In The 

Court of Appeals 

Seventh District of Texas at Amarillo 

 

No. 07-23-00175-CV 

 

NATIONAL ASSOCIATION OF CHAIN DRUG STORES, INC., APPELLANT 

 

V. 

 

CECILE YOUNG, IN HER OFFICIAL CAPACITY AS THE EXECUTIVE 

COMMISSIONER OF THE TEXAS HEALTH AND HUMAN SERVICES COMMISSION 

AND THE TEXAS HEALTH AND HUMAN SERVICES COMMISSION, APPELLEES 

 

On Appeal from the 98th District Court 

Travis County, Texas 

Trial Court No. D-1-GN-20-004599, Honorable Amy Clark Meachum, Presiding 

June 12, 2024 

MEMORANDUM OPINION 

Before DOSS and YARBROUGH and PIRTLE,

1

 JJ. 

By this appeal, we are asked to determine whether online updates to specific 

sections of the Texas Vendor Drug Program Pharmacy Provider Procedural Manual

(Manual), which impact the method for determining the “usual and customary” price for 

Medicaid reimbursement to participating pharmacies constitute new rules which were 

1 Patrick A. Pirtle, Justice (Ret.), Seventh Court of Appeals, sitting by assignment.
2

subject to the notice-and-comment rulemaking requirements of the Texas Administrative 

Procedure Act (APA).

2

 Appellant, the National Association of Chain Drug Stores, Inc. 

(NACDS) filed suit against Appellees, Cecile Young, in her official capacity as the 

Executive Director of the Texas Health and Human Services Commission, and the Texas 

Health and Human Services Commission (collectively HHSC) seeking a declaratory 

judgment and an injunction to prohibit enforcement of the updates. HHSC asserted 

sovereign immunity and argued the updates were not new rules subject to the notice-andcomment period. Both sides filed motions for summary judgment and HHSC also filed a 

plea to the jurisdiction. The trial court denied NACDS’s motion and granted HHSC’s 

cross-motion but denied its plea to the jurisdiction.3 

By two issues presented in its original brief and expounded on in its reply brief, 

NACDS contends the trial court erred in finding that (1) the updates to the Payment and 

Enrollment Sections of the Manual were not new rules which required compliance with 

the APA’s notice-and-comment period and (2) Commissioner Young did not act ultra 

vires.

4 HHSC complains of the trial court’s failure to grant its plea to the jurisdiction. We 

reverse and render.

2 See TEX. GOV’T CODE ANN. §§ 2001.001–.903. All further references to “§” or “section” are to the 

Texas Government Code unless another code is designated.

3 Originally appealed to the Third Court of Appeals, this appeal was transferred to this Court by the 

Texas Supreme Court pursuant to its docket equalization efforts. TEX. GOV’T CODE ANN. § 73.001. Should 

a conflict exist between precedent of the Third Court of Appeals and this Court on any relevant issue, this 

appeal will be decided in accordance with the precedent of the transferor court. TEX. R. APP. P. 41.3.

4 According to NACDS, Young acted ultra vires by failing to adopt rules that describe the process 

used to determine payment rates in violation of section 32.0281(a), (b) of the Human Resources Code, 

failing to adopt rules and standards governing the determination of fees, charges, and rates for Medicaid 

reimbursement in violation of section 531.021(d), (e) of the Government Code, and did not consult an 

advisory panel in adopting rules for the state prescription drug program in violation of section 531.302(c) of 

the Government Code.
3

PLEA TO THE JURISDICTION AND ULTRA VIRES CLAIM

Which came first, the chicken or the egg? We must first dispense with HHSC’s

contention of error in the trial court’s denial of its plea to the jurisdiction.5In doing so, it 

is difficult to discuss sovereign immunity without entwining the underlying challenge by 

NACDS to invalidate certain updates based on whether those updates are “rules” as 

defined by section 2001.003(6) of the APA.

