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. e du/thir dc ir c uit_1999/75Filed 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

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*Honorable Myron H. Bright, Senior Judge of the Uni ted States Court of Appeals for the Eighth Circuit, sitting by designat ion.

2Doris 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 ("Depar tment") promulgation of revised regulations governing payme nt rates for prescription drugs and related services p rovided to Medicaid recipients pursuant to Title XIX of the So cial Security Act, 42 U.S.C. SS 1396-1396v ("Medicaid Ac t").1 The Department appeals from an order and judgment o f the

United States District Court for the Eastern Distri ct of Pennsylvania, entered August 31, 1998, enjoining it from applying revised formulas to pay pharmacies for prescription drugs and related services under the M edicaid program which were to become effective October 1, 1 995. Rite Aid of Pennsylvania and the Pennsylvania Pharm acists Association ("PPA") cross-appeal from the district court's order to the extent that it upheld procedures the

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1. In order to assist the readers of this opinion, we set forth the letter abbreviations that the parties have used which we a lso 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 Reg ulatory Review Commission (IRRC); Medical Care Advisory Committee (MAAC); Maximum Allowable Costs (MAC); Omnibus Budget Recon ciliation Act (OBRA); Pennsylvania Pharmacists Association (PPA); and State Plan Amendment (SPA).

3Department 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 exerci sed jurisdiction under 28 U.S.C. SS 1331, 1343 and we e xercise jurisdiction under 28 U.S.C. S 1291. For the reason s 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 thr ough which the federal government provides funds to the states to assist the poor, elderly, and disabled to receiv e medical care. 42 U.S.C. S 1396. See Cleary v. Waldman, 1999 WL 53046, at *3 (3d Cir. Feb. 8, 1999). The Medicaid A ct requires states to pay for certain services and all ows 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 accordanc e 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 Dep artment is the state agency responsible for the administrat ion 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 p ayment rates for each type of service included in the prog ram. 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, o f course, must meet federal requirements. 42 U.S.C. SS 1396a(b); 42 C.F.R. SS 430.10, 430.12. Pennsylva nia law requires that the Pennsylvania Independent Regulato ry Review Commission ("IRRC") review and approve the Department's proposed amendments before the Departm ent seeks HHS approval. Pa. Stat. Ann. tit. 71, #8E8E # 745.1 to 745.15 (West 1990).

4Pennsylvania has opted to cover prescription drugs and

related services in its State Plan. 42 U.S.C. S 139 6d(a)(12); 42 C.F.R. S 440.120(a). Federal legislation control s program costs for Medicaid prescription drug benefits by establishing upper limits, or Maximum Allowable Cos ts ("MACs"), for certain drugs. Certain generic drugs are reimbursed at the Federal Upper Limit ("FUL") as ma ndated by the Health Care Financing Administration ("HCFA" ) of the HHS.2 For brand name drugs, states reimburse fo r the lower of the pharmacy's "usual and customary charge s" or the Estimated Acquisition Cost ("EAC"), which is th e state's best estimate of the price generally and currently paid by providers for a drug marketed or sold by a particul ar manufacturer. See 42 C.F.R. S 447.301. Prior to the adoption of the revisions at issue here, the Depart ment defined the EAC as the full Average Wholesale Price ("AWP") for the drug as found in the Department's pricing s ervices.

Rite Aid and members of the PPA voluntarily partici pate as enrolled providers in the Pennsylvania Medical Assistance Program pursuant to provider agreements executed with the Department. See 55 Pa. Code. S 11 21. The agreements provide for the Department to reimbu rse Rite Aid and other pharmacies for prescription drug s and related services in accordance with applicable fede ral and state laws and regulations. We detail here only tho se 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 an d 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 necessa ry to safeguard against unnecessary utilization of such care and services and to assure that payments are consistent with efficiency, economy, and qua lity of care and are sufficient to enlist enough provider s so that care and services are available under the pl an at least

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2. By federal regulation, reimbursement for those g eneric drugs specified by HCFA may not exceed the FUL. 42 C.F.R. S 447.332

.

