Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Pennsylvania Department of Public Welfare
DATE: March 18, 1992
Docket No. 91-113
Audit No. A-03-89-00233
Decision No. 1315
DECISION
The Pennsylvania Department of Public Welfare (Pennsylvania or
State)
appealed a determination of the Health Care Financing
Administration
(HCFA) disallowing $3,152,092 claimed by the State under title
XIX of
the Social Security Act. The disallowed amount represented the
federal
share of payments made by the State from October 29, 1987
through
October 28, 1988 for multiple source drugs provided to
Medicaid
recipients. HCFA found that the State exceeded the upper
payment limit
for these drugs, which HCFA regulations provide may not exceed
an
aggregate amount equal to the sum of the specific limits established
by
HCFA for each listed drug plus a "reasonable dispensing fee"
established
by the state for each drug. During Board proceedings, the
State
conceded that $371,554 was properly disallowed. See page 6, note
6,
infra. The issues with respect to the $2,780,538 remaining in
dispute
are whether the regulations require that, in calculating the
aggregate
upper payment limit, the State use the dispensing fee which it
actually
paid to pharmacies, and, if not, whether the dispensing fee used by
the
State in making its assurances that it would not exceed the
upper
payment limit was a "reasonable dispensing fee" within the meaning
of
the regulations.
For the reasons set forth below, we conclude that the regulations permit
a
state to calculate the aggregate upper payment limit using an amount
other
than the dispensing fee which it actually paid. However, unless
the
state provides documentation or analysis that the "reasonable
dispensing fee"
which it established is based on actual dispensing
costs, HCFA reasonably may
presume that the amount actually paid
represents a reasonable dispensing
fee. We further conclude that the
State did not show that the
dispensing fee used to make its assurances
was a reasonable dispensing
fee. Accordingly, we uphold the
disallowance, subject to reduction by
HCFA if the State furnishes
documentation to HCFA which establishes the
reasonableness of this fee
(or some lesser amount which exceeds the fee
actually paid).
Statutory and Regulatory Background
Section 1902(a)(30)(A) of the Social Security Act requires state
Medicaid
plans to provide methods and procedures "to assure that
payments are
consistent with efficiency, economy, and quality of care."
Pursuant to that
authority, HCFA published rules which require states to
provide assurances
that they have complied with certain limits on
payments for drugs provided
under the Medicaid program. At issue here
are limits on payments for
"multiple source drugs," defined at 42 C.F.R.
. 447.301 (1987) as drugs
"marketed or sold by two or more manufacturers
or labelers or . . . marketed
or sold by the same manufacturer or
labeler under two or more different
proprietary names or both under a
proprietary name and without such a
name." A state must provide
assurances "at least annually" that "[i]n
the aggregate, its Medicaid
expenditures for multiple source drugs . . . are
in accordance with the
upper limits specified in . 447.332(b) . . . ."
42 C.F.R. . 447.333(b)
(1987). Section 447.332(b) states:
Specific upper limits. The agency's payments for
multiple
source drugs identified and listed in accordance with
paragraph
(a) of this section must not exceed, in the aggregate,
payment
levels determined by applying for each drug entity a
reasonable
dispensing fee established by the agency plus an
amount
established by HCFA that is equal to 150 percent of
the
published price for the least costly therapeutic
equivalent
(using all available national compendia) that can be
purchased
by pharmacists in quantities of 100 tablets or capsules (or,
if
the drug is not commonly available in quantities of 100,
the
package size commonly listed) or, in the case of liquids,
the
commonly listed size. 1/
Prior to the period in question here, HCFA limited payments for
multiple
source drugs to the lowest of (1) the maximum allowable cost
established
by a Pharmaceutical Reimbursement Board plus a reasonable
dispensing
fee, (2) the estimated acquisition cost plus a reasonable
dispensing
fee, or (3) the provider's usual and customary charge to the
public for
the drug. 42 C.F.R. . 447.331 and . 447.332 (1986). 2/
The earlier
regulations further stated that "[t]he dispensing fee must be set
by the
[state Medicaid] agency . . . ." 42 C.F.R. . 447.331(c).
