Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-03-05118/USCOURTS-caDC-03-05118-0/pdf.json

Nature of Suit Code: 890
Nature of Suit: Other Statutory Actions
Cause of Action: 

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Notice: This opinion is subject to formal revision before publication in the

Federal Reporter or U.S.App.D.C. Reports. Users are requested to notify

the Clerk of any formal errors in order that corrections may be made

before the bound volumes go to press.

United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued December 12, 2003 Decided April 2, 2004

No. 03-5117

PHARMACEUTICAL RESEARCH AND MANUFACTURERS OF AMERICA,

APPELLEE

NATIONAL URBAN INDIAN COALITION AND

NATIONAL ALLIANCE FOR THE MENTALLY ILL OF MICHIGAN,

APPELLANTS

v.

TOMMY G. THOMPSON, IN HIS OFFICIAL CAPACITY AS

SECRETARY, UNITED STATES DEPARTMENT OF HEALTH AND

HUMAN SERVICES, ET AL.,

APPELLEES

Consolidated with

03–5118

Appeals from the United States District Court

for the District of Columbia

(No. 02cv01306)

–————

 Bills of costs must be filed within 14 days after entry of judgment.

The court looks with disfavor upon motions to file bills of costs out

of time.

USCA Case #03-5118 Document #813702 Filed: 04/02/2004 Page 1 of 17
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Jonathan S. Franklin argued the cause for the appellants.

Darrel J. Grinstead and H. Christopher Bartolomucci were

on brief.

Bert W. Rein, Michael L. Sturm, Eve Klindera Reed and

Dineen Pashoukos Wasylik were on brief for appellants

National Urban Indian Coalition and National Alliance for the

Mentally Ill of Michigan.

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

amici curiae Washington Legal Foundation et al.

Alisa B. Klein, Attorney, United States Department of

Justice, argued the cause for the appellees. Peter D. Keisler,

Assistant Attorney General, Roscoe C. Howard, Jr., United

States Attorney, and Mark B. Stern, Attorney, United States

Department of Justice, were on brief.

Michael A. Cox, Attorney General, State of Michigan,

Thomas Case, Solicitor General, State of Michigan, Charles J.

Cooper, Hamish P. M. Hume, Gordon D. Todd, Derek L.

Shaffer and Elisebeth C. Cook were on brief for Michigan

Department of Community Health.

Bruce Vignery, Dorothy Siemon, Sarah Lock and Michael

R. Schuster were on brief for amicus curiae American Association of Retired Persons.

Before: HENDERSON and ROGERS, Circuit Judges, and

WILLIAMS, Senior Circuit Judge.

Opinion filed for the court by Circuit Judge HENDERSON.

KAREN LECRAFT HENDERSON, Circuit Judge: The appellants,

the Pharmaceutical Research and Manufacturers of America

(PhRMA) and two non-profit organizations, the National Alliance for the Mentally Ill of Michigan (NAMI) and the National Urban Indian Coalition (NUIC) (referred to jointly as

Non–Profits),1

 appeal the district court’s summary judgment

1 The district court held that NAMI lacked standing to pursue

this action. 259 F. Supp. 2d at 52. We need not resolve NAMI’s

USCA Case #03-5118 Document #813702 Filed: 04/02/2004 Page 2 of 17
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rejecting their challenge to the ‘‘Michigan Best Practices

Initiative’’ (Initiative), a low-cost state prescription drug coverage program—for beneficiaries of Medicaid and of two nonMedicaid state health programs—which was designed by the

State of Michigan and approved by the Secretary of the

United States Department of Health and Human Services

(Secretary, HHS). Under the Initiative, if a drug manufacturer does not sign each of two specified rebate agreements

with Michigan—one to provide rebates for drugs the state

purchases for Medicaid recipients and the other to provide

identical rebates for drugs the state purchases for the two

non-Medicaid state health programs—the drug will be covered under the programs subject to ‘‘prior authorization.’’

The appellants argue, as they did below, that the Initiative

violates (1) the ‘‘formulary’’2

 provision of the Medicaid outpatient drug payment statute, 42 U.S.C. § 1396r–8(d)(4), because it excludes from its drug formulary those drugs for

which prior authorization is required; (2) the general statutory mandate that Medicaid services be provided in a manner

consistent with the best interests of the recipients, 42

U.S.C.A. § 1396a(a)(19); and (3) the Commerce Clause of the

United States Constitution because it requires manufacturers

to charge the same prices both within and without Michigan.

