LTE ad IRS Drug Disallowances, DAB No. 1366 (1992)

Department of Health and Human Services

DEPARTMENTAL APPEALS BOARD

Appellate Division

SUBJECT:  LTE and IRS Drug Disallowances

DATE:  October 26, 1992
Docket Nos. 90-101 90-139 90-145 90-158 90-161
        90-166 90-183 90-191 90-196 90-219 90-224 91-45
        A-92-2 A-92-143 A-92-230
Decision No. 1366

DECISION

Background

Fourteen states appealed determinations by the Health Care Financing
Administration (HCFA) disallowing federal financial participation (FFP)
claimed by the States under Title XIX (Medicaid) of the Social Security
Act (Act). 1/  HCFA, on the basis of audits performed by the Office of
the Inspector General (OIG) of the Department of Health and Human
Services (DHHS), determined that the States had claimed FFP for drug
products that were ineligible for Medicaid reimbursement because the
drug products had been deemed either ineffective or "identical, related,
or similar" to ineffective drugs.

These appeals arose over a two-year period and were assigned to either
one of two Board Members, and thus.both have signed this decision as
Presiding Board Members.  Once the Board realized that the same drug
products were the subject of disallowances for the different States, the
Board proposed that these appeals be coordinated.  The parties agreed to
this proposal.  These appeals were then stayed for approximately nine
months while HCFA reexamined the disallowances.  HCFA eventually decided
not to withdraw any of the disallowances.

The Board has previously examined issues related to drug effectiveness
in three decisions.  In Illinois Dept. of Public Aid, DAB No. 667 (1985)
(Illinois), the Board decided that once the Food and Drug Administration
(FDA) publishes a notice that a drug product is less-than-effective
(LTE) in the Federal Register, states are put on notice that Medicaid
reimbursement for the drug product ceases from the date of the Federal
Register notice, plus an applicable grace period.  The Board
specifically rejected the argument that HCFA had the  sole
responsibility for identifying ineffective drug products which were
ineligible for FFP:

 [W]e will not condone a dangerously passive approach to the
 problem of ineffective drugs.  Medicare and Medicaid
 beneficiaries' use of ineffective drugs can be hazardous, and
 the State clearly had an obligation to move as quickly as it
 reasonably could to stop reliance on these drugs.

Illinois at 8.

In Pennsylvania Dept. of Public Welfare, DAB No. 836 (1986), the Board
found that states are also required to cease Medicaid payments for other
drugs products not specifically named in a Federal Register notice, but
which are "identical, related, or similar" to drugs named in the Federal
Register (IRS drugs).  The Board further found that, in the particular
circumstances of that case, Pennsylvania's pharmacist would have had no
meaningful difficulty, after consulting such national drug compendia as
the National Drug Code Directory and "Facts and Comparisons," in
determining in a relatively short period of time the IRS drug status of
the drug products at issue in that case.

In Louisiana Dept. of Health and Human Resources, DAB No. 1083 (1989)
(Louisiana), the Board explored further the process by which a state is
able to determine whether a drug product is an IRS drug.  The Board
found that many IRS drugs can easily be identified from compendia
commonly used by pharmacists, and that these drug.products therefore
should be treated the same as FDA-specified LTE drugs.  The Board also
found, however, that a state was not responsible for the identification
of all possible IRS drugs, noting that many drug products do not appear
in the various compendia commonly used by pharmacists:

 It is debatable as to what extraordinary lengths Louisiana
 should have gone to ferret out the information, but there is no
 HCFA rule or guideline establishing the extent of Louisiana's
 obligation . . . . In this context, Louisiana should not be
 held, with the benefit of hindsight, to be culpable for not
 doing the virtually impossible.  The State should not be denied
 FFP for the continued use of such a drug until such time as HCFA
 or FDA informed the State that the drug was an IRS drug, or the
 drug appeared in compendia, or the State otherwise discovered
 (or reasonably should have) that the drug was an IRS drug.

Louisiana at 16 (emphasis in original).  The Board thus found that, in
the absence of any publication by HCFA or the FDA of what drug products
are considered IRS drugs, a reasonableness standard should be applied in
determining a state's responsibility for the identification of an IRS
drug.

In these appeals, disallowed claims for both LTE and IRS drugs are at
issue.  While the disallowed drug products vary from state to state,
each State had claims disallowed for at least one, if not all, of the
following three drug products:  Bellergal, an alleged IRS drug;
dipyridamole, an alleged LTE drug; and Naldecon and Naldecon-related
drugs, all alleged IRS drugs. 2/  The States disputed whether these drug
products were, in fact, LTE drugs or IRS drugs, and whether the States
had sufficient information to make those determinations. 3/  .The States
also appealed disallowances for other alleged IRS drugs, but did not
offer specific arguments for these drug products, suggesting rather that
the whole process by which HCFA assigns the responsibility for the
identification of IRS drugs to the States should be invalidated.  The
States also challenged the audit process from which the disallowances
resulted.

Summary of Holdings

For the reasons discussed below, and as described more fully in the
conclusion to this decision, we reach the following conclusions.  The
disallowances relating to Bellergal are sustained.  The disallowances
relating to dipyridamole are reversed.  The disallowances relating to
Naldecon are reversed, except for those claims after actual notice to
the States of HCFA's position.  We decline to invalidate either the
process of State responsibility in the identification of and termination
of payment for LTE and IRS drugs or the audit review process which
resulted in these disallowances, except for certain recalculations
explained below.  Disallowances for other drugs about which the States
made no specific arguments, except these challenges to the system, are
sustained.

Overview of the Drug Review Process

The Federal Food, Drug, and Cosmetic Act of 1938 (FFDCA), 21 U.S.C. .
301 et seq., establishes a system of premarketing clearance for drugs
and prohibits the introduction into commerce of any "new drug" unless a
new drug application (NDA) filed with the FDA establishes the safety of
that drug.  Under the FFDCA, a "new drug" is one not generally
recognized by qualified experts as safe for its intended use.  In the
Drug Amendments of 1962, Public Law 87-781, Congress amended the FFDCA
to direct the FDA to refuse approval of a NDA and to withdraw any
approval for NDAs if, after notice and opportunity for a hearing, it
found a lack of evidence that the drug product involved was effective as
well as safe for use under the conditions prescribed, recommended, or
suggested in its labeling.

The FFDCA provides an exemption from the definition of a "new drug," if
a product was subject to the 1906 Food and Drug Act and "if its labeling
contained the same representations concerning the conditions of its
use." .21 U.S.C. . 321(p)(1).  The 1962 amendments perpetuated this
exemption, in a provision commonly referred to as the "grandfather"
clause, as follows:

 In the case of any drug which on the day immediately preceding
 the enactment date, (A) was commercially used or sold in the
 United States, (B) was not a new drug as defined by section
 201(p) of the basic Act as then in force, and (C) was not
 covered by an effective application under section 505 of that
 Act, the amendments made by this Act shall not apply to such
 drug when intended solely for use under conditions prescribed,
 recommended, or suggested in labeling with respect to such drug
 on that day.

Section 107(c)(4) of Public Law 87-871.

Most of the new drug products that were introduced in the market through
the new drug procedures from 1938 to 1962 were submitted to a scientific
board to determine the drug product's effectiveness for all conditions
in its labeling.  Each sponsor of a drug product with a 1938-1962 NDA
was required to submit to the FDA evidence for its labeled indications.
After 1962 no new drug was allowed to be marketed unless it received
approval from the FDA for safety and effectiveness for its labeled
indication through the NDA process.

The FDA's conclusions on a drug product's effectiveness in the Drug
Efficacy Study Implementation (DESI) program are published in the
Federal Register as DESI notices and Notices of Opportunity for Hearing
(NOOH).  Each DESI notice and NOOH is assigned a DESI number, which
applies to all of the drug products covered by the notice.  If the drug
product is effective for all its labeled indications, then the DESI
notice will state the marketing conditions for the drug product.  If the
drug product is effective for some labeled indications, the DESI notice
will state the marketing conditions for those effective labeled
indications.  If the drug product lacks substantial evidence of
effectiveness for all its labeled indications, a NOOH is published in
the Federal Register.  The NOOH gives notice to the sponsor of the LTE
drug product, and any interested party, which includes the manufacturer
or distributor of a drug product identical, related, or similar to the
LTE drug, of an opportunity to request a hearing and submit data to
demonstrate the drug product's effectiveness.

Publication of a NOOH in the Federal Register results in ineligibility
for reimbursement under the Medicare and Medicaid programs for the LTE
drug and IRS drugs.  Denial.of FFP begins after a grace period of 30
days from the date of the NOOH's publication in the Federal Register.
During that grace period, a state is to notify providers that the
affected drug will no longer be eligible for reimbursement under the
Medicare and Medicaid programs.

Statutory and Regulatory Provisions for Drug Reimbursement under
Medicaid

States have the option of including the costs of prescription drugs in
their Medicaid plans.  Section 1905(a)(10) of the Act.  All of the
States appealing here have elected to include the costs of prescription
drugs in their Medicaid plans.  Section 1903(i)(5) of the Act, however,
denies federal funding under Medicaid for drug products which are not
eligible for Medicare payments under section 1862(c) of the Act.
Section 1862(c) prohibits payment for --

 (1)  a drug product --

   (A)   which is described in section 107(c)(3) of the Drug
   Amendments of 1962,

      (B)        which may be dispensed only upon prescription,

    (C)   for which the Secretary [of DHHS] has issued a
    notice of an opportunity for a hearing . . . on a
    proposed order of the Secretary to withdraw approval
    of an application for such drug product . . . because
    the Secretary has determined that the drug is less
    than effective for all conditions of use prescribed,
    recommended, or suggested in its labeling, and

    (D)   for which the Secretary has not determined there
    is a compelling justification for its medical need;
    and

 (2)  any other drug product --

    (A)   which is identical, related, or similar [IRS] .
      . . to a drug productdescribed in
      paragraph (1) and

    (B)   for which the Secretary has not determined there
    is a compelling justification for its medical need . .
    . ..The FDA regulations describe an IRS drug product
    as follows:

 An identical, related or similar drug includes other brands,
 potencies, dosage forms, salts, and esters of the same drug
 moiety as well as of any drug moiety related in chemical
 structure or known pharmacological properties.

