AMARILLO, Texas — A Texas court has ruled in favor of the National Association of Chain Drug Stores in its lawsuit against the state’s Health and Human Services Commission, which has far-reaching and precedent-setting implications for pharmacies.

The Seventh Court of Appeals reversed a trial court’s ruling. The decision can be read at: https://www.nacds.org/pdfs/NACDSvTX-HHS-June2024.pdf

Pursuant to the appellate court’s opinion, a Medicaid agency must engage in formal rulemaking before radically changing how pharmacies submit claims for reimbursement. Notably, the court said the “plain meaning of ‘discount’ does not capture the savings offered under membership program prices and third-party discount programs.” This should be helpful in defending future “usual and customary” (U&C) challenges in other jurisdictions and in signaling to other state Medicaid programs that they cannot interpret certain U&C laws on the books broadly without engaging the industry through notice-and-and comment rulemaking.

NACDS initially filed the lawsuit against the Texas Health and Human Services Commission (HHSC) in September 2020, challenging updates posted online that purported to radically change how pharmacies report their U&C prices for prescription drugs for the purposes of Medicaid reimbursement. NACDS asserted that these changes failed to follow the requirements of the Texas Administrative Procedure Act, making the updates invalid.

After the trial judge granted summary judgment to HHSC, NACDS appealed the decision, arguing that the Manual Updates are new rules that require notice and comment period, and the agency needed to engage with the industry before making these types of changes, as required by Texas law. The appellate court agreed and granted relief to NACDS on all of its claims.

Outcomes:

The court denied the state’s plea for sovereign immunity and granted complete relief to NACDS on all of its claims.

First, the court held “the 2020 updates constitute rules which required HHSC to comply with the APA’s rulemaking requirements and its failure to do so results in those updates being rendered invalid.”

Second, the court held “[b]y failing to comply with her ministerial duties, [Commissioner] Young acted ultra vires” – beyond her authority.

Judgment is rendered that “the May 2020 online updates . . . constitute rules and are invalid and of no effect.”

HHSC and the commissioner will have 15 days from yesterday to file a motion for rehearing with the court of appeals. This is not expected since this was a unanimous opinion that does not appear to contain any factual errors.  Assuming they do not file a motion for rehearing, they will have 45 days to file a petition for review with the Texas Supreme Court. They may well seek Supreme Court review, and if they do, NACDS will review its options with counsel.  Either of these deadlines could be extended if they file a motion to extend the time for filing.