Medi-Cal Drug-Payment Fight Hits 9th Circuit

PASADENA, Calif. (CN) - AIDS Healthcare Foundation told the Ninth Circuit on Tuesday that California violated the state and U.S. constitutions when it scrapped Medi-Cal drug payments to health care groups serving the most vulnerable patients.

The organization says the California Department of Health Care Services violated the equal protection clauses of both constitutions when it eliminated a reimbursement option for "safety net" health care providers that buy prescription drugs for Medi-Cal patients under the federal 340B drug program.

And it claims the state eliminated the reimbursement option to help balance the budget during the 2009 fiscal crisis, implementing a "discriminatory" policy by reimbursing AIDS Healthcare at a lower rate than non-340B program participants like large commercial pharmacies.

"The whole point of the statute was to give [340B participants] access to drugs so they can have resources for other things," foundation attorney Jordan Keville told the three-judge panel at Tuesday's hearing. "Congress' idea was to give them some savings on drugs so they can meet the other needs of these patients. What the state's statute does is basically co-opts that savings for the state and deprives these parties of using those discounts as they were intended."

Under the 340B program, drug makers are required to give safety net providers - government-supported health care organizations that serve vulnerable patient populations - upfront discounts on covered prescription drugs for Medicaid patients.

It's estimated that 340B providers can save up to 60 percent on prescription drugs by participating in the program. Even so, the foundation says it doesn't cover all of its dispensing costs, and so until 2009, it used a second reimbursement option available to participants: a "carve-out" that allowed them to buy drugs from drug makers of their choice and instead get a reimbursement from Medi-Cal.

But the Medi-Cal reimbursement rate, which is typically reserved for non-340B providers, is higher than the 340B rate, and the foundation claims the state eliminated the carve-out to save money "on the backs of safety net providers."

State officials, however, say the carve-out was eliminated to simplify management of the 340B program as required by federal law. According to state Deputy Attorney General Carmen Snuggs, that means reducing the number of "double discounts" that drug companies can incur under the program and the administrative burden that claim disputes with them were causing.

The state says it has reduced both of those since the carve-out was eliminated, something it struggled to do when it was in place.

"While it has not completely eradicated these problems, it has been successful in reducing them," the state said in a brief. "AIDS Healthcare Foundation cannot refute that the Department of Health Care Services had a rational basis for enacting [the legislation]."

The foundation concedes double discounts under the carve-out were possible. According to a petition it filed in 2012, under the carve-out 340B providers could often buy drugs at the discounted 340B price as well as erroneously receive a Medi-Cal reimbursement for them. Meanwhile, drug makers were also giving Medi-Cal a rebate for the same drugs.

A 2012 state audit confirmed the foundation's admission. The audit revealed that all of the 340B providers the state randomly selected for audit submitted at least one reimbursement claim to Medi-Cal for a drug they had already bought at a 340B discount. The audit also found that drug companies were being charged duplicate discounts.

In pushing to reverse a federal judge's finding for the state, the foundation says the state failed to show that streamlining management of the 340B program was "rationally" related to the two-tier reimbursement policy, especially when it already had a system to track 340B prescriptions.

"The director [of the Department of Health Care Services] makes no effort to explain why, as part of the effort to more accurately track provider use of 340B drugs, it was also necessary to adopt a parallel reimbursement policy ensuring that 340B safety net providers will be paid less than their non-340B counterparts, some of which are large chain pharmacies, for furnishing the same drugs," the foundation says in its brief.

But Snuggs reiterated to the panel that the state had legitimate reasons to eliminate the carve-out: federal law requires it to reduce double discounts under the 340B program, streamline its management and save money.

Keville, however, said the state can't get around the fact that it violated the foundation's right to equal protection by reimbursing it at a lower rate than non-340B providers. The organization provides the same services to the same types of patients as commercial pharmacies and should be treated as equal to them, he said.

The state nonetheless maintains that equal protection doesn't apply to the foundation because it chose to participate in the 340B program, where it gets "deep discounts" that commercial providers don't get.

"They're paying less, they're getting reimbursed less," Snuggs told the panel.

In what could ultimately decide the case, Circuit Judge Stephen Reinhardt asked Keville whether Proposition 61, which will go before voters in November, could moot AIDS Healthcare's case.

If passed, the ballot measure would limit the price state agencies pay for prescription drugs.

"I couldn't answer whether it relates to it directly," Keville said.

Keville is with Hooper, Lundy & Bookman in Los Angeles.

The case is before Reinhardt, Senior Circuit Judge Ferdinand Fernandez and Circuit Judge John Owens.

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