251 F.3d 219 (D.C. Cir. 2001)
Pharmaceutical Research and Manufacturers of America, Appellantv.Tommy G. Thompson, in his official capacity as Secretary, United States Department of Health and Human Services, et al., Appellees
No. 01-5029
United States Court of Appeals FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued April 10, 2001Decided June 8, 2001

Appeal from the United States District Court  for the District of Columbia (No. 00cv02990)
Allen R. Snyder argued the cause for appellant.  With him  on the briefs were Darrel J. Grinstead and Jeffrey Pariser.
Ronald A. Shems argued the cause for appellee State of  Vermont Agency of Human Services.  With him on the brief were Susan R. Harritt and Rebecca Ellis, Assistant Attorneys General, State of Vermont.
Scott R. McIntosh, Attorney, U.S. Department of Justice,  argued the cause for the federal appellees.  With him on the  brief were Wilma A. Lewis, U.S. Attorney at the time the  brief was filed, and Barbara C. Biddle, Attorney.
G. Steven Rowe, Attorney General, and Paul Stern, Deputy  Attorney General, State of Maine, were on the brief for  amicus curiae State of Maine in support of appellee.
Before:  Sentelle, Rogers and Tatel, Circuit Judges.
Opinion for the Court filed by Circuit Judge Tatel.
Tatel, Circuit Judge:


1
The Medicaid statute requires pharmaceutical manufacturers to rebate a portion of the price of  their drugs as a condition for participating in Medicaid.  In  this case, pharmaceutical manufacturers challenge the Department of Health and Human Service's approval of a Vermont demonstration project requiring the manufacturers to  rebate a portion of the price of drugs purchased directly by  certain individuals who are not otherwise covered by the  state's Medicaid program.  Because Congress imposed the  rebate requirement in order to reduce the cost of the Medicaid program, and because no Medicaid funds are expended  under the Vermont demonstration project and thus no Medicaid savings produced by the required rebates, we conclude  that the Department lacked authority to approve the project. We therefore reverse the district court's decision to the  contrary and remand for further proceedings.


2
* Funded jointly by the federal government and the states,  Medicaid pays medical expenses for low-income people. Medicaid services are provided pursuant to plans developed  by the states and approved by the Secretary of Health and  Human Services.  42 U.S.C.  1396a(a)-(b).  States pay doctors, hospitals, pharmacies, and other providers of medical  goods and services according to established rates.  The federal government then pays each state a statutorily established share of "the total amount expended ... as medical assistance under the State plan."  Id.  1396b(a)(1).  Medicaid  beneficiaries cannot be required to contribute more than a  "nominal" amount toward the cost of the benefits they receive.  Id.  1396o.


3
Pharmaceutical manufacturers participating in Medicaid rebate to the states a portion of the price of drugs purchased  for Medicaid purposes.  Manufacturers do this because the  Medicaid statute, id.   1396-1396u, permits the federal government to reimburse states only for drugs purchased from  manufacturers who have agreed to pay statutorily specified  rebates.  Id.  1396r-8(a)(1).  Rebates equal the number of  units of a drug provided by a state's Medicaid program times  the greater of (1) the difference between the average price of  the drug and the lowest price its manufacturer gives any  wholesaler, provider, health maintenance organization, nonprofit, or governmental entity, or (2) 15.1 percent of the  average manufacturer price.  See id.  1396r-8(c)(1).  If the  average price of a manufacturer's drug has increased faster  than the consumer price index, the manufacturer must pay an  additional rebate for each unit of the drug equal to the  difference between the average price of the drug and the  price of the drug on July 1, 1990 (or the day the drug first  entered the market) adjusted to the consumer price index. Id.  1396r-8(c)(2).  So calculated, rebates ensure that states  get at least the best prevailing wholesale price--and possibly  even a much better price--for drugs they purchase for Medicaid beneficiaries.  In language central to this case, section  1396r-8 provides that rebate agreements shall require manufacturers to pay rebates on drugs for which "payment was  made under the State plan."  Id.  1396r-8(b)(1)(A).


