Civilian Health and Medical Program of the Uniformed Services (CHAMPUS)/TRICARE: Inclusion of TRICARE Retail Pharmacy Program in Federal Procurement of Pharmaceuticals, 11279-11293 [E9-5702]

Agencies

• Office of the Secretary
• DEPARTMENT OF DEFENSE

[Federal Register Volume 74, Number 50 (Tuesday, March 17, 2009)]
[Rules and Regulations]
[Pages 11279-11293]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-5702]


=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF DEFENSE

Office of the Secretary

32 CFR Part 199

[DoD-2008-HA-0029; 0720-AB22]


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.

-----------------------------------------------------------------------

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 of the NDAA, 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. NDAA-08 was 
enacted on January 28, 2008. The statute requires implementing 
regulations. This final rule is to implement section 703 of the NDAA-
08.

DATES: Effective Date: This final rule is effective May 26, 2009.

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 of the NDAA, 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. NDAA-08 was enacted on January 
28, 2008. The statute requires implementing regulations.
    The Veterans Health Care Act (VHCA) of 1992, codified at 38 U.S.C. 
8126, established Federal Ceiling Prices (FCPs) of covered 
pharmaceuticals (requiring a minimum 24% discount off non-Federal 
average manufacturing prices--``non-FAMP'') procured by the four 
designated agencies covered in the Act: Department of Veterans Affairs 
(VA), DoD, Coast Guard, and the Public Health Service/Indian Health 
Service. The non-FAMP is the average price paid to the manufacturer by 
wholesalers (or, if there are insufficient wholesale sales, others who 
purchase directly from the manufacturer) for drugs distributed to non-
federal purchasers, taking into account any cash discounts or similar 
reductions given to those purchasers. The VA administers the VHCA 
discount program on behalf of the four specified agencies. The DoD 
consulted closely with the VA in the development of this final rule and 
also, consistent with 10 U.S.C. 1073, consulted with the Departments of 
Health and Human Services and Homeland Security.
    The TRICARE Pharmacy Benefits Program operates under the authority 
of 10 U.S.C. 1074g. It provides outpatient drugs to TRICARE 
beneficiaries through Military Treatment Facility (MTF) pharmacies, the 
TRICARE mail order pharmacy program (TMOP), and a TRICARE Retail 
Pharmacy program consisting of TRICARE Retail Pharmacy Network and 
retail non-network pharmacies. As implemented, the new statutory 
requirement will only apply to pharmaceuticals paid for by DoD and 
provided to eligible beneficiaries through the TRICARE Retail Pharmacy 
Network. There are approximately 60,000 retail pharmacies in the Retail 
Pharmacy Network. Section 1074g requires DoD to establish a Uniform 
Formulary of pharmaceutical agents, selected based on clinical and cost 
effectiveness, as evaluated by the DoD Pharmacy and Therapeutics (P&T) 
Committee, reviewed by the Beneficiary Advisory Panel, and decided by 
the Director, TRICARE Management Activity (TMA). The Uniform Formulary 
has three tiers: Tier 1 contains generic drugs; Tier 2 brand name 
Uniform Formulary drugs; and Tier 3 non-Formulary drugs. Drugs in all 
three tiers are covered by the TRICARE Pharmacy Benefits Program, but 
cost sharing and other program differences encourage the use of generic 
drugs and Uniform Formulary brand name drugs.
    The TRICARE Retail Pharmacy Network is managed under a single 
Pharmacy Benefits Manager contract,

[[Page 11280]]

linked to the DoD Pharmacy Benefits Office, and enabled by a management 
information system to verify beneficiary eligibility, check for 
potential drug interactions, and authorize payment for the 
pharmaceuticals used to fill the beneficiary's prescription. The 
management information system also records data on all prescriptions 
filled through the Retail Pharmacy Network, permitting an accurate 
accounting of all retail network pharmaceuticals paid for by DoD under 
the TRICARE Pharmacy Benefits Program. Since the beginning of the 
Federal Ceiling Price program, outpatient pharmaceuticals provided by 
DoD through MTF pharmacies have been subject to FCPs, as have those 
under the TMOP program since it began. Implementation of similar 
applicability to the TRICARE Retail Pharmacy Network component of the 
Program is the subject of this final regulation.

B. Provisions of the Proposed Rule

    The proposed rule, published for public comment July 25, 2008, 
proposed to add a new paragraph (q) to 32 CFR 199.21. Paragraph (q)(1) 
repeated the new statutory requirement. Paragraph (q)(2) provided that 
an agreement by a manufacturer to honor the FCPs in the Retail Pharmacy 
Network component of the Pharmacy Benefits Program is a condition of 
inclusion of a drug on the Uniform Formulary. Further, it stated that a 
drug not under such an agreement would require preauthorization to be 
provided through the Retail Pharmacy Network. In addition, it indicated 
that drugs covered by this requirement are TRICARE Retail Pharmacy 
Network provided drugs that are covered by the VA's FCP program, except 
any prescription for which the TRICARE Pharmacy Benefits Program is the 
second payer. While DoD proposed in this rulemaking to enter into 
voluntary agreements with manufacturers that would make prescriptions 
filled on or after the date of enactment of NDAA-08 subject to FCPs, 
the Department solicited comment regarding any other appropriate and 
legally permissible implementation approach and/or date from which to 
begin making prescriptions filled in the Retail Pharmacy Network 
subject to FCPs. DoD was specifically interested in the legal 
justification, including under section 703 of NDAA-08, for any 
alternative implementation approaches and/or dates that commenters may 
propose.
    Proposed paragraph (q)(3) established refund procedures to, in the 
words of the statute, ``ensure that 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'' 
of the FCP program. The refund procedures will, 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 submission by TMA to the manufacturer 
(initially expected to be on a quarterly basis) 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-FAMP (reported to VA) and the FCP or, in the discretion of 
the manufacturer, the difference between FCP and direct commercial 
contract sales prices specifically attributable to TRICARE paid 
pharmaceuticals, determined for each applicable National Drug Code 
(NDC) listing. Further, this paragraph of the proposed rule provided 
that a refund due under the statute is subject to the overpayment 
recovery procedures of Sec.  199.11 of the TRICARE regulation.
    Finally, proposed paragraph (q)(4) stated that in the case of the 
failure of a manufacturer of a covered drug to make or honor an 
agreement to ensure that DoD pays no more than the FCP for covered 
drugs provided through the TRICARE Retail Pharmacy Network component of 
the program, the Director, TMA, in addition to other actions referred 
to in the rule, may take any other action authorized by law.

C. Public Comments

    The proposed rule was published in the Federal Register July 25, 
2008, for a 60-day comment period. DoD received 16 public comments. 
Most of these were from or on behalf of the pharmaceutical industry. 
Several were from or on behalf of the retail pharmacy sector. 
Significant comments are discussed below.

