Texas District Court Dismisses Pharmacy Association's Challenge to Medicare's ''Preferred Pharmacy'' Rule

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Southwest Pharmacy Solutions, Inc., a pharmacy cooperative association made up of over 500 independent pharmacies participating in the Medicare program, sued the Centers for Medicare and Medicaid Services (CMS) alleging that the preferred pharmacy rule, 42 C.F.R. § 423.120(a)(9) (Preferred Pharmacy Rule), violated the Medicare Act’s “any willing pharmacy” provision, 42 U.S.C. § 1395w-104(b)(1)(A). Because Southwest failed to exhaust its administrative remedies, CMS moved to dismiss Southwest’s claims for lack of jurisdiction and the court granted CMS’s motion.

No Judicial Review Until Administrative Remedies are Exhausted

Under the Preferred Provider Rule, preferred provider prescription drug plans may exclude independent pharmacies from their preferred networks. According to Southwest, this type of exclusion violates the “any willing pharmacy” provision set forth in the Medicare Act and results in higher copayments for those Medicare beneficiaries choosing to patronize independent pharmacies. In response, the court noted that judicial review of claims brought under the Medicare Act is available only when a plaintiff has exhausted all of the administrative procedures set forth in 42 U.S.C. § 405(g). Furthermore, the court wrote, the Supreme Court made this jurisdictional limit clear in Shalala v. Illinois Council on Long Term Care, Inc., 529 U.S. 1 (1999), when it ruled that plaintiffs must use the particular review channel created by the Medicare Act notwithstanding the type of claim, the identity of claimants, or the nature of the dispute. The court held that there was no question that the Social Security statutes provided the standing and the substantive basis for Southwest’s claims, as required under Illinois Council. As a result, the court stated, the only question left to be determined was whether CMS’s motion to dismiss would preclude judicial review of Southwest’s claims.

Availability of Judicial Review

Southwest first argued that at it did not have access to judicial review under § 405(g) because the nature of its claims went to the overall structure of the Medicare benefit regulations rather than to a simple coverage determination. According to Southwest, coverage decisions trigger the administrative review process under Illinois Council, while challenges to matters deemed to be a “benefit design” questions are treated as grievances which do not trigger the administrative review process. In response, CMS explained that 42 C.F.R. §423.566(b)(5) clearly provides that disputes over the amount of cost sharing for drugs under the Medicare program are coverage determinations that can be appealed administratively. CMS also offered the interpretation of a CMS official stating that Southwest’s challenge would be treated as a coverage determination subject to judicial review. Considering the plain language of the regulation, the assurances of the CMS official, and the Fifth Circuit's demonstrated deference to agency representations regarding the manner in which the Medicare program was executed, the court held that the administrative process was available to determine Southwest’s claims.

Southwest Can Use a Proxy

Southwest also argued that judicial review of its claims would be precluded because it was not recognized as a potential claimant under the Medicare regulations, being an association as opposed to a Medicare beneficiary. CMS responded by stating that Southwest’s status as an association, rather than a Medicare beneficiary, was irrelevant because 42 C.F.R. § 423.566(c) clearly specifies that appeals may be brought by Medicare beneficiaries or their appointed representatives. The court agreed and held that Southwest would have to demonstrate, consistent with its burden of proof, that the Medicare beneficiaries enrolled in the preferred pharmacy plans could not or would not bring the instant claims. Because CMS had established that the beneficiaries could bring these claims, and could even appoint pharmacy employees as proxies to prosecute the claims, the court held that Southwest had failed to meet its burden in showing that its claims could not be prosecuted.

Sufficient Incentives for Southwest’s Proxies to Ensure Southwest’s Claims are Heard

Southwest next argued, even if it rights were dependent on another party acting as proxy, no proxy was available that had a sufficient incentive to prosecute the Southwest claims. In support of this position, Southwest stated: 1) Medicare beneficiaries choosing to enroll in a pharmacy plan with a preferred provider structure are complacent about the distinction of independent pharmacies, 2) the disputed copay amounts were too small to motivate individual Medicare beneficiaries, and 3) Medicare beneficiaries would not want the hassle of prosecuting the claims. The court rejected all of these arguments, finding that the first issue was not credible because it argued against Southwest’s members’ business model. The second issue was questionable, according to the court, because it was possible for a single ill or elderly beneficiary to have a significant prescription drug copayment. Finally, the court said, the third issue was controverted by the fact that the beneficiary could appoint a proxy, such as a pharmacy employee, to prosecute the claim. Accordingly, the court stated that it was not convinced that there were insufficient incentives for Southwest’s proxies to assist in getting Southwest’s claims heard. The court granted CMS’s motion to dismiss Southwest’s claims for lack of jurisdiction.

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