DEPARTMENTAL APPEALS BOARD
Department of Health and Human Services
SUBJECT: Louisiana Department DATE: August 10, 1989 of
Health and Human Resources Docket No. 88-38 Audit Control No.
06-87-00234 Decision No. 1083
DECISION
Introduction
The Louisiana Department of Health and Human Resources (State or
Louisiana) appealed a disallowance by the Health Care Financing
Administration (Agency or HCFA) of $383,984 (subsequently reduced to
$274,904) in federal financial participation (FFP) claimed under Title
XIX (Medicaid) of the Social Security Act (Act). The disallowance was
based on an audit of the State's Medicaid expenditures for drug products
for the period October 1, 1982 through September 30, 1985. HCFA
determined that the State had claimed FFP for drug products that were
ineligible for Medicaid reimbursement because the drugs had been deemed
either ineffective or "identical, related, or similar" to ineffective
drugs.
The issues presented concern the process by which certain drugs are
determined to be ineffective and thus ineligible for Medicaid
reimbursement. In part, the parties are disputing when the State has
the responsibility to make that determination. Additionally, the
parties are contesting the duration of the "grace period" the State
is
entitled to for drugs found to be ineffective prior to October 1, 1982.
In Illinois Dept. of Public Aid, DAB No. 667 (1985), the Board first
examined issues related to drug effectiveness. The Board there decided
that once the Food and Drug Administration (FDA) publishes a notice that
a drug is less-than-effective (a LTE drug) in the Federal Register in a
process described below, Medicaid reimbursement for the use of that drug
ceases from the date of the Federal Register notice, plus an applicable
grace period. The State here disputed that finding, arguing that HCFA
is required to give the State more specific notice that a drug is a LTE
drug. In Illinois the Board further found that for drugs deemed
ineffective by a listing in the Federal Register prior to October 1,
1982, there was a one-time, 90-day grace period deriving from HCFA's
rules. Here, HCFA attacked that finding as unsupported by the
applicable regulations. The other area of dispute between the parties,
not raised in Illinois, concerns removal of ineffective drug products
which have not been specifically named in the Federal Register, but
which are "identical, related, or similar" (IRS drugs) to the drugs
appearing there. In Pennsylvania Dept. of Public Welfare, DAB No. 836
(1986), the Board found that many IRS drugs are easy to identify
quickly, and thus found certain drugs in that case subject to the same
requirement as FDA-specified drugs.
Summary of Decision
1. We reaffirm our holdings in Illinois that publication in the
Federal Register serves as notice to the State that a specified drug is
a LTE drug ineligible for Medicaid reimbursement, and that the State is
entitled to a grace period of 90 days for a drug product deemed to be
LTE prior to October 1, 1982. Thus, we uphold the disallowance insofar
as it involves FDA-specified LTE drugs, subject to recalculation for the
appropriate grace period.
2. Concerning IRS drugs, we conclude as follows:
o It was Louisiana's responsibility to take
reasonable steps to identify IRS drugs from drug
compendia. Our prior consideration of the issue, and
the record here, shows that many IRS drugs easily can be
identified almost immediately from compendia commonly
used by pharmacists, and these drugs therefore should be
treated the same as FDA-specified LTE drugs. Therefore,
we uphold the disallowance for those drugs which fall in
this category, consistent with our decision in
Pennsylvania.
o However, unlike the facts in Pennsylvania, the
record here indicates that some IRS drugs may have been
practically impossible to identify (for example, generic
drugs made by small businesses not listed in compendia).
The record here suggests that some of the drugs involved
in this disallowance may fall in this category. We
conclude that although Louisiana had a general
responsibility to identify IRS drugs from FDA-specified
LTE listings, it was unreasonable to demand, with the
benefit of generous hindsight, that Louisiana have
identified the unidentifiable. Based on the record
here, and in the absence of any HCFA rule defining the
extent of Louisiana's obligation to take extraordinary
measures, we conclude that Louisiana should not be
subject to this disallowance for such a drug for the
period of time between the publication of the Federal
Register notice and the point when Louisiana knew or
should have known (for example, from later compendia,
HCFA notices, information received from other states, or
Louisiana's own investigations) that the drug was IRS.
The record here does not contain sufficient information
for us to determine whether the drugs in question met
this criteria, and if so, what point in time Louisiana
knew or should have known the drugs were IRS. We
therefore remand this part of the disallowance to HCFA
for further determinations on these two issues, as well
as recalculation of the applicable grace period.
Statutory and Regulatory Background
Section 1903(i)(5) of the Act denies federal funding under Medicaid for
drugs which are not eligible for Medicare payments under section 1862(c)
of the Act. Section 1862(c) prohibits payment for --
(1) a drug product --
(A) which is described in section 107(c)(3) of the
Drug Amendments of 1962,
(B) which may be dispensed only upon prescription,
(C) for which the Secretary [of DHHS] has issued a
notice of an opportunity for a hearing . . . on a
proposed order of the Secretary to withdraw approval of
an application for such drug product . . . because the
Secretary has determined that the drug is less than
effective for all conditions of use prescribed,
recommended, or suggested in its labeling, and
(D) for which the Secretary has not determined there
is a compelling justification for its medical need; and
(2) any other drug product --
(A) which is identical, related, or similar . . . to
a drug product described in paragraph (1), and
(B) for which the Secretary has not determined there
is compelling justification for its medical need . . . .
