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From Health Law Daily, October 15, 2015

Court cannot find a legal home for HHS’ orphan drug 340B rule

By Bryant Storm, J.D.

An HHS Interpretive rule addressing the circumstances in which an orphan drug must be offered at a discounted "orphan drug price" exceeded HHS’ authority to interpret section 340B of the Public Health Service Act (PHSA) (42 USC sec. 256b). A district court reasoned that the Interpretive rule constituted a final agency action that contravened "the plain language" of section 340B(e) of the PHSA (Pharmaceutical Research and Manufacturers of America v. HHS, October 14, 2015, Contreras, R.).

Orphan Drug Act. Under section 526 of the federal Food, Drug and Cosmetic Act (FDC Act) (21 USC sec. 360bb), the FDA designates certain drugs designed to treat rare diseases or conditions as "orphan drugs." The drugs are called orphans because, without the financial and marketing incentives that Congress has afforded pharmaceutical manufacturers, "efforts to invest, research, and otherwise manufacture those drugs would likely be abandoned." The incentives include a seven-year period of market exclusivity, a tax credit for the clinical testing expenses incurred, research grants, and an exemption from the fees otherwise applicable to new drug applications. Drugs that carry the designation can be used to treat non-rare diseases or conditions.

340B. Under Section 340B of the PHSA, price ceilings are imposed on the amount that drug manufacturers can charge certain facilities for medications. In order for pharmaceutical manufacturers’ products to be covered under the 340B Program, manufacturers are required to enter into a Pharmaceutical Pricing Agreement with HHS to specify a ceiling price that covered entities must pay for the manufacturers’ drugs. The program was designed to stretch scarce resources to safety net facilities that primarily serve the poor.

ACA amendments. Section 7101 of the Patient Protection and Affordable Care Act (ACA) (P.L. 111-148) added certain children’s hospitals, rural referral centers, and community hospitals to the list of facilities entitled to the discounted prices under the 340B program. However, Section 2302 of the Health Care and Education Reconciliation Act (HCERA) (P.L. 111-152) provided that, for the newly added facilities, the term "covered outpatient drug" does not include drugs designated for rare conditions under the Orphan Drug Act. The effect of this amendment was to deny the affected facilities the discount for orphan drugs no matter what condition they were used to treat.

Final rule. In July 2013, HHS promulgated a Final rule (78 FR 44016) which provided that orphan drugs used for purposes other than treatment of the rare disease or condition were not excluded from 340B pricing. The court used the example of Prozac (fluoxetine), a drug that has been designated an orphan drug for the treatment of autism and body dysmorphic disorder in children, although its most common use is for the treatment of depression. Under the HHS Final rule, Prozac used to treat depression must be sold at the discounted price, but the facility must pay the undiscounted price when the drug was used to treat autism.

Lawsuit. The Pharmaceutical Research and Manufacturers Association (PhRMA) sued, claiming that the rule exceeded the agency’s authority. The court agreed with PhRMA and held that the Final rule exceeded the HHS’ statutory authority because the agency "had not been granted broad rulemaking authority to carry out all the provisions of the 340B program." In an additional argument, which the court called "half-hearted," HHS asserted that the rule could be upheld as an Interpretive rule. The court rejected that argument because the rule purported to have a binding legal effect, since it was promulgated through the formal notice and comment process (see Court invalidates HHS rule limiting prices of orphan drugs sold under 340B program, May 27, 2014).

Interpretive rule. After the court vacated the Final rule, HHS issued an Interpretive rule (79 FR 42801), "explaining how HHS interprets section 340B(e)." According to the court, "that interpretation—effective as of July 21, 2014—restates, in substantively identical terms, the interpretation that HHS had reached in its prior Final rule." Accordingly, HHS once again interpreted section 340B(e) as "excluding drugs with an orphan designation only when those drugs are transferred, prescribed, sold, or otherwise used for the rare condition or disease for which the drug was designated." PhRMA filed a complaint on October 9, 2014, challenging the Interpretive Rule as arbitrary, capricious, and an abuse of discretion under the Administrative Procedure Act (APA) (5 U.S.C. § 706(2)(A)). Both HHS and PhRMA moved for summary judgment.

