On Friday, May 23, 2014, the U.S. District Court for the District of Columbia “vacated,” or invalidated, HRSA’s final rule on the treatment of orphan drugs under the 340B Drug Discount Program. The Health Resources and Services Administration (HRSA), which administers the 340B program, released the final rule in July 2013. It went into effect on October 1, 2013. As the court explained in its opinion (which explains the decision) and order (which implements the decision and vacates the rule), it vacated the final rule on the ground that the Department of Health and Human Services (HHS), the parent agency to HRSA, lacked the authority to issue a regulation (or “final rule”) on that topic. 

Background: As you may recall, the Affordable Care Act (ACA) expanded the 340B program to add certain new categories of eligible covered entities but excluded drugs subject to an orphan designation from the 340B ceiling price requirement as to those entities. The final rule interpreted that ceiling price exception narrowly, to apply only to orphan drugs when used for the indication subject to the orphan designation. As a result, the final rule allowed the new covered entity types to purchase orphan drugs at the 340B ceiling price when those drugs are to be used for non-orphan indications. 

In September 2013, the Pharmaceutical Research and Manufacturers of America (PhRMA) filed suit against HHS challenging the 340B orphan drug final rule. PhRMA made two arguments in support of its legal challenge. First, PhRMA alleged that HHS did not have the authority to issue a rule interpreting the orphan drug exception. Second, PhRMA alleged that, even if HHS had authority to issue a regulation, the final rule was inconsistent with the statute and therefore invalid on that ground. PhRMA’s position was that the statutory language that creates the ceiling price exception applies to the orphan drug as a whole, and not on an indication basis.

Decision: The Court agreed with PhRMA on the first point — that HHS did not have the authority to issue a regulation on the treatment of orphan drugs in the 340B program. The court’s decision evaluated each of the statutory provisions that HHS claimed gave it authority to issue the orphan drug rule and systematically explained why each provision did not do so. Importantly, the court rejected HHS’ argument that it had a general grant of authority to issue regulations to implement the Public Health Service Act, of which section 340B is a part. The court also rejected HHS’ claim that the ACA’s grant of rule-making authority as to particular aspects of the 340B program — in relation to the establishment of an administrative dispute resolution process, the calculation of the ceiling price, and the imposition of civil monetary penalties — provided implied authority for HHS to issue a rule in relation to orphan drugs as well. The court did not reach PhRMA’s second argument. By finding that HHS lacked authority to issue the regulation, the court did not need to address whether the rule itself was valid as a substantive matter.

Next Steps: HHS will have to decide in the near term whether it will appeal this decision. The agency certainly may have reason to do so, given the implications of this decision both in general as well as in relation to HHS’ plan to issue the proposed “mega-rule” next month in particular. The court left open the possibility that HHS could come back to the court with an alternative argument that the orphan drug regulation is an “interpretive” rather than a substantive rule. The court’s decision notes that this appeared to be a “half-hearted” argument by HHS even in the first instance, but left an opening for HHS to pursue that argument through further briefing. The court has provided HHS until June 13 if it wishes to file supplemental briefs on the interpretive rule issue.

Additional Considerations

  • Manufacturer obligations as to orphan drugs going forward — The orphan drug rule has now been vacated and therefore no longer is in effect. Manufacturers now need to determine their approach to orphan drugs going forward. While we would expect HRSA itself to issue some guidance on that topic, manufacturers should evaluate this issue on their own as well.
  • The Mega-Rule — If HHS does not have authority to issue regulations to implement the 340B program as a general matter, and the ACA’s grant of rule-making authority as to specific topics is limited to those topics alone, that begs the question of whether HHS has authority to issue regulations on the topics expected to be included in the mega-rule: the definition of an eligible patient, compliance requirements for contract pharmacy arrangements, hospital eligibility criteria, and eligibility of off-site facilities. It is important to note that the court’s decision analyzed the question of HHS’ rule-making authority only in relation to the orphan drug issue, and not as to these other 340B topics, but HRSA certainly will now need to be prepared for this same type of challenge to any regulation that does not have the support of a specific grant of rule-making authority.
  • Refunds — It remains to be seen whether the invalidation of HRSA’s regulation means that manufacturers are due refunds on 340B discounts provided since October 1, 2013 where required under the final rule.

As with any court decision involving a government program in which your company participates, it is very important that you review the materials directly and carefully yourself so that you can identify all issues relevant to your organization.