Pharmserv, Inc. v. Texas Health and Human Services Commission Office of the Inspector General of the Texas Health and Human Services Commission Kyle Janek, in His Official Capacity as Commissioner of Texas Health and Human Services Commission

ACCEPTED
03-13-00526-CV
3738137
THIRD COURT OF APPEALS
AUSTIN, TEXAS
1/12/2015 4:11:39 PM
JEFFREY D. KYLE
CLERK
No. 03-13-00526-CV
____________________________
RECEIVED IN
IN THE COURT OF APPEALS FOR THE THIRD DISTRICT OF OF
3rd COURT TEXAS
APPEALS
AUSTIN, TEXAS
AUSTIN, TEXAS
1/12/2015 4:11:39 PM
____________________________
JEFFREY D. KYLE
Clerk
PHARMSERV, INC.
APPELLANT,

V.

TEXAS DEPARTMENT OF HEALTH AND HUMAN SERVICES, AND
OFFICE OF THE INSPECTOR GENERAL OF THE TEXAS HEALTH AND
HUMAN SERVICES COMMISSION, DOUG WILSON
AND KYLE L. JANEK, M.D.
APPELLEES.
____________________________
BRIEF AMICUS CURIAE OF SOUTHWEST PHARMACY SOLUTIONS
d/b/a AMERICAN PHARMACIES
IN SUPPORT OF THE APPELLANT
____________________________
On Appeal from the
st
261 Judicial District Court of Travis County, Texas
Cause No. D-1-GN-12-001074
____________________________
TAYLOR DUNHAM AND RODRIGUEZ, LLP
301 CONGRESS AVENUE, SUITE 1050
AUSTIN, TEXAS 78701
(512) 473-2257 TELEPHONE
(512) 478-4409 FACSIMILE
MIGUEL S. RODRIGUEZ
STATE BAR NO. 24007938
MRODRIGUEZ@TAYLORDUNHAM.COM

ATTORNEYS FOR SOUTHWEST PHARMACY
SOLUTIONS, INC. D/B/A AMERICAN
PHARMACIES
 IDENTITY OF PARTIES AND COUNSEL

1. Petitioner/Appellant/Plaintiff

Pharmserv, Inc.

Represented by:

Jeff Avant
Avant & Mitchell, L.P.
700 Lavaca, Suite 1400
Austin, Texas 78701
(512) 478-5757 Telephone
(512) 478-5404 Facsimile
avantlaw@swbell.net

and

Hugh Barton
Hugh M. Barton, P.C.
603 West 13th St., Ste 1B
Austin, Texas 78701
(512) 499-0793 Telephone
(512) 727-6717 Facsimile
bartonlaw@yahoo.com

2. Respondents/Appellees/Defendants

Texas Health and Human Services Commission
Office of Inspector General of the Texas Health and Human Services
Commission
Dr. Kyle Janak, Appellee, in his official capacity currently acting as
Executive Commissioner of the TxHHSC
Mr. Douglas Wilson, in his official capacity as Inspector
General of the Office of Inspector General Office of TxHHSC

Represented by:

i
 Ann Hartley
Assistant Attorney General of the Financial,
Tax and Litigation Section or the Texas Office of the Attorney
General
P.O. Box 12548
Austin, Texas 78711-2548
(512) 936-1313 Telephone
(512) 477-2348 Facsimile
ann.hartley@texasattorneygeneral.gov

3. Amicus Curiae

Southwest Pharmacy Solutions, Inc. d/b/a American Pharmacies

Represented by:

Miguel S. Rodriguez
Taylor Dunham and Rodriguez, LLP
301 Congress Avenue, Suite 1050
Austin, Texas 78701
(512) 473-2257 Telephone
(512) 478-4409 Facsimile
mrodriguez@taylordunham.com

ii
 TABLE OF CONTENTS

IDENTITY OF PARTIES AND COUNSEL .............................................................i 

TABLE OF CONTENTS ......................................................................................... iii 

INDEX OF AUTHORITIES.....................................................................................iv 

INTEREST OF AMICUS CURIAE............................................................................ 1 

SUMMARY OF THE ARGUMENT ........................................................................ 2 

ARGUMENT ............................................................................................................. 4 

CONCLUSION .......................................................................................................... 8 

CERTIFICATE OF COMPLIANCE ......................................................................... 9 

CERTIFICATE OF SERVICE .................................................................................. 9 

APPENDIX .............................................................................................................. 10 

iii
 INDEX OF AUTHORITIES

Page(s)

Statutes
TEX. GOV’T CODE § 2001.003(1) ............................................................................... 6

