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The Coalition For Common Sense In Government Procurement v. United States of America and United States Department of Defense

October 25, 2011

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



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"). Section 703 of NDAA-08 requires that pharmaceuticals paid for by the Department of Defense and provided through the TRICARE retail pharmacy program be subject to pricing standards known as Federal Ceiling Prices. The Department promulgated a final rule implementing section 703 on March 17, 2009. Under this rule, pharmaceutical manufacturers were required to refund amounts received in excess of the Federal Ceiling Prices for pharmaceuticals paid for by DoD in the retail pharmacy program or after January 28, 2008. This Court previously concluded that, in promulgating this rule, DoD erroneously interpreted the statute to mandatemanufacturer refunds. The Court remanded for DoD to consider whether it wished to implement manufacturer refunds as an exercise of its discretion or instead promulgate a different rule. On remand, the Department considered a variety of alternatives before eventually issuing a rule on October 7, 2010 that was, for the most part, identical to the prior rule. Plaintiff Coalition for Common Sense in Government Procurement again challenges the rule on the grounds that DoD lacks authority under NDAA-08 to require refunds from manufacturers that have not voluntarily agreed to them.*fn1 The Coalition also argues that the Department does not have authority to require refunds on transactions occurring before the promulgation of the rule. Now before the Court are the parties' cross-motions for summary judgment. For the reasons set out below, the Court will grant summary judgment in favor of the Department.

I. Introduction

The Court and the parties have been here several times before. See Coal. for Common Sense in Gov't Procurement v. United States, 671 F. Supp. 2d 48 (D.D.C. 2009); Coal. for Common Sense in Gov't Procurement v. United States, 576 F. Supp. 2d 162 (D.D.C. 2008); see also Coal. for Common Sense in Gov't Procurement v. Sec'y of Veterans Affairs, 464 F.3d 1306 (Fed. Cir. 2006). The Court will therefore not retell the history of this case at length, but instead will proceed directly to the background relevant to the Coalition's latest challenge to the rule.

DoD provides pharmaceuticals to beneficiaries through the TRICARE Pharmacy Benefits Program. Beneficiaries receive drugs through four "points of service": Military Treatment Facilities, the TRICARE Mail Order Pharmacy, private retail network pharmacies (the "TRICARE Retail Pharmacy Network"), and private retail non-network pharmacies. See 74 Fed. Reg. 11,279, 11,279 (March 17, 2009); Pl.'s Mot. for Summ. J. ("Pl.'s SJ Mot.") [Docket Entry 72] at 1-2. Drugs provided to beneficiaries by Military Treatment Facilities and the TRICARE Mail Order Pharmacy are procured by DoD directly from manufacturers or distribution agents. See Pl.'s SJ Mot. at 2. By contrast, drugs provided to beneficiaries by pharmacies are sold through commercial supply chains from manufacturers to the pharmacies; DoD pays its share of the cost to pharmacies, by way of a pharmacy benefits manager, rather than directly to manufacturers or distribution agents. See 75 Fed. Reg. 63,383, 63,385 (Oct. 15, 2010). This case concerns pharmaceuticals provided to beneficiaries by network pharmacies.

Section 703 of NDAA-08 required that pharmaceuticals obtained through the TRICARE retail pharmacy program be subject to Federal Ceiling Prices. It provided in a new 10 U.S.C. § 1074g(f) that [w]ith respect to any prescription filled on or after the date of the enactment of the National Defense Authorization Act for Fiscal Year 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.

And the statute requires DoD, after consultation with other administering agencies, to "modify the regulations under [10 U.S.C. § 1074g(h)] to implement the requirements of [the new 10 U.S.C. § 1074g(f)]." National Defense Authorization Act for Fiscal Year 2008, Pub. L. 110-181, 122 Stat. 3, 188 (2008).*fn2

The Department published the original regulation ("2009 rule") implementing NDAA-08 on March 17, 2009. 74 Fed. Reg. at 11,279. In response to the Court's remand of that rule, the Department published a notice soliciting comment on both the 2009 rule and other approaches to the regulation. See 75 Fed. Reg. 6,335 (Feb. 9, 2010). After considering these comments and several alternatives, the Department decided to reissue the regulation ("2010 rule") with only minor changes to the 2009 rule. See 75 Fed. Reg. at 63,383.

