Rashid Pharmacy, P.L.C. v. Iowa Department of Health and Human Services ( 2023 )

IN THE COURT OF APPEALS OF IOWA
No. 22-1334
Filed June 7, 2023
RASHID PHARMACY, P.L.C.,
Petitioner-Appellant,
vs.
IOWA DEPARTMENT OF HEALTH AND HUMAN SERVICES,
Respondent-Appellee.
________________________________________________________________
Appeal from the Iowa District Court for Polk County, Samantha Gronewald,
Judge.
Rashid Pharmacy, P.L.C. appeals from judicial review of an adverse
administrative ruling. AFFIRMED.
Adam D. Zenor, Allyson F. Aden, and Derek R. LaBrie of Zenor Kuehner,
P.L.C., Des Moines, for appellant.
Brenna Bird, Attorney General, Eric Wessan, Solicitor General, and Lisa
Reel Schmidt, Assistant Attorney General, for appellee.
Heard by Schumacher, P.J., and Chicchelly and Buller, JJ.
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BULLER, Judge.
Rashid Pharmacy, P.L.C. (Rashid), appeals from judicial review following a
decision by the Iowa Department of Health and Human Services (HHS1) to
suspend Medicaid payments following a credible allegation of fraud. Rashid
specifically alleges that HHS failed to give proper notice, that substantial evidence
did not support the agency’s determination there was a credible allegation of fraud,
and that HHS abused its discretion when it declined to find good cause to modify
or halt the suspension of payments. We affirm the district court, finding substantial
evidence supports the agency’s findings and discerning no abuse of discretion or
error of law.
I. Background Facts and Proceedings
Rashid is an enrolled pharmacy provider in the Iowa Medicaid program and
serves patients across three states, including Iowa. HHS, specifically Iowa
Medicaid, administers the program within the state.
In February 2020, the Iowa Medicaid Fraud Control Unit (MFCU) notified
HHS that MFCU was investigating Rashid for “submitting payment claims to
Medicare and Medicaid for prescriptions that are not supported by inventory and
purchase records.” In other words, MFCU was investigating Rashid for fraud. An
invoice review completed by federal investigators was attached to the notice, in
which auditors explained that Rashid did not have adequate purchases to support
various Medicare payments Rashid received, with 79 of 163 drugs sampled
1As used in this opinion, “HHS” refers to the Iowa Department of Health and
Human Services and any of its various divisions, subunits, or other constituent
parts.
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returning a shortage and a total potential loss of more than $8 million. Also
attached was email correspondence in which federal authorities requested state
assistance with their investigation and a state field auditor’s report detailing
potential Medicaid exposure within the scope of Rashid’s fraud.
Ordinarily, HHS would quickly suspend payment to suspected Medicaid
fraudsters upon notice of an MFCU investigation. Here, however, MFCU
requested an exception to temporarily avoid suspending payments to Rashid, as
an early suspension could have tipped off Rashid or otherwise jeopardized the
investigation. HHS noted the request and—according to customary practice—
opened an investigative file but took no action to suspend payments at that point.
In March 2021, a federal search warrant was issued as part of the
investigation. The warrant authorized seizure of a long list of items, including:
“[a]ny and all records relating to the purchase, ordering or procurement of
medications; medication inventories; the delivery of medications; the return of
medications; the transfer, disbursement, or disposal of medications; and the
payment and billing of medications.”
In June, the suspension exception ended. HHS reviewed the notice and
attachments received in February 2020 and determined there was a credible
allegation of Medicaid fraud against Rashid. HHS employees testified that this
determination was based on the documents received, the state field auditor’s
report regarding Medicaid exposure, and the ongoing state and federal law
enforcement investigations.
HHS informed Rashid in writing that it was immediately suspending
Medicaid payments under Title 42, section 1396b(i)(2)(c) of the United States
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Code and Title 42, sections 455.2 and 455.23 of the Code of Federal Regulations,
having found no good cause to withdraw or reduce the suspension. Rashid
appealed, arguing (1) HHS did not provide adequate notice before suspension; (2)
there was no credible allegation of fraud to suspend Rashid; and (3) even if there
was a credible allegation, a good cause exception should apply to withdraw or
reduce the suspension. Rashid also sent a letter to HHS staff requesting
reconsideration of suspension, reiterating the first and third arguments.
