Coal. for Common Sense in Goverment Procurement v. United States

• Decision Date: 04 January 2013
• Docket Number: No. 11–5350.,11–5350.
• Parties: COALITION FOR COMMON SENSE IN GOVERNMENT PROCUREMENT, Appellant, v. UNITED STATES of America and United States Department of Defense, Appellees.
• Court: U.S. Court of Appeals — District of Columbia Circuit

707 F.3d 311

COALITION FOR COMMON SENSE IN GOVERNMENT PROCUREMENT, Appellant,

v.UNITED STATES of America and United States Department of Defense, Appellees.

No. 11–5350.

United States Court of Appeals, District of Columbia Circuit.

Argued Oct. 17, 2012.

Decided Jan. 4, 2013.

Appeal from the United States District Court for the District of Columbia (No. 1:08–cv–00996).

Lisa S. Blatt argued the cause for appellant. With her on the briefs were Jeffrey L. Handwerker, Kara L. Daniels, and R. Stanton Jones. Daniel G. Jarcho entered an appearance.

Sarang Vijay Damle, Attorney, U.S. Department of Justice, argued the cause for appellees. With him on the brief were Stuart F. Delery, Acting Assistant Attorney General, Ronald C. Machen, Jr., U.S. Attorney, and Mark B. Stern, Attorney.

Before: HENDERSON and TATEL, Circuit Judges, and WILLIAMS, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge TATEL.

TATEL, Circuit Judge:

Seeking to curb the rising cost of prescription drugs for military families, Congress enacted section 703 of the National Defense Authorization Act for Fiscal Year 2008, which subjects all prescriptions purchased at retail pharmacies by service members to the same price caps as drugs procured directly by the Department of Defense. Pursuant to this provision, the Secretary of Defense issued a regulation requiring pharmaceutical manufacturers to refund to the federal government the difference between the retail price and the price cap. This case presents two questions: May the Secretary impose price caps without obtaining the voluntary written agreements required in the procurement process? Has the Secretary impermissibly imposed retroactive rebate liability on pharmaceutical manufacturers? For the reasons given below, we conclude that the Secretary reasonably interpreted section 703 to impose involuntary price caps and hold that the statute itself imposes retroactive rebate liability on pharmaceutical manufacturers.

I.

The Department of Defense provides medical benefits to current and retired service members and their families through the TRICARE health care program. TRICARE beneficiaries receive prescription drugs through three “points of service” relevant to this case: military treatment facilities; TRICARE's mail-order pharmacy; and within-network retail pharmacies, like Walgreens or CVS. For prescriptions filled at military treatment facilities and TRICARE's mail-order pharmacy, the Department procures the drugs from manufacturers and then distributes them to beneficiaries. Since 1992, this procurement process has been governed by 38 U.S.C. § 8126, which requires the Department and manufacturer to “enter into a master agreement ... under which the price charged during the one-year [contract] may not exceed 76 percent of the non-Federal average manufacturer price.” Id. § 8126(a)(2). In other words, these written agreements mandate a price—known as the “federal ceiling price”—discounted by at least twenty-four percent from the retail price.

For many years, by contrast, when a TRICARE beneficiary filled a prescription at the third “point of service”—a within-network retail pharmacy—the Department paid the full retail price for the drug. The reason was simple: unlike in the case of military treatment facilities and TRICARE's mail-order pharmacy, the Department did not procure the drug. Instead, the drug was distributed through commercial supply chains, and the TRICARE beneficiary purchased the drug from the retail pharmacy. The Department thus had no written agreement with the manufacturer through which it could limit the cost of a drug to the federal ceiling price.

Over the past decade, the government has made several attempts to close the twenty-four percent price differential between prescription drugs procured by the Department and those purchased by TRICARE beneficiaries at retail pharmacies. In October 2004, the Department of VeteransAffairs issued a “Dear Manufacturer letter” that required pharmaceutical manufacturers to refund to the Defense Department the difference between the retail price and the federal ceiling price. In a lawsuit filed by the Coalition for Common Sense in Government Procurement—a multi-industry interest group that represents pharmaceutical companies—the Federal Circuit invalidated the rebate requirement, finding that it constituted a substantive regulation that had to be promulgated via notice and comment rulemaking, a process the Secretary had tried to circumvent by issuing the Dear Manufacturer letter. See Coalition for Common Sense in Government Procurement v. Secretary of Veterans Affairs, 464 F.3d 1306 (Fed.Cir.2006).

