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Coalition for Common Sense in Government Procurement v. United States

September 19, 2008

THE COALITION FOR COMMON SENSE IN GOVERNMENT PROCUREMENT, PLAINTIFF,
v.
UNITED STATES OF AMERICA AND UNITED STATES DEPARTMENT OF DEFENSE, DEFENDANT.



The opinion of the court was delivered by: John D. Bates United States District Judge

MEMORANDUM OPINION

On January 28, 2008, Congress enacted the National Defense Authorization Act for Fiscal Year 2008 ("NDAA-08"). Under Section 703 of the NDAA-08, pharmaceuticals paid for by the Department of Defense ("DoD") that are provided by retail pharmacies to TRICARE beneficiaries are to be subject to the pricing standards of 38 U.S.C. § 8126, known as Federal Ceiling Prices. Section 703 also directs that the existing applicable regulations be modified to implement the new statutory requirement. On February 1, 2008, DoD issued a letter to pharmaceutical manufacturers (the "Dear Manufacturer letter") that served as "the initial implementation" of Section 703. The Dear Manufacturer letter announced DoD's decision to use its current rebate program, which is effectuated through voluntary rebate agreements with pharmaceutical manufacturers, to ensure that qualified prescriptions filled at TRICARE network retail pharmacies are subject to Federal Ceiling Prices. Meanwhile, DoD has proceeded to modify the relevant regulations through a proposed rulemaking initiated on July 25, 2008.

Plaintiff Coalition for Common Sense in Government Procurement ("Coalition") brings this action against DoD alleging that the rebate program implemented by the Dear Manufacturer letter and associated materials constitutes a substantive rule issued in excess of DoD's statutory authority under Section 703 of the NDAA-08 and in violation of the notice and comment rulemaking procedures of the Administrative Procedures Act ("APA"). Currently before the Court is the Coalition's motion for a preliminary injunction seeking to prohibit DoD from implementing and enforcing the rebate program pending a final determination of its validity on the merits. In response, DoD has filed a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(1) and 12(b)(6), arguing that the Coalition lacks standing and that it has failed to state a claim upon which relief can be granted. Upon careful consideration of the motions, the parties' several memoranda, the arguments advanced at the motions hearing held on September 10, 2008, the applicable law, and the entire record, the Court will deny the Coalition's motion for a preliminary injunction and will deny DoD's motion to dismiss.

BACKGROUND

I. Statutory and Regulatory Background

TRICARE is the health care program of the Department of Defense, and includes a Pharmacy Benefits Program. TRICARE was established for current and former members of the uniformed services and their families under the authority of 10 U.S.C. Chapter 55, principally Section 1097. See 10 U.S.C. § 1072(7). Section 701 of the National Defense Authorization Act for Fiscal Year 2000, see Pub. L. No. 106-65, § 701, 113 Stat. 512 (1999), enacted 10 U.S.C. § 1074g, which directed the Secretary of Defense to "prescribe regulations" that "establish an effective, efficient, integrated pharmacy benefits program." 10 U.S.C. § 1074g(h), (a)(1). DoD promulgated implementing regulations for the TRICARE Pharmacy Benefits Program in 2004.

See 67 Fed. Reg. 17,948 (Apr. 12, 2002) (notice of proposed rulemaking); 69 Fed. Reg. 17,035 (Apr. 1, 2004) (final rule), codified at 32 C.F.R. § 199.21.

