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U.S. Supreme Court Blocks Medicaid Providers Challenging Rx Overcharges

The U.S. Supreme Court ruled that public health hospitals, clinics and community health centers that primarily provide care to Medicaid recipients, known as 340B entities, do not have a right under federal law to sue drug companies for alleged overpricing of drugs they sell for outpatient treatment.


Medicaid is a federal-state run health insurance program that provides health care services for extremely low income people, people with disabilities, children in foster care, and other at-risk populations.

The federal government, in contracting with pharmaceutical companies so that the companies have access to the largest pool of insured patients in the country, negotiates with drug companies for discounts of approximately 20 percent for medications provided to public health agencies, county hospitals, etc. Santa Clara County (Calif.) sued pharmaceutical companies for breaching that federal contract; pharmaceutical companies responded that Santa Clara County was not a party to the contract and had no standing to sue for breach.

After Santa Clara County filed its lawsuit, the Patient Protection and Affordable Care Act (PPACA) was passed, establishing a new administrative procedure to resolve claims by state Medicaid programs (or their county agencies) for refunds and other recovery for violations of the rebate program. Prescription drug companies and the United States argued that this new provision shows that Congress intended for the U.S. Department of Health and Human Services (HHS) to have exclusive jurisdiction to regulate and enforce the agreements. The Medicaid providers argued that the changes in the administrative practices are prospective and irrelevant to prior rights of parties under general contract law.

AARP's "friend of the court" brief, filed with the National Senior Citizens Law Center, reviewed well-established state common law allowing third-parties to sue to enforce rights as an intended beneficiary of a contract. It also pointed out that the Medicaid rebate program is not a contractual program at all, but a mechanism by which state Medicaid programs effectuate regulatory policy, and that the new statutory framework is simply a new regulatory structure. The brief pointed out that while this new regulatory structure provides a welcome new way to address future questions such as these, it does nothing to change common law contractual rights in the past.

The Supreme Court disagreed. "Congress vested authority to oversee compliance … in HHS and assigned to auxiliary enforcement role to covered entities," the Court ruled. The Court noted that despite concerns raised by the Office of Inspector General alerting Congress to enforcement problems, Congress did not respond by allowing lawsuits. Instead, the Court noted, "Congress directed HRSA to create a formal dispute resolution procedure, institute refund and civil penalty systems, and perform audits of manufacturers."

What's at Stake

Medicaid and Medicare programs are increasingly being challenged by both rising health care and prescription drug costs and shrinking budgets. Accountability is more important than ever, as is the ability to recover overcharges.


The U.S. Supreme Court reversed the Ninth Circuit's decision in Astra USA Inc. v. Santa Clara County, California on March 29, 2011.

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