Coalition For Common Sense v. USA, et al

Filing

OPINION filed [1413429] (Pages: 16) for the Court by Judge Tatel [11-5350]

USCA Case #11-5350

Document #1413429

Filed: 01/04/2013

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued October 17, 2012

Decided January 4, 2013

No. 11-5350
COALITION FOR COMMON SENSE IN GOVERNMENT
PROCUREMENT,
APPELLANT
v.
UNITED STATES OF AMERICA AND UNITED STATES
DEPARTMENT OF DEFENSE,
APPELLEES

Appeal from the United States District Court
for the District of Columbia
(No. 1:08-cv-00996)

Lisa S. Blatt argued the cause for appellant. With her on
the briefs were Jeffrey L. Handwerker, Kara L. Daniels, and
R. Stanton Jones. Daniel G. Jarcho entered an appearance.
Sarang Vijay Damle, Attorney, U.S. Department of
Justice, argued the cause for appellees. With him on the brief
were Stuart F. Delery, Acting Assistant Attorney General,
Ronald C. Machen, Jr., U.S. Attorney, and Mark B. Stern,
Attorney.
Before: HENDERSON and TATEL, Circuit Judges, and
WILLIAMS, Senior Circuit Judge.

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Opinion for the Court filed by Circuit Judge TATEL.
TATEL, Circuit Judge: Seeking to curb the rising cost of
prescription drugs for military families, Congress enacted
section 703 of the National Defense Authorization Act for
Fiscal Year 2008, which subjects all prescriptions purchased
at retail pharmacies by service members to the same price
caps as drugs procured directly by the Department of Defense.
Pursuant to this provision, the Secretary of Defense issued a
regulation requiring pharmaceutical manufacturers to refund
to the federal government the difference between the retail
price and the price cap. This case presents two questions: May
the Secretary impose price caps without obtaining the
voluntary written agreements required in the procurement
process? Has the Secretary impermissibly imposed retroactive
rebate liability on pharmaceutical manufacturers? For the
reasons given below, we conclude that the Secretary
reasonably interpreted section 703 to impose involuntary
price caps and hold that the statute itself imposes retroactive
rebate liability on pharmaceutical manufacturers.
I.
The Department of Defense provides medical benefits to
current and retired service members and their families through
the TRICARE health care program. TRICARE beneficiaries
receive prescription drugs through three “points of service”
relevant to this case: military treatment facilities; TRICARE’s
mail-order pharmacy; and within-network retail pharmacies,
like Walgreens or CVS. For prescriptions filled at military
treatment facilities and TRICARE’s mail-order pharmacy, the
Department procures the drugs from manufacturers and then
distributes them to beneficiaries. Since 1992, this
procurement process has been governed by 38 U.S.C. § 8126,
which requires the Department and manufacturer to “enter

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into a master agreement . . . under which the price charged
during the one-year [contract] may not exceed 76 percent of
the
non-Federal
average
manufacturer
price.”
Id. § 8126(a)(2). In other words, these written agreements
mandate a price—known as the “federal ceiling price”—
discounted by at least twenty-four percent from the retail
price.
For many years, by contrast, when a TRICARE
beneficiary filled a prescription at the third “point of
service”—a within-network retail pharmacy—the Department
paid the full retail price for the drug. The reason was simple:
unlike in the case of military treatment facilities and
TRICARE’s mail-order pharmacy, the Department did not
procure the drug. Instead, the drug was distributed through
commercial supply chains, and the TRICARE beneficiary
purchased the drug from the retail pharmacy. The Department
thus had no written agreement with the manufacturer through
which it could limit the cost of a drug to the federal ceiling
price.
Over the past decade, the government has made several
attempts to close the twenty-four percent price differential
between prescription drugs procured by the Department and
those purchased by TRICARE beneficiaries at retail
pharmacies. In October 2004, the Department of Veterans
Affairs issued a “Dear Manufacturer letter” that required
pharmaceutical manufacturers to refund to the Defense
Department the difference between the retail price and the
federal ceiling price. In a lawsuit filed by the Coalition for
Common Sense in Government Procurement—a multiindustry interest group that represents pharmaceutical
companies—the Federal Circuit invalidated the rebate
requirement, finding that it constituted a substantive
regulation that had to be promulgated via notice and comment

