Recent Court Decision May Impact 340B Drug Pricing Program "Mega-Reg"

by Foley & Lardner LLP

A federal district court invalidated the first regulation published by the U.S. Department of Health and Human Services (HHS) addressing the 340B Drug Pricing Program (340B Program), on May 23, 2014, ruling that HHS had not been granted authority by Congress to issue the regulation. While the invalidated regulation addressed a narrow issue applicable only to certain 340B covered entities – the eligibility of orphan drugs for 340B Program pricing at certain hospital covered entities made eligible by the 2010 health care reform legislation (the Affordable Care Act or ACA) – the court’s ruling, and HHS’ decision not to challenge it, may indicate significant changes to forthcoming 340B Program regulations (the so-called “Mega-Reg”) that would impact all participating 340B Program covered entities and manufacturers.

The Invalidated Orphan Drug Rule

On July 23, 2013, the Health Resource and Services Administration (HRSA) within HHS published a final 340B Program rule implementing the statutory exclusion of orphan drugs for certain covered entities from the definition of a “covered outpatient drug.” The ACA expanded the types of covered entities that may obtain significant discounts from manufacturers on covered outpatient drugs through the 340B Program to include critical access hospitals, rural referral centers, sole community hospitals, freestanding cancer hospitals, and children’s hospitals, but prohibited these covered entities from purchasing orphan drugs at 340B Program discounted prices.

HRSA’s rule applied the statutory exclusion only to orphan drugs purchased by the newly eligible covered entities when the drugs are transferred, prescribed, or sold for treating the rare disease or condition for which the drug was designated as an orphan drug. Under the rule, 340B Program pricing could be available for drugs designated as orphan drugs when the drugs are dispensed or prescribed for a “non-orphan” condition. The regulation was challenged by the Pharmaceutical Research and Manufacturers of America (PhRMA), and supported by an amicus brief from the Safety Net Hospitals for Pharmaceutical Access, an association representing safety net health care providers.

The Court Decision

On May 23, 2014, the U.S. District Court for the District of Columbia struck down the orphan drug rule, holding that HHS lacked authority to issue the regulation. Applying principles of law established under the federal Administrative Procedures Act, the court found that the sources of authority referenced by HHS in promulgating the regulation failed to establish its authority to issue the regulation. Specifically, the court held that the 340B Program statute itself provides only limited grants of rulemaking authority in the following three areas:

  • the establishment of an administrative dispute resolution process for claims by manufacturers and covered entities,
  • standards and methodology for calculating ceiling prices, and
  • standards for the imposition of civil monetary penalties.

The court concluded HRSA’s orphan drug regulation did not fall within these areas of HHS’ rulemaking authority, and that no general statutory grant of authority had been made. Because the rulemaking exceeded HHS’ authority, the court vacated the rule and granted PhRMA’s motion for an injunction.

The Impact of the Court’s Decision

If HHS does not appeal the decision, the orphan drug rule will not have any legal effect. However, because the court found HHS lacked authority to promulgate the rule, it did not address or call into question the interpretations expressed by HHS in the rule. To the contrary, the court agreed HRSA’s attempt to issue standards addressing uncertainties surrounding the orphan drug exclusion issue in a “prophylactic” manner was a reasonable method for minimizing disputes, but nonetheless ruled that this approach had not been authorized by Congress. As a result of the ruling, 340B Program covered entities subject to the orphan drug exclusion and participating drug manufacturers lack binding guidance for determining or documenting compliance with the orphan drug exclusion, and therefore there are likely to be additional disputes on this topic in the future.

In its ruling, the court raised the possibility HHS could have authority to issue the orphan drug rule as an interpretive rule, rather than a legislative rule. According to the court, interpretative rules are not granted the same deference as legislative rules, but may nonetheless be given deference to the extent the agency’s interpretation of the relevant statutes has the power to persuade. On June 12, 2014, HHS filed a response to the court declining to submit additional briefing to defend the orphan drug regulation as an interpretive rule, and stated it did not interpret the court’s decision to prevent it from issuing an interpretive rule or other type of interpretive guidance, even if such rule or guidance includes the same interpretation included in the challenged regulation.

On June 18, 2014, HRSA added a statement to its 340B Program website indicating that it continues to stand by the interpretation set forth in its final rule. HRSA’s website also includes Frequently Asked Questions related to the orphan drug exclusion that state that orphan drugs that are used for “non-orphan” indications are not subject to the exclusion. While this interpretation has not been established in a valid regulation, HRSA could take the position in future disputes that its guidance should be treated with deference as the agency’s interpretation of the statute.

Potential Impact on 340B Program “Mega-Reg”

The court’s decision vacating the orphan drug regulation based on HHS’ lack of broad rulemaking authority to carry out all the provisions of the 340B program creates uncertainty with respect to whether HRSA has the authority to issue other broad regulations implementing the 340B program. 340B Program covered entities and drug manufacturers have long been awaiting the issuance of a planned 340B Program “Mega-Reg” to address key aspects of the 340B Program. HRSA submitted its draft of the proposed regulation to the Office of Management and Budget in April, and HHS currently lists the target release date for the regulation as July 2014. The regulation is expected to address areas such as the definition of an eligible patient, compliance requirements for contract pharmacy arrangements, hospital eligibility criteria, and eligibility of off-site hospital facilities. HHS has previously issued 340B Program notices addressing each of these areas, but has also recognized that many gray areas exist in how its prior notices should be applied. If promulgated, the Mega-Reg would be the first attempt by HHS to establish formal regulations outside of the orphan drug area.

HHS now must assess the impact of the recent court decision on the “Mega-Reg” and determine its next steps. Based on the court’s discussion of HHS’ narrow rulemaking authority with respect to the 340B Program, it is possible some portions of the “Mega-Reg” could be viewed as outside of the agency’s rulemaking authority. If HHS elects to reserve certain subjects from its proposed rule, drug manufacturers and 340B Program covered entities will likely have less guidance to rely on regarding how to comply with 340B Program requirements. The court’s ruling on the scope of HHS’ rulemaking authority could also help prompt additional Congressional action on the 340B Program.

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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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