April 13, 2010 - The AIDS Healthcare Foundation (AHF) says it will appeal a federal district judge's recent dismissal of its challenge to a 2009 California law that drastically cut the reimbursements safety-net providers get from the state Medicaid agency when dispensing or administering prescription drugs to Medicaid outpatients.
Backgrounder: The 340B Medicaid Carve-Out
When 340B covered entities provide prescription drugs to Medicaid patients, drug manufacturers must be protected against duplicate discounts, i.e., the provision of a 340B discount on the front end of the transaction and a Medicaid rebate on the back end.
Federal guidelines establish two ways to prevent such double dipping:
Why are some states seeking to ban the carve-out? First, they expect to save money on drug expenditures because, on average, 340B-discounted prices are lower than the net Medicaid reimbursement paid for non-340B drugs, even after deducting the rebates received. Second, states prohibiting the carve-out would also be able to access the 340B discount up front and thus be spared having to chase after manufacturers months later for rebates on the same drugs.Covered entities, meanwhile, use the carve-out to achieve a reasonable return on drugs dispensed under Medicaid. A number of states and 340B covered entities have developed shared savings arrangements that benefit both parties.
Medi-Cal, California's Medicaid agency, meanwhile has rejected a proposal by 340B-enrolled hospitals on how best to define the actual acquisition cost (AAC) at which the hospitals and other covered entities must now bill the agency. It told the hospitals, though, that it was open to further discussions. A conference call on the matter is to take place next week.
U.S. District Judge Manuel L. Real of the Central District of California, Western Division, issued his dismissal order March 29 without comment. AHF sued the California Department of Health Care Services last November, arguing that the July 2009 emergency budget bill implementing the ban illegally addressed the state's budget problems by cutting Medi-Cal payment rates to nonprofit safety-net providers and paying them less than for-profit providers for the same drugs.
The contested law forbids the state's covered entities from using the so-called 340B Medicaid carve-out, forcing them to purchase their Medi-Cal drugs through the 340B program and to bill Medi-Cal at AAC for all such drugs except when they are unable to obtain a 340B price (see box).
AHF General Counsel Tom Myers told the Monitor "We're disappointed and we don't agree with the dismissal." He says his group will file a notice of appeal with the 9th U.S. Circuit Court of Appeals.
Unequal Treatment Alleged
AHF seeks a permanent injunction against enforcement of the July 2009 state law. It says the law violates equal protection guarantees granted under both the federal and state constitutions by reimbursing 340B providers differently than non-340B providers for drugs. AHF also claims that the law was pre-empted by federal law governing both the 340B and Medicaid programs. It says the federal Health Resources and Services Administration (HRSA) guidelines permitting use of the Medicaid carve-out pre-empted any state law prohibiting its use. The association also says that by prohibiting use of the carve-out, the state denies 340B providers the financial benefit intended to be conferred by the 340B program.
In its Dec. 21, 2009 motion to dismiss and in a Mar. 15, 2010 reply brief, the state denied that its carve-out prohibition was pre-empted by federal law, saying that there is no federal statute underlying the voluntary carve-out guidelines that could be read to pre‑empt the state action. The Medi-Cal program told the court that, in the absence of a federal law, "the state is free to legislate in this area."
In fact, the state argued, its law actually facilitates compliance with the federal statutory prohibition against manufacturers being required to provide both 340B discounts and Medicaid rebates by making it easier to track when covered entities are getting 340B discounts.
The state also denied AHF's allegation that it had discriminated against 340B providers in favor of retail pharmacy providers by allowing retail pharmacies to bill at the normal state Medi-Cal reimbursement rate while requiring AAC billing by 340B providers. It insisted that 340B providers and retail pharmacy providers are not "similarly situated," noting that 340B providers receive advantages, such as tax-exempt status, that for-profit pharmacies do not receive, and that they voluntarily choose to participate in the 340B program to receive deep discounts "not received by the other pharmacy providers."
California also defended the law on the grounds that it serves the rational purposes of simplifying the management of the Medicaid rebate program and decreasing Medi-Cal's difficulty in determining whether a drug was purchased through the 340B program.
State Says Carve-Out Prohibition Was Not a Rate Reduction
AHF had also contended that the law prohibiting the use of the Medicaid carve-out constituted a rate reduction that should have been submitted to the Centers for Medicare and Medicaid Services (CMS) for prior review as a Medicaid State Plan Amendment (SPA). The state countered that the ban did not constitute a "direct and unequivocal rebate reimbursement reduction" and thus did not require submission of an SPA.
The state also was dismissive of what it called "the plaintiff's concern ... with its profit margin" and retaining "the option of maximizing its profit margin by either purchasing on the open market or from the 340B program, whichever is profitable." The state said "Medi-Cal is not obligated to reimburse providers for profit or ensure that they do not operate at a loss. Federal law does not require the state to provide a profit for Medicaid providers."
In response to AHF's assertion that the ability to retain savings from 340B drugs would help it fulfill its nonprofit mission, the state said "While plaintiff's objective to fulfill its stated nonprofit goal may be admirable, the Medi-Cal system is administered so as to ensure that as many beneficiaries as possible, not just those served by plaintiff, receive appropriate services."
Talks Continue on Alternative to Ban
Medi-Cal, 28 California hospitals, and three trade associations representing those hospitals are due to resume talks next week on possible alternatives to the carve-out ban. Safety Net Hospitals for Pharmaceutical Access (SNHPA) is one of the groups involved in the discussions.
In a Jan. 29 proposal recently rejected by California Department of Health Care Services Chief Deputy Director Toby Douglas, the consortia suggested that the state's 340B hospitals be permitted to bill Medi-Cal at their usual and customary rates, but be paid by Medi-Cal at a discount off average wholesale price (AWP) for brand name drugs or the listed state maximum allowable ingredient cost (MAIC) for generic drugs. The hospitals recommended that the discount off AWP be set at a level that closely matches 340B costs while allowing 340B providers some mark-up that falls below what a retail pharmacy is reimbursed.
A shared-savings arrangement crafted along such lines would forestall providers from concluding "that the costs of joining or remaining within the 340B program outweigh the benefits of participation—a conclusion that can only result in lost savings for both the provider and the state," the hospitals and associations said in their letter to Douglas. At least one California hospital has decided not to enroll in the 340B program due to the carve-out prohibition.