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rulemaking, a process the Secretary had tried to circumvent
by issuing the Dear Manufacturer letter. See Coalition for
Common Sense in Government Procurement v. Secretary of
Veterans Affairs, 464 F.3d 1306 (Fed. Cir. 2006).
While that case was pending, the Defense Department
announced the creation of a voluntary rebate program
whereby manufacturers would give the Department refunds
for drugs purchased at retail pharmacies in exchange for
increasing the prospects that the particular drug would be
placed on TRICARE’s uniform formulary—prescription
drugs with lower co-payments for beneficiaries. See 32 C.F.R.
§§ 199.21(a)–(g). As an additional incentive, the Department
indicated that it might waive its written preauthorization
requirement for beneficiaries seeking these drugs. See id.
§ 199.21(k). The Department chose a rebate system because
the drugs were distributed via private supply chains, which
meant that pharmaceutical manufacturers had no way of
knowing in advance what percentage of their drugs would be
purchased by TRICARE beneficiaries. Thus, rather than
involving downstream actors or adjusting the wholesale price,
the Department required participating manufacturers to refund
the money. This voluntary rebate program was not linked to
the federal ceiling price.
In fiscal year 2007, the voluntary rebate program
recouped only $28 million. At the same time, TRICARE costs
continued to soar. As detailed in a Government
Accountability Office report, the Defense Department’s
“prescription drug spending more than tripled from $1.6
billion in fiscal year 2000 to $6.2 billion in fiscal year 2006.
Retail pharmacy spending drove most of this increase, rising
from $455 million to $3.9 billion and growing from 29
percent of [the Defense Department’s] overall drug spending
to 63 percent.” U.S. Government Accountability Office,

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GAO-08-327, DOD Pharmacy Program: Continued Efforts
Needed to Reduce Growth in Spending at Retail Pharmacies
3–4 (2008). The report found the cost increase attributable to
“federal pricing arrangements . . . not appl[ying] to drugs
dispensed at retail pharmacies” and to “increased use of retail
pharmacies” by TRICARE beneficiaries. Id. at 4.
Concerned about the spiraling cost of TRICARE’s
prescription drug program and seeking to close the cost gap
between prescriptions procured by the Department and those
purchased at retail pharmacies, Congress enacted section 703
of the National Defense Authorization Act for Fiscal Year
2008, Pub. L. 110-181, 122 Stat. 3, 188, which, as amended,
provides:
With respect to any prescription filled after 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 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.
10 U.S.C. § 1074g(f); see also National Defense
Authorization Act for Fiscal Year 2010, Pub. L. No. 111-84,
123 Stat. 2190, 2474 (2009) (making a technical amendment
to section 703 to replace the words “on or after the date of
enactment of the [statute]” with “after January 28, 2008”). In
short, section 703 subjects all prescriptions filled in the
TRICARE retail pharmacy program to section 8126
requirements “to the extent necessary to ensure” that those
drugs “are subject to [section 8126] pricing standards.” 10