Because the district court correctly rejected each of these

arguments, we affirm the summary judgment.3

appeal of this ruling because both PhRMA and NUIC have standing

and NUIC raises the same arguments on appeal as NAMI. See

Central Fla. Enters. v. FCC, 683 F.2d 503, 505 n.3 (D.C. Cir. 1982)

(‘‘[W]e need not resolve the issue of [appellant organization’s]

standing since it raises no issues not raised by [broadcaster appellant] that would affect the disposition of the appeal, making irrelevant whether we view their submissions as those of parties or of

amici.’’)

2 ‘‘Webster’s New Collegiate Dictionary (1994) defines a ‘formulary’ as ‘a book listing medicinal substances and formulas.’ ’’

PhRMA v. Meadows, 304 F.3d 1197, 1202 (11th Cir. 2002), cert.

denied, 123 S. Ct. 2213 (2003).

3 Michigan argues that the appellants have no private right of

action for injunctive relief against the state based on Justices

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I.

The Medicaid program, jointly funded by the federal government and the states, pays for medical services to lowincome persons pursuant to state plans approved by the

Secretary. See 42 U.S.C. § 1396a(a)-(b). The statutory rebate provisions require that, in order for a state to receive

Medicaid payments for a covered outpatient drug, the drug’s

manufacturer must have entered into an agreement to rebate

a specified portion of the drug’s price pursuant to a state plan

approved by the Secretary. 42 U.S.C. § 1396r–8(a)(1). In

recent years, some states have gone beyond the required

Medicaid rebate agreement and ‘‘have enacted supplemental

rebate programs to achieve additional cost savings on Medicaid purchases as well as for purchases made by other needy

citizens.’’ PhRMA v. Walsh, 123 S. Ct. 1855, 1860 (2003).

The Initiative is one such supplemental program.

The Initiative began in October 2001 when Michigan’s

governor convened the Pharmacy & Therapeutics Committee

(Committee), made up of physicians and pharmacists, with

instructions to review the ‘‘Michigan Pharmaceutical Product

Scalia’s and Thomas’s separate opinions in PhRMA v. Walsh, 123 S.

Ct. 1855 (2003). See 123 S. Ct. at 1878 (Scalia, J., concurring in

judgment) (‘‘[T]he remedy for the State’s failure to comply with the

obligations it has agreed to undertake under the Medicaid Act is set

forth in the Act itself: termination of funding by the Secretary of

the Department of Health and Human Services.’’ (citing Blessing v.

Freestone, 520 U.S. 329, 349 (1997); Pennhurst State Sch. & Hosp.

v. Halderman, 451 U.S. 1, 17 (1981); 42 U.S.C. § 1396c); id. at

1878 (Thomas, J., concurring in the judgment) (because ‘‘Spending

Clause legislation ‘is much in the nature of a contract,’ ’’ there are

‘‘serious questions as to whether third parties may sue to enforce

Spending Clause legislation—through pre-emption or otherwise’’)

(quoting Pennhurst, 451 U.S. at 17; citing Blessing v. Freestone,

520 U.S. 329, 349–350 (1997)). By addressing the merits of the

parties’ arguments without mention of any jurisdictional flaw, the

remaining seven Justices appear to have sub silentio found no flaw.

See Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 94–102

(1998) (federal courts must ensure they have jurisdiction before

considering merits).

USCA Case #03-5118 Document #813702 Filed: 04/02/2004 Page 4 of 17
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List’’ (MPPL), a listing of all drugs covered by any program

operated by Michigan’s Department of Community Health

(DCH), including those requiring prior authorization. The

Committee studied 40 therapeutic drug classes and in each

class designated two or more as ‘‘Therapeutically Advantageous,’’ that is, as having a clinical advantage over other

drugs in the class without regard to cost. Declaration of

David Viele, Deputy Director of DCH (Viele Decl.) ¶ ¶ 15–17.

These ‘‘best in class’’ drugs were designated as ‘‘Preferred

Drugs’’ and were included on the MPPL for automatic reimbursement under the Initiative. The best-in-class drug available at the lowest cost anywhere in the United States (taking

into account the mandatory Medicaid rebate) was designated

as the ‘‘reference drug’’ and all drugs in the class priced

comparably with it were also listed on the MPPL as Preferred Drugs for automatic reimbursement. Id. ¶ ¶ 20–21.

