Rashid Pharmacy, P.L.C. v. Iowa Department of Health and Human Services

IN THE COURT OF APPEALS OF IOWA

No. 22-1334
Filed June 7, 2023

RASHID PHARMACY, P.L.C.,
Petitioner-Appellant,

vs.

IOWA DEPARTMENT OF HEALTH AND HUMAN SERVICES,
Respondent-Appellee.
________________________________________________________________

Appeal from the Iowa District Court for Polk County, Samantha Gronewald,

Judge.

Rashid Pharmacy, P.L.C. appeals from judicial review of an adverse

administrative ruling. AFFIRMED.

Adam D. Zenor, Allyson F. Aden, and Derek R. LaBrie of Zenor Kuehner,

P.L.C., Des Moines, for appellant.

Brenna Bird, Attorney General, Eric Wessan, Solicitor General, and Lisa

Reel Schmidt, Assistant Attorney General, for appellee.

Heard by Schumacher, P.J., and Chicchelly and Buller, JJ.
2

BULLER, Judge.

Rashid Pharmacy, P.L.C. (Rashid), appeals from judicial review following a

decision by the Iowa Department of Health and Human Services (HHS1) to

suspend Medicaid payments following a credible allegation of fraud. Rashid

specifically alleges that HHS failed to give proper notice, that substantial evidence

did not support the agency’s determination there was a credible allegation of fraud,

and that HHS abused its discretion when it declined to find good cause to modify

or halt the suspension of payments. We affirm the district court, finding substantial

evidence supports the agency’s findings and discerning no abuse of discretion or

error of law.

I. Background Facts and Proceedings

Rashid is an enrolled pharmacy provider in the Iowa Medicaid program and

serves patients across three states, including Iowa. HHS, specifically Iowa

Medicaid, administers the program within the state.

In February 2020, the Iowa Medicaid Fraud Control Unit (MFCU) notified

HHS that MFCU was investigating Rashid for “submitting payment claims to

Medicare and Medicaid for prescriptions that are not supported by inventory and

purchase records.” In other words, MFCU was investigating Rashid for fraud. An

invoice review completed by federal investigators was attached to the notice, in

which auditors explained that Rashid did not have adequate purchases to support

various Medicare payments Rashid received, with 79 of 163 drugs sampled

1As used in this opinion, “HHS” refers to the Iowa Department of Health and
Human Services and any of its various divisions, subunits, or other constituent
parts.
3

returning a shortage and a total potential loss of more than $8 million. Also

attached was email correspondence in which federal authorities requested state

assistance with their investigation and a state field auditor’s report detailing

potential Medicaid exposure within the scope of Rashid’s fraud.

Ordinarily, HHS would quickly suspend payment to suspected Medicaid

fraudsters upon notice of an MFCU investigation. Here, however, MFCU

requested an exception to temporarily avoid suspending payments to Rashid, as

an early suspension could have tipped off Rashid or otherwise jeopardized the

investigation. HHS noted the request and—according to customary practice—

opened an investigative file but took no action to suspend payments at that point.

In March 2021, a federal search warrant was issued as part of the

investigation. The warrant authorized seizure of a long list of items, including:

“[a]ny and all records relating to the purchase, ordering or procurement of

medications; medication inventories; the delivery of medications; the return of

medications; the transfer, disbursement, or disposal of medications; and the

payment and billing of medications.”

In June, the suspension exception ended. HHS reviewed the notice and

attachments received in February 2020 and determined there was a credible

allegation of Medicaid fraud against Rashid. HHS employees testified that this

determination was based on the documents received, the state field auditor’s

report regarding Medicaid exposure, and the ongoing state and federal law

enforcement investigations.

HHS informed Rashid in writing that it was immediately suspending

Medicaid payments under Title 42, section 1396b(i)(2)(c) of the United States
4

Code and Title 42, sections 455.2 and 455.23 of the Code of Federal Regulations,

having found no good cause to withdraw or reduce the suspension. Rashid

appealed, arguing (1) HHS did not provide adequate notice before suspension; (2)

there was no credible allegation of fraud to suspend Rashid; and (3) even if there

was a credible allegation, a good cause exception should apply to withdraw or

reduce the suspension. Rashid also sent a letter to HHS staff requesting

reconsideration of suspension, reiterating the first and third arguments.