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U.S.C. § 1074g(f). Section 703 also includes an express
delegation of rulemaking authority to the Secretary of
Defense. See id. § 1074g(h) (“The Secretary of Defense shall
. . . prescribe regulations to carry out this section.”).
Almost immediately after section 703’s enactment, on
February 1, 2008, the Defense Department issued its own
“Dear Manufacturer letter” informing pharmaceutical
companies that the voluntary rebate program would be “used
for the initial implementation” of section 703. The
Department then published a proposed rule that would have
required manufacturers to enter into written agreements to
abide by the federal ceiling price before their drugs could be
included on the uniform formulary. See 73 Fed. Reg. 43,394
(July 25, 2008). Diverging from the proposed rule, the final
rule, issued on March 17, 2009, directs manufacturers to
refund to the Department the difference between the federal
ceiling price and the retail price for all prescriptions filled at
TRICARE retail pharmacies. See 74 Fed. Reg. 11,279 (Mar.
17, 2009); 32 C.F.R § 199.21(q). Thus, price caps apply
regardless of whether manufacturers have signed a voluntary
written agreement, though such agreements remain a
prerequisite for both uniform formulary status and
preauthorization. See 32 C.F.R. § 199.21(q)(2). Additionally,
the final rule requires manufacturers to refund to the
Department the price differential for any prescription filled
after January 28, 2008, the date of section 703’s enactment.
See id. § 199.21(q)(1)(i). According to the Coalition, this
“retroactive” requirement will likely cost the pharmaceutical
industry in excess of $500 million. Under the final rule,
however, the Secretary may waive or reduce the refund
amount. See id. § 199.21(q)(3)(iii)(A). Manufacturers,
moreover, can escape the federal ceiling price altogether by
removing a drug from TRICARE coverage. See id.
§ 199.21(q)(3).

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In the meantime, the Coalition, which had also sued the
Defense Department in the United States District Court for
the District of Columbia, amended its complaint to challenge
the Secretary’s authority to impose price caps without written
agreements. On cross-motions for summary judgment, the
district court remanded the final rule to the Department
because the Secretary had failed to explain why he imposed
the rebate requirement on drug manufacturers rather than
another actor in the supply chain. See Coalition for Common
Sense in Government Procurement v. United States, 671 F.
Supp. 2d 48 (D.D.C. 2009). At Chevron step one, the district
court reasoned that “the statute does not establish a particular
regulatory scheme. Congress has not dictated that
manufacturers must pay the costs associated with the Federal
Ceiling Prices, or that they must refund proceeds in excess of
this price on retail pharmacy program transactions.” Id. at 54.
But the district court declined to defer to the Secretary at
Chevron step two because the Secretary had simply assumed
that section 703 itself mandated that manufacturers rebate the
twenty-four percent discount to the government. See id. at 55–
56. Accordingly, the district court instructed the Secretary to
consider other alternatives, such as requiring retail pharmacies
to bear the burden of refunding the price differential to the
Department. See id. at 54–56, 61.
Responding to the district court on October 15, 2010, the
Secretary issued a supplemental rule explaining his rationale
for requiring manufacturers to refund the price differential.
See 75 Fed. Reg. 63,383 (Oct. 15, 2010). The Secretary
interpreted section 703’s text, structure, purpose, and
legislative history as strongly indicating that the federal
ceiling price applies to manufacturers, not some other entity
in the supply chain such as wholesalers or retail pharmacies.
See id. at 63,386–88. After addressing alternative
mechanisms, the Secretary re-adopted the requirement that

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pharmaceutical manufacturers refund the price differential to
the Department. See id. at 63,388–91.
The Secretary also reiterated his position on the two main
issues in this appeal. First, he defended his view that section
703’s rebate program cannot be dependent on a voluntary
written agreement. See id. at 63,391–93. Second, regarding
retroactivity, the Secretary emphasized that he lacked
discretion to impose a different implementation date.
According to the Secretary, the statute’s text and legislative
history made clear that Congress intended that any
prescription filled after the enactment date would be subject
to the federal ceiling price. See id. at 63,391.
The 2010 rule fared better in the district court. Finding
section 703 ambiguous as to the question of whether the
federal ceiling price could be imposed on pharmaceutical
manufacturers absent section 8126 written agreements, the
district court upheld the Secretary’s rule as a reasonable
interpretation of the statute. The district court also rejected the
Coalition’s retroactivity argument, concluding that section
703 itself determines when prescriptions become subject to
the federal ceiling price. See Coalition for Common Sense in
Government Procurement v. United States, 821 F. Supp. 2d
275 (D.D.C. 2011).
Echoing its position in the district court, the Coalition
raises two arguments on appeal. First, it contends that the
Secretary has no authority to impose federal ceiling prices on
manufacturers without obtaining their consent. Specifically,
the Coalition believes that section 703 incorporates section
8126’s written agreement requirement. Second, the Coalition
argues that the rule impermissibly imposes retroactive rebate
liability. The Coalition has abandoned its argument that other

