TriCare TRRx Refund Final Rule: A Big Stick Disguised as a Carrot

By Michelle L. Butler & Alan M. Kirschenbaum –

On March 17, 2009, the Department of Defense (“DoD”) issued a final rule implementing section 703 of the National Defense Authorization Act for Fiscal Year 2008 (“NDAA-08”).  Section 703 of the NDAA-08 provides that, for any prescriptions filled on or after the date of enactment (January 28, 2008), the TriCare retail pharmacy network shall be treated as an element of the DOD such that drugs dispensed by the TriCare retail pharmacy program ("TRRx") to eligible covered beneficiaries are subject to 38 U.S.C. § 8126, which imposes Federal Ceiling Price ("FCP") limitations on drugs approved under NDAs.  Because DOD is a reimburser rather than a purchaser under TRRx, the regulation lays a framework for a system of manufacturer rebates, or “refunds”, to refund to DOD the difference between the cost of the drug to the government and the FCP. 

Retroactive liability for refunds:  Since the enactment of NDAA-08, DOD has taken the position that, although manufacturers may choose to delay the payment of refunds on drugs dispensed under TRRx since January 28, 2008, those refunds eventually must be paid.  The rule and its preamble lay to rest any hope that DOD would change its views on this issue.  Rejecting industry’s argument that the manufacturers’ obligation to pay refunds was contingent on publication of a final rule, the rule and preamble state unambiguously that prescriptions on or after January 28, 2008 are entitled to FCP pricing under 38 U.S.C. § 8126.  See 32 C.F.R. § 199.21(q)(1); 74 Fed. Reg. 11,279, 11,283-84.  The preamble makes clear that DoD does not view this start date as a retroactive application of a new rule; rather, “the legal landscape” changed prospectively as of the enactment of the statute and manufacturers were obligated to sell at statutory prices as of that date.  The rule does not provide procedures for retroactive repayment of refunds, nor specify a date when they are due.  Presumably, instructions will be forthcoming before the rule’s effective date of May 26, 2009.

“Voluntary” agreements:  Going forward, the regulation provides for voluntary written agreements by manufacturers to honor the FCPs for covered drugs provided through the TriCare retail pharmacy network.  See id. § 199.21(q)(2).  Only by entering into such an agreement will a manufacturer’s covered drugs be eligible for inclusion on the Uniform Formulary (though an agreement is not a guarantee of such inclusion) and be available without preauthorization.  See id. § 199.21(q)(2)(i).  Notably, a failure to enter into an agreement does not relieve a manufacturer of the obligation to pay refunds.  Therefore, there is nothing to gain by declining to enter into an agreement.

The preamble clarifies that, if there is currently in effect a Uniform Formulary Voluntary Agreement for Retail Refunds (“UF-VARR”) for a drug at a price above the FCP, “that agreement fails to achieve the statutory requirement [and] DoD anticipates canceling it.”  74 Fed. Reg. at 11,287.  The preamble also clarifies that if a drug was previously placed on Tier 3, and a manufacturer signs an agreement to honor FCPs, the drug will then be eligible for reclassification to Tier 2 at the next review by the P&T Committee of the drug class involved.  Id.  The regulation provides that the requirement for a written agreement can be waived by the Director of the TriCare Management Activity (“TMA”) if it is necessary to ensure that at least one drug in a drug class is included on the Uniform Formulary.  See 32 C.F.R. § 199.21(q)(2)(iv).  Such a waiver does not waive the statutory requirement that prescriptions be subject to FCPs; it only waives the exclusion from the Uniform Formulary of drugs not covered by a written agreement.  See id.

