United States Court of Appeals

FOR THE EIGHTH CIRCUIT

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No. 08-3284

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Iowa Department of Human Services, * 

*

Petitioner, *

* On Petition for Review of an

v. * Order of the Secretary of

* Health and Human Services.

Centers for Medicare and Medicaid *

Services, U.S. Department of Health *

and Human Services, *

* 

Respondent. *

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Submitted: June 11, 2009

Filed: August 19, 2009 (Corrected: 08/21/2009)

 (Corrected: 08/31/2009)

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Before SMITH, ARNOLD, and SHEPHERD, Circuit Judges.

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SHEPHERD, Circuit Judge.

Iowa submitted a state plan amendment (“Plan”) to the Centers for Medicare

and Medicaid Services (“CMS”) in March 2005. The Plan proposed changes to the

state’s Medicaid program relating to multiple source drugs. CMS disapproved the

Plan in November 2005. Iowa requested administrative reconsideration, and the

matter was referred to a hearing officer in June 2007. The hearing officer issued a

proposed decision in January 2008 denying the state’s request. Iowa submitted

exceptions to the proposed decision, and, in August 2008, the CMS Administrator

issued a final decision on behalf of the Secretary of Health and Human Services
1

“Multiple source drug” means a covered outpatient drug with at least one

competitor drug for sale in the same state that is pharmaceutically equivalent,

therapeutically equivalent, and bioequivalent. 42 C.F.R. § 447.502. In layman’s

terms, this means a brand name drug that is also available in generic form or under a

different brand name.

2

“Other drugs” include single source drugs and non-listed multiple source

drugs. See 42 C.F.R. § 447.512(b).

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(“Secretary”) affirming the agency’s disapproval of the Plan. Iowa petitions this court

to review and reject the Secretary’s final decision. We deny the state’s petition.

I.

The Medicaid statute, 42 U.S.C. § 1396 et seq., establishes a cooperative

federal-state program in which the federal government provides funding to state

programs that give medical assistance to people whose income and resources are

insufficient to meet the costs of necessary medical services. States that choose to

participate in the Medicaid program must submit plans for medical assistance that

conform to federal regulations. Minnesota v. CMS, 495 F.3d 991, 993 (8th Cir.

2007); see also 42 U.S.C. § 1396a. To help control rising Medicaid expenses, the

Secretary has issued regulations establishing two federal upper limits (“FULs”), which

cap the aggregate amount states can pay to purchase prescription drugs for Medicaid

patients. See 42 C.F.R. § 447.512. The first FUL applies to “multiple source drugs”1

that CMS has specifically listed, and it is based on the price of the least costly

therapeutic equivalent drug. Id. §§ 447.512(a), 514(a)-(b). The second FUL applies

to “other drugs”2

 and is based on the pharmacy’s estimated acquisition cost or the

usual and customary charge the general public would pay, whichever is lower. Id. §

447.512(b). The FUL for “other drugs” also applies to listed, multiple source drugs

but only when they are dispensed after a physician certifies that a specific brand name

drug is medically necessary for a particular patient. Id. § 447.512(c).
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Congress established the Medicaid Drug Rebate Program to further reduce

Medicaid spending. See Pub. L. No. 101-508, § 4401 (1990) (codified at 42 U.S.C.

§§ 1396a, 1396b, and 1396r-8). The program requires drug manufacturers to enter

into rebate agreements with the Secretary in order for their drugs to be eligible for

Medicaid reimbursement. See 42 U.S.C. §§ 1396b(i)(10), 1396r-8(a)(1). Pursuant

to these federal agreements, drug manufacturers must provide rebates to states for

covered outpatient drugs for which payment was made under state Medicaid plans.

Id. § 1396r-8(b)(1)(A). In addition, an individual state can negotiate supplemental

rebate agreements with drug manufacturers. Many manufacturers provide these

supplemental rebates in return for placement on a state’s list of “preferred drugs,”

which doctors may prescribe to Medicaid patients without having to obtain prior

authorization from the state.

Iowa has entered into supplement rebate agreements with multiple drug

manufacturers, and the state maintains a preferred drug list. For drugs under its

current Medicaid plan, the state will pay the lesser of: (1) the drug’s estimated

acquisition cost, (2) the multiple-source-drug FUL, (3) a state-set upper limit, or (4)

the usual and customary charge for the drug. The current plan also provides that, if

a physician certifies that a specific brand is medically necessary, Iowa will pay the

lesser of options (1) and (4). By including options (1), (2), and (4), as well as the

physician certification requirement, Iowa’s current plan complies with the federal

Medicaid regulations governing payments for prescription drugs.