All remaining drugs were labeled ‘‘non-preferred drugs’’ and

were listed on the MPPL with an asterisk signifying required

prior authorization for reimbursement—unless the manufacturer signed both a ‘‘Supplemental Drug–Rebate Agreement’’

(Medicaid Agreement) requiring the manufacturer to rebate

to the state the difference between the price of the drug and

the price of the reference drug for Medicaid purchases and a

‘‘Non–Medicaid State Funded Rebate Agreement’’ (Non–

Medicaid Agreement), extending the additional rebate to

Michigan’s non-Medicaid state prescription drug programs.

Id. ¶ ¶ 22, 24–25, 29.

In Fall 2001 DCH submitted to the Secretary a proposed

State Plan Amendment to Michigan’s State Medicaid Plan

incorporating the Initiative’s provisions for approval pursuant

to 42 U.S.C. § 1396. The Secretary approved use of the

Medicaid Agreement in a letter dated January 24, 2002 and of

the additional Non–Medicaid Agreement in a letter dated

December 5, 2002 (Non–Medicaid Approval Letter). The

Secretary limited approval of the non-Medicaid rebate program, however, to only two of the four Michigan health

programs for which it was proposed: the Elder Prescription

Insurance Company Program (EPIC), which provides prescription drug coverage to low-income seniors, and the MaterUSCA Case #03-5118 Document #813702 Filed: 04/02/2004 Page 5 of 17
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nity Outpatient Medical Service (MOMS), which provides prenatal care, including drug coverage, to low-income, adolescent

and incarcerated females and to Medicaid beneficiaries eligible for emergency services only.

On June 28, 2002 PhRMA filed this action challenging the

Secretary’s approval of the prior authorization provisions in

both the Medicaid Agreement and the Non–Medicaid Agreement. DCH intervened on the side of the Secretary and the

Non–Profits intervened in support of PhRMA. In a decision

dated March 28, 2003 the district court granted summary

judgment in favor of the Secretary and DCH. PhRMA and

the Non–Profits filed timely appeals.

After the district court entered judgment, the United

States Supreme Court issued its decision in PhRMA v.

Walsh, 123 S. Ct. 1855, 1860 (2003), which affirmed the First

Circuit’s vacatur of a preliminary injunction preventing implementation of Maine’s Medicaid-covered outpatient drug program which, like Michigan’s, requires prior authorization for a

Medicaid drug if its manufacturer has not agreed to provide

rebates both for Medicaid and for non-Medicaid state prescription drug programs.4

 In Walsh the Supreme Court

expressly rejected PhRMA’s challenges to Maine’s program

based on Medicaid’s ‘‘best interests’’ requirement, albeit without a majority opinion, and, by a majority, on the Commerce

Clause. The analyses in Walsh enlighten ours here.

II.

We review the district court’s grant of summary judgment

de novo pursuant to the Administrative Procedure Act and

therefore will uphold the Secretary’s decision unless it is

‘‘arbitrary, capricious, an abuse of discretion, or otherwise not

in accordance with law,’’ 5 U.S.C. § 706(2)(A). See Arizona v.

Thompson, 281 F.3d 248, 253 (D.C. Cir. 2002) (citing Indep.

Petroleum Ass’n of Am. v. DeWitt, 279 F.3d 1036 (D.C. Cir.

4 Unlike Michigan’s non-Medicaid programs, Maine’s was open to

all state residents and the drugs were purchased by the program’s

members rather than by the state. 23 S. Ct. at 1860.

USCA Case #03-5118 Document #813702 Filed: 04/02/2004 Page 6 of 17
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2002); Dr. Pepper/Seven-Up Cos. v. FTC, 991 F.2d 859, 862

(D.C. Cir. 1993)). There is some question, however, what

level of deference the court should accord the Secretary’s

interpretation of the Medicaid drug payment statute. Ordinarily we review an agency’s interpretation of a statute it is

charged with implementing under the familiar and deferential

two-part framework of Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984). The

appellants assert, however, that the Secretary’s decisions

approving the Initiative are due only minimal deference, if

any, under a line of Supreme Court decisions beginning with

Skidmore v. Swift & Co., 323 U.S. 134 (1944), and culminating

in United States v. Mead, 533 U.S. 218 (2001). Cf. PhRMA v.