(emphasis added)
The focus here is on drugs described in sections (1)(C) and 2(A), that
is, LTE drugs (i.e., those for which FDA, under delegation from the
Secretary, has issued a notice of opportunity for a hearing ("NOOH"))
and IRS drugs (i.e., those which are identical, related or similar to
those drugs in NOOHs).
These provisions were added to the Act by section 2103 of the Omnibus
Budget Reconciliation Act of 1981 (Pub. L. 97-35). Under section
2103(b)(2), the prohibition of Medicaid payments for ineffective drugs
(and IRS drugs) was to apply to "amounts expended on or after October 1,
1981." On October 1, 1981, HCFA published an "interim final rule"
to
implement the prohibition. 46 Fed. Reg. 48550 et seq.
This rule, codified at 42 C.F.R. 441.25, basically repeated the
statutory provisions, and referred to FDA regulations for the definition
of IRS drugs.
The parts of the FDA regulations at 21 C.F.R. 310.6 relevant to this
appeal state:
(b) (1) An identical, related or similar drug includes
other brands, potencies, dosage forms, salts, and esters of the
same drug moiety as well as of any drug moiety related in
chemical structure or known pharmacological properties.
(2) Where experts qualified by scientific training
and experience to evaluate the safety and effectiveness
of drugs would conclude that the findings and
conclusions, stated in a drug efficacy notice or notice
of opportunity for hearing, that a drug product is a
"new drug" or that there is a lack of evidence to show
that a drug product is safe or effective are applicable
to an identical, related, or similar drug product, such
product is affected by the notice. . . .
The notice that FDA has determined a drug is less-than-effective -- the
NOOH -- is provided through publication in the Federal Register by FDA.
46 Fed. Reg. 48550 (October 1, 1981). Although FDA's NOOH is a proposed
action, under the Act it is specifically determinative of a drug's
Medicare and Medicaid eligibility, as the NOOH reflects a FDA finding of
ineffectiveness.
The preamble to 42 C.F.R. 441.25 focused on the states' need for time to
phase in a determination that a drug in use was ineffective. The
preamble said that HCFA, "in the exercise of [its] enforcement
discretion," would allow a one-time 90-day grace period for initial
implementation of the regulation, followed by an on-going 30-day grace
period following publication of each NOOH. 46 Fed. Reg. 48551-2
(October 1, 1981). The preamble also said that HCFA would "notify
Medicare contractors and Medicaid state agencies" when a NOOH was
published in the Federal Register. Id., at 48552.
Section 441.25 was intended to be effective as of its publication,
October 1, 1981. The 90-day grace period provided for in the section's
preamble was challenged, however, in National Council of Senior Citizens
v. Schweiker, No. 81-2462 (D.D.C. Oct. 23, 1981), reprinted in Medicare
and Medicaid Guide (CCH) par. 31,619. State Exhibit (Ex.) 8. The Court
granted an injunction prohibiting the Secretary from reimbursing states
for ineffective drugs. Congress then passed a law (Pub. L. 97-72),
which included a provision that prohibited implementation of section
2103 and the regulations. A later law (Pub. L. 97-161) extended the
effective date of Public Law 97-72 to September 30, 1982. Then, a
provision of a third law (Pub. L. 97-248) required implementation of
section 2103 effective September 30, 1982. Section 441.25 accordingly
was also implemented September 30, 1982.
Procedural and Factual Background
The Office of Inspector General (OIG), Department of Health and Human
Services, issued an audit report titled, "Report on Review of Procedures
for Identifying and Denying Medicaid Payments for Drugs Determined by
the Food and Drug Administration to Be Less-Than-Effective-- Louisiana
Department of Health and Human Resources" (Audit Control No.
06-87-00234). For the period October 1, 1982 through September 30,
1985, the auditors, working in 1986, identified 75,943 paid
prescriptions amounting to $627,952 ($460,008 FFP) for LTE and IRS
drugs. To arrive at these findings the auditors used a computer program
to identify the drugs. The auditors also added to, deleted from, and
otherwise verified the listing through comparisons with lists of LTE
drugs published in HCFA's State Medicaid Manual, in national compendia
such as "Facts and Comparisons," the "Drug Topics Redbook,"
and
information provided by FDA officials. State Ex. 3, p. 2. When HCFA
issued a disallowance based on the auditors' findings, the State
appealed that determination to this Board. That appeal was assigned
Board Docket No. 87-80. In the course of proceedings in that appeal,
HCFA withdrew that disallowance in October 1987.
Thereafter, HCFA issued the disallowance at issue. HCFA cited section
1862(c) of the Act as basis for the disallowance and noted that, while
the statutory prohibition on Medicaid reimbursement takes effect on the
actual date a NOOH is published, HCFA allows a 30-day grace period
allowing states time to notify all interested parties the FDA has
determined the drugs less-than-effective. Thus, the auditors in the
revised disallowance identified only those LTE and IRS drugs dispensed
more than 30 days after NOOHs were published in the Federal Register.
In reducing the amount of the original disallowance to $383,984, HCFA
eliminated 37 drug products from the computer lists prepared by the
auditors. Attached to the disallowance notification were two
appendixes: Appendix A listed 128 LTE drugs for which $202,747.50 FFP
was disallowed; Appendix B contained 126 IRS drugs for which $181,236.80
FFP was disallowed.
In the course of proceedings in this appeal, HCFA, in response to the
State's briefs and to testimony and Board questions posed at the hearing
held in this appeal, eliminated numerous drugs from the appendixes
attached to the disallowance notification. Accordingly, HCFA reduced
the amount of the disallowance at various stages of this appeal. As of
March 8, 1989 HCFA had reduced the amounts of the disallowance to
$190,746 for 116 specified LTE drugs and $84,158 for 94 specified IRS
drugs, for a total remaining disallowance of $274,904 FFP.
