# Opinion

> Texas Court of Appeals, 3rd District (Austin) · July 12, 2013

URL: https://www.frixlaw.com/law-library/cases/2956913

## Case

- **Full name:** Southwest Pharmacy Solutions, Inc. D/B/A American Pharmacies 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
- **Court:** Texas Court of Appeals, 3rd District (Austin)
- **Decided:** July 12, 2013
- **Precedential status:** Published
- **Opinion:** Opinion
- **Cited by:** 0 later opinions in the Frix Law Library

## Citator (automated)

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## How later opinions describe it (automated extraction)

- observing that “governmental agencies have a ‘unique understanding’ of the statutes they administer”

## Opinion text

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

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/2956913. Public record. Not legal advice.