21 C.F.R. . 310.6(b)(1).

The regulations then describe the process for identifying an IRS drug:

 Where experts qualified by scientific training and experience to
 evaluate the safety and effectiveness of drugs would conclude
 that the findings and conclusions, stated in a drug efficacy
 notice or notice of opportunity for hearing, that a drug product
 is a "new drug" or that there is a lack of evidence to show that
 a drug product is safe or effective are applicable to an
 identical, related, or similar drug product, such product is
 affected by the notice.  A combination drug product containing a
 drug that is identical, related, or similar to a drug named in a
 notice may also be subject to the findings and conclusions in a
 notice that a drug product is a "new drug" or that there is a
 lack of evidence to show that a drug product is safe or
 effective.

21 C.F.R. . 310.6(b)(2).

The regulations define a "new drug" as follows:

 Any marketed drug is a "new drug" if any labeling change made
 after October 9, 1962, recommends or suggests new conditions of
 use under which the drug is not generally recognized as safe and
 effective by qualified experts.  Undisclosed or unreported side
 effects as well as the emergence of new knowledge presenting
 questions with respect to the safety or effectiveness of a drug
 may result in its becoming a "new drug" even though it was
 previously considered "not a new drug . . . ."

21 C.F.R. . 310.100(c)..Analysis of Issues Relating to Specific Drug
Products

   BELLERGAL

Bellergal and Bellergal-S are drug products manufactured by the Sandoz
Pharmaceuticals Corporation (Sandoz).  HCFA disallowed claims for the
Bellergal drugs because, according to HCFA, Bellergal is IRS to two drug
products named in a May 6, 1983 NOOH (48 Fed. Reg. 20,495) (DESI 597),
Belladenal and Donnatal. 4/  Belladenal, a drug product also made by
Sandoz, and Donnatal have as their primary ingredients belladonna and
phenobarbital.  Bellergal is composed of the following ingredients:
belladonna, phenobarbital, and ergotamine tartrate.

The States argued that any disallowance for Bellergal should be reversed
for the following reasons:

 --      it is questionable whether Bellergal was in fact a "new
 drug" subject to a DESI notice and subsequent IRS status;

 --      the presence of an additional ingredient, ergotamine
 tartrate, in Bellergal changes its use and renders it
 substantially different from the LTE drugs named in the May 6,
 1983 NOOH; and

 --      the States could not have nor should have known that
 Bellergal was an IRS drug.

We conclude that any dispute concerning the "new drug" status of
Bellergal did not interfere with the States' ability to identify it as
an IRS, that the additional ingredient did not prevent Bellergal from
being IRS to the drugs in the 1983 NOOH, and that the States should have
identified Bellergal as IRS.

A.  The "New Drug" Status of Bellergal

The States contended that an ongoing dispute exists between the FDA and
Sandoz as to whether Bellergal was subject to a NOOH, and that this
dispute impeded their efforts to identify Bellergal as IRS.  Sandoz
began marketing Bellergal in 1934.  Sandoz took the position that
Bellergal was exempt from the DESI provisions under.the "grandfather"
clause of the FFDCA.  Sandoz maintained that Bellergal was subject to
the Food and Drug Act of 1906 and therefore, under the FFDCA's
"grandfather" clause, was not a "new drug" since the labeling for
Bellergal contained the same representations as to conditions for use as
it did under the 1906 Act.  Sandoz accordingly never submitted a NDA for
Bellergal under the FFDCA.  Sandoz concluded that Bellergal, being
exempt from the "new drug" category, cannot be considered IRS within the
meaning of 21 C.F.R. . 310.6, and that accordingly Bellergal was not
covered by any NOOH as part of the DESI review process.  Illinois Ex. 3.

We find the States' argument concerning the effect of the legal dispute
between the FDA and Sandoz unpersuasive.  There is no evidence that the
States were paralyzed by the Sandoz-FDA dispute over the status of
Bellergal, or indeed, that they were even aware of it, during the time
period covered by these disallowances (1984 through 1988 for States
disputing Bellergal disallowances).  The earliest indication we have
from the record before us that the States knew of the controversy over
Bellergal was a March 31, 1989 letter from Sandoz to Illinois, detailing
Sandoz's discussions with the FDA, which was apparently written in
response to Illinois' inquiries after receipt of the audit results.  Id.
Thus, the States' argument that the Sandoz-FDA dispute justified their
delays regarding Bellergal is patently untenable.

Furthermore, while this Board is not the proper forum to resolve any
conflict between Sandoz and the FDA over Bellergal, we note that the
record before us suggests that this dispute was, in fact, resolved since
Sandoz failed to challenge a 1983 FDA finding that Bellergal does not
qualify for the "grandfather" exemption. 5/.B.  The Effect of an
Additional Ingredient in Bellergal

The States also argued that, even if Bellergal is subject to the NDA and
DESI process, the presence of an additional ingredient, ergotamine
tartrate, removes Bellergal from the ambit of the 1983 NOOH.  The 1983
NOOH concerned a review of certain drugs containing an anticholinergic
in fixed combination with a barbiturate, which were classified as
lacking substantial evidence of effectiveness for various
gastrointestinal disorders.  Among the anticholinergic/barbiturate
combination drug products listed in the NOOH were Donnatal and
Belladenal, whose primary ingredients are belladonna and phenobarbital.

The States argued that the different combination of ingredients in
Bellergal radically changes its use and renders it substantially
different from Donnatal and Belladenal, since the addition of ergotamine
tartrate gives Bellergal a wider range of uses than Donnatal.  While
conceding that the ingredient with the greatest volume, phenobarbital,
is the same in both the LTE drugs and Bellergal, the States contended
that the critical factor in determining a drug's effectiveness is the
labeled indications of usage.  The States referred to the Physicians'
Desk Reference, wherein the labeled uses of Donnatal and Belladenal
relate only to the gastrointestinal system, while Bellergal is shown as
therapeutic in the endocrine and cardiovascular systems, as well as in
the gastrointestinal system..Being composed of three ingredients,
Bellergal is considered a combination drug product.  Concerning
combination drugs, the regulations provide:

 Two or more drugs may be combined in a single dosage form when
 each component makes a contribution to the claimed effects and
 the dosage of each component . . . is such that the combination
  is safe and effective . . . .

21 C.F.R. . 300.50(a) (emphasis added).

The regulations further provide:

 A combination drug product containing a drug that is identical,
 related or similar to a drug named in a notice may also be
 subject to the findings and conclusions in a notice that a drug
 product is a "new drug" or that there is a lack of evidence to
 show that a drug product is safe or effective.

21 C.F.R. . 310.6(b)(2).  Thus, a combination drug product may also be
ineffective when the drug product is made up of two or more ingredients,
where one or more of these ingredients is the subject of a NOOH and is
the basis for finding the drug ineffective.

In order for a drug product to be considered an IRS drug, therefore, its
ingredients do not have to coincide exactly with those of a LTE drug.
If the ingredients were exactly the same, then the suspect drug would be
"identical" to the LTE drug.  It is sufficient, however, to confer IRS
status on a drug product if that drug is "related or similar" to the LTE
drug.  Here, of the three ingredients present in Bellergal, two of them
in combination, belladonna and phenobarbital, were classified as LTE in
the 1983 NOOH.  It is difficult to see how any drug would qualify as
"similar" if the addition of a small amount of one other ingredient
could be presumed to overcome the substantial identity of all the other
ingredients.  The States have not shown any reason why they could not
identify Bellergal as IRS by tracing the two matching ingredients.  Nor
have the States provided any evidence that their experts determined that
the belladonna/phenobarbital combination somehow contributes to the
effectiveness of ergotamine tartrate, as each ingredient in a
combination drug must. 6/.The regulations are explicit that "each
component" of a combination drug must make a contribution to the drug's
effectiveness.  21 C.F.R. . 300.50(a).  The Court of Appeals for the
Third Circuit has held that "a product with an additional active
ingredient must be more effective for its intended purposes than that
product would be without the extra ingredient."  United States v. 225
Cartons, More or Less, of an Article or Drug, 871 F.2d 409, 416 (3rd
Cir. 1989).

It is not sufficient for the States to point to additional indications
for which Bellergal is labeled, beyond those for which the NOOH found
belladonna and phenobarbital to be ineffective.  While a drug must be
found ineffective for all its labeled indications to be LTE, a drug
which is related or similar to an ineffective drug is not reimbursable
unless a compelling medical need has been shown.  No such compelling
need has been alleged here, and none is likely to exist, even if we were
to address the issue, since ergotamine tartrate is approved in other
forms.  Accordingly, we find that Bellergal is IRS to the LTE drugs
listed in the 1983 NOOH.

C.  Notice of Bellergal's Status as an IRS Drug

The States' final argument concerning the Bellergal drugs was that
HCFA's imposition of a disallowance amounted to a retroactive sanction.
Citing Louisiana, the States contended that they could not have known
that Bellergal was IRS until they received the audit findings.  The
States argued that a reference to drug compendia after the 1983 NOOH
would have shown only the different usages for the drugs.  The States
asserted, moreover, that their experts concluded that Bellergal was not
an IRS drug. 7/

The Board held in Louisiana that a state should not be subject to
disallowances for IRS drugs for the period of time between publication
of the Federal Register notice and the point when the state knew or
should have known that the drugs were IRS.  Louisiana at 3.  Applying
this criteria to the facts of these appeals, we find that the States
reasonably should have determined from the 1983.NOOH that Bellergal was
IRS to the LTE drugs listed there.  The near-identity of Bellergal's
ingredients to those of the LTE drugs could have been ascertained from
drug compendia, not merely the existence of additional indications for
Bellergal.  In the Physicians' Desk Reference (44th Ed., 1990) (PDR),
Bellergal is indexed, along with Donnatal and Belladenal, under the
active ingredient phenobarbital.  PDR at 322.  The descriptions show
that Belladenal consists of alkaloids of belladonna (.25 mg) and
phenobarbital (50 mg), while Bellergal-S consists of alkaloids of
belladonna (.2 mg), phenobarbital (40 mg), and ergotamine tartrate (.6
mg).  Compare PDR at 1931 with PDR at 1932.

Unlike the situation with Naldecon, discussed below, we have no evidence
that the States' pharmacists actually made prospective determinations
that Bellergal was not IRS in their professional judgment, that the
States were in widespread agreement about such a conclusion, or that any
efforts were made to contact FDA or HCFA for guidance about Bellergal
specifically if the State experts found the determination difficult to
reach.  Furthermore, even before us, the States have not developed any
persuasive explanation of why Bellergal would not be considered IRS to
Belladenal and Donnatal, given the strong similarity of ingredients.
Under the reasonableness standard set forth in Louisiana, the States
have not shown that it was unreasonable to expect them to have
identified Bellergal as IRS from an examination of national drug
compendia.