After receiving the letter requesting reconsideration, HHS contacted the
local managed care organizations (MCOs) in Rashid’s area, and the MCOs
informed HHS they would not be harmed by Rashid’s potential suspension. HHS
staff also met with MFCU investigators, who confirmed that a theory of defense put
forward by Rashid—concerning certain price-regulated drug invoices and
inventory—did not impact their investigation or alter their findings. HHS staff also
reviewed correspondence Rashid sent to federal and state investigators and
analyzed Rashid’s financials (which revealed that suspended Medicaid payments
accounted for 18% of the company’s revenue). HHS staff determined that none of
these considerations undermined their previous determination that there was a
credible allegation of fraud and that a good-cause exception was not justified. HHS
denied Rashid’s request for reconsideration.
In September 2021, an administrative law judge (ALJ) heard Rashid’s
suspension appeal and issued a proposed decision in favor of HHS. The ALJ
proposed denying the appeal and ruled that (1) the ALJ lacked authority to decide
the issue of notice, as that issue was reserved solely to the HHS Director; (2)
sufficient evidence supported the finding of a credible allegation of fraud; and (3)
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there was not good cause to terminate or alter the suspension and, even if there
was, Rashid’s intent to sell the business obviated any need to consider good
cause.
In January 2022, HHS Director Kelly Garcia issued a final decision in which
she affirmed the agency action and rejected Rashid’s three claims. On the first
issue (notice) Director Garcia found that Iowa Administrative Code rule 44-79.2(8)
applied to the notice that HHS needed to give, meaning that the agency only had
to give notice within five days after suspension. As to the other two issues (a
credible allegation of fraud and good cause to withdraw or reduce the suspension)
Director Garcia affirmed and adopted the ALJ’s ruling in full, relying on “the record,
the state and federal regulatory framework, and [the] evidentiary standard for
contested cases.”
Rashid petitioned for judicial review in February 2022, raising the same
three issues. The district court affirmed HHS, finding substantial evidence to
support the factual findings and no errors of law. Rashid appealed to the supreme
court, which transferred the matter to our court for resolution.
II. Standard of Review
Judicial review of agency action is governed by Iowa Code chapter 17A
(2022), applying the standards found in Iowa Code section 17A.19(10). “The
petitioner challenging agency action has the burden of demonstrating the prejudice
and invalidity of the challenged agency action.” Colwell v. Iowa Dep’t of Hum.
Servs., 923 N.W.2d 225, 231 (Iowa 2019) (citing Iowa Code § 17A.19(8)(a)).
When the General Assembly has not clearly vested an agency with
interpretative authority, we review interpretative issues for corrections of error at
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law. See Iowa Code § 17A.19(10)(c); Gartner v. Iowa Dep’t of Pub. Health, 830
N.W.2d 335, 343 (Iowa 2013). We apply this standard to the first issue concerning
notice.
When an agency is tasked with deciding a factual issue, such as with the
second issue concerning a credible allegation of fraud and underlying the third
issue concerning good-cause exceptions, the agency’s factual findings must be
upheld unless they are “not supported by substantial evidence in the record before
the court when that record is viewed as a whole.” Iowa Code § 17A.19(10)(f); see
also Burton v. Hilltop Care Ctr., 813 N.W.2d 250, 256 (Iowa 2012). In reviewing
the evidence, we are instructed to “consider only the evidence favorable to the
[agency’s] findings, whether or not contradicted.” Cargill, Inc. v. Conley, 620
N.W.2d 496, 502 (Iowa 2000).
When an agency is granted discretion, as with the third issue about good-
cause exceptions, we review for whether that discretion was abused. An abuse of
discretion is proven when the agency exercises its discretion “on grounds clearly
untenable or to an extent clearly unreasonable.” Marovec v. PMX Indus., 693
N.W.2d 779, 782 (Iowa 2005); see also Iowa Code § 17A.19(10)(n). “An abuse of
discretion also means the decision lacked rationality and was made clearly against
reason and evidence.” Marovec, 693 N.W.2d at 782.
