Opinion ID: 204019
Heading Depth: 1
Heading Rank: 3

Heading: the district court's definition of average wholesale price

Text: AstraZeneca's initial challenge is to the district court's definition of average wholesale price as that term is used in the Balanced Budget Act of 1997, Pub.L. No. 105-33, 111 Stat. 251 (the BBA). According to AstraZeneca, the district court erred in concluding that the term should be interpreted in accordance with the alleged plain meaning of those words, which the district court determined to be the average of actual wholesale prices paid by providers, net of discounts and rebates. AstraZeneca argues that the plain meaning analysis was inappropriate because, inside the pharmaceutical industry, the term had long referred to the list prices in the industry publicationssuch as Red Book, Medispan, and First DataBankand not actual transaction prices. Congress and the relevant regulators were aware of that industry usage and, AstraZeneca argues, they adopted it for purposes of the BBA; and AstraZeneca therefore should not be subject to liability for conduct consistent with the federal Medicare scheme. We disagree.
Congress created Medicare Part B in 1965 to establish a supplemental medical insurance program for senior and disabled citizens. See 42 U.S.C. §§ 1395j-1395w-4. The Secretary of the Department of Health and Human Services (DHHS) oversees the program, and the Centers for Medicare and Medicaid Services (CMS), formerly known as the Health Care Financing Administration (HCFA), administers it. See id. Among its services, Medicare Part B provides insurance for physician services, for which it has historically paid a reasonable charge limited to the lowest of the physician's actual charge, the physician's customary charge, or the prevailing charge in the relevant locality for similar services. See 42 U.S.C. §§ 1395 l (a), 1395u(b); 42 C.F.R. §§ 405.500 et seq. For covered prescription or physician-administered drugs, Medicare Part B reimburses providers for up to eighty percent of the allowable cost, and the program's beneficiary pays the remaining twenty percent as a co-payment. See 42 U.S.C. § 1395 l ; Montana v. Abbot Labs., 266 F.Supp.2d 250, 252 (D.Mass. 2003). The term average wholesale price has not always featured in the Medicare Part B repayment lexicon. Prior to 1991, the standard for Medicare reimbursement was the reasonable charge of the covered services rendered. See 42 U.S.C. §§ 1395 l, 1395u(o). In 1991, the Secretary of DHHS promulgated a new rule set[ting] forth a fee schedule for payment for physicians' services that incorporated the term average wholesale price. Medicare Program; Fee Schedule for Physicians' Services, 56 Fed.Reg. 59,502, 59,502 (Nov. 25, 1991) (final rule). Notably, five months earlier, AWP was not part of the Secretary's proposed rule: although the Secretary believed that ultimately there should be a national fee schedule for reimbursement, he concluded that the large number of different drugs and the myriad ... dosage levels made such a schedule impractical. Medicare Program; Fee Schedule for Physicians' Services, 56 Fed.Reg. 25,792, 25,800 (June 5, 1991) (proposed rule). The Secretary's proposed rule therefore settled instead on continuing the reasonable charge regime that was already in place, proposing to reimburse at a rate of 85 percent of the national wholesale price. Id. The Secretary proposed that reimbursement level because the Red Book and other wholesale price guides substantially overstate the true cost of the drugs by failing to reflect an average discount of 15.9 percent off the published wholesale price. Id. After receiving a great many comments on the proposed rule pointing out that, for providers, many drugs could be purchased for considerably less than 85 percent of AWP... while others were not discounted, and that individual physicians often paid more for drugs than did pharmacies or large practices, the Secretary modified the proposed policy. 