Since 2008, the Department of Defense took different steps to curb rising drug costs in the Tricare program, but the Coalition for Common Sense in Government Procurement - a trade group that represents drugmakers, including GlaxoSmithKline (GSK) and Pfizer (PFE), and other companies that contract with the federal government - filed a lawsuit challenging the DoD efforts.
Here is the background: Looking to lower drug costs, Congress enacted section 703 of the National Defense Authorization Act in 2008, which subjects all prescriptions purchased at retail pharmacies by service members to the same price caps as drugs purchased by the DoD. The DoD also issued a regulation requiring drugmakers to refund to the federal government the difference between the retail price and the price cap, the ruling explains.
Why? Since 1992, a federal law requires the DoD and drugmakers to have written agreements that mandate a “federal ceiling price," which amounts to a discount of at least 24 percent from the retail price. But over the past decade, the DoD tried to close a gap in price between what was purchased by the DoD and by TRICARE beneficiaries at retail pharmacies.
But in fiscal year 2007, a voluntary rebate program recouped only $28 million. At the same time, Tricare costs soared. A Government Accountability Office report found that DoD drug spending "more than tripled from $1.6 billion in fiscal year 2000 to $6.2 billion in fiscal year 2006. Retail pharmacy spending rose from $455 million to $3.9 billion and grew from 29 percent of overall drug spending to 63 percent,” according to the court ruling.
And so, the DOD issued a rule in March 2009 that directs drugmakers to refund the difference between the federal ceiling price and the retail price for all prescriptions filled at retail pharmacies participating in the Tricare network. The DoD also created a voluntary rebate program in which drugmakers would give refunds for drugs purchased at retail pharmacies in exchange for increasing the odds of formulary placement.
The coalition argued that the DoD should not impose price caps without obtaining voluntary written agreements required in the procurement process and impermissibly imposed retroactive rebate liability on drugmakers. And these became the two questions that had to be answered by the United States Court of Appeals for the District of Columbia Circuit.
The court overturned an earlier decision by explaining that "the rule imposes involuntary price caps 'to the extent necessary' to guarantee compliance with “pricing standards” (mandated by law). Moreover, the rule furthers Congress’s primary goal of ensuring price parity across Tricare’s three points of service. And finally, the rule capitalizes on the logistical convenience of imposing refund liability on manufacturers rather than lowering retail prices or seeking refunds from downstream actors" (Here is the ruling). The upshot? The DoD can seek refunds for prescriptions after January 28, 2008, and the only option available to drugmakers that do not want to pay refunds going forward is to opt-out of the Tricare program. In other words, the pharmaceutical industry should start making plans to take care of any unpaid bills.
We asked the Coalition for a response and will update you accordingly.