1999 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

3-23-1999

Rite Aid Of PA Inc v. Houstoun

Precedential or Non-Precedential:

Docket 98-1823,98-1879,98-1880

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Recommended Citation

"Rite Aid Of PA Inc v. Houstoun" (1999). 1999 Decisions. Paper 75.

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Filed March 22, 1999 

UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

Nos. 98-1823, 98-1879, 98-1880 

RITE AID OF PENNSYLVANIA, INC., et al 

v. 

FEATHER O. HOUSTOUN, 

PENNSYLVANIA PHARMACISTS ASSOCIATION 

(Intervenor in D.C.) 

 Feather O. Houstoun, as 

 Secretary of the Department 

 of Public Welfare for the 

 Commonwealth of Pennsylvania 

 Appellant in No. 98-1823 

RITE AID OF PENNSYLVANIA, INC., 

 Appellant in No. 98-1879 

v. 

FEATHER O. HOUSTOUN 

PENNSYLVANIA PHARMACISTS ASSOCIATION 

(Intervenor in D.C.) 

RITE AID OF PENNSYLVANIA, INC. 

v. 
FEATHER O. HOUSTOUN 

PENNSYLVANIA PHARMACISTS ASSOCIATION 

(Intervenor in D.C.) 

 Pennsylvania Pharmacists 

 Association, 

 Appellant in No. 98-1880 

On Appeal from the United States District Court 

for the Eastern District of Pennsylvania 

(D.C. Civil No. 97-2120) 

District Judge: Honorable Harvey Bartle, III 

Argued February 18, 1999 

BEFORE: GREENBERG, LEWIS, and BRIGHT,* 

Circuit Judges 

(Opinion Filed: March 22, 1999) 

 Raymond P. Pepe (argued) 

 David R. Overstreet 

 Kirkpatrick & Lockhart 

 240 North Third Street 

 Harrisburg, PA 17101-1503 

 Attorneys for appellants 

 in Nos. 98-1879 and 98-1880 

 John A. Kane 

 Commonwealth of Pennsylvania, 

 Office of Legal Counsel 

 Department of Public Welfare 

 Health & Welfare Building 

 P.O. Box 2675 

 Harrisburg, PA 17105-2675 

_________________________________________________________________ 

*Honorable Myron H. Bright, Senior Judge of the United States Court of 

Appeals for the Eighth Circuit, sitting by designation. 

 2 
 Doris M. Leisch (argued) 

 Peter J. Garcia 

 Commonwealth of Pennsylvania 

 Department of Public Welfare 

 1400 Spring Garden Street 

 State Office Building 

 Philadelphia, PA 19130 

 Attorneys for Appellant 

 in No. 98-1823 

OPINION OF THE COURT 

GREENBERG, Circuit Judge. 

I. INTRODUCTION 

This appeal concerns a procedural challenge to the 

Pennsylvania Department of Public Welfare's ("Department") 

promulgation of revised regulations governing payment 

rates for prescription drugs and related services provided to 

Medicaid recipients pursuant to Title XIX of the Social 

Security Act, 42 U.S.C. SS 1396-1396v ("Medicaid Act").1 

The Department appeals from an order and judgment of the 

United States District Court for the Eastern District of 

Pennsylvania, entered August 31, 1998, enjoining it from 

applying revised formulas to pay pharmacies for 

prescription drugs and related services under the Medicaid 

program which were to become effective October 1, 1995. 

Rite Aid of Pennsylvania and the Pennsylvania Pharmacists 

Association ("PPA") cross-appeal from the district court's 

order to the extent that it upheld procedures the 

_________________________________________________________________ 

1. In order to assist the readers of this opinion, we set forth the letter 

abbreviations that the parties have used which we also use: Average 

Wholesale Price (AWP); Estimated Acquisition Cost (EAC); Federal Upper 

Limit (FUL); Health Care Financing Administration (HCFA); Department 

of Health and Human Services (HHS); Independent Regulatory Review 

Commission (IRRC); Medical Care Advisory Committee (MAAC); 

Maximum Allowable Costs (MAC); Omnibus Budget Reconciliation Act 

(OBRA); Pennsylvania Pharmacists Association (PPA); and State Plan 

Amendment (SPA). 

 3 
Department followed in promulgating the regulations. See 

Rite Aid of Pennsylvania, Inc. v. Houstoun, 1998 WL 631966 

(E.D. Pa. Aug. 31, 1998). The district court exercised 

jurisdiction under 28 U.S.C. SS 1331, 1343 and we exercise 

jurisdiction under 28 U.S.C. S 1291. For the reasons that 

follow, we will reverse the order and judgment and dismiss 

the cross-appeals. 

II. FACTUAL AND PROCEDURAL HISTORY 

A. Statutory and Regulatory Background. 

Medicaid is a cooperative state-federal program through 

which the federal government provides funds to the states 

to assist the poor, elderly, and disabled to receive medical 

care. 42 U.S.C. S 1396. See Cleary v. Waldman, 1999 WL 

53046, at *3 (3d Cir. Feb. 8, 1999). The Medicaid Act 

requires states to pay for certain services and allows them 

to provide additional services. 42 U.S.C. S 1396a(a)(10); 42 

C.F.R. SS 440.210-440.225. The states, in accordance with 

federal law, establish eligible beneficiary groups, types and 

ranges of service, payment levels for services, and

administrative and operating procedures and make 

payment for services directly to the individuals or entities 

furnishing the services. 42 C.F.R. S 430.0. The Department 

is the state agency responsible for the administration of 

Pennsylvania's version of Medicaid. 

States that choose to participate in Medicaid must 

submit a State Plan to the United States Department of 

Health and Human Services ("HHS") for approval. The State 

Plan describes the policy and methods used to set payment 

rates for each type of service included in the program. See, 

e.g., Wilder v. Virginia Hosp. Ass'n, 496 U.S. 498, 502, 110 

S.Ct. 2510, 2511 (1990). The state also must submit any 

subsequent proposed amendment (State Plan Amendment, 

or "SPA") to the HHS for approval. The amendment, of 

course, must meet federal requirements. 42 U.S.C. 