1. Statutory Requirement (Paragraph (q)(1))

a. Statutory Interpretation
    Comments: A number of comments by or on behalf of the 
pharmaceutical industry expressed the view that 10 U.S.C. 1074g(f), 
which was added by section 703(a) of NDAA-08, does not require that 
prescriptions filled in the TRICARE Retail Pharmacy Network are subject 
to Federal Ceiling Prices. Rather, they say, it authorizes DoD to use 
procedures of the TRICARE Pharmacy Benefits Program to encourage drug 
manufacturers to enter into agreements to apply FCPs to Retail Pharmacy 
Network prescriptions. Some commenters said the statute only 
establishes a general ``goal'' of applying FCPs and that the references 
in the preamble to the proposed rule to voluntary agreements with 
manufacturers should be taken to signal that the statute has no effect 
absent a manufacturer's agreement. On the other hand, commenters 
representing retail pharmacies strongly supported the interpretation 
that FCPs now apply equally in all three TRICARE Pharmacy Benefits 
Program venues.
    Response: DoD does not agree with the interpretation of the statute 
recommended by the pharmaceutical industry representatives. 10 U.S.C 
1074g(f) provides:

    (f) Procurement of pharmaceuticals by TRICARE retail pharmacy 
program. 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.

Setting aside the start date issue, which will be discussed below, DoD 
interprets the statute as follows. First, DoD interprets the phrase, 
``the pricing standards in such section 8126'' to mean Federal Ceiling 
Prices. This is based on the text of 38 U.S.C. 8126(a) and (b), which 
provide that ``[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'' 
the Department of Veterans Affairs, the Department of Defense, the 
Public Health Service, or the Coast Guard, ``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 * * * may not exceed 76 percent of the non-Federal average 
manufacturer price.'' The end result of the pricing calculations 
required by section 8126 is referred to as the Federal Ceiling Price.
    Second, DoD interprets the phrase ``treated as an element of the 
Department of Defense for purposes of

[[Page 11281]]

the procurement of drugs by Federal agencies under section 8126'' to 
mean treated the same as a covered drug directly procured by DoD. The 
phrase does not require that the retail pharmacy actually was involved 
in a procurement by a Federal agency under section 8126 or that the 
retail pharmacy was acting as an agent of a Federal agency. An 
interpretation that would require such an actual procurement by DoD is 
unsupportable because the words ``shall be treated as'' would be 
rendered meaningless, as would the entire section since any such actual 
procurement was undisputedly already covered within section 8126. In 
addition, DoD interprets this phrase as precluding an interpretation of 
the statute that would apply FCPs to what the retail pharmacy may be 
paid by DoD. In referring to the procurement of drugs by Federal 
agencies under section 8126, the statute is addressing manufacturers' 
prices, which are the focus of section 8126. Retail pharmacies are 
specifically excluded from the definition of ``manufacturer'' in 38 
U.S.C. 8126(h)(4).
    Third, DoD interprets the phrase ``pharmaceuticals paid for by the 
Department of Defense that are provided by pharmacies under the program 
to eligible covered beneficiaries under this section'' to mean 
pharmaceuticals paid for through the TRICARE Retail Pharmacy Program. 
More specifically, DoD interprets the provision as limited to the 
TRICARE Retail Pharmacy Network because prescriptions filled by non-
network retail pharmacies are not subject to the pre-screening and 
authorization process incorporated into the information systems 
referred to in 10 U.S.C. 1074g and relied upon by DoD to document DoD 
payment for the specific prescriptions covered and because of 
legislative history on this point, specifically, a Conference Report 
statement (discussed below).
    Fourth, DoD interprets ``any prescription filled'' to mean all 
prescriptions filled, regardless of whether the drugs are on the 
TRICARE Uniform Formulary or are non-formulary drugs. Provisions of the 
rule making a manufacturer's agreement to honor Federal Ceiling Prices 
in the Retail Pharmacy Network a condition for Uniform Formulary status 
in no way suggests that the statutory provision has such a limited 
scope.
    Taken together, DoD interprets 10 U.S.C. 1074g(f) to mean that all 
TRICARE Retail Pharmacy Network prescriptions shall be treated the same 
as drugs procured directly by DoD for purposes of the Federal Ceiling 
Price program to the extent necessary to ensure that pharmaceuticals 
provided under those prescriptions are subject to Federal Ceiling 
Prices. Stated even more simply, DoD interprets 10 U.S.C. 1074g(f) to 
mean that all covered drug TRICARE Retail Pharmacy Network 
prescriptions are subject to Federal Ceiling Prices.
    This interpretation is almost a verbatim restatement of the primary 
statement of legislative history concerning 10 U.S.C. 1074g(f). The 
Conference Report accompanying the legislation described it 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. This 
simplified restatement of the statutory requirement has been added to 
paragraph (q)(1).
    Comment: Some commenters representing the pharmaceutical industry 
recommended that instead of establishing regulatory requirements for 
benchmark pricing, DoD should pursue voluntary negotiations with 
manufacturers to reduce costs. Some commenters said that applying 
Federal Ceiling Prices in the Retail Pharmacy Program would hurt 
millions of other Americans because drug companies will raise prices to 
make up their reduced profits from DoD sales, and that retail refunds 
will cause DoD to push patients to retail pharmacies where their co-
payments are higher. On the other hand, comments from the retail 
pharmacy sector expressed approval for equalizing ingredient costs 
across all TRICARE Pharmacy Benefits Program venues.
    Response: While there are many policy arguments for and against 
various potential strategies for reducing the dramatically increasing 
costs of the TRICARE Pharmacy Program, the issue in this rule making is 
implementing the statutory requirement of section 703, under which all 
covered TRICARE Retail Pharmacy Network prescriptions are subject to 
Federal Ceiling Prices. DoD will continue voluntary negotiations 
concerning prices, but does not have the authority to agree to prices 
above Federal Ceiling Prices. It may be noteworthy that over the past 
20 years, Congress has enacted and DoD has implemented through 
regulations (32 CFR 199.14) a long series of payment reforms for 
TRICARE, including payment limits for acute care hospitals, psychiatric 
hospitals, hospital outpatient services, partial hospitalization 
programs, substance abuse treatment programs, ambulatory surgery 
centers, skilled nursing facilities, residential treatment centers, 
hospice programs, home health agencies, physicians and other individual 
health care professionals, durable medical equipment, and military 
treatment facility and mail order program pharmaceuticals. The last 
significant segment of the TRICARE program to be covered by payment 
reform is the $4.5 Billion Retail Pharmacy Network program.
b. Relationship Between 10 U.S.C. 1074g(f) and the Master Agreements 
Under 38 U.S.C. 8126
    Comment: A number of comments from or on behalf of the 
pharmaceutical industry expressed the view that section 1074g(f) has no 
relationship to the VA Master Agreements under 38 U.S.C. 8126 and that 
therefore the final rule would also have no relationship. Some of these 
commenters also stated that under section 8126(g), their Master 
Agreement rights and obligations were frozen as of November 4, 1992, 
and cannot be enlarged by any subsequent enactment, including 10 U.S.C. 
1074g(f).
    Response: DoD does not agree with this opinion, but has endeavored 
to construct a rule that could stand on common ground between the view 
that the Master Agreements encompass the TRICARE Retail Pharmacy 
Network and the view that they utterly do not. This disagreement has 
some history. As noted above, section 8126 includes ``depot contracting 
systems'' within the scope of Federal Ceiling Price coverage. The term 
``depot'' is defined in section 8126(h)(3) to include ``a centralized 
commodity management system through which covered drugs procured by an 
agency'' are ``delivered directly from the commercial source to the 
entity using such covered drugs.'' Pharmacy Benefits Program reforms 
adopted by DoD in response to 10 U.S.C. 1074g included restructured 
management of the Retail Pharmacy Program, including the establishment 
of a Retail Pharmacy Network of pharmacies linked to DoD through the 
Pharmacy Data Transaction Service required by section 1074g(e). This 
led to: A 2002 determination by the Secretary of Veterans Affairs that 
the restructuring, when completed, would make drugs provided by the 
Retail Pharmacy Network subject to Federal Ceiling Prices; a 2004 Dear 
Manufacturer letter from the Department of Veterans Affairs requiring 
manufacturers to refund to DoD costs above the FCPs; and a legal 
challenge in a case called Coalition for Common Sense in Government 
Procurement v. Secretary of Veterans Affairs, 464 F. 3d 1306 (Fed.Cir. 
2006). In that case, the Federal Circuit Court of

