                                                                                                                           Opinions of the United
1999 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


3-23-1999

Rite Aid Of PA Inc v. Houstoun
Precedential or Non-Precedential:

Docket 98-1823,98-1879,98-1880




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Filed March 22, 1999

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

Nos. 98-1823, 98-1879, 98-1880

RITE AID OF PENNSYLVANIA, INC., et al

v.

FEATHER O. HOUSTOUN,

PENNSYLVANIA PHARMACISTS ASSOCIATION
(Intervenor in D.C.)

       Feather O. Houstoun, as
       Secretary of the Department
       of Public Welfare for the
       Commonwealth of Pennsylvania

       Appellant in No. 98-1823

RITE AID OF PENNSYLVANIA, INC.,

       Appellant in No. 98-1879

v.

FEATHER O. HOUSTOUN

PENNSYLVANIA PHARMACISTS ASSOCIATION
(Intervenor in D.C.)

RITE AID OF PENNSYLVANIA, INC.

v.
FEATHER O. HOUSTOUN

PENNSYLVANIA PHARMACISTS ASSOCIATION
(Intervenor in D.C.)

       Pennsylvania Pharmacists
       Association,

       Appellant in No. 98-1880

On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. Civil No. 97-2120)
District Judge: Honorable Harvey Bartle, III

Argued February 18, 1999

BEFORE: GREENBERG, LEWIS, and BRIGHT,*
Circuit Judges

(Opinion Filed: March 22, 1999)

       Raymond P. Pepe (argued)
       David R. Overstreet
       Kirkpatrick & Lockhart
       240 North Third Street
       Harrisburg, PA 17101-1503

       Attorneys for appellants
       in Nos. 98-1879 and 98-1880

       John A. Kane
       Commonwealth of Pennsylvania,
       Office of Legal Counsel
       Department of Public Welfare
       Health & Welfare Building
       P.O. Box 2675
       Harrisburg, PA 17105-2675
_________________________________________________________________

*Honorable Myron H. Bright, Senior Judge of the United States Court of
Appeals for the Eighth Circuit, sitting by designation.

                                  2
       Doris M. Leisch (argued)
       Peter J. Garcia
       Commonwealth of Pennsylvania
       Department of Public Welfare
       1400 Spring Garden Street
       State Office Building
       Philadelphia, PA 19130

       Attorneys for Appellant
       in No. 98-1823

OPINION OF THE COURT

GREENBERG, Circuit Judge.

I. INTRODUCTION

This appeal concerns a procedural challenge to the
Pennsylvania Department of Public Welfare's ("Department")
promulgation of revised regulations governing payment
rates for prescription drugs and related services provided to
Medicaid recipients pursuant to Title XIX of the Social
Security Act, 42 U.S.C. SS 1396-1396v ("Medicaid Act").1
The Department appeals from an order and judgment of the
United States District Court for the Eastern District of
Pennsylvania, entered August 31, 1998, enjoining it from
applying revised formulas to pay pharmacies for
prescription drugs and related services under the Medicaid
program which were to become effective October 1, 1995.
Rite Aid of Pennsylvania and the Pennsylvania Pharmacists
Association ("PPA") cross-appeal from the district court's
order to the extent that it upheld procedures the
_________________________________________________________________

1. In order to assist the readers of this opinion, we set forth the letter
abbreviations that the parties have used which we also use: Average
Wholesale Price (AWP); Estimated Acquisition Cost (EAC); Federal Upper
Limit (FUL); Health Care Financing Administration (HCFA); Department
of Health and Human Services (HHS); Independent Regulatory Review
Commission (IRRC); Medical Care Advisory Committee (MAAC);
Maximum Allowable Costs (MAC); Omnibus Budget Reconciliation Act
(OBRA); Pennsylvania Pharmacists Association (PPA); and State Plan
Amendment (SPA).

                                 3
Department followed in promulgating the regulations. See
Rite Aid of Pennsylvania, Inc. v. Houstoun, 1998 WL 631966
(E.D. Pa. Aug. 31, 1998). The district court exercised
jurisdiction under 28 U.S.C. SS 1331, 1343 and we exercise
jurisdiction under 28 U.S.C. S 1291. For the reasons that
follow, we will reverse the order and judgment and dismiss
the cross-appeals.

II. FACTUAL AND PROCEDURAL HISTORY

A. Statutory and Regulatory Background.

Medicaid is a cooperative state-federal program through
which the federal government provides funds to the states
to assist the poor, elderly, and disabled to receive medical
care. 42 U.S.C. S 1396. See Cleary v. Waldman, 1999 WL
53046, at *3 (3d Cir. Feb. 8, 1999). The Medicaid Act
requires states to pay for certain services and allows them
to provide additional services. 42 U.S.C. S 1396a(a)(10); 42
C.F.R. SS 440.210-440.225. The states, in accordance with
federal law, establish eligible beneficiary groups, types and
ranges of service, payment levels for services, and
administrative and operating procedures and make
payment for services directly to the individuals or entities
furnishing the services. 42 C.F.R. S 430.0. The Department
is the state agency responsible for the administration of
Pennsylvania's version of Medicaid.

States that choose to participate in Medicaid must
submit a State Plan to the United States Department of
Health and Human Services ("HHS") for approval. The State
Plan describes the policy and methods used to set payment
rates for each type of service included in the program. See,
e.g., Wilder v. Virginia Hosp. Ass'n, 496 U.S. 498, 502, 110
S.Ct. 2510, 2511 (1990). The state also must submit any
subsequent proposed amendment (State Plan Amendment,
or "SPA") to the HHS for approval. The amendment, of
course, must meet federal requirements. 42 U.S.C.
SS 1396a(b); 42 C.F.R. SS 430.10, 430.12. Pennsylvania law
requires that the Pennsylvania Independent Regulatory
Review Commission ("IRRC") review and approve the
Department's proposed amendments before the Department
seeks HHS approval. Pa. Stat. Ann. tit. 71, #8E8E # 745.1 to
745.15 (West 1990).