SS 1396a(b); 42 C.F.R. SS 430.10, 430.12. Pennsylvania law 

requires that the Pennsylvania Independent Regulatory 

Review Commission ("IRRC") review and approve the 

Department's proposed amendments before the Department 

seeks HHS approval. Pa. Stat. Ann. tit. 71, #8E8E # 745.1 to 

745.15 (West 1990). 

 4 
Pennsylvania has opted to cover prescription drugs and 

related services in its State Plan. 42 U.S.C. S 1396d(a)(12); 

42 C.F.R. S 440.120(a). Federal legislation controls program 

costs for Medicaid prescription drug benefits by 

establishing upper limits, or Maximum Allowable Costs 

("MACs"), for certain drugs. Certain generic drugs are 

reimbursed at the Federal Upper Limit ("FUL") as mandated 

by the Health Care Financing Administration ("HCFA") of 

the HHS.2 For brand name drugs, states reimburse for the 

lower of the pharmacy's "usual and customary charges" or 

the Estimated Acquisition Cost ("EAC"), which is the state's 

best estimate of the price generally and currently paid by 

providers for a drug marketed or sold by a particular 

manufacturer. See 42 C.F.R. S 447.301. Prior to the

adoption of the revisions at issue here, the Department 

defined the EAC as the full Average Wholesale Price ("AWP") 

for the drug as found in the Department's pricing services. 

Rite Aid and members of the PPA voluntarily participate 

as enrolled providers in the Pennsylvania Medical 

Assistance Program pursuant to provider agreements 

executed with the Department. See 55 Pa. Code. S 1121. 

The agreements provide for the Department to reimburse 

Rite Aid and other pharmacies for prescription drugs and 

related services in accordance with applicable federal and 

state laws and regulations. We detail here only those laws 

and regulations material to this appeal. 

Among such federal laws is 42 U.S.C. S 1396a(a)30(A) 

("section 30(A)"), which instructs that State Plans must 

 provide such methods and procedures relating to the 

 utilization of, and the payment for, care and services 

 available under the plan (including but not limited to 

 utilization review plans as provided for in section 

 1396b(i)(4) of this title) as may be necessary to 

 safeguard against unnecessary utilization of such care 

 and services and to assure that payments are

 consistent with efficiency, economy, and quality of care 

 and are sufficient to enlist enough providers so that 

 care and services are available under the plan at least 

_________________________________________________________________ 

2. By federal regulation, reimbursement for those generic drugs specified 

by HCFA may not exceed the FUL. 42 C.F.R. S 447.332. 

 5 
 to the extent that such care and services are available 

 to the general population in the geographic area . .. 

If a state chooses to amend its State Plan, federal

regulations require it to consult with a "medical care 

advisory committee" ("MAAC"), which will advise the state 

agency director. See 42 C.F.R. S 431.12(b). The committee 

must "have an opportunity for participation in policy 

development and program administration, including 

furthering participation of recipient members in agency 

programs." Id. S 431.12(e). As set forth above, the state also 

must submit an SPA for approval by the HHS through the 

HCFA. See 42 C.F.R. S 430.12(c)(ii). The HCFA must act on 

the SPA within 90 days of submission or it is approved 

automatically. See 42 U.S.C. S 1396n(f)(2); 42 C.F.R. 

S 430.16. Federal statutes and regulations establish the 

criteria for the HCFA to make its decision. See 42 C.F.R. 

S 430.15(a). 

Among other regulations affecting state payment rates 

under section 30(A) is a requirement for public notice for 

changes in "methods and standards for setting payment 

rates for services" before the effective date of the change. 42 

C.F.R. S 447.205. The regulation requires notice of both the 

"proposed change" and of the final change within 60 days 

of its becoming effective, providing a period for public 

comment and criticism. Id. Pennsylvania regulations

require a 60-day public comment period in accordance with 

42 C.F.R. S 447.205. See 55 Pa. CodeS 1101.70.3 

B. Pennsylvania Pharmacy Reimbursement Regulations.

The Department must create formulae and rates to 

govern two components of prescription drug and services 

reimbursement. First, it determines what the pharmacies 

will receive for the ingredient cost of the drugs; second, it 

determines a "dispensing fee": a per-prescription payment 

_________________________________________________________________ 

3. The state regulation provides: 

 Federal regulations at 42 C.F.R. 447.205 require the Department 

 . . . to give a 60 day public notice of proposed Statewide changes 

in 

 any method or level of MA [Medical Assistance] reimbursement that 

 would affect program expenditures by 1% or more during the 12 

 months following the effective date of the change. 

 6 
which compensates pharmacies for the costs associated 

with dispensing a prescription to a Medicaid recipient. 

Prior to the October 1, 1995 rate revisions, the 

Department reimbursed pharmacies for the ingredient cost 

for brand name drugs at the AWP. For generic drugs, the 

formula follows the state MAC guidelines. (The pre-1995 

state MAC guidelines were set at the 70th percentile price 

of those drugs found in the United States Department of 

Health Generic Drug Formulary, an instrument which no 

longer exists.) The dispensing fee was $3.50 perprescription. 

Pennsylvania had good reason to revise these rates. For 

several years prior to 1994, the HCFA had been advising 

the Department that its reimbursement rates were high, 

given, among other reasons, changes in the drug 

marketplace. See, e.g., letter from HCFA to Secretary of 

Public Welfare, John F. White, Jr., (Nov. 27, 1990). App. at 

1881. The HCFA informed the Department that it would not 

accept AWP levels for "EAC without a significant discount 

being applied," unless the Department provided 

documentation that the actual acquisition cost equaled the 

full AWP. Id.4 Furthermore, at the end of 1994, a three-year 

moratorium imposed by federal law which prevented the 

Department from amending its pharmacy reimbursement

formulae was due to expire. See 42 U.S.C.S 1396r-8(e)(1). 

Thus, in September 1994, the Department proposed to

modify pharmacy reimbursements by requiring pharmacies 

to charge the Department the lowest rate they charged any 

other third-party payor, including private insurers. The 

proposal was forwarded to the pharmacy subcommittee of 

the MAAC, and sent to the Governor's Budget Office as a 

plan to save the State approximately $21.4 million for the 

fiscal year 1995-96 (July 1-June 30). The Governor 

included the projected savings in the State's budget, 

although the Department had not yet secured approval for 

the change from the State or federal bodies responsible for 

such review. 

