Coalition for Common Sense v. Veterans Affairs

• Citation: 464 F.3d 1306
• Decision Date: 11 September 2006
• Docket Number: No. 05-7130.,05-7130.
• Parties: THE COALITION FOR COMMON SENSE IN GOVERNMENT PROCUREMENT, (doing business as The Coalition for Government Procurement), Petitioner, v. SECRETARY OF VETERANS AFFAIRS, Respondent.
• Court: United States Courts of Appeals. United States Court of Appeals for the Federal Circuit

464 F.3d 1306

THE COALITION FOR COMMON SENSE IN GOVERNMENT PROCUREMENT, (doing business as The Coalition for Government Procurement), Petitioner, v. SECRETARY OF VETERANS AFFAIRS, Respondent.

No. 05-7130.

United States Court of Appeals, Federal Circuit.

September 11, 2006.

COPYRIGHT MATERIAL OMITTED

Donna Lee Yesner, McKenna Long & Aldridge LLP, of Washington, DC, argued for petitioner. With her on the brief were Joanne L. Zimolzak and Jeniffer M. De Jesus.

Kyle Chadwick, Trial Attorney, Commercial Litigation Branch, Civil Division, United States Department of Justice, of Washington, DC, argued for respondent. With him on the brief were Peter D. Keisler, Assistant Attorney General and David M. Cohen, Director. Of counsel on the brief were Melbourne A. Noel, Jr., Senior Contracts Attorney, Office of General Counsel, United States Department of Veterans Affairs, of Hines, Illinois; John A. Casciotti, Associate Deputy General Counsel, Office of General Counsel, United States Department of Defense, of Washington, DC; and Gerald A. Wesley, Associate General Counsel, Defense Legal Services Agency, United States Department of Defense, of Aurora, Colorado.

Before RADER, SCHALL, and LINN, Circuit Judges.

SCHALL, Circuit Judge.

Pursuant to 38 U.S.C. § 502, the Coalition for Common Sense in Government Procurement ("Coalition") petitions for review of the October 14, 2004 letter ("the Dear Manufacturer letter") of the Department of Veterans Affairs ("VA").¹ The Coalition is a multi-industry association representing over 300 companies, including pharmaceutical companies, which provide products and services that are procured by the federal government. The Dear Manufacturer letter requires manufacturers of drugs covered by the health care benefits program of the Department of Defense ("DOD") to refund to DOD the difference between the drugs' wholesale commercial price and their federal ceiling prices.

For the reasons set forth below, we hold that the Dear Manufacturer letter comprises a substantive rule,² as defined in 5 U.S.C. § 551(4), and that the VA did not comply with the procedural requirements for substantive rulemaking set forth in the Administrative Procedure Act ("APA"), ch. 324, 60 Stat. 237 (codified as amended at 5 U.S.C. § 551 et seq. (2000)), before issuing the letter. We therefore grant the Coalition's petition for review, set aside the Dear Manufacturer letter, and remand the matter to the VA for compliance with the procedures required by the APA.

BACKGROUND

I.

By way of background, we begin with a discussion of DOD's health care benefits program and the Veterans Health Care Act of 1992 ("VHCA"), Pub.L. 102-585, 106 Stat. 4943 (codified as amended at 10 U.S.C. § 1074 and scattered sections of 38 U.S.C.), which applies to the program and which is administered by the VA.

DOD provides a health care benefits program called TRICARE to active duty service members, retired service members, and their dependents. 60 Fed.Reg. 52078, 52078 (Oct. 5, 1995). TRICARE is administered by the TRICARE Management Activity ("TMA") within DOD. See PGBA, L.L.C. v. United States, 389 F.3d 1219, 1221 (Fed.Cir.2004) (summarizing the TRICARE program).

The present action concerns just one aspect of TRICARE, the current TRICARE Pharmacy Benefits Program, which was put in place on May 3, 2004. See 69 Fed.Reg. 17035, 17035 (April 1, 2004) (noting that the final rule would become effective May 3, 2004). Like the pre-May 2004 TRICARE Pharmacy Benefits Program, the current TRICARE Pharmacy Benefits Program covers at least a portion of a beneficiary's cost of prescription drugs when the beneficiary acquires the drugs from one of four sources: a Military Treatment Facility ("MTF"); a network retail pharmacy; a non-network retail pharmacy; or the TRICARE Mail Order Pharmacy ("TMOP").³ 32 C.F.R. § 199.21(h)(1) (2006). Under 32 C.F.R. § 199.21(i), the amount of cost-sharing between beneficiaries and DOD varies depending on the source of the prescription drugs obtained. Beneficiaries have no co-payment when they obtain drugs from an MTF. Id. § 199.21(i)(2)(i). However, beneficiaries must pay a co-payment when they obtain drugs from a retail pharmacy, id. § 199.21(i)(2)(ii), although the co-payment is smaller when a beneficiary purchases drugs at a network pharmacy rather than at a non-network pharmacy. Compare id. with id. § 199.21(i)(2)(iii). Similar to the pharmacy benefits program, when drugs are purchased through TMOP, beneficiaries pay a co-payment to the TMOP distributor. Id. § 199.21(i)(2)(v).

