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United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued December 12, 2003 Decided April 2, 2004
No. 03-5117
PHARMACEUTICAL RESEARCH AND MANUFACTURERS OF AMERICA,
APPELLEE
NATIONAL URBAN INDIAN COALITION AND
NATIONAL ALLIANCE FOR THE MENTALLY ILL OF MICHIGAN,
APPELLANTS
v.
TOMMY G. THOMPSON, IN HIS OFFICIAL CAPACITY AS
SECRETARY, UNITED STATES DEPARTMENT OF HEALTH AND
HUMAN SERVICES, ET AL.,
APPELLEES
Consolidated with
03–5118
Appeals from the United States District Court
for the District of Columbia
(No. 02cv01306)
–————
Bills of costs must be filed within 14 days after entry of judgment.
The court looks with disfavor upon motions to file bills of costs out
of time.
2
Jonathan S. Franklin argued the cause for the appellants.
Darrel J. Grinstead and H. Christopher Bartolomucci were
on brief.
Bert W. Rein, Michael L. Sturm, Eve Klindera Reed and
Dineen Pashoukos Wasylik were on brief for appellants
National Urban Indian Coalition and National Alliance for the
Mentally Ill of Michigan.
Daniel J. Popeo and Richard A. Samp were on brief for
amici curiae Washington Legal Foundation et al.
Alisa B. Klein, Attorney, United States Department of
Justice, argued the cause for the appellees. Peter D. Keisler,
Assistant Attorney General, Roscoe C. Howard, Jr., United
States Attorney, and Mark B. Stern, Attorney, United States
Department of Justice, were on brief.
Michael A. Cox, Attorney General, State of Michigan,
Thomas Case, Solicitor General, State of Michigan, Charles J.
Cooper, Hamish P. M. Hume, Gordon D. Todd, Derek L.
Shaffer and Elisebeth C. Cook were on brief for Michigan
Department of Community Health.
Bruce Vignery, Dorothy Siemon, Sarah Lock and Michael
R. Schuster were on brief for amicus curiae American Asso-
ciation of Retired Persons.
Before: HENDERSON and ROGERS, Circuit Judges, and
WILLIAMS, Senior Circuit Judge.
Opinion filed for the court by Circuit Judge HENDERSON.
KAREN LECRAFT HENDERSON, Circuit Judge: The appellants,
the Pharmaceutical Research and Manufacturers of America
(PhRMA) and two non-profit organizations, the National Alli-
ance for the Mentally Ill of Michigan (NAMI) and the Nation-
al Urban Indian Coalition (NUIC) (referred to jointly as
Non–Profits),1 appeal the district court’s summary judgment
1 The district court held that NAMI lacked standing to pursue
this action. 259 F. Supp. 2d at 52. We need not resolve NAMI’s
3
rejecting their challenge to the ‘‘Michigan Best Practices
Initiative’’ (Initiative), a low-cost state prescription drug cov-
erage program—for beneficiaries of Medicaid and of two non-
Medicaid state health programs—which was designed by the
State of Michigan and approved by the Secretary of the
United States Department of Health and Human Services
(Secretary, HHS). Under the Initiative, if a drug manufac-
turer does not sign each of two specified rebate agreements
with Michigan—one to provide rebates for drugs the state
purchases for Medicaid recipients and the other to provide
identical rebates for drugs the state purchases for the two
non-Medicaid state health programs—the drug will be cov-
ered under the programs subject to ‘‘prior authorization.’’
The appellants argue, as they did below, that the Initiative
violates (1) the ‘‘formulary’’2 provision of the Medicaid outpa-
tient drug payment statute, 42 U.S.C. § 1396r–8(d)(4), be-
cause it excludes from its drug formulary those drugs for
which prior authorization is required; (2) the general statuto-
ry mandate that Medicaid services be provided in a manner
consistent with the best interests of the recipients, 42
U.S.C.A. § 1396a(a)(19); and (3) the Commerce Clause of the
United States Constitution because it requires manufacturers
to charge the same prices both within and without Michigan.
Because the district court correctly rejected each of these
arguments, we affirm the summary judgment.3
appeal of this ruling because both PhRMA and NUIC have standing
and NUIC raises the same arguments on appeal as NAMI. See
Central Fla. Enters. v. FCC, 683 F.2d 503, 505 n.3 (D.C. Cir. 1982)
(‘‘[W]e need not resolve the issue of [appellant organization’s]
standing since it raises no issues not raised by [broadcaster appel-
lant] that would affect the disposition of the appeal, making irrele-
vant whether we view their submissions as those of parties or of
amici.’’)