[[Page 11282]]

Appeals set aside the VA's action on the grounds that it should have 
been taken through notice and comment rulemaking; the Court did not 
reach the merits of the Secretary's interpretation of the ``depot'' 
definition as covering the TRICARE Retail Pharmacy Network.
    Fifteen days after the Court decision, the Conference Report on the 
National Defense Authorization Act for Fiscal Year 2007 (NDAA-07) 
explained that the House-Senate Conference Committee considered but did 
not adopt a Senate-passed provision, which was quite similar to section 
703 of NDAA-08, to ``clarify'' the underlying issue of the Secretary's 
interpretation of section 8126: ``The conferees concluded that there is 
no need for additional legislation at this time because prescriptions 
dispensed by the Department of Defense Retail Pharmacy Program qualify 
for discounted prices under section 8126.'' H. Conf. Rept. 109-702, p. 
772. In other words, the conferees on NDAA-07 agreed with the 
determination of the Secretary of Veterans Affairs. It is a reasonable 
inference that the comparable conferees for NDAA-08, in again 
considering a Senate-passed provision, decided to enact into law an 
affirmation of the determination of the Secretary of Veterans Affairs 
and the full Congress agreed.
    With respect to the section 8126(g) argument, DoD understands the 
VA view to be that section 8126 already encompassed coverage of a depot 
contracting system such as the TRICARE Retail Pharmacy Network program, 
and that therefore it is not limited by section 8126(g), and DoD agrees 
with that view. Thus, there is a basis to conclude that Congress 
affirmed the determination of the Secretary of Veterans Affairs that 
the TRICARE Retail Pharmacy Network program was already covered by 38 
U.S.C. 8126, and required that determination to be implemented as of 
the date of enactment of NDAA-08. This issue, however, remains a matter 
of controversy. The determination of the Secretary of Veterans Affairs, 
with which DoD has always strongly agreed, has never been withdrawn, 
nor has it been further acted upon, and there was no judicial 
resolution.
    Based on this history, DoD decided to propose a rule that would 
allow the agencies and pharmaceutical companies to ``agree to 
disagree'' on that issue and seek common ground on a regulation 
centered on incentives within the TRICARE Pharmacy Benefits Program and 
encouraging voluntary, separate agreements between manufacturers and 
DoD, independent of the Master Agreements, under which manufacturers 
would agree to make TRICARE Retail Pharmacy Network prescriptions 
subject to Federal Ceiling Prices. That DoD considers these to be 
voluntary agreements does not indicate that DoD believes there is no 
legal obligation in the background. It means that, as with most laws, 
voluntary action consistent with the law is far preferable to reliance 
on enforcement action. It also means that, if there is voluntary 
agreement, whatever uncertainties there are about the existence or 
scope of potential enforcement actions can be set aside as moot. DoD 
contacts with pharmaceutical companies led DoD to believe that most 
companies might find this approach acceptable. Therefore, both the 
proposed and final rule focus primarily on DoD program elements and DoD 
market share for implementing the requirement that covered TRICARE 
Retail Pharmacy Network prescriptions are subject to Federal Ceiling 
Prices. The only reference in the rule to any matter outside the scope 
of the TRICARE program is the reservation by DoD of rights to pursue as 
a remedy (paragraph (q)(4)) ``any other action authorized by law.'' The 
scope of any such other actions is a matter that need not and, because 
it potentially involves agencies other than DoD, cannot be settled in 
this rule making.
c. Relationship Between the FCP Statutory Requirement and Other 
Statutory Requirements of 10 U.S.C. 1074g
    Comment: Several commenters addressed the relationship between the 
new subsection (f) of section 1074g, which established the requirement 
that covered Retail Pharmacy Network prescriptions shall be subject to 
FCPs, and other provisions of the statute, such as the requirement (in 
subsection (a)(2)(A)) that the Uniform Formulary shall assure the 
availability of pharmaceutical agents in the complete range of 
therapeutic classes and the requirement (in subsection (a)(2)(D)) that 
no pharmaceutical agent may be excluded from the Uniform Formulary 
except upon the recommendation of the Pharmacy and Therapeutics 
Committee. Some commenters argued that there are limitations on the 
applicability of FCPs. Several comments from representatives of retail 
pharmacies expressed agreement with the policy of the statute and the 
proposed rule in making Retail Pharmacy Network prescriptions subject 
to FCPs, noting that this would equalize ingredient prices between 
retail pharmacies and the TRICARE Mail Order Pharmacy program, and thus 
eliminate any need for TRICARE policies that encourage use of TMOP over 
retail pharmacies. Another commenter noted a prior statute that 
referred to ``best business practices of the private sector'' and 
suggested this limited the applicability of Federal Ceiling Prices.
    Response: DoD interprets the interaction of section 1074g(f) and 
these provisions of 1074g(a) to be that cost-effectiveness 
determinations of the P&T Committee are now based on both a relative 
standard and a fixed standard. The relative standard is the cost-
effectiveness of the drug relative to other drugs in the class. The 
fixed standard is that a drug cannot be considered cost effective if 
its price exceeds the maximum price allowed by law, the FCP. Thus, the 
P&T Committee will recommend Tier 3 (non-Formulary) status for any drug 
not covered by a manufacturer's agreement to honor FCPs for Retail 
Pharmacy Network prescriptions. However, there is a potential conflict 
with the requirement to ensure that all pharmacy classes are 
represented on the Uniform Formulary in the event that no drug in a 
class is covered by a manufacturer's agreement to honor FCPs. To deal 
with that possibility, even though remote, DoD has added a subparagraph 
to this part of the final rule to state that the requirement for Tier 2 
status to be conditioned on a manufacturer's agreement to honor FCPs 
for Retail Pharmacy Network prescriptions may, upon the recommendation 
of the P&T Committee, be waived to ensure that at least one drug in the 
drug class is included on the Uniform Formulary (Tier 1 or Tier 2). It 
must be understood, however, that any such waiver does not waive the 
statutory requirement that Retail Network Pharmacy prescriptions are 
subject to FCPs, only the usual regulatory requirement of exclusion 
from the Uniform Formulary of drugs not covered by agreements.
    Based on these interpretations of the statute, the TMA will ask 
manufacturers to sign agreements to honor FCPs in Retail Pharmacy 
Network prescriptions. On or soon after the effective date of the final 
rule, separate from the usual practice of individual drug class reviews 
of both clinical and cost effectiveness, the P&T Committee will 
determine whether drugs are or are not covered by such agreements. A 
drug that is on the Uniform Formulary and is covered by such an 
agreement will be continued on the Uniform Formulary for the time 
being, pending the next review of the drug class. A drug that is on the 
Uniform Formulary (Tier 2) but not covered by such an agreement will be 
recommended for Tier 3, subject to the requirement for maintaining