4
The Social Security Act, of which the Medicaid statute is a  part, authorizes HHS to approve experimental "pilot" or  "demonstration" projects that the Secretary determines are  "likely to assist in promoting the objectives of [Medicaid]." Id.  1315(a).  Although the Act authorizes the Secretary to  waive certain Medicaid requirements for such demonstration  projects, it does not authorize him to waive any requirements  of section 1396r-8's rebate provision or the requirement that Medicaid beneficiaries contribute no more than a "nominal"  amount to the cost of medical benefits they receive.  See id.   1315(a)(1).


5
For several years, Vermont has administered demonstration projects that extend pharmaceutical benefits to classes of  individuals not otherwise covered by Medicaid.  By letter  dated March 17, 2000, Vermont sought HHS approval to  "extend the Medicaid ... rebate structure" to nearly 70,000  new demonstration project beneficiaries, thus requiring pharmaceutical manufacturers to pay rebates on drugs purchased  by this group.  Known as the Pharmacy Discount Program,  or "PDP," the expanded services would be funded as follows: Pharmacies would charge new beneficiaries the Medicaid  price of a given drug minus the estimated average rebate  Vermont receives for all drugs (approximately eighteen percent in 2000).  Vermont would pay the pharmacies the eighteen percent and then bill manufacturers for that amount. As a result, PDP benefits would be paid not with funds  appropriated by Congress and the states for Medicaid services, but by beneficiaries (eighty-two percent) and drug  manufacturers (eighteen percent).  By letter dated November  3, 2000, HHS approved the PDP.


6
Appellant, the Pharmaceutical Research and Manufacturers  of America, whose members have entered into Medicaid  rebate agreements and so would be required to pay rebates  under the PDP, filed suit in the United States District Court  for the District of Columbia claiming that the program violated two provisions of the Medicaid statute.  First, the manufacturers argued that because the federal government and  Vermont pay nothing under the PDP, the program violates  the provision under which pharmaceutical manufacturers owe  rebates only for drugs "for which payment was made under  the State plan."  Id.  1396r-8(b)(1)(A).  Second, pointing out  that program beneficiaries would pay for approximately  eighty-two percent of the price of their prescriptions, the  manufacturers argued that the PDP violates the requirement  that states charge Medicaid beneficiaries no more than a  "nominal" amount.  Id.  1396o.  Seeking a preliminary injunction, the manufacturers argued that if they refused to make payments under the PDP, HHS could terminate their  eligibility to participate in the entire Medicaid program, but if  they made such payments, Vermont's sovereign immunity  would preclude them from recovering their money should  they ultimately prevail in the litigation.


7
The HHS Secretary, along with the Secretary of Vermont's  Agency of Human Services, who intervened as a defendant,  responded that "payment" means payment, and that even  though Vermont is reimbursed by manufacturers, it has still  made a payment under the ordinary understanding of that  word.  As to the manufacturers' nominal copayment claim,  the HHS Secretary argued that the manufacturers lacked  standing to represent the interests of PDP beneficiaries.  The  Secretary did not deny that manufacturers refusing to make  PDP rebate payments risked losing Medicaid eligibility nationwide, nor did the Vermont Secretary deny that sovereign  immunity would bar recovery of any rebates paid.


8
On January 17, 2001, sixteen days after Vermont began  implementing the PDP, the district court, concluding that the  manufacturers were unlikely to succeed on the merits, denied  their request for a preliminary injunction.  Pharm. Research  & Mfrs. of Am. v. United States, No. 2000-2990 (D.D.C. Jan.  17, 2001) (order denying preliminary injunction);  see also  Pharm. Research & Mfrs. of Am. v. United States, 135  F. Supp. 2d 1 (D.D.C. 2001).  Renewing the arguments they  made in the district court, the manufacturers appeal.

