Coalition for Common Sense in Govt. v. U.S.

671 F.Supp.2d 48

The COALITION FOR COMMON SENSE IN GOVERNMENT PROCUREMENT, Plaintiff, v. UNITED STATES of America and United States Department of Defense, Defendant.

Civil Action No. 08-996 (JDB).

United States District Court, District of Columbia.

November 30, 2009.

COPYRIGHT MATERIAL OMITTED

Daniel G. Jarcho, McKenna Long & Aldridge, LLP, Washington, DC, for Plaintiff.

Susan K. Ullman, U.S. Department of Justice, Washington, DC, for Defendant.

MEMORANDUM OPINION

JOHN D. BATES, District Judge.

On January 28, 2008, Congress enacted the National Defense Authorization Act for Fiscal Year 2008 ("NDAA-08"). Section 703 of NDAA-08 requires that pharmaceuticals paid for by the Department of Defense ("Department" or "DoD") and provided through the TRICARE retail pharmacy program be subject to pricing standards known as Federal Ceiling Prices. The Department promulgated a final rule implementing section 703 on March 17, 2009. Under this rule, pharmaceutical manufacturers cannot receive more than the Federal Ceiling Prices for pharmaceuticals purchased by DoD for the retail pharmacy program, and must refund amounts in excess of the Federal Ceiling Prices for prescriptions filled on or after January 28, 2008. Plaintiff Coalition for Common Sense in Government Procurement ("Coalition") challenges the Department's rule, contending that it should be set aside under the Administrative Procedure Act because, inter alia, the Department erroneously interpreted NDAA-08 to require refunds by manufacturers to DoD and to require the statute's obligations to apply beginning on January 28, 2008. Before the Court are the parties cross-motions for summary judgment.¹

I.

The Court, and the parties, have been here before. See Coal. for Common Sense in Gov't Procurement v. United States, 576 F.Supp.2d 162 (D.D.C.2008); see also Coal. for Common Sense in Gov't Procurement v. Sec'y of Veterans Affairs, 464 F.3d 1306 (Fed.Cir.2006). A detailed retelling of the statutory and regulatory background animating this case is therefore unnecessary. Instead, it is appropriate now to focus on the Department's promulgation of the challenged rule.

Section 703 of NDAA-08 requires pharmaceuticals obtained through the TRICARE retail pharmacy program be subject to Federal Ceiling Prices. It provides in a new 10 U.S.C. § 1074g(f) that

[w]ith respect to any prescription filled on or after the date of the enactment of the National Defense Authorization Act for Fiscal Year 2008, 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.

And it requires DoD, after consultation with other administering agencies, to "modify the regulations under [10 U.S.C. § 1074g(h)] to implement the requirements of [the new 10 U.S.C. § 1074g(f)]." National Defense Authorization Act for Fiscal Year 2008, Pub. L. 110-181, 122 Stat. 3, 188 (2008). In other words, section 703 requires that for any prescription filled on or after January 28, 2008, the TRICARE retail pharmacy program is to be treated as an element of DoD for purposes of drug procurement to the extent necessary to ensure that drugs paid for by DoD are subject to Federal Ceiling Prices.

The Defense Department published a notice of proposed formal rulemaking to implement section 703 in July 2008. See 73 Fed. Reg. 43,394 (July 25, 2008). After receiving comments on the proposed rule, the Department published its final rule on March 17, 2009, to be effective May 26, 2009. See 74 Fed. Reg. 11,279 (March 17, 2009). The rule requires pharmaceutical manufacturers to honor section 703's obligation that "TRICARE retail pharmacy network prescriptions are subject to Federal Ceiling Prices." 32 C.F.R. § 199.21(q)(1)(ii).² The rule does so by prohibiting manufacturers from receiving amounts above the Federal Ceiling Prices for pharmaceuticals provided to the retail pharmacy program. See id.

Three provisions accomplish this outcome. First, the Defense Department and pharmaceutical manufacturers may enter into voluntary written agreements in which manufacturers agree "to honor the pricing standards required by 10 U.S.C. § 1074g(f)." Id. § 199.21(q)(2)(i). In these agreements, manufacturers "acknowledge the existence of the [Federal Ceiling Price] obligation and promise to meet it." 74 Fed. Reg. at 11,286. By recognizing the Federal Ceiling Price obligation, manufacturers also agree to refund payments in excess of this price for retail pharmacy program transactions occurring on or after the enactment of NDAA-08. See 32 C.F.R. § 199.21(q)(3)(i). If a manufacturer enters into a voluntary agreement, it receives market advantages: its pharmaceuticals may be considered for uniform formulary status, and may be available "through retail network pharmacies without preauthorization." Id. § 199.21(q)(2)(i).