[[Page 11283]]

representation on Tiers 1 or 2 for all drug classes. A drug that is on 
Tier 3 that is covered by such an agreement will be subject to review 
at a later time to determine if it should be changed to Tier 2.
    Regarding the issue of preserving incentives for use of TMOP, as 
permitted by 10 U.S.C. 1074g, copayment amounts are currently lower in 
TMOP than in retail pharmacies for the purpose of encouraging TMOP use. 
Possible future changes to this are outside the scope of this rule 
making process. With respect to the comment about the prior statute 
that referred to ``best business practices of the private sector,'' 
this reference was in section 703 of the National Defense Authorization 
Act for Fiscal Year 1999, Public Law 104-261. The reference was in the 
context of a requirement for DoD to submit a plan to Congress for 
redesign of the military pharmacy system. This predates the primary 
statute that now governs the TRICARE Pharmacy Benefits Program, 10 
U.S.C. 1074g, as well as the 2008 amendment on Federal Ceiling Prices. 
Whatever might be associated with the general notion of best business 
practices of the private sector, it does not limit the applicability of 
the later enacted statutory specification that all covered TRICARE 
Retail Pharmacy Network prescriptions are subject to Federal Ceiling 
Prices.
d. Start Date for FCP Coverage of Prescriptions Filled
    Comments: All commenters representing the pharmaceutical industry 
argued that the final rule should state that only prescriptions filled 
on or after the effective date of the final rule are subject to FCPs, 
and that prescriptions filled on or after the effective date of the 
statute (January 28, 2008) and prior to the effective date of the final 
rule should not be subject to FCPs. In support of this position, these 
commenters cited legal precedents generally disfavoring retroactive 
application of regulations unless there is very clear legal requirement 
for retroactive application, including Bowen v. Georgetown Univ. Hosp., 
488 U.S. 204, 208 (1988). They argued that the fact that the statute 
required regulations to be issued supports the view that implementation 
of the statute was conditioned on the regulations; the fact that they 
could not be issued instantaneously, as Congress seemed to expect, does 
not obviate the need for regulations before the statutory requirement 
could apply. They further argued that because 10 U.S.C. 1074g(f) does 
not expressly address refunds, a refund requirement can only be 
established by regulation and by a contract or agreement, which cannot 
be retroactive. Also in response to the request in the proposed rule 
for legal justification, including under section 703 of NDAA-08, for 
any alternative implementation dates commenters may propose, a number 
of commenters argued that the statutory phrase, ``[w]ith respect to any 
prescription filled on or after the date of the enactment of the 
National Defense Authorization Act for Fiscal Year 2008,'' should be 
construed as precluding any applicability to prescriptions filled prior 
to that date, not as requiring applicability as of that date. On the 
other hand, comments from representatives of retail pharmacies strongly 
supported the provision of the proposed rule incorporating the 
statutory date of applicability of FCPs in the retail network of 
January 28, 2008.
    Response: The legal standard applicable to a question regarding 
impermissible retroactivity of a regulation is well summarized in 
National Mining Ass'n v. Dept. of Labor, 292 F.3d 849, 859 (D.C. Cir. 
2002):