III. Discussion
Rashid advances the same three issues on appeal that were decided by the
district court and the agency. First, Rashid contends that HHS had to provide a
fifteen-day notice before suspending Medicaid payments under Iowa
Administrative Code rule 441-79.2(7)(b). Second, Rashid challenges the credible-
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allegation-of-fraud finding. And third, Rashid contends a good-cause exception
should have applied to withdraw or partially reduce the suspension. We affirm the
district court on each argument.
A. Requirement of Notice2
Rashid first argues that HHS had to give notice fifteen days before
suspending Medicaid payments. Rashid generally contends that HHS rule
79.2(7)(b), which requires a fifteen-day notice before the agency sanctions any
person in good standing with all program requirements, governs. Rashid concedes
that rule 79.2(8)—which requires notice within five days of suspension—may apply
too. In any event, Rashid urges the rules are compatible and require that notice
be given at least fifteen days before suspension, in line with rule 79.2(7)(b). Iowa
Admin. Code r. 441-79.2(7)(b), (8); see Iowa Code § 4.7 (“If a general provision
conflicts with a special or local provision, they shall be construed, if possible, so
that effect is given to both.”). We disagree, finding the two provisions are
irreconcilable and the more-specific rule 79.2(8) controls.
In pertinent part, rule 79.2(8), entitled “suspension or withholding of
payments,” explains that “[i]f the department withholds or suspends payments, it
shall notify the person in writing within the time frames prescribed by federal law
for cases related to a credible allegation of fraud.” Iowa Admin. Code
2 Rashid’s brief includes a color-coded chart with arrows and text concerning this
issue. Even if such a chart is permitted under our rules of appellate procedure, we
used a word processor to calculate the word count for the appellant’s brief, and it
appears the thirty-one words contained in the chart were not included in counsel’s
word-count certification. We join the growing chorus of courts to express our
displeasure with attempts to evade word limitations. See Douglas E. Abrams,
Sanctions for Evading Maximum Page Limits on Court Filings, 73 J. Mo. B. 316
(2017) (collecting cases).
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r. 441-79.2(8); see also Harris v. McRae, 448 U.S. 297, 301 (1980) (noting states
that participate in Medicaid “must comply with the requirements of Title XIX”
establishing Medicaid). The applicable federal regulation provides:
The State agency must send notice of its suspension of
program payments within the following timeframes:
(i) Five days of taking such action unless requested in writing
by a law enforcement agency to temporarily withhold such notice.
(ii) Thirty days if requested by law enforcement in writing to
delay sending such notice, which request for delay may be renewed
in writing up to twice and in no event may exceed 90 days.
42 C.F.R. § 455.23(b)(1). In short, notice must be sent within five days after the
suspension of payments for credible allegations of Medicaid fraud, unless the
exceptions triggered by a law enforcement request apply. This more-specific rule
governs over a more-general provision. See Iowa Code § 4.7 (“If the conflict
between the provisions is irreconcilable, the special or local provision prevails as
an exception to the general provision.”).
Although the plain language of the federal regulation disposes of the issue,
the state and federal rulemaking history also reflect intent that notice be given only
after suspension. As HHS noted in a 2014 response to a comment recommending
notification before suspension, “[m]ailing the notice of payment suspension prior
to the actual imposition of the payment suspension may impact the Department’s
ability to protect Medicaid funds against fraud, waste or abuse if the provider
receives advance notice of the payment suspension prior to implementation of the
suspension.” 37 Iowa Admin. Bull. 793–97 (Oct. 29, 2014). Federal regulators
similarly considered and decided against the idea “that providers should be given
notice of a payment suspension prior to such action being taken,” due to “the
sensitive nature of a fraud investigation which may be jeopardized by such notice.”
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Medicaid Suspension of Payments Requirements, 76 Fed. Reg. 5862, 5937
(Feb. 2, 2011) (codified at 42 C.F.R. pt. 455). Expressing the same policy concern
as HHS, federal regulators voiced their expectation “that State agencies will act
appropriately so as not to jeopardize any investigation.” Id. Both rulemaking
histories reflect an intent for notice to only be given after suspension, which
confirms our reading of the text.
