On Sept. 11, 2006, the U.S. Court of Appeals for the Federal Circuit handed down a unanimous decision invalidating a purported Department of Veterans Affairs ("VA") interpretative ruling on procedural grounds. The VA’s attempted interpretative ruling, issued in the form of a Dear Manufacturer letter, concerned TRICARE, the health benefits program offered by the Department of Defense ("DoD") to active and retired military personnel and their dependants. According to the DoD, TRICARE pharmacy expenditures approached $6 billion in 2005.
Over the strong objections from the industry, the VA determined in October 2004 that pharmaceuticals purchased through the TRICARE Pharmacy Benefits Program are subject to the federal ceiling price ("FCP"), an amount calculated annually based on a percentage of non-federal sales price. The Coalition for Common Sense in Government Procurement (the "Coalition"), an association representing more than 300 companies, filed suit to challenge the VA’s interpretation on procedural and substantive grounds. Although the Federal Circuit’s invalidation of the interpretative rule on procedural grounds is not a complete victory for the Coalition, it is a significant setback in the VA’s attempt to extend pricing for covered drugs to the TRICARE program.
In order to ensure that the government obtains low prices for pharmaceuticals, federal law requires that drug manufacturers charge the government no more than the FCP. The FCP applies to "covered drugs," a definition that applies only to pharmaceuticals (1) listed on the Federal Supply Schedule ("FSS") or (2) purchased through a depot contracting system, which is a centralized commodity management system through which the Federal Government buys drugs. Before 2004, purchases made by the TRICARE Pharmacy Benefits Program were not considered to be part of a depot contracting system and pharmaceuticals purchased through the Program were not eligible for the FCP.
In seeking to extend the FCP to purchases made under the TRICARE Pharmacy Benefits Program, the VA issued a Dear Manufacturer letter on Oct. 14, 2004. The VA periodically uses such directives to provide manufacturers of covered drugs with information regarding its interpretations of federal pharmaceutical benefit programs under the Veterans Health Care Act. In this case, the Oct. 14, 2004 letter stated that, following revisions in 2004, the TRICARE Pharmacy Benefits Program became a depot contracting system, and therefore purchases made through TRICARE network pharmacies were eligible for the FCP. In addition to providing its conclusion regarding FCP eligibility, the VA also determined that TRICARE would obtain the FCP through a quarterly refund from manufacturers, beginning Sept. 30, 2004. The VA also stated that published notice and formal rulemaking procedures were not required because the extension of FCP eligibility to the TRICARE Pharmacy Benefits Program was already established by law.
In ruling that the Oct. 14, 2004 Dear Manufacturer letter is invalid on procedural grounds, the Federal Circuit determined that the VA improperly failed to provide notice and comment rulemaking procedures under the Administrative Procedure Act ("APA").
Specifically, the court determined that the VA’s conclusions regarding eligibility for the FCP were not mere interpretations of existing law, but rather, they established new substantive rights and obligations. Under the APA, an agency must publish notice of a proposed substantive rulemaking and provide interested persons the right to submit written comments. The Federal Circuit ruled that the VA’s failure to do so made the Oct. 14, 2004 letter invalid. Unless the VA undertakes a successful appeal or is able to promulgate its interpretation through notice and comment rulemaking procedures, TRICARE network pharmacies will remain ineligible for the FCP. What effect this decision will have on the procedural validity of other VA policies promulgated through Dear Manufacturer letters remains an open question.
This article is presented for informational purposes only and is not intended to constitute legal advice.