Section 199.21 established rules and procedures to govern the selection of pharmaceuticals by the Department of Defense Pharmacy and Therapeutics Committee ("P&T Committee") that will be available to TRICARE beneficiaries. Established by 10 U.S.C. § 1074g, the P&T Committee is authorized to evaluate pharmaceutical agents in each therapeutic class for inclusion on the TRICARE uniform formulary on the basis of their relative clinical effectiveness and cost effectiveness. See 32 C.F.R. § 199.21(e)-(f). The uniform formulary is a list of pharmaceuticals that are available to TRICARE beneficiaries as "basic program benefits." Id. § 199.21(a)(3)(i). The uniform formulary is designed to control costs by limiting the number of drugs covered by TRICARE, and by giving beneficiaries a financial incentive to choose prescription drugs that are on the formulary because TRICARE will cover the cost of the prescription, minus a modest co-payment in some circumstances. See id. § 199.21(i) (detailing cost-sharing requirements under the pharmacy benefits program). Pharmaceutical agents included on the uniform formulary are available to eligible covered TRICARE beneficiaries at three different points of service: Military Treatment Facilities ("MTF"); the TRICARE Mail Order Pharmacy; and network and non-network retail pharmacies, which are non-MTF pharmacies. See 10 U.S.C. § 1074g(a)(2)(E); 32 C.F.R. § 199.21(h)(1)(i)-(iv).

For every prescription filled by an eligible covered TRICARE beneficiary, the ultimate cost incurred by DoD is contingent upon the point of service where the pharmaceutical agent was obtained. Under the Veterans Health Care Act of 1992, codified at 38 U.S.C. § 8126, there is a price limitation placed on drugs "procured by" certain federal agencies, including DoD.

Because drugs dispensed at Military Treatment Facilities and through the TRICARE Mail Order Pharmacy are "procured by" DoD through direct service agreements with pharmaceutical manufacturers, DoD gets the benefit of Section 8126's limitation on prices. Section 8126 provides that each manufacturer of a covered drug shall enter into a master agreement "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 . . . ." 38 U.S.C. § 8126(a)(2). The discounted prices established by Section 8126(a)(2) are known as Federal Ceiling Prices.

By contrast, Federal Ceiling Prices have not applied to prescription drugs obtained by TRICARE beneficiaries at retail pharmacies because DoD plays no role in the procurement process. Consequently, DoD pays the full commercial price for drugs obtained by beneficiaries at TRICARE network retail pharmacies. On October 14, 2004, the Department of Veterans Affairs ("VA") sought to change that by issuing a Dear Manufacturer letter that required pharmaceutical manufacturers to refund DoD the difference between the wholesale commercial price and the Federal Ceiling Price for covered drugs provided by TRICARE network retail pharmacies. See Coal. for Common Sense in Gov't Procurement v. Sec'y of Veterans Affairs, 464 F.3d 1306, 1312 (Fed. Cir. 2006). The Coalition challenged the rebate requirement imposed by the Dear Manufacturer letter on the ground*fn1 that it was a "substantive rule" within the meaning of the APA that was issued "without observance of procedure required by law." Id. at 1317-18. In invalidating the Dear Manufacturer letter, the Federal Circuit held that the letter was a substantive rule that was enacted without compliance with the notice and comment rulemaking procedures required by the APA. Id. at 1319.

In May 2006, several months before the VA's mandatory rebate requirement was invalidated, DoD adopted a voluntary rebate program. DoD's rebate program was implemented through use of the Uniform Formulary Voluntary Agreement for TRICARE Retail Rebates ("UF-VARR" or "rebate agreement"). See Def.'s Mot. Dismiss, Ex. 1 at 1. According to DoD, the UF-VARR has provided a means for pharmaceutical manufacturers to offer incentive price agreements, voluntarily, in order to enhance the prospects that a particular drug will be placed on the uniform formulary based on its clinical and cost-effectiveness. See Def.'s Mot. Dismiss, Stmt. of Mat. Facts at 4, ¶ 8. In the three versions of the UF-VARR that have been used by DoD since 2006, none specified a required minimum rebate or indicated that the rebate should be tied to Federal Ceiling Prices. See Def.'s Mot. Dismiss, Exs. 1, 2; Pl.'s Ex. I to Allen Decl.

On January 28, 2008, Congress enacted the National Defense Authorization Act for Fiscal Year 2008. Section 703 addresses the application of Federal Ceiling Prices to drugs obtained through the TRICARE retail pharmacy network. It provides in a new 10 U.S.C. ยง 1074g(f) that . . . the TRICARE retail pharmacy program shall be treated as an element of the Department of Defense for purposes of 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 and that DoD, after consultation with other administering agencies, shall ...


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