[Federal Register Volume 75, Number 199 (Friday, October 15, 2010)]
[Rules and Regulations]
[Pages 63383-63398]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-25712]
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DEPARTMENT OF DEFENSE
Office of the Secretary
32 CFR Part 199
[DOD-2008-HA-0029]
RIN 0720-AB45
Civilian Health and Medical Program of the Uniformed Services
(CHAMPUS)/TRICARE: Inclusion of TRICARE Retail Pharmacy Program in
Federal Procurement of Pharmaceuticals
AGENCY: Office of the Secretary, Department of Defense (DoD).
ACTION: Final rule.
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SUMMARY: Section 703 of the National Defense Authorization Act for
Fiscal Year 2008 (NDAA-08) states with respect to any prescription
filled on or after the date of enactment, the TRICARE Retail Pharmacy
Program shall be treated as an element of the DoD for purposes of
procurement of drugs by Federal agencies under section 8126 of title
38, United States Code (U.S.C.), to the extent necessary to ensure
pharmaceuticals paid for by the DoD that are provided by network retail
pharmacies under the program to eligible covered beneficiaries are
subject to the pricing standards in such section 8126. DoD issued a
final rule on March 17, 2009, implementing the law. On November 30,
2009, the U.S. District Court for the District of Columbia remanded the
final rule to DoD (without vacating the rule) for DoD to consider in
its discretion whether to readopt the current iteration of the rule or
adopt another approach. This final rule is the product of that
reconsideration. DoD is readopting the 2009 final rule, with some
revision.
DATES: This final rule is effective December 27, 2010.
FOR FURTHER INFORMATION CONTACT: Rear Admiral Thomas McGinnis, Chief,
Pharmacy Operations Directorate, TRICARE Management Activity, telephone
703-681-2890.
SUPPLEMENTARY INFORMATION:
A. Background
Section 703 of the National Defense Authorization Act for Fiscal
Year 2008 (NDAA-08) (Pub. L. 110-181) enacted 10 U.S.C. 1074g(f). It
provides that with respect to any prescription filled on or after the
date of enactment (January 28, 2008), the TRICARE Retail Pharmacy
Program shall be treated as an element of DoD for purposes of the
procurement of drugs by Federal agencies under 38 U.S.C. 8126 to the
extent necessary to ensure pharmaceuticals paid for by DoD that are
provided by network retail pharmacies to TRICARE beneficiaries are
subject to Federal Ceiling Prices (FCPs). This section 8126 established
FCPs for covered drugs (requiring a minimum 24% discount) procured by
DoD and three other agencies from manufacturers. The NDAA required
implementing regulations.
DoD issued a proposed rule July 25, 2008 (73 FR 43394-97) and a
final rule March 17, 2009 (74 FR 11279-93). Among other things, the
preamble to the final rule stated that DoD interpreted the statute as
automatically capping the price manufacturers may get paid for
[[Page 63384]]
those covered drugs that enter into the commercial chain of
transactions that end up as TRICARE-paid retail prescriptions,
resulting in the conclusion that the amount above the FCP was an
overpayment by DoD, which in turn required a refund of the overpayment.
Ruling on a litigation challenge to the final rule in a case called
Coalition for Common Sense in Government Procurement v. U.S., the U.S.
District Court for the District of Columbia decided on November 30,
2009, that although 10 U.S.C. 1074g(f) requires that FCPs shall apply,
the statute does not specify how they will apply. The Court ruled that
DoD incorrectly interpreted the statute as requiring manufacturer
refunds, to the exclusion of other possible approaches, and ordered DoD
to reconsider the implementation of the statute as a function of its
discretionary judgment, rather than only as a legal interpretation. The
Court also ruled that while DoD considers whether to readopt the final
rule as it currently stands or to change it, the final rule and the
manufacturer agreements will remain in effect. Finally, the Court held
that DoD correctly interpreted the statute as applying Federal Ceiling
Prices to all prescriptions filled on or after January 28, 2008.
To help DoD carry out the reconsideration ordered by the Court, on
February 8, 2010, DoD published a notice in the Federal Register
inviting additional public comments on the 2009 final rule, as well as
additional comments regarding any other appropriate and legally
permissible implementation approach. DoD recommended that interested
parties focus their comments on those matters addressed by the Court.
The Notice further advised that in considering alternative approaches
to implementing the statute, DoD intended to use at least the following
three criteria (and welcomed comment on these and other suggested
criteria): (1) Harmony with the statute and legislative history; (2)
consistency with best business practice; and (3) practicability of
administration.
DoD received eleven public comments. Five were from representatives
of the pharmaceutical manufacturing industry, two from representatives
of the retail pharmacy industry, two from specialty providers
participating in the Department of Health and Human Services' 340B
program, one from a representative of pharmaceutical wholesalers, and
one from a pharmacy benefits manager.
Before discussing the major issues for reconsideration and the
public comments received, Figure 1 is provided to assist in
understanding the operation of the TRICARE Retail Pharmacy Program as
it currently operates.
BILLING CODE 5001-06-P
[[Page 63385]]
[GRAPHIC] [TIFF OMITTED] TR15OC10.002
BILLING CODE 5001-06-C
[[Page 63386]]
B. Major Issues for Reconsideration
There are four major issues for reconsideration: (1) Who bears the
burden of applying FCPs? (2) How will FCPs be applied? (3) When do FCPs
apply? (4) To what do FCPs apply? The first two of these issues are the
ones that the Court specifically ordered DoD to reconsider as a matter
of DoD's discretionary judgment. The last two were not covered by that
specific Court order to DoD but were addressed by the Court and by
commenters. These four major issues will be addressed in turn.
1. Who bears the burden of applying FCPs?
The Court framed this issue, stating that DoD should exercise its
discretion to consider ``which of the five parties that participate in
the retail pharmacy program--manufacturers, wholesalers, network
pharmacies, private pharmacy benefit managers, and TRICARE
beneficiaries--must bear any costs associated with imposing the Federal
Ceiling Prices.''
For purposes of this regulation, DoD has considered the five
options identified by the Court (DoD recognizes that a comprehensive
analysis of distributional effects would involve a detailed market
analysis). Representatives of retail pharmacies, wholesalers, and
pharmacy benefits managers argued strongly that FCPs are manufacturer
ceiling prices under 38 U.S.C. 8126 and that the economic burden
necessarily falls on manufacturers. Pharmaceutical industry
representatives that submitted comments did not contest this point,
propose any of the four alternative options, or otherwise comment on
this issue.
(a) Assessment of options for harmony with the statute and
legislative history concerning who bears the burden of FCPs.
Section 1074g(f) provides that ``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 * * * are subject to the pricing
standards in such section 8126.'' Section 8126 provides that ``[e]ach
manufacturer of covered drugs shall enter into a master agreement with
the Secretary under which * * * with respect to each covered drug of
the manufacturer procured by [DoD and certain other agencies] that is
purchased under depot contracting systems or listed on the Federal
Supply Schedule, the manufacturer has entered into and has in effect a
pharmaceutical pricing agreement with the Secretary'' of Veterans
Affairs ``under which the price charged * * * may not exceed 76 percent
of the non-Federal average manufacturer price [non-FAMP]. * * *''
Section 8126 goes on to define ``manufacturer'' as excluding ``a
wholesale distributor of drugs or a retail pharmacy.''
Taken together, the texts of the two statutes support the view that
Federal Ceiling Prices refer to manufacturer prices, not to
wholesalers' prices or retail pharmacies' prices; that FCPs are the
ceiling prices that manufacturers may charge or be paid by the covered
Federal agencies, which may not exceed 76 percent of the average
manufacturer price applicable to non-Federal purchasers; that these
maximum manufacturer prices apply to covered drugs procured by the
agencies, including DoD; and that the TRICARE Retail Pharmacy Program
shall be treated as part of DoD for purposes of this procurement to the
extent necessary to ensure that these maximum manufacturer prices apply
to covered drugs paid for by DoD through this Program.
The other two participants in the TRICARE Retail Pharmacy Program
are the pharmacy benefits manager, which is a company that functions
essentially as a management agent for DoD, and the beneficiary. The
pharmacy benefits manager is not mentioned in section 1074g or section
8126. The financial responsibility of TRICARE beneficiaries under the
Pharmacy Benefits Program is specifically addressed in section
1074g(a)(6), which provides explicit maximums on beneficiary costs.
Based on these statutory provisions, the option that manufacturers
bear the burden of FCPs is in harmony with the statutes, which
establish FCPs as a ceiling on manufacturer prices. The option that
retail pharmacies bear the burden is not in harmony because section
8126 specifically excludes retail pharmacies from the definition of
manufacturer for purposes of identifying entities covered by FCPs. The
same is true of the option that wholesalers bear the burden of FCPs.
The option that beneficiaries bear the burden of FCPs is not in harmony
with section 1074g, which separately specifically establishes maximum
limits on beneficiary costs. The option that pharmacy benefits managers
bear the burden of FCPs is not addressed by the statutory texts.
In addition to the statutory texts, the legislative history of
section 1074g(f) is noteworthy. As previously addressed, section
1074g(f) was enacted as part of NDAA-08. A very similar provision was
included in the Senate-passed version of the proposed National Defense
Authorization Act for Fiscal Year 2007 (NDAA-07), but was not enacted
in the final version. That provision, like the NDAA-08 provision
eventually enacted, said the TRICARE Retail Pharmacy Network ``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.'' The Senate Armed Services Committee explained that the purpose of
the provision was to ``affirm a decision made by the Secretary of
Veterans Affairs * * * that drugs purchased by the TRICARE retail
pharmacy network are subject to the same federal pricing limits that
have long applied to drugs purchased by the Department and provided
through military hospitals and clinics and the national mail order
program.'' (S. Rept. 109-254, 109th Cong. 2d Sess., May 9, 2006, pp.
342-343.) The Secretary of Veterans Affairs decision that the Senate
proposed to affirm through language quite similar to that eventually
enacted placed the burden of FCPs on manufacturers, not on retail
pharmacies, wholesalers, pharmacy benefits managers, or beneficiaries.
Similarly, the Federal pricing limits that have long applied to
military facility pharmacies and the mail order program, which the
Senate proposal sought also to apply to drugs provided through the
retail network, place the financial burden on manufacturers, not on any
other participants in those transactions, such as the pharmacies,
wholesalers, pharmacy benefits managers, or beneficiaries.