Thompson, 251 F.3d 219, 224 (D.C. Cir. 2001) (finding it

unnecessary to decide whether Secretary’s approval of Vermont Medicaid plan is entitled to Chevron deference). We

disagree and conclude the Secretary’s decisions are entitled

to Chevron deference. Accord Texas v. HHS, 61 F.3d 438,

440 (5th Cir. 1995); Georgia v. Shalala, 8 F.3d 565, 1573 (11th

Cir. 1993).

The appellants contend that the Secretary’s decisions do

not qualify for Chevron deference because they do not carry

the force of law. In particular, the appellants assert the

Secretary’s statutory interpretations here are not the result

of a formal administrative process, do not involve agency

expertise, are inconsistent with previous HHS interpretations

and were developed solely in response to this lawsuit. Thus,

the appellants argue, the Secretary’s interpretations are akin

to ‘‘ ‘interpretations contained in policy statements, agency

manuals, and enforcement guidelines,’ ’’ which are ‘‘beyond

the Chevron pale.’’ Mead, 533 U.S. at 234 (quoting Christensen v. Harris County, 529 U.S. 576, 587 (2000)). This argument overlooks the nature of the Secretary’s authority. This

is not a case of implicit delegation of authority through the

grant of general implementation authority. In the case of the

Medicaid payment statute, the Congress expressly conferred

on the Secretary authority to review and approve state

Medicaid plans as a condition to disbursing federal Medicaid

payments. See 42 U.S.C. § 1396 (‘‘The sums made available

USCA Case #03-5118 Document #813702 Filed: 04/02/2004 Page 7 of 17
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under this section shall be used for making payments to

States which have submitted, and had approved by the Secretary, State plans for medical assistance.’’). In carrying out

this duty, the Secretary is charged with ensuring that each

state plan complies with a vast network of specific statutory

requirements, see generally 42 U.S.C. 1396a, including the

prescription rebate agreement provision in section 1396r–8.

Through this ‘‘express delegation of specific interpretive authority,’’ Mead, 533 U.S. at 229, the Congress manifested its

intent that the Secretary’s determinations, based on interpretation of the relevant statutory provisions, should have the

force of law. The Secretary’s interpretations of the Medicaid

Act are therefore entitled to Chevron deference. See Mead,

533 U.S. at 227 (‘‘When Congress has ‘explicitly left a gap for

an agency to fill, there is an express delegation of authority to

the agency to elucidate a specific provision of the statute by

regulation,’ and any ensuing regulation is binding in the

courts unless procedurally defective, arbitrary or capricious in

substance, or manifestly contrary to the statute.’’ (quoting

Chevron, 837 U.S. at 843–44)).5

 Accordingly, we now review

the appellants’ substantive challenges under Chevron.

5 Nonetheless, we note that, while ‘‘the overwhelming number of

TTT cases applying Chevron deference have reviewed the fruits of

notice-and-comment rulemaking or formal adjudication,’’ Chevron

deference may be warranted ‘‘even when no such administrative

formality was required and none was afforded.’’ Mead, 533 U.S. at

230–31 (citing NationsBank of N.C., N.A. v. Variable Annuity Life

Ins. Co., 513 U.S. 251, 256–57, 263 (1995)). Further, the Secretary’s

approval decisions are of a different order from the customs classifications at issue in Mead. The Mead Court observed that 49

different customs offices issued 10,000 to 15,000 customs classifications each year, that ‘‘their treatment by the agency makes it clear

that a letter’s binding character as a ruling stops short of third

parties’’ and that the agency ‘‘in fact warned against assuming any

right of detrimental reliance.’’ Mead, 533 U.S. at 233 (citing 19

C.F.R. § 177.9(c) (2000)). In contrast, HHS considers state Medicaid plans for the fifty states and the District of Columbia and has

promulgated a uniform prior authorization policy for them. See

9/18/2002 HHS Letter to State Medicaid Directors at 2.

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A. The Statutory Formulary Provision

First, the appellants assert the Initiative’s prior authorization requirement violates section 1396r–8(d)(4), which governs

formularies. We conclude the Secretary’s approval of the

Initiative’s prior authorization requirement rests on a permissible construction of the statute under Chevron.

