United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued December 5, 2002 Decided December 24, 2002
No. 02-5110
Pharmaceutical Research and Manufacturers of America,
Appellant
v.
Tommy G. Thompson, in his official capacity as,
Secretary, United States Department of Health
and Human Services, et al.,
Appellees
Appeal from the United States District Court
for the District of Columbia
(No. 01cv01453)
John G. Roberts, Jr. argued the cause for appellant. With
him on the briefs were Jeffrey Pariser and Darrel J. Grin-
stead.
Daniel J. Popeo and Richard A. Samp were on the brief
for amici curiae Washington Legal Foundation, et al., in
support of appellant.
Sushma Soni, Attorney, U.S. Department of Justice, ar-
gued the cause for federal appellees. With her on the brief
were Roscoe C. Howard, Jr., U.S. Attorney, and Scott R.
McIntosh, Attorney, U.S. Department of Justice.
John R. Brautigam, Assistant Attorney General, State of
Maine, argued the cause for intervenor Kevin W. Concannon
in his capacity as Commissioner of the Maine Department of
Human Services. With him on the brief were G. Steven
Rowe, Attorney General, and Paul Stern, Deputy Attorney
General.
Sarah Lenz Lock, Dorothy Siemon, Bruce Vignery, and
Michael Schuster were on the brief for amicus curiae Ameri-
can Association of Retired Persons, in support of appellee.
Before: Edwards, Henderson, and Randolph, Circuit
Judges.
Opinion for the Court filed by Circuit Judge Edwards.
Edwards, Circuit Judge: Appellant Pharmaceutical Re-
search and Manufacturers of America ("PhRMA"), an associa-
tion of drug manufacturing and research firms, challenges a
Medicaid demonstration project administered by the State of
Maine under the auspices of the Secretary of Health and
Human Services ("Secretary" or "HHS"). Maine's program
offers low-income citizens a discount on prescription drugs,
which is funded in part by manufacturer rebates and in part
by a 2% state subsidy. PhRMA claims that the Maine
program mirrors a demonstration project that was imple-
mented by the State of Vermont, approved by HHS, but then
declared unlawful under the Social Security Act ("Act") by
this court in Pharmaceutical Research and Manufacturers of
America v. Thompson, 251 F.3d 219 (D.C. Cir. 2001)
("PhRMA I"). The District Court rejected PhRMA's chal-
lenge and granted summary judgment for the Secretary. See
Pharm. Research and Mfrs. of Am. v. Thompson, 191
F. Supp. 2d 48 (D.D.C. 2002) (Mem. Op.) ("PhRMA II").
The record shows that Maine's initial version of the disput-
ed demonstration program was explicitly patterned after Ver-
mont's program. Eugene Gessow Deposition ("Gessow
Dep.") at 8, reprinted in Joint Appendix ("J.A.") 58. After
the decision in PhRMA I, officials in Maine decided to modify
that state's program, adding a 2% state contribution to the
manufacturer rebates to avoid the fate of Vermont's program.
However, this modification was never approved by the Secre-
tary. Therefore, to the extent that the modified Maine
program purports to be different from the flawed Vermont
program, it has yet to be considered or approved by the
federal government. The only program from Maine that the
Secretary has endorsed is one identical to the Vermont
program that was found unlawful by the court in PhRMA I.
We therefore reverse the judgment of the District Court and
enter judgment for PhRMA.
We have no need to consider questions about the extent to
which the Secretary has authority to "regard" a state pay-
ment as a Medicaid payment; whether the 2% subsidy is
sufficient to trigger the rebate obligations under the Act; or
whether the Act requires that all Medicaid "payments" in-
clude federal matching funds. Until the Secretary has made
clear his views on these questions, we decline to address
these matters.
I. Background
Under the Social Security Act, states can develop Medicaid
"pilot" or "demonstration" projects that experiment with new
methods of providing health care to low-income citizens. The
Secretary may approve such projects if they will "assist in
promoting the objectives" of the Medicaid system. 42 U.S.C.
s 1315(a) (2000). Upon granting such approval, the Secre-
tary can waive certain federal requirements that would nor-
mally apply to traditional Medicaid programs. Id.
s 1315(a)(1). The Secretary also has authority to "regard"
costs for a demonstration project as an "expenditure" pursu-
ant to that state's Medicaid plan. Id. s 1315(a)(2).