The legislative history of 38 U.S.C. 8126 is also notable. That
section was enacted by section 603 of the Veterans Health Care Act of
1992. The Senate Committee Report described the provision as one
intended to ensure ``reasonable prices'' from manufacturers and
explained that the 24 percent discount from non-FAMP was based on ``the
Congressional Budget Office's estimate of the median percentage
discount received'' through the Medicaid manufacturer rebate program,
which in turn is based on the ``best price'' manufacturers charge
customers. (S. Rept. No. 102-401, 102d Cong., 2d. Sess., September 15,
1992, pp. 68-70, reprinted in 1992 U.S. Code Congressional and
Administrative News, pp. 4158-60.)
Therefore, the option of manufacturers bearing the financial burden
of FCPs under section 1074g(f) is in harmony with the legislative
history of both 10 U.S.C. 1074g(f) and 38
[[Page 63387]]
U.S.C. 8126. None of the other options is in harmony with the
legislative history. Further, there is no legislative history hinting
that the financial burden of FCPs, which Sec. 8126 places on
manufacturers, was intended by Sec. 1074g(f) to be shifted to retail
pharmacies, wholesalers, pharmacy benefits managers, or beneficiaries,
or that Sec. 1074g(f) was intended to regulate the financial
activities of retail pharmacies, wholesalers, pharmacy benefits
managers, or beneficiaries.
(b) Assessment of options for consistency with best business
practice concerning who bears the burden of FCPs.
Assuming that the only requirement of the statute applies to the
amount paid by DoD in the retail pharmacy program and that DoD can
implement that requirement by allocating financial burden on any of the
five identified participants, the issue here is to assess what
allocation is consistent with best business practice. As a matter of
business management, the TRICARE Pharmacy Benefits Program provides
outpatient pharmaceuticals through three venues: Military facility
pharmacies, the mail order pharmacy, and retail pharmacies. All three
venues involve four categories of costs: Manufacturing costs,
distribution costs, management costs, and prescription filling costs;
and all three have potential cost sharing with beneficiaries. In
military facility pharmacies, manufacturing costs for covered drugs are
subject to FCPs under 38 U.S.C. 8126, and potentially larger discounts
through competitive market procedures. Distribution costs are paid to
wholesalers under prime vendor contracts based on competitive
processes. Management costs are incurred through direct costs of the
Defense Logistics Agency, a component of the Department of Defense.
Prescription filling costs are incurred through direct costs of
military and civilian personnel, expenses, and operations of outpatient
pharmacies in military hospitals and clinics. Cost sharing by
beneficiaries is subject to some policy discretion by DoD; there are no
beneficiary co-payments for outpatient services in military facilities.
In the mail order pharmacy program, as in military facility
pharmacies, manufacturing costs for covered drugs are subject to FCPs
under 38 U.S.C. 8126, and potentially larger discounts through
competitive market procedures. Distribution costs are paid by DoD to
wholesalers under prime vendor contracts. Management and prescription
filling costs are incurred by the mail order pharmacy program
contractor and paid by DoD based on prices set in the competitive
contracting process. Cost sharing by beneficiaries is set by DoD
regulation, subject to specifications in 10 U.S.C. 1074g and based on a
policy structure aimed at encouraging use of the mail order venue and
more cost-effective drugs.
The retail pharmacy system in the United States is part of the
American health care system, of which the DoD health system is a
relatively small part. In the normal commercial chain, manufacturers
sell their pharmaceuticals to wholesalers. Wholesalers add to the
manufacturing costs (i.e., the costs incurred in purchasing the drugs
from the manufacturers) an amount that covers distribution expenses and
profit (possibly including in these calculations prompt payment
discounts or other incentives) and charge this price to retail
pharmacies. Retail pharmacies take the manufacturing costs and the
distribution costs and add an amount to cover the retail pharmacies'
expenses in salaries and operations and a profit (possibly factoring in
incentives in exchange for network agreements with pharmacy benefit
managers), and arrive at a price reflecting manufacturing,
distribution, and prescription costs. This amount is typically billed
to a pharmacy benefits manager, functioning as an administrative agent
for a health plan sponsor, after collecting a limited portion of the
amount as the beneficiary's co-payment. The plan sponsor ultimately
pays the roll-up of the manufacturing, distribution, prescription, and
management costs.
In this system, prevailing business practice for a plan sponsor is
to get the best value that is feasible at each step of the commercial
chain. The plan sponsor negotiates and contracts directly with the
pharmacy benefits manager, seeking the best value in the management
costs incurred in return for the success of the pharmacy benefits
manager in meeting overall plan objectives for beneficiary services and
cost-effectiveness. The plan sponsor also sets beneficiary co-payment
amounts based on applicable dynamics that may include collective
bargain agreements, employer policy, and the like, as well as
management objectives in influencing market share toward more cost-
effective drugs and points of service. Either the plan sponsor or the
pharmacy benefits manager will seek best value regarding manufacturing
costs, distribution costs, and prescription costs through whatever
tools are feasible in dealing with manufacturers, wholesalers, and
retail pharmacies respectively.
In this system, best business practice for the TRICARE Pharmacy
Benefits Program is to seek to achieve best value with respect to each
of the four categories of cost and with respect to the matter of
beneficiary cost sharing. For purposes of this assessment of retail
program options, the assumption is that the final cost to DoD must
somehow reflect the implementation of FCPs somewhere in the system,
whether in relation to manufacturing costs, distribution costs,
prescription costs, management costs, or beneficiary cost sharing, or
some combination of these. The most obvious option is to apply FCPs to
manufacturing costs in the retail program because FCPs apply to
manufacturing costs in the military facility and the mail order
components of the program. Alternatively, DoD could permit higher
manufacturing costs for the retail program than are legal in the
military facility or mail order programs, and somehow offset that
higher cost by lowering distribution, prescriptions, or management
costs or increasing beneficiary co-payments. Neither DoD nor DoD's
pharmacy benefits manager has much practical ability to have
wholesalers pass on to retail pharmacies less than their normal amounts
in order to offset DoD's ultimate manufacturing costs that exceed the
FCPs.
Although drug manufacturers argue that retail pharmacies enjoy a
mark-up over what they pay wholesalers, the DoD's pharmacy benefits
manager already negotiates network agreements with retail pharmacies
that seek best value, consistent with DoD policy objectives on
maintaining a very large retail pharmacy network, currently more than
60,000 pharmacies. In theory, DoD could limit payments to retail
pharmacies so as to offset the absence of the FCP 24% discount in
manufacturing costs, but the predictable effect of this would be that
most or all retail pharmacies would drop out of the network, resulting
in an inability of DoD to extend the benefits of the network system to
many military families. DoD policy favors a very large pharmacy network
because military families, which include spouses and children of
deployed military members and also include Reserve Component families,
are in communities all over the United States. Retail pharmacy industry
commenters stated they had no economic ability to absorb such
reductions, and that is consistent with DoD's understanding.
The other two participants in the retail pharmacy enterprise are
the pharmacy benefits manager and the beneficiary. With respect to the
[[Page 63388]]
pharmacy benefits manager, DoD's management costs are the product of
the competitive selection of a pharmacy benefits manager contractor
under the Competition in Contracting Act. Manufacturing costs are pass-
through costs under this contract, so there is no opportunity for the
pharmacy benefits manager contractor to absorb the higher manufacturing
costs that would result from not applying FCPs to manufacturing costs.
Finally, beneficiary co-payments are the means to encourage
beneficiaries to favor more cost-effective drugs and service venues,
and must conform to a set of statutory specifications. There is little
or no room to accommodate these requirements and objectives and also to
offset the absence of a 24% discount in manufacturing costs.
A recent Congressional Budget Office report, ``Prescription Drug
Pricing in the Private Sector,'' January 2007, used available private
sector economic data to construct a hypothetical example of payments
for a single-source prescription. In this example, the plan sponsor
paid a total of $88 for a prescription, of which $74 went to the
manufacturer (manufacturing cost), $3 to the wholesaler (distribution
cost), $5 to the retail pharmacy (prescription fill cost), and $6 to
the pharmacy benefits manager (management cost). The economics
reflected in the relative amounts in this example support the view that
best business practice is to treat FCPs as applicable to manufacturing
costs, and therefore the manufacturer prices. Further, pharmaceutical
industry representatives have never asserted that they do not make a
profit at the Federal Ceiling Price or that the economics could support
assessing the burden of FCPs on any other participant.
Based on all of these factors, best business practice is for DoD to
deal with management costs through the best value competitive selection
of a pharmacy benefits manager; prescription fill costs through the
pharmacy benefits manager's network pharmacy negotiations, consistent
with overall health program objectives; beneficiary co-payments based
on incentives for cost-effective utilization, consistent with statutory
specifications; distribution costs, to the extent there is any
feasibility, indirectly through retail network negotiations; and
manufacturing costs by applying FCPs in a manner comparable to the
application of FCPs to manufacturing costs in the military facility and
mail order programs. Therefore, based on the criteria of best business
practice, DoD has concluded that the financial burden of FCPs is
properly assigned to drug manufacturers.
(c) Assessment of options for practicability of administration
concerning who bears the burden of FCPs.
Again assuming that the only requirement of the statute applies to
the amount paid by DoD in the retail pharmacy program and that DoD can
implement that requirement by allocating financial burden on any of the
five identified participants, the issue here is to assess what
allocation is consistent with practicability of administration. The
allocation of the financial burden of FCPs to manufacturers in the
context of a retail pharmacy program can be administered through a
rebate/refund apparatus, possibly among other options (which will be
discussed below). A rebate system is common practice in the industry
and was used by the TRICARE Retail Pharmacy Program prior to the
enactment of NDAA-08 to implement a program of formulary-based
manufacturer discounts.
Allocating the financial burden to wholesalers is not practicable
because, like most plan sponsors, DoD has no relationship with
wholesalers in the distribution mechanisms of the retail pharmacy
system in the United States. Further, as pointed out by a commenter, it
is not clear how DoD could identify from prescription claims data the
identity of the wholesaler that sold the drugs to the retail pharmacy
since there is nothing comparable to a National Drug Code (NDC) number,
which identifies the manufacturer. An administrative system for
imposing FCPs on retail pharmacies could presumably be created that
would limit payments to FCPs plus a reasonable prescription filling
fee, but this would not avoid the retail pharmacy losing money on each
transaction. Under the current pharmacy benefit manager relationship,
there is no practicable way to allocate the financial burden of FCPs to
the TRICARE pharmacy benefits manager because manufacturing costs are a
pass-through to DoD and there is no basis to subtract an amount equal
to 24% of total manufacturing costs from the management fee DoD pays
the pharmacy benefits manager, that total fee being a far lesser
amount. An administrative system for allocating the financial burden of
FCPs to beneficiaries in the form of co-payments increased by an amount
equal to 24% of manufacturing costs would be feasible to design but not
to implement because it would far exceed the maximum co-payment amounts
allowed by 10 U.S.C. Sec. 1074g. Thus, all things considered, DoD has
concluded that allocating the financial burden of FCPs to manufacturers
is the most practicable of administration.
