The Court of Appeals on Thursday blocked efforts by the state's health care program for the poor to assess more than $200 million in reimbursement and penalties against a major drug manufacturer.
In a unanimous decision, the judges said the Arizona Health Care Cost Containment System must operate within its own rules. And those rules, the judges said, limit who can be fined solely to individuals or companies that provide goods and services to the state.
Wednesday's ruling does not address AHCCCS' allegations that McKesson charged too much for its products. Instead, it simply declares that whatever AHCCCS accuses McKesson of doing is beyond the agency's reach.
The issue surrounds allegations that McKesson, along with another company, engaged in a "price inflation'' scheme.
But the problem for AHCCCS in seeking payment from the drug company relates to the way the state agency operates.
AHCCCS itself provides no care, instead acting more like an insurance company.
Instead, it contracts with others to see that those who are eligible get the care they need. And those operations often work with pharmacy benefit managers to actually purchase their drugs.
But Monica Coury, an AHCCCS assistant director, said her agency pays each health plan based on factors like how sick are their patients -- and how much the plans have to spend on prescription drugs. She said any move that artificially inflates the price of those drugs ultimately is passed on to state and federal taxpayers who finance AHCCCS.
David Botsko, AHCCCS' inspector general, said that change increased costs to the state by 5 percent. Over two years, the agency figured that drove up bills it paid by more than $50 million.
AHCCCS then demanded $111.7 million from McKesson, relying on regulations that allow an assessment of double the money lost. And on top of that, the agency sought another $101.3 million in penalties.
McKesson, in suing AHCCCS, never addressed the question of how much it was charging. Instead its attorneys argued the agency has no right to penalize it.
Appellate Judge Michael Brown agreed.
He said AHCCCS' own regulations limit its ability to impose such penalties for fraud to the providers, meaning the companies that actually contract with the agency to provide care. And McKesson does not contract with AHCCCS.
"As a general principle of administrative law, an agency must follow its own rules and regulations,'' Brown wrote. "To do otherwise is unlawful.''
Coury said Thursday she has not yet consulted with AHCCCS lawyers to determine whether to appeal to the state Supreme Court.