In January 2001, the State of Maine received the Secre-
tary's authorization to create a demonstration project for a
prescription drug benefit. See Secretary's Approval Letter
to Maine Department of Human Services (Jan. 18, 2001)
("HHS Letter"), reprinted in J.A. 101-03; Health Care Fi-
nancing Administration Special Terms & Conditions ("Terms
and Conditions"), reprinted in J.A. 105-21. Through its
Prescription Drug Discount Program ("PDDP"), Maine gives
a discount on drug purchases to a specified category of people
who are not otherwise eligible for Medicaid assistance. HHS
Letter at 1, J.A. 101. The State's administrators expressly
patterned this demonstration project after one administered
by the State of Vermont. See Maine Department of Human
Services Proposal Letter to HHS (Jan. 5, 2001) ("Maine
Proposal"), reprinted in J.A. 75-104 at 76; Gessow Dep. at 8,
J.A. 58. A central goal of Maine's project design was to
provide a prescription drug benefit without creating net costs
for the State. Gessow Dep. at 8, J.A. 58; Maine Proposal,
J.A. 76-77, 98. Maine thus proposed that the funding for
PDDP would come from special rebates paid by drug compa-
nies. See Healthy Maine Prescriptions Operational Protocol
("Operational Protocol"), reprinted in J.A. 125-60. As a
condition of participating in Medicaid, the drug companies
have a duty under the Social Security Act to offer rebates so
that state purchasers pay the best available rates for pharma-
ceutical products. See 42 U.S.C. s 1396r-8(b)(1)(A). Maine
sought to piggyback on this requirement to fund its PDDP.
Operational Protocol at 126.
On June 8, 2001, soon after Maine implemented PDDP, this
court issued PhRMA I. The court held that Vermont's
program was impermissible under the Act, because there was
no "net expenditure of funds for Medicaid purposes in an
amount determined independently of the amount of the re-
bates." PhRMA I, 251 F.3d at 225. The court found that
the State merely acted as a "conduit" in the discount pro-
gram, recouping all of its spending from drug company
rebates. See id. at 223.
Maine reacted to PhRMA I by adopting several revisions
to PDDP (renamed the Healthy Maine Prescription Pro-
gram). Eugene Gessow Declaration at 4-5, J.A. 68-69. The
change most relevant to this appeal is the State's decision to
contribute 2% of the annual costs of PDDP. Gessow Dep. at
41, J.A. 63. Maine's so-called "two-percent solution" comes
from state appropriations that are not matched by federal
dollars. The contribution is not mandated by state law and
the amount and frequency of state contributions are not
otherwise guaranteed. And, most significantly, Maine's re-
vised program was never submitted to the Secretary for
consideration or approval. See id. at 59-60.
PhRMA filed suit in the District Court, charging that
Maine's program was illegal under the Social Security Act
and, consequently, the Secretary's approval of the program
was unreasonable under the Administrative Procedure Act
("APA"). See PhRMA II, 191 F. Supp. 2d at 51-52. Appel-
lant first argued that because the Secretary had never ap-
proved the "two-percent solution," Maine's program was iden-
tical to the rebate scheme rejected in PhRMA I. Second,
PhRMA claimed that even if the revisions had been autho-
rized, the State expenditure did not qualify as a Medicaid
"payment," because the amount was de minimis and the
money was not matched by federal funding. Third, appellant
claimed that the program exceeded the Social Security Act's
"nominal" limits for all co-payments in state Medicaid pro-
grams. See 42 U.S.C. s 1396o(b)(3). Finally, PhRMA
claimed that, by allowing an illegal demonstration program to
proceed, the Secretary violated the terms of the APA.