(d) Conclusion on who bears the burden of applying FCPs.
Considering harmony with the statute and legislative history, best
business practice, and practicability of administration, DoD has
concluded that it is most appropriate that manufacturers bear the
burden of applying FCPs to the TRICARE Retail Pharmacy Program. No
commenter contested this conclusion or proposed a different option.
2. How are FCPs applied?
Accepting that for the reasons discussed above FCPs apply to
manufacturer prices, the second issue is how FCPs will be applied to
manufacturer prices. In the proposed and final rules, DoD applied FCPs
to manufacturer prices through manufacturer refunds to DoD of amounts
received by the manufacturers for covered prescriptions paid for by the
TRICARE Retail Pharmacy Program. The Court's opinion of November 30,
2009, stated that ``Congress did not speak to the `precise question' of
how the Department should implement the statute's requirements.'' The
opinion continued:
Indeed, the Court can imagine several other regulatory schemes
consistent with 10 U.S.C. 1074g(f) that the Department could have
chosen. For example, instead of requiring pharmaceutical manufacturers
to pay DoD the amounts in excess of the Federal Ceiling Prices, a rule
could require manufacturers to reduce the price on retail pharmacy
program pharmaceuticals prospectively until the excess proceeds were
reimbursed. Or DoD arguably could have adjusted the retail pharmacy
mark-ups or dispensing fees to ensure that the Department did not pay
more than Federal Ceiling Prices. The Coalition suggests two additional
possibilities: ``DoD could have contracted with pharmacies to purchase
TRICARE beneficiaries' drugs * * * at the Federal Ceiling Price,'' or
``DoD could have procured drugs directly from manufacturers at the
Federal Ceiling Price and then distributed the drugs to pharmacies.''
The manufacturer refund method as well as the four alternative
options noted in the Court's opinion have been considered. DoD also
considered two other options that are used in other parts of the
TRICARE Pharmacy Benefits Program--vendor charge-backs and replacement
inventories. No other options on how to apply FCPs to
[[Page 63389]]
manufacturer prices were presented by commenters, including commenters
representing pharmaceutical manufacturers, and no commenters
recommended a method other than manufacturer rebates or refunds.
(a) Assessment of options for harmony with the statute and
legislative history concerning how FCPs are applied.
10 U.S.C. 1074g(f) provides that ``with respect to any prescription
filled * * *, 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 * * * are subject to the pricing standards in
such section 8126.''
The manufacturer refund method of implementation is in harmony with
the statute. In the case of Department of Defense procurement of drugs
under Sec. 8126, the drug manufacturer's price may not exceed the FCP
and the manufacturer is not paid more than the FCP. Under Sec.
1074g(f), a prescription filled in the TRICARE retail pharmacy program
and paid for by DoD should produce the same outcome. The manufacturer
refund method produces the same outcome because the manufacturer
refunds to DoD the amount above the FCP that the manufacturer had been
paid when the manufacturer began the chain of transactions that ended
with the prescription being filled through the TRICARE retail pharmacy
program. Thus, DoD's net manufacturing cost is at the FCP and the
manufacturer's net price is at the FCP.
The first alternative option is that instead of requiring
pharmaceutical manufacturers to refund to DoD the amounts in excess of
the Federal Ceiling Prices, a rule could require manufacturers to
reduce the price on retail pharmacy program pharmaceuticals
prospectively until the excess proceeds were reimbursed. If a
practicable way could be devised to identify prospectively the subset
of drugs that will end up as TRICARE retail pharmacy program
prescriptions out of the entire set of drugs that begin the
distribution chain through a sale by a manufacturer to a wholesaler,
this alternative could also be in harmony with the statute.
The second alternative option is that DoD could perhaps adjust the
retail pharmacy mark-ups or dispensing fees to ensure that the
Department did not pay more than Federal Ceiling Prices. If this occurs
after the manufacturer has already been paid more than the FCP by the
wholesaler (e.g., been paid at the average manufacturer price) and the
wholesaler passed that higher price on to the retail pharmacy, harmony
with the statute and the resolution of issue number one (on who bears
the burden of FCPs) would require some further transaction between the
retail pharmacy and the manufacturer (such as a manufacturer rebate/
refund to the retail pharmacy) so that the FCP pricing standard
actually applies to the manufacturer. Were this accomplished, then the
manufacturing cost portion of the amount the retail pharmacy charges
DoD could be held down to the FCP, and the result would be in harmony
with the statute.
The third alternative option is that DoD could contract with
pharmacies to allow those pharmacies to purchase drugs for distribution
to TRICARE beneficiaries at the Federal Ceiling Price. Were a
practicable method devised for this approach, it would be in harmony
with the statute because prescriptions filled in the TRICARE retail
pharmacy program would be with drugs for which manufacturers were paid
at the FCPs and the savings would be passed on the DoD through the
arrangement between DoD and the retail pharmacies.
The fourth alternative option would be for DoD to procure drugs
directly from manufacturers at the Federal Ceiling Price and then
distribute the drugs to retail pharmacies. Were a practicable method
devised for this approach, it would also be in harmony with the statute
because prescriptions filled in the TRICARE retail pharmacy program
would be with drugs for which manufacturers were paid directly by DoD
at the FCP.
The fifth alternative option is the vendor charge-back method,
under which the wholesaler obtains a refund from the manufacturer for
pharmaceuticals that the wholesaler passes down stream to retail
pharmacies for TRICARE beneficiaries. This system is used in the
military system for drugs sold by wholesalers to military facility
pharmacies, the charge-back to the manufacturer being based on FCPs or
lower contracted prices. Were a feasible method devised for managing
the retail transactions for exclusive use for TRICARE beneficiaries,
this approach would be in harmony with the statute.
The sixth alternative option is the replacement inventory approach,
under which the pharmacy fills TRICARE prescriptions from its regular
inventory of drugs, but is allowed to replace this inventory from DoD's
prime vendor wholesaler, which then uses the vendor charge-back to the
manufacturer. This system is used for the TRICARE Mail Order Program
contractor. Were a feasible method developed for managing the
transactions throughout the retail pharmacy network to limit
replacement inventory to actual TRICARE prescriptions filled, this
approach would be in harmony with the statute.
Thus, the manufacturer refund method is in harmony with the
statute, as are the last four alternative options if they could be
feasibly implemented. The other two alternatives, with sufficient other
conditions met, could also be in harmony.
(b) Assessment of options for consistency with best business
practice concerning how FCPs are applied.
The mechanism of manufacturer refunds is the established industry
practice in the retail pharmacy system in the United States for
manufacturers to provide price discounts--i.e., reductions below the
average manufacturer price applicable to sales to wholesalers--to
health plan sponsors. No commenter contested this point. The
manufacturer refund method of implementation is consistent with best
business practice.
The first alternative option is that instead of requiring
pharmaceutical manufacturers to refund or rebate to DoD the amounts in
excess of the Federal Ceiling Prices, manufacturers could reduce the
price on retail pharmacy program pharmaceuticals prospectively until
the excess proceeds were reimbursed. This option does not fit normal
industry practice, which cannot identify the subset of drugs that will
end up as prescriptions paid for by a particular health plan sponsor
out of the entire set of drugs that begin the distribution chain
through a sale by a manufacturer to a wholesaler. No commenter
recommended this alternative option.
The second alternative option--that the plan sponsor reduce
payments to retail pharmacies by an amount corresponding to a
manufacturing cost discount of 24% below the non-Federal average
manufacturer price, expecting other arrangements among retail
pharmacies, wholesalers, and manufacturers to accommodate those
participants' commercial viability--is also outside the realm of
established business practice in the retail pharmacy system in the
United States. No commenter recommended this alternative option.
The third alternative option is that pharmacies purchase drugs from
manufacturers earmarked for particular health plan beneficiaries so as
to achieve different ultimate health plan costs for different health
plans,
[[Page 63390]]
depending on the degree of discount the manufacturer intends for the
particular plan sponsor. With so many different plan sponsors and so
many thousands of retail pharmacies, this is not a system that is in
use in the industry. No commenter recommended such a system for
implementing FCPs for the TRICARE Retail Pharmacy Program.
The fourth alternative option--that the plan sponsor procure drugs
directly from manufacturers at the Federal Ceiling Price and then
distribute the drugs to retail pharmacies for use in filling
prescriptions to beneficiaries of the plan sponsor--is not an
established system in the retail prescription drug system in the United
States. It would require multiple product distribution and vast
inventory management systems wholly different from those currently in
use. No commenter recommended such a system.
The fifth alternative option, the vendor charge-back by the
wholesaler to the manufacturer, is not a prevailing method for very
large retail networks. It is in use in restricted pharmacy systems,
like military facility pharmacies, where all beneficiaries are eligible
for prescriptions filled with the drugs covered by the discounted price
so that the vendor charge back can be applied to all drugs moving from
the wholesaler to the retailer. In the large, non-restricted retail
pharmacy network context, only a relatively small fraction of
prescription drug customers of those pharmacies are TRICARE
beneficiaries and only this fraction of prescriptions is covered by the
discounted price. In such a context, a business process between
manufacturers and wholesalers does not accommodate the manufacturer's
desire to restrict the discount to a small subset of eventual retail
customers.
The sixth alternative option, the replacement inventory approach,
is also not a prevailing method for very large retail networks because
of a need to track and audit the retail transactions to prevent
diversion of discounted drugs to customers not eligible for the
discounts. DoD uses this method with its mail order contractor, which
is a single pharmacy, rather than a network of more than 60,000
pharmacies.
Thus, the manufacturer refund method is most consistent with
established business practice in the retail prescription drug pharmacy
system in the United States, and no commenter recommended an approach
other than manufacturer rebates or refunds to apply FCPs to the TRICARE
Retail Pharmacy Program.
(c) Assessment of options for practicability of administration
concerning how FCPs are applied.
