, in the aggregate, payments levels
`that the agency has determined by applying the lower of the—
`(1) [Estimated Acquisition Cost (“EAC”)] plus
`reasonable dispensing fees established by the
`agency; or
`(2) Providers’ usual and customary charges to
`the general public.
`42 C.F.R. § 447.512(b) (2012). So under the 2012 regulations, payments for
`prescription drugs could not exceed a drug’s EAC plus the provider’s
`dispensing fee. 42 C.F.R. § 447.512(b)(1) (2012). The regulations defined the
`EAC as the state’s “best estimate of the price generally and currently paid
`by providers for a drug marketed or sold by a particular manufacturer or
`labeler in the package size of drug most frequently purchased by providers.”
`Id. § 447.502 (2012). A state therefore must “determine the closest estimate
`
`3
`
`

`

`Case: 20-60213 Document: 00515808162 Page: 4 Date Filed: 04/05/2021
`
`No. 20-60213
`
`possible of the actual acquisition cost,” Louisiana, 905 F.2d at 881,1 although
`the regulations did not prohibit states from relying on an average wholesale
`price (“AWP”) or an average acquisition price index in making this estimate,
`see 42 C.F.R. § 502.
`
`The regulations also establish states’ burden in persuading the
`Administrator that a plan meets federal requirements. The regulations
`provide that the state must “maintain and make available to [CMS], upon
`request, documentary evidence to support the findings.” 42 C.F.R.
`§ 447.518(c). The “documentary evidence must include data, mathematical
`and statistical computations, comparisons, and any other pertinent records.”
`Id. Given this burden of proof, this court has stated that a state’s compliance
`with § 447.512(b)’s upper-limit categories does not necessarily amount to
`compliance with the state’s burden, which is to assure CMS that its
`reimbursement methodology is its best estimate of costs that pharmacists
`generally and currently pay. See Louisiana, 905 F.2d at 882 (“But we do not
`think, given the history of the rulemaking proceeding, that a state complies
`with federal requirements merely by proving its reimbursements in a
`particular category do not exceed the aggregate upper limit.”).2
`
`
`
`1 Shortly before Louisiana submitted its state plan amendment in 2012, CMS issued
`a notice of proposed rulemaking that contemplated replacing EAC with “actual acquisition
`cost,” which it defined as a state’s “determination of the actual prices paid by pharmacy
`providers to acquire drug products marketed or sold by specific manufacturers.” Medicaid
`Program: Covered Outpatient Drugs, 77 Fed. Reg. 5320 (proposed Feb. 2, 2012) (to be
`codified at 42 C.F.R. § 447.502). CMS stated that this change would render Medicaid
`reimbursements more reflective of the actual prices paid.
`2 The 1987 regulations at issue in Louisiana are, in relevant part, identical to the
`2012 regulations at issue in this case. Compare 42 C.F.R. § 447.301 (1987) (defining
`“estimated acquisition cost” as “the [state] agency’s best estimate of the price generally
`and currently paid by providers for a drug marketed or sold by a particular manufacturer or
`labeler in the package size of drug most frequently purchased by providers”), with 42
`C.F.R. § 447.502 (2012) (defining “estimated acquisition cost” as “the [state] agency’s
`best estimate of the price generally and currently paid by providers for a drug marketed or
`
`4
`
`