_________________________________________________________________ 

4. The HCFA noted that the full AWP overstated the drug prices by as 

much as 10%-20% in some states, although it did not single out or 

discuss Pennsylvania in particular. Id. 

 7 
Not surprisingly, pharmacies were concerned about the 

impact of the proposed cuts, and voiced many criticisms 

and suggestions. The MAAC and the pharmacy community 

stated that it was unreasonable for the Department to 

compare Medicaid to private, third-party payor plans, 

because, among other reasons, pharmacies face special 

costs in participating in the Medicaid program and serving 

Medicaid recipients. Among other alternatives, the 

pharmacies asked the Department to study "what it costs 

to fill a Medicaid prescription in Pennsylvania and allow a 

reasonable profit." Letter from the PPA to Secretary Feather 

O. Houstoun (May 12, 1995). App. at 1081. 

While considering the proposals discussion participants 

offered, the Department conducted its own review and 

evaluation, although it did not study what Medicaid

provision of pharmaceutical services cost in Pennsylvania. 

The Department, however, delayed the anticipated 

implementation date of January 1, 1995, as it reviewed its 

alternatives. 

After postponing the revision's proposed effective date, 

the Department chose a new reimbursement structure: the 

EAC for brand name drugs would be cut to AWP-10%. For 

generic drugs with an FUL, the maximum acquisition cost 

was the FUL. For generic drugs for which the HHS has not 

determined an FUL, the Department adopted limits set by 

a private pricing service, "BaseLine Prices," to be revised 

every six months. The dispensing fee was raised from $3.50 

per-prescription to $4.00 per-prescription. The Department 

revised the definition of "usual and customary" to require 

pharmacies to reduce their usual and customary charge for 

a given prescription to include any discounts the pharmacy 

would have given the Medicaid recipient if the recipient had 

not been covered by Medicaid, i.e., as if they had paid cash 

or been covered by a third-party payor. 

The Department considered such information as state

pharmacy licensing laws and OBRA counseling 

requirements,5 and input from the MAAC and its pharmacy 

_________________________________________________________________ 

5. Specifically, Pa. Stat. Ann. tit. 63, SS 390-1 to 390-9, and 49 Pa. 

Code 

S 27.19 (requiring pharmacists to offer to conduct a "Prospective Drug 

 8 
subcommittee. It also sought other data, such as the 

geographical distribution of independent and chain 

drugstores throughout the state and participation rates of 

other third-party plans. 

The Department primarily relied upon the following data: 

(1) reimbursement rates provided by 13 third-party payors 

for brand name drugs in Pennsylvania for approximately 

200 private plans operating in the state; (2) reimbursement 

rates for brand name drugs paid by neighboring states, 

HCFA Region III states and other states with high Medicaid 

expenditures;6 and (3) purchase prices of 15 highly-used, 

randomly selected drugs, reviewed by Joseph Concino

("Concino"), the Department's Medical Assistance Policy 

Specialist on Pharmacy. Concino showed that the 

pharmacies could purchase almost every one of the selected 

drugs at or below the FUL rate. He found that the state's 

pre-1995 rates were higher than any of the third-party 

payors' rates, and that the proposed change -- from AWP to 

AWP-10%, and from a dispensing fee of $3.50 to $4.00-- 

also would provide higher rates than those of third-party 

payors. 

Among other findings, the Department learned in its

review that Pennsylvania was fifth in the nation for 

Medicaid program expenditures, and that it was the only 

state surveyed that did not use FULs as the cost limit for 

generic drugs. It was one of just four states using the full 

AWP for brand name drugs, had the highest rate of 

Medicaid payments for Region III states, and the highest 

Medicaid expenditures of the top ten drug expenditure 

states. 

_________________________________________________________________ 

Review" to ensure that drug will not have adverse result for patient). 

Further, under federal law, Medicaid State Plans must include a 

Prospective Drug Review requirement, 42 U.S.C. S 1396r-8(g)(2). OBRA is 

the Omnibus Budget Reconciliation Act, 42 U.S.C.S 1396r-8(g)(2) 

(regulating pharmacies). 

6. HCFA Region III states include Delaware, the District of Columbia, 

Maryland, Pennsylvania, Virginia, and West Virginia. The Department 

also surveyed California, Florida, Illinois. Louisiana, Michigan, New 

Jersey, New York, Ohio, and Texas. 

 9 
On August 8, 1995, the Department submitted the 

amended regulations to the IRRC, which received comments 

during its review, and presented the Department with a 

series of questions, to which the Department replied in 

writing. The Department published a notice on August 26, 

1995, in the Pennsylvania Bulletin, 25 Pa. Bull. 3540 (Aug. 

26, 1995) stating that the Department "will amend" the 

reimbursement rates and provided a synopsis of the 

changes, and that copies of the notice (that is, the very 

same notice available at 25 Pa. Bull. 3540) would be 

available at local agencies throughout the Commonwealth. 

After an IRRC public meeting with representatives of the 

Department, the public, and pharmacies present, the

regulations were deemed approved by the IRRC on 

September 8, 1995, to take effect on October 1, 1995. On 

September 23, 1995, the text of the Department order 

adopting the regulations was published in the Pennsylvania 

Bulletin. See 25 Pa. Bull. 3978 (Sept. 23, 1995). In the 

order the Department stated that: 

 The MA (Medical Assistance) program cannot ignore the 

 trends occurring -- in other state Medicaid programs, 

 private third-party plans and reimbursement rates 

 accepted by Pennsylvania pharmacies. As a prudent 

 buyer of medical care for its clients, the Department 

 must obtain similar rates extended to those of other 

 third-party payors and other Medicaid agencies. 

 Therefore, to make the pharmacy payment policies for 

 the MA program comparable with other private and 

 public payment policies, the Department is adopting 

 the following revisions: . . . 

On December 29, 1995, the Department sent the SPA to 

the HCFA for approval. The HCFA approved the revised SPA 

on May 7, 1995, with changes effective retroactively to 

October 1, 1995. 