The manufacturer refund method of implementation is practicable
administratively. Before the enactment of NDAA-08, the TRICARE Retail
Pharmacy Program implemented a system of Voluntary Agreements for
Retail Rebates (VARRs), which utilized the same apparatus as the refund
program under the 2009 final rule. That apparatus includes an
accounting through the data systems of prescriptions provided to
TRICARE beneficiaries, submission of these data to manufacturers on a
quarterly basis, procedures to reconcile any differences or
disagreements between the manufacturer's data and DoD's data, and
rebate/refund payments by the manufacturer to DoD of the amount in
excess of the target price. Under the VARRs system the target price was
that established in the agreement, which could be above or below the
FCP. Under the final rule, the target price may be no higher than the
FCP, but may be lower. The administrative apparatus, however, is the
same. It is well established and works effectively.
The first alternative option is that instead of pharmaceutical
manufacturers refunding to DoD the amounts in excess of the Federal
Ceiling Prices, manufacturers could reduce the price on retail pharmacy
program pharmaceuticals prospectively until the excess proceeds were
reimbursed. This option is not practicable to administer because there
is no existing apparatus to identify the very small (relatively) subset
of drugs that will end up as prescriptions paid for by TRICARE out of
the entire set of drugs that begin the distribution chain through a
sale by a manufacturer to a wholesaler. No commenter suggested that
such a system would be practicable.
The second alternative option--that TRICARE reduce payments to
retail pharmacies by an amount corresponding to a manufacturing cost
discount of 24% below the non-Federal average manufacturer price,
expecting other arrangements among retail pharmacies, wholesalers, and
manufacturers to accommodate those participants' commercial viability--
is also not practicable. DoD has no way to manage the implementation of
such other arrangements. It is not practicable to expect retail
pharmacies to absorb an economic loss in order the remain in the
TRICARE Retail Pharmacy Network. No commenter suggested that this
alternative option is administratively practicable.
The third alternative option is that DoD authorize pharmacies to
purchase drugs directly from manufacturers earmarked for TRICARE
beneficiaries and to do so at the FCP. For example, the retail pharmacy
could be authorized to order off the Federal Supply Schedule. This is
not practicable because the retail pharmacies would then have to have a
separate inventory management system to ensure that those drugs are
used only for prescriptions provided to TRICARE beneficiaries, and not
diverted to individuals covered by other health plans for whom the
manufacturer is not required to provide drugs at the FCP. DoD has no
administrative apparatus to ensure that 60,000 network pharmacies
strictly maintain such a separate inventory management system,
especially considering that TRICARE covered prescriptions are generally
a very small fraction of the retail pharmacy's total prescription drug
business. No commenter commented that this option would be
administratively practicable.
The fourth alternative option--that DoD procure drugs directly from
manufacturers at the Federal Ceiling Price and then distribute the
drugs to retail pharmacies for use in filling prescriptions to
beneficiaries of the plan sponsor--is not practicable because DoD would
need to establish a separate distribution system to deliver drugs to
more than 60,000 retail pharmacies. Further, such pharmacies would then
have to have a separate inventory management system to ensure that
these drugs are not provided to non-TRICARE eligible people. It is not
practicable for DoD to create separate distribution and inventory
management systems for the vast prescription drug retail pharmacy
industry, particularly because TRICARE beneficiaries make up a very
small portion of the United States population served by that industry.
No commenter commented that this alternative option is administratively
practicable.
The fifth alternative, the vendor charge-back approach, is not
practicable in a very large retail pharmacy network because there is no
practicable system for DoD to ensure that the earmarked drugs from the
wholesaler would be handled by many thousands of retail pharmacies for
the exclusive benefit of TRICARE beneficiaries. No commenter
recommended this approach as administratively practicable.
The sixth alternative, the replacement inventory approach, is also
not practicable in a very large retail pharmacy network because DoD has
no system to audit the inventory replacement for many thousands of
retail pharmacies. No commenter recommended this approach.
Thus, the manufacturer refund method is the most administratively
practicable system for implementing
[[Page 63391]]
FCPs for the TRICARE Retail Pharmacy Program and no commenter suggested
that any other system was administratively practicable. In fact, with
the exception of arguments made in litigation, the pharmaceutical
industry has consistently endorsed manufacturer rebates or refunds as
the practicable method of administration, and no commenter recommended
otherwise.
(d) Conclusion on how FCPs are applied.
DoD's conclusion on how FCPs should apply to the TRICARE Retail
Pharmacy Program is that they should apply through a system of
manufacturer refunds to DoD of the amount the manufacturer received
above the FCP. That system is in harmony with the statute and
legislative history, consistent with best business practice in the
industry, and administratively practicable. None of the alternative
options is comparable based on these criteria and no commenter
suggested that any of them be adopted.
3. When do FCPs apply?
This was not one of the issues that the Court ordered DoD to
reconsider as a matter of DoD's discretionary judgment. However, it was
an issue addressed in the Court's ruling and it was the subject of
several comments. This issue is: When do FCPs begin to apply to
prescriptions filled in the TRICARE retail pharmacy program? The
Court's order of November 30, 2009, granted judgment in favor of DoD
``with respect to the Defense Department's conclusion that 10 U.S.C.
1074g(f) required that the Federal Ceiling Prices apply to any TRICARE
retail pharmacy prescriptions filled on or after January 28, 2008.''
The Court's opinion stated ``the precise question is whether the
statute's requirement that TRICARE drug prescriptions are subject to
the Federal Ceiling Prices--however implemented by the agency--is
active on January 28, 2008, or only once DoD promulgates a rule to
implement the statute.'' The Court answered the question by explaining
that ``the statutory language is clear: `With respect to any
prescription filled on or after the date of the enactment of [NDAA-
08],' pharmaceuticals purchased through the retail pharmacy program are
subject to the Federal Ceiling Prices.'' (Emphasis in the Court's
opinion.) The opinion further concludes that ``no retroactivity problem
is presented'' by the final rule because all parties ``were aware on
January 28, 2008, that 10 U.S.C. 1074g(f) applied the Federal Ceiling
Prices to retail pharmacy program transactions as of that date.''
DoD understands the Court's conclusion to be that the starting date
for applying FCPs to TRICARE Retail Pharmacy Program prescriptions is
established by statute and it is not a matter of DoD's discretion in
the final rule to establish a different starting date. DoD agrees with
this conclusion. However, commenters on behalf of the pharmaceutical
industry argue that DoD can and should establish a starting date on or
after the effective date of the final rule. Therefore, assuming for the
sake of completeness of the rule making record that DoD has discretion
to establish a starting date for applying FCPs as of the effective date
of the final rule, rather than the effective date of the statute, DoD
has considered that alternative option.
(a) Assessment of options for harmony with the statute and
legislative history concerning when FCPs apply.
Under this criterion, DoD agrees with the Court that ``the
statutory language is clear.'' Moreover, the primary statement of
legislative history of this section of NDAA-08, the accompanying
Conference Report, expressly stated Congressional intent that ``the
implementation date'' is ``the date of enactment of this Act.''
(H.Conf. Rept. No. 110-477, page 938.) Thus, the option of a start date
as of the date of enactment of NDAA-08 is in harmony with the statute
and legislative history, and the alternative option of a starting date
as of the effective date of the final rule is not.
(b) Assessment of options for consistency with best business
practice concerning when FCPs apply.
Pharmaceutical industry commenters asserted that standard business
practice requires that arrangements concerning price be adopted
prospectively and that it is unfair to change those arrangements after
the fact. However, DoD believes this standard was met with respect to
NDAA-08 because everyone was on notice that FCPs applied as of the date
of enactment. Further, DoD sent a ``Dear Pharmaceutical Manufacturer''
letter to each manufacturer three days after the date of enactment of
the law, providing them with a copy of the applicable section as well
as DoD's interpretation making clear that DoD believed the law to apply
to manufacturer prices as of the date of statutory enactment. Moreover,
the proposed rule also stated that FCPs apply to any prescription
filled on or after the date of statutory enactment. It is also
noteworthy that NDAA-08 followed a four year running debate between the
government and the pharmaceutical industry over the issue of applying
FCPs to the TRICARE Retail Pharmacy Program, a debate that included
prior litigation and Congressional consideration. Thus, no one
associated with the pharmaceutical industry could have been unaware.
Finally on this point, DoD included in the final rule a procedure for
waiver or compromise of refund amounts to permit consideration of any
particular circumstances where implementation as of the statutory
effective date would be insupportable. On this criterion, DoD concludes
that the statutory effective date option is consistent with best
business practice of establishing prospective terms for transactions.
(c) Assessment of options for practicability of administration
concerning when FCPs apply.
Based on the data systems that have been in use and the pre-
existing VARRs process for retail rebates, both options--the statutory
effective date option and the final rule effective date option--are
administratively practicable.
(d) Conclusion on when FCPs apply.
On this issue, DoD has concluded that the statutory effective date
option is the right one to adopt because it is in harmony with the
statute and legislative history, whereas the final rule effective date
option is not; it is consistent with best business practice; and it is
on par with the final rule effective date option regarding
administrative practicability.
4. To what do FCPs apply?
This also is not an issue the Court ordered DoD to reconsider as a
matter of DoD's discretion. However, commenters on behalf of the
pharmaceutical industry recommended that DoD reconsider it. The
industry recommendation is that DoD not apply FCPs to all covered
prescriptions filled through the TRICARE Retail Pharmacy Program and
paid for by DoD, but only those prescriptions covered by prospective
procurement contracts between DoD and the manufacturer or comparable
agreements having certain attributes they associate with procurement
contracts. The Court's November 30, 2009, opinion rejected the argument
that the statute required a procurement-type contract as a precondition
to applying FCPs, but considered this option to be within the scope of
DoD's discretionary judgment as to implementation method.
DoD has considered two options on the issue of what prescriptions
are to be covered by manufacturer refunds: (1) All covered
prescriptions; and 2) only those prescriptions covered by procurement-
type contracts or agreements. The 2009 final rule applied to all
covered drug prescriptions, subject to a voluntary opt-out and a
waiver/compromise process. Covered
[[Page 63392]]
drugs for this purpose are drugs covered by 38 U.S.C. 8126, paid for by
DoD, introduced by the manufacturer into the normal supply chain, and
dispensed to a TRICARE beneficiary by a network retail pharmacy. The
final rule excluded drugs not covered by Sec. 8126, drugs for which
TRICARE was not primary payer, drugs provided through the 340B program,
and (based on legislative history and administrative practicability)
non-network pharmacy dispensed drugs.
