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July 9, 1982

PENNSYLVANIA PHARMACEUTICAL ASSOCIATION, a Pennsylvania Non-Profit Corporation, et al., Plaintiffs,

The opinion of the court was delivered by: DIAMOND

Presently before the court is the defendants' motion for partial judgment on the pleadings, which will be granted.


 The plaintiffs in this action are the Pennsylvania Pharmaceutical Association, an association of 2500 pharmacies; seven incorporated pharmacies; the owners-pharmacists of these pharmacies (collectively referred to as the pharmaceutical plaintiffs); and two Medicaid recipients. Plaintiffs brought this suit against the Pennsylvania Department of Public Welfare (DPW); Helen O'Bannon, the Secretary of DPW; and Gerald F. Radke, the Deputy Secretary for Medical Assistance, for alleged violations of the Federal Medicaid program. *fn1" The plaintiffs contend that the State's reimbursement to pharmacists for prescription drugs purchased by Medicaid recipients fails to comply with the Federal statute establishing the Medicaid program, 42 U.S.C. § 1396a (1974), and the regulations promulgated by the Secretary of Health and Human Services to implement the Medicaid program. See 42 C.F.R. § 447.204 (1980); 42 C.F.R. 447.331 et seq. (1980). The defendants maintain that the State's reimbursement program fully complies with federal mandates.


 Through Title XIX of the Social Security Act, 42 U.S.C. § 1396 et seq. (1974), commonly referred to as the Medicaid program, Congress devised a cooperative federal-state venture to deliver health care services to the poor. King v. Smith, 392 U.S. 309, 88 S. Ct. 2128, 20 L. Ed. 2d 1118 (1968). Participation by an individual state is entirely voluntary. Harris v. McRae, 448 U.S. 297, 100 S. Ct. 2671, 65 L. Ed. 2d 784 (1980). However, once a state opts to participate it must comply with the requirements of the Medicaid Act. Id.

 A state that elects to join the Medicaid program must submit a "state plan" to the Secretary of Health and Human Services for his approval. 42 U.S.C. § 1396 (1974). To comply with the Congressional requirements of the Medicaid act, the state plan must provide for medical assistance to those termed "categorically needy", 42 U.S.C. § 1396a(a)(10)(A) (Supp.1982), and to those found to be "medically needy". 42 U.S.C. § 1396a(a)(10)(C) (Supp.1982). The state plan must offer these individuals inpatient hospital services, outpatient hospital services, laboratory and X-ray services, nursing facilities, physician care, and other medical care deemed necessary by the Secretary. 42 U.S.C. § 1396a(a)(10) (Supp.1982). In addition to those mandatory requirements, a state plan may offer to underwrite the cost of drugs prescribed for Medicaid recipients. 42 U.S.C. § 1396d(a)(12) (1974). To facilitate the implementation of the Medicaid program, Congress authorized the Secretary to promulgate regulations necessary to promote the "efficient administration" of programs assigned to his agency. 42 U.S.C. § 1302 (1974).

 At the time this action was brought, the Medicaid Act required that a state plan for medical assistance:

(30) provide such methods and procedures relating to the utilization of, and the payment for, care and services available under the plan (including but not limited to utilization review plans as provided for in section 1396b(i)(4) of this title) as may be necessary to safeguard against unnecessary utilization of such care and services and to assure that payments (including payments for any drugs provided under the plan) are not in excess of reasonable charges consistent with efficiency, economy, and quality of care;
42 U.S.C. § 1396a(a)(30) (1974) *fn2"
Pursuant to this section and the overall purpose of the Act, the Secretary has issued several regulations to control the cost of prescription drugs. In a section of those regulations titled "Drugs: Upper limits of payments", states are directed "not (to) pay more for prescribed drugs than the lower of ingredient cost plus a reasonable dispensing fee or the provider's usual and customary charge to the general public." 42 C.F.R. § 447.331(a) (1980). The ingredient cost is further defined as the lesser of a predetermined sum established by the Secretary, known as the maximum allowable cost (MAC), 42 C.F.R. § 447.332(a)(1) (1980), or the estimated acquisition cost (EAC), which "means the state's best estimate of what price providers generally are paying for a drug." 42 C.F.R. § 447.332(c)(2) (1980). The regulations also permit a state to pay pharmacies a dispensing fee based on a survey of a statewide pharmacies' costs that are composed of allocated overhead and profit. 42 C.F.R. § 447.333 (1980). These regulations have been retained verbatim in the 1981 regulations. See 46 F.R. 48560, October 1, 1981.
State contends that the Medicaid program and the Medicaid regulations only place caps on the reimbursement level that a state may authorize for drugs and that the Medicaid program imposes no duty on a state to pay these maximum reimbursement figures. Thus, State argues that its only duty under the Medicaid program is to pay no more than the maximum levels authorized by the regulations. To determine these maximum levels the State must use surveys of typical dispersing fees and drug costs. However, if the State chooses to pay less than the maximum level, its reimbursement fee can be challenged only if the reimbursement fee is so low that Medicaid recipients are effectively denied access to pharmacies because they refuse to participate in a program that provides inadequate remuneration for their ...

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