                                4
Pennsylvania has opted to cover prescription drugs and
related services in its State Plan. 42 U.S.C. S 1396d(a)(12);
42 C.F.R. S 440.120(a). Federal legislation controls program
costs for Medicaid prescription drug benefits by
establishing upper limits, or Maximum Allowable Costs
("MACs"), for certain drugs. Certain generic drugs are
reimbursed at the Federal Upper Limit ("FUL") as mandated
by the Health Care Financing Administration ("HCFA") of
the HHS.2 For brand name drugs, states reimburse for the
lower of the pharmacy's "usual and customary charges" or
the Estimated Acquisition Cost ("EAC"), which is the state's
best estimate of the price generally and currently paid by
providers for a drug marketed or sold by a particular
manufacturer. See 42 C.F.R. S 447.301. Prior to the
adoption of the revisions at issue here, the Department
defined the EAC as the full Average Wholesale Price ("AWP")
for the drug as found in the Department's pricing services.

Rite Aid and members of the PPA voluntarily participate
as enrolled providers in the Pennsylvania Medical
Assistance Program pursuant to provider agreements
executed with the Department. See 55 Pa. Code. S 1121.
The agreements provide for the Department to reimburse
Rite Aid and other pharmacies for prescription drugs and
related services in accordance with applicable federal and
state laws and regulations. We detail here only those laws
and regulations material to this appeal.

Among such federal laws is 42 U.S.C. S 1396a(a)30(A)
("section 30(A)"), which instructs that State Plans must

       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 are
       consistent with efficiency, economy, and quality of care
       and are sufficient to enlist enough providers so that
       care and services are available under the plan at least
_________________________________________________________________

2. By federal regulation, reimbursement for those generic drugs specified
by HCFA may not exceed the FUL. 42 C.F.R. S 447.332.

                                5
       to the extent that such care and services are available
       to the general population in the geographic area . ..

If a state chooses to amend its State Plan, federal
regulations require it to consult with a "medical care
advisory committee" ("MAAC"), which will advise the state
agency director. See 42 C.F.R. S 431.12(b). The committee
must "have an opportunity for participation in policy
development and program administration, including
furthering participation of recipient members in agency
programs." Id. S 431.12(e). As set forth above, the state also
must submit an SPA for approval by the HHS through the
HCFA. See 42 C.F.R. S 430.12(c)(ii). The HCFA must act on
the SPA within 90 days of submission or it is approved
automatically. See 42 U.S.C. S 1396n(f)(2); 42 C.F.R.
S 430.16. Federal statutes and regulations establish the
criteria for the HCFA to make its decision. See 42 C.F.R.
S 430.15(a).

Among other regulations affecting state payment rates
under section 30(A) is a requirement for public notice for
changes in "methods and standards for setting payment
rates for services" before the effective date of the change. 42
C.F.R. S 447.205. The regulation requires notice of both the
"proposed change" and of the final change within 60 days
of its becoming effective, providing a period for public
comment and criticism. Id. Pennsylvania regulations
require a 60-day public comment period in accordance with
42 C.F.R. S 447.205. See 55 Pa. CodeS 1101.70.3

B. Pennsylvania Pharmacy Reimbursement Regulations.

The Department must create formulae and rates to
govern two components of prescription drug and services
reimbursement. First, it determines what the pharmacies
will receive for the ingredient cost of the drugs; second, it
determines a "dispensing fee": a per-prescription payment
_________________________________________________________________

3. The state regulation provides:

       Federal regulations at 42 C.F.R. 447.205 require the Department
       . . . to give a 60 day public notice of proposed Statewide changes
in
       any method or level of MA [Medical Assistance] reimbursement that
       would affect program expenditures by 1% or more during the 12
       months following the effective date of the change.

                               6
which compensates pharmacies for the costs associated
with dispensing a prescription to a Medicaid recipient.

Prior to the October 1, 1995 rate revisions, the
Department reimbursed pharmacies for the ingredient cost
for brand name drugs at the AWP. For generic drugs, the
formula follows the state MAC guidelines. (The pre-1995
state MAC guidelines were set at the 70th percentile price
of those drugs found in the United States Department of
Health Generic Drug Formulary, an instrument which no
longer exists.) The dispensing fee was $3.50 per-
prescription.

Pennsylvania had good reason to revise these rates. For
several years prior to 1994, the HCFA had been advising
the Department that its reimbursement rates were high,
given, among other reasons, changes in the drug
marketplace. See, e.g., letter from HCFA to Secretary of
Public Welfare, John F. White, Jr., (Nov. 27, 1990). App. at
1881. The HCFA informed the Department that it would not
accept AWP levels for "EAC without a significant discount
being applied," unless the Department provided
documentation that the actual acquisition cost equaled the
full AWP. Id.4 Furthermore, at the end of 1994, a three-year
moratorium imposed by federal law which prevented the
Department from amending its pharmacy reimbursement
formulae was due to expire. See 42 U.S.C.S 1396r-8(e)(1).

Thus, in September 1994, the Department proposed to
modify pharmacy reimbursements by requiring pharmacies
to charge the Department the lowest rate they charged any
other third-party payor, including private insurers. The
proposal was forwarded to the pharmacy subcommittee of
the MAAC, and sent to the Governor's Budget Office as a
plan to save the State approximately $21.4 million for the
fiscal year 1995-96 (July 1-June 30). The Governor
included the projected savings in the State's budget,
although the Department had not yet secured approval for
the change from the State or federal bodies responsible for
such review.
_________________________________________________________________

4. The HCFA noted that the full AWP overstated the drug prices by as
much as 10%-20% in some states, although it did not single out or
discuss Pennsylvania in particular. Id.