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entities, such as retail pharmacies, should reimburse the
Defense Department.
We review a district court’s grant of summary judgment
de novo. See Holcomb v. Powell, 433 F.3d 889, 895 (D.C.
Cir. 2006). In considering the Secretary’s interpretation of
section 703, we engage in the familiar Chevron two-step
analysis. See Chevron, U.S.A., Inc. v. NRDC, 467 U.S. 837,
842–43 (1984).
II.
As always, we begin by examining the statute’s text.
Distilled to its core, section 703 provides:
With respect to any prescription filled after January
28, 2008, the TRICARE retail pharmacy program
shall be treated as an element of . . . section 8126 . . .
to the extent necessary to ensure that
pharmaceuticals paid for by the Department of
Defense . . . are subject to [section 8126] pricing
standards . . . .
10 U.S.C. § 1074g(f).
Section 703 unambiguously requires price caps. It directs
the Secretary to “ensure that pharmaceuticals paid for by the
Department of Defense . . . are subject to [section 8126]
pricing standards.” Id. (emphasis added). According to the
Coalition, the statute also unambiguously requires
procurement-type contracts to achieve those price caps. In
addressing this argument, we ask “whether Congress has
directly spoken to the precise question at issue.” Chevron, 467
U.S. at 842. It has not. As the Secretary points out, Congress’s
use of the words “to the extent necessary” signals that not
every jot and tittle of section 8126’s procurement regime had

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to be imposed on TRICARE’s retail pharmacy program. The
Coalition nonetheless advances several reasons why it
believes that section 703 clearly requires written agreements
between pharmaceutical manufacturers and the federal
government. Only three merit serious attention.
First, the Coalition contends that section 703 “folds
TRICARE[’s] retail pharmacy sales into the pre-existing
statutory scheme of federal ceiling prices under Section 8126”
and “leaves no discretion for [the Secretary] to bypass the
consensual underpinnings of the ceiling prices of Section
8126.” Appellant’s Br. 26–27. As the Coalition sees it,
manufacturers cannot be forced to refund the price differential
absent section 8126 procurement-type contracts. But as we
see it, the Coalition’s statutory interpretation risks creating a
two-tiered regime in which only some prescriptions filled
would be subject to federal ceiling prices. The Coalition
offers no explanation for how a voluntary contract
requirement, by itself, would fulfill section 703’s mandate
that “any prescription filled” be subject to the federal ceiling
price. 10 U.S.C. § 1074g(f) (emphasis added). And at
Chevron step one, the Coalition “must show that the statute
unambiguously forecloses the [Secretary’s] interpretation.”
Village of Barrington v. Surface Transportation Board, 636
F.3d 650, 661 (D.C. Cir. 2011). Given the statute’s discretionenhancing language, the Coalition has failed to meet its
“heavy burden” of demonstrating that section 703 precludes
the Secretary’s method for achieving price caps. Id.
Second, pointing to other statutory schemes, such as the
Medicaid Drug Rebate Program, see 42 U.S.C. § 1396r-8, the
Coalition argues that “Congress without exception has
required the government to enter into contracts with drug
manufacturers to obtain their consent to price discounts in
connection with federal healthcare programs.” Appellant’s Br.