Section 2001.038(a) of the APA waives sovereign immunity to the extent of 

creating a cause of action for declaratory relief regarding the validity of a rule if it is alleged 

the rule or its threatened application interferes with or impairs, or threatens to interfere 

with or impair, a legal right or privilege of the plaintiff. El Paso Hosp. Dist. v. HHSC, 247 

S.W.3d 709, 713 (Tex. 2008). “[T]he APA declaratory-judgment vehicle of section 

2001.038 is a legislative grant of subject-matter jurisdiction.” Combs v. Entertainment 

Publ’ns, Inc., 292 S.W.3d 712, 720 (Tex. App.—Austin 2009, no pet.). But the challenged 

agency action constituting a rule must exist for a party to successfully invoke the trial 

court’s subject matter jurisdiction under section 2001.038. Muth v. Voe, Nos. 03-22-

00420-CV, 03-22-00587-CV, 2024 Tex. App. LEXIS 2257, at *71 (Tex. App.—Austin 

March 29, 2024, no pet. h.) (mem. op.). As discussed in detail, infra, we find the updates 

are new rules which should have been subjected to a notice-and-comment period under 

the APA and conclude NACDS properly invoked the trial court’s jurisdiction to test the 

validity of those updates. 

5 NACDS contends HHSC waived any complaint regarding the denial of its plea to the jurisdiction 

by failing to file its own notice of appeal and HHSC conceded the point during oral argument. However, 

this Court must be satisfied the trial court had jurisdiction over the case.
4

The trial court’s jurisdiction was likewise invoked by NACDS’s allegation and proof 

that Young acted ultra vires by exceeding her authority in failing to comply with ministerial 

duties of the APA’s rulemaking requirements.

6

 See Teladoc, Inc. v. Tex. Med. Bd., 453 

S.W.3d 606, 613 (Tex. App.—Austin 2014, pet. denied). We conclude the trial court had 

subject matter jurisdiction and did not err in denying HHSC’s plea to the jurisdiction.

BACKGROUND

NACDS is a non-profit organization which represents pharmacies. Medicaid is a 

health insurance program funded by federal and state governments which provides 

prescription drug benefits through its Vendor Drug Program to eligible individuals enrolled 

in Texas Medicaid. Each individual pharmacy contracts with HHSC through a Pharmacy 

Enrollment Agreement (Agreement) authorizing each to dispense covered medications to 

Medicaid beneficiaries. Per the Agreement, pharmacy providers must submit their “usual 

and customary” price for Medicaid reimbursement claims pursuant to program 

requirements defined in the Manual. The Agreement requires pharmacies to provide

information when submitting a claim for reimbursement that “[i]s true, complete and 

accurate.” 

Title 1, section 355.8541 of the Texas Administrative Code governs reimbursement 

to pharmacies on the lesser of certain price points, one of which is the usual and 

6 A suit against a state official may still proceed even in the absence of a waiver of immunity if the 

official’s actions are ultra vires. Matzen v. McLane, 659 S.W.3d 381, 388 (Tex. 2021). An ultra vires claim 

requires a plaintiff to allege, and ultimately prove, that a government official acted without legal authority or 

failed to perform a purely ministerial act. City of El Paso v. Henrich, 284 S.W.3d 366, 372 (Tex. 2009). The 

Texas Supreme Court has clarified what it means for an official to act “without legal authority.” Hous. Belt 

& Terminal Ry. Co. v. City of Houston, 487 S.W.3d 154, 158 (Tex. 2016). “[A] government officer with some 

discretion to interpret and apply a law may nonetheless act ‘without legal authority,’ and thus ultra vires, if 

[she] exceeds the bounds of [her] granted authority or if [her] acts conflict with the law itself.” Id.
5

customary price charged the general public. 1 TEX. ADMIN. CODE § 355.8541(a)(2). Since 

1987, “usual and customary” price has been determined as follows: 

(a) The usual and customary price is the price the provider most frequently 

charges the general public for the same drug. If the department cannot 

determine a most frequent price, the median price is used. Items that the 

provider must consider when determining the usual and customary price 

include the following:

(1) The term general public does not include any person whose 

prescriptions are paid by third-party payors, including health 

insurers, governmental entities, and the Texas Medical 

Assistance (Medicaid) Program.

(2) When a discount is given (including but not limited to cash 

rebate, monetary price discount, coupon value) or advertised 

for any segment of the general public, the discount must be 

included in the usual and customary price determination for 

Medicaid prescriptions if the Medicaid recipient would 

otherwise have qualified as a member of that same segment 

of the general public. Some providers give discounts to nonMedicaid customers based on requirements similar to those 

specified in subparagraphs (A) and (B) of this paragraph. 

