On July 23, 2014, the Health Resources and Services Administration (“HRSA”) issued an “interpretive rule” entitled “Implementation of the Exclusion of Orphan Drugs for Certain Covered Entities under the 340B Program” (the “Interpretive Rule”).[1] The Interpretive Rule follows the ruling by the U.S. District Court for the District of Columbia on May 23, 2014, that vacated the final rule previously released by HRSA on the treatment of orphan drugs under the 340B program (the “Final Rule”).[2]

By way of background, the 340B program, created in 1992 and administered by HRSA, requires drug manufacturers to give discounts to entities covered under the law—known as “Covered Entities”—in order to have their drugs covered by Medicaid. The Affordable Care Act, along with the Medicare and Medicaid Extenders Act of 2010, expanded the definition of Covered Entities to include critical access hospitals, free-standing cancer hospitals, rural referral centers, and sole community hospitals. For these categories of Covered Entities only, drugs designated by the Food and Drug Administration as drugs “for a rare disease or condition” (“Orphan Drugs”) are excluded from covered outpatient drugs subject to mandatory 340B pricing requirements (the “340B Orphan Drug Exclusion”).[3] Other Covered Entities, such as disproportionate share hospitals, are not subject to the Orphan Drug Exclusion.

Interpretive Rule on Orphan Drugs in the 340B Drug Pricing Program

Consistent with the now vacated Final Rule, the Interpretive Rule states that the 340B Orphan Drug Exclusion only excludes Orphan Drugs when those drugs are “transferred, prescribed, sold, or otherwise used for the rare condition or disease,” for which the drug was designated orphan status. For example, even though Prozac (fluoxetine) is an Orphan Drug for the treatment of autism, under HRSA’s interpretation of the 340B Orphan Drug Exclusion, a Covered Entity subject to the 340B Orphan Drug Exclusion may purchase Prozac for its eligible patients at the 340B discount price when it is prescribed for depression, a non-orphan condition.[4] To support its position, HRSA states that its interpretation is consistent with the FDA’s interpretation of the orphan drug provisions in the Federal Food, Drug, and Cosmetic Act, including the FDA’s application of incentives for the development of orphan drugs (e.g., market exclusivity, tax credit, user fee exemption) to only the use of the drug intended to treat the rare disease or condition and not non-orphan drug indications.

The Interpretive Rule also discusses Section 340B’s requirement that prohibits certain hospitals, including free-standing cancer hospitals subject to the 340B Orphan Drug Exclusion, from purchasing covered outpatient drugs through a group purchasing organization (“GPO”). As with the Final Rule, the Interpretive Rule states that this prohibition does not apply to Orphan Drugs when they are used for the orphan designated rare condition or disease. Therefore, free-standing cancer hospitals can use a GPO to purchase an Orphan Drug for such rare condition or disease but cannot use a GPO when the drug is being used for other non-orphan purposes.

In order to facilitate the identification of drugs with an orphan designation for 340B Program purposes, the Interpretive Rule states that on the first day of the month prior to the end of the calendar quarter, HRSA will publish a listing of orphan drug designations, providing the name of the drug and the designated indication. HRSA also repeats its position in the Final Rule that a Covered Entity cannot purchase Orphan Drugs through the 340B program if the Covered Entity does not have the ability to track the indication for drug use. Notably, the Interpretive Rule does not include the requirement of the Final Rule that Covered Entities must notify HRSA if they cannot or do not wish to maintain auditable records sufficient to demonstrate compliance with the 340B Orphan Drug Exclusion.[5]

Previous Court Decision

After HRSA issued the Final Rule in July 2013, the Pharmaceutical Research and Manufacturers of America (“PhRMA”) brought suit against HRSA claiming that the rule was invalid because it contravened the plain language of the statute.[6] First, the court determined that the Final Rule was a legislative rule, a rule which carries the force of law. Next, the court concluded that HRSA lacked the statutory authority to promulgate the Final Rule as a legislative rule.

In addition to arguing that it had the requisite authority to issue a legislative rule, HRSA also took the alternative position that the Final Rule was not a legislative rule and should be viewed and upheld as an interpretive rule. As opposed to a legislative rule, an interpretive rule provides clarifications or explanations of a statute and does not create a new law, modify an existing law, or create an enforceable right. Even though an interpretive rule does not carry the force of law like a legislative rule, courts will generally give deference to an agency’s interpretive rule.

Calling HRSA’s argument “half-hearted,” the court noted that the Final Rule underwent notice and comment rulemaking and had a “legal effect” on the parties, two components of the D.C. Circuit’s test for a legislative rule. However, the court concluded that it lacked sufficient information to decide if the Final Rule could be considered a valid interpretive rule. HRSA declined the opportunity to make additional arguments on this issue and instead chose to separately promulgate the rule as the Interpretive Rule.

Future Implications

Immediately after HRSA released the Interpretive Rule, PhRMA filed a court document arguing that HRSA’s Interpretive Rule was an attempt to “evade the Court’s holding” that HRSA did not have authority to issue this rule.[7] Thus, it is likely that litigation will continue over the scope of HRSA’s ability to engage in rulemaking, which will likely impact HRSA’s issuance of the proposed 340B “mega-rule.” The “mega-rule” would address multiple key components of the 340B program including the definition of an eligible patient, compliance requirements for contract pharmacy arrangements, and hospital eligibility including criteria for off-site facilities. HRSA had planned to release the “mega-rule” as early as June 2014, but given the questions surrounding HRSA’s authority to engage in rule-making, the “mega-rule” will likely continue to be delayed.

In the absence of a grant of general rulemaking authority in the 340B statute, HRSA’s custom has been to administer the 340B program through a series of Notices issued through the Federal Register, as well as other sub-regulatory guidance. Whether HRSA reverts to this practice as a result of, or in the absence of, a judicial determination regarding its rulemaking authority remains to be seen.

Jonathan Hoerner