C. Procedural History. 

Rite Aid filed an action against the Secretary of the 

Department of Public Welfare on March 27, 1997, 

approximately 17 months after the revised regulation took 

effect. Rite Aid alleged that in adopting the revisions the 

Department had violated various provisions of Title XIX of 

 10 
the Social Security Act and related regulations and state 

statutes, as well as the due process clause of the 

Fourteenth Amendment. The parties filed cross-motions for 

judgment on the pleadings, and on November 3, 1997, the 

district court granted judgment in favor of the Department 

on Rite Aid's claim that the Department violated 42 C.F.R. 

S 447.205 by not publishing notice of the proposed change 

and by not providing a public comment period. 42 C.F.R. 

S 447.205(a) and (d)(1). In addition, the court granted the 

Department judgment on Rite Aid's due process claim. 

The court, however, ruled in favor of Rite Aid on its claim 

that section 30(A) contains a discrete "procedural"

component and thus it denied the Department's motion for 

a judgment on the pleadings on that issue. It also upheld 

Rite Aid's claim that the Department violated 42 C.F.R. 

S 447.205(c)(4) by failing to identify a local agency where 

the proposed reimbursement changes were available for 

public review. Thus, it granted Rite Aid a judgment on the 

pleadings on that issue. Rite Aid of Pennsylvania, Inc. v. 

Houstoun, 998 F. Supp. 522 (E.D. Pa. 1997). 

On January 12, 1998, the PPA moved to intervene as a 

plaintiff; and the district court granted the motion on 

February 20, 1998. On May 8, 1998, the court, on Rite 

Aid's and the PPA's motion to define the scope of review 

and limit discovery, issued an opinion and order limiting its 

review of the Department's compliance with section 30(A) to 

the administrative record. Rite Aid of Pennsylvania v. 

Houstoun, 1998 WL 254082 (E.D. Pa. May 8, 1998). 

On August 31, 1998, the court granted Rite Aid's and the 

PPA's motion for summary judgment and denied the 

Department's motion for summary judgment. It found that 

the Department had violated section 30(A) because it acted 

arbitrarily and capriciously procedurally in adopting the 

revisions. Accordingly, it enjoined the Department from 

reimbursing pharmacies for drugs supplied to Medicaid 

recipients on or after October 1, 1998, in accordance with 

the rates in dispute. See Rite Aid of Pennsylvania, Inc. v. 

Houstoun, 1998 WL 631966 (E.D. Pa. Aug. 31, 1998). 

Moreover, it found that the Department did not comply with 

its obligations under 42 C.F.R. S 431.12 to meet with the 

MAAC to discuss the regulations. The court, however, did 

 11 
not void the regulations on that ground. At the same time, 

the court rejected Rite Aid's and the PPA's claim that 

section 30(A) required the Department to conduct a study 

of actual pharmacy costs before revising the payment 

schedule. 

The Department filed a notice of appeal on September 8, 

1998, amended on September 28, 1998; Rite Aid and the 

PPA filed cross-appeals on September 29, 1998, challenging 

the district court's holding that section 30(A) did not 

require the Department to conduct a study of actual

pharmacy costs, as well as its holding that the Department 

had not violated 42 C.F.R. S 447.205(a) by not publishing 

prior notice of the proposed changes. The district court and 

this court denied the Department's motions to stay the 

injunction by orders entered September 18, 1998, and 

October 26, 1998, respectively. Thus, the revisions have not 

been in effect and the Department has been using the prior 

rates. 

III. DISCUSSION 

We emphasize that Rite Aid and the PPA on this appeal 

have not challenged the substantive impact or results of the 

revised rates as failing to comply with section 30(A). See 

Minnesota Homecare Ass'n Inc. v. Gomez, 108 F.3d 917, 

918 (8th Cir. 1997) (concurring opinion). Rather, they 

challenge the way in which the Department set and 

promulgated the new rates. In particular, they argue that 

the Department (1) failed to comply with section 30(A) 

because section 30(A) mandates that a certain kind of 

process be followed in revising the pharmacy 

reimbursement rates, and (2) acted arbitrarily and 

capriciously in so doing. The district court accepted these 

contentions and thus in this opinion we largely focus on 

these points.7 The parties agree that we exercise plenary 

_________________________________________________________________ 

7. The Department argues at least in part that Rite Aid and the PPA may 

not sue to enforce the Medicaid regulations as section 30(A) "does not 

support a private cause of action." Brief at 27. The district court 

rejected 

this argument and we agree with this result. Rite Aid, 998 F. Supp. at 

525-26. In the district court Rite Aid argued that "substantively" the SPA 

 12 
review over the district court's decision. See Olson v. 

General Elec. Astrospace, 101 F.3d 947, 951 (3d Cir. 1996). 

In this regard, we point out that the district court 

predicated its result, including issuing the injunction, on 

its construction of section 30(A) and its relatedfinding that 

the Department acted arbitrarily and capriciously in 

adopting the revisions, rather than on other equitable 

considerations. See AMP Inc. v. AlliedSignal Corp., 1999 WL 

86843 at *3 (3d Cir. Feb. 18, 1999). Thus, this appeal does 

not require us to review an exercise of discretion.

A. The District Court Properly Confined its Review to the 

 Administrative Record. 

Initially, we agree with the district court's determination 

in its May 8, 1998 order to base its decision on the existing 

administrative record. While we are not aware of any court 

that has held specifically that in reviewing section 30(A) 

issues a court must confine itself to the agency's 

administrative record, in general judicial review should be 

on "the administrative record already in existence, not some 

new record made initially in the reviewing court." Camp v. 

Pitts, 411 U.S. 138, 142, 93 S.Ct. 1241, 1244 (1973); C.K. 

v. New Jersey Dep't of Health and Human Servs., 92 F.3d 

171, 182 (3d Cir. 1996).8 Thus, the district court properly 

ruled that it would not create a new record nor base its 

review on any "post-hoc rationalizations" made by the 

Department after it had taken the disputed action. Rite Aid, 

1998 WL 254082 at *1 (citing Citizens to Preserve Overton 

_________________________________________________________________ 

was invalid because "the revised reimbursement rates are too low to 

satisfy the statutory requirements." Id. At 528. The court, however, 

declined to rule on this contention because it held that a determination 

of "[w]hether the rates are consistent with efficiency, economy, and 

quality of care requires further development of the record." Id. In the 

circumstances, our opinion does not preclude Rite Aid and the PPA from 

making a "substantive" challenge to the revisions. 

