Big Pharma Loses Protest to New Price Ceiling

(CN) - Drugmakers must refund the government for higher prescription costs at retail pharmacies compared with prices the Defense Department pays directly, the D.C. Circuit ruled.

Since 1992, a federal ceiling price has given the U.S. government a discount of at least 24 percent on the retail price of most prescription drugs available to service members through the Defense Department's Tricare health care program.

This cap applied to drugs that the Defense Department procured directly and distributed to service members at military treatment facilities or through Tricare's mail-order pharmacy.

But it did not cover prescriptions that service members filled at a retail pharmacies within the Tricare network, such as a CVS or Walgreens. Thus the Defense Department paid the full retail cost at this point of service, at a price tag of $3.9 billion in 2006, up from just $445 million in 2000.

Congress changed this with the passage of section 703 of the National Defense Authorization Act for Fiscal Year 2008, making the price cap standard at all three points of Tricare service.

A pharmaceutical trade group known as the Coalition for Common Sense in Government Procurement filed suit in 2008. It argued the price caps should not have been imposed without the written agreement of manufacturers.

The coalition also challenged the retroactive rebate requirement, which would require members to refund the Defense Department the price differential for any prescription filled after the law was enacted on Jan. 28, 2008. Drugmakers say the rebate will cost the industry more than $500 million.

After some struggle in the U.S. District Court for the District of Columbia, the secretary of defense issued a supplemental rule in 2010 that explained the rationale for the refund requirements. The court eventually upheld the secretary's rule as a reasonable interpretation of the statute, and also sided with the government on retroactivity.

A three-judge panel of the D.C. Circuit affirmed Friday

The coalition failed to offer any alternative to the secretary's actions that would fulfill section 703's mandate that "any prescription filled" under Tricare "be subject to the federal ceiling price," according to the ruling.

Though the coalition claimed that the defense secretary had acted unreasonably, the court found otherwise.

"As the District Court explained, 'it was the passing of the statute, not the promulgation of a regulation that determined when prescriptions became subject to [federal ceiling prices],'" Judge David Tatel wrote for the panel.

"Section 703 could hardly be clearer: 'With respect to any prescription filled after January 28, 2008, the Tricare retail pharmacy program shall be' subject to section 8126's 'pricing standards,'" he added (emphases in original). "This language leaves no doubt that Section 703's effective date is the date of enactment - January 28, 2008 - and that the triggering event for rebate liability is the filling of a prescription."

He continued: "The only question, then, is whether section 703 unambiguously imposes price caps on manufacturers. Although section 703 nowhere mentions manufacturers, it cross-references section 8126's pricing standards - standards that apply to manufacturers and expressly exclude 'wholesale distributors of drugs or a retail pharmacy.'"

"In other words, federal ceiling prices apply," he said.

"Furthermore, although the final regulation allows the secretary to waive refund liability, no pharmaceutical manufacturer has yet sought a waiver," Tatel added. "Given that Congress clearly imposed refund liability for any prescription filled after section 703's effective date, pharmaceutical manufacturers who believe they should not have to pay for drugs already in the supply chain on January 28, 2008, should seek a waiver from the department, not this court."

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