Interesting Contratemps

TRICARE is a Defense Department health care program for military dependents and retirees. In 2004, TRICARE remodelled its pharmacy benefits program by subcontracting with Express Scripts for a retail pharmacy network and a mail order pharmacy. The Veteran Affairs National Acquisition Center, which administers the the Federal [Government] Supply Schedule for pharmaceuticals, sent a letter to brand name drug manufacturers ordering them to rebate to the Defense Department the difference between the retail price paid at the retail pharmacy and the "federal ceiling price" because the Express Script's pharmacy network represented a depot contracting system.

The U.S. Court of Appeals explains in The Coalition for Government Procurement v. Secretary of Veterans' Affairs, __ F.3d ___ (Sept. 11, 2006) that

The Veterans Health Care Act (VHCA) was enacted in 1992 to reduce the cost of prescription drugs used in the VA health care benefits programs. As seen, the VHCA is codified at scattered sections of Title 38. The VHCA includes 38 U.S.C. § 8126, which provides in relevant part:

(a) Each manufacturer of covered drugs shall enter into a master agreement with the Secretary [of the VA] under which— (1) beginning January 1, 1993, the manufacturer shall make available for procurement on the Federal Supply Schedule of the General Services Administration each covered drug of the manufacturer;
(2) with respect to each covered drug of the manufacturer procured by a Federal agency described in subsection (b) on or after January 1, 1993, 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 . . . under which the price charged during the one-year period beginning on the date on which the agreement takes effect may not exceed 76 percent of the non-Federal average manufacturer price (less the amount of any additional discount required under subsection (c)) during the one-year period ending one month before such date (or, in the case of a covered drug for which sufficient data for determining the non-Federal average manufacturer price during such period are not available, during such period as the Secretary considers appropriate), except that such price may nominally exceed such amount if found by the Secretary to be in the best interests of the Department or such Federal agencies[.]
Thus, section 8126(a) limits the price that manufacturers of “covered drugs” may charge for drugs “procured by a Federal agency.” Section 8126(b)(2) lists DOD as a “Federal agency” to which section 8126(a) applies. Accordingly, section 8126(a) requires that manufacturers charge DOD a percentage of the non-federal average manufacturer price (“non-FAMP”) for “covered drugs.” [Fn. The non-FAMP is defined as “the weighted average price of a single form and dosage unit of the drug that is paid by wholesalers in the United States to the manufacturer, taking into account any cash discounts or similar price reductions during that period.” 38 U.S.C. § 8126(h)(5) (2000).]

This price limit is also called the federal ceiling price (“FCP”).

As seen, section 8126 limits “covered drugs” to those obtained through one of two sources: the drugs must be (1) “listed on the Federal Supply Schedule” or (2) “purchased under depot contracting systems.” The Federal Supply Schedule (“FSS”) of the General Services Administration authorizes the VA to award and manage contracts with pharmaceutical companies in order to obtain low prices. See 41 U.S.C. § 259(b)(3) (2000).

This is how the Government "negotiates" pharmaceutical prices.

Needless to say, the drug manufacturers hit the roof when they received the VA order, and they challenged its legality. The VA agreed to suspend enforcement of the order until a court ruling. In its September 11 opinion, the Federal Circuit ruled that the VA had failed to follow proper Administrative Procedure Act rules when it issued the order without first engaging in notice and comment rule making. The Court did not consider the legality of the substance of the order. The ball is back in the VA's court.