Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Arkansas Department of Human Services
DATE: April 29, 1992
Docket No. A-92-28
Decision No. 1329
DECISION
In Arkansas Dept. of Human Services, DAB No. 1273 (1991), we upheld
in
principle a disallowance by the Health Care Financing
Administration
(HCFA) of federal financial participation (FFP) claimed by the
State
under Medicaid for drug expenditures. We remanded the case to
HCFA,
however, to recalculate the disallowance amount in accordance with
our
decision, since HCFA's calculation had not included both components
of
the aggregate upper limit on drug expenditures set out in the
regulation
on which HCFA had relied. Except for a minor adjustment not
at issue
here, HCFA declined on remand to recalculate the disallowance
amount,
and Arkansas appealed.
What the prior proceedings were about
The disallowance at issue relates to payments made by the State for
"other
drugs" during the period April 1, 1989 to July 1, 1989.
HCFA's
regulations on drug payments require two separate types of
calculations:
1) for each specific drug provided, calculation of the amount
to be paid
for that drug, according to the methods and standards in the state
plan;
2) calculation for any given period of upper limits on a state's
total
expenditures for drugs, according to the formulas set out in
HCFA's
regulations.
A disallowance based on the upper limits regulation requires
calculating
the aggregate upper limit and comparing it to the total amount
the state
paid during the period, to determine the extent to which the
state's
total expenditures for "other drugs" exceeded the upper limit.
FFP is
not available in the excess amount. This calculation is the one
we
referred to in our prior decision. The rationale for
HCFA's
disallowance was based on interpreting one component of the formula
for
calculating an aggregate upper limit, called an "estimated
acquisition
cost" of drug ingredients, or EAC. We agreed with HCFA that
the State's
interpretation of this term was unreasonable and that the
relevant EAC
for the disallowance period was one the State and HCFA had
agreed to use
for later periods, based on a survey of drug costs by an
independent
accounting firm.
We also pointed out, however, that HCFA's regulations set out
two
components to be used in calculating the upper limit: the EAC of
the
ingredients of the drugs provided during the period plus a
"reasonable
dispensing fee" for each time a drug was dispensed. The
independent
survey had also addressed actual dispensing costs during 1988,
based on
which the State and HCFA adopted a dispensing fee of "$4.16
plus
.093(EAC)." Based on this evidence, we found that the $4.01 HCFA
had
used would not reasonably reimburse the providers for the actual
costs
of dispensing, and that HCFA should instead use as the
"reasonable
dispensing fee" the formula of "$4.16 plus .093(EAC)."
What HCFA did on remand
On remand, HCFA ignored our findings because HCFA erroneously thought
it
was bound to use the $4.01 figure, since that was the amount labeled
as
a dispensing fee in the applicable State plan. Nothing in
HCFA's
regulations on state plans requires that a state set out a
dispensing
fee in the state plan, much less that an amount labeled as a
dispensing
fee reasonably reimburse actual dispensing costs. To the
contrary, as
we have said in the past, the preamble to the aggregate upper
limit
regulations indicates that HCFA was providing states flexibility to
use
state plan methods and procedures which contained formulas
different
from the upper limits formulas, including paying a less than
reasonable
dispensing fee. See Pennsylvania Dept. of Public Welfare,
DAB No. 1315,
at 8-10 (1992); see also Ruling on Request for Reconsideration
of
Oklahoma Dept. of Human Services, DAB No. 1271, at 5 (1992). HCFA
did
not offer or present any evidence that, at the time the State
adopted
the $4.01 as part of its State plan method for calculating
individual
payment amounts, it intended that the $4.01 constitute a
"reasonable
dispensing fee," within the meaning of the upper limit
regulation.
There is no evidence in the record on how the State originally chose
the
$4.01. The record does, however, contain some evidence that not all
of
the costs of dispensing were included in the $4.01; specifically,
the
costs of labels or bottles were included in the amount the State used
as
another part of its formula, rather than as part of the amount
labeled
as a dispensing fee. See Hearing Transcript at 148-150. Even if
the
$4.01 was based on actual dispensing costs at the time it was
adopted
(at least as early as January 1987), however, the independent survey
of
dispensing costs during 1988 establishes that the $4.01 no longer
was
adequate during the disallowance period to reimburse actual
dispensing
costs. Finally, the State persuasively argued that the EAC
later
adopted was integrally tied to the dispensing fee of "$4.16
plus
.093(EAC)" as part of the statutorily required determination
that
payments be sufficient to ensure access to Medicaid services.