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32. The Coalition also asserts that when Congress imposes
price caps, it speaks clearly and expressly. See, e.g.,
Emergency Petroleum Allocation Act of 1973, Pub. L. No.
93-159, § 4, 87 Stat. 627, 629 (“The President shall
promulgate a regulation providing for the mandatory
allocation of [petroleum products] . . . at prices specified in
(or determined in a manner prescribed by) such
regulation . . . .”). This may well be true. But our job is to
interpret this statute—section 703—and this statute gives the
Secretary discretion as to how to ensure that prescriptions
filled at retail pharmacies are subject to the federal ceiling
price. Section 703’s evolution reinforces this point. Congress
enacted the provision in the wake of the Defense
Department’s creation of the very type of voluntary rebate
program the Coalition insists the statute now requires. Despite
that reform and its incentives for reducing prescription drug
prices, Congress remained concerned about the rapidly rising
cost of TRICARE’s retail pharmacy program and passed
section 703 to give the Secretary discretionary authority to
solve this problem.
Third, the Coalition argues that because pharmaceutical
manufacturers sell prescription drugs to wholesalers or retail
pharmacies and have “no way of knowing where drugs end
up,” Appellant’s Br. 28, they cannot predict their potential
liability and should therefore not be forced, absent agreement,
to refund unforeseeable sums of money to the government.
Although the opt-out provision allows pharmaceutical
companies to escape federal ceiling prices by removing their
drugs from TRICARE, the Coalition believes that Congress
could never have intended to put military service members’
access to prescription drugs at risk. See Appellant’s Br. 6. It is
certainly true that the logistical issues associated with
commercial supply chains raise questions about precisely how
the federal ceiling price can be extended to prescriptions filled

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at within-network retail pharmacies. But the question before
us at this stage of Chevron analysis is whether section 703
unambiguously requires the Secretary to resolve these issues
through procurement-type contracts. As explained above, it
does not.
Turning to Chevron step two, we ask whether the
Secretary’s rule represents a “permissible construction” of
section 703. Chevron, 467 U.S. at 843. Other than repeating
the Chevron step one arguments we have already rejected, the
Coalition claims that the Secretary’s regulation is
unreasonable because most pharmaceutical companies have
now entered into prospective section 703 agreements. This,
the Coalition believes, demonstrates that a voluntary contract
regime could work. The Chevron step two question, however,
is not whether the Coalition’s proposed alternative is an
acceptable policy option but whether the Secretary’s rule
reflects a reasonable interpretation of section 703.
The rule easily satisfies Chevron step two. It
accomplishes Congress’s objectives and does so in a way that
accounts for market realities. Section 703 requires that “any
prescription filled” be subject to section 8126 “pricing
standards.” 10 U.S.C. § 1074g(f). The rule achieves this goal
through a universal requirement on all pharmaceutical
manufacturers that participate in TRICARE—that is, the rule
imposes involuntary price caps “to the extent necessary” to
guarantee compliance with section 8126 “pricing standards.”
Moreover, the rule furthers Congress’s primary goal of
ensuring price parity across TRICARE’s three points of
service. And finally, the rule capitalizes on the logistical
convenience of imposing refund liability on manufacturers
rather than lowering retail prices or seeking refunds from
downstream actors.

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III.
The Coalition also contends that the regulation—
promulgated in 2010 but requiring refunds for prescriptions
filled after January 28, 2008—impermissibly imposes
retroactive rebate liability. In the legal sense of the term,
retroactivity occurs when a statute or rule “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.” National Mining Association v. Department of Labor,
292 F.3d 849, 859 (D.C. Cir. 2002) (internal quotation marks
omitted). Characterizing January 28, 2008, as nothing more
than section 703’s effective date, the Coalition argues that the
“ ‘mere promulgation of an effective date for a statute does
not provide sufficient assurance that Congress specifically
considered the potential unfairness that retroactive application
would produce.’ ” Appellant’s Br. 47 (quoting INS v. St. Cyr,
533 U.S. 289, 317 (2001)). As a result, the Coalition claims it
was the 2010 regulation, not the statute, that imposed
retroactive liability on pharmaceutical manufacturers.
Because the Secretary lacks retroactive rulemaking authority,
the argument goes, the regulation’s retroactive application
must fail. See Bowen v. Georgetown University Hospital, 488
U.S. 204, 208 (1988) (explaining that a “statutory grant of
legislative rulemaking authority will not, as a general matter,
be understood to encompass the power to promulgate
retroactive rules unless that power is conveyed by Congress in
express terms”).
We disagree with the Coalition’s premise. As the district
court explained, “it was the passing of the statute, not the
promulgation of a regulation, that determined when
prescriptions became subject to [federal ceiling prices].”
Coalition for Common Sense, 821 F. Supp. 2d at 288
(emphases added). As the Supreme Court has instructed, a

