For the Second Time, Judge Squashes California Law that Would Cut Medi-Cal Rates to Safety Net Providers

In News by AHF

In a ruling last week, Federal District Court Judge Manuel L. Real reaffirmed his previous judgment and injunction, thereby stopping enforcement of a state law that would slash Medi-Cal reimbursement rates for drugs dispensed by AHF and other safety net providers.


AHF first filed its lawsuit in 2009 to prevent California from ignoring federal

requirements when attempting to control drug costs.


LOS ANGELES (June 24, 2014) In a ruling issued last week, Federal District Judge Manuel L. Real (United States District Court, Central District of California, Case No. CV 09-8199-R) reaffirmed his previous May 2013 judgment  and permanent injunction against California that blocks the state from making and continuing drastic cuts to reimbursement rates for drugs dispensed by safety net providers including AIDS Healthcare Foundation (AHF) and others that serve Medi-Cal (Medicaid) patients.  In the court’s first judgment of May 2013, the judge enjoined enforcement of California Welfare & Institutions Code section 14105.46 because it was enacted without consideration of its impact on Medi-Cal beneficiaries, in violation of federal law.  California’s Department of Health Care Services (DHCS) subsequently appealed, but while on appeal, the federal agency that oversees Medicaid rate setting (the Centers for Medicare & Medicaid Services, of CMS) approved an amendment to California’s State Medicaid Plan that included the same rate cuts contained in Section 14105.46.  The Ninth Circuit Court of Appeals vacated the judgment and sent the matter back to the trial court to assess the impact of CMS’s approval.  After considering the matter, the court ruled that the approval did not change the fact that the state law was invalidly enacted and could not be enforced and reaffirmed the injunction against the law’s enforcement.

“In seeking to reduce its healthcare costs several years ago, California passed a law requiring safety net providers like AHF to only purchase so-called ‘340B drugs’ (drugs purchased via a federal drug discount program) for use in–and state reimbursement by—California’s Medicaid program,” said Tom Myers, General Counsel and Chief of Public Affairs for AIDS Healthcare Foundation.  “AHF sued, and that law was invalidated; however, the federal Centers for Medicare and Medicaid Services subsequently approved the rate reduction contained in the California law.  A question remained, however: Did that later federal approval validate and make lawful the earlier California law allowing for such drastic reimbursement cuts?  We were pleased to learn that in his ruling last week, Judge Real said ‘no’ the California law is still invalid.”

In its legal complaint from 2009, AHF asserted, “the State of California unfortunately, and illegally, has tried to address its budget woes by reducing Medi-Cal payment rates to nonprofit, safety net medical providers, paying less to these providers than it pays to for-profit businesses for the very same services.”  The suit added, “…the State has enacted a statute that (1) violates both federal and State constitutional guarantees of equal protection, (2) impermissibly intrudes on and is preempted by federal law specifically intended to provide a financial benefit to nonprofit safety net providers like AHF, and (3) violates federal law covering the Medicaid program.”

“The rate cuts California officials forced on Medi-Cal safety net providers risked cutting lifesaving pharmacy services down to the bone for AIDS patients who depend on AHF or other nonprofit providers for their lifeblood,” said Michael Weinstein, AIDS Healthcare Foundation President. “We believed that California’s actions—trying to balance its budget on the backs of some of the poorest and most vulnerable citizens by squeezing safety net providers like AHF—were not only illegal under state and federal law, but that they also threatened the very existence of such nonprofit providers. We are grateful that Judge Real reaffirmed and upheld his ruling granting a permanent injunction blocking further implementation of the law.”

“When it enacted Section 14105.46, California needed to comply with federal law by considering the impact of provider rate cuts on Medi-Cal beneficiaries.  DHCS admitted in court that neither it nor the Legislature considered this impact before the Legislature rushed to enact Section 14105.46 in 2009. Nothing that has happened since can change that history, thus, the court reaffirmed its injunction of the law, providing relief to thousands of struggling safety net providers,” said Laura Boudreau, Chief of Operations for AIDS Healthcare Foundation.


Background on the Federal 340B Program:

Reducing Drug Prices for Safety Net Providers in Order to Advance their Missions

The Veterans Health Care Act of 1992 created what is now commonly known as the 340B Program.  A component of this Act requires drug manufacturers to provide outpatient drugs to specific entities at a reduced price.  For participating entities, the reduced price affords an average savings of approximately 20% on prescription drug purchases.

The entities eligible to participate in the 340B program are all, by and large, nonprofit and governmental safety net medical providers, who primarily provide medical care to low income and indigent people. AHF is able to participate in the 340B program because it provides medical care to people with HIV/AIDS under the Ryan White CARE Act, a federal program designed to provide care to indigent Americans with HIV/AIDS.

Savings from the 340B program work in two ways.  First, for entities that directly pay for and distribute drugs, they are able to buy these drugs at a lower price, and thus can either purchase more drugs to provide more services, or utilize the savings to provide other services.  Second, for entities that purchase the drugs but are reimbursed by a third party (such as an insurance plan), the 340B program allows for a larger difference between the purchase cost and the reimbursement fee, which creates additional resources for the nonprofit entity.

340B participating entities are able to utilize the savings from drug purchases in numerous ways that further their nonprofit and governmental missions as safety net providers.  Entities that participate in the 340B program most commonly use the savings to:

  • Increase the number of patients served;
  • Offset losses from providing pharmacy services for less than full compensation;
  • Reduce prescription prices to patients; and
  • Increase the services provided.

Section 14105.46: How the Reimbursement Cut for Safety Net Providers Came About in 2009

California Welfare & Institutions Code Section 14105.46, which requires safety net providers to bill and be reimbursed by Medi-Cal at their actual 340B acquisition cost plus a nominal dispensing fee was enacted on July 28, 2009, when, after the conclusion of the Fourth Extraordinary Session of the Legislature (to address the state’s budget crisis), Governor Schwarzenegger signed the Special Session Budget Bill and Assembly Bill X4-5 (the Special Session healthcare trailer bill).   Before the law, safety net providers could opt to forego the 340B discount, obtain drugs at normal wholesale price, and be reimbursed by the Medi-Cal list price, like other pharmacies.  Section 14105.46 changed this by removing this option and forcing safety net providers to bill and be reimbursed at a much lesser amount – an amount that DHCS itself recognized did not cover the providers’ costs of purchasing and dispensing drugs to Medi-Cal beneficiaries.

Due to statewide cutbacks and statutory changes, healthcare providers have been steadily leaving the Medi-Cal program, making it progressively more difficult for patients with Medi-Cal to find appropriate care and services.  Despite the exodus of health care providers from the program, the California legislature has continued to enact laws that are likely to further reduce provider participation in Medi-Cal. Section 14105.46 is no longer in the ranks of such laws.

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