The Orphan Drug Wars: HHS’s Recent Loss to PhRMA

by BakerHostetler

On May 27, 2014, almost a year following the promulgation of its final rule, the U.S. Department of Health and Human Services (HHS) had its rule vacated by the U.S. District Court for the District of Columbia under an injunction and the granting of a motion for summary judgment brought by the Pharmaceutical Research and Manufacturers of America (PhRMA). The HHS final regulation, issued July 23, 2013, would have permitted makers of the drugs designated for “orphan” conditions to charge the higher “orphan drug” price only when the drug was used to treat orphan conditions. PhRMA argued that this interpretation exceeded HHS’s authority and was not consistent with the statute, which did not limit the application to the treatment of the condition.

Under the ACA, new categories of providers were given access to the Section 340B Drug Pricing Program (340B Program). These providers include children’s hospitals, rural referral centers, sole community hospitals, critical access hospitals and cancer hospitals. The ACA provision set forth an exclusion of orphan drugs for such entities when involving “covered outpatient drugs.”

The ACA thus limited the use of the drug discount in defining the term “covered outpatient drug” by clarifying that the term does not include drugs designated for rare conditions under the Orphan Drug Act, in effect denying the affected facilities the discount for orphan drugs no matter what condition they were used to treat.

In its attempt to resolve questions and disputes relating to the meaning of the statute, HHS provided in its final rule that an orphan drug is exempt from 340B pricing requirements only when used to treat the rare condition or disease for which that orphan drug was designated. 78 Fed. Reg. 44016 at 44027.

The practical effect of the rule was that the discounted 340B price was not available to the added covered entities when purchasing orphan drugs for their intended orphan use. When the covered entity would have purchased the orphan drug for a non-orphan use, however, it would have received the 340B discounted prices. The final rule also imposed duties on the covered entities to maintain records of compliance.

PhRMA opposed the proposed rule and indicated in its complaint that it worked with HHS to communicate its concerns, urging HHS to respond to its comments and refrain from moving forward. Once the final rule was promulgated, PhRMA sued HHS, asserting that HHS was not given the authority by Congress to issue the regulation in question. Specifically, the Public Health Service Act, the Orphan Drug Act and the ACA did not provide HHS the authority to issue rules relating to the 340B Program and its effect on orphan drug pricing. In fact, HHS’s authority was limited to mediating disputes and providing for certain administrative processes. PhRMA argued that its members would be harmed by requiring manufacturers to provide drugs to the new categories of covered entities at 340B prices when such drugs are used for non-orphan indications, even though the statute expressly relieves manufacturers of that obligation. Additionally, PhRMA argued that the requirement for compliance and the addition of the qualification for knowing who was treated with the drug would impose on manufacturers and providers alike a burden for tracking the indications for which orphan drugs are ultimately used.

Judge Rudolph Contreras found that HHS “lacks statutory rulemaking authority to promulgate the orphan drug rule” at issue in the case. Judge Contreras provided some support for HHS by indicating in his ruling that he understood the desire and intent by HHS to avoid confusion relating to how the orphan drug exclusion applied. “Unfortunately, Congress did not delegate to [HRSA] broad rule-making authority as a means of doing so,” he concluded.

This ruling injects more uncertainty into the 340B arena, as the industry awaits the extensive 340B rules anticipated shortly, which reportedly sit at the Office of Management and Budget in their final review.

One thing is certain—the 340B Program and its application will continue to require the clarification that HHS was attempting to provide, and its implications for safety net providers will remain essential for allowing these providers to serve those individuals who need access to the drugs that the 340B Program was intended to cover.

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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