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June 3, 2014

U.S. District Court Ruling Vacating HRSA’s 340B Program Orphan Drug Exclusion Rule Casts Uncertainty on Forthcoming "Mega-Rule"

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UPDATE: Nothwithstanding the recent U.S. District Court ruling in Pharmaceutical Research and Manufacturers of America v. U.S. Department of Health and Human Services (HHS), on June 18, 2014, HHS stated that it will continue to permit critical access hospitals, free-standing cancer hospitals, sole community hospitals and rural referral centers to continue to purchase orphan drugs at the discounted rate under the 340B program when those drugs are not being used to treat the rare condition for which the drug received an orphan designation. It also said that manufacturers may be subject to penalties for non-compliance, including paying refunds to hospitals and clinics and facing termination of their pharmaceutical pricing agreements.

On May 23, 2014, the U.S. District Court for the District of Columbia vacated the Health Resources and Services Administration’s ("HRSA") Orphan Drug Exclusion Rule, concluding that HRSA “lacks the statutory authority to engage in such rulemaking.” The court’s ruling not only affects the validity of the Orphan Drug Exclusion Rule, but also raises questions as to whether some of the subject matter in HRSA’s highly anticipated 340B Program “mega-rule” expected later this month may fall outside of the agency’s limited rulemaking authority as determined by the D.C. District Court.

The Orphan Drug Exclusion Rule, published by HRSA on July 23, 2013, excludes certain types of 340B covered entities added under the Affordable Care Act (critical access hospitals, free-standing cancer hospitals, sole community hospitals and rural referral centers) from purchasing drugs at the 340B discount price when the drug is designated for a rare disease or condition and will be used by the covered entity for that disease or condition. The trade group Pharmaceutical Research and Manufacturers of America (PhRMA) filed suit in September 2013, challenging HRSA’s authority to promulgate this rule.

In an opinion authored by Judge Rudolph Contreras, the court noted that Congress specifically authorized rulemaking authority to HRSA relative to the 340B Program in three areas: (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. The court found that HRSA’s rulemaking authority was thus specifically limited, and that the agency was not granted broad authority to regulate all the provisions of the 340B program. Judge Contreras wrote, “[w]hile the court agrees that a prophylactic rule like this seems like the most reasonable way for implementing the orphan drug exclusion, unfortunately, Congress did not delegate to [HRSA] broad rulemaking authority as a means of doing so.”

HRSA is expected to publish a far more sweeping 340B Program regulation, the “mega-rule,” in the upcoming weeks, addressing the definition of an eligible patient, compliance requirements for contract pharmacies, hospital eligibility criteria, and eligibility of off-site facilities. If HRSA’s rulemaking authority is specifically limited to these three areas, as this ruling implies, then it undoubtedly begs the question of whether some of the topics in the new regulation will be considered outside of HRSA’s rulemaking limits. It also remains to be seen whether this ruling will delay the release and publication of the new regulation.

Find the Orphan Drug Exclusion Final Rule here.

Find HRSA's webpage on Orphan Drug Rule here.

Find the D.C. District Court opinion here.

About the Author

Diane Moes

Diane Moes is a partner at Donoghue Barrett & Singal where she provides general business and corporate legal services to healthcare clients including hospitals, physicians and other healthcare providers, faculty practice plans and provider networks.

Abbey Coffin contributed to this alert.

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