38 U.S.C. § 8126 — Limitation on prices of drugs procured by Department and certain other Federal agencies

(a) Every manufacturer of a "covered drug" (defined in subsection (h)) must sign a master agreement with the Secretary. That agreement requires four things. First, starting January 1, 1993, the manufacturer must make each of its covered drugs available for purchase on the General Services Administration's Federal Supply Schedule. Second, for each covered drug bought on or after January 1, 1993 by one of the federal agencies listed in subsection (b) — if it's bought under depot contracting or listed on the Federal Supply Schedule — the manufacturer must have a pharmaceutical pricing agreement in effect (with the Secretary, or with that other agency if the Secretary delegates the job). Under that agreement, for the first year, the price charged can't exceed 76 percent of the average price the manufacturer charged non-federal buyers during the year before the agreement took effect, minus any extra discount required by subsection (c). If there isn't enough data to determine that non-federal average price, the Secretary picks whatever comparison period is appropriate. The Secretary can let the price nominally exceed that 76-percent cap if doing so is found to be in the best interest of the Department or the other federal agencies. Third, for covered drugs bought by a State home that receives funding under section 1741, the price can't exceed what's charged under the Federal Supply Schedule at the time of purchase. Fourth, unless a manufacturer meets all three of those requirements, it cannot receive payment for drugs or biologicals sold under a State Medicaid plan (except for a specific carve-out in the Social Security Act), sold to any federal agency listed in subsection (b), or sold to any entity that receives Public Health Service Act funding. (b) The federal agencies covered by this section are: the Department (VA); the Department of Defense; the Public Health Service, including the Indian Health Service; and the Coast Guard. (c) For a covered drug priced under a pricing agreement described in (a)(2), starting on or after January 1, 1993, the manufacturer must provide an extra discount whenever the "change in non-Federal price" (defined in subsection (h)) rises too fast. Here is the formula, step by step. First, find the drug's non-federal average manufacturer price over the 3-month period ending one year before the contract takes effect (or another period the Secretary picks, if there isn't enough data). Multiply that price by the percentage increase in the Consumer Price Index (all urban consumers, U.S. city average) between the end of that 3-month period and the last month before the contract takes effect for which CPI data is available. That product is the allowed increase. The required discount equals the actual change in non-Federal price minus that allowed increase. (d) For a manufacturer with a multi-year contract under (a)(2): after the contract's first year, the price charged in each following one-year period can't exceed the price charged the year before, increased by the percentage rise in the CPI (all urban consumers) over the 12 months ending with the last month of that preceding year for which CPI data is available. Also, when applying the subsection (c) discount formula to a year after the first, "the month during which the contract goes into effect" instead means the first month of that later year. (e) Manufacturers with a pricing agreement under (a)(2) have reporting duties. No later than 30 days after the first day of the last quarter before the agreement takes effect (or, for an agreement starting January 1, 1993, no later than December 4, 1992), the manufacturer must report to the Secretary the drug's non-federal average price over the year that just ended. Then, no later than 30 days after the end of each quarter the agreement is in effect, the manufacturer must report the non-federal average price for that quarter. Specific Social Security Act reporting provisions apply here the same way they apply to Medicaid drugs. The Secretary may audit the manufacturer's or a wholesaler's records to check whether a reported price is accurate, and may delegate that audit authority to one of the agencies listed in subsection (b). Any information reported under this subsection, or obtained through an audit, stays confidential — except when the Secretary determines it's necessary to share it to carry out this section, or to let the Comptroller General and the Congressional Budget Office review it. (f) The Secretary must supply the Secretary of Health and Human Services with two things: the manufacturer's name whenever a master agreement is executed or terminated, and, quarterly, a full list of manufacturers with master agreements under this section. (g) Any reference in this section to a Social Security Act provision means that provision as it existed on November 4, 1992. Also, a manufacturer is deemed to meet subsection (a)'s requirements if it satisfies the Secretary that it would comply — and has offered to comply — with this section as it stood right after enactment, and would have entered into an agreement, except that a later legislative change to this section got in the way. (h) This subsection defines six terms. "Change in non-Federal price" means the non-federal average manufacturer price for the 3-month period ending with the month before a contract takes effect, minus the non-federal average manufacturer price for the 3-month period ending one year before that. "Covered drug" means a drug described in specific clauses of Social Security Act section 1927(k)(7)(A) (or that would be, but for a related clause), or a biological product identified under a specific federal regulation (21 C.F.R. § 600.3). "Depot" means a centralized commodity management system through which covered drugs are received, stored, and delivered — either through a federally owned warehouse system or a commercial contractor performing that role — or delivered directly from the commercial source to the end user. "Manufacturer" means an entity that produces, prepares, or processes prescription drugs (by extraction, chemical synthesis, or both) or that packages, labels, or distributes them, but not a wholesale drug distributor or a state-licensed retail pharmacy. "Non-Federal average manufacturer price" means the weighted average price wholesalers in the United States pay the manufacturer for one form and dosage unit of the drug, accounting for cash discounts, but not counting any price the federal government pays or any price the Secretary finds merely nominal. "Weighted average price" is calculated by adding up, for every quantity of the drug sold during the period, the average price per package unit times the number of units sold, and then dividing that total by the total number of package units sold during the period. (i) If the Secretary modifies a multi-year contract under (d) to add a covered drug that wasn't available for inclusion when the contract began, the drug's price is set in two stages. For the remaining part of the first contract year it's added in, the price follows the rule in (a)(2), treating "the one-year period beginning on the date the agreement takes effect" as meaning just that partial first year. For every subsequent contract year, the price follows the rule in (d), treating "the first year for which the contract is in effect" as meaning that partial first year the drug was added. For this subsection, "contract year" means any one-year period the multi-year contract is in effect.