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The government’s cost of providing brand-name drugs to military beneficiaries through TRICARE’s vast retail pharmacy network is falling by 25 percent as new law forces drug manufacturers to expand price discounts.

The change won’t affect co-payments charged military family members and retirees who have 60 million prescriptions a year filled in retail drug outlets. But Department of Defense pharmacy costs will be cut by more than $700 million next year and by higher amounts in following years.

The cost savings flow from a provision in the fiscal 2008 defense authorization act that requires drug makers to extend federal pricing discounts to brand-name medicines dispensed to military beneficiaries through drug stores, supermarkets and other commercial outlets.

For years, pharmaceutical companies have been required to grant federal discounts only for drugs dispensed on base, or through TRICARE’s mail order option or through Department of Veterans Affairs’ pharmacies.

Defense officials tried administratively to get the same discounts for the retail pharmacy network but that effort was blocked in 2006 through a successful industry lawsuit. A short time later, when TRICARE officials sought a legislation solution, White House politicos quietly sided with the Pharmaceutical Research and Manufacturers Association in opposing imposition of discounts on prescriptions through retail outlets.

Meanwhile, the administration has pressed Congress over the last three years to raise beneficiary co-payments at retail pharmacies to entice greater use of mail order and base pharmacies where federal prices do apply.

In passing the 2008 defense bill, the Democratically-led Congress left beneficiary co-payments unchanged, and directed that federal price discounts be expanded to brand name drugs filled in the TRICARE retail network.

The projected pharmacy savings for fiscal 2009, which total $719 million, exceeds the savings estimate used by Bush administration to argue for higher drug co-payments in the retail network. Only time will tell whether expansion of manufacturer discounts relieves budgetary pressure for raising retail pharmacy co-pays for beneficiaries.

Under the new law, drug companies that refused to extend discounts to TRICARE retail outlets risk seeing their drugs removed from the DoD uniform formulary. Drugs left off the formulary for “not honoring federal ceiling price,” said Rear Adm. Thomas McGinnis, chief of TRICARE pharmaceutical operations, won’t be dispensed without preauthorization which means a phone call to confirm the specific drug is medically necessary. Then the co-payment will be $22 per prescription rather than $9.

“No firm is going to want that for their product,” McGinnis said.

A “plain reading” of the new law shows Congress wanted the discounts to be effective at retail outlets Jan. 28, 2008, the day President Bush signed the bill, McGinnis said. But drug makers have filed a lawsuit in U.S. District Court challenging that contention, and arguing that the discounts don’t apply until DoD publishes a final rule for implementing the law.

A proposed rule was published in the Federal Register July 25. Industry comments are due back by Sept. 23.

If the court finds that a final rule must be in place before lower prices apply to retail outlets, drug makers will avoid as much as $700 million in refunds to DoD for retail drugs dispensed since Jan. 28.

“Because there’s so much money involved here,” McGinnis predicted, “we will see some creative arguments from the industry.”

DoD drug spending more than tripled from fiscal 2000 through 2006, rising to $6.2 billion from $1.6 billion. Most of the increase was in the convenient retail network where annual costs jumped nine-fold, from $455 million to $3.9 billion. McGinnis estimates that the cost of drugs dispensed through retail outlets will reach close to $4.5 billion in the current fiscal year.

One reason DoD eased up on its push for federal price discounts in the retail network was the level of savings being realized through voluntary agreements with drug manufacturers for base pharmacies and the mail order program. In establishing a DoD uniform formulary, or approved list of drugs, DoD began studying whole classes of drugs to determine what medicines are both clinically effective and cost effective. Through last October, 322 drugs had been reviewed and 249 were kept on the formulary

The rest were bumped, many of them for being too costly with no evidence that they were more effective. McGinnis said during this review process the cost of some drugs fell sharply because manufacturers wanted to ensure that their drugs were on the formulary.

“The industry has been bidding prices below the federal ceiling price, both at the military treatment facility and at the mail order pharmacy,” McGinnis explained. “It will take a while until we see whether they bid some of these retail pharmacy prices below federal ceiling prices.”

If that occurs, he said, forcibly extending federal discounts to TRICARE retail outlets could lead to savings greater than the current 25 percent.

For now, McGinnis said he will continue to urge beneficiaries to save themselves and the government money by using base pharmacies and mail order to fill their prescriptions. With mail order, beneficiaries get a three-month supply for the same co-pay as a one-month supply through retail.

Drugs dispensed on base or through mail order also will continue to cost DoD less. Federal pricing in retail outlets, McGinnis said, merely has narrowed the savings disparity. Using mail order or base pharmacies had saved the government 49 percent on each prescription. Now it will save about 24 percent, he said.

To comment, e-mail, write to Military Update, P.O. Box 231111, Centreville, VA, 20120-1111 or visit:

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