D.C. Circuit Decision Upholds DOD Rule, Potentially Leaving Pharmaceutical Manufacturers on the Hook for Refunds

In a recent decision, the D.C. Circuit upheld a Department of Defense (“DOD”) rule that will require drug manufacturers to provide partial refunds on some prescription drugs, dating back to 2008. The rule that was in question in the case imposes a cap on the retail price of drugs and requires manufacturers to refund the difference between the retail price and the discounted rate of the pharmaceutical drug benefits the DOD provides through TRICARE.

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TRICARE Retail Pharmacy Program Subject To Federal Ceiling Prices Under New DoD Rule

This post was written by Joseph W. Metro and Lorraine Mullings Campos.

On March 17, 2009, the Department of Defense (DoD) issued a final rule to implement a provision of the 2008 National Defense Authorization Act (NDAA). In the final rule, the DoD takes the position that the NDAA requires pharmaceutical manufacturers to provide discounted drug prices based on the Veterans Health Care Act’s (VHCA’s) Federal Ceiling Price (FCP), for covered drugs sold by retail pharmacies to TRICARE beneficiaries on or after Jan. 28, 2008 (the date of enactment of the NDAA). DoD further establishes a process whereby manufacturers’ satisfaction of this obligation will be a condition to a product’s continued Tier 2 status on the TRICARE uniform formulary. Finally, however, DoD indicates that it will consider, pursuant to its authority under the Federal Debt Collection Act, proposals to settle outstanding "refund" claims for periods prior to the effective date of the rule.

Further discussion and commentary by the authors is included after the jump. For additional background information, please see Reed Smith’s full alert.

The final rule is an unusual document in two senses. First (and perhaps understandably in light of the litigation history), DoD spends much of its preamble outlining its legal argument in support of the program. Second, after taking a seemingly inflexible legal position that the NDAA imposed statutory discount obligations effective for prescriptions dispensed through TRICARE retail pharmacies on or after Jan. 28, 2008, the agency then opened the doors to negotiation of these obligations. This latter “invitation” may be a simple function of pragmatism. Specifically, given that the final rule has now been issued, the agency may believe that it is on firm legal footing with respect to refunds prospectively, and that the negotiation process may be the most efficient mechanism for resolving claims in the interim period between the NDAA and the effective date of the rule.

  • While manufacturers can of course simply pay any refund amounts and enter into the agreements contemplated by DoD, we believe that there are a number of key issues to consider in responding to the rule:
  • As a threshold matter, given the continuing pendency of the industry litigation against the DoD, manufacturers should consider whether the rule is in fact appropriate even prospectively (e.g., Did the NDAA actually create a refund mandate? Can the NDAA override the VHCA without amending it or the implementing master agreements?).
  • Perhaps the most critical unanswered question is whether DoD contemplates that the waiver and compromise process will be implemented flexibly in order to “put the past behind them” and avoid further legal disputes relating to the effective date of refund obligations, or instead interpreted more rigidly as an “exception” process based on actual disputes relating to data. Manufacturers may wish to discuss these matters informally with DoD.
  • If a manufacturer elects to explore a compromise, it should promptly review and evaluate its specific products, the potential outstanding amounts, and the products’ status (both retrospectively and prospectively) on the TRICARE uniform formulary. There may be many variables that could be taken into account when crafting a compromise proposal, including, but not limited to, the products for which refunds will be paid, the periods in which refunds will be paid, and the percentage of claims or claims dollars that can be paid.
  • In the event that a manufacturer’s products are in the middle of a formulary review (but the TRICARE formulary final decision has not yet been made), manufacturers may wish to contact DoD to seek a delay in any final decision so that the manufacturer’s compliance or compromise position may be taken into account.
  • Manufacturers could also consider proposing settlements that would unwind if the regulation was subsequently invalidated, although it is difficult to imagine what incentive the DoD would have for compromise on that basis.
  • Manufacturers should evaluate any existing voluntary rebate agreements with the agency to assure that they wish to continue them, in light of the potential for increased aggregate liability under the final rule.