                                7
Not surprisingly, pharmacies were concerned about the
impact of the proposed cuts, and voiced many criticisms
and suggestions. The MAAC and the pharmacy community
stated that it was unreasonable for the Department to
compare Medicaid to private, third-party payor plans,
because, among other reasons, pharmacies face special
costs in participating in the Medicaid program and serving
Medicaid recipients. Among other alternatives, the
pharmacies asked the Department to study "what it costs
to fill a Medicaid prescription in Pennsylvania and allow a
reasonable profit." Letter from the PPA to Secretary Feather
O. Houstoun (May 12, 1995). App. at 1081.

While considering the proposals discussion participants
offered, the Department conducted its own review and
evaluation, although it did not study what Medicaid
provision of pharmaceutical services cost in Pennsylvania.
The Department, however, delayed the anticipated
implementation date of January 1, 1995, as it reviewed its
alternatives.

After postponing the revision's proposed effective date,
the Department chose a new reimbursement structure: the
EAC for brand name drugs would be cut to AWP-10%. For
generic drugs with an FUL, the maximum acquisition cost
was the FUL. For generic drugs for which the HHS has not
determined an FUL, the Department adopted limits set by
a private pricing service, "BaseLine Prices," to be revised
every six months. The dispensing fee was raised from $3.50
per-prescription to $4.00 per-prescription. The Department
revised the definition of "usual and customary" to require
pharmacies to reduce their usual and customary charge for
a given prescription to include any discounts the pharmacy
would have given the Medicaid recipient if the recipient had
not been covered by Medicaid, i.e., as if they had paid cash
or been covered by a third-party payor.

The Department considered such information as state
pharmacy licensing laws and OBRA counseling
requirements,5 and input from the MAAC and its pharmacy
_________________________________________________________________

5. Specifically, Pa. Stat. Ann. tit. 63, SS 390-1 to 390-9, and 49 Pa.
Code
S 27.19 (requiring pharmacists to offer to conduct a "Prospective Drug

                                8
subcommittee. It also sought other data, such as the
geographical distribution of independent and chain
drugstores throughout the state and participation rates of
other third-party plans.

The Department primarily relied upon the following data:
(1) reimbursement rates provided by 13 third-party payors
for brand name drugs in Pennsylvania for approximately
200 private plans operating in the state; (2) reimbursement
rates for brand name drugs paid by neighboring states,
HCFA Region III states and other states with high Medicaid
expenditures;6 and (3) purchase prices of 15 highly-used,
randomly selected drugs, reviewed by Joseph Concino
("Concino"), the Department's Medical Assistance Policy
Specialist on Pharmacy. Concino showed that the
pharmacies could purchase almost every one of the selected
drugs at or below the FUL rate. He found that the state's
pre-1995 rates were higher than any of the third-party
payors' rates, and that the proposed change -- from AWP to
AWP-10%, and from a dispensing fee of $3.50 to $4.00--
also would provide higher rates than those of third-party
payors.

Among other findings, the Department learned in its
review that Pennsylvania was fifth in the nation for
Medicaid program expenditures, and that it was the only
state surveyed that did not use FULs as the cost limit for
generic drugs. It was one of just four states using the full
AWP for brand name drugs, had the highest rate of
Medicaid payments for Region III states, and the highest
Medicaid expenditures of the top ten drug expenditure
states.
_________________________________________________________________

Review" to ensure that drug will not have adverse result for patient).
Further, under federal law, Medicaid State Plans must include a
Prospective Drug Review requirement, 42 U.S.C. S 1396r-8(g)(2). OBRA is
the Omnibus Budget Reconciliation Act, 42 U.S.C.S 1396r-8(g)(2)
(regulating pharmacies).

6. HCFA Region III states include Delaware, the District of Columbia,
Maryland, Pennsylvania, Virginia, and West Virginia. The Department
also surveyed California, Florida, Illinois. Louisiana, Michigan, New
Jersey, New York, Ohio, and Texas.

                                9
On August 8, 1995, the Department submitted the
amended regulations to the IRRC, which received comments
during its review, and presented the Department with a
series of questions, to which the Department replied in
writing. The Department published a notice on August 26,
1995, in the Pennsylvania Bulletin, 25 Pa. Bull. 3540 (Aug.
26, 1995) stating that the Department "will amend" the
reimbursement rates and provided a synopsis of the
changes, and that copies of the notice (that is, the very
same notice available at 25 Pa. Bull. 3540) would be
available at local agencies throughout the Commonwealth.
After an IRRC public meeting with representatives of the
Department, the public, and pharmacies present, the
regulations were deemed approved by the IRRC on
September 8, 1995, to take effect on October 1, 1995. On
September 23, 1995, the text of the Department order
adopting the regulations was published in the Pennsylvania
Bulletin. See 25 Pa. Bull. 3978 (Sept. 23, 1995). In the
order the Department stated that:

       The MA (Medical Assistance) program cannot ignore the
       trends occurring -- in other state Medicaid programs,
       private third-party plans and reimbursement rates
       accepted by Pennsylvania pharmacies. As a prudent
       buyer of medical care for its clients, the Department
       must obtain similar rates extended to those of other
       third-party payors and other Medicaid agencies.
       Therefore, to make the pharmacy payment policies for
       the MA program comparable with other private and
       public payment policies, the Department is adopting
       the following revisions: . . .

On December 29, 1995, the Department sent the SPA to
the HCFA for approval. The HCFA approved the revised SPA
on May 7, 1995, with changes effective retroactively to
October 1, 1995.

C. Procedural History.

Rite Aid filed an action against the Secretary of the
Department of Public Welfare on March 27, 1997,
approximately 17 months after the revised regulation took
effect. Rite Aid alleged that in adopting the revisions the
Department had violated various provisions of Title XIX of

                               10
the Social Security Act and related regulations and state
statutes, as well as the due process clause of the
Fourteenth Amendment. The parties filed cross-motions for
judgment on the pleadings, and on November 3, 1997, the
district court granted judgment in favor of the Department
on Rite Aid's claim that the Department violated 42 C.F.R.
S 447.205 by not publishing notice of the proposed change
and by not providing a public comment period. 42 C.F.R.
S 447.205(a) and (d)(1). In addition, the court granted the
Department judgment on Rite Aid's due process claim.