8. Because the Department participated in an IRRC hearing on 

September 7, 1995, and because regulations were notfinal until they 

were deemed approved on September 8, 1995, the court considered the 

administrative record to include documents before the Secretary through 

that date, a decision not challenged on appeal. 

 13 
Park, Inc. v. Volpe, 401 U.S. 402, 419, 91 S.Ct. 814, 825 

(1971)). 

B. The District Court Erred in Holding that 30 (A) Imposes 

 a "Procedural" Requirement. 

The district court held that section 30(A) imposes a 

"procedural" requirement on state agencies. We disagree 

with the district court on this point, as we conclude that 

section 30(A) mandates only substantive compliance with 

its specified factors of efficiency, economy, quality of care, 

and access. 

To date, three courts of appeals have addressed the

question of whether section 30(A) has a procedural 

requirement. The Courts of Appeals for the Eighth and 

Ninth Circuits have ruled that section 30(A) requires that 

the state agency make some investigation or conduct a 

study. See Arkansas Med. Soc'y, Inc. v. Reynolds, 6 F.3d 

519, 530 (8th Cir. 1993) (Agency "must consider the

relevant factors of equal access, efficiency, economy, and 

quality of care as designated in [section 30(A)] when setting 

reimbursement rates."); Minnesota HomeCare Ass'n, Inc., 

108 F.3d at 918; Orthopaedic Hosp. v. Belshe, 103 F.3d 

1491 (9th Cir. 1997), cert. denied, 118 S.Ct. 684 (1998). 

The Court of Appeals for the Seventh Circuit has held, 

however, that there is no such requirement, but rather that 

section 30(A) requires simply that whatever change is 

adopted produce the substantive results demanded by the 

statute. See Methodist Hosps, Inc. v. Sullivan, 91 F.3d 1026, 

1030 (7th Cir. 1996). 

We agree with the Court of Appeals for the Seventh 

Circuit that section 30(A) requires the state to achieve a 

certain result but does not impose any particular method or 

process for getting to that result. Id. Thus, section 30(A) 

does not require any "particular methodology" for satisfying 

its substantive requirements as to modifications of state 

plans.9 However, we will not go as far as did that court as 

_________________________________________________________________ 

9. The district court believed that its holding was not contrary to that 

of 

the Court of Appeals for the Seventh Circuit's result in Methodist Hosp., 

but its logic seems strained. Rite Aid, 998 F. Supp. at 527. On the one 

hand, the district court observed that the court of appeals held that 

 14 
to say that the Department literally may act like any other 

buyer of health care by offering a certain price, and seeing 

what response or result that price brings forth; that is, that 

the "states may behave like other buyers of goods and 

services in the market: they may say what they are willing 

to pay and see whether this brings forth an adequate 

supply." Id. We decline to adopt that approach because 

ordinarily, at least, a state may not act arbitrarily and 

capriciously, although other actors in the market may do so 

if they so choose. While section 30(A) does not govern the 

process by which it sets its prices, as we explain below 

other doctrines do control that process and protect the 

public from the possible ill effects of an agency testing out 

new formulae or prices at random, then correcting the 

results once a violation has occurred. 

The courts of appeals' split thus arises from the question 

whether section 30(A) demands a process which will ensure 

future results, or merely the result itself. In reaching our 

result we will not read procedural criteria into section 

30(A). That section requires that the state "assure" certain 

outcomes, including efficiency, economy, etc., but it does 

not call explicitly for any particular findings. Thus, it is up 

to a state to determine how it will "assure" the outcomes. 

We reiterate that section 30(A) does not specify a particular 

process for a state agency to follow in establishing rates.10 

_________________________________________________________________ 

section 30(A) does not require "comprehensive studies" such "that would 

put an environmental impact study to shame." Id. (citing Methodist 

Hosp., 91 F.3d at 1029). But the district court asserted that "by this 

language, Methodist does not conclude that 30(A) eliminates any 

mandate for evaluation of the statutory factors before revising the 

rates." 

Id. (citing Methodist Hosp., 91 F.3d at 1030). In fact, Methodist Hosp. 

does eliminate any such mandate: that is why its holding differs from 

those of the Courts of Appeals for the Eighth and Ninth Circuits on this 

point. 

10. "Assure" is defined by Black's Law Dictionary as "[t]o make certain 

and put beyond doubt. To . . . ensure positively." Black's Law Dictionary 

123 (6th ed. 1990). Webster's Third New International Dictionary defines 

"assure" similarly as "to make certain the coming or attainment of: 

ensure," in its sixth definition for the term. Webster's Third New 

International Dictionary 133 (1986). 

 15 
What the section does require is that the agency achieve 

proper results in revising its State Plan. 

The district court analogized section 30(A) to the Boren 

Amendment, which dealt with reimbursement rates for

institutional providers under Medicaid, but now has been 

repealed. See 42 U.S.C. S 1396a(a)(13)(A); Rite Aid, 1998 WL 

631996, at *4. The Boren Amendment instructed state

agencies to make findings and assurances that their

Medicaid reimbursement rates promote economy, efficiency, 

quality of care, and equal access, 42 U.S.C. 

S 1396a(a)(13)(A),11 and thus, to that extent, it was 

undeniably similar to section 30(A). See Arkansas Med. 

Soc'y, 6 F.3d 519, 524 (noting similarity of function and 

language). But in contrast to section 30(A), the Boren 

Amendment directed the states as to the procedure they 

must follow in formulating a reimbursement rate, 

specifically requiring that states take into account certain 

findings. New Jersey Hosp. Ass'n v. Waldman, 73 F.3d 509, 

513 (3d Cir. 1995). Federal regulations implementing the 

Boren Amendment outline the specific "findings" a state 

agency must make whenever it made "a change in its 

methods and standards." 42 C.F.R. S 447.253(b).12 The 

_________________________________________________________________ 

11. The Boren Amendment required the Department to set inpatient 

reimbursement rates that "the State finds, and makes assurances 

satisfactory to the Secretary, are reasonable and adequate to meet the 

costs which must be incurred by efficiently and economically operated 

facilities in order to provide care and services . .. and to assure that 

individuals eligible for medical assistance have reasonable access . . . 

to 

inpatient hospital services of adequate quality; and such State makes 

further assurances, satisfactory to the Secretary, for the filing of 

uniform 

cost reports by each hospital . . . and periodic audits by the State of 

such reports." 42 U.S.C. S 1396a(a)(13)(A). 

