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From Health Law Daily, May 2, 2013

Independent pharmacy coalition required to exhaust administrative remedies to challenge preferred pharmacy rule

By Geri Szuberla, JD, LLM

A challenge to the preferred pharmacy rule (PPR), 42 C.F.R. sec. 423.120(a)(9), filed by a coalition of independent pharmacies, Southwest Pharmacy Solutions, Inc. (Southwest) was dismissed because administrative review had not been exhausted (Southwest Pharmacy Solutions, Inc. v CMS, May 1, 2013, Clement, E). The PPR allows prescription drug plans (PDPs) to charge enrollees different copayment amounts based on the pharmacy where they choose to have their prescriptions filled. The sole issue on appeal, the court said, was whether the district court properly dismissed Southwest’s claim for lack of subject matter jurisdiction.

While 42 U.S.C. sec. 405(h) clearly requires a plaintiff to exhaust administrative remedies before filing a claim in federal court, the Supreme Court has provided a narrow exception to this rule in Shalala v. Illinois Council on Long Term Care, Inc., 529 U.S. 1 (2000). Southwest argued that its claim falls within this exception and therefore was dismissed erroneously. The court disagreed, saying that the exception is appropriately applied only in cases where judicial review would be entirely unavailable through the prescribed administrative procedures. The court held that Southwest did not show that the Illinois Council exception applies, and affirmed the district court’s order dismissing the suit.

Background. Southwest filed this suit in the district court for the Southern District of Texas on July 11, 2011, against CMS. Southwest alleged that the PPR allows a PDP to create a scheme that excludes independent pharmacies from participating in preferred pharmacy networks in direct contravention of the “any willing pharmacy” requirement at 42 U.S.C. sec. 1395w-104(b)(1)(A). The suit was dismissed on the basis that any claims arising under the Medicare Act must be brought before HHS prior to seeking judicial review of those claims under sec. 405(g).

Analysis. Under the Illinois Council exception to the exhaustion of administrative remedies required by sec. 405(h), the appellate court said, a party may file a claim under the Medicare Act in federal court without first bringing it before HHS if further postponement of judicial review would have the effect of foreclosing judicial review entirely. Southwest asserted that channeling its claims through the administrative process would effectively result in a total loss of judicial review for several reasons: (1) a claim challenging the PPR would likely be characterized by CMS as a grievance rather than a coverage dispute; (2) Southwest could not bring a claim challenging the PPR either directly or through its enrollees and, (3) assuming it could bring a claim through its enrollees, those enrollees would not be able to satisfy the statutory amount-in-controversy requirement.

The court deferred to the CMS position that this challenge would be treated as a coverage dispute. With respect to the other barriers, the court said that the regulations at 42 C.F.R. sec. 423.566(c) allow for an enrollee to appoint a representative to navigate the appeals process on his behalf. In order to obtain judicial review of a regulatory challenge to the PPR, a provider must seek to be appointed as the representative of an enrollee, the court said. The court held that Southwest had not demonstrated that the enrollees would be ineffective or unwilling proxies. The enrollees may not stand to gain a fortune from challenging the PPR, the court found, but they also have some non-financial stake in the outcome of the case, as evidenced by their continued patronage of independent pharmacies.

With respect to the amount-in-controversy, both CMS and Southwest seem to agree that it would take multiple enrollees who have been prescribed expensive drugs to satisfy the amount-in- controversy requirement. Nonetheless, the court held, this burden does not warrant the application of the Illinois Council exception, which requires complete preclusion of judicial review rather than mere postponement of review based on hypothetical, unconfirmed difficulties in bringing a claim.

The case number is 12-40097.

Attorneys: Miguel Sergio Rodriguez (Taylor Dunham, L.L.P.) for Southwest Pharmacy Solutions, Inc., d/b/a American Pharmacies. Dana Lydia Kaersvang (U.S. Department of Justice) for CMS.

Companies: Southwest Pharmacy Solutions, Inc., d/b/a American Pharmacies; CMS.

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