56 Fed.Reg. at 59,524-59,525. The final promulgated rule, effective January 1, 1992, stated: (b) Methodology. Payment for a drug described in paragraph (a) of this section is based on the lower of the estimated acquisition cost or the national average wholesale price of the drug. The estimated acquisition cost is determined based on surveys of the actual invoice prices paid for the drug. In calculating the estimated acquisition cost of a drug, the carrier may consider factors such as inventory, waste, and spoilage. (c) Multiple-Source drugs. For multiple-source drugs, payment is based on the lower of the estimated acquisition cost described in paragraph (b) of this section or the wholesale price that, for this purpose, is defined as the median price for all sources of the generic form of the drug. 56 Fed.Reg. at 59,621 (promulgating 42 C.F.R. § 405.517 (1992)) (emphasis added). In promulgating the rule, the Secretary added that, to determine the estimated acquisition cost, [c]arriers could survey a sample of the physicians who furnish the drugs to obtain cost information, or, [a]s an alternative, carriers could request that physicians periodically provide cost information when they submit claims for payment for the drugs. [7] Id. at 59,525. The reimbursement scheme was augmented again by the BBA, prompted in part by concerns that the average wholesale price was little more than a sticker price bearing little resemblance to the actual acquisition costs of the reimbursed drugs. For instance, the Senate Committee on Finance heard testimony from the Secretary of DHHS that the AWP is not the average price actually charged by wholesalers to their customers ... [r]ather, it is a `sticker' price set by drug manufacturers and published in several commercial catalogs. President's Fiscal Year 1998 Budget Proposal for Medicare, Medicaid, and Welfare: Hearing Before the S. Comm. on Finance, 105th Cong. 265 (1997) (statement of Donna E. Shalala, Secretary of Health and Human Services); see In re Pharm., 460 F.Supp.2d at 280-81. Similarly, a report from the House of Representatives Committee on the Budget noted that over the past several years, Medicare had been reimbursing certain drugs at rates far above providers' actual acquisition costs, sometimes nearly 1000 percent higher. H.R.Rep. No. 105-149, at § 10616 (1997); see In re Pharm., 460 F.Supp.2d at 281. The committee therefore stated its intention that the Secretary of DHHS, in determining the average wholesale price, should take into consideration commercially available information including such information as may be published or reported in various commercial reporting services. H.R.Rep. No. 105-149, at § 10616; see In re Pharm., 460 F.Supp.2d at 281. Based on these concerns, the BBA amended the relevant Medicare statute to state that the amount payable for the drug or biological is equal to 95 percent of the average wholesale price.  42 U.S.C. §§ 1395u(o) (West 1998) (emphasis added). The BBA also directed the Secretary of DHHS to study the effect on the average wholesale price of drugs and biologicals of the statutory change, and to report its findings to separate House and Senate committees. 42 U.S.C. § 4556(c) (West 1998). [8] Roughly a year later, the DHHS regulations were amended to reflect the new statutory provision. See Medicare Program; Revisions to Payment Policies and Adjustments to the Relative Value Units Under the Physician Fee Schedule for Calendar Year 1999, 63 Fed.Reg. 58,814, 58,905 (Nov. 2, 1998) (codified as 42 C.F.R. § 405.517 (1999)). In the process, HCFA noted that the law does not define the term `average wholesale price,' but nonetheless interpreted the term for regulatory purposes to require that, when there is an array of charges, the median is an appropriate measure of central tendency. Id. at 58,849. As for the DHHS's study on the effect of the statutory change, the results were delivered to Congress in 1999. The Secretary included a history of Medicare drug reimbursement noting that [f]or the past 13 years, the Office of Inspector General... has issued a series of reports that consistently show a finding that the Medicare program overpays for the drugs ... it covers. It further noted that DHHS's attempt to fix the problema proposal in the 1997 budget to base payment on the lower of the billed charge or the actual acquisition cost for the relevant drughad been rejected in favor of the current rule, which is to pay based on the lower of the billed charge, or 95 percent of the AWP. Rep. to Cong., The Average Wholesale Price for Drugs Covered Under Medicare, DHHS 1-2 (1999); In re Pharm., 460 F.Supp.2d at 281-82. The BBA and the resulting regulations stayed in effect until 2003, when Congress enacted the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Pub.L. No. 