Providers must not use the following types of requirements as 

reasons to disqualify Medicaid recipients as members of the 

same segment of the general public receiving the discount:

(A) possessing or presenting a special identification 

card or document, or making a verbal request 

for a discount;

(B) paying for the prescription by a particular 

method;

(b) If a provider utilizes one pricing policy for cash recipient and a different 

pricing policy for charge recipient, the lower of the two pricing policies is the 

provider’s usual and customary price.

(c) The provider must keep adequate records showing how the usual and 

customary charge to the general public was determined according to the 

requirements as stated in this section. On request, the provider must 

disclose the records to the representatives of the following agencies: Texas 

Department of Health, Texas Attorney General’s Medicaid Fraud Control 

Unit, and United States Department of Health and Human Services. The 

identification (name and address of non-Medicaid customers) may have 
6

been removed from these records. If the provider does not keep the records

for the time period specified in his contract with the department, then the 

usual and customary price determination includes all discounts given or 

advertised by the provider, regardless of whether the Medicaid recipient 

would or would not have qualified as a member of the general public 

receiving the discount.

1 TEX. ADMIN. CODE § 355.8544. (Emphasis added).

In May 2020, HHSC posted online updates to the Enrollment and Payment Sections

of its Manual as follows:

Enrollment

5.4 Pharmacy Discount Membership Programs

Some pharmacies offer discount price clubs and other membership 

discount card programs. These programs typically have offered discount 

drug prices to all customers and given the discounted drug prices to the 

cash-paying customers who enrolled in the program and paid a nominal 

membership fee. The Usual and Customary (UAC) Price regulation (1 TAC 

Section 355.8544) does not exclude persons who pay a nominal 

membership fee from the general public. Therefore, pharmacy discount 

membership program prices constitute discounts given or advertised to the 

general public pursuant to 1 TAC Section 355.8544, as well as applicable 

federal law. See, e.g., U.S. ex rel. Garbe v. Kmart Corp., 824 F.3d 632 (7th 

Cir. 2016). Pharmacy discount membership program prices must be 

submitted as the UAC price (as previously indicated in the April 2008 edition 

of the RxUpdate newsletter former published by VDP . . .) unless the price 

would be greater than the most frequently charged price for the same drug.

5.5 Third-Party Discount Plans

Some pharmacies honor discount prices advertised to cash-paying 

customers by third-parties. Pharmacies may or may not contract with thirdparties to adjudicate and administer these discounts.

Only people whose prescriptions are paid by third-party payors, such as 

health insurers, government entities and Texas Medicaid, are excluded 

from the general public in accordance with the UAC Price regulation (1 TAC 

Section 355.8544).

The involvement of a third party in offering, advertising, adjudicating, or 

administering the discount price a person pays does not remove the person 
7

from the general public, and the third-party discount price must be included

in the UAC price determination if honored by the pharmacy.

As with pharmacy discount membership programs, the requirement a 

person pay a nominal fee to enroll in the third-party’s discount program does 

not remove the person from the general public or otherwise exempt the 

discount price from the UAC price determination. Some third-party discount 

plan prices are only offered to segments of the general public, such as 

discount plans for senior adults, employees/retirees of companies, etc. 

These discount prices must be included in the UAC price determination if 

the person would have qualified as a member of the same group or segment 

of the public, but-for the person’s status as a Texas Medicaid beneficiary.

Refer to the “Usual and Customary” section of the Payment chapter of this 

manual for the definition of the UAC price.

Payment

2.1 Usual and Customary

The “Usual and Customary” (UAC) field (426-DQ) captures the amount 

requested for reimbursement. The usual and customary price is the price 

most frequently charged to the general public for the same drug.

***

• Any person whose prescription is not paid for by a third-party payor, 

such as a health insurer, governmental entity, or Texas Medicaid, is a 

member of the general public.

• Pharmacies cannot exclude discount prices given to customers from its 

determination of the most frequently charged price for the same drug 

when reporting the UAC price to Texas Medicaid on a claim transaction. 

If a discount price is advertised for a drug then the discount price must 

be reported to Texas Medicaid as the UAC price for the same drug, 

unless the most frequently charged price is lower.