II

9
According to the Vermont Secretary of Human Services,  "[p]rescription drug prices can place an enormous burden on  working Vermonters."  Intervenor's Br. at 58. "The uninsured and under-insured," she explains, "are often unable to  obtain drugs because of the high cost....  Without the  assistance of the PDP, these individuals might forego obtaining these medicines, reduce the amount or frequency of their  prescriptions for financial reasons, or elect to obtain medicines by sacrificing other necessities."  Id. (internal quotation  omitted).  Our task, however, is neither to evaluate the PDP's policy justification nor to determine whether the program  best serves the pharmaceutical needs of the poor.  Cf. Robert  Pear, States Creating Plans to Reduce Costs for Drugs, N.Y.  Times, Apr. 23, 2001, at A1 (describing various state programs  to help low-income elderly people buy prescription drugs). We face a straightforward legal issue:  Did the Department  exceed its statutory authority by authorizing Vermont to  require pharmaceutical manufacturers to make rebates under  the PDP?


10
The manufacturers argue that the Department lacked authority to approve the PDP because, as they interpret the  statute, the payments Vermont makes to pharmacies are not  "payment[s] ... made under the State plan."  As they see it,  Vermont merely acts as a conduit for money received from  drug manufacturers, which could not possibly be what Congress meant by "payment":


11
[T]he only plausible reading of the "payment" requirement is that the State must make an actual outlay of funds....  Had Congress wanted Medicaid rebates to be triggered by loans, pass-throughs, or individual beneficiaries' outlays, it would have said as much.  The Act cannot reasonably be interpreted such that the only "payment ... under a state plan" necessary to justify a manufacturer rebate is the manufacturer rebate itself.


12
Appellant's Opening Br. at 22.  The HHS Secretary responds  that Vermont does make payments:  it pays approximately  eighteen percent of the price of drugs purchased by PDP  beneficiaries.  Citing a dictionary, the Secretary argues that  "[t]o say that Vermont is not making a 'payment' to pharmacies when it pays them for the drugs they dispense to PDP  participants is to abandon any ordinary understanding of the  meaning of 'payment.' "  Appellees' Br. at 24.  The fact that  Vermont gets reimbursed, the Secretary asserts, does not  mean that Vermont's outlays of funds are not payments:  "if  an automobile owner pays a garage to repair the owner's car,  the owner has made a payment to the garage;  if the owner  later receives a check from his insurance company that covers the cost of the repairs, it hardly follows that he no longer has  made any payment."  Id. at 25.


13
To resolve this debate, we proceed in accordance with  Chevron U.S.A. Inc. v. Natural Resources Defense Council,  Inc., asking first "whether Congress has directly spoken to  the precise question at issue."  467 U.S. 837, 842 (1984).  If it  has, "that is the end of the matter;  for the court, as well as  the agency, must give effect to the unambiguously expressed  intent of Congress."  Id. at 842-43.  If we find the statute  either silent or ambiguous with respect to the precise question at issue, we proceed to the second step of Chevron  analysis, asking "whether the agency's answer is based on a  permissible construction of the statute."  Id. at 843.  At this  stage of Chevron review, we afford substantial deference to  the agency's interpretation of statutory language.  Id. at 844. Of course, not all agency interpretations of statutes warrant  Chevron deference.  See Christensen v. Harris County, 120  S.Ct. 1655, 1662 (2000) ("Interpretations such as those in  opinion letters--like interpretations contained in policy statements, agency manuals, and enforcement guidelines, all of  which lack the force of law--do not warrant Chevron-style  deference.") (internal citations omitted).  In this case, however, we need not decide whether the Department's approval of  the PDP would be entitled to Chevron deference, for using  traditional tools of statutory interpretation--text, structure,  purpose, and legislative history, see Bell Atl. Tel. Cos. v. FCC,  131 F.3d 1044, 1047 (D.C. Cir. 1997)--we conclude that Congress has "directly spoken to the precise question at issue";  that is, whether "payment" includes expenditures that are  fully reimbursed by manufacturer rebates.