The Medicaid rebate provisions, enacted in 1990, expressly

authorize a state ‘‘to subject to prior authorization any covered outpatient drug’’ so long as the state ‘‘provides response

by telephone or other telecommunication device within 24

hours of a request for prior authorization’’ and ‘‘provides for

the dispensing of at least 72–hour supply of a covered outpatient prescription drug in an emergency situation.’’ 42 U.S.C.

§ 1396r–8(d)(1)(A), (5(A)-(B)).6

 In 1993 the Congress added

the formulary provision which authorizes a state to create a

drug ‘‘formulary’’ of covered drugs that is ‘‘developed by a

committee consisting of physicians, pharmacists, and other

appropriate individuals appointed by the Governor of the

State.’’ Id. § 1396r–8(d)(4)(A). The provision further directs

that each formulary must ‘‘include[ ] the covered outpatient

drugs of any manufacturer which has entered into and complies with a [rebate] agreement under [section 1396r–8(a)]’’

and permits ‘‘[a] covered outpatient drug [to] be excluded

with respect to the treatment of a specific disease or condition

for an identified population (if any) only if TTT the excluded

drug does not have a significant, clinically meaningful therapeutic advantage in terms of safety, effectiveness, or clinical

outcome of such treatment for such population over other

drugs included in the formulary and there is a written

explanation (available to the public) of the basis for the

exclusion.’’ 42 U.S.C. § 1396r–8(d)(4)(B)-(C). In addition,

the state is required to ‘‘permit[ ] coverage of a drug excluded

from the formulary TTT pursuant to a prior authorization

program that is consistent with [section 1396r–8(d)(5)].’’ Id.

§ 1396r–8(d)(4)(D).

6 The appellants do not dispute that the Initiative complies with

the two statutory requirements. See Viele Decl. ¶ ¶ 47–48.

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The appellants contend that the Initiative’s prior authorization requirement violates the formulary provision because it

excludes the asterisked drugs7

 from the MPPL based on their

price rather than their therapeutic value and because the

Secretary has not provided the requisite written explanation

for the exclusion. The Secretary does not dispute that the

MPPL is a formulary, see Fed. Appellees’ Br. at 28, but,

relying on the Supreme Court’s opinion in Walsh, asserts that

the Initiative’s prior authorization program was implemented

pursuant to the general prior authorization authority conferred by section 1396r–8(d)(1)(A) and is expressly exempted

from the formulary restrictions in section 1396r–8(d)(4)(B)-(C)

by the final sentence of section 1396r–8(d)(4): ‘‘A prior authorization program established under [section 1396r–8(d)(5)]

is not a formulary subject to the requirements of [section

1396r–8(d)(4)].’’8

 The appellants respond that the Secretary’s

construction permits a state to gut the restriction on formulary exclusion in section 1396r–8(d)(4)(C) by simply attaching

the label ‘‘prior authorization program’’ to what is really a

formulary drug exclusion. They point out that, under the

Secretary’s interpretation, the formulary provision serves no

purpose because its end result—drug availability restricted

by prior authorization—can be more easily achieved, that is,

without running the gauntlet of subsection 396r–8(d)(4)(C), if

a state simply invokes prior authorization authority up front

under section (d)(1)(A).

Under the Chevron framework, ‘‘[i]f TTT ‘Congress has

directly spoken to the precise question at issue,’ we must give

effect to Congress’s ‘unambiguously expressed intent’ ’’ but

‘‘[i]f ‘the statute is silent or ambiguous with respect to the

specific issue,’ we ask whether the agency’s position rests on

a ‘permissible construction of the statute.’ ’’ Beverly Health

7 As noted above, supra p. 5, drugs subject to prior authorization

are marked with asterisks on the MPPL.

8 The appellants assert that on appeal the Secretary relies on the

Walsh decision to the exclusion of ‘‘any other defense.’’ PhRMA

Reply Br. at 4 n.1; see also id. at 12. The Secretary’s argument, as

we read it, is that Walsh confirms his position below.

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& Rehab. Servs. v. Nat’l Labor Relations Bd., 317 F.3d 316,

321 (D.C. Cir. 2003) (quoting Chevron, 467 U.S. at 842–43)

(additional quotations omitted). Applying this standard we

conclude that the Secretary’s position, at least as applied to

the circumstances here, reflects a permissible construction of

the statutory provisions under Chevron.