• “Opt-in” requirements to obtain discount prices (such as requiring the 

customer to possess or present a special identification card or to make 

a request for a discount) do not exclude a person from the general public 

for the purposes of determining the UAC price to report to Texas 

Medicaid.

***

2.1.1 Most Frequent Price Determination

Texas HHS requires pharmacies to determine the price the pharmacy most 

frequently charges for the same drug, which means the pharmacy is 
8

required to consider past-pricing data in actual transactions with uninsured 

customers to determine the most frequent (or mode) price for the same 

drug. The median price is used if a most frequent price cannot be 

determined.

A given drug is the same drug whether it is dispensed in a single unit or in 

multiple units, and Texas HHS requires a pharmacy to consider all 

transactions for the same drug as the Medicaid claim when determining the 

most frequent price, regardless of the quantity dispensed. To determine the 

most frequent price for the same drug across transactions with multiple 

different dispensed quantities, a pharmacy should:

1. Calculate the unit price for each uninsured transaction for the 

same drug.

2. Determine the most frequent unit price for the drug in its 

uninsured transactions.

3. Multiply the most frequent unit price for the drug by the 

quantity of the same drug being dispensed in the Texas 

Medicaid claim.

The result will be the UAC price, (unless an advertised discount price for 

the same drug would be lower).

1 TAC Section 355.8544 is silent regarding the time period of actual 

transactions in past-pricing data before the Texas Medicaid claim a 

pharmacy should consider when determining the most frequent price. 

Accordingly, a reasonable time period should be used. To be reasonable, 

the period must be of sufficient duration to be likely to capture multiple 

uninsured transactions for each drug in the portfolio of drugs dispensed by 

the pharmacy during the period. Texas HHS presumes a period between 

thirty (30) to ninety (90) days would be reasonable. A period only 

considering uninsured transactions on the same day as the Medicaid claim 

would not be reasonable, because it would render the frequency 

determination meaningless. To be reasonable, the period a chain 

pharmacy uses to calculate the most frequent price at a single pharmacy 

location in Texas would likely need to be longer than if the chain considered 

past pricing data across multiple Texas pharmacy locations within the chain.

NACDS construed the updates as radical changes that implemented new rules or 

amended or clarified existing rules for determining the usual and customary price for 

reimbursement of drugs dispensed to Medicaid beneficiaries. It contended the updates 

substantially altered the manner in which pharmacies must report their usual and 
9

customary price and should have been subjected to the APA’s notice-and-comment 

period to be effective. HHSC took the position that the updates were not new rules,

tracked the language of the 1987 rule, and operated only as guidance or clarification. 

HHSC’s stance compelled NACDS to seek a declaration regarding the mode for 

calculating the usual and customary price for reimbursement and an injunction to prohibit 

enforcement of the updates. NACDS alleged that if HHSC had provided a notice-andcomment period, pharmacy providers could have offered feedback on the unfeasibility of 

complying with the updates. 

The trial court held a hearing on the parties’ summary judgment motions. NACDS 

argued the updates interpreted law and policy, affected the private rights of the regulated 

entities, and changed the requirements for reporting the usual and customary price for 

Medicaid reimbursement. It posited the updates made substantial changes, especially to 

the terms “most frequently charged,” “general public,” and “same drug.” Importantly, 

NACDS argued the updates redefined “discount.” It further argued the updates added a 

look-back period of between thirty to ninety days for past-pricing data to determine the 

most frequent price charged and prohibited a same-day determination when the 1987 

rule was silent on the issue. 

NACDS also contested an addition to the determination of “same drug.” The 

updates added a requirement related to the quantity dispensed to the general public 

which is not referenced in the 1987 rule.

NACDS challenged inclusion of pharmacy membership programs and third-party 

discount programs in the determination of the usual and customary price. Most likely, 
10

such programs were unavailable when the 1987 rule became effective but under the 

updates, pharmacies would be required to have knowledge of myriad discounts in 

determining the most frequent price. It considered the inclusion of such changes as an 

amendment to, or interpretation of, the existing rule. According to NACDS, without a 

notice-and-comment period to seek input from the pharmaceutical industry, the updates 

left many questions regarding discounts and imposition of a look-back period 

unanswered.