They required
the agency to conduct periodic surveys of pharmacy operations
to obtain
certain data which the agency could take into account in setting
the
dispensing fee. 42 C.F.R. . 447.333(a). In addition, the
regulations
listed certain factors which it stated might justify variations
in the
dispensing fee. 42 C.F.R. . 447.333(b).
In the preamble to the 1987 regulations, HCFA explained its adoption of
a
new method for limiting title XIX reimbursement of payments for
multiple
source drugs. HCFA stated in pertinent part that "by setting
an
aggregate limit for multiple source drugs, we believe that we can
provide
more than adequate flexibility to States to use payment
standards that
reflect the price and availability of particular drugs."
52 Fed. Reg. 28648,
at 28650 (July 31, 1987). HCFA also explained its
decision to delete
the requirement for periodic surveys of dispensing
fees and related
requirements as follows:
In the interest of State flexibility and to avoid
imposing
unnecessary Federal procedural requirements as to how
State
agencies establish such fees, we are deleting the
current
requirement at . 447.333 regarding dispensing fees.
State
agencies will still be required to determine
reasonable
dispensing fees or, if dispensing fees are not paid
separarely
[sic], to impute an amount equivalent to a reasonable
dispensing
fee, in order to include those amounts in the calculations
and
comparisons they make to meet the upper limit standard for
FFP.
We expect that most States will continue their
present
activities to establish a reasonable dispensing fee level
and
will document these and any new activities in their State
plan.
Such activities could include: (1) Audits and surveys
of
pharmacy operational costs; (2) compilation of data
regarding
professional salaries and fees; and, (3) analysis of
compiled
data regarding pharmacy overhead costs, profits, etc.
Id. at 28651-28652.
Factual Background
Prior to the period covered by the disallowance, the State implemented
its
own program (State MAC program) 3/ which limited the amount it could
pay
pharmacies for certain multiple source drugs. However, most of
the
limits set by the State were higher than HCFA's specific limits and
many
multiple source drugs listed by HCFA were not even included in the
State
MAC program. The State paid the lower of (1) the State MAC
program
limit, if any, plus a dispensing fee of $2.75 per prescription; (2)
the
estimated acquisition cost plus a $2.75 per prescription dispensing
fee;
or (3) the pharmacy's usual charge. State ex. A at 2.
4/ The record
does not indicate whether the $2.75 dispensing fee
paid by the State was
specified in the State's title XIX plan.
On October 13, 1987, the State wrote HCFA that "[t]here is a
legitimate
concern by the pharmacy community and the recipients that a
straight
application of the HCFA multisource upper limits in our program
would
create either a counterproductive financial situation for the
pharmacies
in Pennsylvania or an unavailability of certain medications
for
recipients . . . ." State ex. A at 1. However, the State told
HCFA
that it could pay the higher MAC prices and still assure that
HCFA's
aggregate upper payment limit was not exceeded. The State noted
that
its dispensing fee was the second lowest dispensing fee in the
nation
and that pharmacists in the State were able to provide
adequate
pharmaceutical services only because the ingredient cost reimbursed
by
the State was higher than the cost to the pharmacies. The State
stated
that its dispensing fee could therefore not be considered a
"reasonable
dispensing fee" within the meaning of 42 C.F.R. . 447.332(b) and
that
the State was instead "defining a `reasonable dispensing fee' as
the
median dispensing fee of all Medicaid dispensing fees" for purposes
of
calculating the upper payment limit. According to the State,
its
payments would not exceed the aggregate of the median
Medicaid
dispensing fee plus the specific limits imposed by HCFA on drug
costs.
State ex. A at 2.