The Parties' Arguments
While acknowledging the Board's holding in Illinois on the effective
termination date of Medicaid reimbursement for a drug, the State
nevertheless argued that from the inception of section 441.25 in October
1981 until June 1984 it had relied on numerous announcements and
correspondence from HCFA that stated that HCFA would inform the states
of drug products considered to be LTE and IRS drugs. Most of these
documents were examined by the Board in reaching its decision in
Illinois. We incorporate that decision here. Other correspondence
offered by Louisiana, not examined in Illinois, includes the following:
-- On October 29, 1981 HCFA sent the State a telegram which
read: "A list of subject drugs presently known to the
Department is being sent to the States immediately." A
September 25, 1981 NOOH accompanies the telegram. Quoted in
State Ex. 65.
-- In response to the State's December 7, 1981 request
(State Ex. 13) for guidelines and criteria in identifying IRS
drugs, HCFA, on January 26, 1982, supplied the State with a list
of IRS drugs provided to HCFA by FDA and stated: "You should be
receiving similar issuances in the future on additional drugs."
State Ex. 14.
A State witness testified that she understood those HCFA communications,
particularly HCFA's January 26, 1983 response to the State's inquiry, as
evidencing HCFA's intent to specifically notify the states of all drugs
affected by NOOHs. Tr. 241-43. The witness further testified that the
State was not notified that Louisiana had the responsibility to identify
IRS drugs until a June 20, 1984 Regional Medical Services Letter which
stated:
The State Medicaid Agencies must institute procedures for
identifying drugs determined by the FDA to be
less-than-effective and for denying payment on these drugs on a
timely basis. Our State Assessment reviews have found that
timely action has not been taken on these drugs. Some States
are waiting for the listing from HCFA to terminate the drugs,
but this listing is published only twice a year. Please review
your procedures to ensure that your program is not reimbursing
for these drugs.
State Ex. 27.
The State's position was that on the basis of the preamble and the cited
communications it had relied upon HCFA to identify the drug products
that were no longer eligible for Medicaid reimbursement.
The State argued that the lack of HCFA lists was particularly
problematical in the area of IRS drugs. The State claimed that it was
extremely difficult, if not impossible, to determine all the unnamed IRS
drugs that might be affected just from an examination of the LTE drugs
on a NOOH. The State contended that the auditors, in urging the
disallowance for the IRS drugs during the period at issue, were drawing
on hindsight in 1986. According to the State, the auditors largely
relied on the State's own recently developed listing of ineffective
drugs to arrive at their conclusion, and that many of the IRS drugs were
not known to be IRS drugs even to HCFA until the State developed its
listing.
HCFA vehemently denied that it had changed its policy on listing drugs
and maintained that states have always been responsible for identifying
IRS drugs. Tr. 197. HCFA contended that the preamble to section 441.25
is clear in requiring that Medicaid reimbursement is to cease once a
drug product is named in a NOOH. HCFA asserted that, in regard to IRS
drugs, the Act is unambiguous that FFP is to be denied for IRS drugs and
section 441.25 incorporated the identification process for IRS drugs set
forth at 21 C.F.R. 310.06. HCFA contended that personnel in the State's
employ, such as pharmacists, are qualified and capable of determining
what is an IRS drug.
Discussion
The State and HCFA presented contrasting views about which party has the
responsibility for preventing ineffective drugs from reaching Medicaid
beneficiaries. Both parties agree that a drug is deemed ineffective
when the FDA publishes it in a NOOH in the Federal Register. The NOOH
lists the subject drug by its trade name, active ingredients, dosage
form/route (e.g., tablets), and manufacturer.
But once a drug product is so listed, what happens next? Briefly
stated, the State's position is that HCFA is required to then notify the
State that a particular drug product is an LTE drug and also notify the
State of any drugs identical, related or similar to the LTE drug so that
the State can notify its Medicaid providers to stop employing those
drugs. HCFA's position, on the other hand, is that publication of the
NOOH in the Federal Register gives the State the responsibility to
eliminate listed drugs from its Medicaid reimbursement system, along
with applicable IRS drugs (even though HCFA may occasionally publish
lists of such drugs).
Currently at issue is the FFP for 210 drug products: 116 LTE drugs and
94 IRS drugs. We will first discuss the less complicated question of
the status of the LTE drugs at issue. Next, we will discuss the
responsibility and ability to identify IRS drugs. Last, we will analyze
the duration of the grace period to which the State is entitled for
purposes of implementing a NOOH.
I. The NOOH serves as notification for a LTE drug.
The 116 LTE drugs can be broken down into two categories: 24 with
required termination dates of October 1, 1982, and 92 with various
termination dates after October 1, 1982. As for the 92 latter drug
products, the State argued that their termination dates should not be
the dates of their NOOH publication, but the dates when HCFA published
notice of their ineffectiveness in the State Medicaid Manual. In its
post-hearing brief the State supplied a schedule listing how the Medical
Manual notification for each of these days lagged behind the NOOH
publication. Att. 4.
