## Facts

- Michigan adopted the “Michigan Best Practices Initiative,” a prescription-drug cost-containment program covering Medicaid beneficiaries and participants in two state-funded, non-Medicaid health programs.
- The Initiative offered manufacturers two agreements: (1) a Medicaid rebate agreement and (2) a non-Medicaid rebate agreement requiring identical rebates for the non-Medicaid programs.
- If a manufacturer signed both agreements, its drugs were covered without added restrictions; if it refused either agreement, the drugs remained covered but were subject to prior authorization (state approval required before dispensing and reimbursement).
- The Secretary of Health and Human Services approved the Initiative as a Medicaid state-plan measure, enabling continued federal matching funds for Michigan’s Medicaid program.
- A pharmaceutical trade association and two nonprofit organizations challenged the approval, arguing the structure used Medicaid coverage restrictions to pressure rebates for non-Medicaid sales.
- The district court granted summary judgment to the Secretary and Michigan’s health agency; plaintiffs appealed.

## Issues

1. Whether approving the Initiative violated federal Medicaid law and regulations governing covered outpatient drugs, formularies, and permissible use of prior authorization, including the requirement that services be provided consistent with recipients’ best interests.
2. Whether the Initiative violated the Commerce Clause by effectively controlling manufacturers’ interstate pricing or regulating transactions outside Michigan.
3. Whether the Secretary acted within delegated authority, and reasonably, in approving a state-plan measure whose cost-containment design affected non-Medicaid state programs.

## Decision

- The D.C. Circuit affirmed summary judgment for the Secretary and Michigan’s health agency.
- The court held the Secretary’s approval was lawful under the Medicaid statute and regulations, including rules permitting prior authorization with required safeguards.
- The court held the Initiative did not create an unlawful closed formulary because drugs were not excluded from coverage; non-participating manufacturers’ drugs were subject to a procedural condition.
- The court held the Initiative did not violate the “best interests of recipients” requirement as applied by the Secretary, given the continued availability of medically necessary drugs through the prior-authorization process.
- The court rejected the Commerce Clause challenge because the Initiative operated on in-state program purchases and did not directly regulate out-of-state transactions or mandate out-of-state prices.

## Legal Principles

- When Congress expressly delegates to the Secretary authority to review and approve Medicaid state plans, courts give substantial deference to reasonable agency interpretations of the Medicaid statute and implementing regulations.
- States may employ prior authorization for covered outpatient drugs as a utilization and cost-control tool if federal procedural safeguards and response-time requirements are satisfied.
- A program that conditions preferred coverage status on participation in rebate arrangements does not necessarily violate Medicaid formulary requirements where covered drugs remain available, subject to prior authorization.
- The Medicaid “best interests” requirement does not categorically bar cost-containment measures; the relevant question is whether the approved design reasonably preserves access to medically necessary care.
- A state program does not violate the dormant Commerce Clause merely because its purchasing terms influence manufacturers’ broader pricing decisions; unconstitutional extraterritorial regulation requires direct control over out-of-state commerce.

## Conclusion

The D.C. Circuit upheld HHS’s approval of Michigan’s integrated rebate and prior-authorization program, concluding it complied with Medicaid requirements and did not unconstitutionally regulate interstate commerce, and it deferred to the Secretary’s reasonable judgment on permissible Medicaid cost-containment tools.


Pharmaceutical Research & Mfrs. of Am. v. Thompson, 362 F.3d 817 (D.C. Cir. 2004)