The 2010 rule, like its predecessor, requires pharmaceutical manufacturers to honor section 703's obligation that "TRICARE retail pharmacy network prescriptions are subject to Federal Ceiling Prices." 32 C.F.R. § 199.21(q)(1)(ii). The rule does so by prohibiting manufacturers from receiving amounts above the Federal Ceiling Prices for pharmaceuticals provided to the retail pharmacy program. See id. By contrast, the rule does not affect the rights or liabilities of other parties to the program (wholesalers, network pharmacies, private pharmacy benefit managers, and TRICARE beneficiaries). See 75 Fed. Reg. at 63,388-91. Three provisions -- again, virtually identical in both iterations of the rule -- accomplish this outcome.

First, the Department and pharmaceutical manufacturers may enter into voluntary written agreements in which manufacturers agree "to honor the pricing standards required by 10 U.S.C. § 1074g(f)." Id. 199.21(q)(2)(i). In these agreements, manufacturers "acknowledge the existence of the [Federal Ceiling Price] obligation and promise to meet it." 74 Fed. Reg. at 11,286. By recognizing the Federal Ceiling Price obligation, manufacturers also agree to refund payments in excess of this price for retail pharmacy program transactions occurring on or after the enactment of NDAA-08. See 32 C.F.R. § 199.21(q)(3)(i). If a manufacturer enters into a voluntary agreement, it receives advantageous treatment in the program.*fn3

Second, if a manufacturer does not agree to meet the Federal Ceiling Prices through such an agreement, but nevertheless provides pharmaceuticals to beneficiaries through network pharmacies, DoD may obtain refunds from manufacturers for transactions in which the manufacturer has received prices in excess of the Federal Ceiling Prices. These refunds are obtained either through a separate agreement with the manufacturer or through a debt collection agency. See id. § 199.21(q)(3)(i) ("Refund procedures . . . . may be established as part of the agreement referred to in paragraph (q)(2), or in a separate agreement, or pursuant to § 199.11."); see also id. § 199.11 (authority for debt collection under TRICARE). The Department may obtain refunds from retail pharmacy program sales occurring on or after January 28, 2008 (the date of NDAA-08's enactment) that were in excess of the Federal Ceiling Prices. See id. § 199.21(q)(3)(iii); see also 74 Fed. Reg. at 11,286 ("[I]f a manufacturer was paid more than the [Federal Ceiling Price] . . . the transaction resulted in an overpayment . . . . To resolve the overpayment, the manufacturer must pay DoD a refund of the amount above the [Federal Ceiling Price]."). The Department, however, may waive or compromise the refund amount. See 32 C.F.R. § 199.21(q)(3)(iii)(A).

Finally, the manufacturer may escape Federal Ceiling Prices altogether by voluntarily removing the drug "from coverage in the TRICARE Pharmacy Benefit Program." Id. § 199.21(q)(3)(iii)(C). Under this provision, a manufacturer may remove one or some of its drugs from TRICARE without removing all of its pharmaceuticals. See 75 Fed. Reg. at 63,395 ("The opt-out provision continues to be on a drug-by-drug basis.").

The 2010 rule left these provisions of the 2009 rule intact. The 2010 rule also made some relatively minor adjustments to the rule that do not affect the outcome of this case.*fn4

II. Summary Judgment Standard

Under Fed. R. Civ. P. 56(c), summary judgment is appropriate when the pleadings and the evidence demonstrate that "there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." In a case involving review of a final agency action under the Administrative Procedure Act, 5 U.S.C. § 706, however, the standard set forth in Rule 56(c) does not apply because of the limited role of a court in reviewing the administrative record. See Prof'l Drivers Council v. Bureau of Motor Carrier Safety, 706 F.2d 1216, 1229 (D.C. Cir. 1983); Sierra Club v. Mainella, 459 F. Supp. 2d 76, 89-90 (D.D.C. 2006). Under the APA, the agency resolves factual issues to arrive at a decision that is supported by the administrative record. Summary judgment is the mechanism for deciding whether as a matter of law the agency action is supported by the administrative record and is otherwise consistent with the APA standard of review. See Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 415 (1971); Sw. Merch. Corp. v. NLRB, 53 F.3d 1334, 1341 (D.C. Cir. 1995); Richard v. INS, 554 F.2d 1173, 1177 & n.28 (D.C. Cir. 1977).

A court must "hold unlawful and set aside agency action, findings, and conclusions" that are "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law," 5 U.S.C. § 706(2)(A), in excess of statutory authority, id. § 706(2)(C), or "without observance of procedures required by law," id. § 706(2)(D). The scope of review, however, is narrow. See Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43 (1983). The agency's action is presumed valid. See Volpe, 401 U.S. at 415. And the "court is not to substitute its judgment for that of the agency." State Farm, 463 U.S. at 43. But the court must be satisfied that the agency has "'examine[d] the relevant data and articulate[d] a satisfactory ...


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