DoD Loses a Battle but Wins the War on TRICARE Retail Refunds

By Alan Kirschenbaum −

We previously reported on a March 2009 Department of Defense (DoD) regulation establishing a prescription drug “refund” program to implement section 703 of the National Defense Authorization Act of 2008 (NDAA 08).  That section 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.  As reported in our previous post, the DoD’s regulation implemented a program of voluntary agreements under which drug manufacturers agree to provide refunds for prescriptions filled prospectively and also retroactive to January 28, 2008, and, in return, their drugs may be considered for inclusion in the TRICARE uniform formulary.  However, even if a manufacturer does not sign an agreement, it must still pay the refunds prospectively and retroactively under the regulation.

Shortly after the regulation was issued, the Coalition for Common Sense in Procurement, an industry coalition, filed a lawsuit in the U.S. District Court for the District of Columbia challenging the regulation on a number of grounds.  Among other things, the Coalition argued that the statute does not require manufacturers to pay mandatory refunds, but instead calls for DoD to obtain FCP pricing through voluntary procurement agreements.  The Coalition also argued that DoD could implement a refund program only prospectively from the effective date of the regulation (May 26, 2009), and could not seek refunds retroactive to January 28, 2008.

Applying the deferential review standard of Chevron U.S.A., Inc. v. Natural Resources Def. Council, 367 U.S. 837 (1984), the District Court concluded, based on the plain language of the statute, that FCPs apply to all TRICARE retail pharmacy program prescriptions filled on or after January 28, 2008.  The court rejected the Coalition’s arguments against retroactive application of the regulation, explaining that drug manufacturers were on notice that their transactions would be subject to FCPs when the NDAA-08 was enacted. 

However, the court also decided that DoD had erroneously interpreted the statute to mandate that FCP pricing be implemented through manufacturer refunds, when, in fact, the statute did not speak to the question of how DoD should implement the FCP requirement.  Accordingly, the court remanded the rule to DoD (without vacating it), for DoD to decide whether to maintain the current rebate/refund approach or implement some other mechanism for obtaining FCPs.  In view of the fact that DoD has been trying since 2004 to establish a rebate/refund program to obtain FCP pricing for retail drugs, and the current refund program is already up and running, we do not expect the agency to change its approach.