Accordingly, we find that the Bellergal drugs were IRS drugs, and we
sustain HCFA's disallowance of claims for FFP for the Bellergal drugs.

        DIPYRIDAMOLE

Dipyridamole is a generic drug product manufactured by a number of
pharmaceutical companies and identical to a brand name product marketed
under the name Persantine.  During the period at issue, a NOOH
classified dipyridamole as less-than-effective for its only labeled
indication.  Before issuing the NOOH, however, the FDA approved a
supplement to Persantine's NDA, finding it effective for a new
indication, which its manufacturer was permitted to substitute on its
label.  Because of a law providing for a three-year marketing
exclusivity, the manufacturers of the generic products were not
permitted to amend their labeling to show the new effective indication
until the exclusivity period expired.  Since the LTE status of a drug is
weighed in relation to its labeled indications, the generics were
classified LTE in the interim..HCFA argued that the issuance of a NOOH
relating to dipyridamole automatically triggered termination of payment,
and no other facts should be considered relevant.  The States contended
that retroactive reimbursement for dipyridamole was guaranteed by
language in the preamble to HCFA's regulations asserting that Medicaid
would retroactively reimburse for any drug for which a NOOH was issued
but which was later determined to be effective.  In any case, the States
argued that, because of the unique situation presented here, the Act
could not have intended to cut funding for a product already found
effective, simply because another law (for purposes unrelated to
Medicaid) prevented the effective use from being added to the labeling.

We conclude that dipyridamole is eligible for retroactive Medicaid
reimbursement, and the disallowances for generic dipyridamole are
consequently reversed.  The States' challenge to the automatic
triggering of non-payment by the NOOH in the case of dipyridamole is,
thus, moot.

A.  The Regulatory History of Dipyridamole

The history of FDA actions relating to dipyridamole is relatively
complex.  In 1971 the FDA classified the generic drug product
dipyridamole, including a brand name version known as Persantine, as
possibly effective for long-term therapy of chronic angina pectoris.  36
Fed. Reg. 3,078 (Feb. 17, 1971).  Later, in 1972, the FDA exempted
coronary vasodilators (anti-anginal drugs), including products
containing dipyridamole, from the time limits established for completing
the DESI program.  37 Fed. Reg. 26,623 (Dec. 14, 1972).  This exemption
allowed 81 dipyridamole drug products to remain on the market while
studies were conducted to determine their effectiveness.  FDA granted
the exemption because of the medical need for, and absence of, effective
drugs for treatment and prevention of anginal attacks.  All of these
dipyridamole drug products had only one labeled indication, for
long-term therapy of chronic angina pectoris.

In 1977 the FDA amended the exemption by announcing guidelines and
methods for evaluating the bioavailability and effectiveness of coronary
vasodilators, and describing conditions under which the drug products
could be marketed while the studies were in progress.  42 Fed. Reg.
43,127 (August 26, 1977).  On February 17, 1978, the FDA announced that,
in the interest of minimizing duplicate and costly clinical testing of
essentially the same drug product, each manufacturer need not clinically
test its own product for effectiveness as long as at.least one other
manufacturer conducted appropriate tests on a product containing the
same chemical entity in a similar dosage form.  43 Fed. Reg. 7,044.  The
FDA later announced that this new policy was implemented specifically
with regard to single-entity coronary vasodilators.  43 Fed. Reg. 41,282
(September 15, 1978).

In September 1981, Boehringer Ingelheim (Boehringer), the manufacturer
of Persantine, submitted to the FDA the results of four clinical studies
intended to demonstrate the effectiveness of Persantine in the long-term
therapy of chronic angina pectoris.  On January 15, 1987, the FDA issued
a NOOH which reclassified dipyridamole as "lacking substantial evidence
of effectiveness" for long term therapy of chronic angina pectoris,
proposed to withdraw NDAs for the labeled indication of angina, offered
an opportunity for a hearing on the proposal, and revoked the temporary
exemption that had allowed drug products containing dipyridamole to
remain on the market.  52 Fed. Reg. 1,663.  FDA found that the four
studies submitted by Boehringer did not "constitute substantial evidence
that Persantine is effective for long term therapy of chronic angina
pectoris."  Id. at 1,667. 8/

Although not mentioned in the January 15, 1987 NOOH, approximately a
month earlier (on December 22, 1986) the FDA had approved a supplement
to Boehringer's NDA for Persantine.  The supplement approved was for a
new labeled indication "as an adjunct to coumarin anticoagulants in the
prevention of postoperative thromboembolic complications of cardiac
valve replacements."  HCFA Ex. 31.  The FDA concluded that "adequate
information has been presented to demonstrate.that the drug product is
safe and effective for use as recommended" in the new labeling.  Id.
The approved labeling for Persantine contained the new indication only.
Boehringer received a three-year marketing exclusivity for Persantine
for the new labeled indication under the Drug Price Competition and
Patent Term Restoration Act of 1984, Public Law 98-417, which amended 21
U.S.C. . 355.  See 53 Fed. Reg. 12,605 (April 17, 1987).  During these
three years, no other manufacturer could receive approval to label its
drug product for the new indication.  The net effect of the FDA's
actions was to inform the public that dipyridamole was ineffective for
one use, effective for another, and subject to a delay in correcting the
generics' labeling to reflect that reality.  In the meantime, generic
dipyridamole products remained on the market.

After the expiration of the three-year period, other manufacturers of
dipyridamole products submitted, and received approval from the FDA for,
supplements to their abbreviated NDAs to reflect the new labeled
indications.  See HCFA Exs. 25 through 29.  In the interim, HCFA
approved claims of FFP for Persantine, but denied FFP for all other
claims for dipyridamole submitted by the States, even though they were
identical and bioequivalent to Persantine. 9/  However, HCFA
acknowledged that the other products are now eligible for FFP upon
obtaining approval to substitute the new indication on their labels.
HCFA Br. at 58-69.

B.  Retroactive Reimbursement for Dipyridamole

Since dipyridamole has ultimately been proven effective for a new
indication which has been substituted for the prior labeled indication,
and is now reimbursable, the commitment made by HCFA to reimburse DESI
drugs later found effective appears applicable.  In the preamble to.the
Federal Register notice promulgating 42 C.F.R. . 441.25, codifying the
prohibition of Medicaid payments for ineffective drugs, HCFA stated:

 If any drug that is the subject of a NOOH is subsequently proven
 to be effective, the Federal government will reimburse under
 Medicare Part B and Medicaid claims that were denied during the
 period the NOOH was in effect because the drug was determined
 less than effective.

46 Fed. Reg. 48,550 at 48,551-52 (October 1, 1981).  Further, the House
report on the bill adding the restrictions on LTE drugs to the Medicaid
Act anticipated that, if a drug is contained in a NOOH based on the
Secretary's determination that it is "less than effective for all
conditions of use," but is "subsequently proven to be effective, then
reimbursement would be allowed."  H.R. Rep. No. 158, 97th Cong., 1st
Sess. 345.  These statements would appear to guarantee retroactive
reimbursement for dipyridamole, since it was "proven to be effective"
and had claims denied during a period when a NOOH was "in effect."

HCFA argued that retroactive reimbursement is nevertheless unavailable,
because the preamble language was intended to be limited to situations
where the NOOH is determined to be in error.  HCFA Br. 59-60.  The plain
language of the preamble is not so limited.  Neither the preamble nor
the legislative history limited the intended retroactive funding to
drugs whose original indications were vindicated.  A NOOH is a proposed
action of the Secretary to withdraw approval for a drug because of a
determination that it is LTE for all "conditions of use . . . in its
labeling."  The DESI process of which the NOOH was one stage cannot be
said to be limited only to consideration of the initially-sponsored
indications.  The final actions which ultimately flow from a NOOH may
include withdrawal of the drug from the market, hearings on or
investigations of the effectiveness of the drug with a determination
that some or all conditions of use on the label are effective, or, as
here, altered labeling to reflect effective conditions of use. 10/  HCFA
did not.deny that once the challenge to the effectiveness of the
dipyridamole drugs was resolved by the substitution of revised labeling
reflecting their effective use, they became eligible for FFP.  HCFA Br.
at 58-59.

Dipyridamole was the subject of a NOOH which was in effect during the
period for which claims were denied.  During the DESI process of which
the NOOH was a part, the FDA withdrew approval of some of the products
when their manufacturers did not choose to seek hearings, while others
remained on the market with pending hearing requests. 11/  52 Fed. Reg.
11,753 (April 10, 1987).  The.products listed in the withdrawal notice
included Persantine, but the notice specified that it applied to the
applications only "insofar as they pertain to the original indication."
At least one manufacturer, and probably others, withdrew its pending
hearing request only when it was able to substitute the new labeling
indication, as a result of supplementing its original application.  The
NOOH process thus may fairly be said to have ended only with the
approval of the supplemented applications.  The NOOH may not have been
proven wrong, but it is plainly no longer "in effect," since many of the
generics (and presumably all of them ultimately) are approved for a
labeled indication.  Therefore, the Secretary has manifestly not
"determined that the drug is less than effective for all conditions of
use prescribed, recommended or suggested in its labeling" now that the
labels are revised to show an effective use.

Nothing in our decision limits HCFA's ability prospectively to restrict
its commitment to situations where the outcome for a drug subject to a
NOOH is the vindication of at least one of the labeled indications
originally listed in the NOOH, provided that notice of the policy is
given to the States.  However, it would be unfair to impose such a
restriction on the States in this case when it was not articulated by
HCFA in either the regulation or the preamble.

We note that the approval of new labeling for dipyridamole occurred in
essence as a part of the DESI review process for the drug.  The
dipyridamole drugs involved here continued to be available on the market
throughout the period, the new indication was known to be effective even
before the NOOH was issued, and the same DESI process ultimately
resulted in their approval.  We might reach a different conclusion if,
long after the DESI process has been completed and a drug withdrawn from
the market, some new use were found.  Medicaid could not be held
responsible to fund a drug retroactively when no effective use was known
at the time, simply because some later research uncovered one (and such
situations should be rare, since an ineffective drug would normally be
withdrawn from the market within a reasonable period of time).  But in
this case there is no reason to conclude that the drug was being used
for ineffective purposes,.since the effective use was known throughout
the period the NOOH was in effect.  We conclude that, under these
circumstances, HCFA's commitment to reimburse retroactively for drugs
later proven to be effective should be carried out in the case of
generic dipyridamole.