14
We agree with the Secretary that our inquiry begins with  the words of the statute.  But a word's "ordinary understanding" is not always controlling.  Words draw meaning from  context.  Consider Article III, Section 1 of the Constitution: "Judges ... shall hold their Offices during good Behaviour." Although the dictionary includes "conformity with ... the  norms of good manners or social decorum" among its definitions of "behavior," Webster's Third New International  Dictionary 199 (1993), no one would suggest that judges be removed for failing to observe Emily Post's standards of  etiquette--the use of "behaviour" in the context of judges'  qualifications for office rules out such an interpretation.  Indeed, just last week the Supreme Court emphasized that  statutory terms can have a narrower meaning in context than  the same words have in common usage.  See Buckhannon  Bd. & Care Home, Inc. v. W. Va. Dep't of Health & Human  Res., U.S., 121 S.Ct. 1835, L.Ed.2d (2001)  (interpreting the word "prevailing" in the statutory term  "prevailing party" to have a narrower meaning than it has in  Webster's);  cf. K Mart Corp. v. Cartier, Inc., 486 U.S. 281,  319 (1988) (Scalia, J., concurring in part and dissenting in  part) ("While looking up the separate word 'foreign' in a  dictionary might produce the reading the majority suggests,  that approach would also interpret the phrase 'I have a  foreign object in my eye' as referring, perhaps, to something  from Italy.").


15
So too here.  Although as the Secretary's car repair example illustrates, the word "payment" is broad enough to include  reimbursed expenditures, consideration of the word's context--the statute's purpose and legislative history--reveals a  far narrower meaning.  Properly understood, "payment" here  means only payments with state or federal funds appropriated for Medicaid expenditures;  absent such payments, pharmaceutical rebates would not contribute to reducing the cost of the taxpayer-funded Medicaid program, and the legislative  history makes quite clear that Congress's purpose in requiring rebates was to do just that.  Senator Pryor, sponsor of  the rebate provision, explained in his statement introducing  the bill that rebates are designed to stop pharmaceutical  manufacturers from "bankrupting the coffers of the State  Medicaid drug programs."  136 Cong. Rec. 24,145 (1990).  The  provision "requires drug manufacturers to offer substantial  discounted prices to the Medicaid Program ... [b]ecause  there is no logical reason why, in an era of severe budget  constraints and social needs, the Medicaid Program should be  denied access to [the] same generous discounts" hospitals and  HMOs receive.  Id.  Rebates, the Senator estimated, would "achieve in excess of $2.5 billion in savings" over five years. Id.


16
The House Report on the bill likewise demonstrates that  Congress required rebates in order to reduce Medicaid expenditures:  "[T]he bill is framed to achieve significant Medicaid savings...."  H.R. Rep. No. 101-881, at 98 (1990).  Responding to projections that federal Medicaid payments for  prescription drugs would reach $2.8 billion in 1991, the House  Report declared that "Medicaid, the means-tested entitlement  program that purchases basic health care for the poor, should  have the benefit of the same discounts on single source drugs  that other large public and private purchasers enjoy."  Id. at 96.U.S.Code Cong. & Admin. News 1990, at 2108.


17
This legislative history demonstrates that Congress imposed the rebate requirement for two overlapping reasons:  to  reduce the cost of Medicaid and to prevent pharmaceutical  manufacturers from charging the government and taxpayers  above-market prices for Medicaid drugs.  Understood within  this context, "payment" excludes situations where no government funds are spent;  otherwise, manufacturers could be  required to pay rebates that neither "achieve significant  Medicaid savings" nor prevent pharmaceutical companies  from "bankrupting the coffers of the State Medicaid drug  programs."  Because Vermont's PDP payments are fully  reimbursed by manufacturer rebates, and because the rebates  produce no savings for the Medicaid program, the state's  payments to pharmacies are not "payments" within the meaning of the statute.


