Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-caDC-11-05350/USCOURTS-caDC-11-05350-0/pdf.json

Parties Involved:
Coalition For Common Sense In Government Procurement
Appellant
United States Department of Defense
Appellee
United States of America
Appellee

Document Text:

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.

USCA Case #11-5350 Document #1413429 Filed: 01/04/2013 Page 1 of 16
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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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