We acknowledge that there is tension, if not actual inconsistency, between the broad prior authorization power granted

under subsection (d)(1)(A), buttressed by the final exempting

sentence of subsection (d)(4), and the apparent intent of the

formulary provision to broaden drug availability. The appellants are correct that under the Secretary’s construction the

formulary provision simply gives the states an alternate, and

more cumbersome, means of subjecting drugs to prior authorization. Nonetheless, the tension is a necessary consequence

of the language the Congress drafted. The Secretary’s construction permits all of the language to be given its plain

meaning, albeit with a somewhat anomalous result. The

appellants’ construction, on the other hand, would require a

crabbed reading of subsection (d)(1)(A) and of the final sentence of subsection (d)(4) and yet would not produce a coherent statutory scheme. Given these choices—neither entirely

satisfactory—we believe the Secretary reasonably chose an

interpretation consistent with the literal meaning of the statutory language. We note the Eleventh Circuit approved the

same construction in PhRMA v. Meadows, 304 F.3d 1197

(11th Cir. 2002), cert. denied, 123 S. Ct. 2213 (2003).9

9 The Eleventh Circuit, however, decided the issue under step one

of Chevron, concluding that there is no inconsistency given the

‘‘unequivocal’’ language of section (d)(1)(A), granting broad prior

authorization authority (expressly set out as an alternative to

restricting coverage through a formulary), and of the final sentence

of section (d)(4), exempting section (d)(1)(A) programs from the

formulary restrictions. PhRMA v. Meadows, 304 F.3d at 1210–11.

The Secretary’s construction is also consistent with the various

opinions in Walsh which, in addressing the parties’ ‘‘best interests’’

arguments, appear to assume, without expressly deciding, that it is

permissible for a state to subject drugs in a formulary to prior

authorization, although the opinions differ as to the circumstances

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B. The Best Interests of Medicaid Recipients

Next, the appellants argue, as in Walsh, that the Medicaid

Agreement violates the general statutory requirement that a

state Medicaid plan ‘‘provide such safeguards as may be

necessary to assure that eligibility for care and services under

the plan will be determined, and such care and services will

be provided, in a manner consistent with simplicity of administration and the best interests of the recipients.’’ 42 U.S.C.A.

§ 1396a(a)(19) (emphasis added). Specifically, they argue

that, by making a drug available to Medicaid beneficiaries

without prior authorization only if the drug’s manufacturer

has signed the Non–Medicaid Agreement, the Initiative benefits EPIC and MOMS participants at the expense of Medicaid

beneficiaries and therefore is not in the best interests of

Medicaid recipients. We reject this argument as well.

We first consider whether the Secretary’s interpretation of

section 1396a(a)(19) is permissible under Chevron and find

that it is. The Secretary construes the best interests requirement to allow a state to establish a Medicaid prior authorization program in order to secure rebates on drugs for nonMedicaid populations if ‘‘a state demonstrates ‘through appropriate evidence that the prior authorization program will

further the goals and objectives of the Medicaid program.’ ’’

Fed. Appellant’s Br. at 29 (quoting 9/18/2002 HHS Letter to

State Medicaid Directors at 3). Specifically, the Secretary

concluded that ‘‘by making prescription drugs accessible to

the EPIC and MOMS populations, which are closely related

to Medicaid populations in terms of financial and medical

need, it is reasonable to conclude that these populations (and

in the case of the MOMS program, their children) will maintain or improve their health status and be less likely to

become Medicaid eligible.’’ Non–Medicaid Apporval Letter

under which prior authorization may be imposed. This construction

is also consistent with the Walsh Court’s construction of the final

sentence of section 1396r–8(d)(4), albeit in dictum, to mean that ‘‘a

prior authorization program that complies with the 24–hour and 72–

hour conditions is not subject to the limitations imposed on formularies.’’ Walsh, 123 S. Ct. at 1862 (citing 42 U.S.C. § 1396r–8(d)(4)).