2 ‘‘Webster’s New Collegiate Dictionary (1994) defines a ‘formu-
lary’ as ‘a book listing medicinal substances and formulas.’ ’’
PhRMA v. Meadows, 304 F.3d 1197, 1202 (11th Cir. 2002), cert.
denied, 123 S. Ct. 2213 (2003).
3 Michigan argues that the appellants have no private right of
action for injunctive relief against the state based on Justices
4
I.
The Medicaid program, jointly funded by the federal gov-
ernment and the states, pays for medical services to low-
income persons pursuant to state plans approved by the
Secretary. See 42 U.S.C. § 1396a(a)-(b). The statutory re-
bate provisions require that, in order for a state to receive
Medicaid payments for a covered outpatient drug, the drug’s
manufacturer must have entered into an agreement to rebate
a specified portion of the drug’s price pursuant to a state plan
approved by the Secretary. 42 U.S.C. § 1396r–8(a)(1). In
recent years, some states have gone beyond the required
Medicaid rebate agreement and ‘‘have enacted supplemental
rebate programs to achieve additional cost savings on Medic-
aid purchases as well as for purchases made by other needy
citizens.’’ PhRMA v. Walsh, 123 S. Ct. 1855, 1860 (2003).
The Initiative is one such supplemental program.
The Initiative began in October 2001 when Michigan’s
governor convened the Pharmacy & Therapeutics Committee
(Committee), made up of physicians and pharmacists, with
instructions to review the ‘‘Michigan Pharmaceutical Product
Scalia’s and Thomas’s separate opinions in PhRMA v. Walsh, 123 S.
Ct. 1855 (2003). See 123 S. Ct. at 1878 (Scalia, J., concurring in
judgment) (‘‘[T]he remedy for the State’s failure to comply with the
obligations it has agreed to undertake under the Medicaid Act is set
forth in the Act itself: termination of funding by the Secretary of
the Department of Health and Human Services.’’ (citing Blessing v.
Freestone, 520 U.S. 329, 349 (1997); Pennhurst State Sch. & Hosp.
v. Halderman, 451 U.S. 1, 17 (1981); 42 U.S.C. § 1396c); id. at
1878 (Thomas, J., concurring in the judgment) (because ‘‘Spending
Clause legislation ‘is much in the nature of a contract,’ ’’ there are
‘‘serious questions as to whether third parties may sue to enforce
Spending Clause legislation—through pre-emption or otherwise’’)
(quoting Pennhurst, 451 U.S. at 17; citing Blessing v. Freestone,
520 U.S. 329, 349–350 (1997)). By addressing the merits of the
parties’ arguments without mention of any jurisdictional flaw, the
remaining seven Justices appear to have sub silentio found no flaw.
See Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 94–102
(1998) (federal courts must ensure they have jurisdiction before
considering merits).
5
List’’ (MPPL), a listing of all drugs covered by any program
operated by Michigan’s Department of Community Health
(DCH), including those requiring prior authorization. The
Committee studied 40 therapeutic drug classes and in each
class designated two or more as ‘‘Therapeutically Advanta-
geous,’’ that is, as having a clinical advantage over other
drugs in the class without regard to cost. Declaration of
David Viele, Deputy Director of DCH (Viele Decl.) ¶ ¶ 15–17.
These ‘‘best in class’’ drugs were designated as ‘‘Preferred
Drugs’’ and were included on the MPPL for automatic reim-
bursement under the Initiative. The best-in-class drug avail-
able at the lowest cost anywhere in the United States (taking
into account the mandatory Medicaid rebate) was designated
as the ‘‘reference drug’’ and all drugs in the class priced
comparably with it were also listed on the MPPL as Pre-
ferred Drugs for automatic reimbursement. Id. ¶ ¶ 20–21.
