TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN
NO. 03-12-00293-CV
Southwest Pharmacy Solutions, Inc. d/b/a American Pharmacies, Appellant
v.
Texas Health and Human Services Commission and Thomas Suehs, solely in his
Official Capacity as Executive Commissioner of the Texas Health and Human
Services Commission, Appellees
FROM THE DISTRICT COURT OF TRAVIS COUNTY, 419TH JUDICIAL DISTRICT
NO. D-1-GN-12-000469, HONORABLE JOHN K. DIETZ, JUDGE PRESIDING
OPINION
Southwest Pharmacy Solutions, Inc. d/b/a American Pharmacies appeals the trial
court’s judgment granting the plea to the jurisdiction of the Texas Health and Human Services
Commission (HHSC) and Thomas Suehs, Executive Commissioner of HHSC (jointly HHSC) and
denying its requests for declaratory and injunctive relief. American Pharmacies challenged HHSC’s
rulemaking obligations and certain rules promulgated by HHSC related to pharmacy benefits under
Texas’s Medicaid managed care (MMC) program. For the reasons that follow, we affirm the trial
court’s judgment.
STATUTORY AND REGULATORY FRAMEWORK
Medicaid is a cooperative federal-state program that provides health care to needy
individuals. See generally 42 U.S.C. §§ 1396–1396w (Grants to States for Medical Assistance
Programs).1 While federal law establishes Medicaid’s basic parameters, each state decides the nature
and scope of its Medicaid program and submits a State plan describing its program to the federal
Center for Medicare and Medicaid Services, which must approve the plan and any amendments. See
42 U.S.C. §1396a(a), (b); 42 C.F.R. § 430.10. The federal government agrees to pay a specified
percentage of a state’s expenditures for covered services provided by the state under an approved
State plan. See 42 U.S.C. §§ 1396b(a), 1396c, 1396d(b). Outpatient pharmacy services are among
the covered services. See id. § 1396r-8. In Texas, HHSC is the agency designated to administer
federal medical assistance programs, including Medicaid. See Tex. Hum. Res. Code § 32.021(a);
Tex. Gov’t Code § 531.021(a).
Traditionally, health care providers enrolled in the Medicaid program
were reimbursed by HHSC on a fee-for-service basis at rates set by HHSC, with pharmacies
being reimbursed under the Vendor Drug Program.2 See Act of May 26, 1979,
66th Leg., R.S., ch. 842, §§ 32.028, .029, 1979 Tex. Gen. Laws 2333, 2351 (current versions at Tex.
Hum. Res. Code §§ 32.028, .029); see also Tex. Gov’t Code § 531.021(b)(2); 1 Tex. Admin. Code
1
Because there have been no substantive changes to the relevant state and federal statutes
and rules since the filing of this case, we cite to the current versions except where we cite for
historical fact of passage or amendment.
2
Under a traditional fee-for-service arrangement, a health care provider is reimbursed for
all procedures that are provided, at a price controlled by the health care providers. See Hawkins
v. El Paso First Health Plans, Inc., 214 S.W.3d 709, 713 n.5 (Tex. App.—Austin 2007, pet. denied);
Vista Health Plan, Inc. v. Texas Health & Human Servs. Comm’n, No. 03-03-00216-CV, 2004 Tex.
App. LEXIS 4529, at *6 n.6 (Tex. App.—Austin May 20, 2004, pet. denied) (mem. op.) (citing
Andrew Ruskin, Capitation: the Legal Implications of Using Capitation to Affect Physician
Decision-making Processes, 13 J. Contemp. Health L. & Pol’y 391, 392–93 (1997)).
2
§§ 354.1801–.1928 (Tex. Health and Hum. Servs. Comm’n,3 Pharmacy Services), 355.201
(Establishment and Adjustment of Reimbursement Rates by the Health and Human Services
Commission), 355.8541–.8551 (Pharmacy Services: Reimbursement). HHSC is charged with
adopting rules for determining reimbursement rates for medical assistance payments. Act of May
26, 1979, 66th Leg., R.S., ch. 842, § 32.028(a) (current version at Tex. Hum. Res. Code § 32.028(a));
Tex. Gov’t Code § 531.021(b)(2).
Since 1997, HHSC has had statutory authority to implement an MMC program for
providing Medicaid services in Texas. See Act of May 28, 1997, 75th Leg., R.S., ch. 1262, § 2,
1997 Tex. Gen. Laws 4780, 4781 (current version at Tex. Gov’t Code §§ 533.001–.063)
(Implementation of Medicaid Managed Care Program); Tex. Gov’t Code § 533.002 (“The
commission shall implement the Medicaid managed care program as part of the health care delivery
system . . . .”). Under MMC, HHSC contracts with managed care organizations (MCOs) to provide
Medicaid health services under a managed care plan. See Tex. Gov’t Code §§ 533.001–.002; see
also 42 U.S.C. § 1396b (authorizing federal reimbursement to state for costs of contracting with
eligible MCOs). The MMC program in Texas operates as a Medicaid “demonstration project”
authorized by certain waivers from the required provisions of the State plan granted by the
federal government and monitored by the U.S. Department of Health and Human Services. See
42 U.S.C. § 1315; Tex. Hum. Res. Code § 32.041 (authorizing planning and evaluations of MMC
demonstration project for implementation in 1996–97 biennium).
3
All cites to title 1, chapters 353–55 of the Texas Administrative Code are to rules issued
by the Texas Health and Human Services Commission.