The procurement-type contract option, as presented by commenters,
would require a prospective written contract or agreement stating that
in return for FCP-based refunds/rebates the manufacturer would receive
favorable positioning on the uniform formulary, and that prescriptions
filled in the TRICARE Retail Pharmacy Program for drugs not covered by
such an agreement would be exempt from FCPs. (Some commenters asserted
that the 2008 proposed rule was consistent with this option, but this
is incorrect as both the 2008 proposed rule and the 2009 final rule
required the application of FCPs to any prescription filled on or after
the date of enactment and incorporated the regulatory overpayment
recovery procedures of 32 CFR 199.11 for all such prescriptions.)
(a) Assessment of options for harmony with the statute and
legislative history concerning FCP applicability.
As noted above, the statute provides:
With 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.
Section 8126 of title 38 is titled, ``Limitation on prices of drugs
procured by Department and certain other Federal agencies.'' The
Department referred to is the Department of Veterans Affairs and the
other agencies include DoD. The statute requires that as a condition of
doing business under covered Federal programs, ``[e]ach manufacturer of
covered drugs shall enter into a master agreement with the Secretary''
of Veterans Affairs under which ``with respect to each covered drug of
the manufacturer procured by a [covered] Federal agency * * * the
manufacturer has entered into and has in effect a pharmaceutical
pricing agreement * * * under which the price charged * * * may not
exceed 76 percent of the non-Federal average manufacturer price.'' The
price referred to in this statute is the Federal Ceiling Price. The
purpose and effect of section 8126, as applied to DoD, is that all
covered drugs procured by DoD are subject to the Federal Ceiling Price.
Pharmaceutical industry commenters asserted that the ``procurement
of drugs'' phrase in Sec. 1074g(f) requires implementation through
procurement-type contracts. They commented that this position is
supported by the construct of Sec. 8126, which requires an agreement
and that the application of FCPs without such a contract would be to
treat the TRICARE Retail Pharmacy Program better than other elements of
DoD under Sec. 8126. They further pointed to Sec. 8126(g)(2), which
they say freezes the statute's requirements in place as of the date of
enactment, giving the resulting pharmaceutical pricing agreement
precedence over later statutory enactments and their implementing
regulations.
DoD does not agree that these views are in harmony with the statute
and legislative history. The ``procurement of drugs'' phrase in Sec.
1074g(f) is to identify the applicability of Sec. 8126 and to
establish the applicability of Sec. 8126 as the purpose for which the
TRICARE retail pharmacy program shall be treated as an element of DoD.
That purpose is to bring it within the scope of the requirement of
Sec. 8126 ``to the extent necessary to ensure that pharmaceuticals
paid for by'' DoD through the TRICARE retail pharmacy program ``are
subject to the'' FCP ``pricing standards.'' The ``procurement of
drugs'' phrase does not in Sec. 1074g(f) describe the transaction to
which the FCP requirement attaches. Rather, the transaction to which
the FCP requirement attaches is clearly established as a ``prescription
filled'' for a drug ``paid for by'' DoD ``provided by'' a program
pharmacy ``to eligible covered beneficiaries.'' The procurement-type
contract option requires that the phrase ``procurement of drugs'' in
Sec. 1074g(f) be treated as the TRICARE Retail Pharmacy Program
transaction to which the FCP requirement attaches. This would treat the
statute as if it read:
With respect to any procurement of drugs by the TRICARE retail
pharmacy program [rather than ``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 procured by the
TRICARE retail pharmacy program [rather than ``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.
This is not in harmony with what Congress actually enacted. It would
not cover ``any prescription filled,'' but only some prescriptions
filled. It would not ``ensure that'' pharmaceuticals paid for by DoD
are subject to FCPs; it would exempt prescriptions paid for by DoD but
not covered by a procurement-type contract. And it would not provide
that the retail pharmacy program ``shall'' be treated as an element of
DoD for purposes of FCP applicability, only that it may be so treated
if that is provided for in a procurement-type contract.
The pharmaceutical industry's argument on Sec. 8126(g)(2) also
does not have weight. What this paragraph actually says is that a
manufacturer meets its obligation under that law if it ``establishes to
the satisfaction of the Secretary'' of Veterans Affairs that the
manufacturer is complying with Sec. 8126 as enacted, without regard to
a future legislative change in that section. DoD has seen no evidence
that the Secretary of Veterans Affairs has determined that anything in
Sec. 1074g(f) or the 2009 final rule is beyond the scope of Sec.
8126. Rather, it is DoD's understanding that the position of the
Secretary of Veterans Affairs continues to be that the TRICARE Retail
Pharmacy Program is covered by Sec. 8126. (In the preamble to the 2009
final rule, DoD suggested that DoD and the pharmaceutical industry
should ``agree to disagree'' on whether the TRICARE Retail Pharmacy
Program is covered directly by Sec. 8126 since that issue was beyond
the scope of the final rule and DoD authority, and it would be a moot
point if manufacturers complied with the final rule.)
Nor is the procurement-type contract option in harmony with the
legislative history of what Congress enacted. The Conference Report
accompanying NDAA-08 described the applicable section as a provision
``that would require that any prescription filled * * * through the
TRICARE retail pharmacy network will be covered by the Federal pricing
limits applicable to covered drugs under section 8126 of title 38,
United States Code.'' (H. Conf. Rept. 110-477, p. 938.) In addition, a
very similar provision that was passed by the Senate in its proposed
version of NDAA-07 but not finally enacted at that
[[Page 63393]]
time (``The TRICARE Retail Pharmacy Network * * * 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 * * *.'')
was described in the accompanying Senate Committee Report as a
provision to ``reaffirm a decision made by the Secretary of Veterans
Affairs on October 24, 2002, * * * that drugs purchased by the
Department of Defense through the TRICARE retail pharmacy network are
subject to the same Federal pricing limits that have long applied to
drugs purchased by the Department and provided through military
hospitals and clinics and the national mail order program.'' (S. Rept.
No. 109-254, pp. 342-43.) Thus, the all covered prescriptions option is
in harmony with the statute and legislative history; the procurement-
type contract option is not.
In addition to the pre-enactment legislative history, recent
Congressional commentary reinforces this understanding of Congressional
expectations. For example, the Senate Appropriations Committee report
accompanying the Department of Defense Appropriations Bill, 2010,
expressed concern that ``the fiscal years 2008 and 2009 budgetary
savings programmed by the Department of Defense and the Office of
Management and Budget for manufacturer refunds for TRICARE retail
pharmacy prescriptions under section 703 of the National Defense
Authorization Act for Fiscal Year 2008 have not been realized,'' and
asked for a report from DoD on implementation, ``including an
assessment of whether any additional legislation is needed to
effectuate the purposes of section 703.'' (S. Rept. No. 111-74, p.
224.) (The resulting DoD report advised that no additional legislation
is needed.) The House Appropriations Committee expressed similar
concern, noting ``the $1,000,000,000 in rebates that are currently
owed.'' (H. Rept. No. 111-230, p. 307.)
(b) Assessment of options for consistency with best business
practice concerning FCP applicability.
Commenters on behalf of the pharmaceutical industry assert that
best business practice calls for the voluntary agreement of the parties
and that only a procurement-type contract is consistent with this
practice. But the all covered prescriptions option also provides for
the voluntary agreement of the parties; no pharmaceutical manufacturer
is forced to do business with DoD under 10 U.S.C. 1074g or other
agencies under 38 U.S.C. 8126. Manufacturers make a voluntary choice to
do business with DoD under the applicable terms. The difference between
the two options is not in the nature of the voluntary participation, it
is in the terms of the voluntary participation. The procurement-type
contract option seeks more limited terms, such as that FCPs will only
apply if drugs receive preferred status under the uniform formulary,
rather than covered status. The 2009 final rule attaches FCP
applicability to a voluntary decision by the manufacturer to keep its
drugs covered by TRICARE, rather than take the opt-out opportunity
provided in the rule. Voluntariness is preserved under both options.
Under the all covered prescriptions option, preferred formulary status
is based on cost-effectiveness, which means a price no higher than the
FCP, and for drug classes that have competition among covered drugs,
generally a price below the FCP. Taking advantage of competition in
drug classes to produce prices below FCP (i.e., refunds greater than
the FCP-level refund) is more consistent with best business practice.
All of this has to do with the terms of doing business, not with the
nature of the business practice.
(c) Assessment of options for practicability of administration
concerning FCP applicability.
Both options rely upon the same implementation apparatus, so both
options are administratively practicable.
(d) Conclusion on the issue of to what do FCPs apply.
DoD has concluded that the option that all covered drug TRICARE
retail pharmacy network prescriptions are subject to FCPs is the better
option because: It is in harmony with the statute and legislative
history, while the alternative, procurement-type contract option is
not; it is more consistent with best business practice; and it is
comparable in administrative practicability.
C. Additional Issues Raised by Public Comments
What follows is a brief summary of the 2009 final rule and a
discussion of the new public comments received pertinent to those
provisions. The 2009 final rule added to section 199.21 of the TRICARE
regulation, the section governing the Pharmacy Benefits Program, a new
paragraph (q) regarding pricing standards for the retail pharmacy
program.
1. Section 199.21(q)(1).
As in paragraph (1) of the 2008 proposed rule, paragraph (1)(i) of
the 2009 final rule repeated the statutory requirement, virtually
verbatim. Like the statute, both the proposed and final rules applied
FCPs to ``any prescription filled on or after the date of the
enactment'' of the statute. Paragraph (1)(ii) was added in the 2009
final rule to state in simpler terms (similar to the primary statement
in the legislative history of Sec. 1074g(f)) DoD's interpretation of
the statute as requiring that all covered drug TRICARE Retail Pharmacy
Network prescriptions are subject to FCPs.
Applicability of FCPs to All Covered Drug Prescriptions (Para.
(q)(1)(ii))
Comment: Pharmaceutical industry commenters recommended an
exemption, which could potentially be added to this paragraph, for
prescriptions filled after January 28, 2008, but covered by pre-
existing Uniform Formulary Voluntary Agreements for Retail Refunds (UF-
VARRs) that provided for less than FCP-based discounts, the exemption
lasting as long as necessary to implement the termination clause of the
VARR. The rationale was that this would show appropriate deference to
the terms of the pre-existing agreements.