On cross-motions for summary judgment, the District
Court ruled against PhRMA on all counts and granted sum-
mary judgment for appellees. PhRMA II, 191 F. Supp. 2d at
51. The court rejected each of appellant's claims that PDDP
was impermissible. The judge found PhRMA I distinguish-
able because of Maine's 2% contribution toward the prescrip-
tion discount costs. Id. at 63. The court also determined
that the Secretary had reasonably exercised his authority to
approve Maine's payments "as Medicaid expenditures," which
were also sufficient to trigger the manufacturer rebate re-
quirement in the statute. Id. at 64-66. Finally, the court
found that PhRMA did not have standing to assert claims
that the co-payments in Maine's program exceed the "nomi-
nal" limits set forth in the Social Security Act. Id. at 59-61.
PhRMA appeals the decision below and renews each of
these claims.
II. Analysis
We limit our discussion to PhRMA's first argument - that
the demonstration project is illegal under the Social Security
Act in light of PhRMA I. This issue is dispositive, so we
reach no other.
The District Court's decision hinges on its finding that a
2% subsidy is a part of Maine's demonstration project. This
finding cannot carry the day. Under the original proposal
that the Secretary approved in January 2001, the single
source of revenue for the program was to be the rebate from
drug companies. As PhRMA I holds, Maine cannot impose a
rebate obligation on drug companies where neither the State
nor the federal government makes a Medicaid "payment."
251 F.3d at 224-25.
Maine insists that the revised program cures the flaws
uncovered in the Vermont program. This is far from clear on
the record before us. Under the revised program, although
Maine presently has volunteered to contribute 2% of the
project's costs, this contribution is not guaranteed by state
law. In other words, it is not an official component of PDDP.
The amount can be changed and the contribution can be
discontinued at any time. This does not appear to be mean-
ingfully different from the Vermont program.
We need not reach this issue, however. The Social Securi-
ty Act requires HHS to approve all Medicaid demonstration
projects, see 42 U.S.C. s 1315(a). However, all parties agree
that the Secretary has never formally considered or endorsed
Maine's revised program that includes the 2% contribution.
Therefore, the revised program is not properly before this
court for review.
Appellees nonetheless claim that the "two percent solution"
is consistent with the original terms that the Secretary did
approve. But the record simply does not support this argu-
ment. In reviewing Maine's program, the Secretary merely
indicated that the State could not look to the federal govern-
ment to cover funding shortfalls:
If, in any quarter, the State believes subsidies are
likely to exceed rebates collected, the State will not
request [federal money] for the estimated difference
between subsidies paid and anticipated rebates col-
lected. The state will perform an annual reconcilia-
tion of subsidies paid and rebates received 180 days
after the end of each demonstration year. The state
will return to [HHS] the Federal share of any
subsidies claimed in excess of applicable rebates.
Rebates collected in excess of subsidies paid to
pharmacies in any given year will be considered in
the calculation of the pharmacy subsidy percentage
for the next demonstration year.
Terms and Conditions at 11, J.A. 115. This language, which
is repeated in the State's Operational Protocol, see Operation-
al Protocol at 10, J.A. 134, merely affirms Maine's duty to
reconcile any budgetary shortfalls if they occur in PDDP.
There is nothing in the record to indicate that HHS consid-
ered and approved Maine's revised program which is founded
on an unguaranteed 2% contribution.
Appellees also suggest that federal approval is implied in a
June 1 letter from the Secretary that acknowledges a modifi-
cation to PDDP. But the only programmatic change dis-
cussed in that document pertains to the project's scope and
not its source of funding. See HHS Letter to Maine Dep't of
Human Services (June 1, 2001), reprinted in J.A. 299-300
(approving a modification "to include coverage for all individ-
uals under 300 percent of the [poverty line] - rather than for
adults only - as was inadvertently approved."). This commu-
nication occurred before PhRMA I and Maine's revisions, and
its language does not endorse a limited state contribution to
assist in the funding of PDDP.
Maine's only federally approved version of PDDP mirrors
Vermont's legally flawed program, i.e., one in which all costs
are covered by drug discount rebates, with no required state
or federal "payments" under Medicaid. This approach is
clearly forbidden under the Social Security Act for the rea-
sons stated in PhRMA I.
III. Conclusion
For the aforementioned reasons, the judgment of the Dis-
trict Court is hereby reversed and summary judgment is
entered for appellant.