After receiving the letter requesting reconsideration, HHS contacted the

local managed care organizations (MCOs) in Rashid’s area, and the MCOs

informed HHS they would not be harmed by Rashid’s potential suspension. HHS

staff also met with MFCU investigators, who confirmed that a theory of defense put

forward by Rashid—concerning certain price-regulated drug invoices and

inventory—did not impact their investigation or alter their findings. HHS staff also

reviewed correspondence Rashid sent to federal and state investigators and

analyzed Rashid’s financials (which revealed that suspended Medicaid payments

accounted for 18% of the company’s revenue). HHS staff determined that none of

these considerations undermined their previous determination that there was a

credible allegation of fraud and that a good-cause exception was not justified. HHS

denied Rashid’s request for reconsideration.

In September 2021, an administrative law judge (ALJ) heard Rashid’s

suspension appeal and issued a proposed decision in favor of HHS. The ALJ

proposed denying the appeal and ruled that (1) the ALJ lacked authority to decide

the issue of notice, as that issue was reserved solely to the HHS Director; (2)

sufficient evidence supported the finding of a credible allegation of fraud; and (3)
5

there was not good cause to terminate or alter the suspension and, even if there

was, Rashid’s intent to sell the business obviated any need to consider good

cause.

In January 2022, HHS Director Kelly Garcia issued a final decision in which

she affirmed the agency action and rejected Rashid’s three claims. On the first

issue (notice) Director Garcia found that Iowa Administrative Code rule 44-79.2(8)

applied to the notice that HHS needed to give, meaning that the agency only had

to give notice within five days after suspension. As to the other two issues (a

credible allegation of fraud and good cause to withdraw or reduce the suspension)

Director Garcia affirmed and adopted the ALJ’s ruling in full, relying on “the record,

the state and federal regulatory framework, and [the] evidentiary standard for

contested cases.”

Rashid petitioned for judicial review in February 2022, raising the same

three issues. The district court affirmed HHS, finding substantial evidence to

support the factual findings and no errors of law. Rashid appealed to the supreme

court, which transferred the matter to our court for resolution.

II. Standard of Review

Judicial review of agency action is governed by Iowa Code chapter 17A

(2022), applying the standards found in Iowa Code section 17A.19(10). “The

petitioner challenging agency action has the burden of demonstrating the prejudice

and invalidity of the challenged agency action.” Colwell v. Iowa Dep’t of Hum.

Servs., 923 N.W.2d 225, 231 (Iowa 2019) (citing Iowa Code § 17A.19(8)(a)).

When the General Assembly has not clearly vested an agency with

interpretative authority, we review interpretative issues for corrections of error at
6

law. See Iowa Code § 17A.19(10)(c); Gartner v. Iowa Dep’t of Pub. Health, 830

N.W.2d 335, 343 (Iowa 2013). We apply this standard to the first issue concerning

notice.

When an agency is tasked with deciding a factual issue, such as with the

second issue concerning a credible allegation of fraud and underlying the third

issue concerning good-cause exceptions, the agency’s factual findings must be

upheld unless they are “not supported by substantial evidence in the record before

the court when that record is viewed as a whole.” Iowa Code § 17A.19(10)(f); see

also Burton v. Hilltop Care Ctr., 813 N.W.2d 250, 256 (Iowa 2012). In reviewing

the evidence, we are instructed to “consider only the evidence favorable to the

[agency’s] findings, whether or not contradicted.” Cargill, Inc. v. Conley, 620

N.W.2d 496, 502 (Iowa 2000).

When an agency is granted discretion, as with the third issue about good-

cause exceptions, we review for whether that discretion was abused. An abuse of

discretion is proven when the agency exercises its discretion “on grounds clearly

untenable or to an extent clearly unreasonable.” Marovec v. PMX Indus., 693

N.W.2d 779, 782 (Iowa 2005); see also Iowa Code § 17A.19(10)(n). “An abuse of

discretion also means the decision lacked rationality and was made clearly against

reason and evidence.” Marovec, 693 N.W.2d at 782.