Response: For the reasons given above relating to the starting date
for applying FCPs under the statute, DoD has concluded that the final
rule should not be changed, and that it should, as the proposed rule
did, mirror the statute's applicability to ``any prescription filled on
or after the date of enactment.'' The statutory effective date, of
which everyone had notice, obviated the need for DoD to cancel the pre-
existing UF-VARRs, which also could have been canceled at any time by
the manufacturer. The applicability of FCPs on or after January 28,
2008, is not dependent on Tier 2 Uniform Formulary status or the
existence of a VARR or pricing agreement. If there is some special
circumstance regarding any particular drug, it can be addressed under
the waiver/compromise authority of paragraph (q)(3)(iii).
2. Section 199.21(q)(2).
Paragraph (q)(2) provided, similar to the proposed rule, that a
written agreement by a manufacturer to honor Federal Ceiling Prices in
the retail pharmacy network is with respect to a particular covered
drug a condition for inclusion of that drug on the uniform formulary
(Tier 2, or in the case of covered generic drugs, Tier 1) and for the
availability of that drug through retail network pharmacies without
preauthorization.
[[Page 63394]]
Preauthorization of Tier 3 Drugs (Para. (q)(2)(ii))
Comment: Pharmaceutical industry commenters recommended removal of
the requirement that drugs not covered by voluntary pricing agreements
and thus disqualified from Tier 2 uniform formulary status also become
subject to preauthorization for dispensing at the retail pharmacy. The
argument was made that this preauthorization conflicts with other
preauthorization requirements in the TRICARE Pharmacy Benefits Program
regulation.
Response: There is no conflict. There are simply two different
types of preauthorization. One type of prior authorization relates to
whether a patient needs a particular drug. The preauthorization
required under this paragraph relates to where the patient should
receive it. If the manufacturer refuses to comply with the requirement
to apply FCPs at the retail venue, TRICARE will consider other options
to meet the patient's needs, which may include dispensing that same
drug at the mail order venue.
Comment: Retail pharmacy industry commenters also recommended
elimination of the prior authorization requirement on the grounds that
it potentially shifts business from retail pharmacies to the mail order
pharmacy and that DoD should force manufacturers to honor FCPs without
disadvantaging retail pharmacies.
Response: DoD hopes it will not be necessary to rely on either Tier
3 status or the preauthorization process to reinforce the FCP
requirement under paragraph (q), but is unable at this point to forgo
the option, when needed. Therefore, this provision is retained in the
new final rule.
Inclusion of Authorized Generics as ``Covered Drugs'' (Para.
(q)(2)(iii))
Comment: Pharmaceutical industry commenters recommended exclusion
of authorized generics from the definition of covered drugs. Authorized
generics are drugs that were approved by the Food and Drug
Administration under a new drug application (NDA), rather than an
abbreviated new drug application (ANDA) under section 505(j) of the
Food, Drug, and Cosmetic Act, and are still marketed under the original
NDA approval, but are no longer single source drugs. The rationale was
that generic drug competition usually produces a low price and it is
unfair to impose an additional FCP-based discount to the authorized
generics when their competitor ANDA generics have no such requirement.
Response: With awareness of the statutory reference to ``the
pricing standards in * * * section 8126,'' the 2009 final rule
maintained the section 8126 definition of covered drugs. Covered drugs,
including authorized generics, are subject to FCPs under section 8126
and are sold at the FCP (or FSS price if lower) for prescriptions
filled at military facility pharmacies and the mail order pharmacy
program. In regard to the economics of authorized generics,
manufacturers still have marketing options to protect profits. In any
event, the Department of Veterans Affairs, the lead agency for FCP
implementation government-wide, has not recommended exemption of
authorized generics as covered drugs, and DoD has concluded that
following the lead agency's policy on this is advisable. Therefore, the
new final rule is unchanged on this point.
Exclusion of 340B Drugs (Para. (q)(2)(iii)(E))
Comment: Pharmaceutical industry commenters recommended the
continued exclusion of 340B program drugs.
Response: This provision is unchanged in the new final rule. They
are excluded.
Comment: Commenters on behalf of specialty providers under the 340B
program agreed that 340B covered drugs should be excluded from covered
drugs under this rule, but expressed concern that this might be causing
their newly restricted ability to participate in the TRICARE Retail
Pharmacy Network.
Response: DoD is aware of and seeking to address issues between
some of these providers, such as comprehensive hemophilia treatment
centers, and TRICARE's Pharmacy Benefits Manager contractor. These
issues, however, are not affected by the exclusion of 340B program
drugs from this final rule and thus are outside the scope of this
rulemaking.
3. Section 199.21(q)(3).
Paragraph (q)(3) of the 2009 final rule addressed refund
procedures. As under the proposed rule, paragraph (q)(3)(iii) of the
2009 final rule stated that a refund due under the final rule is
subject to section 199.11 of the TRICARE regulation, the section that
governs ``overpayments recovery.'' The 2009 final rule was revised to
elaborate that the applicability of section 199.11 brings with it a
procedure for a manufacturer to request waiver or compromise of a
refund amount. Also, in response to pharmaceutical industry complaints
that the rule would make the imposition of FCPs involuntary on
manufacturers since they could not control the flow of their products
through the supply chain that end up as prescriptions filled under the
TRICARE Retail Pharmacy Program, the 2009 final rule was revised to
state that a request for waiver may also be premised on the voluntary
removal by the manufacturer in writing of a drug from coverage in the
TRICARE Pharmacy Benefit Program. Based on such a voluntary opt-out,
DoD could block the prescription at the retail network pharmacy and in
other transactions pertinent to the military facility pharmacies and
mail order pharmacy, thus preserving the manufacturer's voluntary
choice on whether it wants to participate in the TRICARE Pharmacy
Benefits Program.
FCP Calculation (Para. (q)(3)(ii))
Comment: Pharmaceutical industry commenters suggested that DoD
apply an alternative Federal Ceiling Price under this rule, one that
would not include the computation under Sec. 8126(d)(1) that is
referred to as the ``FSS Max Cap.''
Response: Under paragraph (q)(3)(ii), DoD applies the FCP as it is
calculated and provided by the Department of Veterans Affairs (DVA).
The DVA's calculations in second and subsequent years of multi-year
contracts take into account prices reflected in those contacts,
referred to as the FSS Max Cap. In those years the resulting FCP is
applicable to all covered drug contracts and applicable to the TRICARE
Retail Pharmacy Program. Based on this comment, DoD considered asking
DVA to produce an alternative set of FCPs for the TRICARE Retail
Pharmacy Program that would exclude any impact of the FSS Max Cap.
Assuming the technical feasibility of this option, it was considered
under the same criteria used for the major issues assessed in this
rulemaking reconsideration process. With respect to consistency with
the statute and legislative history, there is clear legislative history
that Congress intended ``that drugs purchased by the Department of
Defense through the TRICARE retail pharmacy network are subject to the
same federal pricing limits that have long applied to drugs purchased
by the Department and provided through military hospitals and clinics
and the national mail order program.'' S. Rept. 109-254, pp. 342-343.
The use of two sets of FCPs--one for military facilities and the mail
order program and a different set for the retail program--would
conflict with this Congressional intent. In addition, with respect to
administrative practicability, there is currently only one set of FCPs
calculated by DVA, and while it is not impossible to calculate an
alternative set of FCPs, doing so for one segment of
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covered drugs for one of the ``big four'' agencies covered by section
8126 could create confusion and administrative difficulties. Further,
in connection with implementation of the 2009 final rule to date and
the voluntary agreements made under it, DoD is unaware of any request
from a manufacturer for use of anything other than the normal FCPs, nor
of any request from a manufacturer for a waiver or compromise of the
refund amount based on the possible effect on the FCPs of the FSS Max
Cap. Were there special circumstances relating to application of the
FCP in a particular case, the compromise process would be the
appropriate one to find a remedy. Based on these considerations, it is
DoD's judgment that the single set of FCPs calculated by DVA under
section 8126 apply to the TRICARE Retail Pharmacy Program as they do to
the TRICARE Pharmacy Benefits Program generally.
Overpayments Recovery Procedures (Para. (q)(3)(iii)(A))
Comment: Pharmaceutical industry commenters recommended deletion of
the provision stating that the normal TRICARE overpayments recovery
procedures of 32 CFR 199.11 would apply to retail refunds due under
Sec. 199.21(q), or revision to limit overpayments recovery to refunds
owed under contracts. Comments argued that properly constructed
voluntary refunds do not fit the purposes and scope of Sec. 199.11.
Response: DoD believes Sec. 199.11, which has been incorporated by
reference since the proposed rule, is properly used for all refunds
under Sec. 199.21(q), all of which are based on the voluntary decision
of the manufacturer to participate in TRICARE. Section 199.11 applies
to ``erroneous payments,'' which are ``expenditures of government funds
which are not authorized by law or this part'' (i.e., Part 199, the
TRICARE Regulation). Because this final rule is intended, in the terms
used in the statute, to ensure that covered prescriptions are subject
to the FCP pricing standards, it fits Sec. 199.11 very well to view
the amount paid that exceeds FCPs as an expenditure of government funds
in excess of the amount authorized by the TRICARE regulation,
specifically Sec. 199.21(q), which in turn is authorized by the
statute.
Opt-Out Provision (Para. (q)(3)(iii)(C))
Comment: Pharmaceutical industry commenters recommended that
remedial actions continue to be on a drug-by-drug basis, rather than a
company-by-company basis, to give manufacturers flexibility on deciding
whether they wish to do business with TRICARE.
Response: The opt-out provision continues to be on a drug-by-drug
basis. A manufacturer is not required by this regulation to remove all
of its drugs from TRICARE coverage in order to remove any. However, DoD
makes no representation that selective opt-outs would be consistent
with the manufacturer's obligations under its Sec. 8126 master
agreement, a matter which is outside DoD's authority.
Comment: Pharmaceutical industry commenters commented that
manufacturers should be given notice and an opportunity to opt-out in
order to avoid liability for prescriptions filled prior to the
effective date of the regulation.
Response: The opt-out opportunity has been available since the
effective date of the 2009 final rule, May 26, 2009. The 2009 final
rule provided for ``the voluntary removal by the manufacturer in
writing of a drug from coverage in the TRICARE Pharmacy Benefit
Program.'' To date, no manufacturer has opted out. DoD takes this as a
voluntary agreement to participate in the TRICARE Pharmacy Benefits
Program under the terms of the TRICARE Regulation. The opt-out
opportunity remains available under this new final rule, and it may be
coupled with a request for waiver or compromise.