    The general legal principles governing retroactivity are 
relatively easy to state, although not as easy to apply. An agency 
may not promulgate retroactive rules absent express congressional 
authority. Bowen v. Georgetown Univ. Hosp., 488 U.S. 204, 208 
(1988). A provision operates retroactively when it ``impairs rights 
a party possessed when he acted, increases a party's liability for 
past conduct, or imposes new duties with respect to transactions 
already completed.'' Landgraf v. USI Film Prods., 511 U.S. 244, 280, 
(1994). In the administrative context, a rule is retroactive if it 
```takes away or impairs vested rights acquired under existing law, 
or creates a new obligation, imposes a new duty, or attaches a new 
disability in respect to transactions or considerations already 
past.''' Nat'l Mining Ass'n v. United States Dep't of Interior, 177 
F.3d 1, 8 (D.C. Cir. 1999) (quoting Ass'n of Accredited Cosmetology 
Sch. v. Alexander, 979 F.2d 859, 864 (D.C. Cir. 1992)). The critical 
question is whether a challenged rule establishes an interpretation 
that ``changes the legal landscape.'' Id. (quoting Health Ins. Ass'n 
of Am., Inc. v. Shalala, 23 F.3d 412, 423 (D.C. Cir. 1994)).

    The rule does not create any retroactive obligation on drug 
companies. Paragraph (q)(1) simply restates the statute. The statute 
applies according to its terms and the regulation cannot modify those 
terms. The major provision of the regulation that ``changes the legal 
landscape'' is paragraph (q)(2). It requires an agreement from 
manufacturers to honor the statute as a condition of DoD Uniform 
Formulary status and unrestricted availability through the TRICARE 
Retail Pharmacy Network. This paragraph is prospective; a refusal to 
agree will not affect a drug's formulary status prior to the effective 
date of the final rule. If a drug company does not want to maintain 
formulary status and refuses to sign an agreement to honor the statute, 
the regulation does not say anything that would affect the legal rights 
and obligations of the parties--i.e., ``change the legal landscape''--
with respect to prescriptions filled between the dates of January 28, 
2008, and the effective date of the final rule.
    The question of ``retroactivity'' of the regulation should not be 
confused with the effective date of the statute. The statute commands 
that ``[w]ith respect to any prescription filled on or after the date 
of the enactment of the National Defense Authorization Act for Fiscal 
Year 2008,'' which was January 28, 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'' 38 
U.S.C. 8126 ``to the extent necessary to ensure that pharmaceuticals 
paid for by the Department of Defense that are provided by pharmacies 
under the program * * * are subject to the pricing standards in such 
section 8126.'' The statute changed the legal landscape, and did so 
prospectively. The fact that the statute also requires implementing 
regulations does not mean that the statute has no legal effect until 
implementing regulations are issued. On the contrary, the statute by 
its express terms requires that all prescriptions filled on or after 
the date of enactment ``shall'' be treated so as to ``ensure'' that 
they are subject to Federal Ceiling Prices. The Conference Report 
accompanying the proposed legislation reinforces that express statutory 
requirement:

Inclusion of TRICARE retail pharmacy program in federal procurement 
of pharmaceuticals (sec. 703)
* * * * *
    The Senate amendment contained a provision (sec. 701) that would 
require that any prescription filled on or after October 1, 2007 
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.
    The House recedes with an amendment that would change the 
implementation date from October 1, 2007 to the date of enactment of 
this Act.

H. Conf. Rept. 110-477, p. 938. The date of enactment is clearly 
established as the ``implementation date'' of the statutory 
requirement. The fact that conforming regulatory modifications are also 
required by section 703(b) does not

[[Page 11284]]

alter the fact that the statutory command to apply Federal Ceiling 
Prices to all covered drugs in Retail Pharmacy Network prescriptions 
filled on or after January 28, 2008 applies according to its explicit 
terms.

    Therefore, with respect to prescriptions filled on or after January 
28, 2008, drug companies had a right to payment at the Federal Ceiling 
Price and no more. The transaction of pharmaceuticals moving from 
manufacturer to patient, if not completed through the filling of a 
prescription before January 28, became subject to a new obligation: the 
transaction ``shall be treated'' as a DoD purchase under 38 U.S.C. 8126 
``to the extent necessary to ensure'' that the Federal Ceiling Price 
applies. With respect to the applicability of FCPs. the rule does not 
change that legal landscape, nor does it add to or subtract from that 
obligation. Under the statute, with respect to any covered TRICARE 
Retail Pharmacy Network prescriptions filled on or after January 28, 
2008, if a manufacturer received more than the Federal Ceiling Price, 
the transaction produced an overpayment and an overpayment requires a 
refund.
    The fact of the overpayment is purely a function of the statutory 
effective date, and has nothing to do with the date the Department of 
Defense asks for the refund of the overpayment or of the Uniform 
Formulary status of the drug. Separate from mandating the applicability 
of Federal Ceiling Prices to all prescriptions filled on or after 
January 28, the statute also commanded the Secretary of Defense to 
``modify the regulations under'' the TRICARE Pharmacy Benefits Program 
``to implement the requirements of'' the new subsection 1074g(f). The 
rule, when it becomes effective, will implement the requirements 
through means including agreements between manufacturers and DoD. Those 
agreements will call on manufacturers to honor the statute. Honoring 
the statute includes refunding any overpayments that accrued on or 
after January 28. Nothing in the rule and nothing in the agreements 
will operate to change the legal landscape that was created, effective 
January 28, by the statute.
    Concerning the argument that the ``with respect to any prescription 
filled on or after the date of the enactment'' clause of the statute 
should be construed as only precluding any applicability to 
prescriptions filled prior to that date, not as requiring applicability 
as of that date, DoD does not believe that is a credible 
interpretation. Had Congress intended that FCPs would apply only ``with 
respect to any prescription filled on or after the date of promulgation 
of regulations under section 703(b) of the National Defense 
Authorization Act for Fiscal Year 2008,'' Congress would have said 
that. The words chosen by Congress are quite different and cannot be 
dismissed as imprecise drafting. Further, as noted above, the 
legislative history, in the form of the Conference Report, 
unequivocally refers to the date of enactment of the statute as the 
``implementation date'' for ensuring that prescriptions filled through 
the TRICARE Retail Pharmacy Network shall be subject to Federal Ceiling 
Prices.
    DoD interprets section 703 as precluding any start date for 
applying FCPs to covered Retail Pharmacy Network prescriptions filled 
other than the date of enactment, January 28, 2008. The only legal 
authority DoD has found that would allow it to disregard the 
overpayment and/or waive the refund is the Federal Debt Collection Act 
and related statutes. In an effort to find an acceptable resolution, 
DoD has added to the final rule provisions to address requests for 
compromise or waiver of overpayment refunds under those authorities. 
These provisions are discussed below.
    Comment: In addition to the legal arguments, a number of commenters 
advanced several practical arguments and what they considered to be 
fairness arguments. One was the need to recalculate non-FAMPs if 
manufacturers' commercial sales into retail distribution between the 
statutory enactment date and the regulatory effective date have to be 
reclassified as DoD sales. Another practical problem was that if 