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“statute may not be applied retroactively . . . absent a clear
indication from Congress that it intended such a result.” St.
Cyr, 533 U.S. at 316. Thus, the question is whether Congress
intended section 703 to impose rebate liability for
prescriptions filled after its date of enactment.
Section 703 could hardly be clearer: “With respect to any
prescription filled after January 28, 2008, the TRICARE retail
pharmacy program shall be” subject to section 8126’s
“pricing standards.” 10 U.S.C. § 1074g(f) (emphases added).
This language leaves no doubt that Section 703’s effective
date is the date of enactment—January 28, 2008—and that the
triggering event for rebate liability is the filling of a
prescription.
The Coalition nonetheless insists that because the district
court ruled in 2009 that section 703 was ambiguous as to who
should pay the rebate, it was in fact the 2010 regulation that
imposed refund liability on pharmaceutical manufacturers. As
the Coalition understands the law-of-the-case doctrine, the
district court’s ruling binds this Court. This is incorrect. The
law-of-the-case doctrine bars us from reconsidering only
questions decided by this Court in this case. See LaShawn A.
v. Barry, 87 F.3d 1389, 1393 (D.C. Cir. 1996) (en banc)
(explaining that under the law-of-the-case doctrine “the same
issue presented a second time in the same case in the same
court should lead to the same result” (emphases omitted)).
The only question, then, is whether section 703
unambiguously imposes price caps on manufacturers.
Although section 703 nowhere mentions manufacturers, it
cross-references section 8126’s pricing standards—standards
that apply to manufacturers and expressly exclude “wholesale
distributors of drugs or a retail pharmacy.” 38 U.S.C.
§ 8126(h)(4)(B). In other words, federal ceiling prices apply

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to manufacturers, not other entities. Congress, moreover,
enacted section 703 against a regulatory backdrop that
presumed manufacturers would bear the burden of refunding
the price differential to the Defense Department. The 2004
Dear Manufacturer letter mandated manufacturer liability, and
the Defense Department’s voluntary rebate program focused
on signing deals with manufacturers, not retail pharmacies.
We therefore conclude that section 703 not only clearly
imposed rebate liability on January 28, 2008, but also put
pharmaceutical manufacturers on notice that they would bear
the burden of closing the gap between the retail price and the
federal ceiling price.
The Coalition marshals one final argument. Invoking the
realities of supply chains, it contends that the final rule makes
pharmaceutical manufacturers liable for drugs that entered the
marketplace well before section 703’s enactment. Put
differently, the Coalition claims Congress could not have
intended that a drug sold by a manufacturer to a wholesaler
before the statute’s effective date could trigger refund liability
when purchased by a TRICARE beneficiary after that date.
That, however, is precisely what Congress intended: section
703 applies price caps to “any prescription filled after” the
effective date, not to any drug sold to a wholesaler after that
date. 10 U.S.C. § 1074g(f) (emphasis added). Given the
logistics of pharmaceutical supply chains, which Congress
obviously understood, some drugs would inevitably be in the
distribution stream on section 703’s enactment date.
Furthermore, although the final regulation allows the
Secretary to waive refund liability, no pharmaceutical
manufacturer has yet sought a waiver. See Appellees’ Br. 27–
28. Given that Congress clearly imposed refund liability for
any prescription filled after section 703’s effective date,
pharmaceutical manufacturers who believe they should not

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have to pay for drugs already in the supply chain on January
28, 2008, should seek a waiver from the Department, not this
Court.
IV.
For the foregoing reasons, we affirm.
So ordered.

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