5to the extent that such care and services ar e 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 c are advisory committee" ("MAAC"), which will advise the state agency director. See 42 C.F.R. S 431.12(b). The com mittee must "have an opportunity for participation in poli cy development and program administration, including furthering participation of recipient members in ag ency 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 appro ved automatically. See 42 U.S.C. S 1396n(f)(2); 42 C.F. R. S 430.16. Federal statutes and regulations establis h the

criteria for the HCFA to make its decision. See 42 C.F.R. S 430.15(a).

Among other regulations affecting state payment rat es under section 30(A) is a requirement for public not ice for changes in "methods and standards for setting payme nt

rates for services" before the effective date of th e 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 p ublic comment and criticism. Id. Pennsylvania regulations require a 60-day public comment period in accordanc e 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 serv ices reimbursement. First, it determines what the pharma cies will receive for the ingredient cost of the drugs; second, it determines a "dispensing fee": a per-prescription p ayment

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3. The state regulation provides:

Federal regulations at 42 C.F.R. 447.205 req uire the Department . . . to give a 60 day public notice of prop osed Statewide changes

in any method or level of MA [Medical Assistanc e] reimbursement that would affect program expenditures by 1% or m ore during the 12 months following the effective date of the c hange.

6which compensates pharmacies for the costs associat ed

with dispensing a prescription to a Medicaid recipi ent.

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 percentil e price of those drugs found in the United States Departmen t of Health Generic Drug Formulary, an instrument which nolonger 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 advi sing the Department that its reimbursement rates were hi gh, given, among other reasons, changes in the drug marketplace. See, e.g., letter from HCFA to Secreta ry of Public Welfare, John F. White, Jr., (Nov. 27, 1990) . App. at 1881. The HCFA informed the Department that it woul d not accept AWP levels for "EAC without a significant di scount being applied," unless the Department provided documentation that the actual acquisition cost equa led the full AWP. Id.4 Furthermore, at the end of 1994, a t hree-year moratorium imposed by federal law which prevented t he 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 pharmac ies to charge the Department the lowest rate they charg ed 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 budge t, although the Department had not yet secured approva l for the change from the State or federal bodies respons ible for

such review.

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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.

7Not surprisingly, pharmacies were concerned about t he

impact of the proposed cuts, and voiced many critic isms and suggestions. The MAAC and the pharmacy communit y stated that it was unreasonable for the Department to compare Medicaid to private, third-party payor plan s, because, among other reasons, pharmacies face speci al costs in participating in the Medicaid program and serving Medicaid recipients. Among other alternatives, the pharmacies asked the Department to study "what it c osts to fill a Medicaid prescription in Pennsylvania and allow a reasonable profit." Letter from the PPA to Secretar y Feather O. Houstoun (May 12, 1995). App. at 1081.

While considering the proposals discussion particip ants offered, the Department conducted its own review an d evaluation, although it did not study what Medicaid provision of pharmaceutical services cost in Pennsy lvania. The Department, however, delayed the anticipated implementation date of January 1, 1995, as it revie wed 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%. F or generic drugs with an FUL, the maximum acquisition cost was the FUL. For generic drugs for which the HHS ha s not determined an FUL, the Department adopted limits se t by a private pricing service, "BaseLine Prices," to be revised every six months. The dispensing fee was raised fro m $3.50 per-prescription to $4.00 per-prescription. The Dep artment revised the definition of "usual and customary" to require pharmacies to reduce their usual and customary char ge for a given prescription to include any discounts the p harmacy would have given the Medicaid recipient if the reci pient 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 phar macy

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

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

8subcommittee. It also sought other data, such as th e

geographical distribution of independent and chain drugstores throughout the state and participation r ates 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 approximat ely 200 private plans operating in the state; (2) reimb ursement rates for brand name drugs paid by neighboring stat es, HCFA Region III states and other states with high M edicaid expenditures;6 and (3) purchase prices of 15 highly -used, randomly selected drugs, reviewed by Joseph Concino ("Concino"), the Department's Medical Assistance Po licy Specialist on Pharmacy. Concino showed that the pharmacies could purchase almost every one of the s elected drugs at or below the FUL rate. He found that the s tate's pre-1995 rates were higher than any of the third-pa rty payors' rates, and that the proposed change -- from AWP to AWP-10%, and from a dispensing fee of $3.50 to $4.0 0-- 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 fo r Medicaid program expenditures, and that it was the only state surveyed that did not use FULs as the cost li mit 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 hi ghest Medicaid expenditures of the top ten drug expenditu re

states.

