Indiana Family and Social Services Administration, DAB No. 1351 (1992)

Department of Health and Human Services

DEPARTMENTAL APPEALS BOARD

Appellate Division

SUBJECT: Indiana Family and Social Services Administration

DATE: August 19, 1992
Docket No. A-92-104
Decision No. 1351

DECISION

The Indiana Family and Social Services Administration (State) appealed a
determination by the Health Care Financing Administration (HCFA)
disallowing $3,652,956 in federal financial participation (FFP) claimed
under title XIX (Medicaid) of the Social Security Act (Act).  HCFA's
disallowance was based on an Office of the Inspector General (OIG) audit
of Indiana's compliance with upper payment limit requirements for
multiple source drugs during the period October 29, 1987 through October
28, 1988.  Based on this audit, HCFA determined that Indiana paid
$5,733,724 ($3,652,956 FFP) for multiple source drugs in excess of the
aggregate upper payment limit established by regulation.

For the reasons discussed below, we uphold HCFA's disallowance.

Statutory and Regulatory Background

The Medicaid program authorizes FFP in costs incurred by the states for
providing medical services to eligible low income and medically needy
persons.  Although prescription drugs are an optional Medicaid service,
Indiana, as does virtually every state, provides this as a covered
service.  Because of the cost of this option, HCFA determined that one
way to ensure prudent purchasing by provider pharmacies and to lower
Medicaid costs was to take advantage of savings available in the
marketplace for multiple source drugs.  Multiple source drugs are
defined as a drug marketed or sold by two or more manufacturers or
labelers, or a drug 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.  42 C.F.R. .447.301.

HCFA established upper payment limits under the authority of section
1902(a)(30)(A) of the Act.  On July 31, 1987, HCFA revised the
regulations on drug payments at 42 C.F.R. Part 447.  52 Fed. Reg. 28648.
Prior to this revision, specific payment limits applied to individual
multiple source drugs.  Under the revised regulations, HCFA would
identify multiple source drugs meeting certain specified criteria (i.e.,
all formulations have been evaluated as therapeutically equivalent by
the Food and Drug Administration; at least three suppliers list the
drug), and would establish upper limit amounts for each of these drugs.
42 C.F.R. ..447.331 and 447.332.  The upper limit amount for each drug
would equal 150% of the published price for the least costly therapeutic
equivalent that can be purchased by pharmacists in certain specified
quantities.  42 C.F.R. .447.332.

States were not required to have any particular payment methodology.
Rather, the regulation provided that a state could not pay more than an
"aggregate" upper limit. The aggregate upper limit would be determined
by totaling the dispensing fees paid for the drugs plus the amount of
the individual upper limits in HCFA's listings for multiple source drugs
(except that the upper limit would not apply to any prescription for
which a physician had certified in handwriting that a certain brand was
medically necessary).  The change to an "aggregate" upper limit provided
each state with greater flexibility to establish a method for payment
that would most suit its local conditions.  52 Fed. Reg. 28655.  This
would allow a state to pay at levels above the listed price set by HCFA
for some of the designated multiple source drugs, provided that the
state pays at levels below the listed price for other drugs subject to
the listings.  52 Fed. Reg. 28651.

The revised regulations also require that each state must make a finding
and submit assurances at least annually that in the aggregate its
Medicaid expenditures for multiple source drugs remain in accordance
with the upper limits.  42 C.F.R. .447.333(b).

Prior to the effective date of these regulations, HCFA distributed to
the states lists of the multiple source drugs subject to individual
upper limits and of the upper limits for payments for these drugs.  The
regulations were effective October 29, 1987, three months after
publication.  . Factual Background

On October 28, 1987, the day before the effective date of the
regulations, Indiana requested an extension until June 1, 1988, for its
implementation of the revised regulations.  State Exhibit (Ex.) 1.  By
letter dated December 29, 1987, HCFA denied the State's request.  HCFA
Ex. B.  Indiana subsequently submitted its initial assurance of
compliance with the upper payment limit provisions to HCFA in a state
plan amendment with an effective date of December 1, 1989.  HCFA Ex. C
at 6.  In this assurance, the State indicated compliance with the upper
limits regulations since November 1, 1988.  HCFA Ex. C at 6.

The OIG audit determined that during the period October 29, 1987 through
October 28, 1988, the State had claimed FFP in payments in excess of the
aggregate upper limit because the State Medicaid Agency had delayed
implementing controls to prevent claims from exceeding the limits.  HCFA
disallowed $3,652,956 FFP for non-compliance with the aggregate upper
payment limit.

The State appealed, arguing that it should have been granted an
extension since it was impracticable, if not impossible, for the State
to have implemented the regulation by the effective date.

Analysis

The State asked us here to apply a later effective date of HCFA's
revised regulations than the date set out in the Federal Register.  The
State's reasons why it needed an extension are not related specifically
to what the State was required to do in order to comply with the revised
regulations, however.