Comment: Pharmaceutical industry commenters asserted that in the
absence of a voluntary agreement between a manufacturer and DoD, a
refund requirement conflicts with the Unfunded Mandates Reform Act.
Response: This program is neither unfunded nor a mandate. The opt-
out provision ensures that the application of FCPs is a function of the
voluntary decision of manufacturers to participate in the TRICARE
Pharmacy Benefits Program under the terms required or authorized by
statute, including 10 U.S.C. 1074g(f). The economic impact of this
regulation is not in the nature of a mandatory expenditure by the
private sector, but in the nature of reduced Federal expenditures for
pharmaceuticals paid for by DoD under TRICARE, which is precisely what
Congress intended.
Comment: Pharmaceutical industry commenters argued that the opt-out
authority should allow manufacturers to opt out of the Retail Pharmacy
Program only, rather than opt out of the entire TRICARE Pharmacy
Benefits Program. They argued that if they opt out of the TRICARE
Pharmacy Benefits Program completely, this will put them in violation
of their master agreement with the Department of Veterans Affairs,
which includes a requirement to make their products available under the
Federal Supply Schedule to DoD.
Response: Again, this is a discussion over terms of voluntary
participation in the TRICARE Pharmacy Benefits Program, not over the
nature of voluntary participation. If the pharmaceutical industry is
correct that 39 U.S.C. 8126(g)(2) (which is discussed above) freezes
their Sec. 8126 obligations as of the original enactment of that law
and that this TRICARE rule creates new obligations beyond the scope of
Sec. 8126, they will be able to remain in compliance with Sec. 8126
by demonstrating a willingness to adhere to the original scope of
obligations, including a willingness to make their drugs available
under the Federal Supply Schedule. If the industry is not correct about
that (which DoD believes to be the case), manufacturers remain free
voluntarily to decide whether they want to do business with all
agencies covered by Sec. 8126 under the terms Congress has established
or authorized. For doing business with DoD, DoD believes the terms of
voluntary participation are properly set as honoring FCPs in all three
venues of the TRICARE Pharmacy Benefits Program--military facility
pharmacies, mail order pharmacy, and retail pharmacy network. DoD
understands that manufacturers would prefer more favorable terms, but
these terms are in harmony with the statute and legislative history,
consistent with best business practice, and administratively
practicable.
4. Section 199.21(q)(4), Remedies.
Paragraph (q)(4) of the 2009 final rule provided that in the case
of the failure of a manufacturer of a covered drug to make or honor an
agreement under paragraph (q), DoD may take any action authorized by
law. This paragraph was unchanged from the 2008 proposed rule.
Comment: Pharmaceutical industry commenters recommended deletion of
the provision stating that in the case of the failure of a manufacturer
``to make'' an agreement under paragraph (q), DoD may take any other
action authorized by law on the grounds that the only appropriate
remedy would be under breach of contract rules concerning an agreement
that had been voluntarily made.
Response: DoD believes the authority to take any action authorized
by law, which has been included since the proposed rule, is properly
used for all obligations under the regulation, all of which are based
on the voluntary
[[Page 63396]]
decision of the manufacturer to participate in the TRICARE Retail
Pharmacy Program. However, the point is well taken that under the rule,
a failure ``to make'' an agreement is not an action that should be
treated as noncompliance nor be the subject of a remedy. This is
because the applicability of FCPs is not dependent upon the making of
an agreement. Rather, it is a function of the voluntary decision of a
manufacturer to continue to participate in the TRICARE Pharmacy
Benefits Program, rather than to take advantage of the opt-out
opportunity. Therefore, this paragraph has been revised. The revised
paragraph no longer premises a remedy on a failure ``to make or honor
an agreement under'' paragraph (q), but on a failure ``to honor a
requirement of'' paragraph (q) or ``to honor an agreement under''
paragraph (q). An accompanying revision is also made to paragraph
(q)(3)(iii)(B) to state that during the pendency of a request for
waiver or compromise of a refund amount, the matter that is the subject
of the request will not be treated as a failure to honor a requirement
of paragraph (q).
5. Section 199.21(q)(5).
Finally, paragraph (q)(5) of the 2009 final rule authorized
beneficiary transition provisions to protect beneficiary access to
particular pharmaceuticals even when manufacturers act to avoid the
application of FCPs. No comments were received during this new comment
period regarding this provision.
D. Provisions of New Final Rule
DoD is readopting the 2009 final rule, with one substantive change
and another accompanying revision. The substantive change is to
paragraph (q)(4) concerning remedies. An accompanying change is to
paragraph (q)(3)(iii)(B) concerning the effect of a pending request for
waiver or compromise of a refund amount. Following is a summary of the
new final rule.
Section 199.21(q) establishes pricing standards for the retail
pharmacy program. Paragraph (1) restates the statutory requirement.
With respect to any prescription filled on or after the statutory
effective date (January 28, 2008), all covered drug TRICARE retail
pharmacy network prescriptions are subject to Federal Ceiling Prices.
Paragraph (1) is unchanged from the 2009 final rule. Paragraph (1)
answers the question, ``When do FCPs apply?'' They apply to all
prescriptions filled on or after the date of statutory enactment.
Paragraph (2) states that a manufacturer's written agreement to
honor the requirement of paragraph (1) is a condition for including a
drug on the preferred tier (Tier 2, or in the case of covered drugs
that are generics, Tier 1) of the uniform formulary and the
availability of that drug through retail network pharmacies without
preauthorization. As under the 2008 proposed rule and the 2009 final
rule, an agreement to honor FCPs does not guarantee preferred tier
placement because FCPs are a ceiling price and the cost-effectiveness
standard for Tier 2 (and in some cases Tier 1) placement may result in
the FCP being insufficiently cost-effective in particular drug classes.
Also as under the 2008 proposed rule and the 2009 final rule, the
application of FCPs is not conditional on preferred formulary status.
Paragraph (2) also defines covered drugs for purposes of the
applicability of FCPs. Paragraph (2) is unchanged from the 2009 final
rule. This paragraph (2), along with paragraph (3), answer the
questions, ``Who bears the burden of FCPs?'' and ``How do FCPs apply?''
Manufacturers bear the burden of FCPs, and they apply through
manufacturer refunds.
Paragraph (3) establishes refund procedures. Such procedures may be
included in an agreement under paragraph (2) or a separate agreement or
default to the standard overpayments recovery procedures of the TRICARE
regulation, Sec. 199.11. Also under Sec. 199.11, a manufacturer may
request a waiver or compromise of a refund amount due. While a waiver
or compromise request is pending, the matter that is the subject of the
request will not, under revised wording of this paragraph, be treated
as a failure to honor a requirement of paragraph (q) for purposes of
DoD pursuing any remedies under paragraph (4). Also under paragraph
(3), in addition to other grounds for waiver or compromise, a waiver
request may be based on the voluntary removal by the manufacturer in
writing of a drug from coverage in the TRICARE Pharmacy Benefits
Program. This paragraph (3) answers the question, ``To what do FCPs
apply?'' They apply to all covered drugs the manufacturer has
voluntarily chosen to keep in the TRICARE Pharmacy Benefits Program.
Paragraph (4) provides that remedies may be based on any action
authorized by law. Paragraph (4) is changed from the 2009 final rule.
The revised paragraph no longer promises a remedy on a failure ``to
make or honor an agreement under'' paragraph (q), but on a failure ``to
honor a requirement of'' the regulation ``or to honor an agreement
under'' the regulation. This change reinforces that a manufacturer's
failure ``to make an agreement'' is not subject to a remedial action
because the applicability of FCPs is not dependent upon the ``making''
of an agreement. Rather, a remedy could be based on a failure to honor
a requirement under the final rule for a manufacturer who has made the
voluntary decision to participate in the TRICARE Pharmacy Benefits
Program by not exercising the opt-out opportunity.
Paragraph (5) authorizes special beneficiary transition provisions
for the continued availability of pharmaceuticals to beneficiaries.
Paragraph (5) is unchanged from the 2009 final rule.
E. Regulatory Procedures
Executive Order 12866, ``Regulatory Planning and Review''
Executive Order (EO) 12866 requires that a comprehensive regulatory
impact analysis be performed on any economically significant regulatory
action, defined primarily as one that would result in an effect of $100
million or more in any one year. The DoD has examined the economic,
legal, and policy implications of this final rule and has concluded
that it is an economically significant regulatory action under section
3(f)(1) of the EO. The economic impact of applying Federal Ceiling
Prices to the TRICARE Retail Pharmacy Network is in the form of
reducing the prices of drugs paid for by DoD in the retail pharmacy
component of the TRICARE Pharmacy Benefits Program, making them
comparable to the prices paid by DoD in the Military Treatment Facility
and Mail Order Pharmacy components of the program.
A recent Government Accountability Office Report, ``DoD Pharmacy
Program: Continued Efforts Needed to Reduce Growth in Spending at
Retail Pharmacies,'' April 2008 (GAO-08-327), found that DoD's drug
spending ``more than tripled from $1.6 billion in fiscal year 2000 to
$6.2 billion in fiscal year 2006'' and that retail pharmacy spending
``drove most of this increase, rising almost nine-fold from $455
million to $3.9 billion and growing from 29 percent of overall drug
spending to 63 percent.'' DoD concurs in these findings. The principal
economic impact of this final rule is to moderate somewhat the rate of
growth in spending in the retail pharmacy component of the program.
At various times since the enactment of NDAA-08, DoD estimated the
reduced spending associated with applying Federal Ceiling Prices to the
Retail Pharmacy Network. DoD funds the Military Health System through
two separate mechanisms. One is the
[[Page 63397]]
Defense Health Program (DHP) appropriation, which pays for health care
for all beneficiaries except those who are also eligible for Medicare.
DoD-funded health care for DoD beneficiaries who are also eligible for
Medicare is paid for by way of an accrual fund called the Medicare-
Eligible Retiree Health Care Fund (MERHCF) under 10 U.S.C. chapter 56.
Funds are paid into the MERHCF from military personnel appropriations
and the general U.S. treasury. At the time of the 2008 proposed rule,
for example, DoD estimated FY-10 reduced spending of $388 Million for
the DHP and $404 for the MERHCF. At the time of the 2009 final rule,
DoD used a different estimating model and estimated much larger
savings, including for FY-10 for example, reduced spending of $761
Million for the DHP and $910 for the MERHCF. Based on experience since
issuance of the final rule and a refined estimating model, DoD now
estimates that the reduced spending will be closer to the original,
lower estimates. DoD's current estimated cost reductions from applying
Federal Ceiling Prices to the TRICARE Retail Pharmacy Network in Fiscal
Years 2010 through 2015 appear in the following table. FCP savings
estimates will continue to be updated as actual refunds are received
and estimating methodologies are refined.