The court, however, ruled in favor of Rite Aid on its claim
that section 30(A) contains a discrete "procedural"
component and thus it denied the Department's motion for
a judgment on the pleadings on that issue. It also upheld
Rite Aid's claim that the Department violated 42 C.F.R.
S 447.205(c)(4) by failing to identify a local agency where
the proposed reimbursement changes were available for
public review. Thus, it granted Rite Aid a judgment on the
pleadings on that issue. Rite Aid of Pennsylvania, Inc. v.
Houstoun, 998 F. Supp. 522 (E.D. Pa. 1997).

On January 12, 1998, the PPA moved to intervene as a
plaintiff; and the district court granted the motion on
February 20, 1998. On May 8, 1998, the court, on Rite
Aid's and the PPA's motion to define the scope of review
and limit discovery, issued an opinion and order limiting its
review of the Department's compliance with section 30(A) to
the administrative record. Rite Aid of Pennsylvania v.
Houstoun, 1998 WL 254082 (E.D. Pa. May 8, 1998).

On August 31, 1998, the court granted Rite Aid's and the
PPA's motion for summary judgment and denied the
Department's motion for summary judgment. It found that
the Department had violated section 30(A) because it acted
arbitrarily and capriciously procedurally in adopting the
revisions. Accordingly, it enjoined the Department from
reimbursing pharmacies for drugs supplied to Medicaid
recipients on or after October 1, 1998, in accordance with
the rates in dispute. See Rite Aid of Pennsylvania, Inc. v.
Houstoun, 1998 WL 631966 (E.D. Pa. Aug. 31, 1998).
Moreover, it found that the Department did not comply with
its obligations under 42 C.F.R. S 431.12 to meet with the
MAAC to discuss the regulations. The court, however, did

                               11
not void the regulations on that ground. At the same time,
the court rejected Rite Aid's and the PPA's claim that
section 30(A) required the Department to conduct a study
of actual pharmacy costs before revising the payment
schedule.

The Department filed a notice of appeal on September 8,
1998, amended on September 28, 1998; Rite Aid and the
PPA filed cross-appeals on September 29, 1998, challenging
the district court's holding that section 30(A) did not
require the Department to conduct a study of actual
pharmacy costs, as well as its holding that the Department
had not violated 42 C.F.R. S 447.205(a) by not publishing
prior notice of the proposed changes. The district court and
this court denied the Department's motions to stay the
injunction by orders entered September 18, 1998, and
October 26, 1998, respectively. Thus, the revisions have not
been in effect and the Department has been using the prior
rates.

III. DISCUSSION

We emphasize that Rite Aid and the PPA on this appeal
have not challenged the substantive impact or results of the
revised rates as failing to comply with section 30(A). See
Minnesota Homecare Ass'n Inc. v. Gomez, 108 F.3d 917,
918 (8th Cir. 1997) (concurring opinion). Rather, they
challenge the way in which the Department set and
promulgated the new rates. In particular, they argue that
the Department (1) failed to comply with section 30(A)
because section 30(A) mandates that a certain kind of
process be followed in revising the pharmacy
reimbursement rates, and (2) acted arbitrarily and
capriciously in so doing. The district court accepted these
contentions and thus in this opinion we largely focus on
these points.7 The parties agree that we exercise plenary
_________________________________________________________________

7. The Department argues at least in part that Rite Aid and the PPA may
not sue to enforce the Medicaid regulations as section 30(A) "does not
support a private cause of action." Brief at 27. The district court
rejected
this argument and we agree with this result. Rite Aid, 998 F. Supp. at
525-26. In the district court Rite Aid argued that "substantively" the SPA

                               12
review over the district court's decision. See Olson v.
General Elec. Astrospace, 101 F.3d 947, 951 (3d Cir. 1996).
In this regard, we point out that the district court
predicated its result, including issuing the injunction, on
its construction of section 30(A) and its relatedfinding that
the Department acted arbitrarily and capriciously in
adopting the revisions, rather than on other equitable
considerations. See AMP Inc. v. AlliedSignal Corp., 1999 WL
86843 at *3 (3d Cir. Feb. 18, 1999). Thus, this appeal does
not require us to review an exercise of discretion.

A. The District Court Properly Confined its Review to the
       Administrative Record.

Initially, we agree with the district court's determination
in its May 8, 1998 order to base its decision on the existing
administrative record. While we are not aware of any court
that has held specifically that in reviewing section 30(A)
issues a court must confine itself to the agency's
administrative record, in general judicial review should be
on "the administrative record already in existence, not some
new record made initially in the reviewing court." Camp v.
Pitts, 411 U.S. 138, 142, 93 S.Ct. 1241, 1244 (1973); C.K.
v. New Jersey Dep't of Health and Human Servs., 92 F.3d
171, 182 (3d Cir. 1996).8 Thus, the district court properly
ruled that it would not create a new record nor base its
review on any "post-hoc rationalizations" made by the
Department after it had taken the disputed action. Rite Aid,
1998 WL 254082 at *1 (citing Citizens to Preserve Overton
_________________________________________________________________

was invalid because "the revised reimbursement rates are too low to
satisfy the statutory requirements." Id. At 528. The court, however,
declined to rule on this contention because it held that a determination
of "[w]hether the rates are consistent with efficiency, economy, and
quality of care requires further development of the record." Id. In the
circumstances, our opinion does not preclude Rite Aid and the PPA from
making a "substantive" challenge to the revisions.

8. Because the Department participated in an IRRC hearing on
September 7, 1995, and because regulations were notfinal until they
were deemed approved on September 8, 1995, the court considered the
administrative record to include documents before the Secretary through
that date, a decision not challenged on appeal.