We see no reason why Medicaid should be denied the benefits of lower
price generic drugs, which continued to be marketed legally absent FDA
withdrawal action, by denying retroactive reimbursement for their use.
The medical community was informed by the approval of Persantine's
labeling, with the explicit FDA ruling that it was bioequivalent, that
an effective use existed, and that equivalent generics were available.
12/  An examination of the PDR, for example, would have informed any
physician that Persantine was dipyridamole and was indicated for the new
usage in cardiac valve replacement (at 691) and that a number of
manufacturers produced generic dipyridamole (at 310).  A responsible
physician or pharmacist might well permit generic substitution in light
of the enormous price differential.  Under HCFA's interpretation, any
patient or third-party payor could benefit from such cost savings except
the ones that perhaps most need to, Medicaid and Medicare.

Our conclusion serves the purpose of permitting Medicaid and Medicare
patients to benefit from an effective drug.at the most economical cost,
which is clearly in accord with the purposes of the Act.  See, e.g.,
Section 1902(a)(30)(A) of the Act; 42 C.F.R. .. 447.331-447.333.
Unquestionably, the savings involved are substantial. 13/  One State put
the monthly cost of a prescription for Persantine (25 milligrams) per
patient at $14.85, the cost of the generic dipyridamole at $1.26.
Oregon Ex. 7.C.  Assuming a FFP rate of 50 percent, one monthly
prescription of Persantine would cost both the federal government and a
state $7.42 each, while for generic dipyridamole the cost would be
$0.63, about one-twelfth the price of Persantine. 14/

We thus conclude that claims for dipyridamole are eligible for
retroactive reimbursement.  In light of this conclusion, we need not
address the States' arguments that dipyridamole was not LTE for all
indications, despite issuance of a NOOH, or that Medicaid reimbursement
should have been permitted, even if it was LTE, because of compelling
medical justifications. 15/.                        NALDECON

Naldecon and Naldecon-related drugs (Naldecon drugs) are combination
drug products. 16/  HCFA disallowed claims for the Naldecon drugs
because, according to HCFA, the Naldecon drugs are "identical, related,
or similar" to Dimetapp Elixir and Dimetapp Extentabs (Dimetapp) found
to be LTE in a December 23, 1983 NOOH.  48 Fed. Reg. 56,854 (DESI
11935).  The States argued that it was unreasonable to expect them to
identify these drugs as IRS to Dimetapp based not on the specific
ingredients they contain but only on the fact that they each contain
more than one decongestant or more than one antihistamine, since the
NOOH did not make clear that this was the reason that Dimetapp was LTE.
We conclude that the States were not given sufficient information to
have identified the Naldecon drugs as IRS.

A. The Regulatory History Relating to Naldecon

The history behind the FDA's determination that Dimetapp was a LTE drug
product is as follows.  In 1972 the FDA found that Dimetapp Extentabs
was possibly effective, but that Dimetapp Elixir in oral dosage form
lacked substantial evidence of effectiveness as a fixed combination drug
product.  37 Fed. Reg. 15,022 (July 27, 1972).  In April 1973 the FDA
issued a NOOH proposing to withdraw approval of a NDA for Dimetapp
Extentabs as lacking substantial evidence of effectiveness since no data
was submitted pursuant to the July 1972 notice.  38 Fed. Reg. 10,168
(April 25, 1973).  The FDA invited any interested party with an IRS drug
product, not the subject of an approved NDA, to respond to the NOOH and
participate in a hearing.  Id.  Any person who wished to determine
whether a specific product was covered by the NOOH was advised to write
to the FDA.  Id.

On December 14, 1973, however, the FDA granted a temporary exemption for
certain prescription oral drugs.offered for relief of cough, cold,
allergy, and related symptoms.  The exemption was granted because of the
similarity between prescription drugs for these uses and over the
counter (OTC) drugs for the same indications which were subject to an
ongoing OTC drug review program.  38 Fed. Reg. 34,481-82.  As a result,
the sustained release version of Dimetapp was exempted from the April
25, 1973 NOOH for an indeterminate amount of time.  Gerstenzang
Declaration, HCFA Ex. 1, . 35.

On September 9, 1976, the FDA published an advance notice of proposed
rulemaking to establish a monograph by the Advisory Review Panel on OTC
Cold, Cough, Allergy, Bronchodilator and Antiasthmatic Products.  41
Fed. Reg. 38,312.  In this monograph the FDA proposed to establish
conditions under which OTC cold, cough, allergy, bronchodilator and
antiasthmatic drugs are generally recognized as safe and effective and
not misbranded.

In the December 23, 1983 NOOH, the FDA announced that it was revoking
the exemptions for Dimetapp Extentabs and Elixir and stated the
conditions for the manufacturer of Dimetapp to market the Dimetapp
products in a reformulated version.  The formulation of Dimetapp ruled
LTE consisted of the following ingredients:  phenylephrine hydrochloride
(a decongestant), phenypropanolamine hydrochloride (a decongestant), and
brompheniramine maleate (an antihistamine).

The FDA explained:

 Brompheniramine maleate and phenylpropanolamine hydrochloride
 were both considered to be safe and effective by the OTC review
 panel . . . .  The OTC drug review panel  . . . also concluded
 that combinations containing a nasal decongestant and an
 antihistamine, as in reformulated Dimetapp Extentabs and Elixir,
 are safe and effective (41 FR 38326).

48 Fed. Reg. 56,854 (December 23, 1983).  The Federal Register reference
is to a page from the proposed monograph which sets various criteria for
Category I (effective) and Category II (ineffective) combination drug
products.  Among the combinations of ingredients classified as Category
I are combinations containing an antihistamine and a nasal decongestant.
The FDA later approved a reformulated version of Dimetapp conforming to
Category I and containing one decongestant, phenylpropanolamine
hydrochloride, and one antihistamine, brompheniramine maleate.  Id..On
July 19, 1985, the FDA withdrew marketing approval of the original
three-ingredient formulation of Dimetapp Elixir and Extentabs as lacking
substantial evidence of effectiveness, and stated:

 Specifically, each of the two nasal decongestants contained in
 these combination products has not been shown to contribute to
 the effectiveness of the products.  Reformulations of the
 products have been approved as safe and effective.

50 Fed. Reg. 29,484.

Naldecon is composed of the following ingredients:  two decongestants,
phenylephrine hydrochloride and phenylpropanolamine hydrochloride; and
two antihistamines, chlorpheniramine maleate and  phenyltoloxamine
citrate.  Thus, Naldecon has among its ingredients the two decongestants
in combination that were in the formulation of Dimetapp found
ineffective.

In the September 1989 revision to the State Medicaid Manual, HCFA for
the first time published a list, described as not all-inclusive, of IRS
drug products.  The Naldecon products appear on this list.  Section
4370.1, Addendum D at D-2.

B. The States' Ability to Identify Naldecon as IRS

HCFA argued that, while Naldecon is not "identical" to Dimetapp, it
nevertheless is "related" or "similar" to Dimetapp in that Dimetapp and
Naldecon share "known pharmacological properties" as set forth in 21
C.F.R. . 310.6(b)(1) because they both contain two decongestants.  HCFA
contended that, if the States had been monitoring the Federal Register
properly, they would have been alerted to the fact that the FDA
considered any two decongestants in combination ineffective in a drug
product.  HCFA argued that, under the criteria set forth by the Board in
Louisiana, the States could have then easily identified Naldecon as an
IRS drug product by consulting such compendia as Facts and Comparisons
or the Physicians' Desk Reference, where the ingredients for the drug
products are listed.  HCFA acknowledged that the States could not have
identified which drug products were IRS to Dimetapp merely by
pinpointing one or two of its specific ingredients and eliminating every
cold remedy listed in the compendia references which contained those
ingredients.  HCFA Master Br. at 48.  Nevertheless, HCFA insisted, the
States' experts could have readily identified Naldecon as IRS to
Dimetapp, by recognizing the basis of the LTE finding in the Federal
Register.notices as the presence of any two decongestants and then
consulting the compendia.

We do not share HCFA's view that the FDA's notices in the Federal
Register were so unambiguous that the States should readily have been
able to determine the basis for the FDA's finding that Dimetapp was
ineffective and to extrapolate that finding through compendia to arrive
at the conclusion that Naldecon was an IRS drug product.  We find
nothing in the wording of the December 23, 1983 NOOH that would, as HCFA
contends, lead necessarily to the conclusion that the presence of more
than one decongestant in a drug product makes that drug product LTE.
The NOOH stated that the three-ingredient formulations of Dimetapp were
ineffective.  The NOOH stated that no clinical studies were submitted in
support of the products.  No further explanation was given.

The NOOH then stated that brompheniramine maleate and
phenylpropanolamine hydrochloride were considered safe and effective by
the OTC drug review panel, and that the OTC panel concluded that
combinations containing a nasal decongestant and an antihistamine in the
reformulated Dimetapp products were safe and effective.  This latter
finding contained a reference to the 1976 proposed monograph.  This,
according to HCFA, was adequate notice to the States that the
combination of two decongestants in a drug product makes that product
LTE. 17/

HCFA's position that the reference in the NOOH to the monograph would
have explained the basis for the FDA's finding that Dimetapp was
ineffective is not persuasive for several reasons.  The monograph
referred to in the .NOOH was an advance notice of proposed rulemaking.
18/  The stated intent of that notice was "to stimulate discussion,
evaluation, and comment . . . . before any decision is made on the
recommendations of the Panel."  41 Fed. Reg. 38,312.  The notice also
proposed that the conditions in the monograph for Category I drugs (safe
and effective) and Category II drugs (ineffective) be effective,
respectively, 30 days and six months after the date of the final
monograph in the Federal Register. 19/  Id.  Thus, the monograph did not
make any final determination regarding the effectiveness of OTC cold
remedies.