`

`Case: 20-60213 Document: 00515808162 Page: 5 Date Filed: 04/05/2021
`
`No. 20-60213
`
`II.
`Before 2012, Louisiana calculated the EAC of many Medicaid-
`
`covered drugs as a percentage of the drug’s AWP. Louisiana reimbursed the
`acquisition cost of most brand-name drugs at either AWP minus 13.5% or
`AWP minus 15%, depending on the status of the pharmacist. The discount
`reflects the fact that pharmacies typically can purchase drugs below the
`wholesale price. Louisiana reimbursed pharmacies for generic drugs at the
`lowest of various metrics, chiefly the provider’s “usual and customary
`charge” to the public.
`
`In 2010, Louisiana began transitioning to a different reimbursement
`calculation that it said would more accurately reflect Louisiana-specific costs.
`Louisiana State Plan Amendment (“SPA”) 10-13 restricted maximum
`compensation for multiple source drugs to 135% of a drug’s “average
`acquisition cost.” CMS approved SPA 10-13, effective February 1, 2010.
`Louisiana then signaled to pharmacies that more changes were on the way.
`
`On September 28, 2012, Louisiana submitted for CMS’ approval SPA
`12-55, which defined a drug’s EAC as its “average acquisition cost,”
`measured by pharmacists’ actual invoices, and without any multiplier or
`percentage increase. SPA 12-55 reflected the State’s analysis of several years
`of data and the advice of a private consultant. The State said that the new
`reimbursement methodology was “intended to establish an accurate
`pharmacy reimbursement system based on actual acquisition cost (invoice)
`data and a statistically validated cost of dispensing survey.” The State
`acknowledged that because SPA 12-55 set prices at the average of actual
`invoices, some providers would necessarily be underpaid. But SPA 12-55
`
`
`
`sold by a particular manufacturer or labeler in the package size of drug most frequently
`purchased by providers”).
`
`5
`
`

`

`Case: 20-60213 Document: 00515808162 Page: 6 Date Filed: 04/05/2021
`
`No. 20-60213
`
`provided for a review method whereby pharmacists could ask a helpdesk for
`specific variations. CMS approved SPA 12-55, effective September 5, 2012.
`
`Consistent with this expectation, “[a]lmost immediately,” some
`participating pharmacies complained to the State that the new metric would
`not adequately cover their costs, and Louisiana faced political pressure to
`provide a more generous reimbursement rate. The State then convened a
`workgroup of “more than a dozen independent and chain pharmacists.”
`
`On November 1, the State implemented an amended plan (SPA 12-
`66), based on input from the working group, that would result in higher
`payments to pharmacists. SPA 12-66 proposed an adjustment to its
`prescription drug payment methodology by applying multipliers or markups
`to the average acquisition cost. Specifically, the State revised its definition of
`EAC as follows:
`Estimated Acquisition Cost (EAC)-- the Average Acquisition
`Cost (AAC) of the drug dispensed adjusted by a multiplier of
`1.1 for multiple source drugs and a multiplier of 1.01 for single-
`source drugs. If there is not an AAC available, the EAC is equal
`to the Wholesale Acquisition Cost (WAC), as reported in the
`drug pricing compendia utilized by the Department’s fiscal
`intermediary. For Department defined specialty therapeutic
`classes, the EAC is the Wholesale Acquisition Cost adjusted by
`a multiplier of 1.05.
`
`The State explained in the press release that it would soon provide “a markup
`of 10 percent” above the average acquisition cost for generic drugs and a
`markup of 1 percent for brand-name drugs, and that it would reimburse
`certain classes of “specialty drugs” at their “Wholesale Average Cost (a
`more generous price index) plus 5 percent.” The State also amended the
`dispensing fee reimbursement for all drugs from $10.13 to $10.51.
`
`6
`
`

`

`Case: 20-60213 Document: 00515808162 Page: 7 Date Filed: 04/05/2021
`
`No. 20-60213
`
`Louisiana submitted SPA 12-66 to CMS on December 21, 2012, with
`
`a requested effective date of November 1, 2012.3 The State told CMS that it
`had “received numerous concerns from community pharmacists, legislators
`and other stakeholders” about SPA 12-55’s methodology, and that the State
`had conducted a “detailed review of the cost and reimbursement data
`through the information submitted by community pharmacists.”
`
`On March 19, 2013, CMS requested additional
`information
`supporting SPA 12-66. Specifically, CMS asked the State why it reverted
`from a baseline average based on actual invoices, and how it arrived at the
`specific markups. The State says that it “provided CMS with some but not
`all of the analyses that it had conducted.” That data consisted of a survey of
`four independent pharmacies, and an accountant’s estimate that SPA 12-66
`would save $30 million compared to the AWP-based methodology in place a
`few years earlier. There are over 1,000 independent and chain pharmacies
`operating in Louisiana. CMS followed up with several questions further
`asking the State to “explain” its arrival at the multipliers. The State
`responded that the figures are “[b]ased on discussions, research, and analysis
`of information submitted by providers,” but the State did not provide that
`underlying data. The State also responded that it implemented SPA 12-66 in
`response to legislators and participating pharmacists’ criticisms of SPA 12-
`55.
`In September 2014, CMS communicated to the State that it would
`
`approve SPA 12-66’s dispensing fee reimbursements but would disapprove
`SPA 12-66’s reimbursement rates for ingredient costs. In response, the State
`divided SPA 12-66 into two components: SPA 12-66A referred to dispensing
`
`
`
`3 The regulations allow states to implement their plans before CMS’ approval,
`although doing so risks going without federal reimbursement if the plan is later
`disapproved, as happened here. See 42 C.F.R. §§ 430.20(b); 447.256(c).
`
`7
`
`