108-173, 117 Stat. 2066 (2003 Act), but the issue of Medicare reimbursement remained an active issue both in Congress and at DHHS throughout that time. In 2000, DHHS announced its intention to abandon AWP as a reimbursement baseline in favor of an alternative set of price lists, thereby provoking a letter from two Senators reminding the agency that Congress [had] instructed [D]HHS to base Medicare reimbursement... on 95 percent of the `average wholesale price,' or AWP, a term widely understood and indeed defined by [D]HHS manuals to reference amounts reflected in specified publications. See Letter from Sen. Christopher Bond and Sen. John Ashcroft to Donna E. Shalala, Secretary of Health and Human Services (Aug. 3, 2000); In re Pharm., 460 F.Supp.2d at 282. Later that year, Congress passed an act requiring DHHS to study the difference between acquisition costs and AWP, and in the meantime, avoid actions that would directly or indirectly decrease the rates of reimbursement ... under the current medicare payment methodology.... Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000, Pub.L. 106-554, § 429(c), 114 Stat. 2763. In 2001, while testifying before Congress about his concern that Medicare beneficiaries and taxpayers were paying far more than the `average' price that we believe the law intended them to pay, the Administrator of CMS stated, The AWP is intended to represent the average price at which wholesalers sell drugs to their customers, which include physicians and pharmacies.... This Committee, CMS, the [DHHS] Inspector General (IG), and others have long recognized the shortcomings of AWP as a way for Medicare to reimburse for drugs. Medicare Drug Reimbursements: A Broken System for Patients and Taxpayers: Joint Hearing Before the Subcommittee on Health and the Subcommittee on Oversight and Investigations of the House Commission on Energy and Commerce, 107th Cong. 87-88 (2001) (prepared statement of Thomas Scully, Administrator, CMS); see In re Pharm., 460 F.Supp.2d at 282. This testimony prompted a question from the chairman of the committee that largely echoes the gravamen of the plaintiffs' complaint in this class action: Why on earth do we have a system that requires a Medicare beneficiary to pay 20 percent as a copay of an artificial price? Medicare Drug Reimbursements: A Broken System for Patients and Taxpayers, 107th Cong. at 95; In re Pharm., 460 F.Supp.2d at 282. Finally, in 2003, the DHHS Inspector General issued a voluntary compliance program for the health care industry that stated, Where appropriate, manufacturers' reported prices should accurately take into account price reductions, cash discounts, free goods contingent on a purchase agreement, rebates, up-front payments, coupons, goods in kind, free or reduced-price services, grants, or other price concessions or similar benefits offered to some or all purchasers. OIG Compliance Program Guidance for Pharmaceutical Manufacturers, 68 Fed.Reg. 23,731-01, 23,733-27,734 (May 5, 2003). The term average wholesale price was eventually phased out of the Medicare reimbursement scheme by the 2003 Act, which stipulated that reimbursements for drugs furnished on or after January 1, 2005 would be based on either a competitive acquisition program or an average sales price, a term defined to include all discounts and rebates. See 42 U.S.C. §§ 1395u(o), 1395w-3, 1395w-3a, 1395w-3b (2006). Although the 2003 Act retained the term average wholesale price in the interim, the House Committee on Ways and Means issued a report explaining its understanding of AWP in more detail, stating, The term `AWP' is not defined in statute or regulation, but generally, AWP is intended to represent the average price used by wholesalers to sell drugs to their customers. It continued: AWPs are not grounded in any real market transaction, and do not reflect the actual price paid by purchasers. Congress has long recognized AWP is a list price and not a measure of actual prices. Congress is now able to adopt an alternative basis for payment that will more accurately reflect actual acquisition costs for physicians. This will ensure that Medicare no longer bases its payments on prices that do not reflect prices otherwise available through market incentives and transactions. H.R.Rep. No. 108-178, pt. 2, at 194, 197-98 (2003); In re Pharm., 460 F.Supp.2d at 283.