HHSC argued in support of its motion that the updates did not amend or repeal 

any requirements for determining the usual and customary price and did not interfere with 

or impair any rights or privileges of NACDS. HHSC considered the updates “guidelines 

and information” for pharmacy providers. It argued the inclusion of discounts was not a 

new requirement in reporting the usual and customary price charged to the general public.

It conceded the 1987 rule begins with the most frequent price charged as the baseline 

but insisted that if a discount is given or advertised, that discount must be included in the 

usual and customary price determination. It further argued that third-party discount 

programs operate as coupons already contemplated by the 1987 rule. 

Regarding the look-back period for past-pricing data, subsection 2.1.1 of the 

Enrollment Section of the updates acknowledges the 1987 rule is silent on the issue. 

HHSC, however, disagreed with NACDS that the thirty-to-ninety-day look-back period or 

the prohibition of same-day transactions for past-pricing data were new requirements. It

asserted the look-back period was nonbinding and optional. Finally, HHSC argued that 

“quantity dispensed” regarding the same drug was not a change that required a noticeand-comment period. HHSC maintained the update requirements were consistent with 
11

the 1987 rule and did not amend or repeal any provisions. It also denied the updates

interfered with or impaired the legal rights or privileges of NACDS. 

Ultimately, the trial court granted HHSC’s motion for summary judgment and 

denied NACDS’s motion. 

STANDARD OF REVIEW—COMPETING MOTIONS FOR SUMMARY JUDGMENT

We review a grant of summary judgment de novo. Trial v. Dragon, 593 S.W.3d 

313, 316–17 (Tex. 2019). When both sides move for summary judgment, each bears the 

burden of establishing that it is entitled to judgment as a matter of law. City of Richardson 

v. Oncor Elec. Delivery Co., 539 S.W.3d 252, 259 (Tex. 2018). When, as here, the trial 

court grants one motion for summary judgment and denies the other, the reviewing court 

considers the summary judgment evidence presented by both sides, determines all 

questions presented, and if the reviewing court determines the trial court erred, renders 

the judgment the trial court should have rendered. Seabright Ins. Co. v. Lopez, 465 

S.W.3d 637, 641–42 (Tex. 2015). Neither party can prevail because of the failure of the 

other to discharge its burden. Tigner v. First National Bank of Angleton, 153 Tex. 69, 264 

S.W.2d 85, 87 (1954).

When the trial court’s order does not specify the grounds for summary judgment, 

we must affirm the judgment if any of the theories presented to the trial court and 

preserved for appellate review are meritorious. Provident Life & Accident Ins. Co. v. 

Knott, 128 S.W.3d 211, 216 (Tex. 2003). When the trial court’s summary judgment does 

specify a ground upon which it was granted, we generally limit our review to that ground. 

Cincinnati Life Ins. Co. v. Cates, 927 S.W.2d 623, 625–26 (Tex. 1996).
12

APPLICABLE LAW

Section 2001.003(6) defines “rule” as follows:

(A) a state agency statement of general applicability that:

(i) implements, interprets, or prescribes law or policy; or

(ii) describes the procedure or practice requirements of a 

state agency;

(B) includes the amendment or repeal of a prior rule; and 

(C) does not include a statement regarding only the internal 

management or organization of a state agency and not affecting private 

rights or procedures. 

§ 2001.003(6). “General applicability” references “statements that affect the interest of 

the public at large such that they cannot be given the effect of law without public input.” 

R.R. Comm’n of Tex. v. WBD Oil & Gas Co., 104 S.W.3d 69, 79 (Tex. 2003). When an 

agency adopts a rule, it is commanded by the APA to follow numerous requirements. 

RWE Renewables Ams., LLC v. PUC of Tex., 669 S.W.3d 566, 577 (Tex. App.—Austin 

2023, pet. granted Dec. 8, 2023).

When a state agency implements a new “rule,” it is subject to a notice-andcomment period under the APA. El Paso Hosp. Dist., 247 S.W.3d at 715. Sections

2001.023(a) and (b) provide in part that “[a] state agency shall give at least 30 days’ notice 

of its intention to adopt a rule before it adopts the rule” and shall file notice of the proposed 

rule with the secretary of state for publication in the Texas Register. Section 

2001.024(a)(7) requires inclusion of numerous details in the notice, including “a request 

for comments on the proposed rule from any interested person.” Section 2001.029(a) 
13

requires three public-comment requirements related to rulemaking: “a reasonable

opportunity to submit data, views, or arguments, orally or in writing.” 