Refund Procedures:  The regulation does not set forth procedures to implement the refunds, but requires DOD to establish such procedures.  See id. § 199.21(q)(3)(i).  The regulation provides that the refund procedures must, “to the extent practicable, incorporate common industry practices for implementing pricing agreements between manufacturers and large pharmacy benefit plans sponsors.”  32 C.F.R. § 199.21(q)(3)(ii).  DOD explains in the preamble that it believes the UF-VARR process has been successful and plans to use it as a basis for the refund procedures.  74 Fed. Reg. at 11,289.  The regulation mandates that manufacturers have at least 70 days from the date of their receipt of utilization data to pay the refund.  See id.  Manufacturers will have two options for calculating the amount of the refund:  (1) the difference between the current annual FCP and the non-Federal average manufacturer price (“non-FAMP”) from which it was derived, or (2) the difference between the FCP and “direct commercial contract sales price[] specifically attributable to the reported TriCare paid pharmaceuticals[] determined for each applicable NDC listing” and the FCP.  Id.  DoD will defer to and not change any VA determinations of FCPs or non-FAMPs, including deferring to VA determinations with regard to penny pricing.  74 Fed. Reg. at 11,289. 

Waiver and Compromise:  The regulation states that the refunds due are treated as erroneous payments under 32 C.F.R. § 199.11 pertaining to “overpayments recovery.”  See 32 C.F.R. § 199.21(q)(3)(iii).  Although DOD rejected many of the manufactures’ arguments why payment of retroactive refunds would be unfair or unworkable, “DoD agrees that there may be merit to some concerns that in particular circumstances concerning stale utilization data, prior incentive pricing agreements between DoD and drug manufacturers, and other situations, there may be a reasonable basis to waive or compromises a refund for prescriptions filled between January 28, 2008 and the effective date of the final rule.”  74 Fed. Reg. at 11,285.  Accordingly, a manufacturer is permitted to request such a waiver or compromise of a refund amount due.  See id. § 199.21(q)(3)(iii)(A).  While the provision for waiver or compromise is available at any time, DoD states that it “intends that it especially be available to address and resolve in a reasonable way issues arising from the period between the date of enactment of the statute and the effective date of the regulation.”  74 Fed. Reg. at 11,285.  DOD provides an illustration of a compromise whereby a manufacturer is required to pay refunds only retroactive to a specified date between January 28, 2008 and the effective date of the regulation, but there is little guidance on the kinds of grounds that would justify a waiver or compromise.
 
While any request for waiver or compromise is pending, a manufacturer’s written agreement to honor FCPs will be deemed to exclude the matter that is the subject of the request.  See 32 C.F.R. § 199.21(q)(3)(iii)(B).  This is so that the agreement will be considered sufficient for purposes of satisfying the precondition for Uniform Formulary placement and for purposes of remedies for noncompliance.  In addition, in the case of disputes by the manufacturer regarding the accuracy of utilization data, a refund obligation will be deferred pending good faith efforts to resolve the dispute.  See id. § 199.21(q)(3)(iv).

Penalties:  In the event that a manufacturer fails to make or honor an agreement, the regulation authorizes the Director of the TMA to “take any other action authorized by law.”  32 C.F.R. § 199.21(q)(4).  As pointed out by a commenter, a manufacturer’s failure to comply with section 703 of the NDAA-08 arguably also constitutes a violation of the FCP requirement of 38 U.S.C. § 8126, thereby subjecting a manufacturer to loss of federal payment under Medicaid and a ban on selling drugs to the government.  DoD states that, while it agrees with this position, the law is not settled and the question is outside the regulatory authority of the DoD.  See 74 Fed. Reg. at 11,289. 

Faced with strong objections from industry, DOD has offered in this rule a veneer of a voluntary agreement rewarded by potential formulary benefits, provisions for waiver or compromise of refunds due, and a comforting statement that “voluntary action consistent with the law is far preferable to reliance on enforcement action.  74 Fed. Reg. at 11,281-82.  On the other hand, DOD has taken a hard line on the payment of retroactive refunds, and “expressly does not waive the right to pursue any action authorized by law,” which would include the penalties identified above.  The rule as a whole is an attempt by DOD to offer a carrot while carrying a big stick.