3
HHSC’s contracts with MCOs must include “capitation rates that ensure the cost-
effective provision of quality health care.” Tex. Gov’t Code § 533.005(a)(2). “Capitation is a
method of financing that distinguishes managed care service plans from traditional fee-for-service
plans.” Hawkins v. El Paso First Health Plans, Inc., 214 S.W.3d 709, 712 (Tex. App.—Austin
2007, pet. denied). Under a “capitated” payment system, healthcare payers like Medicaid purchase
services at a per person/per month rate from providers like the MCOs in return for payment pursuant
to a capitated rate schedule. Id. The capitation rates are fixed sums that are calculated monthly for
each enrolled member regardless of the amount of covered services used by the member and thus
provide budget certainty to the state. Id.4 Capitated payment arrangements are termed “full risk”
because the MCO bears the risk that the capitated payment received for an insured member may be
insufficient to cover that member’s medical needs for any given month. See 42 C.F.R. 438.2 (risk
contract means contract under which contractor assumes risk for cost of covered services and incurs
loss if cost exceeds payments); Vista Health Plan, Inc. v. Texas Health & Human Servs. Comm’n,
No. 03-03-00216-CV, 2004 Tex. App. LEXIS 4529, at *6 n.4 (Tex. App.—Austin May 20, 2004,
pet. denied) (mem. op.) (citing David M. Studdert, Direct Contracts, Data Sharing and Employee
Risk Selection: New Stakes for Patient Privacy in Tomorrow’s Health Insurance Markets,
4
See also Tex. Ins. Code § 843.002(4) (defining capitation as “a method of compensating
a physician or provider for arranging for or providing a defined set of covered health care services
to certain enrollees for a specified period that is based on a predetermined payment per enrollee for
the specified period, without regard to the quantity of services actually provided”);
42 C.F.R. § 422.208(a) (defining capitation as “a set dollar payment per patient per unit of time
(usually per month) paid to a physician or physician group to cover a specified set of services and
administrative costs without regard to the actual number of services provided . . . includ[ing] the
physician’s own services, referral services, or all medical services”).
4
25 Am. J. L. & Med. 233, 236 (1999)); see also 42 U.S.C. § 1395mm(b)(2)(D) (to be eligible for
federal reimbursement, MCO must assume full financial risk on prospective basis for provision of
health care services).
Prior to March 1, 2012, outpatient pharmacy benefits were excluded from MMC, and
Medicaid recipients obtained their outpatient drugs through pharmacies enrolled in the Vendor Drug
Program. See 1 Tex. Admin. Code § 354.1873 (Freedom of Choice). In 2011, the legislature
expanded the MMC program to include outpatient pharmacy benefits. See Act of June 27, 2011,
82d Leg., 1st C.S., ch. 7, § 1.02(d), 2011 Tex. Gen. Laws 5390, 5393 (SB 7) (codified at Tex. Gov’t
Code § 533.005(a)(23)) (contract between HHSC and MCO must include outpatient pharmacy
benefit plan). In December 2011, HHSC obtained a waiver from the federal government for its new
Medicaid Demonstration Project, entitled “Texas Healthcare Transformation and Quality
Improvement Program.” The waiver authorized HHSC, among other things, “to restrict freedom of
choice of provider through the use of mandatory enrollment in managed care plans for the receipt
of covered services[,]” including pharmacy services. See 42 U.S.C. 1315(a) (waiver of state plan
requirements for demonstration projects); see also 42 U.S.C. §1396a(a)(23)(A) (requiring State plan
to provide that individuals eligible for medical assistance, including drugs, may obtain such
assistance from any qualified provider); 1 Tex. Admin. Code § 354.1873 (affording Medicaid
recipients right to obtain pharmacy services from any pharmacy enrolled in Drug Vendor Program).
Under MMC, MCOs generally contract with pharmacy benefit managers (PBMs) to act as
intermediaries between MCOs and pharmacies. The PBMs establish networks of providers and
process prescription drug claims submitted by provider pharmacies.
5
HHSC subsequently proposed rules to comply with SB 7. See 36 Tex. Reg. 8667
(2011), adopted 37 Tex. Reg. 1292 (2012) (codified at 1 Tex. Admin. Code § 353.901–.915
(Outpatient Pharmacy Services) (“Subchapter J”). The preamble stated that the new rules were
proposed to comply with SB 7 and the cost-saving initiatives of the 2012–2013 General
Appropriations Act and to implement the statutory mandates consistent with the federally-approved
demonstration project waiver. See id. at 8667–68; see also 42 U.S.C. §§ 1315, 1396a. Included in
the proposed rules was a Small Business and Micro-business Impact Analysis required by section
2006.002 of the Government Code. See 36 Tex. Reg. 8668–70; Tex. Gov’t Code § 2006.002(c)
(requiring state agency to prepare economic impact statement and regulatory flexibility analysis
before adopting rule that may have adverse economic effect on small businesses). In the economic
impact statement, HHSC concluded that the proposed rules would affect independent pharmacies
that may be small businesses and that they may experience adverse economic effects as a result of
their inclusion in MMC, as required by SB 7. In its regulatory flexibility analysis, HHSC considered
three alternative methods for achieving the purposes of the proposed rules, see Tex. Gov’t Code
§ 2006.002(c)(2), but declined to implement them, observing that participation in the program was
voluntary and any alternative to including pharmacy services in MMC would fail to comply with the
mandates of SB 7, see 36 Tex. Reg. 8669–70. In February 2012, HHSC adopted the proposed rules
without relevant changes. See 37 Tex. Reg. 1292. The stated purpose of the new rules is “to
implement the requirements of Texas Government Code § 533.005, which establishes requirements
for providing outpatient pharmacy benefits through Medicaid managed care.” See 1 Tex. Admin.
Code § 353.901; see also Tex. Gov’t Code § 533.005. The new rules did not include provisions
6
regulating reimbursements to pharmacy benefits under MMC care. See 1 Tex. Admin. Code
§§ 353.901–.915.