All remaining drugs were labeled ‘‘non-preferred drugs’’ and
were listed on the MPPL with an asterisk signifying required
prior authorization for reimbursement—unless the manufac-
turer signed both a ‘‘Supplemental Drug–Rebate Agreement’’
(Medicaid Agreement) requiring the manufacturer to rebate
to the state the difference between the price of the drug and
the price of the reference drug for Medicaid purchases and a
‘‘Non–Medicaid State Funded Rebate Agreement’’ (Non–
Medicaid Agreement), extending the additional rebate to
Michigan’s non-Medicaid state prescription drug programs.
Id. ¶ ¶ 22, 24–25, 29.
In Fall 2001 DCH submitted to the Secretary a proposed
State Plan Amendment to Michigan’s State Medicaid Plan
incorporating the Initiative’s provisions for approval pursuant
to 42 U.S.C. § 1396. The Secretary approved use of the
Medicaid Agreement in a letter dated January 24, 2002 and of
the additional Non–Medicaid Agreement in a letter dated
December 5, 2002 (Non–Medicaid Approval Letter). The
Secretary limited approval of the non-Medicaid rebate pro-
gram, however, to only two of the four Michigan health
programs for which it was proposed: the Elder Prescription
Insurance Company Program (EPIC), which provides pre-
scription drug coverage to low-income seniors, and the Mater-
6
nity Outpatient Medical Service (MOMS), which provides pre-
natal care, including drug coverage, to low-income, adolescent
and incarcerated females and to Medicaid beneficiaries eligi-
ble for emergency services only.
On June 28, 2002 PhRMA filed this action challenging the
Secretary’s approval of the prior authorization provisions in
both the Medicaid Agreement and the Non–Medicaid Agree-
ment. DCH intervened on the side of the Secretary and the
Non–Profits intervened in support of PhRMA. In a decision
dated March 28, 2003 the district court granted summary
judgment in favor of the Secretary and DCH. PhRMA and
the Non–Profits filed timely appeals.
After the district court entered judgment, the United
States Supreme Court issued its decision in PhRMA v.
Walsh, 123 S. Ct. 1855, 1860 (2003), which affirmed the First
Circuit’s vacatur of a preliminary injunction preventing imple-
mentation of Maine’s Medicaid-covered outpatient drug pro-
gram which, like Michigan’s, requires prior authorization for a
Medicaid drug if its manufacturer has not agreed to provide
rebates both for Medicaid and for non-Medicaid state pre-
scription drug programs.4 In Walsh the Supreme Court
expressly rejected PhRMA’s challenges to Maine’s program
based on Medicaid’s ‘‘best interests’’ requirement, albeit with-
out a majority opinion, and, by a majority, on the Commerce
Clause. The analyses in Walsh enlighten ours here.
II.
We review the district court’s grant of summary judgment
de novo pursuant to the Administrative Procedure Act and
therefore will uphold the Secretary’s decision unless it is
‘‘arbitrary, capricious, an abuse of discretion, or otherwise not
in accordance with law,’’ 5 U.S.C. § 706(2)(A). See Arizona v.
Thompson, 281 F.3d 248, 253 (D.C. Cir. 2002) (citing Indep.
Petroleum Ass’n of Am. v. DeWitt, 279 F.3d 1036 (D.C. Cir.
4 Unlike Michigan’s non-Medicaid programs, Maine’s was open to
all state residents and the drugs were purchased by the program’s
members rather than by the state. 23 S. Ct. at 1860.
7
2002); Dr. Pepper/Seven-Up Cos. v. FTC, 991 F.2d 859, 862
(D.C. Cir. 1993)). There is some question, however, what
level of deference the court should accord the Secretary’s
interpretation of the Medicaid drug payment statute. Ordi-
narily we review an agency’s interpretation of a statute it is
charged with implementing under the familiar and deferential
two-part framework of Chevron U.S.A. Inc. v. Natural Re-
sources Defense Council, Inc., 467 U.S. 837 (1984). The
appellants assert, however, that the Secretary’s decisions
approving the Initiative are due only minimal deference, if
any, under a line of Supreme Court decisions beginning with
Skidmore v. Swift & Co., 323 U.S. 134 (1944), and culminating
in United States v. Mead, 533 U.S. 218 (2001). Cf. PhRMA v.
Thompson, 251 F.3d 219, 224 (D.C. Cir. 2001) (finding it
unnecessary to decide whether Secretary’s approval of Ver-
mont Medicaid plan is entitled to Chevron deference). We
disagree and conclude the Secretary’s decisions are entitled
to Chevron deference. Accord Texas v. HHS, 61 F.3d 438,
440 (5th Cir. 1995); Georgia v. Shalala, 8 F.3d 565, 1573 (11th
Cir. 1993).