However, unlike the pre-May 2004 version of the TRICARE Pharmacy Benefits Program, the current program utilizes a Pharmacy Benefits Manager ("PBM"). The PBM is responsible for overseeing the distribution and payment for prescription drugs throughout the retail pharmacy network. When a TRICARE beneficiary purchases covered drugs at a network retail pharmacy, the pharmacy transmits data concerning the beneficiary to the PBM. The PBM then relays this beneficiary information to DOD and requests authorization to pay DOD's portion of the cost-share for the drugs to the network pharmacy. After receiving this information, DOD's Pharmacy Benefits Office checks beneficiary eligibility and potential drug interactions. DOD then authorizes the PBM to approve the transaction, accept the beneficiary's co-pay, and pay the pharmacy the difference between the beneficiary's co-pay and the retail price of the drugs. Most of this information exchange between the network pharmacy and the PBM occurs in "real time" before the beneficiary's prescription is filled. However, DOD's payment to the pharmacy only occurs after a ten-day hold period. Notably, the PBM does not provide these services for non-network retail pharmacies.

II.

The Dear Manufacturer letter concerns the application of the VHCA to the TRICARE Pharmacy Benefits Program. The VHCA was enacted in 1992 to reduce the cost of prescription drugs used in the VA health care benefits programs. As seen, the VHCA is codified at scattered sections of Title 38. The VHCA includes 38 U.S.C. § 8126, which provides in relevant part:

(a) Each manufacturer of covered drugs shall enter into a master agreement with the Secretary [of the VA] under which —

(1) beginning January 1, 1993, the manufacturer shall make available for procurement on the Federal Supply Schedule of the General Services Administration each covered drug of the manufacturer;

(2) with respect to each covered drug of the manufacturer procured by a Federal agency described in subsection (b) on or after January 1, 1993, that is purchased under depot contracting systems or listed on the Federal Supply Schedule, the manufacturer has entered into and has in effect a pharmaceutical pricing agreement with the Secretary ... under which the price charged during the one-year period beginning on the date on which the agreement takes effect may not exceed 76 percent of the non-Federal average manufacturer price (less the amount of any additional discount required under subsection (c)) during the one-year period ending one month before such date (or, in the case of a covered drug for which sufficient data for determining the non-Federal average manufacturer price during such period are not available, during such period as the Secretary considers appropriate), except that such price may nominally exceed such amount if found by the Secretary to be in the best interests of the Department or such Federal agencies[.]

Thus, section 8126(a) limits the price that manufacturers of "covered drugs" may charge for drugs "procured by a Federal agency." Section 8126(b)(2) lists DOD as a "Federal agency" to which section 8126(a) applies. Accordingly, section 8126(a) requires that manufacturers charge DOD a percentage of the non-federal average manufacturer price ("non-FAMP") for "covered drugs."⁴ This price limit is also called the federal ceiling price ("FCP").

As seen, section 8126 limits "covered drugs" to those obtained through one of two sources: the drugs must be (1) "listed on the Federal Supply Schedule" or (2) "purchased under depot contracting systems." The Federal Supply Schedule ("FSS") of the General Services Administration authorizes the VA to award and manage contracts with pharmaceutical companies in order to obtain low prices. See 41 U.S.C. § 259(b)(3) (2000). The statute does not provide a definition of a "depot contracting system." However, section 8126(h)(3) defines the term "depot," as used in "depot contracting system" in section 8126(a), as follows:

The term "depot" means a centralized commodity management system through which covered drugs procured by an agency of the Federal Government are —

(A) received, stored, and delivered through —

(i) a federally owned and operated warehouse system, or

(ii) a commercial entity operating under contract with such agency; or

(B) delivered directly from the commercial source to the entity using such covered drugs.

Examination of procurement by MTFs and the TMOP illustrates the features of direct procurement via listing on the FSS and procurement through a "depot contracting system." Under section 8126(a), FCP pricing is available for both MTFs and for the TMOP because they operate either through direct procurement by VA facilities or a prime vendor arrangement in which a merchant middleman distributes drugs to VA facilities. Direct procurement from the FSS expressly falls under section 8126(a). FCP pricing is available for the prime vendor arrangement because the prime vendor arrangement falls under the definition of a "depot contracting system" in section 8126. In contrast to MTFs and the TMOP, prior to May of 2004, DOD could not obtain drugs at low FCP prices for its TRICARE Pharmacy Benefits Program because the program did not utilize either direct procurement from the FSS or a "depot contracting system" as required by section 8126.

On October 10, 2002, a policy group composed of representatives of...