FACTUAL AND PROCEDURAL BACKGROUND
American Pharmacies is a for-profit, member-owned cooperative of independent
pharmacies operating in Texas and other states. Most of its members are small businesses as defined
in section 2006.001(2) of the Government Code, see Tex. Gov’t Code § 2006.001(2), that provide
outpatient drugs to beneficiaries of the Texas Medicaid program administered through HHSC. See
Tex. Hum. Res. Code § 32.021(a); Tex. Gov’t Code § 531.021(a). In January 2012, American
Pharmacies filed comments to HHSC’s proposed rules, objecting to the lack of minimum
reimbursement rates for pharmacy claims paid by MCOs and contending that HHSC had not
complied with section 2006.002 of the Government Code. In adopting the rules, HHSC responded
to the comments of American Pharmacies and others, but as previously stated, did not modify the
rules in response. See 37 Tex. Reg. 1292. American Pharmacies filed suit seeking declaratory
relief under the Uniform Declaratory Judgments Act (UDJA), see Tex. Civ. Prac. & Rem. Code
§§ 37.001–.011, and the declaratory judgment provision of the Administrative Procedure Act (APA),
see Tex. Gov’t Code § 2001.038. American Pharmacies asked the trial court to construe the relevant
statutes and declare that HHSC is required to regulate reimbursement rates of pharmacies under the
MMC program and that HHSC had failed to perform a proper impact analysis under section
2006.002 of the Government Code because it had failed to adopt a legal and feasible alternative to
the proposed rules. American Pharmacies also sought declarations that Suehs’s failure to adopt rules
governing pharmacy reimbursements and to tailor the new rules so as to reduce their adverse
7
economic impact on small business pharmacy providers was ultra vires and that the new rules were
consequently void.
HHSC filed a plea to the jurisdiction asserting that (1) American Pharmacies lacked
standing because it had asserted no justiciable interest and (2) Suehs had not acted ultra vires because
HHSC had no duty to set pharmacy provider rates under MMC and HHSC had fully complied with
section 2006.002 in performing the impact analysis. The trial court found that it had jurisdiction to
construe the statutes and rules at issue under the UDJA to determine if Suehs’s actions were ultra
vires, conducted a hearing on the merits, and rendered final judgment holding that (1) American
Pharmacies had failed to allege or prove a justiciable interest; (2) American Pharmacies had failed
to allege or prove that HHSC had any rate-setting duty in the MMC context; (3) HHSC had
substantially complied with section 2006.002; and (4) Suehs had reasonably construed the statutes
governing Texas Medicaid and acted within his discretion and authority, and American Pharmacies
had failed to allege or prove that Suehs acted ultra vires with respect to implementation of MMC.
The trial court granted HHSC’s plea to the jurisdiction and rendered judgment for HHSC in all
respects. This appeal followed.
STANDARD OF REVIEW
A plea to the jurisdiction challenges the court’s authority to decide a case. Heckman
v. Williamson Cnty., 369 S.W.3d 137, 149 (Tex. 2012). A plea questioning the plaintiff’s standing,
which is a component of subject matter jurisdiction, raises questions of law that we review de novo.
Westbrook v. Penley, 231 S.W.3d 389, 394 (Tex. 2007); Texas Dep’t of Transp. v. City of Sunset
Valley, 146 S.W.3d 637, 646 (Tex. 2004). When a plea to the jurisdiction challenges the pleadings,
8
we look to the pleader’s intent, construe the pleadings liberally in favor of jurisdiction, and accept
the allegations in the pleadings as true to determine if the pleader has alleged sufficient facts to
affirmatively demonstrate the trial court’s jurisdiction to hear the cause. Heckman, 369 S.W.3d at
150; City of El Paso v. Heinrich, 284 S.W.3d 366, 378 (Tex. 2009); Texas Dep’t of Parks & Wildlife
v. Miranda, 133 S.W.3d 217, 226 (Tex. 2004). If the pleadings affirmatively negate the existence
of jurisdiction, then a plea to the jurisdiction may be granted without allowing the plaintiff an
opportunity to amend. Miranda, 133 S.W.3d at 227. When the plea challenges the jurisdictional
facts, the trial court may consider any evidence the parties have submitted and must do so when
necessary to resolve the jurisdictional inquiry. Id.; Bland Indep. Sch. Dist. v. Blue, 34 S.W.3d 547,
555 (Tex. 2000).
When, as here, the jurisdictional facts implicate the merits of the plaintiff’s cause of
action, the party challenging jurisdiction has a burden similar to that in a traditional summary
judgment. Miranda, 133 S.W.3d at 227–28; Good Shepherd Med. Ctr. v. State, 306 S.W.3d 825,
831 (Tex. App.—Austin 2010, no pet.). If the evidence creates a fact issue as to jurisdiction, the trial
court cannot grant the plea to the jurisdiction, and the fact issue must be resolved by the fact finder
at trial. Miranda, 133 S.W.3d at 227–28; University of Tex. v. Poindexter, 306 S.W.3d 798, 807
(Tex. App.—Austin 2009, no pet.). On the other hand, if the evidence is undisputed or fails to raise
a fact issue, the trial court rules on the plea to the jurisdiction as a matter of law. Miranda,
133 S.W.3d at 228; Poindexter, 306 S.W.3d at 807. We review the trial court’s determination de
novo, indulging every reasonable inference and resolving any doubts in the plaintiff’s favor.
Miranda, 133 S.W.3d at 228; Poindexter, 306 S.W.3d at 807.
9
In its plea to the jurisdiction, HHSC challenges American Pharmacies’ standing,
contending that it failed to assert a justiciable interest. The general test for standing is whether
there is a real controversy between the parties that will actually be determined by the
judicial determination sought. Texas Ass’n of Bus. v. Texas Air Control Bd., 852 S.W.2d 440,
443–45 (Tex. 1993); City of Waco v. Texas Comm’n on Envtl. Quality, 346 S.W.3d 781, 801 (Tex.
App.—Austin 2011, pet. granted). A justiciable interest with regard to a statute or rule requires
“some actual or threatened restriction” under the statute or rule. See Brantley v. Texas Youth
Comm’n, 365 S.W.3d 89, 102 (Tex. App.—Austin 2011, no pet.) (citing Texas Workers Comp.
Comm’n v. Garcia, 893 S.W.2d 504, 517–18 (Tex. 1995)).