The appellants contend that the Secretary’s decisions do
not qualify for Chevron deference because they do not carry
the force of law. In particular, the appellants assert the
Secretary’s statutory interpretations here are not the result
of a formal administrative process, do not involve agency
expertise, are inconsistent with previous HHS interpretations
and were developed solely in response to this lawsuit. Thus,
the appellants argue, the Secretary’s interpretations are akin
to ‘‘ ‘interpretations contained in policy statements, agency
manuals, and enforcement guidelines,’ ’’ which are ‘‘beyond
the Chevron pale.’’ Mead, 533 U.S. at 234 (quoting Christen-
sen v. Harris County, 529 U.S. 576, 587 (2000)). This argu-
ment overlooks the nature of the Secretary’s authority. This
is not a case of implicit delegation of authority through the
grant of general implementation authority. In the case of the
Medicaid payment statute, the Congress expressly conferred
on the Secretary authority to review and approve state
Medicaid plans as a condition to disbursing federal Medicaid
payments. See 42 U.S.C. § 1396 (‘‘The sums made available
8
under this section shall be used for making payments to
States which have submitted, and had approved by the Secre-
tary, State plans for medical assistance.’’). In carrying out
this duty, the Secretary is charged with ensuring that each
state plan complies with a vast network of specific statutory
requirements, see generally 42 U.S.C. 1396a, including the
prescription rebate agreement provision in section 1396r–8.
Through this ‘‘express delegation of specific interpretive au-
thority,’’ Mead, 533 U.S. at 229, the Congress manifested its
intent that the Secretary’s determinations, based on interpre-
tation of the relevant statutory provisions, should have the
force of law. The Secretary’s interpretations of the Medicaid
Act are therefore entitled to Chevron deference. See Mead,
533 U.S. at 227 (‘‘When Congress has ‘explicitly left a gap for
an agency to fill, there is an express delegation of authority to
the agency to elucidate a specific provision of the statute by
regulation,’ and any ensuing regulation is binding in the
courts unless procedurally defective, arbitrary or capricious in
substance, or manifestly contrary to the statute.’’ (quoting
Chevron, 837 U.S. at 843–44)).5 Accordingly, we now review
the appellants’ substantive challenges under Chevron.
5 Nonetheless, we note that, while ‘‘the overwhelming number of
TTT cases applying Chevron deference have reviewed the fruits of
notice-and-comment rulemaking or formal adjudication,’’ Chevron
deference may be warranted ‘‘even when no such administrative
formality was required and none was afforded.’’ Mead, 533 U.S. at
230–31 (citing NationsBank of N.C., N.A. v. Variable Annuity Life
Ins. Co., 513 U.S. 251, 256–57, 263 (1995)). Further, the Secretary’s
approval decisions are of a different order from the customs classifi-
cations at issue in Mead. The Mead Court observed that 49
different customs offices issued 10,000 to 15,000 customs classifica-
tions each year, that ‘‘their treatment by the agency makes it clear
that a letter’s binding character as a ruling stops short of third
parties’’ and that the agency ‘‘in fact warned against assuming any
right of detrimental reliance.’’ Mead, 533 U.S. at 233 (citing 19
C.F.R. § 177.9(c) (2000)). In contrast, HHS considers state Medic-
aid plans for the fifty states and the District of Columbia and has
promulgated a uniform prior authorization policy for them. See
9/18/2002 HHS Letter to State Medicaid Directors at 2.
9
A. The Statutory Formulary Provision
First, the appellants assert the Initiative’s prior authoriza-
tion requirement violates section 1396r–8(d)(4), which governs
formularies. We conclude the Secretary’s approval of the
Initiative’s prior authorization requirement rests on a permis-
sible construction of the statute under Chevron.
The Medicaid rebate provisions, enacted in 1990, expressly
authorize a state ‘‘to subject to prior authorization any cov-
ered outpatient drug’’ so long as the state ‘‘provides response
by telephone or other telecommunication device within 24
hours of a request for prior authorization’’ and ‘‘provides for
the dispensing of at least 72–hour supply of a covered outpa-
tient prescription drug in an emergency situation.’’ 42 U.S.C.