TEX. GOV’T CODE § 2001.171.................................................................................... 6

Rules
1 TEX. ADMIN. CODE § 371.1601(18) (eff. 1/9/2005) ................................................ 6

1 TEX. ADMIN. CODE § 371.1601(33) (eff. 1/9/2005) ................................................ 7

1 TEX. ADMIN. CODE § 371.1601(41) (eff. 1/9/2005) ................................................ 6

1 TEX. ADMIN. CODE § 371.1601(45) (eff. 1/9/2005) ................................................ 4

1 TEX. ADMIN. CODE § 371.1603(f) (eff. 1/9/2005) .................................................. 7

1 TEX. ADMIN. CODE § 371.1603(j)(2) (eff. 1/9/2005) .............................................. 5

1 TEX. ADMIN. CODE § 371.1613 (eff. 1/9/2005) ...................................................... 7

1 TEX. ADMIN. CODE § 371.1643(c) (eff. 1/9/2005) .................................................. 5

1 TEX. ADMIN. CODE § 371.1647(c) and (d)(5) (eff. 1/9/2005) ................................. 6

1 TEX. ADMIN. CODE § 371.1667(a) (eff. 1/9/2005) .................................................. 6

1 TEX. ADMIN. CODE § 371.1667(b) (eff. 1/9/2005) .................................................. 6

1 TEX. ADMIN. CODE § 371.1669(a) (eff. 1/9/2005) .................................................. 6

1 TEX. ADMIN. CODE § 371.1709(h) (eff. 4/10/11) .................................................... 7

1 TEX. ADMIN. CODE § 371.1719(d)(4) (eff. 4/10/11) ............................................... 7

iv
 INTEREST OF AMICUS CURIAE

American Pharmacies is a for-profit, member-owned, independent pharmacy

cooperative with over 600 members operating in several states, including Texas.

PharmServ, Inc. is one of American Pharmacies’ members. The vast majority of

the members of American Pharmacies are pharmacy providers in the Texas

Medicaid Vendor Drug Program overseen by the Texas Health and Human

Services Commission (“HHSC”). From time to time, many of the pharmacy

providers who are members of American Pharmacies are the subject of audits by

the HHSC Office of Inspector General (“HHSC-OIG”) and, in some cases, the

HHSC-OIG seeks recoupment for alleged overpayments. Many of those

recoupment allegations include the use of a sampling process to extrapolate the

findings of an audit across a population of unaudited claims.

American Pharmacies devotes significant resources to advocating in the

legislature and the courts of Texas to advance and protect the interests of its

member-pharmacies. American Pharmacies has no parent corporation, and no

publicly held corporation owns 10% or more of its stock.

This brief is being submitted in support of Appellant.

American Pharmacies is the source of all fees paid or to be paid for

preparing this brief.
 SUMMARY OF THE ARGUMENT

American Pharmacies respectfully submits this brief as a friend of the Court

to bring to the Court’s attention an area of analysis not closely focused upon by the

parties to this appeal.

The members of American Pharmacies, a purchasing cooperative, are

independent pharmacies. These are small businesses, often owned by the

pharmacist behind the counter. They stand ready to serve their community and are

an integral component of the delivery of health care services. Appellant is just one

of hundreds of other independently-owned small-business pharmacies in Texas

serving the Medicaid population. The HHSC-OIG audits of these pharmacies

often identify small clerical errors on a script (a missing date, word or notation)

that most often do not question the fact that a patient received the correct

medication and that the State was billed the correct amount for the quantity of

medication dispensed to the patient. Therefore, the “overpayments” imposed as

sanctions act to recoup money from the pharmacy even though the pharmacy has

already unquestionably provided medicine to the patient. As a result, the

pharmacy is left without its inventory and its revenue.

However, the imposition of monetary sanctions of hundreds of thousands of

dollars or more (as a result of extrapolated findings from a sampling process) is, in

most cases, a death sentence to such a business. The HHSC regulations in effect in

2
2010, the time that HHSC imposed its administrative sanctions upon Appellant,

provided that Medicaid providers such as Appellant would be afforded due

process.

The thrust of the argument of HHSC-OIG is that it may impose an

administrative sanction upon Appellant but give the sanction a different label to

avoid providing the required due process.

However, HHSC-OIG’s demand for nearly $1 million in payments from

Appellant and the imposition of a hold on any future payments to Appellant is

within the direct ambit of the definition of an “administrative sanction” set forth in

the regulations applicable to Appellant at the time of their imposition in 2010.

Whether HHSC-OIG’s demand for the return of such amounts is the result

of a claim of fraud or clerical error is of no moment in the analysis. The

regulations plainly state that demands for recoupment of overpayments, including

the withholding of future payments, are administrative sanctions which require a

right of a formal appeal hearing to be afforded to the provider prior to their

imposition.