HHSC’s plea to the jurisdiction also challenges American Pharmacies’ ultra vires
claims. While sovereign immunity bars actions against the state absent a legislative waiver, Harris
Cnty. v. Sykes, 136 S.W.3d 635, 638 (Tex. 2004), requests for declaratory relief that do not attempt
to control state action do not implicate governmental immunity at all, see Heinrich, 284 S.W.3d at
372 (Tex. 2009). Suits against governmental officials alleging that they “acted without legal
authority or failed to perform a purely ministerial act” and seeking to compel the officials “to comply
with statutory or constitutional provisions” fall within the “ultra vires” exception to governmental
immunity because they “do not attempt to exert control over the state—they attempt to reassert the
control of the state.” Id. To determine whether a party has asserted a valid ultra vires claim, we
construe the relevant statutory provisions, apply them to the facts alleged, and determine whether
those facts constitute acts beyond the official’s authority or establish a failure to perform a purely
ministerial act. See Texas Dep’t of Transp. v. Sunset Transp., Inc., 357 S.W.3d 691, 701–02 (Tex.
10
App.—Austin 2011, no pet.); Creedmoor-Maha Water Supply Corp. v. Texas Comm’n on Envtl.
Quality, 307 S.W.3d 505, 516 n.8 (Tex. App.—Austin 2010, no pet.) (quoting Hendee v. Dewhurst,
228 S.W.3d 354, 368–69 (Tex. App.—Austin 2007, pet. denied)) (when analyzing whether plaintiff
has alleged ultra vires acts, we construe statutes defining official’s authority, apply provisions to
pleaded and unnegated facts, and determine whether those facts fall within or outside that authority).
The resolution of American Pharmacies’ ultra vires claims turns on statutory
construction, which is a question of law that we review de novo. See Railroad Comm’n v. Texas
Citizens for a Safe Future & Clean Water, 336 S.W.3d 619, 624 (Tex. 2011). Of primary
concern is the express statutory language. See Galbraith Eng’g Consultants, Inc. v. Pochucha,
290 S.W.3d 863, 867 (Tex. 2009). We apply the plain meaning of the text unless a different
meaning is supplied by legislative definition or is apparent from the context or the plain meaning
leads to absurd results. Marks v. St. Luke’s Episcopal Hosp., 319 S.W.3d 658, 663 (Tex. 2010).
“We generally avoid construing individual provisions of a statute in isolation from the statute as a
whole[,]” Texas Citizens, 336 S.W.3d at 628, we must consider a provision’s role in the broader
statutory scheme, see 20801, Inc. v. Parker, 249 S.W.3d 392, 396 (Tex. 2008), and we presume that
“the entire statute is intended to be effective[,]” Tex. Gov’t Code § 311.021(2). A court may
consider the law’s objective, the circumstances under which it was enacted, the legislative history,
former statutory provisions, and the consequences of a particular construction when construing
statutes, whether or not the statute is ambiguous. Tex. Gov’t Code § 311.023(1)–(5); Atmos Energy
Corp. v. Cities of Allen, 353 S.W.3d 156, 160 (Tex. 2011). “Construction of a statute must be
11
consistent with its underlying purpose and the policies it promotes.” Northwestern Nat’l Cnty. Mut.
Ins. Co. v. Rodriguez, 18 S.W.3d 718, 721 (Tex. App.—San Antonio 2000, pet. denied).
Here, we must construe statutes and rules that HHSC is charged with administering.
See Tex. Hum. Res. Code § 32.021(a); Tex. Gov’t Code § 531.021(a). “[A]n agency’s interpretation
of a statute it is charged with enforcing is entitled to ‘serious consideration,’ so long as the
construction is reasonable and does not conflict with the statute’s language.” Texas Citizens,
336 S.W.3d at 624. When a statutory scheme is subject to multiple interpretations, we must uphold
an enforcing agency’s construction if it is reasonable and in harmony with the statute. Id. at 629
(observing that “governmental agencies have a ‘unique understanding’ of the statutes they
administer”) (quoting Wyeth v. Levine, 555 U.S. 555 (2009)). This deference is particularly
important in construing a complex statutory scheme like that governing Texas Medicaid. See id. at
629–30. We construe administrative rules in the same manner as statutes. TGS-NOPEC
Geophysical Co. v. Combs, 340 S.W.3d 432, 438 (Tex. 2011). We defer to an agency’s
interpretation of its own rules unless it is plainly erroneous or contradicts the text of the rule or
underlying statute. Public Util. Comm’n v. Gulf States Utils. Co., 809 S.W.2d 201, 207 (Tex.
1991); Texas Bd. of Chiropractic Exam’rs v. Texas Med. Ass’n, 375 S.W.3d 464, 475 (Tex.
App.—Austin 2012, pet. denied). With these rules of construction in mind, we turn to American
Pharmacies’ issues.
12
DISCUSSION
HHSC’s Duty to Regulate Reimbursement Rates under Managed Care
In its first three issues, American Pharmacies argues that the trial court erred in
construing the relevant statutes so as to find that HHSC was not obligated to regulate pharmacy
reimbursement rates under MMC and that Suehs’s actions in implementing MMC without doing so
were not ultra vires. The crux of the parties’ dispute concerning HHSC’s duty to regulate pharmacy
benefits under MMC is their conflicting interpretations of four statutory provisions. American
Pharmacies argues that sections 531.0055(b)(1) and 531.021(b)(2) of the Government Code and
sections 32.028(a) and 32.003(4) of the Human Resources Code, read together, demonstrate that
HHSC has the obligation to adopt reasonable rates and standards governing “medical assistance
payments,” which include pharmacy benefits. See Tex. Gov’t Code §§ 531.021(b)(2), .0055(b)(1);
Tex. Hum. Res. Code §§ 32.003(4), .028(a). Government Code section 531.0055(b)(1) requires
HHSC to manage Medicaid, including MMC, in accordance with section 531.021. See Tex. Gov’t
Code § 531.0055(b)(1). Section 531.021(b)(2) requires HHSC to adopt rules for determination of
rates for medical assistance payments under chapter 32 of the Human Resources Code. See id.
§ 532.012(b)(2). Human Resources Code section 32.028(a) requires HHSC to adopt rules for
determination of rates for medical assistance payments. See Tex. Hum. Res. Code § 32.038(a).
While “medical assistance” is defined as “all of the health care and related services
and benefits authorized or provided under federal law for needy individuals of this state,” see id.