Moreover, the specific page of the monograph cited in the NOOH, 41 Fed.
Reg. 38,326, declared that a Category I (effective) drug product may
have a combination from each pharmacologic group, such as a combination
"containing an antihistamine and a nasal decongestant."  On the same
page, however, a Category II (ineffective) drug product is classified as
including "more than two active ingredients from the same pharmacologic
group."  (emphasis added.)  These categories offered little meaningful
guidance to the States for determining why the original version of
Dimetapp was ineffective, since it arguably could have fallen under the
effective category  (having an antihistamine and a decongestant, but not
more than two of either).  Furthermore, a later version of the monograph
abandoned any insistence that two ingredients from the same group are
automatically ineffective. 20/.In support of its argument that the
States should have been able to discern why Dimetapp was ineffective,
HCFA also referred to another page of the monograph, 41 Fed. Reg.
38,420, where FDA proposed a regulation.  This proposed regulation,
which was to be codified at 21 C.F.R. . 341.40(b), stated that any
single antihistamine active ingredient could be combined with any single
oral nasal decongestant active ingredient.  It is not clear that this
language also meant that no drug could, like Naldecon, contain two
ingredients from one of those categories.  Even if the language were
clearer, the States cannot fairly be considered to have been put on
notice of the FDA's interpretation by a proposed regulation which never
has been promulgated in final form.  Proposed regulations are, by
definition, subject to revision or even abandonment by an agency, so the
public cannot be expected to rely on them.  See, e.g., Powell v. Andrus,
631 F.2d 699, 702, n. 2 (10th Cir. 1980); Joyce Faye Hughey, DAB No.
1221, at 5-6, 8-9 (1991).

HCFA's position regarding Naldecon might thus be summarized as follows:
the States should have recognized Naldecon as IRS based on a NOOH that
did not contain any explanation for the action taken on Dimetapp, but
did refer to one page of a seven-year old, 122-page proposed monograph
that contained contradictory information, accompanied by a proposed
regulation that, as of today,.some 16 years later, has never been
promulgated in final form.

The States would bear an unreasonable burden if they are unable to
determine from the explanation in the NOOH itself the basis on which to
classify drug products as IRS to the products found to be ineffective.
If the States are to meet their responsibility to identify IRS drug
products, they must be given the necessary information to carry out that
task.  That was not done in the case of Dimetapp and, consequently,
Naldecon. 21/

HCFA's position is further undermined by the fact that only a small
number of states made the determination that Naldecon was an IRS drug
product.  The regulations provide that "experts qualified by scientific
training and experience" are to make the determination whether a drug
product is IRS to a LTE drug.  21 C.F.R. . 310.6(b)(2).  The States
contended that their experts had reviewed the NOOH for Dimetapp and
concluded that Naldecon was not IRS to Dimetapp.  A survey conducted by
one State showed that of 34 states audited by OIG, only two states, Utah
and Iowa, had identified Naldecon as an IRS drug product.  New Jersey
Appeal File at 15-20.  Another State pointed out that none of four major
drug database companies had identified Naldecon as an IRS drug product.
Indiana Appendix C at 5.  If the basis for the FDA's finding in the NOOH
that Dimetapp was ineffective were as clear as HCFA maintains it was, it
is probable that more states, as well as the drug database companies,
would have made determinations that Naldecon was an IRS drug product.

HCFA contended that if states have questions concerning a particular
drug product, the states are encouraged to make inquiries to the FDA as
to the applicability of a NOOH to that drug product.  21 C.F.R. .
310.6(b)(3).  HCFA pointed out that Idaho made such a request concerning
Naldecon in July 1986, and received a response, through the HCFA
regional office, in February.1987 that Naldecon was considered IRS to
Dimetapp.  HCFA Oregon Ex. 2.  This does not, however, address the
situation where a state has consulted its expert and that expert has
rendered a professional opinion that the drug product is not IRS.  As
the States have pointed out, no HCFA or FDA rule imposes an obligation
upon a state to verify that the FDA agrees with the opinions of the
state's own experts.  We also note that nothing in the record indicates
that, after receiving the FDA's opinion that Naldecon was an IRS drug,
the regional office disseminated that information to all the states in
the region rather than just to Idaho.  Further, other States reported
they made efforts to obtain information in this regard from the FDA and
encountered considerable difficulty.  See, e.g., Missouri Br. at 10;
Maryland Br. at 3 and 13.

The Board has described the process for the identification of a drug as
an IRS drug product:

 A NOOH lists a LTE drug by its trade name, active ingredients,
 dosage form/route, and manufacturer.  With this information a
 trained individual would consult various publications and
 national drug compendia . . . .  From reference to these
 materials, that individual could presumably locate all IRS drugs
 in the marketplace.  The most important information in this
 process is the active ingredients listed in the NOOH.  As a HCFA
 witness testified, "[T]he burden is to follow the ingredients.
 If you have the ingredients, you have the key to the whole
 thing."

Louisiana at 12.

Here, however, HCFA conceded that the States could not have identified
Naldecon as an IRS drug from merely the ingredients of Dimetapp listed
in the 1983 NOOH.  HCFA Master Br. at 48.  The basis for the FDA's
finding that Dimetapp was ineffective was not any of Dimetapp's
ingredients specifically, but the fact that Dimetapp contained two
decongestants. 22/  The FDA, however, as we.have shown above, failed to
articulate that basis in the NOOH. It is not enough that a drug is
listed in compendia; the NOOH must provide ingredients, or other
articulated criteria, by which an expert can reasonably trace its IRS
status.  Hence, the States' experts could not have reasonably determined
that Naldecon was an IRS drug through the use of compendia.

In order for the States to have carried out their responsibilities with
respect to Naldecon, they required adequate information beyond that
provided in the NOOH.  The FDA and HCFA did not provide the States with
that information.  Accordingly, we reverse the disallowances for
Naldecon and Naldecon-related drug products, up to the time HCFA put
each State on notice -- through either direct communication or the
September 1989 revision of the State Medicaid Manual, plus the
applicable grace period -- that those drug products were considered IRS
drugs. 23/  This result conforms with our holding in Louisiana that the
States "should not be held, with the benefit of hindsight, culpable for
not doing the virtually impossible."  At 16.

Challenges to The LTE/IRS System Generally

The States contended that their experience with Naldecon is illustrative
of the difficulties the States currently confront in implementing the
DESI program.  See discussion in the section on the Audit Process,
infra.  The States argued that it is fundamentally unfair for HCFA to
require the States to make determinations on the IRS status of drug
products, and then for HCFA to use one state's determination to bind all
the other states.  The responsibility for identifying IRS drugs should
fall on the FDA, according to the States, and HCFA should then have an
affirmative obligation to notify the States of the drug products which
are considered to be IRS drugs.  Until such notice is given, the States
argued, Medicaid reimbursement should be available for drug products
later determined to be IRS.  The States generally blamed the .federal
agencies for poor administration and communication.

One State argued that a 1990 OIG Report recommending changes in how HCFA
and the FDA handle LTE drugs demonstrates that the federal government is
wholly responsible for any payments for IRS drugs.  Indiana Supplemental
Br. at 4-8; "DHHS' Enforcement of Regulations Prohibiting Medicaid
Payments for Less-Than-Effective Drugs," OIG/OAS Report No. A-03-8900220
(July 13, 1990).  We do not agree that this report in any way exempts
the States from their responsibility during the audit periods for
identifying IRS drugs.

The Board has previously heard such general attacks on the supposed
inequities of the current DESI system and has rejected them.  Whether
this system is the most efficient alternative is a policy issue which we
do not address. 24/  The Medicaid program is a partnership between the
federal government and the states.  Each partner has responsibilities in
seeing that the Medicaid program is managed in a responsible, safe, and
effective manner, including the removal of unsafe and ineffective drug
products.  The Board "will not condone a dangerously passive approach to
the problem of ineffective drugs."  Illinois at 8.  The States cannot
simply wait for HCFA to inform them of each LTE and IRS drug without
risking delays which could be avoided by proactive efforts to .monitor
the NOOHs and identify IRS drugs. 25/  In this effort, good faith, as
claimed by the States, is not enough.  Effective actions are required.

Therefore, we are not reversing the disallowances for any other IRS
drugs appealed by the States where the States did not offer arguments
why they were unable to identify those specific drugs as IRS. 26/.One
State did make a specific argument relating to Pediacof Syrup, which was
disallowed as IRS to DESI Notices 6514 as well as the Dimetapp NOOH.
38 Fed. Reg. 4,006 (February 9, 1973) and 47 Fed. Reg. 22,604 (May 25,
1982).  DESI notice 6514 expressly stated that drug combinations of
antihistamines and expectorants are "irrational."  47 Fed. Reg. 22,605.
The State's pharmacist did not contend that he had any difficulty
recognizing that Pediacof Syrup contained a combination directly
addressed in that NOOH.  Rather, he disagreed with the scientific merits
of the FDA conclusion in the NOOH.  While the States must exercise some
judgment in determining which drugs are IRS to those drugs covered in a
NOOH, they may not disregard a NOOH because they disagree with it.
Therefore, the disallowances relating to Pediacof Syrup are sustained.
27/.The Audit Process

In addition to challenging the disallowances for specific drug products,
some of the States also called into question the audit process used to
arrive at the disallowances.  Initially, the OIG began a review in 1985
of drug claims from seven states aimed at ascertaining whether they were
effectively halting claims for FFP for LTE and IRS drugs. 28/  This
review resulted in disallowances, which HCFA stated are not at issue
here, and led to a national audit.  HCFA Master Br. at 13.  Several
States objected to the methodology used in the national audit.

HCFA submitted a declaration from the official with lead responsibility
for the national audit review, who detailed the process summarized here.
See Marion Declaration.  A list of 4300 LTE and IRS drugs, identified by
NDCs, was compiled as of August 1988 by the OIG from the initial review,
an FDA list, and lists from four states (Pennsylvania, Indiana,
Virginia, and Louisiana). 29/  The list was then reviewed by the FDA as
of July 1989 to verify that each drug was LTE or IRS based on a
published NOOH and to cross-check the NDCs for each drug.  The FDA
removed over 600 drugs and the OIG eliminated 32 others due to problems
with their NDCS, resulting in a verified list of 3583.  This list was
compared by computer to all drugs for which the States claimed FFP
during the audit periods. 30/

The procedure then followed for each State (with three exceptions
discussed below) began with the submission on magnetic tape of the
State's paid claims and a determination by comparison with the LTE/IRS
list of the amount of FFP attributable to such drugs.  Then, a random
sample of 200 paid LTE/IRS claims was examined manually by comparing
them to the original copies to verify that the magnetic tape was
accurate.  The States were given an opportunity to comment on draft
reports.  Disallowance .letters were then issued reflecting any
adjustments which were accepted based on the States' comments.

