Federal Court Invalidates 340B Orphan Drug Exclusion Final Rule, Holds That HHS Has Only Limited Rulemaking Authority under 340B Statute
The U.S. District Court for the District of Columbia (DDC) invalidated the 340B Orphan Drug Exclusion Final Rule1 on May 23, 2014, holding that the U.S. Department of Health and Human Services (HHS) lacks the statutory authority to promulgate it. The decision is significant not only because it vacates the first-ever regulation that HHS has finalized through rulemaking for the 340B Drug Pricing Program (340B program), but also because it does so by adopting a limited interpretation of HHS’ rulemaking authority for the 340B program overall. If the ruling stands (it is unclear at this time whether the government will appeal), it could have a substantial impact on the scope of future 340B regulations, including the much-anticipated 340B “mega-rule” that is currently pending.
The case is Pharmaceutical Research and Manufacturers of America v. United States Department of Health and Human Services (PhRMA v. HHS), Civ. Action No. 13-1501 (RC). The DDC decision by Judge Rudolph Contreras vacates the 340B Orphan Drug Exclusion Final Rule and grants PhRMA’s motions for an injunction and for summary judgment. The court states that the 340B statute “specifically authorized rulemaking in three places”—and finds that none of those specific grants of rulemaking authority authorizes the 340B Orphan Drug Exclusion Final Rule.
Stakeholders’ Opposition to the Final Rule
The case involved the application of 340B pricing to orphan drugs. Specifically, the 340B statute, as amended by the Affordable Care Act (ACA), provides that for certain 340B entities, “the term ‘covered outpatient drug’ shall not include a drug designated by the Secretary under section 526 of the Federal Food, Drug, and Cosmetic Act [(FFDCA)] for a rare disease or condition.” In other words, drugs designated for a rare disease or condition under the Orphan Drug Act are ineligible for 340B pricing for certain types of covered entities.
In July 2013, however, HHS’ Health Resources and Services Administration (HRSA) issued a Final Rule to implement this statutory exclusion in an “indication-specific” manner. Under the Final Rule, which took effect October 1, 2013, the statutory exclusion for orphan drugs for certain covered entities applies only where the drug is used “for the rare condition or disease for which that orphan drug was designated under section 526 of the FFDCA.” Thus, under the Final Rule, if an orphan drug is used by an affected entity for an indication other than its orphan-designated indication, the drug is eligible for 340B discounts—i.e., non-orphan uses of orphan drugs are eligible for 340B discounts when used by the affected covered entities. Further, other covered entity types may continue to claim 340B pricing for orphan drugs, regardless of the indication for which the drug is used.
Several stakeholders, including a number of pharmaceutical manufacturers and certain lawmakers, expressed strong opposition to the proposed and Final Rule, arguing that HRSA’s interpretation of the 340B orphan drug exclusion was contrary to the plain language of the statute and administratively unworkable. PhRMA, the pharmaceutical industry trade association, raised these arguments in its complaint and subsequent filings challenging the Final Rule. PhRMA also argued, more broadly, that HHS lacked the statutory authority to issue a rule on the 340B orphan exclusion in the first place, such that no rulemaking from HHS on this issue would be permissible. In its May 23 decision invalidating the Final Rule, the federal district court started and ended with the latter argument, finding it was “ultimately the dispositive one in this case.”
DDC’s Reasoning: Limited 340B Rulemaking Authority
The court held that “HHS lacks statutory rulemaking authority to promulgate the orphan drug rule at issue here.” HHS had cited five statutory provisions as supportive of its rulemaking authority on this issue, including provisions in the 340B statute. The district court rejected all of them, finding them to be either inapplicable to the orphan drug rule or “specific grants of authority that do not authorize the orphan drug rule implemented here.” As such, the court found that it “must give effect to the unambiguously expressed intent of Congress,” and vacate the Final Rule under Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984).
With respect to the 340B statute in particular, the court found that Congress “specifically authorized rulemaking in three places”: “(1) the establishment of an administrative dispute resolution process, (2) the ‘regulatory issuance’ of precisely defined standards of methodology for calculation of ceiling prices, and (3) the imposition of monetary civil sanctions.” Analyzing each of those provisions in turn, the court found that none of them authorizes HHS rulemaking on the 340B orphan drug exclusion.
The invalidation of the 340B Orphan Drug Exclusion Final Rule is positive for manufacturers that had opposed the rule. However, the reasoning upon which the court relies does not simply invalidate the reasonableness of the policy position that HHS took in the rule; instead, it holds that HHS lacks the authority to issue a rule on this issue at all. The decision could limit HHS’ ability to regulate other areas of the 340B program—such as the “patient” definition—for which stakeholders have urged additional clarity and increased regulatory specificity. Accordingly, the ruling could impact the scope and/or release of the pending 340B “mega-rule.”
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William A. Sarraille
1 Health Resources and Services Administration (HRSA), Department of Health and Human Services (HHS), Exclusion of Orphan Drugs for Certain Covered Entities Under 340B Program, 78 Fed. Reg. 44,016 (July 23, 2013).
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