refunds are required for prescriptions filled throughout 2008, by the 
time refund demands are made, manufacturers will be forced to review 
and evaluate stale utilization data to determine the accuracy of the 
data. Another concern expressed was that companies already accounted 
for 2008 sales as commercial sales and reported profits based on 
regular commercial prices, and should not have to redo financial 
statements and accounting and profit reports, which would be costly and 
burdensome, especially for small companies. Commenters also cited a 
contemporaneous statement in the Congressional Record from Senator 
Nelson which they said was to the effect that section 703 was not 
intended to modify any existing agreements with drug companies, and 
that existing Uniform Formulary Voluntary Agreements for Retail Refunds 
(UF-VARRs) for amounts higher than FCPs, or other agreements pertaining 
to drugs dispensed in military hospitals and through TMOP, would be 
breached by a demand for an additional refund under the statute. In 
relation to this breach of contract argument, some commenters cited 
Winstar Corp. v. United States, 518 U.S. 839 (1996), for the 
proposition that the government's contract obligations cannot be 
reduced by subsequent legislation. Further, commenters argued that in 
the case of a drug that had previously been moved to Tier 3 because the 
manufacturer refused to offer a refund, it would be unfair to now 
require a refund for a time period for which the drug was on Tier 3.
    Response: DoD does not agree with all of these arguments, but 
believes some may have merit in relation to particular drugs. First, 
with respect to recalculating non-FAMPs, DoD understands that the 
Department of Veterans Affairs has addressed that concern, as it 
relates to the 2008 annual non-FAMP reports, by advising manufacturers 
that there is no need for reclassification of 2008 sales data to 
redesignate commercial sales as DoD sales because of section 1074g(f). 
Second, DoD believes all drug manufacturers were promptly aware of the 
enactment of section 703 and were thus on notice regarding the 
statutory date for applying FCPs to prescriptions filled. This 
situation is not like the Winstar case. In that case, the legislation 
purported to reduce the government's contract obligation after the 
contractors had already performed their part of the bargain. In this 
case, the statute changed nothing regarding transactions completed 
before January 28, 2008. And the companies were on notice as of that 
date that covered prescriptions filled on or after that date in the 
TRICARE Retail Pharmacy Network were subject to FCPs. Third, with 
respect to Senator Nelson's statement, what he said was that with 
respect to the ``section of the bill that would require that 
prescriptions dispensed through the TRICARE retail pharmacy program be 
procured at or below Federal ceiling prices,'' ``it is the intent of 
the language and the intent of the conferees not to modify the current 
master agreements.'' (153 Cong. Rec. S-15,613-14, Dec. 14, 2007.) DoD's 
consistent position, both prior to and since the enactment of section 
703, has been that the law does not require an amendment to the master 
agreements between the VA and drug manufacturers. But DoD does not 
believe there is any legislative history, including Senator Nelson's 
statement, suggesting a statutory implementation

[[Page 11285]]

date other than January 28, 2008, or making any point regarding UF-
VARRs.
    However, DoD agrees there may be merit to some of the other 
concerns that in particular circumstances concerning stale utilization 
data, prior incentive pricing agreements between DoD and drug 
manufacturers, and other situations, there may be a reasonable basis to 
waive or compromise a refund for prescriptions filled between January 
28, 2008 and the effective date of the final rule. The proposed rule 
included a paragraph ((q)(3)) stating that a refund due under paragraph 
(q) is subject to section 199.11 of the TRICARE regulation, which is 
the section of the regulation addressing overpayments recovery, 
including administration of procedures under the Federal Debt 
Collection Act and related laws for compromise or waiver of overpayment 
refunds. DoD has revised this provision of paragraph (q) to address 
specifically a request for waiver or compromise of a refund amount in 
the context of section 1074g(f) and the new 32 CFR 199.21(q). It 
provides that a manufacturer may request waiver or compromise of a 
refund amount and that during the pendency of any request for waiver or 
compromise, a manufacturer's written agreement to honor FCPs for 
covered Retail Pharmacy Network prescriptions shall be deemed to 
exclude the matter that is the subject of the request for waiver or 
compromise. 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 make or honor an agreement for purposes of 
the remedies paragraph of the regulation. In other words, a 
manufacturer can request a waiver or compromise of a refund DoD 
believes is owing on any grounds the manufacturer believes appropriate, 
and the matter that is the subject of the request will not be 
considered noncompliance with any provision of the regulation while the 
request is pending. This provision for waiver or compromise is 
available at any time, but DoD intends that it especially be available 
to address and resolve in a reasonable way issues arising from the 
period between the date of enactment of the statute and the effective 
date of the regulation.
    Thus, to give one possible example, a company might propose that if 
it agrees that for all of its covered drugs, all TRICARE retail 
pharmacy network prescriptions will prospectively be priced at or below 
Federal Ceiling Prices, it might further propose to compromise refunds 
for prescriptions filled during the period beginning January 28, 2008, 
and ending on the date this final rule becomes effective. One 
formulation for such a compromise could be to propose a date that is in 
between January 28, 2008, and the effective date of the final rule, 
proposing that DoD waive collection of refunds for prescriptions filled 
prior to that date, and for the company promptly to pay refunds for 
prescriptions filled on or after that date. (This example is merely 
illustrative and does not commit the Department of Defense to any 
response.)
    Comment: One commenter said that DoD's failure to meet the 
statutory deadline for issuing implementing regulations, which was 
December 31, 2007, did not give DoD the right to make drug 
manufacturers bear the cost of DoD's delay.
    Response: Nothing in the final rule requires manufacturers to bear 
the cost of DoD's delay in issuing final regulations. As noted above, 
section 1074g(f) requires that all covered TRICARE Retail Pharmacy 
Network prescriptions are subject to Federal Ceiling Prices, beginning 
with prescriptions filled on or after the date of enactment. Drug 
manufacturers were aware of the law and were on notice of their 
obligations. It is not clear how they were somehow prejudiced by the 
delay in issuing regulations. In some ways they benefited by the delay 
because it deferred the due date of the refund necessary to resolve the 
statutory overpayment. Nonetheless, the final rule provides any company 
that believes it has been prejudiced in some way to apply for a waiver 
or compromise of the refund necessary for prescriptions filled between 
the date of enactment and the effective date of the regulation to be 
subject to FCPs. DoD will consider all such applications and their 
supporting rationale.
     Comment: One commenter said there are constitutional limitations 
on laws that alter rights under existing contracts, and that this 
reinforced the need for not applying FCPs to prescriptions filled 
before the effective date of the regulation.
     Response: The existing contract rights referred to by this 
commenter are not identified. If the commenter is referring to the 
Master Agreements with VA, DoD does not believe they are altered by 
section 703. If the commenter means existing UF-VARRs, DoD does not 
believe section 1074g(f) is dependent on such an agreement. DoD is 
unaware of any constitutional or legal right of a vendor to sell its 