The State did not argue, apart from those drugs which HCFA later removed
from its list in response to specific arguments by the State, that the
drugs appearing in the NOOHs were not, in fact, ineffective and thus
ineligible for Medicaid reimbursement. At the hearing, in response to
Board questions, it appeared that the State was challenging only HCFA's
decision to permit only a 30-day grace period for the 24 LTE drugs with
a listed termination date, for Medicaid reimbursement, of October 1,
1982. Tr. 301-02. In its post-hearing brief, however, the State
asserted that the required termination date for LTE drugs should not be
the NOOH publication date, but the notification in HCFA's State Medicaid
Manual. Attachment (Att.) 4. Accordingly, the State argued for a
downward adjustment in the disallowance for those LTE drugs.
The question of what should be the termination date for a LTE drug was
clearly decided by the Board in Illinois, supra, where the Board held
that the termination date for a LTE drug was the NOOH publication date,
plus the applicable grace period. There, as Louisiana did here,
Illinois referred to the preamble of the 1981 regulation where HCFA
stated it would notify states of the NOOH publications in the Federal
Register. Here the State argued that it relied on this alleged promise
by HCFA and the other cited HCFA correspondence and did not refer to
NOOHs in the Federal Register, which the State alleged it did not always
receive. Tr. 262.
In Illinois, the Board cited both the language of the Act and language
in the preamble as clearly establishing that the statutory prohibition
on FFP takes effect "when the NOOH is published," plus a grace period.
46 Fed. Reg. 48552. The Board reasoned:
It is unreasonable to draw any interpretation from these
materials other than that ineffective drugs were ineligible for
federal funding from the date of the NOOH plus the applicable
grace period. HCFA did say it planned to publicize NOOHs, but,
in context, there is no reasonable linkage between that promise
of information and the substantive determination of
ineligibility: everything clearly stated that the latter
directly tied to the moment of publication of the NOOH. The
preamble's statement about HCFA's notification intentions is at
best only impliedly inconsistent with the rest of the preamble,
and then, only if read out of context. The rest of the preamble
made it clear that the NOOH publication date controlled.
Moreover, while HCFA in fact stated it would provide follow-up
notification, it gave no guarantee that notification would come
at any particular time during the grace period or even within
the grace period at all. Thus, the State should have known that
the only certain way to assure Medicaid reimbursement was to
depend on the Federal Register NOOH, not the subsequent
notification. The State here was not dependent on some obscure
form of notice; rather, the Federal Register is a formal
nationwide vehicle for disseminating information related to
federal programs.
* * * *
Surely, Illinois needed to do more than sit by idly, waiting
indefinitely for publication of a notice form HCFA listing drugs
already listed in FDA's publication of NOOHs. HCFA arguably
might have done a better job of getting its composite lists out,
but the lists were only a way to gather together in one
convenient place a description of NOOHs issued to date. The use
of delayed composite lists should not divert attention from the
clear linkage between NOOH dates and drug ineligibility.
pp. 8-9.
The State's other communications from HCFA, not cited in Illinois, add
nothing substantial enough to the record to change our analysis. The
State's insistence on the State Medicaid Manual publication date as the
termination date for an LTE drug is curious when the State itself
admitted that "it is possible to exclude from coverage those drugs on
the published list." State Ex. 13. Furthermore, Transmittal No. 6,
cited by the State to support its position on identifying IRS drugs,
specifically declared, "Payment for those [LTE] drugs will be terminated
on the date of publication of the NOOH in the Federal Register." State
Ex. 19, p. 2.
Accordingly, based on Illinois, which we have incorporated here, we
sustain HCFA's disallowance of $144,008.31 FFP for the 92 LTE drugs
listed in Attachment 4 to the State's post-hearing brief. We also
sustain the disallowance in principle for the remaining 24 LTE drugs;
however, HCFA will have to recalculate the disallowance to reflect the
applicable grace period, as discussed in Part III below.
II. The identification of an IRS drug.
A significant part of the record development in this case concerned the
parties' obligations to identify IRS drugs. As we discuss below, many
IRS drugs are easy to identify, but some are difficult or impossible to
identify. In brief, we hold that Louisiana should be held to account
for IRS drugs about which the State knew or should have known (e.g.,
because the drugs appeared in drug compendia, HCFA lists, information
received from other states, or Louisiana's own investigations).
As outlined above, the State said that it relied on numerous HCFA
pronouncements that it would notify the State of IRS drugs. HCFA
responded that the regulations clearly require that State to identify
IRS drugs. At the hearing each party produced witnesses to testify on
the relative difficulty or ease, depending on the party's point of view,
of identifying IRS drugs, apparently in the belief that this factor
would show who should bear the burden of identifying IRS drugs.
In the best of circumstances, the identification of an IRS should
proceed as follows. A NOOH lists a LTE drug by its trade name, active
ingredients, dosage form/route, and manufacturer. With this information
a trained individual would consult various publications and national
drug compendia such as "Facts and Comparisons," the National Drug
Code
Directory, the Physician's Desk Reference, and the Blue Book. From
reference to these materials, that individual could presumably locate
all IRS drugs in the marketplace. The most important information in
this process is the active ingredients listed in the NOOH. As a HCFA
witness testified, "[T]he burden is to follow the ingredients. If you
have the ingredients, you have the key to the whole thing." Tr. 222.
The witness testified that a compendia would contain a cross-index by
ingredients, and by looking up those ingredients, one should find a list
of products containing the ingredients. Tr. 279. In short, most IRS
drugs are quickly and easily identifiable from the information available
in the NOOH.