12. The implementing regulations specify that the following findings be 

made: 

(b) Findings. Whenever the Medicaid agency makes a change in its 

methods and standards, but not less often then annually, the agency 

must make the following findings: 

(1) Payment rates. (i) The Medicaid agency pays for inpatient hospital 

services and long-term care facility services through the use of rates 

that 

are reasonable and adequate to meet the costs that must be incurred by 

 16 
district court noted that section 30(A), unlike the Boren 

Amendment, "does not require the State to utilize any 

prescribed method of analyzing and considering said factors 

[of economy, efficiency, quality of care and access]," and 

that section 30(A) does not require the agency to study any 

"specific" item "such as actual pharmacy costs." Rite Aid, 

1998 WL 631966, at *4 (internal quotation marks omitted). 

We will not read back from section 30(A) to say that the 

section implicitly requires that a state follow a specific 

procedure or demonstrate that it has reviewed each factor. 

Thus, the situation under the Boren Amendment is 

distinguishable from that here. 

Rite Aid and the PPA contend in their cross-appeals that 

without knowing pharmacies' costs, the Department could 

not know what price would lead to adequate, quality

service. See Orthopaedic Hosp., 103 F.3d at 1500 (agency 

must study actual provider costs in revising Medicaid 

payments). Preliminarily, on this issue we point out that 

Rite Aid and PPA are not by their cross-appeals seeking 

additional relief. See United States v. Tabor Court Realty 

Corp., 943 F.2d 335, 342-45 (3d Cir. 1991). Rather, they 

advance the issue as an alternative ground to affirm the 

summary judgment and injunction. University of Md. v. 

Peat Marwick Main & Co., 923 F.2d 265, 275 (3d Cir.

1991). Thus, we will dismiss the cross-appeals. 

_________________________________________________________________ 

efficiently and economically operated providers to provide services in 

conformity with applicable State and Federal laws, regulations, and 

quality and safety standards. 

(ii) With respect to inpatient hospital services-- 

(A) The methods and standards used to determine payment rates take 

into account the situation of hospitals which serve a disproportionate 

number of low income patients with special needs;[and] 

. . . . 

(C) The payment rates are adequate to assure that recipients have 

reasonable access, taking into account geographic location and 

reasonable travel time, to inpatient hospital services of adequate 

quality. 

42 C.F.R. S 447.253(b). 

 17 
Addressing the point raised in the cross-appeals on the 

merits, we think it consistent with our reading of section 

30(A) that a finding of the pharmacies' costs is not 

mandated: within the agency's discretion, pharmacies' costs 

may be considered or not, so long as its process of

decision-making is reasonable and sound. Moreover, there 

was evidence that the Department is familiar with 

providers' costs through setting the EAC and the 

dispensing fee, although it did not conduct a special study 

in this case. Thus, we approve the district court's holding 

that the Department was not required to conduct a study 

of actual pharmacy costs before revising the payment 

schedule. Rite Aid, 998 F. Supp. at 527. 

C. The District Court Erred in Holding that th e Department 

 was Arbitrary and Capricious. 

As we have indicated, the district court, in addition to 

concluding that section 30(A) has a procedural component, 

found that the Department's action in adopting the 

revisions was procedurally arbitrary and capricious. Thus, 

we must make our own determination whether the action 

was arbitrary, capricious, or an abuse of discretion, or 

otherwise was not in accordance with law, or if the action 

failed to meet statutory, procedural or constitutional 

requirements. See, e.g., Davis Enterprises v. United States 

Envtl. Protection Agency, 877 F.2d 1181, 1184 (3d Cir. 

1989). We may find that an action is arbitrary and 

capricious if the agency relied on factors other than those 

intended by Congress, did not consider "an important 

aspect" of the issue confronting the agency, provided an 

explanation for its decision which "runs counter to the 

evidence before the agency," or is entirely implausible. See 

Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut. 

Auto. Ins. Co., 463 U.S. 29, 43, 103 S.Ct. 2856, 2867 

(1983). Our standard of review is narrow. Id. at 43-44, 103 

S.Ct. at 2867. We must "uphold [an agency's] decision of 

less than ideal clarity if the agency's path may reasonably 

be discerned." Id. at 43, 103 S.Ct. at 2867 (internal 

citations omitted). Of course, if a reasonable person could 

rely on the agency's studies to reach its conclusions, the 

conclusions are not arbitrary. 

 18 
The district court found the review arbitrary and 

capricious at least in part because it already had decided, 

incorrectly in our view, that section 30(A) imposed duties 

on the Department to consider how its rates affected the 

section 30(A) factors. Thus, the Department, for example, 

could not rely on some independent guarantee of 

compliance. Rite Aid, 1998 WL 631966, at *5. The district 

court held that while the Department had discretion in how 

to conduct its review, it was obligated to consider all of the 

section 30(A) factors. Id. at *4. 

We are aware that Motor Vehicle Mfrs. requires us to 

examine whether the agency has "entirely failed to consider 

an important aspect of the problem," and that each of the 

section 30(A) factors may be considered to be relevant 

issues. Motor Vehicle Mfrs., 463 U.S. at 43, 103 S.Ct. at 

2867. Moreover, we believe that the Department might have 

done a better job in its review by considering systematically 

and thoroughly all the implications of its rate revisions, 

and, as we discuss below, in communicating its thought 

processes and decision to the public and to participants in 

the review. 

The Department gave some of the section 30(A) factors 

more attention than others. In particular, it paid greater 

consideration to economy and efficiency than to provision of 

quality of care and access to care providers comparable to 

that enjoyed by the general population. Cuts in Medicaid 

funding have enormous implications for the well being of 

some of Pennsylvania's most vulnerable people, and the 

pharmacy community is correct in pointing out that profit 

margins are already small for many of its members. 

Nevertheless, given our deferential and narrow standard of 

review, we find that the Department did not arbitrarily and 

capriciously decide to use AWP-10%, FULs and BaseLine 

Prices for ingredient costs and to raise the dispensing fee 

by $0.50. 