                               13
Park, Inc. v. Volpe, 401 U.S. 402, 419, 91 S.Ct. 814, 825
(1971)).

B. The District Court Erred in Holding that 30 (A) Imposes
       a "Procedural" Requirement.

The district court held that section 30(A) imposes a
"procedural" requirement on state agencies. We disagree
with the district court on this point, as we conclude that
section 30(A) mandates only substantive compliance with
its specified factors of efficiency, economy, quality of care,
and access.

To date, three courts of appeals have addressed the
question of whether section 30(A) has a procedural
requirement. The Courts of Appeals for the Eighth and
Ninth Circuits have ruled that section 30(A) requires that
the state agency make some investigation or conduct a
study. See Arkansas Med. Soc'y, Inc. v. Reynolds, 6 F.3d
519, 530 (8th Cir. 1993) (Agency "must consider the
relevant factors of equal access, efficiency, economy, and
quality of care as designated in [section 30(A)] when setting
reimbursement rates."); Minnesota HomeCare Ass'n, Inc.,
108 F.3d at 918; Orthopaedic Hosp. v. Belshe, 103 F.3d
1491 (9th Cir. 1997), cert. denied, 118 S.Ct. 684 (1998).
The Court of Appeals for the Seventh Circuit has held,
however, that there is no such requirement, but rather that
section 30(A) requires simply that whatever change is
adopted produce the substantive results demanded by the
statute. See Methodist Hosps, Inc. v. Sullivan, 91 F.3d 1026,
1030 (7th Cir. 1996).

We agree with the Court of Appeals for the Seventh
Circuit that section 30(A) requires the state to achieve a
certain result but does not impose any particular method or
process for getting to that result. Id. Thus, section 30(A)
does not require any "particular methodology" for satisfying
its substantive requirements as to modifications of state
plans.9 However, we will not go as far as did that court as
_________________________________________________________________

9. The district court believed that its holding was not contrary to that
of
the Court of Appeals for the Seventh Circuit's result in Methodist Hosp.,
but its logic seems strained. Rite Aid, 998 F. Supp. at 527. On the one
hand, the district court observed that the court of appeals held that

                                14
to say that the Department literally may act like any other
buyer of health care by offering a certain price, and seeing
what response or result that price brings forth; that is, that
the "states may behave like other buyers of goods and
services in the market: they may say what they are willing
to pay and see whether this brings forth an adequate
supply." Id. We decline to adopt that approach because
ordinarily, at least, a state may not act arbitrarily and
capriciously, although other actors in the market may do so
if they so choose. While section 30(A) does not govern the
process by which it sets its prices, as we explain below
other doctrines do control that process and protect the
public from the possible ill effects of an agency testing out
new formulae or prices at random, then correcting the
results once a violation has occurred.

The courts of appeals' split thus arises from the question
whether section 30(A) demands a process which will ensure
future results, or merely the result itself. In reaching our
result we will not read procedural criteria into section
30(A). That section requires that the state "assure" certain
outcomes, including efficiency, economy, etc., but it does
not call explicitly for any particular findings. Thus, it is up
to a state to determine how it will "assure" the outcomes.
We reiterate that section 30(A) does not specify a particular
process for a state agency to follow in establishing rates.10
_________________________________________________________________

section 30(A) does not require "comprehensive studies" such "that would
put an environmental impact study to shame." Id. (citing Methodist
Hosp., 91 F.3d at 1029). But the district court asserted that "by this
language, Methodist does not conclude that 30(A) eliminates any
mandate for evaluation of the statutory factors before revising the
rates."
Id. (citing Methodist Hosp., 91 F.3d at 1030). In fact, Methodist Hosp.
does eliminate any such mandate: that is why its holding differs from
those of the Courts of Appeals for the Eighth and Ninth Circuits on this
point.

10. "Assure" is defined by Black's Law Dictionary as "[t]o make certain
and put beyond doubt. To . . . ensure positively." Black's Law Dictionary
123 (6th ed. 1990). Webster's Third New International Dictionary defines
"assure" similarly as "to make certain the coming or attainment of:
ensure," in its sixth definition for the term. Webster's Third New
International Dictionary 133 (1986).

                               15
What the section does require is that the agency achieve
proper results in revising its State Plan.

The district court analogized section 30(A) to the Boren
Amendment, which dealt with reimbursement rates for
institutional providers under Medicaid, but now has been
repealed. See 42 U.S.C. S 1396a(a)(13)(A); Rite Aid, 1998 WL
631996, at *4. The Boren Amendment instructed state
agencies to make findings and assurances that their
Medicaid reimbursement rates promote economy, efficiency,
quality of care, and equal access, 42 U.S.C.
S 1396a(a)(13)(A),11 and thus, to that extent, it was
undeniably similar to section 30(A). See Arkansas Med.
Soc'y, 6 F.3d 519, 524 (noting similarity of function and
language). But in contrast to section 30(A), the Boren
Amendment directed the states as to the procedure they
must follow in formulating a reimbursement rate,
specifically requiring that states take into account certain
findings. New Jersey Hosp. Ass'n v. Waldman, 73 F.3d 509,
513 (3d Cir. 1995). Federal regulations implementing the
Boren Amendment outline the specific "findings" a state
agency must make whenever it made "a change in its
methods and standards." 42 C.F.R. S 447.253(b).12 The
_________________________________________________________________

11. The Boren Amendment required the Department to set inpatient
reimbursement rates that "the State finds, and makes assurances
satisfactory to the Secretary, are reasonable and adequate to meet the
costs which must be incurred by efficiently and economically operated
facilities in order to provide care and services . .. and to assure that
individuals eligible for medical assistance have reasonable access . . .
to
inpatient hospital services of adequate quality; and such State makes
further assurances, satisfactory to the Secretary, for the filing of
uniform
cost reports by each hospital . . . and periodic audits by the State of
such reports." 42 U.S.C. S 1396a(a)(13)(A).