In response to the State's letter, HCFA advised the State on January
29,
1988 that the methodology the State had selected to assure that it
met
the upper payment limit requirements was not acceptable, and that
the
State should instead take into account the actual dispensing fee paid
to
pharmacies in the State. State ex. C at 1. In a letter dated
March 17,
1988, the State maintained that its methodology was appropriate
and
asked HCFA to reconsider its position. However, the State
indicated
that it could assure that it would not exceed the upper payment
limit
even if it used the dispensing fee actually paid because it had
expanded
its MAC program to include additional drugs since the time it made
its
original assurances. State ex. E. There is no indication in
the record
that HCFA made any response to the State's request for
reconsideration
prior to taking the disallowance in this case.
In calculating the aggregate upper payment limit (and thus
the
disallowance here), HCFA used $2.75 as a "reasonable dispensing
fee."
According to the State, HCFA should have used the median dispensing
fee
for the period in question ($3.50). HCFA did not dispute that, if
$3.50
rather than $2.75 is used to calculate the upper payment limit,
the
resulting amount (after making an allowance for brand
medically
necessary drugs) would be greater than the State's total drug
payments
so there would be no disallowance. 5/
In October 1990, the Office of the Inspector (OIG), Office of
Audit
Services, issued a report on its review of the State's compliance
with
upper payment limit requirements for the period October 29, 1987
through
October 28, 1988. The report identified $3,152,092 (federal
share) in
unallowable costs, consisting of:
o $2,780,538 paid in excess of HCFA's upper payment limit
for
claims not coded "brand medically necessary" and claims
for
generic drugs which were erroneously coded "brand
medically
necessary";
o $362,455 paid in excess of HCFA's upper payment limit
for
claims coded "brand medically necessary" which were not
exempt
from HCFA's upper payment limit because the physician did
not
certify that brand name drugs were medically necessary; and
o $9,099 paid in excess of State MAC program limits, but
not
the HCFA upper payment limit, for claims for generic drugs
which
were erroneously coded "brand medically necessary."
State ex. P.
On June 21, 1991, HCFA notified the State that it was disallowing
the
amounts identified in the OIG report. State ex. V. The State
initially
appealed the entire disallowance. The State later withdrew
its appeal
with respect to the $362,455 and $9,099 identified above.
State's
letter to Board dated 2/19/92. 6/
Parties' Arguments
HCFA took the position that "the natural, reasonable reading of the
plain
language of the regulation is that the `reasonable dispensing fee
established
by the agency' . . . is the dispensing fee which the
Medicaid agency actually
uses to reimburse pharmacists." HCFA's brief
dated 12/4/91, p.
13. HCFA argued, moreover, that even if the State's
interpretation of
the regulations is also a reasonable one, HCFA's
interpretation should be
upheld since HCFA advised the State of its
interpretation when it first
received the State's assurances.
HCFA also argued that, while the major purpose of the 1987 regulations
was
to give states flexibility to choose their own payment
methodologies, that
does not "imply that a state may use . . . imaginary
dispensing fees" in
calculating the upper payment limit. Id. at 14.
Moreover, HCFA noted
that another purpose of the regulations was to
allow "responsible but not
burdensome Federal oversight," (Id. at 16,
quoting preamble at 52 Fed. Reg.
28648, 28653), and argued that the
State's approach would undercut the
possibility of such oversight since
states could avoid the effect of HCFA's
specific limits "by merely
redefining what constitutes a `reasonable
dispensing fee,' exclusively
for the purposes of the upper payment limit
calculation." Id.
HCFA also took the position that the fact that HCFA deleted
the
requirement for annual surveys of pharmacy operations when it
adopted
the 1987 regulations did not mean that HCFA had changed the
regulations
to no longer require that states use the dispensing fees actually
paid
in calculating the upper payment limit. HCFA noted that the
preamble to
the 1987 regulations stated that "State agencies will still be
required
to determine reasonable dispensing fees," and that the
preamble
described the provisions which were deleted merely as
"unnecessary
Federal procedural requirements." Id. at 14-15, quoting
preamble at 52
Fed. Reg. 28648, 28651 (with added emphasis).