The requirement to provide such due process protections is important not

just to the Appellant in this case, but to the hundreds of other small business

pharmacies subject to audit by HHSC-OIG.

3
 Because HHSC-OIG’s duty to provide a right to a formal appeal hearing and

judicial review is nondiscretionary, jurisdiction exists to compel such forms of due

process.

ARGUMENT

A. In 2010, HHSC-OIG Imposed “Administrative Sanctions” Upon
Appellant.

As reflected in the record, on October 13, 2010, HHSC-OIG declared that

“[a]fter summarizing the audit exceptions and extrapolating to the population (the

error rate and amounts) the Office of the Inspector General determined that the

Vendor owes the State of Texas $900.916.96.” (Clerk’s Record at page 40). In its

letter, HHSC-OIG (1) demanded payment in the amount of $900,916.96 within

thirty days and (2) indicated that a hold would be placed on the Appellant’s claims

if payment was not received by the due date or a payment plan could not be agreed

upon. (Clerk’s Record at pages 57-58). In other words, by this letter, HHSC-OIG

was seeking recoupment of $900,916.96 in alleged overpayments and instituting a

payment hold on future payments to the Pharmacy.

The regulations in effect at the time defined such a demand for payment and

utilization of a hold on payment as “administrative sanctions” subject to an

entitlement to due process.

Specifically, the demand for payment of $900,916.96 and hold on future

payments constituted a “recoupment of overpayment.” See 1 TEX. ADMIN. CODE §

4
371.1601(45) (eff. 1/9/2005) (emphasis added) (defining a “recoupment of

overpayment” as a “sanction imposed to recover funds paid to the provider or

person to which they were not entitled” and describing the recoupment as either

being taken in a lump sum, monthly payments or a reduction of payments to the

provider, in full or in part).

The regulations further provided that a recoupment of overpayments,

including a “recoupment of overpayments projected from a sampling process” (as

was performed in this case), are “administrative sanctions.” See 1 TEX. ADMIN.

CODE § 371.1643(c) (eff. 1/9/2005).

B. In 2010, the Imposition of Administrative Sanctions Triggered Due
Process Rights Including an Opportunity for a “Formal Appeal
Hearing.”

HHSC’s regulations in effect in 2010 recognized the seriousness of the

power given to HHSC-OIG to impose sanctions on a provider. As a result, the

same regulations which granted HHSC-OIG such power also required that the

provider be afforded due process notice and hearing requirements.

(2)Sanctions – Sanctions may directly impact a person's ability to keep or
receive payments and/or the person's participation in the Medicaid program;
e.g., exclusion from program participation, recoupment of overpayments,
or payment hold. Imposition of sanctions triggers due process notice
and hearing requirements.

1 TEX. ADMIN. CODE § 371.1603(j)(2) (eff. 1/9/2005) (emphasis added).

5
 The Inspector General affords, to any provider1 or person against
whom it imposes sanctions, all administrative and judicial due process
remedies applicable to administrative sanctions.

1 TEX. ADMIN. CODE § 371.1667(a) (eff. 1/9/2005) (emphasis added). Upon the

Inspector General’s final determination of a sanction against a provider, such as a

pharmacy, the Inspector General must provide written notice to the provider of its

right to a formal appeal hearing. 1 TEX. ADMIN. CODE § 371.1647(c) and (d)(5)

(eff. 1/9/2005).

“The provider . . . may choose to request an informal review, a formal

appeal hearing, or both.” 1 TEX. ADMIN. CODE § 371.1667(b) (eff. 1/9/2005).2

This “formal appeal hearing” clearly sets forth the type of “contested case” subject

to the procedural requirements of the Administrative Procedures Act. TEX. GOV’T

CODE § 2001.003(1). Moreover, the resolution of such a contested case would

afford the provider an opportunity for judicial review. TEX. GOV’T CODE

§2001.171.3

1
Pharmacies in the Vendor Drug Program meet the definition of “providers” under
Subchapter G. 1 TEX. ADMIN. CODE § 371.1601(41) (eff. 1/9/2005) (defining “provider” as
including person providing services to an HHS agency); 1 TEX. ADMIN. CODE § 371.1601(18)
(eff. 1/9/2005) (defining “HHS” as including the Commission and any other program or division
under the Commission’s umbrella).
2
Upon receiving a provider’s notice of appeal, the Inspector General must then “forward
the notice of appeal to the Commission’s Office of General Counsel for docketing.” 1 TEX.
ADMIN. CODE § 371.1669(a) (eff. 1/9/2005).
3
This amicus brief focuses on the regulations in effect at the time that HHSC-OIG issued
its administrative sanction against Appellant. The regulations in effect today likewise provide