§ 1396r–8(d)(1)(A), (5(A)-(B)).6 In 1993 the Congress added
the formulary provision which authorizes a state to create a
drug ‘‘formulary’’ of covered drugs that is ‘‘developed by a
committee consisting of physicians, pharmacists, and other
appropriate individuals appointed by the Governor of the
State.’’ Id. § 1396r–8(d)(4)(A). The provision further directs
that each formulary must ‘‘include[ ] the covered outpatient
drugs of any manufacturer which has entered into and com-
plies with a [rebate] agreement under [section 1396r–8(a)]’’
and permits ‘‘[a] covered outpatient drug [to] be excluded
with respect to the treatment of a specific disease or condition
for an identified population (if any) only if TTT the excluded
drug does not have a significant, clinically meaningful thera-
peutic advantage in terms of safety, effectiveness, or clinical
outcome of such treatment for such population over other
drugs included in the formulary and there is a written
explanation (available to the public) of the basis for the
exclusion.’’ 42 U.S.C. § 1396r–8(d)(4)(B)-(C). In addition,
the state is required to ‘‘permit[ ] coverage of a drug excluded
from the formulary TTT pursuant to a prior authorization
program that is consistent with [section 1396r–8(d)(5)].’’ Id.
§ 1396r–8(d)(4)(D).
6 The appellants do not dispute that the Initiative complies with
the two statutory requirements. See Viele Decl. ¶ ¶ 47–48.
10
The appellants contend that the Initiative’s prior authoriza-
tion requirement violates the formulary provision because it
excludes the asterisked drugs7 from the MPPL based on their
price rather than their therapeutic value and because the
Secretary has not provided the requisite written explanation
for the exclusion. The Secretary does not dispute that the
MPPL is a formulary, see Fed. Appellees’ Br. at 28, but,
relying on the Supreme Court’s opinion in Walsh, asserts that
the Initiative’s prior authorization program was implemented
pursuant to the general prior authorization authority con-
ferred by section 1396r–8(d)(1)(A) and is expressly exempted
from the formulary restrictions in section 1396r–8(d)(4)(B)-(C)
by the final sentence of section 1396r–8(d)(4): ‘‘A prior au-
thorization program established under [section 1396r–8(d)(5)]
is not a formulary subject to the requirements of [section
1396r–8(d)(4)].’’8 The appellants respond that the Secretary’s
construction permits a state to gut the restriction on formu-
lary exclusion in section 1396r–8(d)(4)(C) by simply attaching
the label ‘‘prior authorization program’’ to what is really a
formulary drug exclusion. They point out that, under the
Secretary’s interpretation, the formulary provision serves no
purpose because its end result—drug availability restricted
by prior authorization—can be more easily achieved, that is,
without running the gauntlet of subsection 396r–8(d)(4)(C), if
a state simply invokes prior authorization authority up front
under section (d)(1)(A).
Under the Chevron framework, ‘‘[i]f TTT ‘Congress has
directly spoken to the precise question at issue,’ we must give
effect to Congress’s ‘unambiguously expressed intent’ ’’ but
‘‘[i]f ‘the statute is silent or ambiguous with respect to the
specific issue,’ we ask whether the agency’s position rests on
a ‘permissible construction of the statute.’ ’’ Beverly Health
7 As noted above, supra p. 5, drugs subject to prior authorization
are marked with asterisks on the MPPL.
8The appellants assert that on appeal the Secretary relies on the
Walsh decision to the exclusion of ‘‘any other defense.’’ PhRMA
Reply Br. at 4 n.1; see also id. at 12. The Secretary’s argument, as
we read it, is that Walsh confirms his position below.
11
& Rehab. Servs. v. Nat’l Labor Relations Bd., 317 F.3d 316,
321 (D.C. Cir. 2003) (quoting Chevron, 467 U.S. at 842–43)
(additional quotations omitted). Applying this standard we
conclude that the Secretary’s position, at least as applied to
the circumstances here, reflects a permissible construction of
the statutory provisions under Chevron.