12. The implementing regulations specify that the following findings be
made:

(b) Findings. Whenever the Medicaid agency makes a change in its
methods and standards, but not less often then annually, the agency
must make the following findings:

(1) Payment rates. (i) The Medicaid agency pays for inpatient hospital
services and long-term care facility services through the use of rates
that
are reasonable and adequate to meet the costs that must be incurred by

                               16
district court noted that section 30(A), unlike the Boren
Amendment, "does not require the State to utilize any
prescribed method of analyzing and considering said factors
[of economy, efficiency, quality of care and access]," and
that section 30(A) does not require the agency to study any
"specific" item "such as actual pharmacy costs." Rite Aid,
1998 WL 631966, at *4 (internal quotation marks omitted).
We will not read back from section 30(A) to say that the
section implicitly requires that a state follow a specific
procedure or demonstrate that it has reviewed each factor.
Thus, the situation under the Boren Amendment is
distinguishable from that here.

Rite Aid and the PPA contend in their cross-appeals that
without knowing pharmacies' costs, the Department could
not know what price would lead to adequate, quality
service. See Orthopaedic Hosp., 103 F.3d at 1500 (agency
must study actual provider costs in revising Medicaid
payments). Preliminarily, on this issue we point out that
Rite Aid and PPA are not by their cross-appeals seeking
additional relief. See United States v. Tabor Court Realty
Corp., 943 F.2d 335, 342-45 (3d Cir. 1991). Rather, they
advance the issue as an alternative ground to affirm the
summary judgment and injunction. University of Md. v.
Peat Marwick Main & Co., 923 F.2d 265, 275 (3d Cir.
1991). Thus, we will dismiss the cross-appeals.
_________________________________________________________________

efficiently and economically operated providers to provide services in
conformity with applicable State and Federal laws, regulations, and
quality and safety standards.

(ii) With respect to inpatient hospital services--

(A) The methods and standards used to determine payment rates take
into account the situation of hospitals which serve a disproportionate
number of low income patients with special needs;[and]

. . . .

(C) The payment rates are adequate to assure that recipients have
reasonable access, taking into account geographic location and
reasonable travel time, to inpatient hospital services of adequate
quality.

42 C.F.R. S 447.253(b).

                               17
Addressing the point raised in the cross-appeals on the
merits, we think it consistent with our reading of section
30(A) that a finding of the pharmacies' costs is not
mandated: within the agency's discretion, pharmacies' costs
may be considered or not, so long as its process of
decision-making is reasonable and sound. Moreover, there
was evidence that the Department is familiar with
providers' costs through setting the EAC and the
dispensing fee, although it did not conduct a special study
in this case. Thus, we approve the district court's holding
that the Department was not required to conduct a study
of actual pharmacy costs before revising the payment
schedule. Rite Aid, 998 F. Supp. at 527.

C. The District Court Erred in Holding that th e Department
       was Arbitrary and Capricious.

As we have indicated, the district court, in addition to
concluding that section 30(A) has a procedural component,
found that the Department's action in adopting the
revisions was procedurally arbitrary and capricious. Thus,
we must make our own determination whether the action
was arbitrary, capricious, or an abuse of discretion, or
otherwise was not in accordance with law, or if the action
failed to meet statutory, procedural or constitutional
requirements. See, e.g., Davis Enterprises v. United States
Envtl. Protection Agency, 877 F.2d 1181, 1184 (3d Cir.
1989). We may find that an action is arbitrary and
capricious if the agency relied on factors other than those
intended by Congress, did not consider "an important
aspect" of the issue confronting the agency, provided an
explanation for its decision which "runs counter to the
evidence before the agency," or is entirely implausible. See
Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut.
Auto. Ins. Co., 463 U.S. 29, 43, 103 S.Ct. 2856, 2867
(1983). Our standard of review is narrow. Id. at 43-44, 103
S.Ct. at 2867. We must "uphold [an agency's] decision of
less than ideal clarity if the agency's path may reasonably
be discerned." Id. at 43, 103 S.Ct. at 2867 (internal
citations omitted). Of course, if a reasonable person could
rely on the agency's studies to reach its conclusions, the
conclusions are not arbitrary.

                               18
The district court found the review arbitrary and
capricious at least in part because it already had decided,
incorrectly in our view, that section 30(A) imposed duties
on the Department to consider how its rates affected the
section 30(A) factors. Thus, the Department, for example,
could not rely on some independent guarantee of
compliance. Rite Aid, 1998 WL 631966, at *5. The district
court held that while the Department had discretion in how
to conduct its review, it was obligated to consider all of the
section 30(A) factors. Id. at *4.

We are aware that Motor Vehicle Mfrs. requires us to
examine whether the agency has "entirely failed to consider
an important aspect of the problem," and that each of the
section 30(A) factors may be considered to be relevant
issues. Motor Vehicle Mfrs., 463 U.S. at 43, 103 S.Ct. at
2867. Moreover, we believe that the Department might have
done a better job in its review by considering systematically
and thoroughly all the implications of its rate revisions,
and, as we discuss below, in communicating its thought
processes and decision to the public and to participants in
the review.

The Department gave some of the section 30(A) factors
more attention than others. In particular, it paid greater
consideration to economy and efficiency than to provision of
quality of care and access to care providers comparable to
that enjoyed by the general population. Cuts in Medicaid
funding have enormous implications for the well being of
some of Pennsylvania's most vulnerable people, and the
pharmacy community is correct in pointing out that profit
margins are already small for many of its members.
Nevertheless, given our deferential and narrow standard of
review, we find that the Department did not arbitrarily and
capriciously decide to use AWP-10%, FULs and BaseLine
Prices for ingredient costs and to raise the dispensing fee
by $0.50.