While that case was pending, the Defense Department announced the creation of a voluntary rebate program whereby manufacturers would give the Department refunds for drugs purchased at retail pharmacies in exchange for increasing the prospects that the particular drug would be placed on TRICARE's uniform formulary—prescription drugs with lower co-payments for beneficiaries. See32 C.F.R. § 199.21(a)-(g). As an additional incentive, the Department indicated that it might waive its written preauthorization requirement for beneficiaries seeking these drugs. See id. § 199.21(k). The Department chose a rebate system because the drugs were distributed via private supply chains, which meant that pharmaceutical manufacturers had no way of knowing in advance what percentage of their drugs would be purchased by TRICARE beneficiaries. Thus, rather than involving downstream actors or adjusting the wholesale price, the Department required participating manufacturers to refund the money. This voluntary rebate program was not linked to the federal ceiling price.

In fiscal year 2007, the voluntary rebate program recouped only $28 million. At the same time, TRICARE costs continued to soar. As detailed in a Government Accountability Office report, the Defense Department's “prescription drug spending more than tripled from $1.6 billion in fiscal year 2000 to $6.2 billion in fiscal year 2006. Retail pharmacy spending drove most of this increase, rising from $455 million to $3.9 billion and growing from 29 percent of [the Defense Department's] overall drug spending to 63 percent.” U.S. Government Accountability Office, GAO–08–327, DOD Pharmacy Program: Continued Efforts Needed to Reduce Growth in Spending at Retail Pharmacies 3–4 (2008). The report found the cost increase attributable to “federal pricing arrangements ... not appl[ying] to drugs dispensed at retail pharmacies” and to “increased use of retail pharmacies” by TRICARE beneficiaries. Id. at 4.

Concerned about the spiraling cost of TRICARE's prescription drug program and seeking to close the cost gap between prescriptions procured by the Department and those purchased at retail pharmacies, Congress enacted section 703 of the National Defense Authorization Act for Fiscal Year 2008, Pub.L. No. 110–181, 122 Stat. 3, 188, which, as amended, provides:

With respect to any prescription filled after January 28, 2008, the TRICARE retail pharmacy program shall be treated as an element of the Department of Defense for purposes of the procurement of drugs by Federal agencies under section 8126 of title 38 to the extent necessary to ensure that pharmaceuticals paid for by the Department of Defense that are provided by pharmacies under the program to eligible covered beneficiaries under this section are subject to the pricing standards in such section 8126.10 U.S.C. § 1074g(f); see also National Defense Authorization Act for Fiscal Year 2010, Pub.L. No. 111–84, 123 Stat. 2190, 2474 (2009) (making a technical amendment to section 703 to replace the words “on or after the date of enactment of the [statute]” with “after January 28, 2008”). In short, section 703 subjects all prescriptions filled in the TRICARE retail pharmacy program to section 8126 requirements “to the extent necessary to ensure” that those drugs “are subject to [section 8126] pricing standards.” 10 U.S.C. § 1074g(f). Section 703 also includes an express delegation of rulemaking authority to the Secretary of Defense. See id. § 1074g(h) (“The Secretary of Defense shall ... prescribe regulations to carry out this section.”).

Almost immediately after section 703's enactment, on February 1, 2008, the Defense Department issued its own “Dear Manufacturer letter” informing pharmaceutical companies that the voluntary rebate program would be “used for the initial implementation” of section 703. The Department then published a proposed rule that would have required manufacturers to enter into written agreements to abide by the federal ceiling price before their drugs could be included on the uniform formulary. See73 Fed.Reg. 43,394 (July 25, 2008). Diverging from the proposed rule, the final rule, issued on March 17, 2009, directs manufacturers to refund to the Department the difference between the federal ceiling price and the retail price for all prescriptions filled at TRICARE retail pharmacies. See 74 Fed.Reg. 11,279 (Mar. 17, 2009); 32 C.F.R § 199.21(q). Thus, price caps apply regardless of whether manufacturers have signed a voluntary written agreement, though such agreements remain a prerequisite for both uniform formulary status and preauthorization. See32 C.F.R. § 199.21(q)(2). Additionally, the final rule requires manufacturers to refund to the Department the price differential for any prescription filled after January 28, 2008, the date of section 703's enactment. See id. § 199.21(q)(1)(i). According to the Coalition, this “retroactive” requirement will likely cost the pharmaceutical industry in excess of $500 million. Under the final rule, however, the Secretary may waive or reduce the refund amount. See id. § 199.21(q)(3)(iii)(A). Manufacturers, moreover, can escape the federal ceiling price altogether by removing a drug from TRICARE coverage. See id. § 199.21(q)(3).

In the meantime, the Coalition, which had also sued the Defense...