In 2005, Iowa submitted the Plan, which proposed two amendments to its

Medicaid program regarding multiple source drugs. First, the Plan abolishes the

physician certification requirement. Second, the Plan deletes all references to the FUL

for multiple source drugs. Instead, for all brand name drugs, the Plan requires Iowa

to pay the lesser of (1) the drug’s estimated acquisition cost or (2) the provider’s usual

and customary charge for the drug. After Iowa submitted the Plan, CMS requested

additional information from the state pursuant to 42 U.S.C. § 1396n(f)(2). CMS asked
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Iowa whether it was contending it could “dispense brand name prescription drugs

cheaper than [] generic drugs after consideration of the rebates?” (Pet’r App. 10.)

CMS advised the state that “[t]he Federal Upper Limit (FUL) under Federal statute

applies to the agency’s payment to the pharmacy” and instructed Iowa to “explain how

[it] can reconcile using the price after rebate rather than the price paid to the

pharmacy.” (Id.) In its response, Iowa asserted that it could provide brand name

drugs more cheaply than generic equivalents (and thus below the multiple-source-drug

FUL) after accounting for federal and state rebates. In other words, Iowa’s payments

to pharmacies for brand name drugs would exceed the FUL for multiple source drugs,

but Iowa’s eventual receipt of both federal and state rebates would reduce its net costs

for brand name drugs below the FUL. Iowa also argued that, in light of its preferred

drug list, the physician certification requirement was obsolete because the state had

already granted prior authorization for dispensing covered brand name drugs.

After reviewing Iowa’s response, CMS disapproved the state’s Plan. CMS

noted that the Plan did not conform to regulations requiring that a physician certify

a brand name drug as medically necessary in order for it to be excluded from the

multiple-source-drug FUL. CMS further noted that the multiple-source-drug FUL

applied to Iowa’s payments to the pharmacy, not to its net costs after taking into

account federal and state rebates. After Iowa sought reconsideration, a hearing officer

issued a proposed decision affirming the agency’s initial disapproval of the Plan.

After reviewing the record and the hearing officer’s proposed decision, the CMS

Administrator issued the agency’s final decision affirming disapproval of the Plan.

The Administrator stated, “the law and regulations require that the FUL is to be

applied to the State’s payments, or expenditures, to the pharmacies, and not calculated

to include rebates.” (Id. at 140.) The Administrator explained that “[i]n order for the

term ‘payment’ (or similarly expenditures) to be used throughout the Medicaid statute

and regulations in a consistent manner, the State’s payments for purposes of the FUL

regulation must be interpreted to mean payments before rebates.” (Id. at 141.)
3

Iowa alleges that CMS has approved state plan amendments proposed by

Arkansas and Pennsylvania that, according to Iowa, are similar to the Plan. (See Pet’r

Br. 39-40.) We express no opinion as to the accuracy of this allegation because

Arkansas’s and Pennsylvania’s plan amendments were approved prior to 2007 and,

thus, prior to the new FUL regulations, which were issued in 2007 via notice-andcomment rulemaking and which rejected Iowa’s proposed method of calculating

aggregate payments for multiple source drugs. This intervening regulatory change

blunts any argument that CMS’s disapproval of Iowa’s Plan in August 2008 was

somehow inconsistent with prior agency practice.

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Finally, the Administrator observed that, when the agency promulgated new

FUL regulations in 2007, the Secretary expressly rejected the same argument Iowa

advanced in support of its Plan:

Comment: A few commenters said that FULs should be compared to net

payments after rebates, since that will allow the State to take advantage

of higher rebates on brand name drugs.

Response: We disagree. In accordance with provisions of the [Deficit

Reduction Act of 2005] which amended section 1927(e) of the [Medicaid

Statute], the FUL is based on 250 percent of the AMP [Average

Manufacturer Price]. Thus, we have based the FULs on AMP, as

opposed to any payments by States net of rebates.

Medicaid Program; Prescription Drugs, 72 Fed. Reg. 39,142, 39,214 (July 17, 2007).

Moreover, “neither CMS, nor the commenters, suggested that the inclusion of the

rebates was a prior practice in the application of the FUL.”3

 (Pet’r App. 143.)

Because Iowa could not “give assurances that the [Plan] is in conformity with” the

relevant federal statutes and regulations, the Administrator decided that “CMS

properly disapproved” the Plan. (Id.) Iowa petitions this court for review and

requests that we overturn the agency’s final decision.
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II.

We review CMS’s final disapproval of the Plan under the Administrative

Procedure Act’s (“APA’s”) “requirements for an individual adjudication. Under the

APA, the Secretary’s decision is set aside if it is arbitrary, capricious, an abuse of

discretion, unsupported by substantial evidence, or contrary to law.” Minnesota v.

