U.S. District Court Sacramento
A federal district judge in Sacramento, Calif., is holding arguments next week in a lawsuit to reverse the state’s transfer of Medicaid managed care benefits to Medicaid fee for service.

Federal Court Hearing Next Week on California’s Medicaid Drug Benefit Transfer; Bill Introduced in N.J. with 340B Implications

A federal district judge in Sacramento, Calif., is holding oral arguments next week in a lawsuit aimed at reversing the state’s January 2022 transfer of Medicaid managed care benefits to Medicaid fee for service.

Meanwhile, a bill was introduced in the New Jersey Assembly Friday to require a similar drug benefit transfer from Medicaid managed care to FFS. There is a companion bill in the state Senate. New York state shifted Medicaid managed care drug benefits to FFS on April 1. 340B health centers have sued in state court to reverse the change.

California health centers say the switch in their state illegally deprives them of hundreds of millions of dollars year in revenue from billing managed care plans at above acquisition cost for 340B-purchased drugs. Under FFS, 340B covered entities must bill at acquisition cost plus a dispensing fee. The health centers are suing the state Department of Health Care Services and the U.S. Center for Medicare & Medicaid Services.

U.S. District Judge Dale Drozd late last month issued an order scheduling the arguments for June 20. He is the third judge assigned to the case. It was transferred to him in August 2022. It previously was transferred in April 2022 from Judge John Mendez, who semi-retired, to Judge Troy Nunley.

Drodz’s May 26 order said, “upon further review” of the state’s and CMS’s motions to dismiss the case, “the court has determined that oral argument would be helpful.” He didn’t say what he wants to question the parties about.

The state argued in a February 2022 brief that the drug benefit transfer did not deprive California health centers “of any reimbursement or revenue to which they are entitled under law.” CMS said in a brief a month later that it “has no authority to second-guess California’s decision.”

U.S. Supreme Court Case

The health centers dodged a bullet last week when the U.S. Supreme Court handed down a ruling that, had it gone the other way, would have undercut their main legal claim against the state.

The Supreme Court case, Health and Hospital Corp. v. Talevski, was over a family’s federal right to sue an Indiana county-owned nursing home in federal court. The court by a 7-2 margin upheld the principle that a Reconstruction era law commonly known as Section 1983 lets individuals sue in federal court when state officials deprive them of “any rights … secured by the Constitution and laws.”

The California health centers are suing the state under Section 1983. They are suing CMS under the federal Administrative Procedure Act.

New Jersey Legislation

The companion bills introduced in the New Jersey Assembly and Senate would require Medicaid prescription drugs services to be delivered under a fee for service system. Reimbursement for 340B covered outpatient drugs would be the lower of (including the state dispensing fee):

  • 340B ceiling price
  • the federal upper limit
  • the state maximum allowable cost
  • the state submitted ingredient cost
  • the provider’s usual and customary charge.

Reimbursement for clotting factors dispensed by specialty pharmacies or hemophilia treatment centers would be National Average Drug Acquisition Cost or wholesale acquisition cost plus the state dispensing fee.

The changes would take effect 90 days after the bill’s enactment.

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