The three States which diverged from this audit procedure were New
Jersey, Illinois, and Indiana.  In New Jersey, the magnetic tape
submitted by the State contained claims for drugs paid from State funds
as well as those for which FFP was claimed.  In order to determine for
what percentage of the LTE/IRS claims FFP was claimed, the random sample
of 200 claims used to check the accuracy of the magnetic tape was also
evaluated to ascertain that 195 were claimed for FFP and five were
State-only claims.  The disallowance was reduced by a projected amount
to eliminate the State-only claims.  In Illinois, the OIG found that the
State had a master listing of LTE and IRS drugs, which the OIG compared
to the computer list used in the other audits.  This comparison showed
that eight drugs which the OIG listed as IRS were omitted from Illinois'
master listing.  The OIG then used Illinois' periodic payment reports to
calculate expenditures and FFP attributable to those eight drugs. 31/
Indiana maintained periodic payment reports by NDCs for drugs claimed
for FFP against which the OIG ran its computerized list and found claims
for 286 LTE and IRS drugs for which the related FFP was disallowed. 32/

The audit process was complicated somewhat by the issuance of our
Louisiana decision, after which the OIG removed from its computer
program all NDCs not listed in the compendia or sources referenced in
that decision, reducing the verified list to 2850, as of May 10, 1990.
The OIG reexamined the pending audits and issued final disallowances
which did not include any amount attributable to the 733 NDCs removed
from the list.  However, some States already had received final audit
reports and disallowances prior to that reexamination.  HCFA agreed to
have the OIG reexamine those States' disallowances and make any
resulting reduction in the disallowances.  HCFA Master Br. at 15.  HCFA
should identify and notify each affected State when the.reexamination is
completed and what if any reduction in the disallowance resulted. 33/
If any State wishes to appeal the results of the reexamination on this
issue only, it may do so within 30 days of receiving such notice from
HCFA.

Some States argued that the random sample was used improperly to
extrapolate the disallowances, because the auditors did not claim to
have checked every "hard copy" claim.  See, e.g., New York Br. at 14-18.
34/  However, the States provided the magnetic tapes to the OIG as an
accurate record of the claims paid, so they can hardly insist that the
use of a sample to verify the accuracy of the tapes against the original
claims copies maintained by the States was insufficient to permit HCFA
to rely on the magnetic tape data.  Despite the apparent confusion among
some States, HCFA clearly stated that the sample was not used to
calculate the disallowance but only to doublecheck the accuracy of the
magnetic tape.  Accurate recordkeeping is a responsibility of the States
under the Act.  See sections 1902(a)(6) and (27).  The disallowance
amounts were based on the computer comparison of all paid claims from
the audit period against the OIG's list of LTE/IRS drugs, not on the use
of any statistical sample of claims. .Some States argued that several
NDCs on the HCFA computer list have been reassigned to drugs which are
not LTE or IRS, which casts doubt on the validity of the audit results.
See, e.g., Georgia Br. at 21.  HCFA acknowledged that NDCs are sometimes
prematurely reassigned.  HCFA argued, however, that the FDA verified
that the NDCs were still assigned to the drugs at issue as of July 1989
and that all the audit periods (except for the second New Jersey
disallowance) involved were prior to that date.  Therefore, HCFA
contended that "recycled" NDCs could not have affected the accuracy of
the audits.  Nevertheless, HCFA agreed to recalculate the disallowance
of any State which demonstrates that a particular NDC for which a claim
was paid was not the drug listed for that NDC on the computer listing of
LTE/IRS drugs.  HCFA Master Br. at 29.  Any State with such evidence
should submit it to HCFA within 30 days of receiving this decision.
HCFA should issue a written response to this issue, along with any other
recalculations HCFA may make in the disallowance amounts.

The States presented a variety of arguments against the essential
fairness and overall reliability of the audit results. 35/  Some States
complained that the computer list.developed by HCFA should have been
provided to the States as a tool to modify their drug formularies or
payment records, instead of employed retroactively to penalize them in
an audit.  See, e.g., Georgia Br. at 20; Maryland Br. at 8; Indiana
Supp. Br. at 2.  Further, the States argued that, if HCFA and the FDA
could not maintain a complete list of LTE/IRS drugs and had to compile
this list from various sources including some State listings, then it is
unreasonable to expect any one State to keep a complete, current list on
its own.  See, e.g., Missouri Br. at 3 and 7.  In addition, the efforts
of various States led to differing conclusions, so that "no two states
agreed on the status of all prescription products," despite good faith
efforts.  Id. at 10.  Some States argued that, since each State is
required to identify and stop payment on LTE/IRS drugs, the OIG should
have deferred to each State's expert in determining which drugs were not
reimbursable, absent some showing of negligent procedures by the State.
See, e.g., Virginia Reply Br. at 8-9.  Consequently, the States argued
that it was unfair and improper for the OIG to compile a list from
sources outside the State being reviewed, such as other States which may
have reached different conclusions about particular drugs.

Certainly, compliance efforts would have been enhanced if the States had
had ready access to some central listing and guidance in resolving
difficult cases.  As noted above, a number of States represented that
inquiries to the FDA or HCFA to seek information to resolve questions
about specific drugs met with slow or unresponsive results.  It is not
our role, however, to impose policy judgment on the operation of the
LTE/IRS program, but rather to determine the enforceability of the
particular disallowances before us.  In so doing, we do not find it
unreasonable for HCFA to approach the task of evaluating the States'
compliance with LTE/IRS drug restrictions by seeking to compare State
payment files against a master list of unreimbursable drugs.  Nor is it
unreasonable to use a variety of sources to compile as comprehensive a
list as possible and then to seek FDA verification. 36/  Our prior
decisions have made clear that the States have the affirmative
responsibility to identify and restrict payment on LTE/IRS drugs, using
their own expertise.  It.is not enough for the States to argue that
their job could have been made easier by more federal coordination and
better communication; the States must nevertheless shoulder their part
of the job.  The States have not shown any basis to invalidate the audit
as a whole as unreliable or improper, and we therefore decline to do so.

Conclusion

For the reasons discussed above, we hold as follows:

 We find that Bellergal was a readily identifiable IRS drug and
 we therefore sustain any disallowance for that drug product.

 We find that dipyridamole is eligible for retroactive
 reimbursement, and we therefore reverse the disallowances for
 that drug product.

 We find that it was unreasonable to expect the States to
 identify Naldecon and the Naldecon-related drug products as IRS
 to Dimetapp, and we therefore reverse the disallowances for
 those drugs.  However, we sustain any disallowance for the
 period after issuance of the September 1989 State Medicaid
 Manual, which provided notice to the States that Naldecon was
 IRS.  (The record only shows a later disallowance for New Jersey
 that would be affected.)  We also sustain any disallowances for
 the original formulation of Dimetapp, which was clearly LTE (see
 fn. 21).

 We decline to invalidate the drug payment termination process
 under which the States share the responsibility for the denial
 of Medicaid reimbursement for IRS drugs.  Thus, we sustain the
 disallowances for any other drug product for which the States
 failed to make any specific arguments, as well as the
 disallowances for Pediacof Syrup and Meprogesic Tablets, for
 which we rejected the States' arguments.  We reverse the
 disallowance for V.V.S. only if that drug product is the drug
 V.V.S. Vaginal Cream ruled by HCFA in 1991 not to be IRS.

 Finally, we reject the States' challenges to the audit review
 process, except for certain recalculations, as follows:

 -- HCFA is to notify any State which was audited against an
 earlier LTE/IRS drug list and should reexamine its claims
 against the.              final, reduced list.  Any State may
 appeal to us on this issue, within 30 days of its receipt of
 written notice of the results of HCFA's reexamination.

  -- Any State with evidence that its disallowance
  included amounts for a NDC that was reassigned at the
  time to a drug not on the LTE/IRS drug list should
  submit its documentation to HCFA within 30 days of this
  decision.  Any State may appeal HCFA's written response
  on this issue to us within 30 days of its receipt.

 We direct HCFA to adjust the amounts of the disallowances to
 reflect the above conclusions.  As a result of this decision,
 there will be numerous recalculations of the disallowances.  Any
 State that believes itself adversely affected by any
 recalculation determination may appeal that determination to the
 Board within 30 days of that determination.

 

       __________________________ M. Terry Johnson

 

       __________________________ Donald F. Garrett
       Presiding Board Member

 

       __________________________ Norval D. (John)
       Settle Presiding Board Member.
       ATTACHMENT A

Docket No.           State      Disallowed Amounts Appealed

90-101            Illinois Dept. of         $127,715 Public Aid

90-139            Oregon Dept. of Human     $75,754 Resources

90-145            Indiana Dept. of Public   $870,277 Welfare

90-158            Iowa Dept. of Human       $647,116 Services

90-161          Missouri Dept. of         $555,240 Social Services

90-166            Maryland Dept. of Health  $179,164 and Mental Hygiene

90-183            Virginia Dept. of         $813,448 Medical Assistance
       Services

90-191            North Carolina Dept.      $816,131 37/ of Human
      Resources

90-196            New Jersey Dept. of       $736,000 38/ Human Services

90-219            Pennsylvania Dept. of     $1,297,963 Public Welfare

90-224            Colorado Dept. of         $111,871 Social Services

91-45             New York State Dept.      $647,081 of Social
       Services.A-92-2           Georgia Dept. of
       $895,873 Medical Assistance

A-92-143          Texas Dept. of Human      $2,394,934 Services

A-92-230    New Jersey Dept. of       $803,718 Human Services.
       ATTACHMENT B

State                                           Appealed Disallowed Drug
Products

Illinois                                        Bellergal, Naldecon

Oregon                                          Naldecon, Dipyridamole,
       Pediacof Syrup

Indiana                                         Bellergal, Naldecon,
       Dipyridamole,
       Dimetapp

Iowa                                                    Bellergal,
Naldecon, Naldecon-related (Entex, Rutuss), Dipyridamole,  Pediacof
Syrup

Missouri                                        Dipyridamole

Maryland                                        Naldecon,
Naldecon-related     (Entex, Rutuss, Naldeate Syrup), Dipyridamole

Virginia                                        Naldecon,
Naldecon-related, Dipyridamole, Vaginal Sulfa, other IRS drugs

North Carolina          Naldecon, Naldecon-related, Dipyridamole,
Vaginal Sulfa, other IRS drugs

New Jersey                              Naldecon, Tedral, Dipyridamole,
other IRS drugs

Pennsylvania                    Bellergal, Naldecon, Naldecon-related
(Tedral, Entex), Dipyridamole, Vaginal Sulfa, Pediacof Syrup, other IRS
drugs

Colorado                                        Bellergal, Naldecon,
Naldecon-related (New-Decongestant, Tri-Phen-Chlor), Dipyridamole

New York                                        Dipyridamole

Georgia                                         Naldecon,
Naldecon-related

Texas                                           Naldecon,
Naldecon-related, Dipyridamole, other IRS drugs.
ATTACHMENT C


        AUDIT PERIODS

Illinois                                        1/1/84-9/30/88 ACN
       A-05-89-00102

Oregon                                          10/1/87-12/31/88 ACN
       A-10-90-00001

Indiana                                         1/1/84-7/31/88 ACN
       A-05-89-00081

Iowa                                                    1/1/85-12/31/88
       ACN A-07-87-00200

Missouri                                        1/1/85-1/31/89 ACN
       A-07-89-00199

Maryland                                        1/1/87-6/30/88 ACN
       A-03-89-00223

Virginia                                        4/1/84-6/30/88 ACN
       A-03-89-00221

North Carolina          1/1/86-8/31/89 ACN A-04-90-02000

New Jersey                              1/1/87-6/30/88 ACN A-02-89-01021
       7/1/88-9/30/90

Pennsylvania                    6/1/84-3/31/88 ACN A-03-89-00602

Colorado                                        1/1/85-12/31/88 ACN
       A-08-89-00232

New York                                        1/1/87-6/30/88 ACN
       A-03-89-00229

Georgia                                         9/1/86-6/30/88 ACN
       A-03-89-00225

Texas                                           1/1/86-2/28/89 ACN
       A-06-90-00101  .1.  See Attachment A to this
       decision for a listing, by docket number, of
       the States and the amounts of their
       respective appealed disallowances.