Second, if a manufacturer does not agree to meet the Federal Ceiling Prices through such an agreement, but nevertheless provides pharmaceuticals through the retail pharmacy program, DoD may obtain refunds on transactions in excess of the Federal Ceiling Prices through a debt collection action. See id. § 199.21(q)(3)(i) ("Refund procedures .... may be established as part of the agreement referred to in paragraph (q)(2), or in a separate agreement, or pursuant to § 199.11."); see also id. § 199.11 (authority for debt collection under TRICARE). The Department may also obtain refunds from retail pharmacy program sales occurring on or after January 28, 2008, that were in excess of the Federal Ceiling Prices under the same authority. See id. § 199.21(q)(3)(iii); see also 74 Fed. Reg. at 11,286 ("[I]f a manufacturer was paid more than the [Federal Ceiling Price] ... the transaction resulted in an overpayment.... To resolve the overpayment, the manufacturer must pay DoD a refund of the amount above the [Federal Ceiling Price]."). The Department, however, may waive or compromise the refund amount. See 32 C.F.R. § 199.21(q)(3)(iii)(A).

Finally, the manufacturer may escape the Federal Ceiling Prices altogether by voluntarily removing the drug "from coverage in the TRICARE Pharmacy Benefit Program." Id. § 199.21(q)(3)(iii)(C). In effect, the pharmaceutical manufacturer would not participate in the TRICARE program.

II.

Under Fed.R.Civ.P. 56(c), summary judgment is appropriate when the pleadings and the evidence demonstrate that "there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." In a case involving review of a final agency action under the Administrative Procedure Act, 5 U.S.C. § 706, however, the standard set forth in Rule 56(c) does not apply because of the limited role of a court in reviewing the administrative record. See Prof'l Drivers Council v. Bureau of Motor Carrier Safety, 706 F.2d 1216, 1224 (D.C.Cir.1983); Sierra Club v. Mainella, 459 F.Supp.2d 76, 89-90 (D.D.C.2006). Under the APA, the agency resolves factual issues to arrive at a decision that is supported by the administrative record. Summary judgment is the mechanism for deciding whether as a matter of law the agency action is supported by the administrative record and is otherwise consistent with the APA standard of review. See Citizens to Preserve Overton Park, Inc. v. Volpe, 401 U.S. 402, 415, 91 S.Ct. 814, 28 L.Ed.2d 136 (1971); Sw. Merchandising Corp. v. NLRB, 53 F.3d 1334, 1341 (D.C.Cir.1995); Richards v. INS, 554 F.2d 1173, 1177 & n. 28 (D.C.Cir.1977).

A court must "hold unlawful and set aside agency action, findings, and conclusions" that are "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law," 5 U.S.C. § 706(2)(A), in excess of statutory authority, id. § 706(2)(C), or "without observance of procedures required by law," id. § 706(2)(D). The scope of review, however, is narrow. See Motor Vehicle Mfrs. Ass'n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463 U.S. 29, 43, 103 S.Ct. 2856, 77 L.Ed.2d 443 (1983). It presumes the agency's action is valid. See Volpe, 401 U.S. at 415, 91 S.Ct. 814. And the "court is not to substitute its judgment for that of the agency." State Farm, 463 U.S. at 43, 103 S.Ct. 2856. But the court must be satisfied that the agency has "`examine[d] the relevant data and articulate[d] a satisfactory explanation for its action including a rational connection between the facts found and the choice made.'" Alpharma, Inc. v. Leavitt, 460 F.3d 1, 6 (D.C.Cir.2006) (quoting State Farm, 463 U.S. at 43, 103 S.Ct. 2856).

III.

This Court reviews an agency's regulations according to the familiar two-step framework articulated in Chevron, U.S.A., Inc. v. Natural Resources Def. Council, Inc., 467 U.S. 837, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). The first step determines "whether Congress has spoken directly to the precise question at issue," for if it has, "the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress." Id.; see also New Jersey v. EPA, 517 F.3d 574, 581 (D.C.Cir.2008). If, however, the statute is silent or ambiguous on the specific issue, "the question for the court is whether the agency's answer is based on a permissible construction of the statute." Chevron, 467 U.S. at 843, 104 S.Ct. 2778.

When an agency's construction of a statute is challenged, its "interpretation need not be the best or most natural one by grammatical or other standards.... Rather [it] need be only reasonable to warrant deference." Pauley v. BethEnergy Mines, Inc., 501 U.S. 680, 702, 111 S.Ct. 2524, 115 L.Ed.2d 604 (1991) (citations omitted). But deference "`is only appropriate when the agency has exercised its own judgment.'" Arizona v....