Finally, HCFA argued that the Board's decision in Oklahoma Dept. of
Human
Services, DAB No. 1271 (1991) was erroneous to the extent that it
found a
connection between the ingredient cost and the dispensing fee.
HCFA asserted,
in any event, that the lack of connection between the two
components was even
clearer in the case of multiple source drugs than in
the case of the other
drugs at issue in Oklahoma since a state
determines only the dispensing fee
for multiple source drugs while the
state determines both the ingredient cost
and the dispensing fee for
other drugs.
The State took the position that it properly used the median
Medicaid
dispensing fee rather than the dispensing fee it actually paid
to
determine whether it had complied with the upper payment limit in
42
C.F.R. . 447.332(b). The State asserted that the regulations
could
easily have stated that the dispensing fee be the fee actually used
to
reimburse pharmacists if that was what was intended. The State
argued
that the absence of a definition of the term "reasonable dispensing
fee"
therefore signified that HCFA did not intend to require the use of
the
actual dispensing fee paid by a state. The State also argued that
the
preamble to the final regulations "clearly allows a state `to impute
an
amount equivalent to a reasonable dispensing fee'," and that it
had
merely followed this directive. State's brief dated 8/28/91, at
9.
The State also argued that, in directing that payments for multiple
source
drugs be examined "in the aggregate," the regulations make
federal funding
available as long as a state "does not exceed the
aggregate of a `reasonable
dispensing fee' plus a drug ingredient price
set by HCFA." State's
brief dated 8/28/91, at 9. Thus, according to
the State, the
regulations "implicitly" recognize that a state may need
to impute an amount
equivalent to a reasonable dispensing fee to offset
HCFA limits on ingredient
prices. Id.
The State further argued that the Board "acknowledged the
connection
between ingredient cost and dispensing fee" in its decision in
Oklahoma.
State brief dated 8/28/91, at 10. The State contended that,
under
Oklahoma, it would be inconsistent and arbitrary for HCFA to require
the
use of the $2.75 dispensing fee because that fee "was linked to
the
higher State MAC prices" rather than the prices established by
HCFA.
Id. at 11.
The State argued, moreover, that its interpretation of the regulations
did
not deprive HCFA of the ability to control drug prices since, even
if the
State did not exceed the upper payment limit, HCFA could still
review the
dispensing fee set by the State to see if it was reasonable.
The State
asserted that HCFA had failed to demonstrate that a $3.50
dispensing fee was
unreasonable here, however. According to the State,
the $3.50
dispensing fee was actually incurred because part of the cost
of dispensing a
drug "was being covered by higher ingredient cost."
State's reply brief dated
12/24/91, at 3. The State also contended that
a $3.50 dispensing fee
was reasonable because the State did not pay more
in the aggregate for
multiple source drugs than other states. 7/
Discussion
As discussed below, we conclude that the regulations permit states
the
flexibility to establish as a "reasonable dispensing fee" an
amount
other than the amount actually paid. This does not mean,
however, that
a state may simply disregard the amount actually paid and
designate an
arbitrary amount as a "reasonable dispensing fee," without
any
supporting analysis based on actual costs. The regulations
contemplate
a determination by a state of an amount reasonably sufficient
to
reimburse actual dispensing costs in the particular state. HCFA
is
entitled to presume that the amount actually paid represents such
a
determination by the state, absent affirmative evidence that a
higher
amount established by the state as a "reasonable dispensing
fee"
reasonably reflects actual dispensing costs.
Here, the mere fact that the $3.50 dispensing fee on which the
State's
original assurances were based was the median dispensing fee for all
the
states is not sufficient to establish its reasonableness
for
Pennsylvania. Furthermore, the State has provided no other evidence
of
its actual dispensing costs. Given the flexibility which
the
regulations give states to establish a "reasonable dispensing fee,"
and
the particular circumstances here (where the State specifically
and
consistently took the position that the $2.75 actually paid was too
low
to reimburse actual dispensing costs, and where HCFA never
contended
that the $3.50 was unreasonable), however, HCFA should afford the
State
an opportunity to provide documentation of actual dispensing costs
in
Pennsylvania to support its contention that $3.50 was a
"reasonable
dispensing fee" for the disallowance period. Accordingly,
we uphold the
disallowance in principle, subject to reduction in whole or in
part if
the State establishes that use of an amount higher than the
$2.75
actually paid (but not exceeding the $3.50 established by the State as
a
"reasonable dispensing fee") is justified.