In sum, we affirm here our findings in DAB No. 1273 that, in
calculating
the aggregate upper limit, HCFA must use both components
specified in
the regulations as part of the aggregate upper limit
calculations, and
that the "$4.16 plus .093(EAC)" represents a "reasonable
dispensing fee"
based on actual costs of dispensing drugs during the relevant
period.
Contrary to what HCFA argued, this upper limit calculation will
not
provide FFP in payments the State did not make. Instead, it
simply
limits the disallowance amount to FFP in the total amount the State
paid
for all drugs provided during the relevant period in excess of
the
aggregate upper limit for that period.
The applicable State plan
As noted above, it is a separate requirement under the regulations that
a
state calculate payments for each specific "other drug" provided,
according
to the methods and standards set out in the state plan.
During the
disallowance period, the Arkansas State plan provided that
the State would
pay the lower of a provider's usual and customary charge
for the drug, or an
amount determined by adding the "cost of the drug"
to the $4.01 labeled as a
dispensing fee.
HCFA argued after the remand that the disallowance was based on the
State
plan, as well as on the upper limit regulations. While HCFA did
mention
the State plan in its disallowance letter, the rationale HCFA
gave depended
on an interpretation of the term EAC in the upper limits
regulations, not on
an interpretation of the term "cost of the drug" in
the State plan. The
State had consistently interpreted the phrase "cost
of the drug" in the State
plan to mean the average wholesale price
(AWP). If the State plan had
been at issue, the rationale would have
had to be that this was an
unreasonable interpretation of the State
plan, in order to be consistent with
our past decisions on interpreting
state plan provisions. See Virginia
Dept of Medical Assistance
Services, DAB No. 1207 (1990); South Dakota Dept.
of Social Services,
DAB No. 934 (1988). This would entail a different
set of issues from
those addressed in the prior proceedings; HCFA did not
address these
State plan issues, focusing instead on the upper limit
requirements.
Moreover, HCFA's original disallowance calculation was not
based on
comparing the amount the State paid for any specific drug to the
amount
allowable under the State plan (which was in some instances
the
provider's usual and customary charge). Rather, HCFA was
comparing
aggregate figures.
Nothing in DAB No. 1273 precludes HCFA from examining state plan
issues
and taking a different disallowance based on the State plan
requirements
(to the extent that disallowance would not duplicate the
disallowance
here, based on the upper limit). If HCFA chooses to
address this issue
further, the following factors would be relevant:
o HCFA's regulations give states flexibility to use a
state
plan method different from the formula used for calculating
the
aggregate upper limit.
o Since the states may choose a different formula, HCFA
cannot
automatically assume (as it appeared to do here) that "cost
of
the drug" is equivalent to EAC.
o The State consistently interpreted the phrase "cost of
the
drug" to mean AWP. Thus, under prior Board decisions,
HCFA
would either have to have persuasive evidence that this was
not
the intended interpretation or show that this was not
a
reasonable interpretation.
o Even if the AWP would not be a reasonable measure of the
true
cost of a drug's ingredients, the evidence previously
presented
indicates that the AWP may have included some other costs,
such
as labels or bottles, that were not included in the
$4.01
labeled as a dispensing fee, but which could reasonably
be
considered "cost of the drug." There is no evidence in
the
current record of the actual amount of those costs to
providers
in Arkansas during the disallowance period.
o Once HCFA determined what "cost of the drug" meant, a
new
comparison would be required between the amount the State
paid
for each "other drug" and the amount the State could
have
properly paid using the method in its State plan
properly
interpreted.
Meanwhile, the State is entitled to have the disallowance here, based
on
the upper limit regulation, recalculated according to our decision.
Conclusion
HCFA should recalculate the disallowance here by comparing the
State's
total expenditures for the relevant period to the aggregate upper
limit
(determined by using both the EAC we found in our earlier decision
and
the reasonable dispensing fee of "4.16 plus .093(EAC)"). Nothing in
our
decision precludes HCFA from issuing a different disallowance based
on
the State plan, considered in light of the factors noted above.
_________________________
Donald
F.
Garrett
_________________________
Norval
D. (John)
Settle
_________________________
Judith
A.
Ballard
Presiding
Board