2.  See Attachment B of this decision for a listing, by state, of the
disallowed drug products being appealed.

3.  Each State submitted its own brief and appeal file, with the later
opportunity to incorporate arguments made by other States.  In addition
to filing an individual response to each state brief, HCFA also
submitted a Master Brief (Br.) applicable to all the arguments made by
the States.  When we refer to an argument offered by the States, it is
possible that the particular argument was made by only one or some of
the States.  We will identify an exhibit (Ex.) by the name of the
particular State that submitted it.

4.  Sandoz manufactures two products, Bellergal and Bellergal-S, which
contain the same active ingredients in different dosages and which do
not differ in any way material here.  We refer to both when we use the
term "Bellergal."

5.  The controversy between Sandoz and the FDA over Bellergal concerned
a 1977 FDA determination that the Bellergal fell within the "new drug"
category because Bellergal failed to meet the criteria for "grandfather"
status.  The FDA explained that Bellergal's labeling had changed, with
some indications dropped from the current labeling and some new
indications added to the current labeling not present in the pre-1938
labeling.  Illinois Ex. 4, at 2.  Citing United States v. Allan Drug
Corp., 357 F.2d 713 (10th Cir. 1966), cert. denied, 385 U.S. 899 (1965),
and 21 C.F.R. . 310.3(h), the FDA declared that the deletion of old
claims and the addition of new claims for a drug product destroyed its
"grandfather" status.  Id.

Determinations of whether drugs are "new drugs" or are exempt under the
"grandfather" clause fall within the authority of the FDA, subject to
district court review.  See Weinberger v. Hynson, Westcott & Dunning,
412 U.S. 609, 624 (1973).  Significantly, Sandoz never challenged in
district court the FDA's determination that Bellergal did not qualify
for the "grandfather" exemption.  Additionally, the 1983 NOOH that
listed Donnatal and Belladenal as LTE drugs expressly stated that it
"encompasses all issues relating to the legal status of the drug
products subject to it (including identical, related or similar drug
products . . .) e.g., any contention that any such product is not a new
drug . . ."  48 Fed. Reg. 20,495, 20,501.  The NOOH then warned that the
failure to request a hearing "constitutes a waiver of any contentions
concerning the legal status of any such drug product."  Id.  Sandoz made
no request for a hearing.  Therefore, the FDA's determination regarding
Bellergal appears final, thus undercutting the States' position.

6.  The FDA found ergotamine tartrate effective for prevention of
vascular headaches, both alone as an aerosol and in combination with
caffeine in tablet form.  37 Fed. Reg. 15,032 (July 27, 1975) (DESI
5929).

7.  However, two States which made specific arguments on Bellergal are
those in which, HCFA asserted, the States' pharmacists admitted during
their audits that they did not make any attempt to identify IRS drugs,
since they believed it was the responsibility of the FDA.  See fns. 31
and 32 infra.

8.  This January 15, 1987 NOOH specifically named 62 dipyridamole
products.  A February 23, 1987 NOOH added 16 dipyridamole products.  52
Fed. Reg. 5,501.  A May 8, 1987 NOOH further added three more
dipyridamole products.  52 Fed. Reg. 17,477.  The States argued that, in
the event the Board should find that dipyridamole was a LTE drug, any
disallowances for drug products named in the February and May NOOHs
should be measured from these later NOOHs, plus the applicable grace
periods, rather than from the January NOOH.  HCFA responded that the
later NOOHs specifically referred to the January 15, 1987 NOOH, and,
therefore, the January NOOH applied to all dipyridamole products, and
that in any the other generics would certainly have been IRS to those in
the first NOOH.  In view of our conclusion that the States' claims for
dipyridamole should be retroactively reimbursed, we need not address
this matter.

9.  We note that all but one of the States whose claims for dipyridamole
were denied had disallowances for audit periods that began prior to the
January 1987 NOOH that announced dipyridamole's LTE status.  We accept
HCFA's assertion that the disallowances were calculated to include only
those claims for dipyridamole that were submitted after the publication
of the NOOH and applicable grace period, and acknowledge that HCFA
expressed willingness to recalculate the disallowances of any State that
demonstrated otherwise.  HCFA Br. at 62, n.35.  However, this issue is
moot, in light of the determination that all the claims for dipyridamole
are eligible for retroactive reimbursement.

10.  All the parties pointed to the uniqueness of dipyridamole's
situation, which arose not only from the substitution of a new
indication but the grant of a marketing exclusivity period, which did
not prevent the generics from being sold as identical to Persantine but
did prevent them from promoting their drugs for the new use.  The
confusion which resulted from the FDA's actions is demonstrated by an
article in the March 20, 1987 newsletter of the American Pharmaceutical
Association, Pharmacy Weekly (Maryland Ex. 14), which noted that it was
unclear whether the FDA's action precluded Medicaid payment for generic
dipyridamole and quoted a HCFA employee saying, "We have no clear
answers.  We are asking for our General Counsel to help us set a policy
for this."  Id. at 2.

The record before us shows that at least one State specifically
submitted a written inquiry to HCFA regarding the implications of the
January 1987 NOOH regarding Medicaid reimbursement of dipyridamole drug
products.  Maryland Ex. 15.  In July 1987 HCFA responded that FFP would
be available for Persantine, but not for other dipyridamole products.
Maryland Ex. 17.  There is no indication, however, that HCFA
communicated this information to any of the other States.  In fact, one
State alleged that a HCFA representative specifically told two State
employees that FFP would not be denied for dipyridamole even after the
January 1987 NOOH.  Texas Exs. A and B.  Texas argued that, on the basis
of this representation, HCFA should be estopped from taking any
disallowance action on claims for dipyridamole.  HCFA denied that its
representative gave any such advice to Texas employees and argued that
Texas failed to establish that it met the elements for asserting
estoppel against the federal government.  See, e.g., Heckler v.
Community Health Services, 467 U.S. 51 (1984), and Office of Personnel
Management v. Richmond, 496 U.S. 414 (1990), reh. denied 59 U.S.L.W.
3137 (1990).  Inasmuch as we are reversing the disallowances for
dipyridamole, we see no need for determining whether an estoppel defense
would be appropriate under these particular circumstances.

11.  The parties have not raised, and we have not addressed, any
distinction among dipyridamole claims based on whether the manufacturers
pursued hearing requests or the dates that their abbreviated NDAs were
approved.  We presume that the products which were withdrawn from the
market are not reflected in the claims, and our conclusion on
retroactive reimbursement makes the date of each product's approval
irrelevant.

12.  Of course, it is possible that some physicians prescribed
dipyridamole in either brand name or generic form for its former
ineffective indication.  Some claims may be for still other indications
for which the parties have noted that the product has been commonly used
by physicians.  See, e.g., Oregon Ex. 7; New York Ex. 4.  Such
"off-label" use is an accepted and lawful practice.  See, e.g., PDR at
Foreword.  The methods used to handle claims for prescription drugs
under Medicaid do not enable the States to distinguish the use for which
a drug was prescribed.  The anomaly which would result from denying
retroactive reimbursement for the generic drugs here is that FFP would
be paid for Persantine prescribed by a doctor for the treatment of
chronic angina pectoris, an indication for which all brands of
dipyridamole, including Persantine, have been found ineffective.  Yet
FFP would be denied (for a three-year period) for a prescription of
dipyridamole filled by a generic, even though admittedly chemically
identical and bioequivalent to Persantine, for purposes for which it has
been ultimately proven effective and been approved for labeling.

13.  One manufacturer of a dipyridamole product estimated in 1990 that
the nationwide market for dipyridamole was in excess of $110 million.
Missouri Ex. 5, at 2.

14.  New Jersey determined that, on average, the brand name Persantine,
in all strengths, cost 525% more than generic dipyridamole.  Indiana
Appendix B at 1.  The total cost of generic dipyridamole during New
Jersey's audit period was placed at $674,183, while the estimated cost
if Persantine had been substituted was put at $3,651,070.  Indiana
Appendix B at 3.

15.  The States also argued that FFP for dipyridamole claims should be
allowed because there was "a compelling justification for its medical
need" for dipyridamole as an antiplatelet drug and produced articles
from medical journals to support this indication.  See Oregon Exs. 4, at
A, and 7, at D and E.  Section 1862(c)(1)(D) of the Act allows FFP if
the Secretary of DHHS has made a determination that such a justification
exists.  We agree with HCFA that the authority to make such a
determination lies solely with the Secretary.  The Board is not the
proper forum to address this argument.

16.  The terms "Naldecon-related" drugs, or simply Naldecon, are used
here to include various drug products which allegedly are IRS to
Dimetapp, in that these drugs have among their ingredients more than one
decongestant or more than one antihistamine.  Among the Naldecon-related
drugs that are subject to disallowances here are the following drug
products:  Entex, RuTuss, Tedral New-Decongestant, Tri-Phen-Chlor,
Naldelate, Naldelate Syrup, Nalgest, Naldagen, Naldec, Naldec Syrup,
Quadrahist, Decongestabs, Par de Con, Sinucon, and other unnamed drugs.

