November 17, 2009 - The AIDS Healthcare Foundation in California has sued the state over a new law that drastically cuts Medi-Cal reimbursements for safety-net providers in favor of large, national, for-profit pharmacy chains.
The AIDS Healthcare Foundation Central District of California, Western Division (AHF) filed its Nov. 9 complaint against the California Department of Health Care Services, seeking an injunction to prevent implementation of the new state Medicaid law.
Gov. Arnold Schwarzenegger signed an emergency budget bill in July that required all 340B participants to dispense only drugs purchased through the 340B program to Medi-Cal beneficiaries. That means such providers can no longer carve Medi-Cal drugs out of the 340B program, a change that deprives them of millions of dollars in savings. (See Monitor, Oct. 7, 2009.)
The law also requires 340B providers to bill Medi-Cal at actual acquisition cost. A small exception allows a 340B provider to bill at regular Medi-Cal reimbursement rates if the provider is unable to purchase the drug at 340B prices and maintains documentation of its inability to obtain the drug at a 340B discount.
Under the new California law, the Medi-Cal reimbursement rate for 340B drugs is significantly lower than the rate for non-340B drugs.
"The rate cuts that California has forced on Medi-Cal safety-net providers will cut life-saving pharmacy services down to the bone for AIDS patients who depend on us and other non-profit providers for their lifeblood," said AIDS Healthcare Foundation President Michael Weinstein. "At the same time, giant for-profit pharmacy chains remain untouched, receiving much higher drug reimbursement rates from California."
He acknowledged that California, along with many other states, is struggling to stay afloat during the financial crisis.
"But trying to balance the budget on the backs of some of our poorest and most vulnerable citizens by squeezing safety-net providers like AHF is not only illegal under state and federal law, it also threatens the very existence of such nonprofit providers," Weinstein said.
Carve-out option critical for safety-net providers
The federal 340B and Medicaid laws both protect manufacturers from duplicate discounts by preventing states from billing drug manufacturers for Medicaid rebates on drugs already subject to 340B discounts. Under federal law, 340B-covered entities are allowed to carve out their Medicaid drugs from the 340B program in order to avoid having to pass their discounts through to Medicaid.
Allowing 340B entities the option of carving out their Medicaid drugs permits them to choose the option that best supports their non-profit missions, especially in light of recent cutbacks and changes to the Medi-Cal program, 340B advocates say.
In its complaint, AHF alleges that the California state government has illegally tried to address its budget problems by reducing Medi-Cal payment rates to non-profit safety-net medical providers, and paying these providers less than it pays for-profit businesses for the very same drugs.
AHF: State sanctions price discrimination
AHF alleges that the disputed state law "violates both federal and State constitutional guarantees of equal protection, impermissibly intrudes on and is preempted by federal law specifically intended to provide a financial benefit to non-profit safety-net providers like AHF, and violates federal law covering the Medicaid program."
Under the California law, for-profit pharmacies receive a higher reimbursement rate, and therefore higher revenues, than 340B participants, noted Brian Chase, AHF's associate general counsel.
"This violates the equal protection clauses of both the California and United States constitutions," he said.
He also argued that the carve-out ban won't save the state any money to speak of.
"California is merely going to receive money upfront versus seeking rebates down the road," he said. "No new savings for the state (are) created."
According to AHF, 340B providers that also participate in Medi-Cal now face a number of damaging choices. They can either leave the 340B program in order to secure regular Medi-Cal reimbursement or — if they stay in — they may find the reduced Medi-Cal reimbursement so insufficient that they can no longer serve their Medi-Cal patients.
AHF is asking the court to declare the state statute preempted by federal law, saying it violated the Equal Protection Clause of the U.S. Constitution and the Equal Protection and Privileges and Immunities Clauses of the California Constitution. AHF is also seeking a permanent injunction that would halt the implementation of the California law.