We affirm the district court’s ruling that HHS did not commit a legal error
when it did not provide Rashid advance notice it was suspending payments.
B. Credible Allegation of Fraud
Rashid’s second argument revolves around HHS determining there was a
credible allegation of fraud. Rashid contends the record lacks substantial evidence
supporting the determination related to Medicaid, and that HHS failed to conduct
an investigation or review “all allegations, facts, and evidence” related to the case.
We disagree.
We find substantial evidence supported a credible allegation of fraud
perpetrated by Rashid. The federal rules define a “credible allegation of fraud” as
an allegation, which has been verified by the State, from any source,
including but not limited to the following:
(1) Fraud hotline tips verified by further evidence.
(2) Claims data mining.
(3) Patterns identified through provider audits, civil false
claims cases, and law enforcement investigations. Allegations are
considered to be credible when they have indicia of reliability and the
State Medicaid agency has reviewed all allegations, facts, and
evidence carefully and acts judiciously on a case-by-case basis.
42 C.F.R. § 455.2. In reviewing whether there was a credible allegation of fraud
against Rashid, HHS reviewed the notice from MFCU, an invoice review completed
by federal investigators, an email request for ongoing law enforcement assistance,
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and a state field auditor’s report detailing the potential Medicaid exposure due to
Rashid’s fraud. On the other side of the ledger, HHS also considered Rashid’s
contentions related to the price-regulated drug program and the financial audit. As
a whole, this evidence supports HHS finding a credible allegation of fraud against
Rashid, particularly given our highly deferential standard of review. See Iowa
Code § 17A.19(10)(f); Burton, 813 N.W.2d at 256.
Rashid also contends that HHS had to conduct an investigation and review
all information related to the case before finding a credible allegation of fraud. We
reject this argument as well. No regulations expressly require HHS to begin a
Medicaid fraud investigation; investigations can begin either with HHS (or its
subunits) or MFCU. See 42 C.F.R. §§ 455.2, .23, 1007.9. When MFCU initiates
an investigation, it “may refer any provider with respect to which there is pending
an investigation of a credible allegation of fraud under the Medicaid program to the
Medicaid agency for payment suspension in whole or part under § 455.23 of this
title.” 42 C.F.R. § 1007.9(e)(1). In terms of the detail required, “[r]eferrals may be
brief but must be in writing and include sufficient information to allow the Medicaid
agency to identify the provider and to explain the credible allegations forming the
ground for the payment suspension.” 42 C.F.R. § 1007.9(e)(2).
MFCU is not part of HHS. See 42 U.S.C. § 1396b(q)(2) (providing the
requirements for a state MFCU, including that MFCU “is separate and distinct from
the single State agency that administers or supervises” Medicaid). When
investigations originate with MFCU, HHS has only the information MFCU makes
available and must evaluate the information provided. HHS contends state law
renders the underlying MFCU law enforcement records confidential. See Iowa
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Code § 22.7 (describing public records that typically must “be kept confidential”).
We need not decide that question on this record, though we recognize that (under
current law) MFCU is a law enforcement entity housed within the Iowa Department
of Inspections and Appeals rather than HHS, and we decline to second-guess the
information-sharing practices of state agencies as they navigate pending criminal
investigations. Regardless of whether section 22.7 applies to the investigative file
here, there is no dispute that MFCU did not produce its full investigative file to
HHS. HHS could only review the information before it, and we find the agency was
not required to do more.
Rashid also reiterates on appeal its claim that, while there was evidence of
Medicare fraud, there was no evidence of Medicaid fraud. We disagree. The
federal search warrant authorized seizure of “[a]ny and all records relating to the
purchase, ordering, or procurement of medications; medication inventories, the
delivery of medications; the return of medications; the transfer, disbursement or
disbursal or medications; and the payment and billing for medications.” By its
nature, the warrant’s inclusive language would include records related to Medicaid
claims, and the federal warrant was supported by probable cause. See generally
Fed. R. Crim. P. 41(d). We also note that HHS expressly considered whether the
Medicare concerns likely extended to Medicaid and relied on an audit report to
evaluate this potential exposure. While this is a type of inferential reasoning, we
agree with the agency’s observation—supported by its expertise in this area—that
“the Medicare program and Medicaid program are similar programs in terms of
government insurance to selected groups and the allegation of large scale fraud
against one is enough to infer an issue with the other program sufficient to justify
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withholding all such payments.” While perhaps not enough to return a criminal
conviction or find civil liability at jury trial, the standard here is far lower, and we
conclude the evidence before HHS crossed the substantial-evidence threshold.