In arriving at its plain meaning interpretation of the term average wholesale price, see In re Pharm., 460 F.Supp.2d 277 (D.Mass.2006), the district court first addressed the question of whether the term should be interpreted based on its plain meaning, or whether it is instead a term of art. See U.S. v. Lachman, 387 F.3d 42, 53 (1st Cir.2004) ([T]here are instances where a statutory or regulatory term is a technical term of art, defined more appropriately by reference to a particular industry usage than by the usual tools of statutory construction.). Noting that a term must have an established and settled meaning to constitute a term of art, the district court canvassed the BBA's legislative history to conclude that the weight of [this] history reflects congressional intent to have the AWP moored to actual wholesale pricing, not to the prices listed in the industry publications. In so doing, the district court emphasized Congress's various expressions of consternation over its awareness ... that the pharmaceutical industry was overstating AWPs for some drugs in the industry publications, and that therefore the AWP, as reported, was not a reasonable charge for the relevant drugs. It also emphasized the committee report recommending that Congress order DHHS to take into account commercially available information including, but not limited to, published AWPs, and to monitor the effects of the new reimbursement standards to ensure that they were not circumvented by an offsetting increase in the published AWPs. The district court further concluded that, despite the existence of some evidence suggesting that the term average wholesale price may have had a settled meaning, there is also evidence to the contrary, and therefore the defendants had not carried their burden to show that the term qualified as a term of art. The district court added that this conclusion was further merited given that the defendants' suggested meaningto quote the district court's paraphrase, that AWP is a term of art for whatever benchmark was placed in industry publicationswould lead to absurd results, among them, DHHS and Congress would be surrendering all control over Medicare fiscal responsibility by anchoring Medicare reimbursement to a metric that is wholly dictated by the pharmaceutical industry. The district court therefore proceeded with a plain meaning construction of average wholesale price, citing dictionary definitions to arrive at its conclusion that the term include[s] discounts and rebates. In so doing, the district court relied heavily on what it inferred to be the policy behind the 1991 reimbursement regulations directing Medicare to reimburse the lower of the estimated acquisition cost, based on surveys of actual acquisition prices, or the national average wholesale price. That policy, the district court concluded, was that the government gets the benefit of rebates and discounts by paying the lower of those two rates. Finally, the district court noted that, by 2003, the term average wholesale price had become a term of art, finding that by that point Congress clearly did understand AWP was different than average sales price and was not reflective of actual prices in the marketplace.
We review a district court's statutory construction de novo. Me. People's Alliance & Natural Res. Def. Council v. Mallinckrodt, Inc. 471 F.3d 277, 286-87 (1st Cir.2006); Gen. Motors Corp., 444 F.3d at 107. The Supreme Court has repeatedly emphasized the importance of the plain meaning rule, stating that if the language of a statute or regulation has a plain and ordinary meaning, courts need look no further and should apply the regulation as it is written. Textron, Inc. v. Comm'r, 336 F.3d 26, 31 (1st Cir.2003). This is not to say, of course, that we always defer to plain language, but the circumstances under which we look behind plain language are extremely limited, usually confined to those rare cases [in which] the literal application of a statute will produce a result demonstrably at odds with the intentions of the drafters, and those intentions must be controlling Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571, 102 S.Ct. 3245, 73 L.Ed.2d 973 (1982), or where the plain meaning will result in an absurd outcome, Textron, 336 F.3d at 31 ( citing Sullivan v. CIA, 992 F.2d 1249, 1252 (1st Cir.1993)). Additionally, where a statutory or regulatory term is a technical term of art, defined more appropriately by reference to a particular industry usage than by the usual tools of statutory construction, we will employ that industry usage. Lachman, 387 F.3d at 53. But this canon of construction requires the disputed term to actually be a technical term of art. Id. Finally, where a statute is ambiguous, we turn to the legislative history to determine Congress's intent. Gen. Motors Corp., 444 F.3d at 108.