`

`Case: 20-60213 Document: 00515808162 Page: 8 Date Filed: 04/05/2021
`
`No. 20-60213
`
`fees while SPA 12-66B referred to ingredient costs. The State then returned
`to reimbursing all drugs based on average acquisition cost without any
`markup.
`
`CMS issued its decision on December 11, 2014. The CMS
`Administrator concluded that the State had not shown that SPA 12-66B met
`42 C.F.R. § 447.502’s EAC definition. Specifically, the Administrator
`concluded that the State did not sufficiently demonstrate how it arrived at
`the specific multipliers, and why it reverted to the more generous wholesale
`acquisition price for specialty drugs. The Administrator thus found that SPA
`12-66B did not comply with § 1902(a)(30)(A), which requires that states
`have methods and procedures to assure that payment rates are consistent
`with efficiency, economy, and quality of care, or with the implementing
`regulations at 42 C.F.R. §§447.502 and 447.512. The Administrator
`accordingly disallowed Federal Financial Participation for payments to
`pharmacists based on SPA 12-66B. Those payments amounted to $26 million
`over the two-year period. Had CMS approved SPA 12-66B, the federal
`government would have paid 61% percent of the total, or about $16 million.
`
`The State timely requested reconsideration of CMS’ disapproval of
`SPA 12-66B. The State then submitted additional data—two declarations
`and thirty-one exhibits consisting mostly of spreadsheets of pharmacist
`surveys—that it had not presented to CMS in its initial petition or in its
`responses to CMS’ follow-up questions.
`
`CMS’ presiding officer first held that CMS properly disapproved SPA
`12-66B. He declined to review CMS’ decision de novo, and so refused to
`consider the State’s supplementary evidence as untimely. The State had
`cited regulations allowing discovery in the review process, and it argued that
`it had the “absolute right” to introduce new evidence on reconsideration.
`The presiding officer, however, concluded that the State’s cited regulations
`“must be read in the context of the overall” SPA review framework, and, in
`
`8
`
`

`

`Case: 20-60213 Document: 00515808162 Page: 9 Date Filed: 04/05/2021
`
`No. 20-60213
`
`that light, “the regulations in 430 Subpart D discuss gathering and
`submitting evidence that has previously been timely submitted for CMS to
`consider in its initial review of the SPA.” Accordingly, the presiding officer
`considered only the evidence that the State had initially supplied regarding
`the four surveyed pharmacies.
`
`On the merits, the presiding officer mainly concluded that the State
`did not satisfy 42 C.F.R. § 447.512 (2012), because the State had submitted
`insufficient data explaining how it arrived at the across-the-board multipliers.
`He also concluded that the State’s proposed markup impermissibly
`combined the ingredient costs and dispensing fee, because the State had
`acknowledged that it used the multipliers to reflect both ingredient costs and
`“other costs associated with dispensing” drugs. Accordingly, the presiding
`officer concluded that the State had not assured that SPA 12-66’s ingredient
`reimbursement methodology represented the State’s best estimate of prices
`that pharmacists generally paid in 2012.
`
`The State timely asked the Administrator to reverse the presiding
`officer’s conclusions. The Administrator agreed with the presiding officer
`that the additional data should not be considered, but the Administrator also
`concluded that the additional data did not merit reversal even if considered.
`The Administrator decided that, on the record before CMS, the State had
`not demonstrated that the proposed payment increases were consistent with
`the aggregate upper payment limitations set forth in 42 C.F.R. § 447.512. He
`further concluded that the State’s proposed EAC calculation did not
`represent the State’s “‘best estimate of the price generally and currently paid
`by providers for a drug marketed or sold by a particular manufacturer or
`labeler in the package size of a drug most frequently purchased by
`providers.’” See 42 C.F.R. § 447.502 (2012). The Administrator did not
`endorse the presiding officer’s conclusions regarding ingredient-dispensing
`cost conflation, holding instead that this rationale “was not included as a
`
`9
`
`