§ 32.003(4); Tex. Gov’t Code § 533.0025(a) (adopting meaning assigned by section 32.003),
“medical assistance payments” is not defined. (Emphasis added.) American Pharmacies contends
13
that the plain meaning of the term includes payments under both fee-for-service and MMC and that
nothing specifically excludes payments under MMC from the scope of the term. American
Pharmacies also cites rule 355.201(b), which governs HHSC’s establishment of reimbursement rates,
states that its purpose is to implement Government Code section 531.021(d) (guidelines for setting
rates under section 531.021(b)(2)), and expressly applies to all programs that provide medical
assistance. See 1 Tex. Admin. Code § 355.201(b), Tex. Gov’t Code § 531.021(d). American
Pharmacies thus argues that the term includes payments to pharmacies by MCOs and PBMs in the
MMC model.
American Pharmacies also contends that the legislative history of section 531.021
supports its construction of these provisions. Prior to 1997, when MMC was adopted,
section 531.021 provided only that “[HHSC] is the state agency designated to administer
federal medical assistance funds.” See Act of Apr. 21, 1995, 74th Leg., R.S., ch. 76, § 8.002,
1995 Tex. Gen. Laws 458, 589 (current version at Tex. Gov’t Code § 531.021(a)). In 1997, as part
of the act implementing MMC, subsection (b) was added to section 531.021, making HHSC
responsible for adopting rules for rates for medical assistance payments under chapter 32. See Act
of May 28, 1997, 75th Leg., R.S., ch. 1262, § 1, 1997 Tex. Gen. Laws 4780, 4781 (current version
at Tex. Gov’t Code § 531.021(b)(2)). Because this rulemaking authority was granted to HHSC in
an act the purpose of which was to “provide[] for the authority of [HHSC] to administer and operate
[MMC],” see Senate Research Center, Bill Analysis, Tex. H.B. 2913, 75th Leg. R.S. (1997),
American Pharmacies argues that it is clear that the legislature intended to require HHSC to adopt
rules to determine rates even in the MMC context.
14
American Pharmacies also argues that section 531.021(b) must be considered in its
entirety in the MMC context. American Pharmacies contends that because Government Code
section 533.0055(b)(1) requires HHSC to manage MMC in accordance with Government Code
section 521.021, and subsections (1)–(3) of section 521.021(b) are joined by “and,” HHSC must
comply with all three subsections in the MMC context, including subsection (2), which requires the
regulation of rates. Consequently, American Pharmacies argues, HHSC’s position that subsection
(2) does not apply in MMC destroys the meaning of the statute, and the trial court erred in
determining that HHSC’s interpretation of the statute was reasonable. Rather, American Pharmacies
contends, when all the provisions are read together, it is clear that HHSC is obligated to adopt rules
for pharmacy benefit reimbursements under MMC, and Suehs’s failure to do so was ultra vires.
HHSC has adopted a differing interpretation of these governing statutes. HHSC
contends that the statutory provisions are not as “intertwined” as American Pharmacies claims and
that the rate-setting requirements of chapter 32 of the Human Resources Code do not apply to MMC
as American Pharmacies argues. HHSC points out that chapter 32, which provides rate-setting
procedures under the fee-for-service model, was enacted before MMC was adopted in Texas5 and
was not repealed by SB 7—as American Pharmacies argues would have been necessary for it not to
apply to MMC—because it still applies to fee-for-service payments.6 HHSC contends that Suehs
interprets “medical assistance payments” to mean payments made by HHSC to providers and that
5
Section 32.028 was enacted in 1979. See Act of May 26, 1979, 66th Leg., R.S., ch. 842,
§ 32.028, 1979 Tex. Gen. Laws 2333, 2351.
6
Twenty percent of Medicaid recipients are not enrolled in managed care, and pharmacy
reimbursement rates set under chapter 32 and adopted under the Vendor Drug Program still apply
to them.
15
he did not abuse his discretion in so interpreting the term. See 1 Tex. Admin. Code § 355.201(a)(2)
(defining medical assistance as health care related service delivered to Medicaid recipient and
authorized for payment or reimbursement by HHSC or a health and human services agency);
37 Tex. Reg. 1294 (explaining agency’s long-standing interpretation that section 32.028 of Human
Resources Code applies only to payments made by state to providers in fee-for-service model).
Regarding section 531.021(b), HHSC contends that the legislative history does not
support American Pharmacies’ construction. It states that in 1999, following the implementation
of MMC in 1997, subsection (b)(1) was added to address HHSC’s new duties to manage MMC.7
See Act of May 30, 1999, 76th Leg., R.S., ch. 1460, § 3.01, 1999 Tex. Gen. Laws 4953, 4961.
HHSC argues that the separation of its duty to manage MMC contracts, required by (b)(1), from the
duty to set rates for fee-for-service, required by (b)(2), carries over the federal distinction between
MMC and fee-for-service. See 42 C.F.R. 438 (Managed Care); 42 C.F.R. 447 (Payments for
Services). HHSC contends that in this context and from its plain language, it is clear Government
Code section 531.021(d), providing guidelines for setting rates, refers only to 531.021(b)(2), or
fee-for-service, and not to (b)(1), or MMC. Thus, HHSC contends, (b)(2) does not apply to MMC,
and nothing in Human Resource Code chapter 32, or elsewhere, empowers HHSC to dictate the
financial terms of contracts between pharmacies and MCOs or PBMs, to which HHSC is not a party.