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Review" to ensure that drug will not have adverse r esult for patient). Further, under federal law, Medicaid State Plans mu st include a Prospective Drug Review requirement, 42 U.S.C. S 13 96r-8(g)(2). OBRA is the Omnibus Budget Reconciliation Act, 42 U.S.C.S 1 396r-8(g)(2) (regulating pharmacies).

6. HCFA Region III states include Delaware, the Dis trict of Columbia, Maryland, Pennsylvania, Virginia, and West Virginia . The Department also surveyed California, Florida, Illinois. Louisi ana, Michigan, New Jersey, New York, Ohio, and Texas.

9On August 8, 1995, the Department submitted the

amended regulations to the IRRC, which received com ments during its review, and presented the Department wit h a series of questions, to which the Department replie d in writing. The Department published a notice on Augus t 26, 1995, in the Pennsylvania Bulletin, 25 Pa. Bull. 35 40 (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, th e very same notice available at 25 Pa. Bull. 3540) would b e available at local agencies throughout the Commonwe alth. After an IRRC public meeting with representatives o f 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, 199 5. On September 23, 1995, the text of the Department orde r adopting the regulations was published in the Penns ylvania Bulletin. See 25 Pa. Bull. 3978 (Sept. 23, 1995). I n the order the Department stated that:

The MA (Medical Assistance) program cannot i gnore the trends occurring -- in other state Medicaid programs, private third-party plans and reimbursement rates accepted by Pennsylvania pharmacies. As a pr udent buyer of medical care for its clients, the D epartment

must obtain similar rates extended to those of other third-party payors and other Medicaid agenci es. Therefore, to make the pharmacy payment poli cies for the MA program comparable with other private and public payment policies, the Department is a dopting the following revisions: . . .

On December 29, 1995, the Department sent the SPA t o the HCFA for approval. The HCFA approved the revise d SPA on May 7, 1995, with changes effective retroactivel y to October 1, 1995.

C. Procedural History.

Rite Aid filed an action against the Secretary of t he Department of Public Welfare on March 27, 1997, approximately 17 months after the revised regulatio n took effect. Rite Aid alleged that in adopting the revis ions the Department had violated various provisions of Title XIX of

10the Social Security Act and related regulations and state

statutes, as well as the due process clause of the Fourteenth Amendment. The parties filed cross-motio ns for judgment on the pleadings, and on November 3, 1997, the district court granted judgment in favor of the Dep artment 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 gra nted the Department judgment on Rite Aid's due process claim

.

The court, however, ruled in favor of Rite Aid on i ts claim that section 30(A) contains a discrete "procedural" component and thus it denied the Department's motio n 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 agen cy where the proposed reimbursement changes were available f or 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 motio n on February 20, 1998. On May 8, 1998, the court, on Ri te Aid's and the PPA's motion to define the scope of r eview and limit discovery, issued an opinion and order li miting 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 an d 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 i t acted arbitrarily and capriciously procedurally in adopti ng the revisions. Accordingly, it enjoined the Department from reimbursing pharmacies for drugs supplied to Medica id recipients on or after October 1, 1998, in accordan ce 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 comp ly with its obligations under 42 C.F.R. S 431.12 to meet wi th the MAAC to discuss the regulations. The court, however , did

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

the court rejected Rite Aid's and the PPA's claim t hat section 30(A) required the Department to conduct a study of actual pharmacy costs before revising the paymen t

schedule.

The Department filed a notice of appeal on Septembe r 8, 1998, amended on September 28, 1998; Rite Aid and t he PPA filed cross-appeals on September 29, 1998, chal lenging 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 Dep artment had not violated 42 C.F.R. S 447.205(a) by not publ ishing 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, an d October 26, 1998, respectively. Thus, the revisions have not been in effect and the Department has been using th e prior

rates.

