Drug Industry Wins HHS Discounts Rule Challenge

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By Dana A. Elfin

Oct. 15 — The drug industry scored a big win Oct. 14 when a federal court struck down a rule from the Department of Health and Human Services that allowed safety-net hospitals to purchase rare-disease or orphan drugs at discounted prices under certain conditions.

Judge Rudolph Contreras of the U.S. District Court for the District of Columbia found that the HHS's interpretive rule on the drug discount program, issued by the Health Resources and Services Administration (HRSA) in 2014, contravened the plain language of the governing statute, Section 340B of the Public Health Service Act (PHSA).

In addition, Contreras rejected HHS's argument that its interpretive rule didn't constitute final agency action and couldn't form the basis for a suit, finding instead that the interpretive rule was a final agency action.

Denying the government's motion for summary judgment and granting summary judgment to the industry, Contreras also found that the HHS’s interpretive rule on the discount program, which it issued after the court vacated the agency's final rule on the discount program, was “identical in substance to the vacated Final Rule.”

The Pharmaceutical Research and Manufacturers of America (PhRMA) sued HHS over the rule, following an initial suit in which it challenged an earlier version of the rule on discounts for drugs that have orphan uses as well as non-orphan uses.

Although the Affordable Care Act expanded 340B to include new types of providers, the law also added an exemption for orphan drugs, which narrowed the categories of drugs the new entities could access at reduced prices, the court said.

The court said the practical effect of the HHS's rulemaking was that while the discount isn't available for the newly covered 340B entities when buying orphan drugs to treat orphan or rare diseases, the discount is available when such drugs are purchased for a non-orphan use.

Drug Industry Group ‘Pleased'

In an Oct. 14 statement, Mit Spears, PhRMA's executive vice president and general counsel, said the group was “very pleased with the Court’s decision.”

“PhRMA supports the original intent of the 340B program and remains committed to working with the administration and Congress to reform the 340B program to ensure it reaches the vulnerable or uninsured patients it was intended to help,” he said. “To achieve this important objective, it is critical the program operates in a manner consistent with the clear and unambiguous direction of Congress.”

Safety-Net Providers Warn on Cost

But a trade group representing hospitals that participate in the 340B program warned the decision would greatly increase the cost of orphan drugs for rural and cancer hospitals and their patients.

Ted Slafsky, the president and chief executive officer of 340B Health, an association of over 1,000 hospitals that participate in the 340B program, said in a statement, “This is a major setback for rural hospitals who are already struggling to keep their doors open.”

In addition, the American Hospital Association issued a statement Oct. 15 expressing disappointment with the court's decision. Tom Nickels, executive vice president with AHA, said, “The ruling excludes all drugs with an `orphan' designation from the 340B Drug Pricing Program for rural and cancer hospitals. Denying these hospitals the ability to utilize 340B discounts for these drugs will reduce access to critical services and treatments for some of the most vulnerable patients in society.”

More Legal Challenges in the Offing?

Meanwhile, attorney Donna Lee Yesner, of Morgan Lewis & Bockius LLP in Washington, told Bloomberg BNA Oct. 15 that while she wasn't surprised by the merits of the decision, the procedural aspects of the decision could make the HHS's recent proposed “omnibus” guidance on the 340B program vulnerable to additional challenges. Comments on the guidance are due Oct. 27.

That guidance is for covered entities, such as hospitals and certain clinics, enrolled in the 340B program and for the drug manufacturers that are required to provide discounts on outpatient drugs. The document covers several aspects of the program, which helps safety-net providers obtain discounted drugs.

“What is interesting to me—and will impact the proposed mega guidance—is the court’s conclusion that the rule was reviewable as final agency action by a trade association rather than forcing individual companies to litigate the issue in enforcement proceedings,” Yesner told Bloomberg BNA in an e-mail.

“Factors the court considered (e.g., HRSA was unlikely to change its position that non-complying manufacturers would be in violation of the statute, compliance was costly, and manufacturers who did not comply would be subjected to severe sanctions) apply equally to some of the positions taken in the proposed guidance, so that may spawn more litigation,” she said.

The contract pharmacy program may be “especially vulnerable to challenge as an improper interpretation of the term ‘covered entity' and as an unauthorized substantive rule,” Yesner said. The contract pharmacy program was expanded to include retail pharmacies as covered entities.

She said it's also possible the covered entities will sue over the interpretation of the term “patient” because that limits their revenue.

As to the merits of the case, Yesner said she wasn't surprised the court concluded that HRSA’s interpretation was inconsistent with the statute because the agency clearly added criteria that narrowed the statutory exclusion. “The orphan drug rule always seemed to me to be outcome-driven—an effort to help the new covered entities enjoy the same benefits as other hospitals even if Congress did not provide for that,” she said.

“Interestingly, the court rejected HRSA’s argument that deference was due even if its interpretive rule was a final agency action, but concluded it didn’t matter as the interpretation contravened the plain language of the statute,” she said.

Orphan Drug Exemption at Issue

At issue in the case was HRSA's rule interpretation of the ACA's 340B orphan drug exemption.

PhRMA said the HHS rule extending the discounts to orphan drugs violated the plain language of the ACA's orphan drug exemption and said the government lacked the authority to issue the final rule.

The 340B program was created to help covered facilities make the most of scarce federal funds. The program was created in a 1992 law.

Second Suit by PhRMA

The lawsuit is PhRMA's second challenge to the HHS's rule on safety-net providers' discounts for drugs that have orphan designations.

PhRMA first challenged the HHS regulation in 2013.

The court vacated the rule in May 2014, finding the agency lacked the authority to issue it.

After its loss in court, the agency issued a new interpretive rule, and PhRMA sued again in October 2014, arguing that the interpretive rule still conflicted with the plain language of the statute.

While HRSA administers 340B, it is the Food and Drug Administration that designates a drug for an orphan indication.

The orphan designation from the FDA provides incentives for developing drugs for rare diseases or conditions. The designation qualifies a drug company for tax credits for qualified clinical testing and exemption from paying user fees in certain cases.

PhRMA was represented by Arnold & Porter LLP. Jean-Michel Voltaire of the Justice Department, Washington, represented the government. 

To contact the reporter on this story: Dana A. Elfin in Washington at delfin@bna.com

To contact the editor responsible for this story: Brian Broderick at bbroderick@bna.com

The opinion is available at http://www.bloomberglaw.com/public/document/PHARMACEUTICAL_RESEARCH_AND_MANUFACTURERS_OF_AMERICA_Plaintiff_v_.

The interpretive rule from the HHS is at http://www.hrsa.gov/opa/programrequirements/interpretiverule/interpretiverule.pdf.