Health Law Daily Wrap Up, MEDICAID– DAB DECISIONS: CMS properly disallowed nearly $24M in pharmacy dispensing fees, (Jan 20, 2026)

By: Sara Cracau, J.D.

The disallowance resulted from audits conducted for state fiscal years (SFYs) 2011, 2012, 2013, and 2014.

The Departmental Appeals Board (DAB) of HHS has upheld in its entirety the decision of the CMS to disallow $23,977,840 in federal financial participation (FFP) as the result of audits conducted for state fiscal years (SFYs) 2011, 2012, 2013 and 2014 relating to pharmacy dispensing fees paid by Missouri’s Medicaid program and CHIP. The January 15, 2021, disallowance notice met the content requirements of 42 C.F.R. Section 430.42 and met CMS’s initial burden of providing enough details regarding the basis for the disallowance to enable MDSS to respond. Applying established principles of interpretation, the Board concluded that CMS’s interpretation of the state plan was reasonable and it rejected MDSS’s interpretation. MDSS failed to establish allowability of the disputed expenditures (Missouri Department of Social Services, DAB 3209 (2025), Doc. No. A-21-41 (Sept.15, 2025)).

The audits and MDSS’s appeal. The Missouri State Auditor’s first relevant audit report that was issued in March 2012 for SFY 2011 questioned $6,909,934 in pharmacy dispensing fee costs. Missouri’s state plan provides for reimbursement of outpatient prescription drugs consisting of ingredient costs and a professional dispensing fee. For years, the state plan defined the “professional dispensing fee” as the “applicable fee at the time the prescription is being filled.” In the past four decades, MDSS increased the professional dispensing fee several times and state regulatory amendments accompanied some but not all the dispensing fee increases. The state auditor reported that MDSS failed to update the state regulation authorizing the dispensing fees since 1988 and that MDSS increased the dispensing fee to $4.09 in 1991 as required as part of a settlement but did not update the regulations to reflect this increase. The state auditor questioned the costs which represented the “federal share” of the difference between the total dispensing fees that MDSS paid at the $4.84 rate and the total dispensing fees that MDSS would have paid at the $4.09 rate. The state auditor made similar findings for other years also which ultimately led to the issuance of two demand letters to MDSS. CMS concurred with the state auditor’s findings and recommendations for SFY’s 2011, 2012, and 2013 and asked the state to refund $19,332,077 in FFP for excess pharmacy dispensing fees paid in these periods. MDSS disagreed with CMS’s determinations. CMS subsequently concurred with the state auditor’s findings and recommendations for the SFY 2014 audit and requested a supplemental repayment of $4,645,763 in FFP for SFY 2014. MDSS did not respond.

CMS later issued a notice of disallowance for SFYs 2011, 2012, 2013, and 2014 and approved a state plan amendment in February 2021 removing the “applicable fee” language. It adopted a professional dispensing fee of $12.22 for in-state pharmacies. MDSS timely appealed the disallowance in March 2021.

CMS met its initial burden to meet the basis for disallowance. The January 15, 2021, disallowance notice met the content requirements of 42 C.F.R. Section 430.42 and met CMS’s initial burden of providing enough details regarding the basis for the disallowance to enable MDSS to respond. CMS informed MDSS of when the State’s claim for FFP was made, when the relevant expenditures were made, and the amount of FFP claimed and disallowed. It also explained in sufficient detail years prior to the 2021 disallowance why the disputed claims had not been allowed. Until MDSS amended its regulation effective March 30, 2014, the fees paid were “greater than the applicable fees at the time the prescriptions were filled and therefore, were not paid in accordance with the approved state plan.” If the State pays at a rate higher than that authorized by the State plan, the federal share of the excess payment is a properly disallowed overpayment.”

MDSS failed to establish allowability of the disputed expenditures. Applying established principles of interpretation, the Board concluded that CMS’s interpretation of the state plan was reasonable and it rejected MDSS’s interpretation. The Board found that the undefined term “applicable fee” language in the State plan was ambiguous. It did not defer to MDSS’s interpretation of the State plan as it was not reasonable in light of program requirements and did not give reasonable effect to the plan language as a whole. The central flaw in MDSS’s argument was its unreasonableness in light of Medicaid program requirements concerning plan amendments. It has been held that if a state has “claimed enhanced federal funding,” without amending its Medicaid state plan to reflect the enhanced rate, that constitutes a “material change to [the] State plan.” It is the state’s responsibility and not that of the legislature to make rules and regulations to administer its plan. The Board asserted that it was well-established that states are not permitted to change their plans unilaterally and found no inconsistency in CMS’s position. It further found that MDSS’s reliance on cases which it cited was misplaced. The Board declined to defer to MDSS’s State plan interpretation as it was not supported by contemporaneous evidence and, furthermore, the record did not show a consistent administrative practice by MDSS. MDSS’s evidence did not explain the methods used to set rates and the underlying data in its documentation. Although MDSS effected regulatory amendments for some dispensing fee increases, it did not for others. It did not explain why it codified the fee by state regulation in 1988 but not for the subsequently increased fees in 1989,1990,1991,2002, and 2007. The Board noted that MDSS did not establish error or prejudice in CMS’s decision to pursue a disallowance and not a compliance action. Nor did it show impermissible delay by CMS in taking the disallowance. MDSS did not establish a factual or legal basis for recalculating the disallowance to exclude CHIP expenditures.

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