III. Discussion

Rashid advances the same three issues on appeal that were decided by the

district court and the agency. First, Rashid contends that HHS had to provide a

fifteen-day notice before suspending Medicaid payments under Iowa

Administrative Code rule 441-79.2(7)(b). Second, Rashid challenges the credible-
7

allegation-of-fraud finding. And third, Rashid contends a good-cause exception

should have applied to withdraw or partially reduce the suspension. We affirm the

district court on each argument.

A. Requirement of Notice2

Rashid first argues that HHS had to give notice fifteen days before

suspending Medicaid payments. Rashid generally contends that HHS rule

79.2(7)(b), which requires a fifteen-day notice before the agency sanctions any

person in good standing with all program requirements, governs. Rashid concedes

that rule 79.2(8)—which requires notice within five days of suspension—may apply

too. In any event, Rashid urges the rules are compatible and require that notice

be given at least fifteen days before suspension, in line with rule 79.2(7)(b). Iowa

Admin. Code r. 441-79.2(7)(b), (8); see Iowa Code § 4.7 (“If a general provision

conflicts with a special or local provision, they shall be construed, if possible, so

that effect is given to both.”). We disagree, finding the two provisions are

irreconcilable and the more-specific rule 79.2(8) controls.

In pertinent part, rule 79.2(8), entitled “suspension or withholding of

payments,” explains that “[i]f the department withholds or suspends payments, it

shall notify the person in writing within the time frames prescribed by federal law

for cases related to a credible allegation of fraud.” Iowa Admin. Code

2 Rashid’s brief includes a color-coded chart with arrows and text concerning this
issue. Even if such a chart is permitted under our rules of appellate procedure, we
used a word processor to calculate the word count for the appellant’s brief, and it
appears the thirty-one words contained in the chart were not included in counsel’s
word-count certification. We join the growing chorus of courts to express our
displeasure with attempts to evade word limitations. See Douglas E. Abrams,
Sanctions for Evading Maximum Page Limits on Court Filings, 73 J. Mo. B. 316
(2017) (collecting cases).
8

r. 441-79.2(8); see also Harris v. McRae, 448 U.S. 297, 301 (1980) (noting states

that participate in Medicaid “must comply with the requirements of Title XIX”

establishing Medicaid). The applicable federal regulation provides:

The State agency must send notice of its suspension of
program payments within the following timeframes:
(i) Five days of taking such action unless requested in writing
by a law enforcement agency to temporarily withhold such notice.
(ii) Thirty days if requested by law enforcement in writing to
delay sending such notice, which request for delay may be renewed
in writing up to twice and in no event may exceed 90 days.

42 C.F.R. § 455.23(b)(1). In short, notice must be sent within five days after the

suspension of payments for credible allegations of Medicaid fraud, unless the

exceptions triggered by a law enforcement request apply. This more-specific rule

governs over a more-general provision. See Iowa Code § 4.7 (“If the conflict

between the provisions is irreconcilable, the special or local provision prevails as

an exception to the general provision.”).

Although the plain language of the federal regulation disposes of the issue,

the state and federal rulemaking history also reflect intent that notice be given only

after suspension. As HHS noted in a 2014 response to a comment recommending

notification before suspension, “[m]ailing the notice of payment suspension prior

to the actual imposition of the payment suspension may impact the Department’s

ability to protect Medicaid funds against fraud, waste or abuse if the provider

receives advance notice of the payment suspension prior to implementation of the

suspension.” 37 Iowa Admin. Bull. 793–97 (Oct. 29, 2014). Federal regulators

similarly considered and decided against the idea “that providers should be given

notice of a payment suspension prior to such action being taken,” due to “the

sensitive nature of a fraud investigation which may be jeopardized by such notice.”
9

Medicaid Suspension of Payments Requirements, 76 Fed. Reg. 5862, 5937

(Feb. 2, 2011) (codified at 42 C.F.R. pt. 455). Expressing the same policy concern

as HHS, federal regulators voiced their expectation “that State agencies will act

appropriately so as not to jeopardize any investigation.” Id. Both rulemaking

histories reflect an intent for notice to only be given after suspension, which

confirms our reading of the text.

