Recent Court Decision Limits HRSA's Authority Under the 340B Drug Discount Program - Will It Change the Impact of the Anticipated "Mega-Reg" on Industry Practices?

by Holland & Knight LLP


  • In the rapidly evolving landscape of the 340B Drug Discount Program, a recent court decision is the first to limit the rulemaking authority of the Health Resource and Services Administration (HRSA). This decision may significantly impact the pending "mega-reg" on various ambiguous aspects of the 340B Program.
  • The question now becomes what exactly does HRSA have statutory authority to regulate under the 340B Program and how far is HRSA willing to push the bounds of this authority through its future rulemaking?

In the rapidly evolving landscape of the 340B Drug Discount Program, a recent court decision is the first to limit the rulemaking authority of the Health Resource and Services Administration (HRSA). This decision may significantly impact the pending "mega-reg" on various ambiguous aspects of the 340B Program, due for comment later this month. On May 23, 2014, the U.S. District Court for the District of Columbia invalidated HRSA's final rule on the treatment of orphan drugs under the 340B Program (the "Orphan Drug Rule") in Pharmaceutical Research and Manufacturers of America v. United States Department of Health and Human Services (PhRMA v. HHS), Civ. Action No. 13-1501 (RC). Specifically, the court held that the Department of Health and Human Services (HHS), HRSA's parent agency, "lacks the statutory authority to engage in such rulemaking." The question now becomes what exactly does HRSA have statutory authority to regulate under the 340B Program and how far is HRSA willing to push the bounds of this authority through its future rulemaking?

Background of the 340B Program Orphan Drug Rule 

The 340B Program requires manufacturers participating in Medicaid to provide certain "covered entities" with covered outpatient drugs at significantly discounted prices. The Affordable Care Act (ACA) expanded the list of covered entities to include critical access hospitals, free-standing cancer hospitals, some children's hospitals, sole community hospitals and certain rural referral centers. At the same time, ACA excluded orphan drugs from the definition of covered outpatient drugs for certain of these newly eligible covered entities, thereby requiring those covered entities to purchase all orphan drugs at non-340B Program pricing, regardless of the purpose for which they were prescribed. HRSA sought to limit the impact of this provision of ACA by issuing the Orphan Drug Rule, effective as of Oct. 1, 2013, stating that the orphan drug exception only applied to limited types of 340B covered entities and only applied if the drug at issue was being used for its orphan-approved purpose (thus allowing orphan drugs used for "non-orphan purposes" to be eligible for discounted 340B Program pricing).

Litigation and Decision in PhRMA Lawsuit

In response, the Pharmaceutical Research and Manufacturers of America (PhRMA) filed a lawsuit to enjoin enforcement of the Orphan Drug Rule, arguing that HHS (and by extension, HRSA) lacked the statutory authority to promulgate a rule on the 340B orphan drug exclusion. The court agreed and held that Congress did not authorize HHS with general authority to carry out the 340B Program, but rather "specifically authorized rulemaking in three places":

  • the establishment of an administrative dispute resolution process for claims by manufacturers and covered entities
  • the "regulatory issuance" of precisely defined standards of methodology for calculation of ceiling prices
  • the institution of standards for the imposition of monetary civil sanctions applicable to participating manufacturers

The court concluded that HRSA's actions exceeded these three statutory provisions, rendering the Orphan Drug Rule invalid.

Impact of Decision on HRSA Rulemaking

The court's holding is significant due to its potential impact on HRSA's ongoing rulemaking and guidance regarding the 340B Program. This is the first occasion a court has limited HRSA's 340B Program authority. And, it comes at a particularly interesting time – HRSA was expected to publish sweeping new regulations (the so-called "mega-reg") governing several other aspects of 340B for comment later this month. Given the ambiguities in many aspects of the 340B Program, many predicted that the mega-reg would have a significant impact on industry practices. In particular, the mega-reg is expected to address the following:

  • the definition of an eligible patient
  • compliance requirements for contract pharmacy arrangements
  • hospital eligibility criteria
  • eligibility of off-site facilities

However, based on the court's reasoning in PhRMA v. HHS, some of these topics could be construed as outside HRSA's explicit rulemaking authority in section 340B. This leaves the scope, content and timing of the release of the pending mega-reg in doubt and, consequently, many aspects of the 340B Program will remain without detailed guidance and open to diverging interpretations in the industry.

To ensure compliance with Treasury Regulations (31 CFR Part 10, §10.35), we inform you that any tax advice contained in this correspondence was not intended or written by us to be used, and cannot be used by you or anyone else, for the purpose of avoiding penalties imposed by the Internal Revenue Code.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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