1. Whether the regulations require the use of the dispensing
fee
actually paid by a state
We conclude that the regulations permit a state to use an amount
other
than the dispensing fee which it actually paid in calculating the
upper
payment limit. As the State pointed out, the regulations do not
define
the term "reasonable dispensing fee." The only express
limitation on
what constitutes a reasonable dispensing fee is that the
dispensing fee
be "established by the [state] agency." This implies
that there has
been some formal determination of an appropriate dispensing
fee.
However, this language does not obviously imply that the dispensing
fee
must be the amount paid. The submission of assurances which
adopt
another dispensing fee for purposes of calculating the upper
payment
limit can also be viewed as establishing a dispensing fee.
8/
(Nevertheless, as we discuss in section 2. below, in the absence of
a
specific and supportable state determination of a different
dispensing
fee amount as reasonable, HCFA is entitled to presume that
the
dispensing fee actually paid by a state was the fee established by
the
state agency.)
The structure of the regulations also supports the State's reading of
the
regulations as not requiring use of the dispensing fee actually paid
for
purposes of calculating the upper payment limit. Section 447.333(b)
of
42 C.F.R. provides in pertinent part that a state's drug payments may
not
exceed "in the aggregate" the specific limits established by HCFA
for each
drug plus a reasonable dispensing fee for each drug. Since the
focus of
the regulations is on a state's overall payment level, the
State could
reasonably have concluded that it could offset a lower than
reasonable
dispensing fee with ingredient costs which were higher than
HCFA's specific
limits as well as higher than the costs to the
pharmacies themselves.
The preamble to the 1987 regulations provides further support for
the
State's position. The preamble indicates that HCFA set an
aggregate
limit to give the states flexibility to adopt alternative methods
of
reimbursement. Contrary to HCFA's position, it is likely that
HCFA
intended a state to have flexibility in how it determined its
overall
payments and not merely with respect to the pricing of ingredient
costs
since HCFA recognized that some states paid pharmacies
without
separately identifying a dispensing fee. HCFA's approach of
holding the
State to the dispensing fee actually paid regardless of
the
circumstances under which it was set is thus inimical to the intent
to
give the states greater flexibility expressed in the preamble.
We are not persuaded, moreover, that the State's interpretation of
the
regulations deprives HCFA of the ability to perform the
oversight
function referred to in the preamble. As discussed in section
2. below,
HCFA must still determine whether the dispensing fee established by
a
state is reasonable. Accordingly, contrary to HCFA's argument,
the
State's interpretation does not give a state complete freedom
to
determine whether it meets the upper payment limit.
The fact that the requirements for surveys of pharmacy operations
were
deleted when the 1987 regulations were adopted can also be viewed
as
evidence that HCFA did not intend to require states to use
the
dispensing fee actually paid for purposes of assuring that they
would
not exceed the upper payment limit. While the regulations still
require
a state to maintain "records to support its findings and assurances"
(42
C.F.R. . 447.333(c)), the omission of the requirement for
the
collection of specific data relating to pharmacies indicates that
HCFA
did not wish to dictate the manner in which a state agency established
a
dispensing fee. This is not inconsistent with HCFA's description of
the
requirements which were deleted as "procedural" requirements.
Moreover,
while the preamble clearly indicates that the deletion of
these
requirements did not change the requirement that a
"reasonable
dispensing fee" be established by the state agency, this does
not
address the question of what constituted a reasonable dispensing fee.