We affirm the district court’s ruling that HHS did not commit a legal error

when it did not provide Rashid advance notice it was suspending payments.

B. Credible Allegation of Fraud

Rashid’s second argument revolves around HHS determining there was a

credible allegation of fraud. Rashid contends the record lacks substantial evidence

supporting the determination related to Medicaid, and that HHS failed to conduct

an investigation or review “all allegations, facts, and evidence” related to the case.

We disagree.

We find substantial evidence supported a credible allegation of fraud

perpetrated by Rashid. The federal rules define a “credible allegation of fraud” as

an allegation, which has been verified by the State, from any source,
including but not limited to the following:
(1) Fraud hotline tips verified by further evidence.
(2) Claims data mining.
(3) Patterns identified through provider audits, civil false
claims cases, and law enforcement investigations. Allegations are
considered to be credible when they have indicia of reliability and the
State Medicaid agency has reviewed all allegations, facts, and
evidence carefully and acts judiciously on a case-by-case basis.

42 C.F.R. § 455.2. In reviewing whether there was a credible allegation of fraud

against Rashid, HHS reviewed the notice from MFCU, an invoice review completed

by federal investigators, an email request for ongoing law enforcement assistance,
10

and a state field auditor’s report detailing the potential Medicaid exposure due to

Rashid’s fraud. On the other side of the ledger, HHS also considered Rashid’s

contentions related to the price-regulated drug program and the financial audit. As

a whole, this evidence supports HHS finding a credible allegation of fraud against

Rashid, particularly given our highly deferential standard of review. See Iowa

Code § 17A.19(10)(f); Burton, 813 N.W.2d at 256.

Rashid also contends that HHS had to conduct an investigation and review

all information related to the case before finding a credible allegation of fraud. We

reject this argument as well. No regulations expressly require HHS to begin a

Medicaid fraud investigation; investigations can begin either with HHS (or its

subunits) or MFCU. See 42 C.F.R. §§ 455.2, .23, 1007.9. When MFCU initiates

an investigation, it “may refer any provider with respect to which there is pending

an investigation of a credible allegation of fraud under the Medicaid program to the

Medicaid agency for payment suspension in whole or part under § 455.23 of this

title.” 42 C.F.R. § 1007.9(e)(1). In terms of the detail required, “[r]eferrals may be

brief but must be in writing and include sufficient information to allow the Medicaid

agency to identify the provider and to explain the credible allegations forming the

ground for the payment suspension.” 42 C.F.R. § 1007.9(e)(2).

MFCU is not part of HHS. See 42 U.S.C. § 1396b(q)(2) (providing the

requirements for a state MFCU, including that MFCU “is separate and distinct from

the single State agency that administers or supervises” Medicaid). When

investigations originate with MFCU, HHS has only the information MFCU makes

available and must evaluate the information provided. HHS contends state law

renders the underlying MFCU law enforcement records confidential. See Iowa
11

Code § 22.7 (describing public records that typically must “be kept confidential”).

We need not decide that question on this record, though we recognize that (under

current law) MFCU is a law enforcement entity housed within the Iowa Department

of Inspections and Appeals rather than HHS, and we decline to second-guess the

information-sharing practices of state agencies as they navigate pending criminal

investigations. Regardless of whether section 22.7 applies to the investigative file

here, there is no dispute that MFCU did not produce its full investigative file to

HHS. HHS could only review the information before it, and we find the agency was

not required to do more.

Rashid also reiterates on appeal its claim that, while there was evidence of

Medicare fraud, there was no evidence of Medicaid fraud. We disagree. The

federal search warrant authorized seizure of “[a]ny and all records relating to the

purchase, ordering, or procurement of medications; medication inventories, the

delivery of medications; the return of medications; the transfer, disbursement or

disbursal or medications; and the payment and billing for medications.” By its

nature, the warrant’s inclusive language would include records related to Medicaid

claims, and the federal warrant was supported by probable cause. See generally

Fed. R. Crim. P. 41(d). We also note that HHS expressly considered whether the

Medicare concerns likely extended to Medicaid and relied on an audit report to

evaluate this potential exposure. While this is a type of inferential reasoning, we

agree with the agency’s observation—supported by its expertise in this area—that

“the Medicare program and Medicaid program are similar programs in terms of

government insurance to selected groups and the allegation of large scale fraud

against one is enough to infer an issue with the other program sufficient to justify
12

withholding all such payments.” While perhaps not enough to return a criminal

conviction or find civil liability at jury trial, the standard here is far lower, and we

conclude the evidence before HHS crossed the substantial-evidence threshold.