The district court relied upon three aspects of the

Department's review of data in holding that the 

Department's review was arbitrary and capricious with 

respect to the section 30(A) factors of efficiency, economy, 

and quality of care. Rite Aid, 1998 WL 631966, at *4-*8. 

Concluding that it was arbitrary and capricious with regard 

 19 
to those factors, it did not reach the comparable access 

factor, id. at *10, although the parties have briefed it 

extensively.13 First, the court noted a statement made in 

January 1995 by then-Secretary of Public Welfare, Karen 

Snider, who wrote to a state senator and referred to 

discounted AWP rates used by other third-party payors as 

"prearranged and arbitrary." Id. at *5. Because the

Department used such "prearranged and arbitrary" rates as 

a basis for deciding to lower its rates to Medicaid providers, 

the district court concluded that its decision was arbitrary, 

reasoning that the fact that pharmacies had accepted those 

rates did not mean that the Department could conclude 

that the rates satisfied the section 30(A) factors of efficiency 

and economy. Id. The Department points out, however, that 

the Secretary's reference was to industry-wide practices, 

and occurred in the context of noting that Medicaid

payments exceeded those of other prescription plans. Brief 

at 35-36. 

Second, the district court asserted that the Department's 

comparisons with other states' reimbursement rates was 

unacceptable because, as the HCFA itself had cautioned in 

a statement to the Department, what is reasonable in one 

state may not be reasonable for Pennsylvania's needs. Rite 

Aid, 1998 WL 631966, at *5. The Department relied on the 

HCFA's approval of rates paid in other states as evidence 

that those rates conformed with the section 30(A) 

requirements. The district court recognized that 

Pennsylvania could review other states' payments as a 

basis for determining its own payments, yet held that it 

could not conclude that its payments for brand name drugs 

would be "economical and efficient because of data from 

other states." Rite Aid, 1998 WL 631966, at *5. 

Last, the court singled out Concino's cost studies on 

select generic and brand name drugs. Under the revised 

regulations, reimbursement for generic drugs is predicated 

_________________________________________________________________ 

13. The district court did not reach the access issue, concluding that 

such review was unnecessary, but it appears that the Department 

viewed access largely in terms of whether there would be an adequate 

number of pharmacies serving Medicaid clients, not whether Medicaid 

clients had the same or better access than the general population. 

 20 
either on the FUL or on the private services's guidelines. Id. 

at * 6. The district court stated that adoption of the FULs 

for generic drugs in itself does not ensure efficiency and 

economy, and that the Department would "have to evaluate 

the rates for the remaining generic drugs [not covered by a 

FUL] as well as all of the brand name drugs." Id. The 

district court referred to several criticisms of Concino's 

price surveys, and Rite Aid and the PPA expand on them in 

their briefs. Among other issues, Rite Aid and the PPA 

complain that the drug sample of eight brand name and 15 

generic drugs was too small, these neither were selected 

randomly nor representative, the pricing data did not come 

from the pharmacies, and Medicaid payment involves 

variables not at issue with reimbursement by private plans. 

See Brief at 27-29. 

While Rite Aid and the PPA contend that a better survey 

and analysis of the drug market and the State's place in it 

could have been done, those deficiencies do not make the 

overall process arbitrary and capricious. See Methodist 

Hosp., 91 F.3d at 1029-30. (difficulties of gathering data for 

and creating comprehensive study of major segment of 

market). The district court's criticism of the price survey led 

to its conclusion that the Department behaved arbitrarily 

and capriciously in part because the court already had 

concluded that "the Department may not rely on its thirdparty payor survey or its evaluation of other states' rates." 

Rite Aid, 1998 WL 631966, at *7. We find, however, that the 

Department's study, which included data about other

states and payors, supported its revision. While we doubt 

that a rational person would rely on the Concino study 

alone to reach the Department's decision, the Department 

has shown that by considering the study and other sources 

of information, it made a reasonable effort to anticipate the 

effects of its action. 

The district court held that it was unreasonable for the 

Department to rely upon laws or regulations which 

independently ensure quality care, finding that the

Department under section 30(A) had an obligation to

consider the impact of rate changes on quality of care. Rite 

Aid, 1998 WL 631966, at * 8. But we find that it was 

reasonable for the Department to consider the statutory 

 21 
guarantees of quality of care and the necessity for the IRRC 

to approve the changes as being in the public interest, as 

valid evidence suggesting that pharmacies operating under 

the rate revisions would have to provide quality care. Cf. 

Orthopaedic Hosp. v. Belshe, 103 F.3d at 1497 (requiring 

agency to satisfy for itself maintenance of quality of care). 

The Department's finding that at least 40 states 

discounted AWP by, on average, 10%, and that the eight 

large, non-government plans studied discounted AWP by at 

least 10% and, in some cases, discounted AWP by even a 

higher percentage, supported its determination that AWP10% would allow pharmacies to maintain provision of care 

and earn a profit. Furthermore, the plans paid lower 

dispensing fees than the $3.50 previously offered by the 

Department. Thus, the Department was aware that with the 

revised rates, Pennsylvania's program would pay more than 

most states and more than those of other major 

Pennsylvania payors. 

Regarding the dispensing fee, the question is whether the 

Department was irrational in raising its fee by less than 

what the pharmacies sought, or whether it should have 

researched this change more thoroughly before the 

revision's promulgation. We find that the Department took 

into account and considered various suggestions as to what 

the fee ought be, and that it selected the increase

considering that it would keep Pennsylvania's payments 

higher than those of other third-party payors. Although 

budgetary considerations may not be the sole basis for a 

rate revision, they may be considered given that section 

30(A) mandates an economical result. See, e.g., Arkansas 

Med. Soc'y, 6 F.3d at 530. 

D. The District Court Did Not Err in Holding that the 

 Department Failed to Consult with the MAAC. 