17.  Rather than drawing the conclusion that it was the presence of two
decongestants that made the old formulation of Dimetapp ineffective, it
could also have been reasonably inferred that it was the presence of a
particular ingredient, phenylephrine hydrochloride, that made the old
formulation ineffective.  The old, ineffective Dimetapp had that as an
ingredient; the new, effective Dimetapp did not.  If the States had
reasonably inferred that phenylephrine hydrochloride had been the reason
for finding original Dimetapp LTE, the States would have erroneously
identified every cold product with that ingredient as its only
decongestant as IRS.  The FDA has never found, however, that
phenylephrine hydrochloride is ineffective.

18.  We further note that the reference was to a FDA notice published
some seven years earlier.  We question whether it is reasonable to
require state personnel charged with monitoring NOOHs to maintain an
indefinite backlog of Federal Registers in the event a future NOOH might
obliquely contain a reference to one of them.

19.  The FDA did later publish in the Federal Register as a notice of
proposed rulemaking a "tentative final monograph" on the recommendations
of the OTC review panel.  This occurred on August 12, 1988.  53 Fed.
Reg. 30,522.  The Board is unaware of any publication of a final version
of the monograph.

20.  In the "tentative final monograph," some 12 years later, the FDA,
in response to public comments, wrote:

 Category I active ingredients from the same therapeutic category
 that have the same mechanism should not ordinarily be combined
 unless there is some advantage over the single ingredient in
 terms of enhancing effectiveness, safety, patient acceptance, or
 quality of formulation.  Thus, the [FDA]'s combination policy
 does not set limits on the number of ingredients from the same
 pharmacologic group that may be combined, provided data are
 presented to show the combination meets the necessary criteria.
 Combinations containing ingredients from the same pharmacologic
 group will be permitted if adequate data are presented to the
 agency.

    *  *  *

 The [FDA] agrees that no fixed limit need be placed upon the
 number of active ingredients in a combination product if it can
 be shown to be a rational, safe, and effective combination with
 a suitable target population.

53 Fed. Reg. 30,522, 30,535.

21.  Indiana appealed a disallowance for claims for the original
formulation of Dimetapp.  Indiana argued that since Dimetapp was later
found effective this disallowance should be reversed.  This argument
ignores the fact that the disapproved Dimetapp and the approved Dimetapp
are two distinct drug products, with the former being specifically found
LTE.  While we are reversing the disallowances for Naldecon and
Naldecon-related drug products, we sustain any disallowances the States
may have received for the original formulation of Dimetapp.

22.  The States also argued that a significant difference in the dosage
amounts in the decongestant ingredients in Dimetapp and Naldecon removed
the possibility that Naldecon could be considered IRS to Dimetapp, with
the dosages of two decongestants in Naldecon providing a therapeutic
effect that Dimetapp's decongestants lacked.  See, e.g., Virginia Ex. 22
and Oregon Ex. 7.  Since the disallowances for Naldecon are being
reversed, there is no need to consider this argument further.

23.  The only State before us which will apparently be affected by our
holding that the September 1989 Manual announcement constitutes notice
that Naldecon is an IRS drug is New Jersey, which had a second
disallowance issued for the audited period July 1, 1988 through
September 30, 1990.

24.  Some of the problems that the States experienced in the
identification of IRS drug products may be alleviated by HCFA's
publication of updated lists of IRS drugs in the State Medicaid Manual.
If HCFA continues to timely update this list, the difficulties that the
States have experienced in removing IRS drug products from their
reimbursement rolls in a timely fashion should be reduced.  With the
publication of IRS drugs in the Manual, the States have been
definitively put on notice of what drug products are considered IRS
drugs by HCFA and hence are ineligible for FFP.  The publication of a
list of IRS drugs in the State Medicaid Manual does not, however,
relieve the States of their continued responsibility to monitor the
Federal Register for NOOHs and to act expeditiously on their own, as
reasonably as can be expected, in removing drug products IRS to LTE
drugs listed in the Federal Register.

25.  In this regard, it is noteworthy that the States have presented
arguments articulating difficulty identifying only relatively few
allegedly IRS drugs, out of the hundreds of products listed as IRS in
the final audit list.  If the process of identifying IRS drugs were
generally as difficult as the States argued here, it is reasonable to
expect such arguments to have been made for far more drug products.
Thus, we conclude, as we did in Pennsylvania, that the States are able
to make IRS determinations in most cases without great difficulty.

26.  Two States argued that HCFA issued disallowances for some drug
products that were manufactured by small companies and therefore did not
appear in national drug compendia.  The States argued that, under
Louisiana, disallowances should not be taken for such IRS drugs that are
difficult to identify.  North Carolina named three such drugs, UAD Forte
Lotion, Bantuss HC Syrup, and Bantuss C Expectorant.  Virginia claimed
the following drugs were also unlisted in compendia:  Tuss-Ade TD Caps,
Bionade C-modified, Vertab, Unituss, Naldec, Quadrahist, Vaginal Sulfa,
Isolate Cpd, Nafazair, ParDeCon, Oratuss, Naldegen, and Sinocon.

In addition to its assertion that its audit list was already reduced to
exclude drugs not listed in compendia, HCFA responded that these drug
products did, in fact, appear in national drug compendia.  Marion
Declaration,    . 19.  The States did not deny this assertion in their
reply briefs, and we therefore decline to pursue the issue of these
drugs any further.  We do note, however, that many of these drug
products are "Naldecon-related" drugs whose disallowances we have
reversed on other grounds.

One State also argued that its disallowances for miscellaneous drugs
should be reversed because HCFA's delays in this case prevented it from
making effective arguments on these drugs since the State's pharmacist
left State employment in the interim.  New Jersey Br. at 4-5.  This
State, however, failed to show why it could not have obtained access to
any other expert assistance, if needed.  We find no prejudice to New
Jersey and sustain the disallowances for those drugs as to which no
arguments were raised.

27.  One State mentioned two drugs as examples of the confusing nature
of the DESI process but did not effectively articulate why it could not
reasonably have identified them as IRS drugs.  North Carolina Br. at 6.
Thus, the State complained that it did not understand why one sulfonmide
(V.V.S.) is IRS to the LTE drug called AVC, while another drug product
(Sultrin Triple Sulfa) is not.  Id.  The State, however, provided no
information about the ingredients, dosages, or indications of these
drugs.  We note, however, that in an August 1991 State Medicaid Manual
transmittal HCFA announced that as of January 24, 1986, due to product
reformulation, V.V.S. Vaginal Cream was no longer an IRS drug.  Due to
lack of information provided by the State, we are unable to determine
whether this V.V.S. Vaginal Cream is the drug product V.V.S. of which
the State complained.  If it is, HCFA should adjust its disallowance
accordingly.

The State also asserted that a generic product (Meprogesic Tablets) was
declared IRS, while the corresponding brand name product (Equagesic) was
"removed form the DESI list in June 1988."  Id.  The State provided no
evidence to support this statement, and Equagesic still appears as a LTE
drug on the State Medicaid Manual lists in 1989 and 1991.  We therefore
decline to reverse disallowances based only on these unsubstantiated or
erroneous assertions by the State.

28.  Those states were Pennsylvania, Maryland, Maine, Virginia,
Connecticut, Illinois, and Massachusetts.

29.  The NDC is supposed to be unique to a specific product and is not
supposed to be reassigned until at least five years after a product is
discontinued.  Gerstenzang Declaration, HCFA Ex. 1, at . 31-b.

30.  See Attachment C of this decision for a listing of each State's
audit period.

31.  HCFA also alleged that Illinois' drug expert stated during the
audit that he did not attempt to review for similar and related drugs,
since he believed that the FDA should make that determination first.
HCFA Illinois Br. at 7, and Ex. 3.

32.  HCFA stated that the State pharmacist admitted during the audit
that he did not monitor the Federal Register for LTE/IRS drug notices.
HCFA Indiana Br. at 2.

33.  In particular, HCFA should notify Virginia as to whether its audit
was based on the final list or whether it falls into the category
affected here.  See Virginia Reply Br. at 10.  Virginia objected to this
procedure on the basis that the OIG may decline to reaudit it and that
HCFA cannot be relied on to perform any recalculation.  Therefore,
Virginia argued that the audit should be invalidated as unreliable.  We
decline to take this step.  The discrepancy between the FDA-verified
list and the final HCFA list resulted largely from HCFA's adjustment to
reflect our decision in Louisiana, rather than from the lack of
forthrightness or sloppy administration attributed to HCFA by Virginia.
See Virginia Reply Br. at 9-12.  The States have not demonstrated any
inherent unreliability in the audits, and HCFA has offered to
recalculate the disallowances to reflect the reduced number of drugs on
the final list.  We conclude that this approach is preferable to
remanding these appeals to begin again the entire lengthy audit process.

34.  New York also argued that the State's paid claims history file used
in the audit included claims from outside the audit period.  New York
Reply Br. at 9.  Since New York's appeal involved only dipyridamole,
which has been held eligible for FFP, we find this issue moot.

35.  Virginia challenged the validity of the audit based discrepancies
between a list of LTE/IRS drugs on a computer diskette, which the State
obtained from HCFA, and HCFA's audit program as to some of the drugs
included and as to the NOOH dates listed.  Also, Virginia argued that
its State drug claim files showed different amounts of FFP received
during the audit period.  However, the LTE/IRS list used by Virginia to
evaluate the reliability of the master audit list is described by the
State only as having "presumably matched the list published by HCFA in
the September 1989 State Medicaid Manual."  Virginia Reply Br. at 11,
n.10.  The audit list was derived from other sources, while HCFA never
contended that the list in the Manual was comprehensive.  See, e.g.,
State Medicaid Manual, . 4370.3 (April 1983) (acknowledges that IRS list
"may not include all drugs which are affected"); . 4370 (September 1989)
(declares that "this list is not all-inclusive").  Therefore, the
existence of discrepancies between the two lists does not demonstrate
that the audit list was unreliable.  Further, the difference in the
total FFP shown by state records and the OIG audit report is not a
sufficient basis to conclude that the audit report was not reliable,
since Virginia has not eliminated other possible reasons, including
errors in calculation or unreliability of State records.

36.  Our conclusion regarding Naldecon makes clear, however, that the
States may not be responsible where their experts cannot reasonably
identify a drug as IRS, simply because another State's expert has done
so.

37.  HCFA suggested that North Carolina's return of $325,095 left only
$491,036 in dispute.  HCFA North Carolina Br. at 2-3.  North Carolina,
however, reiterated that it continued to press its appeal of the total
disallowance.  North Carolina Reply Br. at 2-3.

38.  In the course of the appeal, HCFA reduced New Jersey's disallowance
by $5,510.50 for OTC