C. Good-Cause Exception
Last, Rashid argues that a good-cause exception under federal
administrative rule 455.23(e) and (f) should apply to withdraw or reduce its
suspension. Rashid claims it was the “sole source of essential specialized
services in [its] community,” that it serves medically underserved areas, and that
its suspension could be limited to specific drugs tied to the alleged fraud. Rashid
posits each reason as independently sufficient for the withdrawal or reduction of
its suspension. However, the rules cited by Rashid are permissive, rather than
mandatory, and grant discretion to HHS. See 42 C.F.R. § 455.23(e), (f) (providing
“[a] State may find that good cause exists” to either not suspend payments or
suspend payments in part (emphasis added)). We see no abuse of that discretion
on this record, as substantial evidence supports HHS declining to apply any of the
exceptions, and we conclude Rashid has not carried its burden to establish the
invalidity of any agency action.
Rashid’s first arguments for a complete withdrawal of its suspension are
based in rule 455.23(e)(4). Under this provision, the State can withdraw
suspension if:
Beneficiary access to items or services would be jeopardized
by a payment suspension because of either the following:
(i) An individual or entity is the sole community physician or
the sole source of essential specialized services in a community.
(ii) The individual or entity serves a large number of
beneficiaries within a HRSA [(Health Resources and Services
Administration)]-designated medically underserved area.
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42 C.F.R. § 455.23(e)(4). Rashid’s claim turns on offering free home delivery and
that it is allegedly the only supplier of a particular pill dispenser within the area.
HHS disagreed, finding Rashid is simply a “generic pharmacy that does some
delivery and packs some pills, nothing more,” and we see no error in this reasoning
or relying on these facts as a rationale for not applying the exception. Accord
NSCH Rural Health Clinic v. Snyder, 321 So. 3d 565, 573–74 (Miss. Ct. App. 2020)
(holding that a dentistry’s satellite campuses and extended hours did not constitute
a specialized service under federal rule 455.23(e)(4)(i) and its state-level
counterpart). HHS’s conclusion is confirmed by the MCOs reporting Rashid’s
suspension would not jeopardize access to pharmaceutical services. We find
substantial evidence supports the agency’s rejection of a good-cause exception
under rule 455.23(e)(4)(i).
Rashid next argues for a good-cause exception for serving an HRSA-
designated medically underserved area under rule 455.23(e)(4)(ii). HHS
determined Rashid’s suspension would not jeopardize access to services for a
large number of persons in the designated area. This finding was also supported
by information from the MCOs in Rashid’s service area, and we find substantial
evidence supports HHS’s determination in light of the agency’s expertise.
Third, Rashid argues for a partial exception to apply to its suspension
through one of several restrictions. Rashid suggests restricting the suspension to
particular drugs, to the percentage of drugs flagged across the board in its
business, to brand-name drugs (which were the focus of the audit), or to the drugs
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not covered in the internal examination or audit performed by Rashid. The
applicable regulation allows a partial suspension where the State finds:
(i) The credible allegation focuses solely and definitively on
only a specific type of claim or arises from only a business unit of a
provider; and
(ii) The State determines and documents in writing that a
payment suspension in part would effectively ensure that potentially
fraudulent claims were not continuing to be paid.
42 C.F.R. § 455.23(f)(3). But here, HHS found the suspected fraud “appear[ed] to
cut across Rashid’s business,” which supports rejecting a partial suspension. The
record in this appeal is voluminous, and we have little trouble concluding there is
evidence of widespread fraud, not limited to certain drugs. Substantial evidence
supports the agency’s rejection of a partial suspension under rule 455.23(f)(3), and
we find HHS did not abuse its discretion in declining to apply this exception.
IV. Disposition
We reject Rashid’s arguments on appeal and affirm the district court’s
decision on judicial review.
AFFIRMED.