III. DISCUSSION

We emphasize that Rite Aid and the PPA on this appe al have not challenged the substantive impact or resul ts of the revised rates as failing to comply with section 30( A). See Minnesota Homecare Ass'n Inc. v. Gomez, 108 F.3d 91 7, 918 (8th Cir. 1997) (concurring opinion). Rather, t hey challenge the way in which the Department set and promulgated the new rates. In particular, they argu e 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 accept ed these contentions and thus in this opinion we largely foc us on these points.7 The parties agree that we exercise p lenary

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7. The Department argues at least in part that Rite Aid and the PPA may not sue to enforce the Medicaid regulations as sect ion 30(A) "does not support a private cause of action." Brief at 27. Th e district court rejected this argument and we agree with this result. Rite A id, 998 F. Supp. at 525-26. In the district court Rite Aid argued that "substantively" the SPA

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

General Elec. Astrospace, 101 F.3d 947, 951 (3d Cir . 1996). In this regard, we point out that the district cour t predicated its result, including issuing the injunc tion, on its construction of section 30(A) and its relatedfi nding that the Department acted arbitrarily and capriciously i n adopting the revisions, rather than on other equita ble considerations. See AMP Inc. v. AlliedSignal Corp., 1999 WL 86843 at *3 (3d Cir. Feb. 18, 1999). Thus, this app eal 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 deter mination in its May 8, 1998 order to base its decision on th e existing

administrative record. While we are not aware of an y court that has held specifically that in reviewing sectio n 30(A) issues a court must confine itself to the agency's administrative record, in general judicial review s hould 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 bas e its review on any "post-hoc rationalizations" made by t he Department after it had taken the disputed action. Rite Aid, 1998 WL 254082 at *1 (citing Citizens to Preserve O verton

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was invalid because "the revised reimbursement rate s are too low to satisfy the statutory requirements." Id. At 528. Th e court, however,

declined to rule on this contention because it held that a determination of "[w]hether the rates are consistent with efficie ncy, economy, and quality of care requires further development of the record." Id. In the circumstances, our opinion does not preclude Rite A id and the PPA from making a "substantive" challenge to the revisions.

8. Because the Department participated in an IRRC h earing on September 7, 1995, and because regulations were not final until they were deemed approved on September 8, 1995, the cour t considered the

administrative record to include documents before t he Secretary through that date, a decision not challenged on appeal.

13Park, Inc. v. Volpe, 401 U.S. 402, 419, 91 S.Ct. 81 4, 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 disa gree with the district court on this point, as we conclu de that section 30(A) mandates only substantive compliance with its specified factors of efficiency, economy, quali ty 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 a nd Ninth Circuits have ruled that section 30(A) requir es 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, econo my, and quality of care as designated in [section 30(A)] wh en setting reimbursement rates."); Minnesota HomeCare Ass'n, I nc., 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 he ld, however, that there is no such requirement, but rat her 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 ac hieve a certain result but does not impose any particular m ethod or process for getting to that result. Id. Thus, secti on 30(A) does not require any "particular methodology" for s atisfying its substantive requirements as to modifications of state plans.9 However, we will not go as far as did that court as

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

of the Court of Appeals for the Seventh Circuit's resu lt 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

14to say that the Department literally may act like a ny other

buyer of health care by offering a certain price, a nd seeing what response or result that price brings forth; th at is, that the "states may behave like other buyers of goods a nd services in the market: they may say what they are willing to pay and see whether this brings forth an adequat e supply." Id. We decline to adopt that approach beca use ordinarily, at least, a state may not act arbitrari ly and capriciously, although other actors in the market m ay do so if they so choose. While section 30(A) does not gov ern 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 t esting out new formulae or prices at random, then correcting t he

results once a violation has occurred.

The courts of appeals' split thus arises from the q uestion whether section 30(A) demands a process which will ensure future results, or merely the result itself. In rea ching our result we will not read procedural criteria into se ction 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. Th us, it is up

to a state to determine how it will "assure" the ou tcomes. We reiterate that section 30(A) does not specify a particular process for a state agency to follow in establishin g rates.10

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section 30(A) does not require "comprehensive studi es" such "that would put an environmental impact study to shame." Id. (c iting Methodist Hosp., 91 F.3d at 1029). But the district court ass erted that "by this language, Methodist does not conclude that 30(A) el iminates any mandate for evaluation of the statutory factors bef ore revising the

rates." Id. (citing Methodist Hosp., 91 F.3d at 1030). In f act, Methodist Hosp. does eliminate any such mandate: that is why its ho lding differs from those of the Courts of Appeals for the Eighth and N inth Circuits on this point.