HHS arguments. HHS asserted (1) the rule did not constitute a final agency action and therefore was not subject to judicial review and (2) even if the rule constituted a final agency action, its interpretation was entitled to deference. The court noted that HHS misunderstood the distinction between a legislative and interpretive rule. The court explained that the particular classification of the rule as "interpretive" was "beside the point." Rejecting HHS’ argument that there was no final agency action "until HHS initiates an enforcement action against a drug manufacturer and imposes a penalty for not complying with the statutory provision," the court held that the Interpretive rule could, and did, have a binding effect.

Legislative nature. The court explained that the Interpretive rule was legislative rather than interpretive in nature because it represented "a definitive and purely legal determination that puts pharmaceutical manufacturers to the painful choice of complying with HHS’s interpretation or risking the possibility of an enforcement action at an uncertain point in the future." The court explained that its finding was only furthered by the existence of the enforcement letters sent to manufacturers stating that a manufacturer who has not offered orphan-designated drugs at the 340B price when those drugs are not used to treat a rare condition or disease "is out of compliance with statutory requirements" and violating Section 340B.

Final agency action. Thus, the court reasoned that the interpretive rule raised a clear question of statutory interpretation and imposed "a significant burden on pharmaceutical manufacturers and other regulated entities alike." Accordingly, the court decided that the rule was not merely an expression of the agency’s view but a legislative pronouncement of a final agency action requiring change in manufacture behavior. The potential consequences for not following the agency mandates included refunding covered entities for charges in excess of ceiling prices, civil monetary penalties, and cancellation of a manufacturer’s Pharmaceutical Pricing Agreement, which could result in a "loss of Medicaid and Medicare Part B reimbursement for all of the manufacturer’s products." Due to the acute burden of those penalties, and because HHS has not yet established an administrative dispute resolution process for the 340B program, the court held that the penalties were "legal" rather than "practical" obligations. Therefore, the court held, "regardless of classification, the burdens posed by HHS’s Interpretive Rule here are sufficiently significant to rise to the level of a final agency action."

Arbitrary. For the second part of its analysis, the court considered whether the Interpretive rule was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law. The court explained that the Section 340B(e) orphan drug exclusion applies to a drug that is "designated . . . for a rare disease or condition." Additionally, the court held that the section refers only to the designation of that drug, and does not address whether the orphan drug is in fact used by the covered entity to treat the rare disease or condition for which it was designated. The court reasoned that "if a prescription drug product ‘designated as a drug for a rare disease or condition’ by definition only described that drug product when used to treat those rare diseases or conditions, Congress would not have needed to specify that the provision does not apply when that drug product’s alternative indications are included."

Plain language. Due to the fact that Congress sometimes did specifically place limitations on the phrase "designated . . . for a rare disease or condition," the court held that Congress intended the phrase to be used generally—that is to say without the limitation that HHS read into it. Thus, because section 340B "unambiguously indicates that Congress intended to exclude all drugs carrying an orphan-designation from 340B Program eligibility for the newly added entities," the Interpretive rule was contrary to the plain language of the statute.

The case is No. 14-1685 (RC).

Attorneys: Jeffrey L. Handwerker (Arnold & Porter LLP) for Pharmaceutical Research and Manufacturers of America. Jean-Michel Voltaire, U.S. Department of Justice, for Sylva M. Burwell, Secretary, U.S. Department of Health and Human Services, Mary K. Wakefield, Administrator, Health Resources and Services Administration.

Companies: Pharmaceutical Research and Manufacturers of America; U.S. Department of Health and Human Services; Health Resources and Services Administration

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