18
An additional feature of the Medicaid statute reinforces our  view that when Congress said "payment," it meant payment  with funds appropriated for Medicaid purposes.  Section  1396r-8(a)(4) provides that if a state had a rebate agreement  with a manufacturer before the federal rebate requirement  took effect, that agreement would "be considered to be ... in  compliance" with the Medicaid statute if "such agreement  provide[d] for a minimum aggregate rebate of 10 percent of  the State's total expenditures under the State plan for coverage of the manufacturer's drugs."  42 U.S.C.  1396r-8(a)(4). This provision makes sense only if a state's expenditures for  drugs are determined by the price of the drugs, not by the  amount of expected rebates.  If, as in the PDP, the amount of  a state's expenditures were determined by the size of the  rebates the state expected, section 1396r-8(a)(4)'s minimum  would be entirely circular--it would require the rebate to be  at least ten percent of the state's expenditures, and those  expenditures would be equal to the rebate, suggesting that  the rebate would have to be at least ten percent of itself. This provision, in other words, does not contemplate that  expenditures would be set at the amount of the rebates a  state receives;  rather, it assumes a net expenditure of funds  appropriated for Medicaid purposes in an amount determined  independently of the amount of the rebates.


19
The HHS Secretary argues that even if the PDP involves  no "payment[s]" within the meaning of the statute, Congress  gave the Department, as part of the power to approve  demonstration projects, authority to regard "costs of such  project[s] which would not otherwise be included as expenditures ... as expenditures under the State plan."  Id.   1315(a)(2)(A) (emphasis added).  Yet in its March 17 letter  seeking approval of the PDP, Vermont assured the Department that "there will be no ... cost to the program." Because manufacturer rebates reimburse Vermont for all  PDP payments, the only cost the state arguably incurs is  "forgone interest" from "the significant delay between the  time that Vermont pays pharmacies and the time that it  receives corresponding rebates."  Appellees' Br. at 25; Pharm. Research & Mfrs. of Am., 135 F. Supp. 2d at 14  ("[T]he state could have earned interest on the funds if they  were collected from taxpayers but not advanced to the pharmacies on behalf of the manufacturers.").  Even assuming the  Department may regard the cost of foregone interest as an  expenditure or payment, however, here it is not a payment  for pharmaceuticals.  Under the PDP, Vermont makes payments to pharmacies and incurs the interest cost in order to  trigger the rebate requirement.  Put another way, Vermont's  foregone interest cost is the cost of extending the manufacturers' rebate obligations to drug purchases made by individuals not otherwise covered by the state's Medicaid program. Yet the statute requires rebates only for "drugs ... for which  payment was made under the State plan."  42 U.S.C.   1396r-8(b)(1)(A) (emphasis added).  The Department has  no statutory authority to treat the cost of providing rebate  benefits to non-Medicaid Vermonters as payment for outpatient drugs.


20
Perhaps Congress could require manufacturers to pay rebates when no funds appropriated for Medicaid purposes  were actually expended.  Perhaps Congress could authorize  HHS to accomplish directly what it has done indirectly  through the PDP--require pharmaceutical manufacturers to  provide substantial discounts to individuals not otherwise  covered by state Medicaid programs.  But because it has  done neither, and because Vermont makes no "payments"  within the meaning of section 1396r-8, the Department lacked  authority to approve the PDP.


21
In reaching this conclusion, we recognize that nothing in  the statute's language or legislative history suggests that  Congress considered the possibility of requiring rebates  where no Medicaid funds are expended.  But because we  think it so obvious that Congress's purpose in requiring  manufacturer rebates was to reduce the cost of the Medicaid  program, we think that Congress's silence cannot provide a  basis for allowing the Department to extend the rebate  requirement to situations where, as here, rebates produce no  Medicaid savings.  Determining how to fund pharmaceutical  benefits for the poor and whether their cost should be shared  by pharmaceutical manufacturers is a responsibility that,  absent express congressional direction to the contrary, must  be left to Congress.

III

22
Having no need to consider the manufacturers' alternative  argument that the PDP also runs afoul of the statute's  "nominal" copayment requirement, we reverse the decision of the district court and remand for further proceedings consistent with this opinion.


23
So ordered.