The Board had dealt with the question of IRS drugs once before, and
reached a similar conclusion. In Pennsylvania, supra, Pennsylvania also
raised the question of the difficulty of examining the thousands of
drugs on the market to determine what drugs are identical, related, or
similar to LTE drugs listed in a NOOH. At the hearing held in that
appeal, Pennsylvania's own pharmacist testified that, upon receiving a
NOOH, it was relatively easy, after consulting compendia, to quickly
determine what is an IRS drug. Pennsylvania, p. 6. Presumably, in
Pennsylvania, all the questioned IRS drugs were identifiable through the
national compendia. (That does not appear to the case here, as we
discuss below.)
It was estimated that approximately 80% of the IRS drugs at issue here
were "identical" drugs and 20% "similar" and "related."
Tr. 281.
"Identical" drugs manufactured by major pharmaceutical firms are always
listed in compendia. Tr. 277. HCFA's own witness, a pharmacist and
Consumer Safety Officer in FDA's Drug Efficacy Study Implementation
program, also testified that some generic drug products made by small
manufacturers would not necessarily appear in national compendia. Tr.
275-79. Regarding these small manufacturers, the State produced a
letter from the managing editor of "Facts and Comparisons":
Many small manufacturer's [sic], especially generic houses, go
quickly in and out of business. Therefore, F&C covers only
companies with national or significant regional distribution
centers.
State's Hearing Ex. 1, p. 3.
HCFA's expert witness testified that it would be very difficult to
determine the ingredients in those generic drug products, not mentioned
in compendia, from their trade names. Tr. 283. The witness admitted
that if the State had called him to learn the status of a drug but
supplied him only with the trade name and not the active ingredients, he
would not have been able to tell the State if that drug was subject to a
NOOH. Tr. 159. The State contended that many of the drugs at issue
here are from such small generic houses and that there was no reasonable
way for it to determine if those drugs were subject to a NOOH. The
State argued that only FDA has the ability to actually identify every
drug in the marketplace, and that it should be HCFA's responsibility,
working with FDA, to convey that information to the states.
Thus, the problem is not with those drugs which can be readily
identified from a NOOH and reference to compendia, but rather with a
separate category of IRS drugs, those from small drug houses and
therefore not easily identifiable.
At the hearing the Board suggested that the parties' approaches to
identifying IRS drugs might be likened to inductive versus deductive
logic. Tr. 282-83. FDA publishes drug names in a NOOH and HCFA
declares them ineligible for FFP. The State, however, must work
backwards, looking at the ingredients listed and then coming up with the
names of IRS drugs. The problem is that some drugs, from small generic
manufacturers, are not listed anywhere.
We do not consider it unreasonable to insist that the State accept
responsibility for the removal from its Medicaid processing system of
drugs that can reasonably be discovered to be ineffective. As we said
in the previous section, the Act and the regulations require that
Medicaid funding be withdrawn for those drugs found to be ineffective
and those drugs which are identical, related, or similar to the
ineffective drugs.
One of the reasons for our firm stance on LTE drugs specified in a NOOH
is simply that the Act and the regulations are clear in requiring that
such drugs be removed from use, without qualification. However, the
regulations introduce an additional element of judgment concerning IRS
drugs; while IRS drugs must also be removed from use, and we know from
the records in Pennsylvania and here that many can be immediately
identified, the regulations recognize that some drugs may only be
identified as IRS based on expert opinion. Section 310.6(b)(2) of 21
C.F.R. says that a drug product is controlled by a NOOH when experts
would conclude that there is a lack of evidence that a drug is
effective. Thus, an element of judgment is present for some IRS drugs
that is not present for specified drugs. In Pennsylvania, the state's
pharmacist qualified as an expert under the regulations. Here,
Louisiana had a pharmacist testify in its behalf. The witness had
considerable familiarity with various national drug compendia. As shown
by the arguments made in the attachments to its post-hearing brief
(discussed below in an Appendix to this decision), the State was able to
readily identify numerous IRS drugs after consulting the compendia (and
did not argue that it could not identify these drugs earlier).
The State's rationale for not doing it earlier was essentially, "We were
waiting for HCFA." We consider that position insupportable, basically
for reasons already dealt with in Illinois and above.
We also consider it worth noting that the provision of drugs to Medicaid
eligible recipients is not required by the Act. Rather, it is an
optional service a state may provide. Section 1905(c)(12) of the Act.
A state, at its option, may cover prescribed drugs in its Medicaid plan.
Here Louisiana, as have most states, elected to cover drugs in its state
plan and thus receive FFP for the drugs.
The Medicaid program was conceived as a joint federal/state partnership.
In this regard there exists a dual obligation, mutually inclusive, upon
the Federal Government and the states to ensure that the Medicaid
program is operated efficiently and for the well-being of its intended
recipients. Thus, we find that even if, for the sake of argument, HCFA
had unambiguously promised the State that it would give the State notice
of IRS drugs and then for whatever reason failed to keep that promise,
that would not relieve the State of its obligation under the Act to
ensure the quality of services delivered under the Medicaid program.
Upon electing to include drugs in its Medicaid plan, the State incurred
the responsibility to keep ineffective drugs away from its citizens. In
Illinois, the Board declared:
[W]e will not condone a dangerously passive approach to the
problem of ineffective drugs. Medicare and Medicaid
beneficiaries' use of ineffective drugs can be hazardous, and
the State clearly had an obligation to move as quickly as it
reasonably could to stop reliance on these drugs.
p. 8.
