D.C. Circuit: Rule Capping Drug Rates Upheld, and Drug Manufacturers are Paying

This post was written by Lorraine M. CamposCarlos A. Valdivia and Joseph W. Metro.

On January 4, 2013, the D.C. Circuit upheld a Department of Defense rule that probably has drug manufacturers feeling like they’re going to pay for drinks they didn’t order—but not literally, of course. In reality, the decision puts them on the hook for the partial refund of thousands of prescription drugs dating back to 2008. See Coalition for Common Sense in Gov’t Procurement v. United States, No. 11-5350 (D.C. Cir. 2013).

The DOD provides pharmaceutical drug benefits through TRICARE, its health care program for current and retired service members. The disputed rule caps the retail price of drugs by having drug manufacturers refund the difference between the retail price and the discounted price offered through DOD channels. And this without the drug manufacturers’ agreement. And applied retroactively to any prescription filled after January 28, 2008. Keep the tab open, bartender.

Why retroactively? It boils down to section 703 of the 2008 National Defense Authorization Act (now 10 U.S.C. § 1074g(f)), which sought to close the price gap. The law specifies that “any prescription filled after January 28, 2008 . . . shall be treated” like drugs purchased through DOD channels. Why are drug manufacturers on the hook? Because the statute expressly delegates rulemaking authority to the Secretary of Defense, and the Secretary found it easier to recover rebates at that level of the drug supply chain.

And that’s where last week’s decision takes up the question: whether the Secretary of Defense reasonably implemented section 703. Simply put, the D.C. Circuit’s examination was limited to two well-established questions under the Chevron doctrine: (1) did Congress directly address the question in the statute; and (2) if not, did the agency render a permissible interpretation of the statute? The D.C. Circuit held that section 703 did not unambiguously address capping prices through procurement-type contracts, so the question became whether the Secretary’s regulation was a permissible construction of section 703. The court held that it was permissible, explaining that the Secretary’s rule (1) created a universal requirement on all drug manufacturers, (2) imposed the statutory pricing standards, and (3) “capitalize[d] on the logistical convenience of imposing refund liability on manufacturers.”

But the D.C. Circuit also noted that the final regulation allows pharmaceutical manufacturers to seek the Secretary’s waiver of refund liability. So the glass may be half full yet.

You can read more about the opinion here, peruse the decision here, and marvel at the complexity of the TRICARE Retail Pharmacy Program as depicted in this handy chart.

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