CMS, 495 F.3d at 996 (quotations omitted); see also PhRMA v. Walsh, 538 U.S. 644,

661 (2003) (the agency’s final disapproval, after a hearing, of a proposed state

Medicaid plan amendment is “presumptively valid”). In addition, “[w]e must give

substantial deference to an agency’s interpretation of its own regulations.” Thomas

Jefferson Univ. v. Shalala, 512 U.S. 504, 512 (1994). “Our task is not to decide which

among several competing interpretations best serves the regulatory purpose. Rather,

the agency’s interpretation must be given controlling weight unless it is plainly

erroneous or inconsistent with the regulation.” Id. (quotation omitted). “This broad

deference is all the more warranted when, as here, the regulation concerns a complex

and highly technical regulatory program . . . .” Id. (quotation omitted).

Medicaid regulations state that Iowa’s “payments for multiple source drugs

identified and listed . . . by CMS . . . must not exceed, in the aggregate,” the FUL. 42

C.F.R. § 447.514(b) (emphasis added); accord id. § 447.512(a) (“the [state] agency

payment for multiple source drugs must not exceed, in the aggregate . . . the specific

limits established in accordance with § 447.514” (emphasis added)). The Medicaid

regulations also direct CMS to set the FUL by calculating “250 percent of the AMP

[Average Manufacturer Price] . . . for the least costly therapeutic equivalent” drug.

Id. § 447.514(b). CMS determined that the state’s Plan would permit Iowa to pay

pharmacies amounts that exceed the FUL for multiple source drugs, with the

expectation that Iowa would eventually receive supplemental rebates from drug

manufacturers to bring its net costs below the FUL. Iowa does not dispute this

determination and agrees that “preferring the drug with the lowest net cost, after
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rebates, sometimes requires an initial payment for a multiple source brand name drug

that exceeds the specific FUL . . . .” (Pet’r Br. 5-6.)

Iowa argues that, for purposes of meeting the multiple-source-drug FUL, the

term “payment” in the Medicaid regulations is ambiguous and that, in this context, any

ambiguity in the regulations should be resolved in favor of the state. Iowa contends

that “payment” should be interpreted as referring to the net cost, after rebates, that the

state pays for prescription drugs, in order “to assure that payments [for prescription

drugs] are consistent with efficiency [and] economy.” (Id. at 20 (citing 42 U.S.C. §

1396a(a)(30)(A)).) Under this reading, Iowa’s Plan would comply with the FUL for

multiple source drugs, and the state would save money. CMS contends that

“payment” is not ambiguous, noting that the Medicaid statute differentiates between

“payments” made initially to pharmacies and “rebates” received subsequently from

manufacturers. CMS further argues that, even if the terms were ambiguous, its

interpretation of its regulations would be entitled to deference unless it is plainly

erroneous or inconsistent with the regulation. Finally, CMS contends that its

interpretation will further the agency’s goal of promoting the use of generic drugs in

the national market and will make the Medicaid rebate program easier to administer.

We find that CMS’s interpretation of its own regulations is not “plain[ly]

erroneous or inconsistent with the regulation[s].” Thomas Jefferson Univ., 512 U.S.

at 512. Specifically, we find reasonable the agency’s interpretation of the term

“payment” in 42 C.F.R. §§ 447.512 and 447.514. As CMS notes, the drug rebate

provisions in the Medicaid statute use the terms “payment” and “rebate” to describe

different concepts. See, e.g., 42 U.S.C. § 1396r-8(c)(2)(A) (increasing “rebate[s]” for

single source drugs by the product of “the total number of units . . . dispensed . . . for

which payment was made under the State plan” and another statutory multiplier

(emphasis added)). Further, Medicaid regulations require CMS to calculate FULs

based on a percentage of the AMP—the “average price paid to the manufacturer for

the drug . . . by wholesalers for drugs distributed to the retail pharmacy . . . .” 42
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C.F.R. § 447.504(a) (emphasis added). CMS is thus prohibited from taking into

account “[r]ebates under the national rebate agreement or a . . . State supplemental

rebate agreement” when it calculates AMP. Id. § 447.504(h)(24). Because CMS must

calculate AMP and establish FULs based on up-front prices, it is entirely reasonable

for CMS to require states to meet FULs based on up-front payments.

Finally, as CMS observed, the Secretary expressly rejected Iowa’s approach

when he issued new FUL regulations in 2007. See 72 Fed. Reg. 39,142, 39,214. Iowa

now invites this court to second-guess the agency’s expertise by attacking the policies

underlying CMS’s decision. However appealing Iowa’s approach may appear to be

as a matter of policy, we must give CMS the deference it is owed as a matter of law.

Because we find CMS’s interpretation of 42 CFR §§ 447.512 and 447.514 to be

reasonable, we hold that CMS’s disapproval of Iowa’s Plan was not “arbitrary,

capricious, an abuse of discretion, unsupported by substantial evidence, or contrary

to law.” Minnesota v. CMS, 495 F.3d at 996. Therefore, we need not determine

whether the Plan violated Medicaid regulations by failing to include a physician

certification requirement for medically necessary brand name drugs.

III.

Accordingly, we deny the state’s petition.

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