HHSC also contends that American Pharmacies’ construction of the statutes conflicts
with the concept of MMC, federal law, and the legislative history and intent of SB 7. HHSC argues
7
Subsection (3), requiring HHSC to establish guidelines for evaluating MMC,
was also added in 1999. See Act of May 30, 1999, 76th Leg., R.S., ch. 1460, § 3.01,
1999 Tex. Gen. Laws 4953, 4961.
16
that under MMC, it pays capitation rates through its contracts with MCOs as required by
Government Code section 533.005(a)(23) (requiring HHSC contract with MCO to include
“outpatient pharmacy benefit plan”), and under traditional fee-for-service Medicaid, it pays provider
reimbursement, and that the two models are mutually exclusive. HHSC cites the federal regulation
requiring it to ensure that the capitation rates paid to MCOs are actuarially sound, see
42 C.F.R. § 438.6(c)(2)(I), which is incorporated into the demonstration waiver under which the
MMC plan operates, and contends that requiring MCOs or PBMs to increase payments to pharmacy
providers would violate section 438.6 and the waiver by compromising the actuarial soundness of
the capitation rates. HHSC also refers to the fiscal note to SB 7—which indicates a legislative intent
to save money by moving pharmacy benefits into MMC from a fee-for-service model and estimates
the cost savings of including prescription drug coverage in MMC, see Fiscal Note, Tex. S.B. 7, 82d
Leg., 1st C.S. (2011)—and argues that regulating rates paid by MCOs and PBMs to pharmacy
providers would negate the legislature’s intended savings. Therefore, HHSC concludes, not adopting
rules regulating reimbursement rates for pharmacy benefits under MMC is consistent with its
legislative mandate and federal law and was not ultra vires.
We agree with the reasoning of HHSC. Although American Pharmacies’ analysis of
the interplay between the relevant provisions appears reasonable on its face, its construction of the
provisions depends on reading them in isolation from the remainder of the statutes in which they
appear and the statutory scheme surrounding them. We must analyze the governing provisions in
the context of the statutes as a whole, see Texas Citizens, 336 S.W.3d at 628, presuming the statutes
are intended to be effective in their entirety, see Tex. Gov’t Code § 311.021(2). We must consider
17
the role of the provisions in the full Medicaid statutory scheme and in the context in which SB 7 was
enacted. See 20801, Inc., 249 S.W.3d at 396; Creedmoor-Maha Water Supply Corp., 307 S.W.3d
at 555. We may consider, as well, the goals of MMC and SB 7, the legislative history, the relevant
prior provisions, and the consequences of American Pharmacies’ construction, see Tex. Gov’t Code
§ 311.023(1)–(5); Atmos Energy Corp., 353 S.W.3d at 160. And we must construe the provisions
in a way that is consistent with their underlying purpose and the policies they are intended to
promote. See Rodriguez, 18 S.W.3d at 721.
In SB 7, the legislature expressly moved, or “carved in,” pharmacy benefits from the
fee-for-service model to MMC with the goal of saving state funds. See Tex. Gov’t Code
§ 533.005(a)(23)); Fiscal Note, Tex. S.B. 7, 82d Leg., 1st C.S.; Conference Comm. Report, H.B. 1,
82d Leg., R.S. (Sept. 20, 2011) (Rider 81 to General Appropriations Act) (“Prescription Drug
Carve in to Managed Care Organizations”). Under MMC, HHSC contracts with MCOs that
provide all covered services to Medicaid recipients. See Tex. Gov’t Code §§ 533.001, .002; see also
42 U.S.C. § 1396b. Directly or through PBMs, the MCOs contract with the provider pharmacies and
negotiate the terms of reimbursement. Under this model, HHSC’s contract with the MCO includes
a capitation rate to ensure cost-effectiveness, see Tex. Gov’t Code § 533.005(2), and the MCO bears
the risk that the capitation payment will be sufficient to cover the services it provides to recipients.
See 42 C.F.R. 438.2; Vista Health Plan, 2004 Tex. App. LEXIS 4529, at *6 n.4. To impose on
HHSC the duty to regulate the rate the MCOs pay the provider pharmacies would contravene the
“full risk” nature and intent of the managed care model, see id., contravene the clear legislative intent
to “carve” pharmacy benefits into MMC, and call for state intervention into private contracts. See
18
Medicaid Program; Medicaid Managed Care: New Provisions, 67 Fed. Reg. 40,989, 40,998
(June 14, 2002) (codified at 42 C.F.R. pts. 400, 430–31, 434–35, 438, 440, & 447) (responding to
comment suggesting requirement for actuarial soundness be extended to payment rates between
MCOs and providers by stating that “[with the exception of payments inapplicable here], we do not
regulate the payment rates between MCOs and subcontracting providers” and that “one of the
efficiencies of managed care is premised on an MCO’s ability to negotiate favorable payment rates
with network providers”). Construing the governing statutes and rules in their entirety and in the
context of the goals and policies they are intended to promote, as well as in light of the legislative
history and prior provisions, we conclude that the plain language of the relevant statutes does not
impose on HHSC the duty to set rates for pharmacy reimbursements in the MMC context.
Even if we were to conclude that there is vagueness, ambiguity, or room for policy
determinations in these statute and rules, we would conclude that HHSC’s interpretation of the
relevant code provisions and agency rules is reasonable, in harmony with the statutes and rules, and
entitled to deference. See Texas Citizens, 336 S.W.3d at 629. We defer to the agency’s
interpretation unless it is plainly erroneous or inconsistent with the language of the statute or rule.
See TGS-NOPEC Geophysical Co., 340 S.W.3d at 438. As the agency designated to administer
Medicaid, HHSC is charged with overseeing a complex regulatory scheme, and deference to its
construction is particularly important. See Texas Citizens, 336 S.W.3d at 629. An agency’s
construction does not have to be “the only—or the best—interpretation in order to warrant . . .
deference.” Id. at 628. Considering the entire statutory scheme, the goals and policies behind it, and
the legislative history and intent, we would conclude that HHSC’s interpretation is reasonable, does
19
not conflict with the provisions’ language, and is entitled to deference. See id. at 628. We therefore
conclude that the trial court did not err in finding that Suehs has reasonably construed the statutes
governing Texas Medicaid and that American Pharmacies failed to allege or prove that HHSC has
any rate-setting duty in MMC or that Suehs’s failure to adopt rules for setting pharmacy
reimbursement rates in MMC was ultra vires. We overrule American Pharmacies’ first through
third issues.