`

`Case: 20-60213 Document: 00515808162 Page: 10 Date Filed: 04/05/2021
`
`No. 20-60213
`
`reason in the original disapproval” and that the presiding officer’s finding
`was “not pertinent to upholding the disapproval.” Last, the Administrator
`concluded that, even considering the supplementary evidence, that evidence
`shows that SPA 12-66B reimbursement rate would overpay more than sixty
`percent of pharmacies in excess of their actual costs for multiple and single
`source drugs. Accordingly, the Administrator upheld CMS’ initial decision
`that SPA 12-66B does not represent the State’s best estimate of costs that
`Louisiana pharmacists generally paid in 2012. Louisiana timely petitioned for
`review in this court.
`
`III.
`We review the Administrator’s decision disapproving a state plan
`
`amendment under the Administrative Procedure Act, 5 U.S.C. §§ 701–706
`(2003), to ensure that the decision was not arbitrary, capricious, an abuse of
`discretion, or otherwise not in accordance with law. See 5 U.S.C. § 706; La.
`Dep’t of Health & Hosps., 346 F.3d at 576. We also must “defer to the
`Secretary’s
`interpretation of Medicare
`legislation and
`its attendant
`regulations—the Secretary’s interpretation of Medicare regulations is given
`‘controlling weight unless it is plainly erroneous or inconsistent with the
`regulation.’” Id. (quoting Harris Cty. Hosp. Dist. v. Shalala, 64 F.3d 220, 221
`(5th Cir. 1995)). “If the agency’s ruling meets these standards, our belief that
`an alternate interpretation is more appropriate is irrelevant.” Louisiana, 905
`F.2d at 881 (citing Homan & Crimen, Inc. v. Harris, 626 F.2d 1201 (5th Cir.
`1980)).
`
`IV.
`The Administrator eventually reviewed the State’s supplementary
`
`data, so we do so as well and we need not determine whether CMS correctly
`refused initially to credit this later-submitted data. The supplementary
`evidence consists primarily of spreadsheets of survey data that an accountant
`prepared for Louisiana in December 2012. The State also submitted the
`
`10
`
`

`

`Case: 20-60213 Document: 00515808162 Page: 11 Date Filed: 04/05/2021
`
`No. 20-60213
`
`accountant’s narrative declaration that, for certain brand-name drug groups,
`34% of the surveyed pharmacies had ingredient costs that exceeded SPA 12-
`66B’s reimbursement rate (average acquisition cost plus 1%). The accountant
`further explained that, for generic drug groups, about 37% of the pharmacies
`had ingredient costs that exceeded SPA 12-66’s reimbursement rate (average
`acquisition cost plus 10%).
`
`But as the Administrator noted, these figures do “not disrupt or
`counter the original supposition when implementing SPA 12-55, which never
`had an expectation that all pharmacies would have their costs reimbursed,
`based on average acquisition cost and that a process was provided for that
`scenario in SPA 12-55.”4 The additional data also undercuts the State’s
`argument: while that data showed that SPA 12-66B’s methodology would
`underpay almost forty percent of pharmacists, the Administrator noted
`conversely that SPA 12-66B overpaid “more than 60 percent of pharmacies
`in excess of their actual costs for” for both generic and brand-name drugs.
`While an average-based metric will necessarily result in a methodology that
`underpays some pharmacists, the Administrator reasonably could conclude
`that SPA 12-66B overpaid most pharmacists. Finally, none of the
`supplemental data addressed specialty drugs, which SPA 12-66B reimbursed
`at “Wholesale Average Cost (a more generous price index) plus 5 percent.”
`
`The Administrator could also reasonably conclude that the State had
`not carried its evidentiary burden, even with the additional data. The
`regulation at 42 C.F.R. § 477.518(b)(2), consistent with § 1902(a)(30)(a) of
`the Social Security Act, provides that each state must “make assurances
`
`
`
`4 The State told CMS when it proposed SPA 12-55 that, because its methodology
`represents an average cost, “prices for individual drugs may sometimes be below the cost
`as experienced by individual providers,” and so “[a]djustments will be made to the [general
`reimbursement rate] when the overall average has increased, which can be reported to [the
`State’s accountant-consultant].”
`
`11
`
`

