Donna Lee Yesner

Partner, Morgan, Lewis & Bockius, LLP

As reported in articles published in the April 22, 2016 issue of the Friday Flash, the VA has posted a change in policy regarding the necessity to add covered drugs (SIN 42-2A) to Federal Supply Schedule (FSS) 65IB contracts.  Covered drugs include single source drugs and innovator multi-source drugs as defined in 42 USC §1396r-8, and biological products.  Although manufacturers of covered drugs must offer them on the FSS in accordance with the Veterans Health Care Act (VHCA), 38 USC §8126, the VA is bound by the Trade Agreements Act (TAA) prohibition against procuring items manufactured in non-TAA countries under contracts subject to the TAA, including FSS contracts, unless the contracting officer determines that the item is not available in sufficient quantities to meet the agency’s needs.  For many pharmaceuticals, the country of origin under the TAA is India or China, neither of which is a TAA country.  When necessary, the VA has made non-availability determinations for its own “national” requirements contracts, enabling manufacturers to bid non-TAA drugs for those contracts.  However, VA policy has prevented it from adding covered drugs to FSS contracts, as contemplated by the VHCA, because the VA administers the FSS contracts under a delegation of authority from GSA and GSA policy prohibited FSS contracting officers from issuing non-availability determinations. The VA’s policy reversal now allows covered drugs to be available on the FSS.

Pursuant to the new policy, manufacturers of covered drugs that are not TAA compliant must sign a letter requesting a non-availability determination and submit it with their addition Request for Modification form.  The form letter requires the manufacturer to verify that the listed NDCs for which the request is sought “have no TAA compliant version, including authorized generics,” and to state the requester understands that the contracting officer may make a non-availability determination based upon the statements in the letter.  Thus, it appears that the VA intends to consider, as it should, whether a TAA compliant generic version of an innovator multi-source drug is available for purchase.  This validation raises an interesting issue.  Why is the VA requiring manufacturers provide information on competing products instead of simply verifying itself that the drug is offered on the FSS by one or more contractors under its generic name?  Manufacturers do not have ready access to information on the country of origin of competing versions of a multi-source drug and cannot validate whether a generic version of its drug is or is not TAA compliant.  On the other hand, if an FDA-rated generic version is on the FSS, the VA can presume it is TAA compliant.[1] Moreover, if a TAA compliant version exists but is not offered on the FSS, as a practical matter, it isn’t available to the VA.  Thus, for purposes of making a non-availability determination, the simplest means for a contracting officer to determine if a TAA compliant version of a multi-source drug is actually available is to check the FSS.

Another significant issue for manufacturers of covered drugs being added to the FSS under the new policy time table is that the need for all manufacturers to add their drugs at the same time will create a backlog of drugs for which FSS prices need to be negotiated.  Adding these products to the FSS at the statutory price (76% of Non-Federal Average Manufacturer Price or NFAMP) should not be problematic as manufacturers of covered drugs are likely calculating and reporting a NFAMP for drugs that do not comply with the TAA (and were not on the FSS) pursuant to the VA’s prior guidance on this issue.  The real concern is negotiating a price by September 30, 2016, the deadline for setting the Max Cap for 2017.  In years after the first year of the FSS contract, the price of a covered drug cannot exceed the prior year contract price plus CPIU, which is referred to as the Max Cap.  Although the VA uses the negotiated FSS price as the prior year contract price rather than the statutorily calculated price to set the Max Cap, it is VA policy to use the contract price in effect on September 30th.  Manufacturers that do not have a negotiated FSS price by September 30th must use the statutorily calculated price to set the Max Cap for 2017.  Given the expected volume of negotiations between June and October for these newly added products, the VA should waive the deadline for companies that submit their CSPs by August 1st.

Finally, even if the reason for allowing FSS contracting officers to make non-availability determinations is to enable the VA to fulfill the intent of the VHCA that manufacturers offer covered drugs for sale on the FSS, the manner in which Schedule 65 I B contracts are awarded must still comply with procurement rules.  Just as a non-availability determination applies equally to all vendors interested in offering the same multi-source drug in response to a national contract solicitation, once a contracting officer determines a particular pharmaceutical is not available from a TAA country for purposes of Schedule 65 I B, so that the TAA prohibition need not apply to that drug, the determination should extend to all sources of the drug.  If a vendor selling an FDA-rated generic version wants to offer it on the FSS, and the VA determines neither the reference drug nor any generic version is available from a TAA country, it would be unfair to exclude the generic version from the FSS simply because offering it is not required by the VHCA.

[1] A drug is a multi-source drug if there is an FDA-rated generic equivalent to the innovator reference drug listed in the Orange Book.  The FDA does not rate an “authorized generic” for equivalence to the reference drug because an authorized generic is the reference drug sold under a different label.