Medicaid Act Enforceable by State as 3rd Party Beneficiary of Federal Contract

A Massachusetts district court has held that there is no implied right of action allowing a state to enforce the Medicaid Best Prices Statute, 42 U.S.C. § 1396r-8, against drug manufacturers who reported false prices to the federal government and thus underpaid rebates due to the state.

However, the state may enforce the statute indirectly as a third-party beneficiary of the contract between the federal government and the drug companies.  Massachusetts v. Mylan Laboratories, 357 F.Supp.2d 314 (2005).  The decision may not, however, be especially helpful to individuals seeking to enforce contracts with the federal government.

No Implied Right of Action.  The Best Prices Statute allows the federal government to enter into agreements with drug manufacturers on behalf of itself “and all States.”  42 U.S.C. § 1396r-8(a)(1).  Analyzing the statute under Alexander v. Sandoval, 523 U.S. 275 (2001), the court found that Massachusetts did not have an implied right of action under the statute.  Although the statute was clearly enacted for the states’ especial benefit, there was no indication that Congress intended to create a remedy for statutes.  The only remedies expressly provided are available to the federal government, suggesting that Congress intended to preclude others. 

Third Party Beneficiary Contract Claim.  Nevertheless, the state could bring a claim as a third party beneficiary of the contract that the statute calls for between the federal government and drug companies.  The court balanced the tension between (1) the fact that Congress used language clearly making states third party beneficiaries under common law principles, and (2) the holdings of several courts that plaintiffs should not be permitted to bring contract law claims as an indirect way of enforcing a statute that they cannot enforce directly.  The court reconciled these arguments in a single rule that “a beneficiary to a federal contract has the right to enforce an agreement imposing duties on a person contracting with the government so long as this is consistent with the statutory scheme, and not an end-run on it.”  357 F.Supp.2d at 328.  

Although the statute’s silence as to state contract remedies could read as deliberate, the court ultimately relied on the contract’s language that it should be construed “in a manner which ‘best effectuates’ the statutory scheme. Permitting the states to sue as third-party intended beneficiary would advance congressional objectives of reducing Medicaid drug costs.”  Id. at 329. The court’s ruling, however, may be of limited use to individuals seeking to enforce federal contracts. 

The statutory scheme “involves close cooperation between the federal government and the state, each of which foots half the bill for Medicaid. This relationship differentiates those cases which decline to find third-party beneficiary status in private individuals because the federal government was deemed the sole enforcer of the laws or there were other remedies provided for the beneficiaries.”  Id.