When an agency promulgates a rule without complying with the proper rulemaking 

procedure, the rule is invalid. TEX. GOV’T CODE ANN. § 2002.035(a); El Paso Hosp. Dist., 

247 S.W.3d at 715. An agency must substantially comply with the APA rulemaking 

requirements and constitute more than a “faint effort or hollow rhetoric.” RWE 

Renewables Ams., LLC, 669 S.W.3d at 581.

ANALYSIS

In our analysis, we apply a de novo review to ascertain and give effect to the 

Legislature’s intent of the relevant statutes. Odyssey 2020 Acad., Inc. v. Galveston Cent. 

Appraisal Dist., 624 S.W.3d 535, 540 (Tex. 2021). “In doing so, we enforce the plain

meaning of statutory text, informed by its context.” Hegar v. Health Care Service Corp.,

652 S.W.3d 39, 43 (Tex. 2022). We seek to “give effect to all words of a provision and

avoid constructions that would render any part of it meaningless.” Odyssey 2020 Acad.,

624 S.W.3d at 540.

Since 1987, the baseline for reporting the usual and customary charge is what a 

pharmacy provider “most frequently charges” the “general public” for the “same drug.” 

There is, however, disagreement on the meaning of those terms. Also contested is how 

to factor discounts in determining the usual and customary price for Medicaid 

reimbursement.

Circa 2006, the pharmacy industry began to change. Wal-Mart began offering 

generic drugs to cash-paying customers for $4 and submitted the discount price as its 
14

usual and customary price for Medicaid reimbursement. Other pharmacies also began 

to offer discounted prices or provide membership plans free or for a nominal fee for lower 

drug prices but did not report those prices as the usual and customary price. HHSC 

alleged that not reporting the discounted prices was an attempt by pharmacies to use 

Medicaid reimbursements to compensate for lost profits resulting from discounts. Such 

a practice prompted HHSC to serve notice on pharmacy providers via its 2008 RxUpdate 

publication that discounted prices should be submitted as the usual and customary price 

for Medicaid claims. It warned pharmacies to enroll all of its Medicaid beneficiaries in any 

discount membership plans which it contends NACDS members refused to do.

After the 2008 RxUpdate publication, various enforcement actions were filed 

against certain pharmacies for using discount membership plans to provide discounts to 

the general public without reporting those discounts to Medicaid as the usual and 

customary price. The suits were eventually settled. Those settlements do not mention 

third-party discounts or reflect a change in the method for reporting the usual and 

customary price.

At the core of the underlying dispute is whether the 2020 updates constitute new 

rules or are merely clarifications to the 1987 rule. HHSC does not dispute that it did not 

provide a notice-and-comment period for the updates. Its position, however, is based on 

its argument that the updates are simply restatements of standards which have been 

applied for years and do not require compliance with the APA.

Central to the dispute is the treatment of discounts. HHSC alleges that pharmacies 

became creative at evading the 1987 rule requirement for reporting discounts by 
15

introducing third-party discount and membership plans to customers but excluding those 

discounts from the usual and customary price submitted for Medicaid reimbursement.

According to NACDS, the updates purport to require pharmacies to automatically 

submit a discount price as the usual and customary price if it is advertised unless the 

most frequently charged price is lower. The 1987 rule requires pharmacies to incorporate 

an advertised discount if the Medicaid beneficiary would qualify as a member of the same 

segment of the general public to whom the discount is available. The updates also purport 

to require pharmacies to automatically submit a membership program price as the usual 

and customary price unless the price would be greater than the most frequently charged 

price for the same drug. The 1987 rule does not reference membership program prices 

as discounts and only requires inclusion of a discount if the Medicaid beneficiary would 

qualify as a member of the same segment of the general public who could receive the 

price. The requirement for automatic submission of discount prices is a significant change 

from submission of advertised discounts.