10. "Assure" is defined by Black's Law Dictionary a s "[t]o make certain and put beyond doubt. To . . . ensure positively." Black's Law Dictionary 123 (6th ed. 1990). Webster's Third New Internation al Dictionary defines "assure" similarly as "to make certain the coming o r attainment of: ensure," in its sixth definition for the term. Webs ter's Third New International Dictionary 133 (1986).

15What the section does require is that the agency ac hieve

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, effic iency, quality of care, and equal access, 42 U.S.C. S 1396a(a)(13)(A),11 and thus, to that extent, it w as undeniably similar to section 30(A). See Arkansas M ed. Soc'y, 6 F.3d 519, 524 (noting similarity of functi on and language). But in contrast to section 30(A), the Bo ren Amendment directed the states as to the procedure t hey must follow in formulating a reimbursement rate, specifically requiring that states take into accoun t certain findings. New Jersey Hosp. Ass'n v. Waldman, 73 F.3 d 509, 513 (3d Cir. 1995). Federal regulations implementin g the Boren Amendment outline the specific "findings" a s tate agency must make whenever it made "a change in its methods and standards." 42 C.F.R. S 447.253(b).12 T he

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11. The Boren Amendment required the Department to set inpatient reimbursement rates that "the State finds, and make s assurances satisfactory to the Secretary, are reasonable and a dequate to meet the costs which must be incurred by efficiently and eco nomically operated facilities in order to provide care and services . .. and to assure that individuals eligible for medical assistance have re asonable access . . .

to inpatient hospital services of adequate quality; an d such State makes further assurances, satisfactory to the Secretary, for the filing of

uniform cost reports by each hospital . . . and periodic au dits by the State of such reports." 42 U.S.C. S 1396a(a)(13)(A).

12. The implementing regulations specify that the f ollowing findings be

made:

(b) Findings. Whenever the Medicaid agency makes a change in its methods and standards, but not less often then annu ally, 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 throu gh the use of rates

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

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

Amendment, "does not require the State to utilize a ny 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 s tudy any "specific" item "such as actual pharmacy costs." Ri te Aid, 1998 WL 631966, at *4 (internal quotation marks omi tted). We will not read back from section 30(A) to say tha t the section implicitly requires that a state follow a s pecific 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 c ould not know what price would lead to adequate, quality service. See Orthopaedic Hosp., 103 F.3d at 1500 (a gency must study actual provider costs in revising Medica id payments). Preliminarily, on this issue we point ou t that Rite Aid and PPA are not by their cross-appeals see king

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 affir m 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.

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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 pay ment rates take into account the situation of hospitals which serve a disproportionate number of low income patients with special needs;[a nd]

. . . .

(C) The payment rates are adequate to assure that r ecipients have reasonable access, taking into account geographic l ocation and reasonable travel time, to inpatient hospital servi ces of adequate quality.

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

17Addressing 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 no t mandated: within the agency's discretion, pharmacie s' 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 speci al study in this case. Thus, we approve the district court's holding that the Department was not required to conduct a s tudy of actual pharmacy costs before revising the paymen t schedule. Rite Aid, 998 F. Supp. at 527.

C. The District Court Erred in Holding that th e De partment was Arbitrary and Capricious.

As we have indicated, the district court, in additi on to concluding that section 30(A) has a procedural comp onent, found that the Department's action in adopting the revisions was procedurally arbitrary and capricious . Thus,

we must make our own determination whether the acti on was arbitrary, capricious, or an abuse of discretio n, or otherwise was not in accordance with law, or if the action failed to meet statutory, procedural or constitutio nal requirements. See, e.g., Davis Enterprises v. Unite d States Envtl. Protection Agency, 877 F.2d 1181, 1184 (3d C ir. 1989). We may find that an action is arbitrary and capricious if the agency relied on factors other th an those intended by Congress, did not consider "an importan t aspect" of the issue confronting the agency, provid ed an explanation for its decision which "runs counter to the evidence before the agency," or is entirely implaus ible. See Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State Fa rm Mut. Auto. Ins. Co., 463 U.S. 29, 43, 103 S.Ct. 2856, 28 67 (1983). Our standard of review is narrow. Id. at 43 -44, 103 S.Ct. at 2867. We must "uphold [an agency's] decisi on of less than ideal clarity if the agency's path may re asonably be discerned." Id. at 43, 103 S.Ct. at 2867 (intern al citations omitted). Of course, if a reasonable pers on could rely on the agency's studies to reach its conclusio ns, the conclusions are not arbitrary.