`

`Case: 20-60213 Document: 00515808162 Page: 12 Date Filed: 04/05/2021
`
`No. 20-60213
`
`satisfactory to CMS” that the economy, efficiency, and quality of care
`requirements are met, and these assurances must be supported, on CMS’
`request, by “data, mathematical and statistical computations, comparisons,
`and any other pertinent records.” 42 C.F.R. § 447.518(c). While a “a state’s
`EAC formula may overestimate the cost of some specific drugs,” the formula
`must produce “the closest, best estimate of the price pharmacists generally
`and currently pay for this category as a whole.” Louisiana, 905 F.2d at 879.
`None of the data show why the State retreated from the use of actual invoices
`to using an inflated multiplier. CMS reasonably could be skeptical of
`Louisiana’s disclaimer of reliance on actual invoices less than two months
`after the State represented that actual invoices provided the most accurate
`figures. On this record, CMS’ decision is not “so implausible that it could
`not be ascribed to a difference in view or the product of agency expertise.”
`Motor Vehicle Mfrs. Ass’n, 463 U.S. at 43. The Administrator’s decision thus
`withstands our limited appellate review.
`V.
`Louisiana’s remaining arguments fare no better. It contends that, in
`
`denying SPA 12-66B, CMS held it to the more onerous but not-yet-enacted
`rule requiring states’ reimbursement methodologies represent their best
`estimate of pharmacists’ actual costs. But as in Louisiana, there is nothing in
`the record suggesting that the State was precluded from relying on average
`acquisition costs, only that CMS concluded that SPA 12-66B’s across-the-
`board multipliers did not represent the state’s best estimate of prices that
`pharmacists generally paid in 2012. See Louisiana, 905 F.2d at 882 (“But
`there is nothing in the Administrator’s decision here that indicates that
`Louisiana would not have prevailed had it been able to prove that AWP did
`provide the closest price estimate.”).
`
`Louisiana also argues that CMS’ decision is arbitrary when compared
`to its treatment of other states. The State asserts Colorado as a comparator,
`
`12
`
`

`

`Case: 20-60213 Document: 00515808162 Page: 13 Date Filed: 04/05/2021
`
`No. 20-60213
`
`because there CMS approved a similar EAC model. The State acknowledges,
`however, that, contrary to Colorado’s CMS-approved rates, Louisiana
`previously had said that an average acquisition cost, without any multiplier
`or markup, is the State’s best estimate of costs. And Colorado’s approved
`methodology applied only to rural pharmacies, and thus was more targeted
`than Louisiana’s across-the-board multipliers. Further, CMS approved the
`Colorado plan with the caveat that it would be phased out over a one-year
`period.
`
`Louisiana also cites CMS’ determinations from 1991 involving
`Arkansas and Oklahoma which it says demonstrate that it carried its burden.
`Those cases involved CMS’ disapproval of state’s plan amendments after
`the states’ failure to produce any evidence supporting their proposals. See
`Ark. Dep’t of Human Servs., No. 90-119, 1991 WL 634857 (DAB Aug. 22,
`1991); Okla. Dep’t of Human Servs., No. 90-164, 1991 WL 634860 (DAB Aug.
`13, 1991). While Louisiana’s evidence certainly surpasses Oklahoma’s and
`Arkansas’s from those cases, Louisiana points to no rule that those cases set
`a minimum evidentiary benchmark above which CMS is obligated to approve
`a state’s plan. Such a rule would contravene states’ obligation to ensure that
`their plans represent their best estimates of pharmacists’ actual costs. CMS’
`conclusion that Louisiana did not meet this obligation with respect to SPA
`12-66 is reasonable.
`
`The petition for review is DENIED.
`
`13
`
`