We acknowledge that there is tension, if not actual inconsis-
tency, between the broad prior authorization power granted
under subsection (d)(1)(A), buttressed by the final exempting
sentence of subsection (d)(4), and the apparent intent of the
formulary provision to broaden drug availability. The appel-
lants are correct that under the Secretary’s construction the
formulary provision simply gives the states an alternate, and
more cumbersome, means of subjecting drugs to prior author-
ization. Nonetheless, the tension is a necessary consequence
of the language the Congress drafted. The Secretary’s con-
struction permits all of the language to be given its plain
meaning, albeit with a somewhat anomalous result. The
appellants’ construction, on the other hand, would require a
crabbed reading of subsection (d)(1)(A) and of the final sen-
tence of subsection (d)(4) and yet would not produce a coher-
ent statutory scheme. Given these choices—neither entirely
satisfactory—we believe the Secretary reasonably chose an
interpretation consistent with the literal meaning of the statu-
tory language. We note the Eleventh Circuit approved the
same construction in PhRMA v. Meadows, 304 F.3d 1197
(11th Cir. 2002), cert. denied, 123 S. Ct. 2213 (2003).9
9 The Eleventh Circuit, however, decided the issue under step one
of Chevron, concluding that there is no inconsistency given the
‘‘unequivocal’’ language of section (d)(1)(A), granting broad prior
authorization authority (expressly set out as an alternative to
restricting coverage through a formulary), and of the final sentence
of section (d)(4), exempting section (d)(1)(A) programs from the
formulary restrictions. PhRMA v. Meadows, 304 F.3d at 1210–11.
The Secretary’s construction is also consistent with the various
opinions in Walsh which, in addressing the parties’ ‘‘best interests’’
arguments, appear to assume, without expressly deciding, that it is
permissible for a state to subject drugs in a formulary to prior
authorization, although the opinions differ as to the circumstances
12
B. The Best Interests of Medicaid Recipients
Next, the appellants argue, as in Walsh, that the Medicaid
Agreement violates the general statutory requirement that a
state Medicaid plan ‘‘provide such safeguards as may be
necessary to assure that eligibility for care and services under
the plan will be determined, and such care and services will
be provided, in a manner consistent with simplicity of admin-
istration and the best interests of the recipients.’’ 42 U.S.C.A.
§ 1396a(a)(19) (emphasis added). Specifically, they argue
that, by making a drug available to Medicaid beneficiaries
without prior authorization only if the drug’s manufacturer
has signed the Non–Medicaid Agreement, the Initiative bene-
fits EPIC and MOMS participants at the expense of Medicaid
beneficiaries and therefore is not in the best interests of
Medicaid recipients. We reject this argument as well.
We first consider whether the Secretary’s interpretation of
section 1396a(a)(19) is permissible under Chevron and find
that it is. The Secretary construes the best interests require-
ment to allow a state to establish a Medicaid prior authoriza-
tion program in order to secure rebates on drugs for non-
Medicaid populations if ‘‘a state demonstrates ‘through appro-
priate evidence that the prior authorization program will
further the goals and objectives of the Medicaid program.’ ’’
Fed. Appellant’s Br. at 29 (quoting 9/18/2002 HHS Letter to
State Medicaid Directors at 3). Specifically, the Secretary
concluded that ‘‘by making prescription drugs accessible to
the EPIC and MOMS populations, which are closely related
to Medicaid populations in terms of financial and medical
need, it is reasonable to conclude that these populations (and
in the case of the MOMS program, their children) will main-
tain or improve their health status and be less likely to
become Medicaid eligible.’’ Non–Medicaid Apporval Letter
under which prior authorization may be imposed. This construction
is also consistent with the Walsh Court’s construction of the final
sentence of section 1396r–8(d)(4), albeit in dictum, to mean that ‘‘a
prior authorization program that complies with the 24–hour and 72–
hour conditions is not subject to the limitations imposed on formu-
laries.’’ Walsh, 123 S. Ct. at 1862 (citing 42 U.S.C. § 1396r–8(d)(4)).