The Department had a duty under 42 C.F.R. S 431.12 to 

consult with the Pennsylvania MAAC during its review 

process. 42 C.F.R. S 431.12(e) (State MAAC "must have 

opportunity for participation in policy development and 

program administration."). The district court concluded that 

the Department did not fulfill that duty, but did not 

determine whether that failure alone would support the 

 22 
issuance of an injunction, as it determined to enjoin the 

application of the revision because it perceived that the 

Department failed to comply with section 30(A) and acted 

arbitrarily and capriciously. Rite Aid, 1998 WL 631966, at 

*10. We agree that the Department did not comply with its 

duty to consult adequately with the MAAC, but find that 

the violation cannot support the injunction.14 

The Department met with the MAAC on October 25, 

1994, but the revisions subsequently adopted in 1995 

differed from those presented at that meeting. The MAAC 

did not meet again until September 28, 1995, after the 

revisions' promulgation, and the MAAC pharmacy 

subcommittee did not meet again until December 1995. The 

Department's discussions with individual members of the 

subcommittee during that time did not satisfy its duty to 

consult with the MAAC during the review. Indeed, Richard 

Lee, Acting Deputy of the Department, conceded in July 

1995, just before the Secretary sent the revised rates to the 

IRRC for review, that "the process [of consultation with the 

MAAC] got out of channel during the discussion, and the 

regulations were not discussed directly with the Pharmacy 

Subcommittee." Minutes of the MAAC Meeting, July 27, 

1995. We recognize that 42 C.F.R. S 431.12(e) requires 

"participation" and not "approval," but the October 1994 

consultation involved the earlier version of rates, which had 

been modified significantly by September 1995. 

The Court of Appeals for the First Circuit has noted that 

case law under 42 C.F.R. S 431.12(e) "suggests that States 

should undertake their MAAC consultations as early in the 

Plan amendment process as practicable, preferably before 

any final decision on proposed changes to their 

reimbursement methodologies," though "the HCFA 

regulations prescribe no time bar for the recommended 

MAAC consultation," and that it is reasonable to think that 

"MAAC consultation is sufficient as along as it occurs 

_________________________________________________________________ 

14. Rite Aid and the PPA raise this issue on their cross-appeals. As we 

have explained, they should have advanced the issue as an alternative 

basis to affirm. The Department contends that 42 C.F.R. S 431.12 is not 

privately enforceable but we agree with the district court that it is. 

Rite 

Aid, 998 F. Supp. at 525-26. 

 23 
before final HCFA approval of the Plan amendment." 

Visiting Nurse Ass'n of North Shore, Inc. v. Bullen, 93 F.3d 

997, 1010 n.14 (lst Cir. 1996). Here, while there was early 

consultation, there was no further consultation prior to 

final approval. Furthermore, the Department itself 

recognized that the review process had bypassed 

consultation with the MAAC. 

However, this violation cannot supply a basis to sustain 

the injunction. In Burgess v. Affleck, 683 F.2d 596, 599- 

600 (1st Cir. 1982), the Court of Appeals for the First 

Circuit found a case of "borderline" compliance with the 

MAAC regulation, but held that as the MAAC's involvement 

was advisory and it had no veto power, an injunction was 

not an appropriate remedy. Therefore, it reversed the 

district court's grant of an injunction entered on that basis, 

finding that relief at best would involve requiring

consultation with the MAAC before implementation of

revisions. Here, too, we think the violation is"not

egregious," id., and that it would not be appropriate to 

sustain the district court's injunction on the basis of the 42 

C.F.R. S 431.12 violation. 

E. The District Court Erred in Holding that the Department 

 Violated 42 C.F.R. S 447.205 (c). 

The district court held that the Department violated 42 

C.F.R. S 447.205(c) by failing to "[i]dentify a local agency in 

each county . . . where copies of the proposed changes are 

available for public review." Rite Aid, 998 F. Supp. at 530. 

The first question on this point is whether the Department's 

August 25, 1995 notice constitutes published notice of a 

"proposed" change. See 25 Pa. Bull. 3540 (Aug. 26, 1995). 

The August 25, 1995 notice stated that the Department 

"will amend" the reimbursement rates, and gave a synopsis 

of the changes. Id. In order to determine whether the 

Department thus had announced a proposed change, the 

court framed the question as whether on that date the rates 

were final or not, as the Department's own public comment 

period had ended by August 25, 1995. Moreover, the rates 

already had been submitted to the IRRC for approval, 

though they were not yet approved. The court properly 

concluded that, as the IRRC had its own public comment 

period, and the rate change was subject to ultimate

 24 
approval by the IRRC, the notice was not final, although the 

agency had determined what it wished the rates to be. Rite 

Aid, 998 F. Supp. at 528-29. Because the notice preceded 

the effective date, we agree that the changes were 

"proposed" and public comment would not have been futile. 

The second question is whether the content of the August 

25, 1995 notice of proposed changes was sufficient. The 

district court simply concluded that "[n]otifying readers 

about another location where they can read the same notice 

is not sufficient." Id. at 530. Wefind that the availability of 

the same notice itself in local agencies satisfied the 

regulation, as it contained sufficient information and detail 

for public consideration. Burgess, 683 F.2d at 602. Clearly, 

though, the Department did the bare minimum to meet its 

duty in this regard. 

Finally, Rite Aid and the PPA argue that the Department 

failed to provide 60 days of public comment on the 

"proposed" rates before changing the rates, as required by 

55 Pa. Code S 1101.70. Federal law no longer requires a 60- 

day period between proposal notice and the effective date of 

the rate change. See 46 Fed. Reg. 58677 (Dec. 3, 1981). 

The district court properly rejected the contention that it 

should incorporate Pennsylvania's law into the federal 

public notice requirement, because the state agency had 

not expressed its clear intent to do so. Rite Aid, 998 F. 

Supp. at 529-30. See Mississippi Band of Choctaw Indians 

v. Holyfield, 490 U.S. 30, 43, 109 S.Ct. 1597, 1605 (1989). 

IV. CONCLUSION 

Because we hold that section 30(A) does not include

procedural requirements, and because the Department's 

11-month period of data gathering, consultation, and 

review before promulgating the changes was not so 

deficient as to be arbitrary and capricious, we will reverse 

the district court's grant of partial summary judgment to 

Rite Aid, and vacate the injunction. The deficiencies we 

have identified in the Department's procedures do not 

justify a different result. We will dismiss Rite Aid's and the 

PPA's cross-appeals because they are unwarranted 

procedurally and in any event are without merit. We will 

 25 
remand the case to the district court for further 

proceedings consistent with this opinion. 

A True Copy: 

Teste: 

 Clerk of the United States Court of Appeals 

 for the Third Circuit 

 26