18The 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 affecte d the section 30(A) factors. Thus, the Department, for ex ample, could not rely on some independent guarantee of compliance. Rite Aid, 1998 WL 631966, at *5. The di strict 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 t o 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 relev ant issues. Motor Vehicle Mfrs., 463 U.S. at 43, 103 S. Ct. at 2867. Moreover, we believe that the Department migh t have done a better job in its review by considering syst ematically and thoroughly all the implications of its rate rev isions, and, as we discuss below, in communicating its thou ght processes and decision to the public and to partici pants in

the review.

The Department gave some of the section 30(A) facto rs more attention than others. In particular, it paid greater consideration to economy and efficiency than to pro vision of quality of care and access to care providers compar able to that enjoyed by the general population. Cuts in Med icaid funding have enormous implications for the well bei ng 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 stan dard of review, we find that the Department did not arbitra rily and capriciously decide to use AWP-10%, FULs and BaseLi ne Prices for ingredient costs and to raise the dispen sing 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 wi th 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 wit h regard

19to those factors, it did not reach the comparable a ccess

factor, id. at *10, although the parties have brief ed it extensively.13 First, the court noted a statement m ade in January 1995 by then-Secretary of Public Welfare, K aren Snider, who wrote to a state senator and referred t o discounted AWP rates used by other third-party payo rs as "prearranged and arbitrary." Id. at *5. Because the Department used such "prearranged and arbitrary" ra tes 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 accepte d those rates did not mean that the Department could conclu de 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 prac tices, 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 Depart ment's comparisons with other states' reimbursement rates was unacceptable because, as the HCFA itself had cautio ned in a statement to the Department, what is reasonable i n one state may not be reasonable for Pennsylvania's need s. Rite Aid, 1998 WL 631966, at *5. The Department relied o n the HCFA's approval of rates paid in other states as ev idence 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 th at 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 revi sed regulations, reimbursement for generic drugs is pre dicated

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13. The district court did not reach the access iss ue, concluding that such review was unnecessary, but it appears that th e Department viewed access largely in terms of whether there wou ld be an adequate number of pharmacies serving Medicaid clients, not whether Medicaid clients had the same or better access than the gene ral population.

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

at * 6. The district court stated that adoption of the FULs for generic drugs in itself does not ensure efficie ncy and economy, and that the Department would "have to eva luate the rates for the remaining generic drugs [not cove red by a FUL] as well as all of the brand name drugs." Id. T he

district court referred to several criticisms of Co ncino's price surveys, and Rite Aid and the PPA expand on t hem in their briefs. Among other issues, Rite Aid and the PPA complain that the drug sample of eight brand name a nd 15 generic drugs was too small, these neither were sel ected randomly nor representative, the pricing data did n ot come from the pharmacies, and Medicaid payment involves variables not at issue with reimbursement by privat e plans.

See Brief at 27-29.

While Rite Aid and the PPA contend that a better su rvey and analysis of the drug market and the State's pla ce in it could have been done, those deficiencies do not mak e the overall process arbitrary and capricious. See Metho dist Hosp., 91 F.3d at 1029-30. (difficulties of gatheri ng data for and creating comprehensive study of major segment o f market). The district court's criticism of the pric e survey led to its conclusion that the Department behaved arbit rarily 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 state s' 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 st udy alone to reach the Department's decision, the Depar tment has shown that by considering the study and other s ources of information, it made a reasonable effort to anti cipate the

effects of its action.

The district court held that it was unreasonable fo r 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 c are. Rite Aid, 1998 WL 631966, at * 8. But we find that it wa s reasonable for the Department to consider the statu tory

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

to approve the changes as being in the public inter est, as valid evidence suggesting that pharmacies operating under the rate revisions would have to provide quality ca re. Cf. Orthopaedic Hosp. v. Belshe, 103 F.3d at 1497 (requ iring 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 ei ght large, non-government plans studied discounted AWP by at least 10% and, in some cases, discounted AWP by eve n a higher percentage, supported its determination that AWP10% would allow pharmacies to maintain provision of care and earn a profit. Furthermore, the plans paid lowe r dispensing fees than the $3.50 previously offered b y the Department. Thus, the Department was aware that wit h the revised rates, Pennsylvania's program would pay mor e than most states and more than those of other major Pennsylvania payors.