The district court relied upon three aspects of the
Department's review of data in holding that the
Department's review was arbitrary and capricious with
respect to the section 30(A) factors of efficiency, economy,
and quality of care. Rite Aid, 1998 WL 631966, at *4-*8.
Concluding that it was arbitrary and capricious with regard

                               19
to those factors, it did not reach the comparable access
factor, id. at *10, although the parties have briefed it
extensively.13 First, the court noted a statement made in
January 1995 by then-Secretary of Public Welfare, Karen
Snider, who wrote to a state senator and referred to
discounted AWP rates used by other third-party payors as
"prearranged and arbitrary." Id. at *5. Because the
Department used such "prearranged and arbitrary" rates as
a basis for deciding to lower its rates to Medicaid providers,
the district court concluded that its decision was arbitrary,
reasoning that the fact that pharmacies had accepted those
rates did not mean that the Department could conclude
that the rates satisfied the section 30(A) factors of efficiency
and economy. Id. The Department points out, however, that
the Secretary's reference was to industry-wide practices,
and occurred in the context of noting that Medicaid
payments exceeded those of other prescription plans. Brief
at 35-36.

Second, the district court asserted that the Department's
comparisons with other states' reimbursement rates was
unacceptable because, as the HCFA itself had cautioned in
a statement to the Department, what is reasonable in one
state may not be reasonable for Pennsylvania's needs. Rite
Aid, 1998 WL 631966, at *5. The Department relied on the
HCFA's approval of rates paid in other states as evidence
that those rates conformed with the section 30(A)
requirements. The district court recognized that
Pennsylvania could review other states' payments as a
basis for determining its own payments, yet held that it
could not conclude that its payments for brand name drugs
would be "economical and efficient because of data from
other states." Rite Aid, 1998 WL 631966, at *5.

Last, the court singled out Concino's cost studies on
select generic and brand name drugs. Under the revised
regulations, reimbursement for generic drugs is predicated
_________________________________________________________________

13. The district court did not reach the access issue, concluding that
such review was unnecessary, but it appears that the Department
viewed access largely in terms of whether there would be an adequate
number of pharmacies serving Medicaid clients, not whether Medicaid
clients had the same or better access than the general population.

                                20
either on the FUL or on the private services's guidelines. Id.
at * 6. The district court stated that adoption of the FULs
for generic drugs in itself does not ensure efficiency and
economy, and that the Department would "have to evaluate
the rates for the remaining generic drugs [not covered by a
FUL] as well as all of the brand name drugs." Id. The
district court referred to several criticisms of Concino's
price surveys, and Rite Aid and the PPA expand on them in
their briefs. Among other issues, Rite Aid and the PPA
complain that the drug sample of eight brand name and 15
generic drugs was too small, these neither were selected
randomly nor representative, the pricing data did not come
from the pharmacies, and Medicaid payment involves
variables not at issue with reimbursement by private plans.
See Brief at 27-29.

While Rite Aid and the PPA contend that a better survey
and analysis of the drug market and the State's place in it
could have been done, those deficiencies do not make the
overall process arbitrary and capricious. See Methodist
Hosp., 91 F.3d at 1029-30. (difficulties of gathering data for
and creating comprehensive study of major segment of
market). The district court's criticism of the price survey led
to its conclusion that the Department behaved arbitrarily
and capriciously in part because the court already had
concluded that "the Department may not rely on its third-
party payor survey or its evaluation of other states' rates."
Rite Aid, 1998 WL 631966, at *7. We find, however, that the
Department's study, which included data about other
states and payors, supported its revision. While we doubt
that a rational person would rely on the Concino study
alone to reach the Department's decision, the Department
has shown that by considering the study and other sources
of information, it made a reasonable effort to anticipate the
effects of its action.

The district court held that it was unreasonable for the
Department to rely upon laws or regulations which
independently ensure quality care, finding that the
Department under section 30(A) had an obligation to
consider the impact of rate changes on quality of care. Rite
Aid, 1998 WL 631966, at * 8. But we find that it was
reasonable for the Department to consider the statutory

                               21
guarantees of quality of care and the necessity for the IRRC
to approve the changes as being in the public interest, as
valid evidence suggesting that pharmacies operating under
the rate revisions would have to provide quality care. Cf.
Orthopaedic Hosp. v. Belshe, 103 F.3d at 1497 (requiring
agency to satisfy for itself maintenance of quality of care).

The Department's finding that at least 40 states
discounted AWP by, on average, 10%, and that the eight
large, non-government plans studied discounted AWP by at
least 10% and, in some cases, discounted AWP by even a
higher percentage, supported its determination that AWP-
10% would allow pharmacies to maintain provision of care
and earn a profit. Furthermore, the plans paid lower
dispensing fees than the $3.50 previously offered by the
Department. Thus, the Department was aware that with the
revised rates, Pennsylvania's program would pay more than
most states and more than those of other major
Pennsylvania payors.

Regarding the dispensing fee, the question is whether the
Department was irrational in raising its fee by less than
what the pharmacies sought, or whether it should have
researched this change more thoroughly before the
revision's promulgation. We find that the Department took
into account and considered various suggestions as to what
the fee ought be, and that it selected the increase
considering that it would keep Pennsylvania's payments
higher than those of other third-party payors. Although
budgetary considerations may not be the sole basis for a
rate revision, they may be considered given that section
30(A) mandates an economical result. See, e.g., Arkansas
Med. Soc'y, 6 F.3d at 530.