Compliance with Government Code Section 2006.002
In its fourth issue, American Pharmacies contends the trial court erred by finding that
in proposing Subchapter J to implement SB 7, HHSC substantially complied with section 2006.002
of the Government Code, which governs an agency’s adoption of rules with an adverse economic
impact on small businesses.8 See Tex. Gov’t Code § 2006.002. Section 2006.002(a) requires that
an agency considering adoption of a rule that would have an adverse effect on small businesses
“shall reduce the effect if doing so is legal and feasible considering the purpose of the statute under
which the rule is to be adopted.” Id. § 2006.002(a). Before adopting such a rule, the agency must
prepare (1) an economic impact statement estimating the number of businesses affected, projecting
the economic impact, and describing alternative methods of achieving the purpose of the proposed
rule and (2) a regulatory flexibility analysis that includes the agency’s consideration of alternative
methods of achieving the purpose of the proposed rule. Id. § 2006.002(c)(1), (2). Section 2001.024
of the APA requires that the published notice of a rule include certain statements and “any other
8
The parties do not dispute that American Pharmacies’ members qualify as small businesses
within the meaning of section 2006.002.
20
statement required by law.” Id. § 2001.024(a)(8). Among the other statements required to be
included in the notice are the economic impact statement and regulatory flexibility analysis required
by section 2006.002. Id. § 2006.002(d); Unified Loan, Inc. v. Pettijohn, 955 S.W.2d 649, 651 (Tex.
App.—Austin 1997, no pet.). Failure to substantially comply with section 2001.024 renders a rule
voidable. Tex. Gov’t Code § 2001.035(a) (rule voidable unless agency adopts it in substantial
compliance with APA sections 2001.0225 through 2001.034).
American Pharmacies contends that HHSC failed to consider and adopt legal and
feasible alternatives to reduce the adverse economic effect of Subchapter J on small pharmacies. It
cites the Texas Attorney General’s guidelines on implementation of section 2006.002’s regulatory
flexibility analysis, which suggests that among the alternatives agencies may consider are
(1) different rules for small businesses, (2) exemptions for certain small businesses, and (3) a “‘no
action’ alternative.”9 American Pharmacies argues that a legal and feasible alternative was to include
a provision in Subchapter J requiring MCOs and PBMs to reimburse pharmacies utilizing rates
established under Human Resources Code section 32.028 and Government Code section 531.021(b).
American Pharmacies also contends that HHSC considered only three alternatives that it knew were
obviously illegal and then rejected them on the ground that they were illegal. Because they were
adopted without the proper flexibility study and without the adoption of “less onerous rules,”
American Pharmacies urges, the rules in Subchapter J are invalid.
9
See HB 3440 Small Business Impact Final Guidelines, April 2008, available
at https://www.oag.state.tx.us/AG_Publications/pdfs/hb3430guidelines2008.pdf (last visited
June 24, 2013).
21
In its regulatory flexibility analysis, HHSC considered three alternatives:
(1) mail-order prescriptions, (2) selective contracting with large chain pharmacies, and
(3) supplemental reimbursements to some pharmacies. See 36 Tex. Reg. 8669–70. Contrary to
American Pharmacies’ assertion, HHSC did not conclude that these alternatives were illegal. Rather,
it concluded that (1) limitations in SB 7 and Rider 81 to the General Appropriations Act allowed the
inclusion of mail-order prescriptions but precluded HHSC from requiring recipients to use them, see
36 Tex. Reg. 8669; Fiscal Note, Tex. S.B. 7, 82d Leg., 1st C.S.; (2) selective contracting could result
in a greater adverse impact on small pharmacies; id. at 8670; and (3) requiring MCOs to pay
providers a certain amount would conflict with the concept of a “risk contract,” and federal
limitations precluded supplemental reimbursements, id.; 42 C.F.R. 438.60. Thus, the record shows
that HHSC considered alternatives that were legal and potentially viable but that it concluded there
were legal and practical barriers making them infeasible.
Further, the alternative American Pharmacies proposes—including in Subchapter J
a provision requiring MCOs and PBMs to reimburse pharmacies using rates established under
chapter 32 of the Human Resources Code and section 531.021(b) of the Government Code—would
not operate to achieve the purposes of the rule, i.e., to implement the “carve in” of pharmacy benefits
into the MMC model, as provided by SB 7, and therefore is not an alternative method of achieving
the purpose of the rule withing the meaning of section 2006.002(c)(2). See Tex. Gov’t Code
§ 2006.002(c)(2). Any other alternative HHSC might have considered that would fail to include
pharmacy benefits in its contracts with MCOs, including those suggested in the attorney general’s
guidelines, would fail to comply with SB 7 and would likewise not constitute an alternative method
22
of achieving the purpose of the proposed rules. See id.; see also Medicaid Program; Medicaid
Managed Care: New Provisions, 67 Fed. Reg. 40,998.
American Pharmacies also complains that HHSC did not adopt “less onerous rules.”
However, that is not the standard of section 2006.002, which requires an agency to reduce the
adverse economic impact “if doing so is legal and feasible considering the purpose of the statute
under which the rule is to be adopted.” See Tex. Gov’t Code § 2006.002(a). HHSC considered
alternatives but concluded that none were feasible to achieve the purpose of implementing MMC as
to pharmacy benefits. Therefore, we conclude that the trial court did not err in finding that Suehs
substantially complied with section 2006.002 and did not act ultra vires in failing to adopt an
alternative method that would reduce the economic impact on American Pharmacies. We overrule
American Pharmacies’ fourth issue.
Justiciable Interest
In its fifth issue, American Pharmacies argues that the trial court erred in finding that it failed
to assert a justiciable interest as to HHSC.10 Under the UDJA and APA, American Pharmacies
sought to have the relevant statutory provisions construed and Subchapter J declared void as in
violation of Government Code section 2006.002.11 While HHSC is a proper party to an action
10
Having resolved the issue of American Pharmacies’ ultra vires claims against Suehs in
issues one through four, we construe this issue to relate to American Pharmacies’ claims for
declaratory relief against HHSC.
11
The UDJA provides that “[a] person . . . whose rights, status, or other legal relations are
affected by a statute . . . may have determined any question of construction or validity arising under
the . . . statute . . . and obtain a declaration of rights, status or other legal relations thereunder.” Tex.