Millions of Dollars
FY-2010 DHP Reduced Spending..................................... 375
FY-2010 MERHCF Reduced Spending.................................. 474
FY-2011 DHP Reduced Spending..................................... 434
FY-2011 MERHCF Reduced Spending.................................. 549
FY-2012 DHP Reduced Spending..................................... 458
FY-2012 MERHCF Reduced Spending.................................. 579
FY-2013 DHP Reduced Spending..................................... 490
FY-2013 MERHCF Reduced Spending.................................. 619
FY-2014 DHP Reduced Spending..................................... 523
FY-2014 MERHCF Reduced Spending.................................. 661
FY-2015 DHP Reduced Spending..................................... 560
FY-2015 MERHCF Reduced Spending.................................. 707
As a frame of reference, total TRICARE Pharmacy Benefits Program
spending is estimated to be $8.5 billion in FY-2010.
Congressional Review Act, 5 U.S.C. 801, et seq.
Under the Congressional Review Act, a major rule may not take
effect until at least 60 days after submission to Congress of a report
regarding the rule. A major rule is one that would have an annual
effect on the economy of $100 million or more or have certain other
impacts. This final rule is a major rule under the Congressional Review
Act. As noted above, applying Federal Ceiling Prices to the TRICARE
Retail Pharmacy Network will reduce DoD spending on pharmaceuticals by
more than $100 million per year.
Sec. 202, Public Law 104-4, ``Unfunded Mandates Reform Act''
This rule does not contain a Federal mandate that may result in the
expenditure by State, local and tribal governments, in aggregate, or by
the private sector, of $100 million or more (adjusted for inflation) in
any one year. The economic impact of this regulation, described above,
is not in the form of a mandated expenditure by a State, local, or
tribal government or the private sector, but by reduced Federal
expenditures.
Public Law 96-354, ``Regulatory Flexibility Act'' (5 U.S.C. 601)
The Regulatory Flexibility Act (RFA) requires that each Federal
agency prepare and make available for public comment, a regulatory
flexibility analysis when the agency issues a regulation which would
have a significant impact on a substantial number of small entities.
DoD does not anticipate that this regulation will result in changes
that would impact small entities, including retail pharmacies, whose
reimbursements are not affected by the final rule. In addition, drugs
newly subject to implementation of Federal Ceiling Prices under the
final rule represent less than 2% of manufacturers' prescription drug
sales. Therefore, this final rule is not expected to result in
significant impacts on a substantial number of small entities.
Public Law 96-511, ``Paperwork Reduction Act'' (44 U.S.C. Chapter 35)
This final rule contains information collection requirements
subject to the Paperwork Reduction Act (PRA) of 1995 (44 U.S.C. 3501-
3511). This consists of responding to the periodic TMA report of the
TRICARE prescription utilization data needed to calculate the refund.
This information collection has been approved with OMB Control Number
0720-0032. No person is required to respond to, nor shall any person be
subject to a penalty for failure to comply with, a collection of
information subject to the requirements of the PRA, unless that
collection of information displays a currently valid OMB Control
Number.
Executive Order 13132, ``Federalism''
This final rule does not have federalism implications, as set forth
in Executive Order 13132. This rule does not have substantial direct
effects on the States; the relationship between the National Government
and the States; or the distribution of power and responsibilities among
the various levels of Government.
List of Subjects in 32 CFR Part 199
Claims, Health care, Health insurance, Military personnel, Pharmacy
benefits.
0
Accordingly, 32 CFR part 199 is amended as follows:
PART 199--[AMENDED]
0
1. The authority citation for part 199 continues to read as follows:
Authority: 5 U.S.C. 301; 10 U.S.C. chapter 55.
0
2. Section 199.21(q) is revised to read as follows:
Sec. 199.21 Pharmacy benefits program.
* * * * *
(q) Pricing standards for retail pharmacy program--(1) Statutory
requirement. (i) As required by 10 U.S.C. 1074g(f), with 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 DoD for
purposes of the procurement of drugs by Federal agencies under 38
U.S.C. 8126 to the extent necessary to ensure pharmaceuticals paid for
by the DoD 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.
(ii) Under paragraph (q)(1)(i) of this section, all covered drug
TRICARE retail pharmacy network prescriptions are subject to Federal
Ceiling Prices under 38 U.S.C. 8126.
(2) Manufacturer written agreement. (i) A written agreement by a
manufacturer to honor the pricing standards required by 10 U.S.C.
1074g(f) and referred to in paragraph (q)(1) of this section for
pharmaceuticals provided through retail network pharmacies shall with
respect to a particular covered drug be a condition for:
(A) Inclusion of that drug on the uniform formulary under this
section; and
(B) Availability of that drug through retail network pharmacies
without preauthorization under paragraph (k) of this section.
(ii) A covered drug not under an agreement under paragraph
(q)(2)(i) of this section requires preauthorization under paragraph (k)
of this section to be provided through a retail network pharmacy under
the Pharmacy Benefits
[[Page 63398]]
Program. This preauthorization requirement does not apply to other
points of service under the Pharmacy Benefits Program.
(iii) For purposes of this paragraph (q)(2), a covered drug is a
drug that is a covered drug under 38 U.S.C. 8126, but does not include:
(A) A drug that is not a covered drug under 38 U.S.C. 8126;
(B) A drug provided under a prescription that is not covered by 10
U.S.C. 1074g(f);
(C) A drug that is not provided through a retail network pharmacy
under this section;
(D) A drug provided under a prescription which the TRICARE Pharmacy
Benefits Program is the second payer under paragraph (m) of this
section;
(E) A drug provided under a prescription and dispensed by a
pharmacy under section 340B of the Public Health Service Act; or
(F) Any other exception for a drug, consistent with law,
established by the Director, TMA.
(iv) The requirement of this paragraph (q)(2) may, upon the
recommendation of the Pharmacy and Therapeutics Committee, be waived by
the Director, TMA if necessary to ensure that at least one drug in the
drug class is included on the Uniform Formulary. Any such waiver,
however, does not waive the statutory requirement referred to in
paragraph (q)(1) that all covered TRICARE retail network pharmacy
prescriptions are subject to Federal Ceiling Prices under 38 U.S.C.
8126; it only waives the exclusion from the Uniform Formulary of drugs
not covered by agreements under this paragraph (q)(2).
(3) Refund procedures. (i) Refund procedures to ensure that
pharmaceuticals paid for by the DoD that are provided by retail network
pharmacies under the pharmacy benefits program are subject to the
pricing standards referred to in paragraph (q)(1) of this section shall
be established. Such procedures may be established as part of the
agreement referred to in paragraph (q)(2), or in a separate agreement,
or pursuant to Sec. 199.11.
(ii) The refund procedures referred to in paragraph (q)(3)(i) of
this section shall, to the extent practicable, incorporate common
industry practices for implementing pricing agreements between
manufacturers and large pharmacy benefit plan sponsors. Such procedures
shall provide the manufacturer at least 70 days from the date of the
submission of the TRICARE pharmaceutical utilization data needed to
calculate the refund before the refund payment is due. The basis of the
refund will be the difference between the average non-federal price of
the drug sold by the manufacturer to wholesalers, as represented by the
most recent annual non-Federal average manufacturing prices (non-FAMP)
(reported to the Department of Veterans Affairs (VA)) and the
corresponding FCP or, in the discretion of the manufacturer, the
difference between the FCP and direct commercial contract sales prices
specifically attributable to the reported TRICARE paid pharmaceuticals,
determined for each applicable NDC listing. The current annual FCP and
the annual non-FAMP from which it was derived will be applicable to all
prescriptions filled during the calendar year.
(iii) A refund due under this paragraph (q) is subject to Sec.
199.11 of this part and will be treated as an erroneous payment under
that section.
(A) A manufacturer may under section 199.11 of this part request
waiver or compromise of a refund amount due under 10 U.S.C. 1074g(f)
and this paragraph (q).
(B) During the pendency of any request for waiver or compromise
under paragraph (q)(3)(iii)(A) of this section, a manufacturer's
written agreement under paragraph (q)(2) shall be deemed to exclude the
matter that is the subject of the request for waiver or compromise. In
such cases the agreement, if otherwise sufficient for the purpose of
the condition referred to in paragraph (q)(2), will continue to be
sufficient for that purpose. Further, during the pendency of any such
request, the matter that is the subject of the request shall not be
considered a failure of a manufacturer to honor a requirement or an
agreement for purposes of paragraph (q)(4).
(C) In addition to the criteria established in Sec. 199.11, a
request for waiver may also be premised on the voluntary removal by the
manufacturer in writing of a drug from coverage in the TRICARE Pharmacy
Benefit Program.
(iv) In the case of disputes by the manufacturer of the accuracy of
TMA's utilization data, a refund obligation as to the amount in dispute
will be deferred pending good faith efforts to resolve the dispute in
accordance with procedures established by the Director, TMA. If the
dispute is not resolved within 60 days, the Director, TMA will issue an
initial administrative decision and provide the manufacturer with
opportunity to request reconsideration or appeal consistent with
procedures under section 199.10 of this part. When the dispute is
ultimately resolved, any refund owed relating to the amount in dispute
will be subject to an interest charge from the date payment of the
amount was initially due, consistent with section 199.11 of this part.
(4) Remedies. In the case of the failure of a manufacturer of a
covered drug to honor a requirement of this paragraph (q) or to honor
an agreement under this paragraph (q), the Director, TMA, in addition
to other actions referred to in this paragraph (q), may take any other
action authorized by law.
(5) Beneficiary transition provisions. In cases in which a
pharmaceutical is removed from the uniform formulary or designated for
preauthorization under paragraph (q)(2) of this section, the Director,
TMA may for transitional time periods determined appropriate by the
Director or for particular circumstances authorize the continued
availability of the pharmaceutical in the retail pharmacy network or in
MTF pharmacies for some or all beneficiaries as if the pharmaceutical
were still on the uniform formulary.
Dated: October 7, 2010.
Morgan F. Park,
Alternate OSD Federal Register Liaison Officer, Department of Defense.
[FR Doc. 2010-25712 Filed 10-14-10; 8:45 am]
BILLING CODE 5001-06-P