The updates also redefine “discount.” Relying on U.S. ex rel. Garbe v. Kmart 

Corp., 824 F.3d 632 (7th Cir. 2016), HHSC now includes pharmacy discount membership 

programs that are given or advertised to the general public and third-party discount 

program prices offered, advertised, or adjudicated to the general public. The updates

mandate those program prices be submitted as the usual and customary price for 

Medicaid reimbursement unless the price would be greater than the most frequently 
16

charged price for the same drug. The plain meaning of “discount” does not capture the 

savings offered under membership program prices and third-party discount programs.7

Subsections 5.4 and 5.5 of the Enrollment Section of the updates added that 

customers who pay a nominal fee to enroll in pharmacy membership programs or thirdparty discount programs are not excluded from the general public. Thus, under the 

updates, discounts from such programs must be included in the determination of the usual 

and customary price.

Subsection (c) of the 1987 rule conditions inclusion of all discounts given or 

advertised in determining the usual and customary price only when the pharmacy fails to 

keep adequate records required by the rule. Yet the updates mandate inclusion of all 

discounts which would render subsection (c) superfluous and meaningless. We must 

avoid construing a portion of a statute as surplusage. Jim Olive Photography v. Univ. of 

Houston Sys., 624 S.W.3d 764, 780 n.9 (Tex. 2021).

A significant addition to the 1987 rule is the requirement of a look-back period to 

calculate the most frequent price for the same drug. Subsection 2.1.1 of the Payment 

Section acknowledges the 1987 rule is silent on any look-back periods. Nevertheless, 

the updates include a thirty-to-ninety-day look-back period as “reasonable” for 

considering past-pricing data to arrive at the most frequently charged price. And the 

updates prohibit consideration of same-day uninsured transactions as unreasonable. The 

7

“Discount” means “a reduction made from the gross; a reduction made from a regular price. 

www.merriam-webster.com/dictionary/discount (last visited June 12, 2024). Additionally, pharmacy 

memberships programs and third-party discount programs create their own price lists and structures and 

are only available to those who take affirmative action to participate in those programs and be bound by 

their terms and conditions. 
17

1987 rule does not contain any requirement on the use of a “reasonable time period” for 

determining the most frequently charged price. Thus, addition of a look-back period and 

prohibition of same-day transactions amends the 1987 rule.

Finally, the 1987 rule does not contain a requirement for calculation of “same drug.” 

However, section 2.1.1 of the Payment Section includes the method for determining the

usual and customary price on a per unit basis of the same drug regardless of the quantity 

sold. 

HHSC posits the updates were drafted simply to “clarify” what the 1987 rule

already provided. Relying on Brinkley v. Tex. Lottery Comm’n, 986 S.W.2d 764, 769 

(Tex. App.—Austin 1999, no pet.), HHSC contends agencies routinely issue letters and 

other documentation which have not been construed as “rules” under the APA definition. 

Brinkley is distinguishable. In Brinkley, the plaintiff sued for declaratory relief to determine 

whether “eight-liners were “gambling devices” under the Texas Penal Code. Id. at 766. 

After numerous complaints from licensees who operate bingo parlors, the Commission 

issued letters setting forth criteria for ascertaining the legal status of their machines. Id. 

at 767. The plaintiff, however, did not hold a license to operate a bingo parlor but did own 

several eight-liners he operated in a space leased in a licensed bingo parlor. The licensee 

of the parlor refused to allow the plaintiff to continue operating his eight-liners. Id. In 

concluding the letters were not rules under the APA, the court explained the letters were 

statements regarding the internal management or organization which did not affect private 

rights or procedures and the plaintiff was not “an affected person.” Id. at 770. 
18

In the underlying case, the pharmacies which are contractually obligated to HHSC 

under their Agreements are affected entities. The updates are statements of general 

applicability that affect the interest of the public at large such that they cannot be given 

the effect of law without public input. Unlike in Brinkley, the updates do not include

statements regarding only the internal management or organization of a state agency 

which do not affect private rights or procedures. Instead, the updates alter the 1987 rule. 

They do not track the language of the statute as HHSC contends but rather interpret 

provisions or add or eliminate text to certain provisions. 

HHSC also relies on Tex. Bd. of Pharm. v. Witcher, 447 S.W.3d 520, 529 (Tex. 

