By Alan M. Kirschenbaum –
After conducting a regulatory exercise mandated by court order, the Department of Defense (“DoD”) on Friday issued a regulation that is virtually identical to a regulation issued in March 2009 to implement its TRICARE retail drug refund program. As we previously reported, section 703 of the National Defense Authorization Act of 2008 provides that prescriptions filled on or after January 28, 2008 (the enactment date) and paid for under the TRICARE retail pharmacy program are subject to Federal Ceiling Prices (“FCPs”) under 38 U.S.C. § 8126. In a November 2009 ruling on an Administrative Procedure Act challenge from a coalition of pharmaceutical manufacturers, the Federal District Court for the District of Columbia remanded the original rule back to DoD to decide whether to maintain the current rebate/refund program in effect since May 26, 2009, or implement some other mechanism for obtaining FCPs. Not surprisingly, after soliciting public comment on the issue in February 2010, DoD has concluded that the existing refund program is the alternative that is most in harmony with the statute, consistent with best business practice, and practical to administer.
The Department rejected industry comments that refunds should be prospective only and that it would be unfair to apply FCPs retrospectively to all prescriptions filled under the TRICARE retail pharmacy benefit since January 28, 2008. DoD explained that it has no discretion to change this statutorily mandated effective date, but even if it did, retroactive application is not unfair because the statute itself, as well as a DoD Dear Manufacturer letter issued three days after its enactment, advised drug manufacturers of the law and DoD’s interpretation of its effective date. DoD also rejected industry comments that refunds may be required only if and when a manufacturer enters into a prospective procurement contract with DoD, concluding that this interpretation is contrary to the statute and the legislative history.
DoD did make one significant change from the previous rule. 32 CFR § 199.21(q)(4) now provides that DoD may impose available remedies for the failure of a manufacturer to honor a requirement of the regulation or of a refund agreement, rather than for a failure to “make” an agreement as before. This change is based on DoD’s view that the refund agreement is voluntary, because a manufacturer may opt out of the program on a drug-by-drug basis under section 199.21(q)(3)(iii)(C) of the rule. However, if a drug is opted out, the drug will be excluded from TRICARE coverage through not only the retail pharmacy benefit, but also the mail order service and military treatment facility pharmacies. More importantly, such an opt out may arguably cause the manufacturer to breach its Master Agreement with the Department of Veterans Affairs (VA), which obligates the manufacturer to offer its products to federal agencies (including DoD) on the Federal Supply Schedule. DoD recognizes this possibility (though calling the issue “outside DoD’s authority”), but offers only cold comfort: if a manufacturer thinks an opt-out will put it in breach of its Master Agreement, the manufacturer can always voluntarily decide to terminate its Master Agreement. Of course, the result of these “voluntary” actions would be that the manufacturer would be prohibited from selling its drugs to the federal government, and could not have any of its outpatient drugs reimbursed by the federal government under Medicaid or Medicare Part B.