goods or services to the Federal government at a price dictated by the 
vendor. The law set a ceiling price for covered prescriptions filled in 
the TRICARE Retail Pharmacy Network, beginning on the date of 
enactment. A company that thought the statute breached an existing 
contract had the ability to mitigate the alleged contract damages by 
canceling the agreement. Even now, a company that does not wish to 
provide its drugs to the TRICARE Pharmacy Benefits Program is not 
forced to do so. If a company believes it has incurred some contract 
damages based on the enactment of section 1074g(f), it can take action 
to mitigate those damages and apply to DoD to waive or compromise any 
refund required by that law.
     Comment: Several commenters argued that applicability of Federal 
Ceiling Prices to prescriptions filled on or after the date of 
enactment but before the effective date of regulations and agreements 
would violate Health and Human Services regulations as 42 CFR 
1001.952(h)(4), which require that in order to be within a safe harbor 
from anti-kickback rules, a ``rebate'' must be ``disclosed in writing 
to the buyer at the time of sale of the initial purchase to which the 
discount applies,'' and that this can only be achieved after 
regulations and agreements are in effect. Some commenters also said 
applicability of Federal Ceiling Prices to prescriptions filled on or 
after the date of enactment but before the effective date of 
regulations and agreements would be contrary to the Sarbanes-Oxley Act 
of 2002 and accounting principles for recording anticipated payment 
liabilities.
     Response: DoD disagrees. Under section 1074g(f), DoD is the buyer 
in a sales transaction that occurs when the prescription is filled for 
a covered beneficiary by a retail network pharmacy. As of the date of 
enactment, DoD and the manufacturer both had written notice that 
Federal Ceiling Prices apply. Further, the statute clearly indicated 
that FCPs applied to prescriptions filled on or after the effective 
date, giving companies and their accountants notice of the anticipated 
payment liability. Nevertheless, if there were a case in which a 
manufacturer is charged with an illegal kickback or some other 
violation as a result of a refund under section 1074g(f), DoD would 
welcome a request to waive or compromise the refund under paragraph 
(q)(3)(iii) of the regulation.
     Comment: Some commenters went further than arguing that FCPs only 
start to apply when the final rule becomes effective, and argued that 
they only start to apply when an agreement between DoD and the 
manufacturer becomes effective. In support of this position they stated 
that because the statute says

[[Page 11286]]

``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,'' some agreement in the nature of a procurement 
contract has to be made before the statute has any effect.
     Response: DoD disagrees. As noted previously, DoD interprets 10 
U.S.C. 1074g(f) to mean that for all covered drugs, TRICARE Retail 
Pharmacy Network prescriptions are subject to Federal Ceiling Prices. 
DoD interprets the statutory phrase ``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'' DoD in the Retail Pharmacy 
Network ``are subject to'' FCPs to mean treated the same as a covered 
drug directly procured by DoD vis-[agrave]-vis the applicability of 
FCPs; the phrase does not require that there be some other transaction 
comparable to a direct procurement by a Federal agency under section 
8126. The transaction of a covered drug prescription filled in the 
Retail Pharmacy Network is all that is required. Further, as previously 
noted, DoD interprets the phrase, ``[w]ith respect to any prescription 
filled on or after the date of the enactment'' to mean that FCPs apply 
with respect to any prescription filled on or after the date of the 
enactment.

2. Manufacturer Written Agreement (Paragraph (q)(2))

a. Agreement in General
     Comment: Some commenters expressed the view that an agreement 
between DoD and a manufacturer is necessary for the manufacturer to 
have any requirement to pay refunds to DoD for amounts received for 
drugs dispensed under prescriptions filled in the TRICARE Retail 
Pharmacy Network. These commenters said a manufacturer's agreement to 
pay refunds must be met with contractual consideration from DoD in the 
form of Uniform Formulary status or something similar, comparable to 
the current Uniform Formulary Voluntary Agreements for Retail Refunds 
(UF-VARRs). They also argued that if a drug is not included on Tier 2, 
the manufacturer would have no obligation to refund to DoD any amount 
it received above the FCP for that drug dispensed under prescriptions 
filled in the TRICARE Retail Pharmacy Network.
     Response: DoD does not agree with this view. As noted above, DoD 
interprets 10 U.S.C. 1074g(f) to mean that all covered TRICARE Retail 
Pharmacy Network prescriptions are subject to Federal Ceiling Prices. 
This means that if a manufacturer was paid more than the FCP for a 
covered drug that was provided through the TRICARE Retail Pharmacy 
Network, the transaction resulted in an overpayment in what DoD paid 
the pharmacy and in what the manufacturer received from the pharmacy 
(directly or through an intermediary). To resolve the overpayment, the 
manufacturer must pay DoD a refund of the amount above the FCP. If the 
amount above the FCP was the difference between FCP and the average 
commercial price for the drug sold to buyers other than the Federal 
government--represented by the non-Federal Average Manufacturer's Price 
(non-FAMP)--then the refund amount is the difference between the non-
FAMP and FCP. DoD interprets the statute as establishing the fact of an 
overpayment and the need for a refund. These things are not dependent 
on the agreement to exist; they exist by operation of law under the 
statute. The purpose of the agreement, therefore, is simply to 
acknowledge the existence of the obligation and promise to meet it. 
This is a change from the UF-VARRs, which are not premised on a 
statutory requirement that prescriptions filled in the Retail Pharmacy 
Network are subject to FCPs.
    However, as noted above, DoD wishes to emphasize voluntary 
compliance by manufacturers. To this end, DoD has included in the new 
regulatory provision for waiver or compromise of refunds, discussed 
above, a waiver criteria (subparagraph (q)(3)(iii)(C)) premised on a 
written request by the manufacturer for voluntary removal of a drug 
from coverage in the TRICARE Pharmacy Benefits Program. Thus if there 
were ever a case in which a manufacturer was really involuntarily 
involved with DoD in relation to drugs sold into the normal commercial 
market, the manufacturer could request voluntary exclusion of a drug 
from coverage in the TRICARE Pharmacy Benefits Program and waiver of 
the refund obligation. This reinforces the voluntariness of drug 
manufacturers' participation in the commercial transaction covered by 
section 1074g(f), a transaction that features sales by the company and 
payment by DoD through the TRICARE Retail Pharmacy Network.
b. Product-by-Product Review
    Comment: A number of pharmaceutical industry commenters agreed with 
the proposed rule's approach of product-by-product review of drugs for 
compliance with Federal Ceiling Prices, rather than requiring a 
manufacturer to agree to provide all covered drugs produced by the 
manufacturer as a condition for any of the manufacturer's drugs to be 
included on the Uniform Formulary.
     Response: This is another area where DoD is seeking an 
accommodation with drug companies. DoD believes it has statutory 
authority to require a manufacturer to agree to provide all covered 
drugs produced by the manufacturer as a condition for any of the 
manufacturer's drugs to be included on the Uniform Formulary because 
the statute applies to all covered drugs. However, DoD chooses in this 
rule at this time to follow a product-by-product approach for Uniform 
Formulary status. DoD urges pharmaceutical companies to honor Federal 
Ceiling Prices for all covered drugs and thereby preserve eligibility 
for each drug for the Uniform Formulary, as well as show their 