App.—Austin 2014, pet. denied), and Texas Educ. Agency v. Leeper, 893 S.W.2d 432,

443 (Tex. 1994), to support its argument that the look-back period falls outside of the 

definition of “rule” because it is nonbinding and optional. It claims a reasonable look-back 

period is merely a recommendation and not sufficient to establish a rule. But the lookback period is not written in nonbinding or optional language. Nor is the prohibition 

against same-day transactions. A contracting pharmacy’s failure to use the look-back 

period could subject it to a fraud claim for non-compliance with those provisions and 

should have been subjected to a notice-and-comment period. 

Comparing the language of the 1987 rule with the complained-of updates does not 

require an evaluation of extrinsic evidence to conclude that, at a minimum, HHSC’s 

updates interpret, add, or remove language from the 1987 rule.

8

 EATX Coffee, LLC v. 

8 Some extrinsic evidence supporting NACDS’s position includes a 2008 email from an HHSC 

executive who commented as follows regarding discount membership programs:

Do either CVS or Albertsons charge for enrollment into their program? I remember that 

was the issue with Walgreens. They charge approx. $30 to be enrolled in the program and 
19

Tex. Alcoholic Bev. Comm’n, No. 04-16-00213-CV, 2016 Tex. App. LEXIS 12938, at *10 

(Tex. App.—San Antonio Dec. 7, 2016, pet. dism’d) (mem. op.) (noting that definition of 

“rule” not only includes amend or repeal, but also interpretive statements). 

The updates purport to alter the method for calculating the usual and customary 

price for submitting a Medicaid reimbursement claim. Per their Agreements, pharmacy 

providers are contractually obligated to comply with the updates. As written, they expose 

pharmacies to liability for fraud for submitting claims which do not comply with the 

proposed method for determining the usual and customary price.

The updates are statements of general applicability which fall under the definition 

of “rule” and thus, required a notice-and-comment period. We hold the 2020 updates 

patients also get other benefits (I think). This model was trickier, re: whether we can direct 

them to enroll Medicaid clients. I think the jury (legal opinion?) is still out about our authority 

for the plans that use this model. 

Another email in 2009 from an HHSC Pharmacy Policy Analyst provided as follows:

We don’t define “Usual and customary” in the state plan other that [sic] to say the 

usual price charged to the general public. We are getting the $4.00 generic prices 

from Walmart and the $5.00 generic prices from HEB, but we are not getting the 

Walgreens generic price deals because they say you have to “buy” one of their 

card [sic], etc. And I think there are a couple of others like that. Our attorney’s 

[sic] have looked at it and don’t think we can do anything about it. 

A chart regarding HHSC Medicaid and CHIP Cost Containment provided as follows under the heading 

“Policy Change”:

Require Pharmacies that offer low cost generic incentive programs to automatically enroll 

Medicaid clients into this program.

Under the “Potential Issues/Notes” column of the chart, a note was included providing a “[s]tatutory change 

may be required to implement this option.”

The referenced evidence indicates HHSC did not consider membership programs or third-party 

discount programs as the types of “discounts” contemplated by the 1987 rule. It demonstrates HHSC’s 

concern on how to handle certain discounts and supports NACDS’s argument that the updates did not 

merely clarify the 1987 rule but significantly changed the method for determining the usual and customary 

price.
20

constitute rules which required HHSC to comply with the APA’s rulemaking requirements 

and its failure to do so results in those updates being rendered invalid. 

HHSC does not dispute that Young did not comply with her ministerial duties; 

however, because this Court now holds the updates are rules, as Executive 

Commissioner, she was required to consult with an advisory panel composed of an equal 

number of physicians, pharmacists, and pharmacologists appointed by her before 

adopting rules for the state prescription drug program. See TEX. GOV’T CODE ANN. 

§ 531.302(c). By failing to comply with her ministerial duties, Young acted ultra vires. 

Issues one and two are sustained.

CONCLUSION

The trial court’s summary judgment in favor of Cecile Young, in her official capacity 

as the Executive Commissioner of the Texas Health and Human Services Commission, 

and the Texas Health and Human Services Commission is reversed. Judgment is 

rendered declaring the May 2020 online updates to subsections 2.1 and 2.1.1 of the 

Payment Section and subsections 5.4 and 5.5 of the Enrollment Section of the Texas 

Vendor Drug Program Pharmacy Provider Procedural Manual constitute rules and are 

invalid and of no effect. 

Alex Yarbrough

 Justice