AstraZeneca argues that the district court made two significant errors. First, it asserts that the district court erred in holding that average wholesale price lacked an established and settled meaning and was not a term of art. According to AstraZeneca, the legislative history and legal context of the term clearly shows an established meaning: it referred to the prices published in the industry publications, which were known to exclude discounts. Whatever uncertainty there may have been about the term's meaning, the argument continues, was not enough to justify the district court's conclusion that AWP was not a term of art. Second, AstraZeneca argues that the district court's plain meaning construction failed to account for the BBA's statutory context and history. Once the district court concluded that there was no settled meaning of the term average wholesale price, its recourse should have been to the statute's legislative history and context, not to an alleged plain meaning, particularly where that meaning is contrary to congressional intent. For support, AstraZeneca focuses on four aspects of the BBA's legislative history and legal context. First, it notes that when HCFA first adopted the term AWP in its 1991 regulations, that phrase already existed in the industry publications, where it was used to describe list prices that did not reflect discounts available in the marketplace. It further notes that during the rulemaking process, HCFA explicitly referenced the published AWPs, and even advised Medicare carriers to obtain payment information from those industry publications. Second, and taking issue with the district court's conclusion to the contrary, AstraZeneca argues that Congress was referring to the AWPs in industry publications when it passed the BBA in 1997. AstraZeneca relies on the reference to the AWPs reported by the manufacturer[s] contained in the congressional report accompanying the BBA. See H.R.Rep. No. 105-149, at 1398. It also relies on DHHS's failed effort during the 1997 budget process to change the basis for payment from AWP to providers' acquisition cost, which was rejected by Congress in favor of the approach adopted in the BBA. See Rep. to Cong., The Average Wholesale Price for Drugs Covered Under Medicare, DHHS 1-2 (1999); In re Pharm., 460 F.Supp.2d at 281-82. Third, AstraZeneca argues that the district court's ruling conflicts with HCFA's own interpretation of the BBA as expressed, for example, in regulations directing that payment would be based on 95% of the national AWP as reflected in sources such as the industry publications even though those amounts were typically higher than the actual acquisition costs. Fourth, AstraZeneca argues that the district court's definition of AWP is inconsistent with subsequent congressional actions demonstrating that Congress understood and intended that the statutory AWP standard was a reference to the industry publications, not to an average of actual transaction costs. Specifically, AstraZeneca points to the Medicare, Medicaid, and SCHIP Balanced Budget Refinement Act of 1999, which provided for additional payments to some providers above the fee schedule amounts set by HCFA, see Pub.L. No. 106-113, 113 Stat. 1501, the refusal in 2000 to institute a new, alternative price list that reflected discounts, and the passage of the 2003 Act, which again used the term AWP, and which was issued with the Inspector General's report acknowledging that AWP is not a measure of actual prices and does not reflect the discounts that manufacturers and wholesalers customarily offer to providers. We find these arguments unpersuasive. As an initial matter, it is a stretch to point to this legislative history and statutory context for the proposition that AWP was a term of art in the BBA referring to the prices appearing in the industry publications. The letter from two Senators discussed above notwithstanding, Congress at no point adopted such a definition explicitly. On the contrary, both the DHHS regulation promulgated in 1991, which we assume Congress was aware of in 1997, and the BBA itself referred to the average wholesale price without reference to the industry publications. Moreover, if the history discussed above demonstrates anything, it is that the precise meaning of average wholesale price was unsettled. In 1991, DHHS was concerned enough about the elastic definition of the term to specify an alternative metric estimated acquisition costagainst which carriers were required to double-check claims based on AWP, a clear effort to ensure that Medicare and its beneficiaries would not be overcharged. When Congress reviewed this scheme in 1997, committees of both the Senate and the House heard testimony expressing concern over the possibility that AWP was merely a sticker price. This testimony appears to have struck home with at least the House committee, which in expressing its intent to instruct DHHS to study the divergence between AWP and actual acquisition costs, suggested that DHHS take into consideration the industry publications. Were the prices reported in the industry publications themselves the very definition of AWP, as AstraZeneca suggests, then such an instruction would not only be unnecessary, it would be inscrutable. Finally, in interpreting the BBA and promulgating related regulations, none of the regulatory agencies explicitly adopted the purported technical meaning of AWP advanced by AstraZeneca. On the contrary, in 1998, HCFA noted that the law does not define the term, and it directed that the proper definition when there is an array of charges should be the median charge, not whatever charge is listed in the industry publications. Similarly, in 1999, DHHS described its reimbursement approach as paying based on the lower of the billed charge, or 95 percent of AWP without any reference to the publications. And in 2001, the Administrator of CMS testified that AWP is the average price at which wholesalers sell drugs to their customers, not the price as listed in the industry publications. Given these statements