Recent DC Circuit Ruling Upholds TRICARE’s Collection of Retroactive Rebates on Prescription Drugs from Pharmaceutical Manufacturers

On January 4, 2013, the United States Court of Appeals for the District of Columbia Circuit (“DC Circuit” or the “Court”) affirmed a decision of the United States District Court for the District of Columbia in the Coalition for Common Sense in Government Procurement v. the United States — Case No. 11-5350 (No. 1:08-cv-00996 in the District Court) — related to the so-called TRICARE Retail Refund Program. The Court held that the Department of Defense (“DOD”) did not exceed its statutory authority by either (1) requiring pharmaceutical manufacturers to provide rebates on innovator prescription drugs dispensed to TRICARE members by retail pharmacies absent written agreements with such manufacturers or by (2) imposing such obligation retroactive to January 28, 2008.

The Coalition for Common Sense in Government Procurement (the “Coalition”) challenged a DOD regulation which subjected all brand-name prescription drugs purchased at retail pharmacies by TRICARE participants to the same price caps as drugs acquired directly by the DOD pursuant to the Veterans Health Care Act of 1992 (“VHCA”). The regulation was developed by the DOD to implement Section 703 of the National Defense Authorization Act for 2008 (“NDAA”), which provides the following:

“with respect to any prescription filled after January 28, 2008, the TRICARE retail pharmacy program shall be treated as an element of…[the VHCA]…to the extent necessary to ensure that pharmaceuticals paid for by the Department of Defense…are subject to [VHCA] pricing standards….”

The DC Circuit based its decision to affirm the lower court ruling and uphold the DOD regulation by applying a two-part test established by the United States Supreme Court in Chevron USA Inc. v. Natural Resources Defense Council, Inc., 467 US 837 (1984), which is used by courts to determine whether a government agency’s interpretation of a statute is reasonable. Entertaining the Coalition’s first argument, the DC Circuit found that Section 703 of the NDAA does not specifically require the DOD to have written agreements with pharmaceutical manufacturers to impose rebate liability on them related to TRICARE retail drug utilization. The DOD highlighted, and the Court agreed, that in Section 703 Congress provided flexibility to the DOD in its establishment and administration of the TRICARE Retail Refund Program through its use of the words “to the extent necessary” when referencing the VHCA. Therefore, just because the VHCA mandates the use of written agreements with manufacturers related to the acquisition of drugs by the DOD and other federal government agencies under the VHCA does not mean the DOD must utilize such written agreements related to the TRICARE Retail Refund Program.

Furthermore, the DC Circuit dismissed the Coalition’s second argument, finding that the DOD did no impermissibly impose retroactive rebate liability on pharmaceutical manufacturers. The Court held that it was Congress’s passing of Section 703 of the NDDA and not the publication of the DOD’s regulation that imposed a rebate obligation on manufacturers. Congress clearly stated that a manufacturer’s rebate obligation was due under the TRICARE Retail Refund Program on “any prescription filled after January 28, 2008.” The DC Circuit held that “(t)his language leaves no doubt that Section 703’s effective date is the date of enactment — January 28, 2008 — and that the triggering event for rebate liability is the filling of a prescription.”

Many pharmaceutical manufacturers had sought waiver/compromise of retroactive rebates due the DOD under the TRICARE Retail Refund Program pending the outcome of the Coalition’s original case in the United States District Court for the District of Columbia. To our knowledge, the DOD for the most part denied those requests in 2012 following the lower court’s ruling in favor of the DOD despite the fact that the Coalition had appealed the ruling. Subsequently, some pharmaceutical manufacturers paid the rebate demands to avoid interest and penalties in the event of a government victory in the litigation and others filed secondary waiver/compromise requests because of the still pending appeal. Now that the DC Circuit has affirmed the lower court’s ruling in favor of the DOD, pharmaceutical manufacturers with pending waiver/compromise requests can assume their requests will likely be denied and the DOD will re-issue demand letters for the retroactive rebates back to January 28, 2008, particularly if the Coalition publicly announces that it does not plan to seek review of the DC Circuit’s decision by the United States Supreme Court.