Finally, we find that the State did not have adequate notice that
its
interpretation of the regulations was not the interpretation adopted
by
HCFA. The State was first advised that its assurances were
not
acceptable in a letter from the Regional Administrator of HCFA
for
Region III dated January 29, 1988. The letter merely stated
that
"[y]our computations in determining whether Pennsylvania meets
with
upper limit requirements should take into account the actual
dispensing
fee paid to pharmacies in the state." State's ex. C at 1
(emphasis in
the original). The letter did not identify any specific
wording in the
regulations or in any official policy issuance which supported
this
conclusion nor specify how the actual dispensing fee should be
taken
"into account." In light of all of the factors discussed above
which
support the State's interpretation of the regulations, the
conclusory
statement in the Regional Administrator's letter is not a
sufficient
basis for holding the State to the interpretation which HCFA
advanced
here.
2. Whether the median Medicaid dispensing fee was a
reasonable
dispensing fee for the State
Our conclusion that the State was not required to use the dispensing
fee
it actually paid to calculate the upper payment limit does
not
necessarily mean that a state may simply disregard the amount
actually
paid and designate an arbitrary amount as a "reasonable dispensing
fee."
The regulations identify the specific limits on ingredient costs and
the
dispensing fee as separate components in determining the upper
payment
limit on drug costs. Thus, HCFA clearly did not intend to
preclude an
examination of the separate components in determining the upper
payment
limit. Instead, as the Board has noted elsewhere, the
regulations
require one to "separately examine these components to determine
what is
the appropriate amount of . . . [ingredient costs] for which
payments
may be made and what is a reasonable dispensing fee for any
period."
Ruling on Request for Reconsideration of Oklahoma Dept. of
Human
Services, DAB No. 1271 (1991), dated February 6, 1992, at 4.
9/
Moreover, the general requirement in 42 C.F.R. . 447.333(c) that
states
maintain records to support their assurances clearly requires
some
documentation and analysis to show that a state's dispensing fee is
in
fact reasonable. See also State Medicaid Manual, section 6305.2
D.
Furthermore, the State itself acknowledged that the regulations
require
that the dispensing fee be reasonable.
However, the State failed to provide sufficient evidence to show that
the
dispensing fee of $3.50 which it used to calculate the upper payment
limit
was reasonable. A dispensing fee is reasonable only if it
reflects the
actual costs of dispensing drugs in the state. The fact
that $3.50 was
the median for all states does not mean that it
necessarily reflects a fair
estimate of actual dispensing costs in
Pennsylvania. In order to
establish that $3.50 was a reasonable
dispensing fee in Pennsylvania, the
State must show that the costs
covered by the dispensing fee in Pennsylvania
were similar to the median
costs for all states. Here, however, the
State did not even allege that
this was the case.
Furthermore, the fact that the State did not pay more in the aggregate
for
multiple source drugs than other states does not show that a $3.50
dispensing
fee was reasonable. It is possible that the State's overall
payments
did not exceed that of other states for other reasons (such as
that its
ingredient costs were relatively low) and not because $3.50
reflected actual
dispensing costs in the State. Accordingly, the
reasonableness of the
dispensing fee must be separately examined.
The State also attempted to bring itself within the scope of the
Board's
holding in Oklahoma, alleging that the $2.75 dispensing fee was
"linked
to the higher State MAC prices" and that part of the cost of
dispensing
a drug was covered by the ingredient cost paid by the State.
However,
the State did not provide any evidence that the ingredient
costs
included any costs of dispensing drugs. Thus, on the record
before us,
we cannot find that the $3.50 dispensing fee was reasonable.
10/
Accordingly, we uphold the disallowance in principle, subject to
reduction
by HCFA in whole or in part if the State furnishes
documentation to HCFA
which establishes that $3.50 (or some lesser
amount which exceeds the $2.75
paid) reasonably reflects actual
dispensing costs in the State. Any
such documentation should be
submitted to HCFA within 30 days of the State's
receipt of this decision
or within such longer period as HCFA may
allow. If the State submits
documentation which HCFA rejects in whole
or in part, the State may
return to the Board.