compliance with the law.
c. Relationship Between Federal Ceiling Prices and Uniform Formulary 
Status
     Comment: A number of pharmaceutical industry representatives 
recommended that because non-compliance with Federal Ceiling Prices 
generally disqualifies a covered drug for Uniform Formulary status, 
compliance with Federal Ceiling Prices should automatically qualify a 
covered drug for Uniform Formulary status. These comments indicated 
that Uniform Formulary status is a necessary quid-pro-quo for a 
company's agreement to honor FCPs.
     Response: DoD does not agree. Under 10 U.S.C. 1074g(a), Uniform 
Formulary (Tier 2) status is based on the relative clinical and cost 
effectiveness of drugs within a drug class. Under section 1074g(f), all 
covered TRICARE Retail Pharmacy Network prescriptions are subject to 
Federal Ceiling Prices. Both requirements apply. A company's obligation 
to honor FCPs is not dependent on Uniform Formulary placement. Further, 
there are drugs that at their particular Federal Ceiling Prices are not 
cost-effective within their respective drug classes. Subject to the 
judgment of the Pharmacy and Therapeutics Committee and the other steps 
in the statutory and regulatory process, such drugs are likely to be 
classified as non-Formulary drugs. However, during the initial period 
of implementation of this final rule, DoD anticipates that drugs 
currently on the Uniform Formulary that become covered by manufacturer 
agreements to honor FCPs in the Retail Pharmacy Network will remain on 
the Uniform Formulary in Tier 2, pending the next

[[Page 11287]]

periodic review of the drug class involved.
     Comment: A number of commenters asked how the requirement for an 
agreement to honor FCPs would affect drugs previously placed on the 
Uniform Formulary or in non-Formulary status, as well as newly approved 
drugs.
     Response: For covered drugs, continuation on the Uniform Formulary 
is conditioned on the manufacturer signing an agreement to honor 
Federal Ceiling Prices for that drug. If there is currently in effect a 
UF-VARR at a price above the FCP, that agreement fails to achieve the 
statutory requirement; DoD anticipates canceling it. For a drug 
previously placed in Tier 3, if the manufacturer signs an agreement to 
honor FCPs, it will be eligible for reclassification to Tier 2 upon the 
next review by the P&T Committee of the drug class involved. That will 
not necessarily occur when the initial adjustments to the Uniform 
Formulary are made upon the final rule becoming effective. For newly 
approved drugs, DoD will continue its current practice of scheduling 
P&T Committee review at the next practicable quarterly meeting.
     Comment: A number of commenters suggested that the requirement for 
a manufacturer's agreement to honor FCPs for TRICARE Retail Pharmacy 
Network prescriptions as a condition for Tier 2 status should be waived 
by DoD if a drug is more cost-effective, or if a weighted average of 
prices in all three venues is no higher than the FCP, or if otherwise 
in the best interests of beneficiaries. Also, some commenters suggested 
that the Uniform Formulary process should not be changed to leverage 
drug manufacturers to agree to honor FCPs in the retail network, and 
that the process of P&T Committee and Beneficiary Advisory Panel review 
by drug class should not be usurped and should continue unchanged. 
These commenters said the beneficiaries should not have to pay higher 
copays or bother with preauthorization because the drug company does 
not comply with the law.
     Response: DoD has modified the final rule to provide for a waiver 
if necessary to ensure that each drug class is represented on the 
Uniform Formulary. Beyond this, DoD does not see a need for further 
waiver. As noted above, DoD interprets the statute as now establishing 
for determining cost-effectiveness a relative standard and a fixed 
standard and the fixed standard must be met, except as noted. With 
respect to protecting beneficiary interests, preauthorization 
procedures ensure that beneficiaries will continue to have access to 
whatever drugs they need. Also, the P&T Committee and Beneficiary 
Advisory Panel will continue to be involved in the process.
    With respect to the argument that beneficiaries should not be 
inconvenienced by the refusal of drug companies to honor FCPs as 
required by law, DoD believes this will very much be the exception to 
the norm. To minimize inconvenience to beneficiaries, DoD has added a 
new paragraph (q)(5) to provide beneficiary transition provisions. It 
provides that in cases in which a pharmaceutical is removed from the 
uniform formulary or designated for preauthorization, 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.
d. Preauthorization for Retail Pharmacy Network Prescriptions for Drugs 
for Which the Manufacturer Refuses To Agree To Honor Federal Ceiling 
Prices
     Comment: A number of commenters argued that DoD should delete the 
provisions of the proposed rule that made a manufacturer's agreement to 
honor FCPs in the Retail Pharmacy Network a precondition for the 
availability of that drug through retail network pharmacies without 
preauthorization under section 199.21(k) of the current regulation. 
They argued that this preauthorization requirement conflicts with 10 
U.S.C. 1074g and the current scope of the preauthorization provisions 
of paragraph (k) of the regulation, which are intended to promote broad 
beneficiary access to clinically appropriate drugs. These comments 
noted that under the current regulation, non-formulary drugs are 
generally available in retail pharmacies, and the only statutory 
reference to preauthorization (in 10 U.S.C. 1074g(a)(4)) is to assure 
clinical appropriateness. They also argued that the preauthorization 
requirement would delay beneficiary access to needed pharmaceutical 
agents, and should have exceptions for emergencies and other clinical 
needs.
    Response: These comments misunderstand the current statute and 
regulation as they apply to preauthorization. First, the statute does 
not require that non-Formulary (Tier 3) drugs be provided in the Retail 
Pharmacy Network. It requires (in paragraph (a)(5) of section 1074g) 
only that non-Formulary drugs are available through one of the three 
pharmacy venues. Non-Formulary drugs are and will remain available in 
the TRICARE Mail Order Pharmacy Program (TMOP). Second, the current 
paragraph (k) of the regulation is not limited to preauthorization for 
medical necessity, but rather provides that: ``Selected pharmaceutical 
agents may be subject to prior authorization or utilization review 
requirements to assure medical necessity, clinical appropriateness and/
or cost effectiveness.'' The new requirement for preauthorization for 
non-Formulary drugs for which manufacturers refuse to honor FCPs as 
required by law is entirely consistent with the current law and 
regulation, as well as with the policy of assuring beneficiary access 
to needed pharmaceutical agents.
    In the case of a beneficiary presenting a prescription in a retail 
network pharmacy for a drug that is on Tier 3 because of the refusal of 
the manufacturer to honor Federal Ceiling Prices, there are several 
possible outcomes. First, the pharmacist may consult with the 
prescribing physician and the physician may change the prescription to 
a Uniform Formulary drug, which can be provided immediately at the Tier 
2 co-payment. Second, if the beneficiary has a valid clinical need for 
that non-Formulary drug without delay, preauthorization will be 
granted. This will take care of emergency needs for pharmaceuticals and 
other cases of immediate clinical need. However, depending on the 
circumstances, the beneficiary may be advised that any refills will 
need to be obtained from TMOP. Third, if there is no urgency, the 
beneficiary may be advised to submit the prescription to TMOP. This 
approach is consistent with the statutory requirement that non-
Formulary agents be made available in at least one venue, and also with 
the statutory requirement that all covered Retail Pharmacy Network 
prescriptions are subject to FCPs. Moreover, it continues DoD policy of 
meeting beneficiary needs, e