expressing uncertainty as to the meaning of AWP, and given the trial testimony, discussed in detail below, showing that the Class 2 and Class 3 plaintiffs were unaware of the size and extent of the spreads created by AWP inflation, AstraZeneca's contention that the BBA incorporated a technical term of art is not persuasive. See Lachman, 387 F.3d at 53. The district court thus did not err in refusing to treat the term AWP in the BBA as a term of art. [9] AstraZeneca's claim that the district court's construction failed to take into account the history and context of the BBA is also unpersuasive. This is not to say that AstraZeneca's arguments about congressional intent entirely lack force. On the contrary, AstraZeneca paints a fair picture of Congress and DHHS attempting to grasp and respond to the complicated billing practices of the pharmaceutical industry, and the conclusion AstraZeneca drawsthat Congress and DHHS intentionally adopted a definition of AWP about which they had concernsis enticing. But in drawing this conclusion, AstraZeneca has significantly understated Congress's unwavering commitment to the overarching policy that Medicare reimbursement should be reasonable and reflective of acquisition costs. This policy is evident in the reasonable charge regime explicitly in place prior to 1991, and contained in DHHS's proposed rule in 1991. It can be inferred from the final 1991 rule, which fleshed out what a reasonable charge is by directing reimbursement based on the lower of the national average wholesale price or the estimated acquisition cost, and which encouraged carriers to gather actual transaction data from physicians to ensure that these reimbursement bases reflected actual acquisition costs. The policy can also be seen in the repeated efforts during the late 1990's by DHHS to solve the problem of AWP becoming a sticker price subject to manipulation, and in Congress's repeatedly-demonstrated concern over this problem, as evidenced by its instructions, given on multiple occasions, for DHHS to monitor the apparent divergence of the AWP from acquisition costs. It is true, of course, that on some occasions during the relevant period, Congress appears to have been more reluctant than DHHS to abolish the role of AWP as a basis for Medicare reimbursement, and it is also true that various members of Congress at times expressed their views that the term AWP referred specifically to the prices reported in the industry publications. But for each of these historical details there exists a counterpoint in the record: an act of Congress demonstrating reluctance about the continued use of AWP, or another member of Congress expressing an opposing view. On balance, we read the legislative history and statutory context to be one of slow adaptation to shadowy industry practices, not ratification of them. Congress's awareness of and response to the divergence of AWP from actual acquisition costs during the 1990's was an evolving one: the concerns expressed in 1991 and studied in the late 1990's were finally addressed in 2003 (with solutions implemented in 2005). But throughout this period, there existed an unwavering commitment to the idea that Medicare and its beneficiaries should not be subject to overpayments, including those caused by prices reported in industry publications that failed to reflect acquisition costs. The legislative history and statutory context simply do not support the proposition that Congress was supportive of, or even acquiescent in, a scheme whereby the AWP represented a sticker price bearing no relation to actual acquisition costs, thereby leaving Medicare and its beneficiaries to pay vast multiples above what physicians paid for the drugs in question. [10] Finally, we note that we need not decide whether the district court's ultimate plain meaning analysis of average wholesale price was correct, for the district court did not rely on this specific definition as a trigger for liability under Chapter 93A. As explained in detail below, it rooted its ultimate liability finding not in the fact that spreads violated the plain meaning of average wholesale price, but instead in the fact that, inter alia, the spreads exceeded industry expectations. See In re Pharm., 491 F.Supp.2d at 32; see also id. at 97 (What Congress understood and intended AWP to mean is not the same as what the industry understood.... Because information about the 20 to 25 percent spread was widespread in the industry, a violation of the Medicare statute by publishing an `AWP' that was not a true average of wholesale prices does not trigger per se liability under Chapter 93A.). Nor has AstraZeneca argued that the BBA shielded the company's conduct from liability as an exempted transaction under Chapter 93A. See Mass. Gen. Laws ch. 93A, § 3 (Nothing in this chapter shall apply to transactions or actions otherwise permitted under laws as administered by any regulatory board or officer acting under statutory authority of the commonwealth or of the United States. For the purpose of this section, the burden of proving exemptions from the provisions of this chapter shall be upon the person claiming the exemptions.). Thus, for purposes of this appeal, it is unnecessary to decide whether the term average wholesale price admits of no spreads at all, as the district court appears to have concluded in its November 2006 order, or whether instead it admits of modest spreads (such as those created by prompt-pay discounts or formulaic markups from other published prices): whatever the correct interpretation of average wholesale price in the BBA, it in no way countenanced spreads in excess of the industry expectations discussed below. The relevance of the district court's interpretive order to this appeal is therefore not its precise definition of the term average wholesale price, but instead its rejection of AstraZeneca's position that, under the BBA, that term referred to prices published in the industry publications which were known to exclude substantial discountsa rejection with which we entirely agree.