But having said that, we question the fairness of retroactively
sanctioning the State for failure to take extraordinary steps to
discover a small class of IRS drugs not identifiable from a NOOH. As
already stated, the State had the responsibility to use its personnel,
who met the criteria set forth in 21 C.F.R. 310.6(b)(2), to consult
various compendia and to detect the readily identifiable IRS drugs
contained therein. FFP should be denied for those drugs reasonably
identifiable. But HCFA's own witness testified about the difficulty in
ascertaining the status of drugs from the small generic houses which do
not appear in any compendia. The various methods of identifying those
drugs suggested by HCFA do not strike us as practical. At one point
HCFA suggested that the State could merely call or write FDA if it had
any questions about a particular drug. Tr. 24. But that approach would
only work as a deductive method of determining an IRS drug. The problem
is that the State does not have the names of the drugs to call FDA, only
the active ingredients. It was also suggested at the hearing that the
dispensing pharmacist would know the active ingredients of every drug
passing through his hands, as such ingredients are listed by even the
small generic houses on their products. This presumably would require
the State to disseminate the active ingredients listed on the NOOHs to
all dispensing pharmacists in Louisiana and direct the pharmacists to
check every prescription against the list. This also does not appear to
be a practical solution to the problem--at least in terms of requiring
that the State remove the drugs within 30 days of the NOOH. HCFA
presumably could require such a massive undertaking, but has not done
so.
We consider it relevant to mention the steps the State has taken since
1984 to prevent a recurrence of the problem that led to this
disallowance. Louisiana has implemented a computer identification
system to develop the largest drug indication file among the states.
Tr. 47. Louisiana's listing currently contains approximately 35,000
drug products. The Agency's auditors utilized Louisiana's system to
expand its data base of LTE and IRS drugs. We view this as evidence of
the State's diligence in keeping ineffective products from its Medicaid
beneficiaries.
Based on the foregoing analysis, we find the disallowance insupportable
for those IRS drugs which Louisiana could not reasonably have
identified, as of the date of the relevant NOOH, from compendia in use
by pharmacists or lists provided by HCFA or FDA. It is debatable as to
what extraordinary lengths Louisiana should have gone to ferret out the
information, but there is no HCFA rule or guideline establishing the
extent of Louisiana's obligation. On the other hand, HCFA indicated
that it would provide some information (even though that was not
sufficient under the clear words of the Act and regulations to lessen
the State's obligation for LTE and easily identifiable IRS drugs). In
this context, Louisiana should not be held, with the benefit of
hindsight, to be culpable for not doing the virtually impossible. The
State should not be denied FFP for the continued use of such a drug
until such time as HCFA or FDA informed the State that the drug was an
IRS drug, or the drug appeared in compendia, or the State otherwise
discovered (or reasonably should have) that the drug was an IRS drug.
In the Appendix to this decision, we provide an analysis of how the 94
IRS drugs at issue here should be treated.
III. The duration of the grace period.
As noted above, HCFA, in promulgating 42 C.F.R. 441.25, announced that
the states would be granted both an initial grace period to implement
the mandates of the regulation and an on-going grace period for each
NOOH. Generally, because HCFA recognized that "it would virtually be
impossible to inform all interested parties . . . of the FDA's action on
the same day the NOOH is published," HCFA authorized a 30-day grace
period after a NOOH publication in the Federal Register, during which
time a state would still receive reimbursement for a drug appearing on
the NOOH. 46 Fed. Reg. 48552. In addition to this standard, HCFA also
announced that, in an exercise of its enforcement discretion, it would
permit a one-time grace period of 90 days, coinciding with the effective
date of the regulation, October 1, 1981, during which it would not deny
reimbursement for all drugs whose NOOHs were published prior to the
regulations; "the prohibition against Federal reimbursement will be
enforced for those drugs beginning January 1, 1982." Id.
Thus in Illinois, the Board found that under HCFA's own regulatory
scheme, there was an initial, one-time 90-day grace period following the
effective date of the regulations, and that drugs appearing in NOOHs
after October 1, 1981 would have a 30-day grace period. This simple
scheme, however, was complicated by the National Council court ruling,
supra, and the subsequent legislation which delayed the effective date
of 42 C.F.R. 441.25 to October 1, 1982.
In Illinois, one particular drug, vioform, was subject of a NOOH dated
September 25, 1981, thus prior to HCFA's publication of the regulation.
HCFA had stated in the preamble to the regulations:
We will also distribute and publish in the Federal Register a
list of all the drugs that have been the subject of an NOOH
before the publication date of these regulations.
46 Fed. Reg. 48552.
HCFA, however, did not send Illinois a list containing vioform until
September 30, 1982. Under these circumstances, the Board stated:
HCFA specifically told the states that HCFA would list
pre-regulation NOOHs for them. Since the states were not told
to depend on NOOHs until the regulation was published, it was
reasonable for states to rely on HCFA to provide a list of
pre-regulation NOOHs. Yet HCFA's first list after the
regulation did not include vioform, and a later list which did
include vioform was not distributed for about a year, roughly at
the same time the HCFA regulations became effective.
p. 13.
Noting that HCFA had volunteered to give Illinois a 60-day retroactive
grace period for vioform, the Board said it was arbitrary on HCFA's part
to deny Illinois the 90-day period mentioned in the preamble. Id.
Accordingly, the Board ordered HCFA to recompute its disallowance to
exclude amounts related to vioform for 90 days after the effective date
of the regulation, October 1, 1982.
In reaching this conclusion, the Board, referring to the preamble's
allowance for an initial 90-day grace period, stated:
HCFA thus clearly stated it would allow a one-time, front-end
implementation period of 90 days from the moment its regulations
became effective for drugs whose NOOHs were published before the
regulations. There is no basis in the record here to argue that
states needed less than 90 days just because the effective date
of the regulation was delayed (and HCFA makes no such argument).