D. The District Court Did Not Err in Holding that the
       Department Failed to Consult with the MAAC.

The Department had a duty under 42 C.F.R. S 431.12 to
consult with the Pennsylvania MAAC during its review
process. 42 C.F.R. S 431.12(e) (State MAAC "must have
opportunity for participation in policy development and
program administration."). The district court concluded that
the Department did not fulfill that duty, but did not
determine whether that failure alone would support the

                                22
issuance of an injunction, as it determined to enjoin the
application of the revision because it perceived that the
Department failed to comply with section 30(A) and acted
arbitrarily and capriciously. Rite Aid, 1998 WL 631966, at
*10. We agree that the Department did not comply with its
duty to consult adequately with the MAAC, but find that
the violation cannot support the injunction.14

The Department met with the MAAC on October 25,
1994, but the revisions subsequently adopted in 1995
differed from those presented at that meeting. The MAAC
did not meet again until September 28, 1995, after the
revisions' promulgation, and the MAAC pharmacy
subcommittee did not meet again until December 1995. The
Department's discussions with individual members of the
subcommittee during that time did not satisfy its duty to
consult with the MAAC during the review. Indeed, Richard
Lee, Acting Deputy of the Department, conceded in July
1995, just before the Secretary sent the revised rates to the
IRRC for review, that "the process [of consultation with the
MAAC] got out of channel during the discussion, and the
regulations were not discussed directly with the Pharmacy
Subcommittee." Minutes of the MAAC Meeting, July 27,
1995. We recognize that 42 C.F.R. S 431.12(e) requires
"participation" and not "approval," but the October 1994
consultation involved the earlier version of rates, which had
been modified significantly by September 1995.

The Court of Appeals for the First Circuit has noted that
case law under 42 C.F.R. S 431.12(e) "suggests that States
should undertake their MAAC consultations as early in the
Plan amendment process as practicable, preferably before
any final decision on proposed changes to their
reimbursement methodologies," though "the HCFA
regulations prescribe no time bar for the recommended
MAAC consultation," and that it is reasonable to think that
"MAAC consultation is sufficient as along as it occurs
_________________________________________________________________

14. Rite Aid and the PPA raise this issue on their cross-appeals. As we
have explained, they should have advanced the issue as an alternative
basis to affirm. The Department contends that 42 C.F.R. S 431.12 is not
privately enforceable but we agree with the district court that it is.
Rite
Aid, 998 F. Supp. at 525-26.

                                23
before final HCFA approval of the Plan amendment."
Visiting Nurse Ass'n of North Shore, Inc. v. Bullen, 93 F.3d
997, 1010 n.14 (lst Cir. 1996). Here, while there was early
consultation, there was no further consultation prior to
final approval. Furthermore, the Department itself
recognized that the review process had bypassed
consultation with the MAAC.

However, this violation cannot supply a basis to sustain
the injunction. In Burgess v. Affleck, 683 F.2d 596, 599-
600 (1st Cir. 1982), the Court of Appeals for the First
Circuit found a case of "borderline" compliance with the
MAAC regulation, but held that as the MAAC's involvement
was advisory and it had no veto power, an injunction was
not an appropriate remedy. Therefore, it reversed the
district court's grant of an injunction entered on that basis,
finding that relief at best would involve requiring
consultation with the MAAC before implementation of
revisions. Here, too, we think the violation is"not
egregious," id., and that it would not be appropriate to
sustain the district court's injunction on the basis of the 42
C.F.R. S 431.12 violation.

E. The District Court Erred in Holding that the Department
       Violated 42 C.F.R. S 447.205 (c).

The district court held that the Department violated 42
C.F.R. S 447.205(c) by failing to "[i]dentify a local agency in
each county . . . where copies of the proposed changes are
available for public review." Rite Aid, 998 F. Supp. at 530.
The first question on this point is whether the Department's
August 25, 1995 notice constitutes published notice of a
"proposed" change. See 25 Pa. Bull. 3540 (Aug. 26, 1995).
The August 25, 1995 notice stated that the Department
"will amend" the reimbursement rates, and gave a synopsis
of the changes. Id. In order to determine whether the
Department thus had announced a proposed change, the
court framed the question as whether on that date the rates
were final or not, as the Department's own public comment
period had ended by August 25, 1995. Moreover, the rates
already had been submitted to the IRRC for approval,
though they were not yet approved. The court properly
concluded that, as the IRRC had its own public comment
period, and the rate change was subject to ultimate

                                24
approval by the IRRC, the notice was not final, although the
agency had determined what it wished the rates to be. Rite
Aid, 998 F. Supp. at 528-29. Because the notice preceded
the effective date, we agree that the changes were
"proposed" and public comment would not have been futile.

The second question is whether the content of the August
25, 1995 notice of proposed changes was sufficient. The
district court simply concluded that "[n]otifying readers
about another location where they can read the same notice
is not sufficient." Id. at 530. Wefind that the availability of
the same notice itself in local agencies satisfied the
regulation, as it contained sufficient information and detail
for public consideration. Burgess, 683 F.2d at 602. Clearly,
though, the Department did the bare minimum to meet its
duty in this regard.

Finally, Rite Aid and the PPA argue that the Department
failed to provide 60 days of public comment on the
"proposed" rates before changing the rates, as required by
55 Pa. Code S 1101.70. Federal law no longer requires a 60-
day period between proposal notice and the effective date of
the rate change. See 46 Fed. Reg. 58677 (Dec. 3, 1981).
The district court properly rejected the contention that it
should incorporate Pennsylvania's law into the federal
public notice requirement, because the state agency had
not expressed its clear intent to do so. Rite Aid, 998 F.
Supp. at 529-30. See Mississippi Band of Choctaw Indians
v. Holyfield, 490 U.S. 30, 43, 109 S.Ct. 1597, 1605 (1989).

IV. CONCLUSION

Because we hold that section 30(A) does not include
procedural requirements, and because the Department's
11-month period of data gathering, consultation, and
review before promulgating the changes was not so
deficient as to be arbitrary and capricious, we will reverse
the district court's grant of partial summary judgment to
Rite Aid, and vacate the injunction. The deficiencies we
have identified in the Department's procedures do not
justify a different result. We will dismiss Rite Aid's and the
PPA's cross-appeals because they are unwarranted
procedurally and in any event are without merit. We will

                               25
remand the case to the district court for further
proceedings consistent with this opinion.

A True Copy:
Teste:

       Clerk of the United States Court of Appeals
       for the Third Circuit

                               26