13
at 2. Conversely, in the Secretary’s view, the failure to
implement the Non–Medicaid Agreement could require cuts
in the two non-Medicaid programs that ‘‘will necessarily
result in some individuals enrolling in Medicaid, and for
others, lead to a decline in their health status and resources
that will result in Medicaid eligibility or increased Medicaid
expenses’’ and the ‘‘[i]ncreased Medicaid enrollments and
expenditures for newly qualified Medicaid recipients will
strain already scarce Medicaid resources in a time of State
budgetary shortfalls.’’ Id. at 3. The Secretary’s conclusion
that a prior authorization program that serves Medicaid goals
in this way can be consistent with Medicaid recipients’ best
interests, as required by section 1396a(a)(19), is reasonable on
its face. If the prior authorization program prevents border-
line populations in Non–Medicaid programs from being dis-
placed into a state’s Medicaid program, more resources will
be available for existing Medicaid beneficiaries. Six Justices
in Walsh acknowledged that such an effect can be in the best
interests of Medicaid beneficiaries.10 The plurality decision
there, authored by Justice Stevens and joined by Justices
Souter and Ginsburg, relied on precisely this reasoning in
determining that Maine’s program served the best interests
of Medicaid recipients, see 123 S. Ct. at 1867–68 (‘‘[T]here is
the possibility that, by enabling some borderline aged and
infirm persons better access to prescription drugs earlier,
Medicaid expenses will be reduced. If members of this
borderline group are not able to purchase necessary prescrip-
tion medicine, their conditions may worsen, causing further
financial hardship and thus making it more likely that they
will end up in the Medicaid program and require more
expensive treatment.’’). In her separate opinion, Justice
O’Connor, joined by Chief Justice Rehnquist and Justice
Kennedy, also suggested that this rationale, although ‘‘not
self-evident,’’ would suffice if supported by facts in the record.
1123 S. Ct. at 1881.
Having concluded the Secretary’s statutory interpretation
is permissible, we must next consider whether his specific
10These Justices did not invoke Chevron deference, presumably
because the Secretary had not reviewed Maine’s program and
participated in the case only as amicus curiae.
14
determination that the Initiative serves valid Medicaid goals
is ‘‘arbitrary, capricious, an abuse of discretion, or otherwise
not in accordance with law,’’ 5 U.S.C. § 706(2)(A). We con-
clude that it is not. The two Michigan Non–Medicaid pro-
grams, unlike Maine’s program (or the two other Michigan
programs for which the Secretary declined to approve a
Medicaid prior authorization requirement, see Letter from
Medicaid Administrator Scully to DCH Director Olszewski),
are open only to ‘‘borderline’’ populations many of whom may
become Medicaid beneficiaries without the support of EPIC
and MOMS. See Walsh, 123 S. Ct. at 1878 (O’Connor, J.)
(rejecting plurality rationale in part because Maine Program
was ‘‘open to all Maine residents, rich and poor,’’ did ‘‘not
purport to further a Medicaid-related purpose’’ and was ‘‘not
tailored to have such an effect’’).11 The EPIC program
provides prescription drug benefits to seniors age 65 and
older with household income levels below 200% of the federal
poverty level. Michigan estimated that 3% of its beneficiaries
(the figure used in similar calculations by the neighboring
states of Indiana and Wisconsin), or 3,000 persons, would
convert to Medicaid without the EPIC program. Based on
an average monthly cost per member of $1,220, Michigan
calculated that EPIC saves the state Medicaid program
$44,147,760 per year. For the MOMS program, which pro-
vides prenatal care for women below 185% of the federal
poverty level, adolescents under 18, persons eligible under
Medicaid for emergency services only and incarcerated bene-
ficiaries, Michigan focused on newborns who would be at risk
for neonatal intensive care in the absence of prenatal care.
Based on state birth data, Michigan estimated that 3.2% of
babies born to the 5,287 MOMS beneficiaries who will not
become Medicaid-eligible, or 169 newborns, would require
neonatal intensive care in the absence of MOMS prenatal
11 We note that our arbitrary-and-capricious standard favors the
Secretary’s finding of benefit, while in Walsh the preliminary
injunction abuse-of-discretion standard, as Justice O’Connor noted,
favored affirming the district court’s granting of the injunction.
See 123 S. Ct. at 1881 (citing Doran v. Salem Inn, Inc., 422 U.S.
922, 931–32 (1975)).
15
care. Then, based on the average annual cost for neonatal
intensive care of $27,461 per infant, Michigan estimated
MOMS saved Medicaid $4,646,002 per year. While the rec-
ord support for Michigan’s estimates is less than overwhelm-
ing, it is sufficient to persuade us the Secretary’s determina-
tion of Medicaid-related benefit is not arbitrary, particularly
given the absence of any demonstrable significant impediment
to Medicaid services from Michigan’s prior authorization re-
quirement. See 123 S. Ct. at 1868 (plurality concluding that
prior authorization program must not ‘‘severely curtail[ ]
Medicaid recipients’ access to prescription drugs’’); id. at
1881 (O’Connor, J.) (noting ‘‘concrete evidence of the burdens
that Maine Rx’s prior-authorization requirement would im-
pose on Medicaid beneficiaries’’).