6
C. A Right to Formal Appeal Hearing Does Not Require an Allegation of
Fraud.

The right to appeal an administrative sanction is not dependent on an

allegation of fraud. See 1 TEX. ADMIN. CODE § 371.1601(33) (eff. 1/9/2005) (“Any

funds received greater than that to which the provider is entitled, whether obtained

through error, misunderstanding, abuse, or fraud is considered to be an

overpayment”); see also 1 TEX. ADMIN. CODE § 371.1603(f) (eff. 1/9/2005) (“Not

all actions resulting in overpayment to a provider are necessarily fraudulent.”); 1

TEX. ADMIN. CODE § 371.1613 (eff. 1/9/2005) (“Unintentional program violations

are subject to administrative actions and sanctions.”). Most program violations

which result in an allegation of overpayment do not result in the pharmacy

provider receiving more compensation than was otherwise due. For example, often

HHSC-OIG makes a claim for overpayment as a result of a prescription not being

dated, a telephonic refill not being noted on the original prescription, or a quantity

not being written on the prescription in both word and numeric form (i.e., “thirty

(30) tablets”). Each of these types of alleged errors do not result in the patient

receiving more medicine than he or she should have or the pharmacy being paid

more than it should have. However, HHSC-OIG still claims each to be an

“overpayment.”

for due process through notice and a formal hearing. See 1 TEX. ADMIN. CODE § 371.1719(d)(4)
and its predecessor 1 TEX. ADMIN. CODE § 371.1709(h) (eff. 4/10/11).

7
 Therefore, it is not sufficient to claim that only those charged with fraud

may obtain an informal appeal hearing.

CONCLUSION

For the foregoing reasons, Amicus American Pharmacies respectfully

requests that the Court receive this brief and consider the arguments raised herein.

Respectfully submitted,

TAYLOR DUNHAM AND RODRIGUEZ, LLP
301 Congress Avenue, Suite 1050
Austin, Texas 78701
Telephone: (512) 473-2257
Telecopier: (512) 478-4409

By: /s/ Miguel S. Rodriguez
Miguel S. Rodriguez
State Bar No. 24007938
mrodriguez@taylordunham.com

ATTORNEYS FOR SOUTHWEST
PHARMACY SOLUTIONS, INC. d/b/a
AMERICAN PHARMACIES

8
 CERTIFICATE OF COMPLIANCE

In compliance with T.R.A.P. 9.4(i)(2), this brief contains 1,602 words,
excluding the portions of the brief exempted by Rule 9.4(i)(l).

/s/ Miguel S. Rodriguez
Miguel S. Rodriguez

CERTIFICATE OF SERVICE

This is to certify that a copy of the foregoing document was served on all
counsel of record by delivering a true and correct copy via electronic service and
U.S. First Class Mail on this the 12th day of January, 2015, as follows:

Jeff Avant Ann Hartley
Avant & Mitchell, L.P. Assistant Attorney General of the
700 Lavaca, Suite 1400 Financial,
Austin, Texas 78701 Tax and Litigation Section or the Texas
(512) 478-5757 Telephone Office of the Attorney
(512) 478-5404 Facsimile General
avantlaw@swbell.net P.O. Box 12548
Austin, Texas 78711-2548
and (512) 936-1313 Telephone
(512) 477-2348 Facsimile
Hugh Barton ann.hartley@texasattorneygeneral.gov
Hugh M. Barton, P.C.
603 West 13th St., Ste 1B Attorneys for Appellees
Austin, Texas 78701
(512) 499-0793 Telephone
(512) 727-6717 Facsimile
bartonlaw@yahoo.com

Attorneys for Appellant

/s/ Miguel S. Rodriguez
Miguel S. Rodriguez

9
 APPENDIX

Tab 1 1 TEX. ADMIN. CODE § 371.1601 (eff. 1/9/2005)

Tab 2 1 TEX. ADMIN. CODE § 371.1603 (eff. 1/9/2005)

Tab 3 1 TEX. ADMIN. CODE § 371.1613 (eff. 1/9/2005)

Tab 4 1 TEX. ADMIN. CODE § 371.1643 (eff. 1/9/2005)

Tab 5 1 TEX. ADMIN. CODE § 371.1647 (eff. 1/9/2005)

Tab 6 1 TEX. ADMIN. CODE § 371.1667 (eff. 1/9/2005)

Tab 7 1 TEX. ADMIN. CODE § 371.1669 (eff. 1/9/2005)

10
 APPENDIX

Tab 1

1 TEX. ADMIN. CODE § 371.1601 (eff. 1/9/2005)
1/9/2015 Texas Administrative Code

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