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at 2. Conversely, in the Secretary’s view, the failure to

implement the Non–Medicaid Agreement could require cuts

in the two non-Medicaid programs that ‘‘will necessarily

result in some individuals enrolling in Medicaid, and for

others, lead to a decline in their health status and resources

that will result in Medicaid eligibility or increased Medicaid

expenses’’ and the ‘‘[i]ncreased Medicaid enrollments and

expenditures for newly qualified Medicaid recipients will

strain already scarce Medicaid resources in a time of State

budgetary shortfalls.’’ Id. at 3. The Secretary’s conclusion

that a prior authorization program that serves Medicaid goals

in this way can be consistent with Medicaid recipients’ best

interests, as required by section 1396a(a)(19), is reasonable on

its face. If the prior authorization program prevents borderline populations in Non–Medicaid programs from being displaced into a state’s Medicaid program, more resources will

be available for existing Medicaid beneficiaries. Six Justices

in Walsh acknowledged that such an effect can be in the best

interests of Medicaid beneficiaries.10 The plurality decision

there, authored by Justice Stevens and joined by Justices

Souter and Ginsburg, relied on precisely this reasoning in

determining that Maine’s program served the best interests

of Medicaid recipients, see 123 S. Ct. at 1867–68 (‘‘[T]here is

the possibility that, by enabling some borderline aged and

infirm persons better access to prescription drugs earlier,

Medicaid expenses will be reduced. If members of this

borderline group are not able to purchase necessary prescription medicine, their conditions may worsen, causing further

financial hardship and thus making it more likely that they

will end up in the Medicaid program and require more

expensive treatment.’’). In her separate opinion, Justice

O’Connor, joined by Chief Justice Rehnquist and Justice

Kennedy, also suggested that this rationale, although ‘‘not

self-evident,’’ would suffice if supported by facts in the record.

1123 S. Ct. at 1881.

Having concluded the Secretary’s statutory interpretation

is permissible, we must next consider whether his specific

10 These Justices did not invoke Chevron deference, presumably

because the Secretary had not reviewed Maine’s program and

participated in the case only as amicus curiae.

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determination that the Initiative serves valid Medicaid goals

is ‘‘arbitrary, capricious, an abuse of discretion, or otherwise

not in accordance with law,’’ 5 U.S.C. § 706(2)(A). We conclude that it is not. The two Michigan Non–Medicaid programs, unlike Maine’s program (or the two other Michigan

programs for which the Secretary declined to approve a

Medicaid prior authorization requirement, see Letter from

Medicaid Administrator Scully to DCH Director Olszewski),

are open only to ‘‘borderline’’ populations many of whom may

become Medicaid beneficiaries without the support of EPIC

and MOMS. See Walsh, 123 S. Ct. at 1878 (O’Connor, J.)

(rejecting plurality rationale in part because Maine Program

was ‘‘open to all Maine residents, rich and poor,’’ did ‘‘not

purport to further a Medicaid-related purpose’’ and was ‘‘not

tailored to have such an effect’’).11 The EPIC program

provides prescription drug benefits to seniors age 65 and

older with household income levels below 200% of the federal

poverty level. Michigan estimated that 3% of its beneficiaries

(the figure used in similar calculations by the neighboring

states of Indiana and Wisconsin), or 3,000 persons, would

convert to Medicaid without the EPIC program. Based on

an average monthly cost per member of $1,220, Michigan

calculated that EPIC saves the state Medicaid program

$44,147,760 per year. For the MOMS program, which provides prenatal care for women below 185% of the federal

poverty level, adolescents under 18, persons eligible under

Medicaid for emergency services only and incarcerated beneficiaries, Michigan focused on newborns who would be at risk

for neonatal intensive care in the absence of prenatal care.

Based on state birth data, Michigan estimated that 3.2% of

babies born to the 5,287 MOMS beneficiaries who will not

become Medicaid-eligible, or 169 newborns, would require

neonatal intensive care in the absence of MOMS prenatal

11 We note that our arbitrary-and-capricious standard favors the

Secretary’s finding of benefit, while in Walsh the preliminary

injunction abuse-of-discretion standard, as Justice O’Connor noted,

favored affirming the district court’s granting of the injunction.

See 123 S. Ct. at 1881 (citing Doran v. Salem Inn, Inc., 422 U.S.

922, 931–32 (1975)).

