Civilian Health and Medical Program of the Uniformed Services (CHAMPUS)/TRICARE: Inclusion of TRICARE Retail Pharmacy Program in Federal Procurement of Pharmaceuticals, 63383-63398 [2010-25712]

Agencies

• Office of the Secretary
• DEPARTMENT OF DEFENSE

[Federal Register Volume 75, Number 199 (Friday, October 15, 2010)]
[Rules and Regulations]
[Pages 63383-63398]
From the Federal Register Online via the Government Printing 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 pr