Conclusion
For the reasons discussed above, we conclude that the State was
not
required to use the $2.75 dispensing fee actually paid in
calculating
the upper payment limit on multiple source drugs. We
further conclude,
however, that the State did not show that the $3.50
dispensing fee which
it established in making its assurances that the upper
payment limit
would not be exceeded was a reasonable one. Accordingly,
we uphold the
disallowance subject to reduction on the basis specified
above.
_____________________________ Donald F. Garrett
_____________________________ Norval D. (John) Settle
_____________________________ Judith A. Ballard Presiding
Board
Member
1. Section 447.331(c) provides that multiple source drugs which
a
physician certifies are "brand medically necessary" are not subject
to
the upper payment limit in . 447.332(b). This exception is not at
issue
in this case, however.
2. These regulations tracked Department-wide regulations at 45
C.F.R.
Part 19.
3. "MAC" is an acronym for "maximum allowable cost".
4. The State also deducted any copayment from the amount which it
paid
the pharmacy.
5. On January 26, 1989, the State submitted assurances which gave
the
same rationale as the prior year's assurances for not using the
actual
dispensing fee and stated that for the purpose of calculating the
upper
payment limit, the State was "defining a `reasonable dispensing fee'
as
the dispensing fee established by HCFA in the recently enacted
Medicare
Catastrophic Coverage Act. This Act clearly defines the
initial
dispensing fee as $4.50." State ex. F at 2.
6. The State originally objected to the statistical
sampling
methodology used to determine the amount of overpayments on
"brand
medically necessary" transactions, but later withdrew its
objection.
Since this was the only basis on which the State objected to the
last
two components of the disallowance identified above, totalling
$371,554,
this amount is no longer in dispute.
7. Although the State referred generally to "prescription drugs,"
we
assume that it meant multiple source drugs since the upper
payment
limits for multiple source drugs and other drugs are
calculated
separately.
8. A different situation would be presented if the State had
not
suggested a $3.50 dispensing fee until it became apparent that the
State
had exceeded the upper payment limit using the $2.75 actually
paid. We
agree with HCFA that it would be inappropriate under
those
circumstances, where the $3.50 was arrived at solely for the purpose
of
avoiding an overpayment, to view the $3.50 as the dispensing
fee
"established" by the State.
9. In Oklahoma, the Board considered the question of the
appropriate
dispensing fee for purposes of calculating the upper payment
limit for
drugs other than multiple source drugs (the aggregate of the
estimated
acquisition costs plus reasonable dispensing fees). Oklahoma
had
improperly used the undiscounted average wholesale price (AWP) of
the
drugs as their EAC. However, the Board found that HCFA should
have
applied the dispensing fee which Oklahoma established when it
later
adopted an EAC of 90% of AWP rather than the lower dispensing
fee
adopted with the undiscounted AWP. The Board stated that the State
had
consistently linked the two pricing components and that there
was
"evidence that the undiscounted AWP had effectively accounted
for
certain overhead costs that could appropriately be included in
the
dispensing fee component of the reimbursement rate." Oklahoma at
11.
In its ruling on HCFA's request for reconsideration of Oklahoma,
the
Board further stated:
The regulation can reasonably be read to permit states to
pay
more than an appropriately determined EAC for drug
ingredient
cost, but less than a reasonable dispensing fee, so long as
the
payments did not, in the aggregate, exceed the upper limit.
Ruling on Request for Reconsideration at 5.
HCFA's argument that Oklahoma was wrongly decided has already been
fully
addressed in our reconsideration ruling.
10. We do not agree with HCFA that this case is distinguishable
from
Oklahoma on the basis that HCFA and not the state sets the
ingredient
costs for multiple source drugs. HCFA sets the ingredient
costs for
purposes of the upper payment limit calculation, but does not
require a
state to actually pay those amounts. Since the State used its
own
specific limits to determine payments for such drugs, it
could
reasonably have linked the dispensing fee which it paid to pharmacies
to
these