Id., p. 12.
Here, HCFA contended that the Board's application of a 90-day grace
period to any other time except October 1, 1981 is unsupported by the
language of the preamble.
HCFA contended that section 441.25 was intended to become effective the
day it was published, October 1, 1981. An undisputed purpose of the
regulation, according to HCFA, was to give the states sufficient time to
make necessary changes in their claims processing systems, hence the
one-time, 90-day grace period. HCFA argued that the fact that a lawsuit
and consequent congressional action delayed the implementation of
section 441.25 a full year should not obscure the fact that the states
were put on notice October 1, 1981 that they were going to have to
adjust their claims processing systems. HCFA continued that the effect
of Illinois was to give the states a 365-day grace period, plus an
additional 90-day grace period, thus defeating the sense of urgency
reflected in the language of the preamble. HCFA pointed to specific
language in the preamble to support its view: "On January 1, 1982, the
publication on Federal reimbursement will be enforced . . . for any drug
that was the subject of an NOOH published before December 2, 1981." 46
Fed. Reg. 48552. HCFA insisted that neither it nor the Department has
ever deviated from this position, and produced a 1987 memorandum stating
that "the 90 day grace period may not commence after October 1, 1981."
HCFA Ex. A.
The Board issued its decision in Illinois on July 2, 1985. The Board
will reconsider one of its decisions "where a party promptly alleges a
clear error of fact or law." 45 C.F.R. 16.13 (emphasis added). In
cases subsequent to Illinois, HCFA has accepted the 90-day standard set
forth in Illinois and adjusted disallowances accordingly. See, e.g.,
Pennsylvania, supra. Now, more than three years after the issuance of
Illinois, HCFA has challenged one of its findings. At the hearing we
were surprised to hear one HCFA witness, an official with the
responsibility of developing policy on what HCFA will reimburse under
the Medicaid program and the author of the 1987 memorandum cited by
HCFA, declare that he had only recently become aware of the Illinois
decision and was "stunned" by it. Tr. 200.
Board decisions are widely disseminated, particularly through the
various agencies of the Department. We find it remarkable that Illinois
would have gone unnoticed for over three years by officials who were
directly affected by it. While we would have entertained a request for
reconsideration of our finding in Illinois if HCFA had timely made the
arguments then that it presented here, to revise our holding now would
be patently unfair to Louisiana. Other states have already received the
FFP available under the Illinois holding as other regional offices of
HCFA have, without Board direction, reduced, on their own, disallowances
to reflect the 90-day grace period. Furthermore, we find nothing in
HCFA's arguments here which shows our analysis in Illinois represented a
clear error of fact or law. HCFA's position was that the states had
ample notice of the provisions of section 441.25 and should have been
actively preparing for its implementation during the period of its
suspension. During the period of the suspension of section 441.25,
however, there was considerable doubt that the regulation would ever be
implemented. We consider it unreasonable that states should have been
required to expend scarce Medicaid funds to develop a system to carry
out a regulation whose existence was in serious question.
We therefore reaffirm our holding in Illinois that states were entitled
to a 90-day grace period, beginning October 1, 1982, for those drug
products which were named in NOOHs prior to October 1, 1982. We do not
consider that our reaffirmation of the 90-day grace period will have any
serious repercussions on HCFA's administration of the Medicaid program
as it applies to only those NOOHs issued before October 1, 1982. For
the drug products affected here by our holding, we direct HCFA to reduce
its disallowance accordingly.
FFP for 53 of the drugs at issue in this appeal will be affected if it
is determined that they are entitled to the 90-day grace period. It
should be noted that HCFA, in calculating the amount of the disallowance
for each particular drug, has already allowed for a 30-day grace period.
State Ex. 3 (Audit Report), p. 3; Tr. 306-07. Of the 53 drugs, 24 are
LTE drugs and 29 IRS drugs. Of the 24 LTE drugs, 20 were listed in a
September 25, 1981 NOOH. State Ex. 65. The other 4 were listed in
NOOHs that appeared in either April or May 1982. State post-hearing
brief, Att. 1, Appendix A. For the 29 IRS drugs, the State stipulated
that 17 are subject to NOOHs and recognizable as such from their trade
names or national compendia information. State Post-Hearing Brief, Att.
1, Appendix B, and Att. 3. HCFA should examine the relevant NOOHs to
determine if the 90-day grace period applies to these 17 drugs. We also
tentatively find that an additional two drugs are entitled to the 90-day
grace period (paragraph E of the Appendix), and that the 10 other drugs
are drugs for which the Board has totally reversed in principle the
disallowance because the State did not have the information to identify
them as IRS drugs. Paragraph F of the Appendix.
Conclusion
For the reasons described above, and as explained further in the
Appendix to this decision, we conclude as follows:
1. We uphold in principle the disallowance of $190,746 FFP for the
116 LTE drugs still in dispute (of the 128 LTE drugs originally listed
in Appendix A to the disallowance letter, HCFA removed 12 in the course
of these proceedings), subject to recalculation of the amount of the
disallowance for these drugs based on our reaffirmation of the 90-day,
one-time grace period applicable to drugs specified in NOOHs published
prior to October 1, 1982.
2. We also uphold in principle the disallowance of $38,462.44 FFP
for 63 IRS drugs, subject also to the 90-day and 30-day grace periods,
which we find Louisiana reasonably knew or should have known were IRS
drugs. See paragraphs A, B, C, D, and E of the Appendix.