HCFA's revised regulations accomplish two things:  1) they provide that
no FFP will be available in state payments that exceed the aggregate
upper limit; and 2) they permit states the flexibility to use whatever
payment methodology the state chooses, so long as the state provides
assurances that the payments will not in the aggregate exceed the
aggregate upper limit.  To ensure that its claims for FFP did not exceed
the amount allowable under the new regulations, the State needed only to
have a computer program which would aggregate the listed upper payment
limits for each of the drugs provided and compare that with the total
amount paid by the State for listed drugs.  The State had notice as of
July 31, 1987 that it would need to make the required comparison of
aggregate payments to ensure it was not claiming unallowable FFP.  HCFA
first published the list in August 1987 and made only minor amendments
in September 1987.  See State Ex. 3.

In its brief here, the State argued that it had first received HCFA's
drug lists on September 14 and October 4, 1987.  The State said:

 Upon receipt of the lists, it was necessary for Indiana's drug
 price file contractor, Redbook, to complete an analysis of the
 drug list and make appropriate modifications to their data
 bases.  As of October 28, 1987, Indiana's fiscal contractor had
 not been able to test the system to ensure that proper
 reimbursement would occur. . . . The importance of developing
 and testing the system to accommodate the new . . . limits
 cannot be underestimated.

State's Brief at 2. 1/

However, in its October 28, 1987 letter to HCFA requesting an extension,
the State indicated that Redbook had already developed a computer tape
listing the covered drug codes, had provided that tape to the fiscal
contractor (apparently Blue Cross/Blue Shield), and was to provide to
Blue Cross/Blue Shield a separate tape containing the appropriate upper
limits for these drugs, by October 28, 1987.  While Blue Cross/Blue
Shield perhaps needed to test the system after that, the State did not
explain how long this took, nor why the State could not have protected
itself by simply delaying payments to pharmacists until the testing was
completed.  HCFA said that such delays would have been authorized under
the regulations.  HCFA Brief at 11, citing 42 C.F.R. ..447.45(d)(4),
447.45(e).

The major administrative difficulties and concerns which the State
described in its extension requests and briefs here arise only because
the State was apparently planning on changing its payment methodology.
The HCFA letter denying the extension request pointed out that the
regulation gave the State flexibility in establishing a payment method
and that the State would be required to change from its current method
only if it could not provide the requisite assurances using that method.
HCFA's letter pointed out that it was not clear from the State's letter
"that Indiana's current payments would exceed the aggregate upper limit
standard."  HCFA Ex. B.

HCFA's letter also pointed out that one of the major reasons the State
gave for needing an extension had no merit.  The State had said there
was a conflict between Indiana law and the requirement that the
prescribing physician indicate a notation like "brand necessary" in his
own handwriting to override the upper limit for a drug item.  State Ex.
1, p. 2.  HCFA responded that there was no difference in the new rules
and the prior rules with respect to the requirement that the term "brand
medically necessary" or words to that effect must be written on the
prescription in order for the pharmacist to receive compensation for the
more costly brand name product, so that it would not be necessary for
the Indiana law to be changed.  HCFA Ex. B.  The State did not dispute
HCFA's response.

Finally, HCFA expressed its concern that, during times of fiscal
constraint, it needed a "straightforward implementation of a program
with such savings potential for both the State and Federal Governments."
HCFA Ex. B.

Under the circumstances, HCFA's denial of the State's extension request
was reasonable.  The State's justification was based in part on its
erroneous interpretation of the "brand medically necessary" requirement
and in part on its own choice to consider a new payment methodology.
The new payment methodology may have required further study since the
State was contemplating paying more than the listed amounts for some
drugs and less for others if necessary because of the particular needs
in Indiana.  However, the State never satisfactorily explained why it
could not have implemented some interim payment method (such as paying
the amounts HCFA listed as the upper limits for specific drugs) which
would have enabled the State to provide the requisite assurances.
Instead, the State (without attempting to appeal HCFA's denial) chose to
proceed with its study of a new payment methodology, which the State did
not implement until November 1, 1988 (five months after the June 1, 1988
implementation date the State had requested).  .In any event, having
been told by HCFA that the aggregate upper limit would apply as of
October 29, 1987, the State was obliged to take some immediate steps to
ensure that its claims for FFP did not exceed the amount determined
allowable by applying the aggregate upper limit.  It is the State's
failure to take such steps which resulted in its claiming more FFP than
allowed under the regulation.

Conclusion

Accordingly, we uphold the disallowance in the amount of $3,652,956.

 

   _____________________________ Donald F. Garrett

 

   _____________________________ Norval D. (John)
   Settle

 

   _____________________________ Judith A. Ballard
   Presiding Board Member


1.  The State also said:  "It was also necessary to place a `stop' date
for those old drug entities that were not subject to the [upper] limits
according to the official listing."  Id.  Since unlisted drugs are not
subject to the aggregate upper limit, we do not see how the need for
"stop" dates for such drugs is relevant