C. Good-Cause Exception

Last, Rashid argues that a good-cause exception under federal

administrative rule 455.23(e) and (f) should apply to withdraw or reduce its

suspension. Rashid claims it was the “sole source of essential specialized

services in [its] community,” that it serves medically underserved areas, and that

its suspension could be limited to specific drugs tied to the alleged fraud. Rashid

posits each reason as independently sufficient for the withdrawal or reduction of

its suspension. However, the rules cited by Rashid are permissive, rather than

mandatory, and grant discretion to HHS. See 42 C.F.R. § 455.23(e), (f) (providing

“[a] State may find that good cause exists” to either not suspend payments or

suspend payments in part (emphasis added)). We see no abuse of that discretion

on this record, as substantial evidence supports HHS declining to apply any of the

exceptions, and we conclude Rashid has not carried its burden to establish the

invalidity of any agency action.

Rashid’s first arguments for a complete withdrawal of its suspension are

based in rule 455.23(e)(4). Under this provision, the State can withdraw

suspension if:

Beneficiary access to items or services would be jeopardized
by a payment suspension because of either the following:
(i) An individual or entity is the sole community physician or
the sole source of essential specialized services in a community.
(ii) The individual or entity serves a large number of
beneficiaries within a HRSA [(Health Resources and Services
Administration)]-designated medically underserved area.
13

42 C.F.R. § 455.23(e)(4). Rashid’s claim turns on offering free home delivery and

that it is allegedly the only supplier of a particular pill dispenser within the area.

HHS disagreed, finding Rashid is simply a “generic pharmacy that does some

delivery and packs some pills, nothing more,” and we see no error in this reasoning

or relying on these facts as a rationale for not applying the exception. Accord

NSCH Rural Health Clinic v. Snyder, 321 So. 3d 565, 573–74 (Miss. Ct. App. 2020)

(holding that a dentistry’s satellite campuses and extended hours did not constitute

a specialized service under federal rule 455.23(e)(4)(i) and its state-level

counterpart). HHS’s conclusion is confirmed by the MCOs reporting Rashid’s

suspension would not jeopardize access to pharmaceutical services. We find

substantial evidence supports the agency’s rejection of a good-cause exception

under rule 455.23(e)(4)(i).

Rashid next argues for a good-cause exception for serving an HRSA-

designated medically underserved area under rule 455.23(e)(4)(ii). HHS

determined Rashid’s suspension would not jeopardize access to services for a

large number of persons in the designated area. This finding was also supported

by information from the MCOs in Rashid’s service area, and we find substantial

evidence supports HHS’s determination in light of the agency’s expertise.

Third, Rashid argues for a partial exception to apply to its suspension

through one of several restrictions. Rashid suggests restricting the suspension to

particular drugs, to the percentage of drugs flagged across the board in its

business, to brand-name drugs (which were the focus of the audit), or to the drugs
14

not covered in the internal examination or audit performed by Rashid. The

applicable regulation allows a partial suspension where the State finds:

(i) The credible allegation focuses solely and definitively on
only a specific type of claim or arises from only a business unit of a
provider; and
(ii) The State determines and documents in writing that a
payment suspension in part would effectively ensure that potentially
fraudulent claims were not continuing to be paid.

42 C.F.R. § 455.23(f)(3). But here, HHS found the suspected fraud “appear[ed] to

cut across Rashid’s business,” which supports rejecting a partial suspension. The

record in this appeal is voluminous, and we have little trouble concluding there is

evidence of widespread fraud, not limited to certain drugs. Substantial evidence

supports the agency’s rejection of a partial suspension under rule 455.23(f)(3), and

we find HHS did not abuse its discretion in declining to apply this exception.

IV. Disposition

We reject Rashid’s arguments on appeal and affirm the district court’s

decision on judicial review.

AFFIRMED.