3. We overturn in principle, and remand to HCFA for further review,
the disallowance of $45,087.26 FFP for 29 IRS drugs for the period prior
to the date when Louisiana can be charged with knowledge of them. See
paragraph F of the Appendix. HCFA should review the State's assertions
about these drugs, and make further determinations consistent with our
discussion above and in the Appendix. In practical terms, this requires
determination of whether, and on what date, Louisiana knew or should
have known of such drugs from drug compendia, HCFA or federal auditors'
lists, information received from other states, or Louisiana's own
investigations.
4. The remainder of the disallowance relates to two drugs for which
we have insufficient information to apply paragraphs 2 and 3 above, and
we also remand this part of the case to HCFA for further review. In the
Appendix we have reached tentative conclusions as to how these drugs
should be treated, but we acknowledge that HCFA may need to obtain
further information from Louisiana, and Louisiana should provide it, to
verify our conclusions. See paragraph G of the Appendix.
Louisiana shall have 30 days from receipt of this decision, or such
longer time as HCFA allows, to submit the information required by
paragraph 4 to HCFA (and any further information the State wants to
submit under paragraph 3). HCFA should then make determinations under
paragraphs 3 and 4 above, recalculate the disallowance consistent with
all four paragraphs above, and advise the State in writing. If
Louisiana disagrees with HCFA's determinations under paragraphs 3 and 4
or HCFA's recalculation of the disallowance amount, Louisiana may return
to the Board (on these issues only) within 30 days after receiving
HCFA's written decision. We urge the parties to cooperate in resolving
these remaining matters, and if we can help we will convene a telephone
conference on request of a party.
Judith
A.
Ballard
Donald F.
Garrett
Norval D. (John)
Settle Presiding
Board Member
APPENDIX--IRS DRUGS
The following represents the Board's tentative conclusions on how the 94
disputed IRS drugs should be treated when HCFA examines them on remand.
A. The State stipulated that 21 drug products were subject
to NOOHs published by FDA and identifiable from review of
compendia data. State's Post-Hearing Brief (PHB), Att. 4,
Appendix B. The State argued, however, that the correct
termination date should be publication in the State Medicaid
Manual, not the NOOH. We rejected that argument above.
Accordingly, we sustain the disallowance of $33,129.26 for these
drugs.
B. The State stipulated at various parts of PHB Attachment
3 that 19 drug products were either identical drug products
listed in national compendia, identical or recognizable as trade
names listed in national compendia, or identical drug products
recognizable by their names or listed in national compendia.
The State, however, also listed 15 of these same drugs in its
Attachment 4, which we included in our discussion in paragraph A
above. Rather than cause confusion for the parties in
determining the total disallowance amount, we sustain the
disallowance for the four drug products not mentioned in
Attachment 4, Appendix B, -- HCI, Hydrocortisone w/Iodo,
Hydroform Cream, and GVC Vag Cream -- in the amount of $1,176.21
FFP.
C. The State stipulated that 14 drug products ($1,116.62
FFP) are subject to NOOHs published by FDA and recognizable as
such from their trade names in national compendia. PHB Att. 1,
Appendix B. The State argued that the disallowance for those
drugs was overstated because HCFA did not apply a 90-day grace
period. As discussed in Part III of the decision, we agree in
principle. We sustain the disallowance for these drugs, but in
a reduced amount to be determined by HCFA.
D. 21 drug products, all containing Pentaerythritol
Tetranitrate (PETN), with NOOH termination dates of November 14,
1984, were not specifically detailed by the State. These
products, however, were listed in an extract (144b Antianginal
Agents) of the March 1982 "Facts and Comparisons" supplied by
the State in connection with its position regarding another
drug. PHB Att. 3. Accordingly, we sustain the disallowance of
$2,978.66 FFP for these drug products.
E. A search of the State's Attachments has not disclosed
any State explanation for three drug products -- Cor-Tar-Quin
Creme, Synlgen DC Capsules, and Pentaerythritol w/PB Tabs.
These products carried a required termination date of October 1,
1982. In the absence of any explanation by the State, we
sustain the disallowance of $61.69 for these drug products,
subject to a reduction to reflect a 90-day grace period.
F. The State listed 30 drug products, which HCFA alleged
were identical, related, or similar to drugs listed in NOOHs,
that the State claimed were generic products not listed in
national compendia. The State supplied various "Facts and
Comparisons" listings for the groupings to which these drugs
belonged. PHB Att. 3. Since we said above that states should
not be held responsible for the identification of IRS not
appearing in nationally recognizable compendia, we reverse in
principle and remand to HCFA the disallowance of $45,087.26 for
29 of these drug products.
G. It is undisputed that HCFA removed one drug, Envert
Tablets, from the list of disallowed drugs because that drug was
subject to a pre-1981 NOOH but was never included on HCFA's
published list of IRS drugs subject to a NOOH published prior to
October 1, 1981. HCFA's January 20, 1989 Revisions to Drug
List, p. 1. The State alleged that two other drug products --
Compal Capsules ($535.90 FFP) and Mycolnel Cream ($24.88 FFP) --
are similarly situated in that they were not provided to the
State in any listing of drug products ever published by HCFA.
PHB Att. 2. The State alleged both drugs were similar or
related to drug products originally named in 1975 prior to the
implementation of section 441.25 and that the combinations of
ingredients for the drugs have never been included in any
subsequent HCFA listing. It appears that the same reasoning
that led HCFA to remove Envert Tablets from the disallowance
should also apply to these two drug products. Accordingly, we
tentatively reverse the disallowance of $560.78 FFP for these
two drug