Civ. Prac. & Rem. Code § 37.004(a). Section 2001.038 of the APA provides for a declaratory
judgment action to determine the “validity or applicability of a rule . . . if it is alleged that the rule
23
construing and challenging the validity of statutes it enforces or its rules, see Tex. Civ. Prac. & Rem.
Code § 37.006(b); Tex. Gov’t Code § 2001.038(c); Heinrich, 284 S.W.3d at 373 n.6, there must be
a justiciable controversy as to the rights and status of the parties that will be resolved by the
declaration sought. See Bonham State Bank v. Beadle, 907 S.W.2d 465, 467 (Tex. 1995); Texas
Health Care Info. Council v. Seton Health Plan, 94 S.W.3d 841, 846 (Tex. App.—Austin 2002, pet.
denied). A controversy is considered justiciable if there is a real and substantial controversy
involving a genuine conflict of tangible interests and not merely a theoretical dispute. Beadle,
907 S.W.2d at 467; Texas Health Care Info. Council, 94 S.W.3d at 846.
American Pharmacies contends that the undisputed economic losses its members have
suffered under MMC is sufficient to establish a justiciable interest and standing. However, although
American Pharmacies has suffered economic losses, they are the result of the legislature’s decision
to “carve” pharmacy benefits into MMC—what American Pharmacies calls “the new unregulated
regime”—not the result of Subchapter J, which was adopted to implement the legislative action. As
we have already determined, American Pharmacies has not shown that Suehs acted ultra vires in
adopting rules to implement SB 7, and it has not challenged SB 7. Therefore, we conclude that
American Pharmacies has failed to assert that its rights, status, or other legal relations are affected
by the rules it seeks to have declared void and thus has not asserted a justiciable interest under the
UDJA. See Tex. Civ. Prac. & Rem. Code § 37.004(a).
Under the APA, American Pharmacies must allege that the challenged rules interfere
with or impair, or threaten to interfere with or impair, a right or privilege belonging to it. See Tex.
or its threatened application interferes with or impairs, or threatens to interfere with or impair, a legal
right or privilege of the plaintiff.” Tex. Gov’t Code § 2001.038(a).
24
Gov’t Code § 2001.038(a). American Pharmacies contends that HHSC’s failure to regulate
pharmacy benefits under MMC “effectively prevents [it] from participating in the federal Medicaid
program as provided for by the statute” and that the economic harm it has suffered under MMC is
sufficient to establish a justiciable interest and standing under section 2001.038. In essence,
American Pharmacies argues that the right or privilege that is impaired by the rules is its right to
participate as a provider in the Medicaid program under the Vendor Drug Program or similarly
regulated reimbursement rates that will mitigate the losses it has sustained under MMC. We do not
find this argument persuasive.
Nothing in Subchapter J prevents American Pharmacies from participating in the
Medicaid program. For the 20% of Medicaid recipients who are not enrolled in MMC and utilize
the services of American Pharmacies’ members, HHSC will continue to reimburse the members on
a fee-for-service basis under the Vendor Drug Program, and American Pharmacies’ rights under the
program are not affected. For the 80% of recipients who are now enrolled in MMC for pharmacy
benefits pursuant to SB 7, reimbursement rates are determined by the contracts between the MCOs
or PBMs and the provider pharmacies. American Pharmacies has cited no authority, and we know
of none, for the proposition that it is entitled to be paid the same rate under any MMC contracts it
chooses to enter into with MCOs and PBMs that it was paid by HHSC under fee-for-service—and
still is for 20% of the recipients—or that it is entitled to be paid any minimum rate under those
privately negotiated contracts. At most, American Pharmacies had an “expectation based upon the
anticipated continuance” of the prior law. See Butler Weldments Corp. v. Liberty Mut. Ins. Co.,
3 S.W.3d 654, 659 (Tex. App.—Austin 1999, no pet.). Any right or privilege it may have had to be
25
paid on a fee-for-service basis existed solely by statute, and that statutory right was modified by
SB 7. Although by their nature, the fee-for-service and MMC models have different rules for
participating providers, American Pharmacies maintains its right or privilege to participate in the
Medicaid program following the adoption of Subchapter J.
Further, to the extent the economic losses American Pharmacies has experienced can
be said to interfere with or impair its right or privilege to participate in the Medicaid program, those
losses, as previously discussed, have resulted from legislative changes to the structure of the Texas
Medicaid program, not from the properly implemented rules effecting those changes. Subchapter
J does not regulate the reimbursement rates paid to American Pharmacies under MMC; its contracts
with MCOs and PBMs do. In short, American Pharmacies has not asserted any right or privilege
affected by the rules it challenges. See Tex. Gov’t Code § 2001.038(a); Texas Dep’t of Pub. Safety
v. Salazar, 304 S.W.3d 896, 907 (Tex. App.—Austin 2009, no pet.) (plaintiff whose credentials met
requirements of rules for issuance of non-citizen driver’s license but was denied license for unknown
reasons did not show that rules interfered with or impaired privilege of obtaining driver’s license);
cf. State Bd. of Ins. v. Deffebach, 631 S.W.2d 794, 797 (Tex. App.—Austin 1982, writ ref’d n.r.e.)
(insurance agent had standing to challenge board rule, implemented in absence of underlying
statutory change, that place ceiling on insurance rate and lowered agent’s commission). We
therefore conclude that the trial court did not err in finding that American Pharmacies failed to allege
or prove a justiciable interest, and we overrule American Pharmacies’ fifth issue.12
12
In its sixth issue, American Pharmacies argues that its pleadings were sufficient to assert
a justiciable interest and Suehs’s ultra vires actions. We find this issue duplicative of issues one
through five and do not reach it. See Tex. R. App. P. 47.1.
26
CONCLUSION
Having overruled American Pharmacies’ issues, we affirm the trial court’s
final judgment.
_______________________________________
Melissa Goodwin, Justice
Before Chief Justice Jones, Justices Goodwin and Field
Affirmed
Filed: July 12, 2013
27