The undisputed evidence establishes that the Initiative’s
prior authorization procedure affords Medicaid beneficiaries
reasonable and prompt access to those drugs subject to prior
authorization. Under the Initiative, DCH’s pharmacy bene-
fits manager immediately authorizes a prior authorization
drug if (1) the drug is needed ‘‘due to a specific medical
condition or necessity, such as a drug allergy’’; (2) the
beneficiary has used the drug for several months and chang-
ing drugs is ‘‘medically inadvisable’’; (3) the beneficiary has
tried available drugs in the class and experienced ‘‘treatment
failure or side effects’’; or (4) the drug works better in
combination with other medications the beneficiary uses.
Viele Decl. ¶ 46. If the drug fits none of these categories, the
request is ‘‘immediately forwarded’’ to a pharmacist who
‘‘after further conversation with the physician’’ either author-
izes the drug or ‘‘informs the physician of his right to appeal
to a DCH physician.’’ Id. ¶ 47. If the request is not ‘‘imme-
diately resolved with a DCH physician,’’ the treating physi-
cian may prescribe an emergency 72–hour supply. Id. ¶ 48.
Perhaps most important, at the end of the prior authorization
process, ‘‘the prescribing physician has the final say as to
whether or not the requested drug will be approved’’ provided
he can ‘‘attest to medical necessity.’’ Id. ¶ 49. And the
available data confirm that in practice the prior authorization
16
requirement has proved neither burdensome nor overly time-
consuming.12
C. Commerce Clause
Finally, PhRMA contends the Initiative violates the Com-
merce Clause because it ‘‘has the ‘practical effect’ of control-
ling out-of-state prices.’’ PhRMA Opening Br. at 54 (quoting
Healy v. Beer Inst., 491 U.S. 324, 336 (1989)). PhRMA
reasons that a manufacturer that wishes to raise the price of
a drug in a particular state must consider the effect of the
change on drug sales in Michigan. As an example, the
appellants note that ‘‘if the manufacturer is considering low-
ering the price of a [reference] drug, doing so would require
the manufacturer to lower the price of other drugs in the
same therapeutic class in Michigan if it wishes to avoid prior
authorization.’’ PhRMA Opening Br. at 57. PhRMA’s theo-
ry rests on an attenuated and speculative causal relationship
between the Initiative’s prior authorization requirement and
the price a manufacturer charges for a reference drug out-of-
state and, as the district court recognized, the claimed effect,
if any, ‘‘will occur only sporadically and incidentally,’’ 259 F.
Supp. 2d at 83. Most important, any interstate effect on
prices is the result not of provisions peculiar to the Initiative,
but of the federal Medicaid rebate statute which requires that
the rebate reflect the difference between the ‘‘average manu-
facturer price’’ and the ‘‘best price,’’ that is, ‘‘the lowest price
available from the manufacturer during the rebate period to
any wholesaler, retailer, provider, health maintenance organi-
zation, nonprofit entity, or governmental entity within the
United States.’’ 42 U.S.C. § 1396r–8(c)(A), (C). It is this
federal provision that requires interstate price conformity.
12 In July 2002, for example, all but 19% of prior authorization
requests placed with the program’s call center were resolved in two
to three minutes of conversation and only 2.2% were not approved
at the pharmacist stage. Viele Decl. ¶ 51. Further, from February
to July 2002 calls to the center averaged 2–3 minutes, discussions
with pharmacists, when necessary, lasted 2–6 minutes, appeals to
DCH physicians were resolved within 24 hours and facsimile re-
quests were typically resolved within 24 hours. Id. ¶ 50.
17
Thus, here, as in Walsh, the state prior authorization pro-
gram ‘‘does not ‘regulate the price of an[ ] out-of-state trans-
action by its express terms or its inevitable effect.’ ’’ Walsh,
123 S. Ct. at 1857 (quoting PhRMA v. Concannon, 249 F.3d
66, 81 (2001)).
* * *
For the foregoing reasons the judgment of the district
court is
Affirmed.