Regarding the dispensing fee, the question is wheth er the Department was irrational in raising its fee by les s than what the pharmacies sought, or whether it should ha ve researched this change more thoroughly before the revision's promulgation. We find that the Departmen t 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 payme nts higher than those of other third-party payors. Alth ough budgetary considerations may not be the sole basis for a rate revision, they may be considered given that se ction 30(A) mandates an economical result. See, e.g., Ark ansas Med. Soc'y, 6 F.3d at 530.

D. The District Court Did Not Err in Holding that t he 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 revie w process. 42 C.F.R. S 431.12(e) (State MAAC "must ha ve opportunity for participation in policy development and program administration."). The district court concl uded that the Department did not fulfill that duty, but did n ot determine whether that failure alone would support the

22issuance of an injunction, as it determined to enjo in the

application of the revision because it perceived th at the Department failed to comply with section 30(A) and acted arbitrarily and capriciously. Rite Aid, 1998 WL 631 966, at *10. We agree that the Department did not comply wi th 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 199 5 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 d uty to consult with the MAAC during the review. Indeed, Ri chard Lee, Acting Deputy of the Department, conceded in J uly 1995, just before the Secretary sent the revised ra tes 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 Ph armacy Subcommittee." Minutes of the MAAC Meeting, July 27

, 1995. We recognize that 42 C.F.R. S 431.12(e) requi res "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 note d 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 b efore any final decision on proposed changes to their reimbursement methodologies," though "the HCFA regulations prescribe no time bar for the recommend ed MAAC consultation," and that it is reasonable to th ink that "MAAC consultation is sufficient as along as it occ urs

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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 distric t court that it is.

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

23before 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 w as early consultation, there was no further consultation pri or 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 su stain the injunction. In Burgess v. Affleck, 683 F.2d 596 , 599- 600 (1st Cir. 1982), the Court of Appeals for the F irst Circuit found a case of "borderline" compliance wit h the MAAC regulation, but held that as the MAAC's involv ement was advisory and it had no veto power, an injunctio n was not an appropriate remedy. Therefore, it reversed t he 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 appropria te to sustain the district court's injunction on the basi s of the 42

C.F.R. S 431.12 violation.

E. The District Court Erred in Holding that the Dep artment Violated 42 C.F.R. S 447.205 (c).

The district court held that the Department violate d 42 C.F.R. S 447.205(c) by failing to "[i]dentify a loc al agency in each county . . . where copies of the proposed chan ges are available for public review." Rite Aid, 998 F. Supp . at 530. The first question on this point is whether the Dep artment'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 Departme nt "will amend" the reimbursement rates, and gave a sy nopsis of the changes. Id. In order to determine whether t he Department thus had announced a proposed change, th e court framed the question as whether on that date t he rates were final or not, as the Department's own public c omment 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 proper ly concluded that, as the IRRC had its own public comm ent period, and the rate change was subject to ultimate

24approval by the IRRC, the notice was not final, alt hough the

agency had determined what it wished the rates to b e. Rite Aid, 998 F. Supp. at 528-29. Because the notice pre ceded the effective date, we agree that the changes were "proposed" and public comment would not have been f utile.

The second question is whether the content of the A ugust 25, 1995 notice of proposed changes was sufficient. The district court simply concluded that "[n]otifying r eaders about another location where they can read the same notice

is not sufficient." Id. at 530. Wefind that the ava ilability 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 Depart ment failed to provide 60 days of public comment on the "proposed" rates before changing the rates, as requ ired by 55 Pa. Code S 1101.70. Federal law no longer requir es a 60- day period between proposal notice and the effectiv e date of the rate change. See 46 Fed. Reg. 58677 (Dec. 3, 19 81). The district court properly rejected the contention that it should incorporate Pennsylvania's law into the fede ral 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 In dians 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, an d review before promulgating the changes was not so deficient as to be arbitrary and capricious, we wil l reverse the district court's grant of partial summary judgm ent to Rite Aid, and vacate the injunction. The deficienci es we have identified in the Department's procedures do n ot justify a different result. We will dismiss Rite Ai d's and the PPA's cross-appeals because they are unwarranted procedurally and in any event are without merit. We will

25remand 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