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care. Then, based on the average annual cost for neonatal

intensive care of $27,461 per infant, Michigan estimated

MOMS saved Medicaid $4,646,002 per year. While the record support for Michigan’s estimates is less than overwhelming, it is sufficient to persuade us the Secretary’s determination of Medicaid-related benefit is not arbitrary, particularly

given the absence of any demonstrable significant impediment

to Medicaid services from Michigan’s prior authorization requirement. See 123 S. Ct. at 1868 (plurality concluding that

prior authorization program must not ‘‘severely curtail[ ]

Medicaid recipients’ access to prescription drugs’’); id. at

1881 (O’Connor, J.) (noting ‘‘concrete evidence of the burdens

that Maine Rx’s prior-authorization requirement would impose on Medicaid beneficiaries’’).

The undisputed evidence establishes that the Initiative’s

prior authorization procedure affords Medicaid beneficiaries

reasonable and prompt access to those drugs subject to prior

authorization. Under the Initiative, DCH’s pharmacy benefits manager immediately authorizes a prior authorization

drug if (1) the drug is needed ‘‘due to a specific medical

condition or necessity, such as a drug allergy’’; (2) the

beneficiary has used the drug for several months and changing drugs is ‘‘medically inadvisable’’; (3) the beneficiary has

tried available drugs in the class and experienced ‘‘treatment

failure or side effects’’; or (4) the drug works better in

combination with other medications the beneficiary uses.

Viele Decl. ¶ 46. If the drug fits none of these categories, the

request is ‘‘immediately forwarded’’ to a pharmacist who

‘‘after further conversation with the physician’’ either authorizes the drug or ‘‘informs the physician of his right to appeal

to a DCH physician.’’ Id. ¶ 47. If the request is not ‘‘immediately resolved with a DCH physician,’’ the treating physician may prescribe an emergency 72–hour supply. Id. ¶ 48.

Perhaps most important, at the end of the prior authorization

process, ‘‘the prescribing physician has the final say as to

whether or not the requested drug will be approved’’ provided

he can ‘‘attest to medical necessity.’’ Id. ¶ 49. And the

available data confirm that in practice the prior authorization

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requirement has proved neither burdensome nor overly timeconsuming.12

C. Commerce Clause

Finally, PhRMA contends the Initiative violates the Commerce Clause because it ‘‘has the ‘practical effect’ of controlling out-of-state prices.’’ PhRMA Opening Br. at 54 (quoting

Healy v. Beer Inst., 491 U.S. 324, 336 (1989)). PhRMA

reasons that a manufacturer that wishes to raise the price of

a drug in a particular state must consider the effect of the

change on drug sales in Michigan. As an example, the

appellants note that ‘‘if the manufacturer is considering lowering the price of a [reference] drug, doing so would require

the manufacturer to lower the price of other drugs in the

same therapeutic class in Michigan if it wishes to avoid prior

authorization.’’ PhRMA Opening Br. at 57. PhRMA’s theory rests on an attenuated and speculative causal relationship

between the Initiative’s prior authorization requirement and

the price a manufacturer charges for a reference drug out-ofstate and, as the district court recognized, the claimed effect,

if any, ‘‘will occur only sporadically and incidentally,’’ 259 F.

Supp. 2d at 83. Most important, any interstate effect on

prices is the result not of provisions peculiar to the Initiative,

but of the federal Medicaid rebate statute which requires that

the rebate reflect the difference between the ‘‘average manufacturer price’’ and the ‘‘best price,’’ that is, ‘‘the lowest price

available from the manufacturer during the rebate period to

any wholesaler, retailer, provider, health maintenance organization, nonprofit entity, or governmental entity within the

United States.’’ 42 U.S.C. § 1396r–8(c)(A), (C). It is this

federal provision that requires interstate price conformity.

12 In July 2002, for example, all but 19% of prior authorization

requests placed with the program’s call center were resolved in two

to three minutes of conversation and only 2.2% were not approved

at the pharmacist stage. Viele Decl. ¶ 51. Further, from February

to July 2002 calls to the center averaged 2–3 minutes, discussions

with pharmacists, when necessary, lasted 2–6 minutes, appeals to

DCH physicians were resolved within 24 hours and facsimile requests were typically resolved within 24 hours. Id. ¶ 50.

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Thus, here, as in Walsh, the state prior authorization program ‘‘does not ‘regulate the price of an[ ] out-of-state transaction by its express terms or its inevitable effect.’ ’’ Walsh,

123 S. Ct. at 1857 (quoting PhRMA v. Concannon, 249 F.3d

66, 81 (2001)).

* * *

For the foregoing reasons the judgment of the district

court is

Affirmed.

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