Early January has seen the release by FDA of a flurry of information on drug and device manufacturer communications, largely reaffirming FDA’s long-held approach to restricting manufacturer communications regarding off-label uses of approved drugs and medical devices. The most significant positive development arising from these documents is the Agency’s concession on proactive pre-approval communications with payors about investigational drugs and devices, allowing certain information to be provided to payors prior to a product’s approval. FDA’s guidance documents issued this week also clarify some grey areas surrounding the circumstances under which manufacturers may communicate about information that is consistent with or related to an approved indication, but is not included in approved product labeling.

While these pronouncements provide drug and device manufacturers with some additional leeway in their communications regarding investigational products and certain information about the approved uses of their products that is not included in the approved labeling, they do not address long-standing questions regarding the circumstances under which manufacturers may communicate about unapproved uses of their products in light of recent First Amendment case law. Instead, these last words of the Agency under the outgoing administration signal that, at least under the direction of current administration, FDA is not inclined to significantly expand manufacturers’ ability to communicate regarding unapproved uses of their products without the risk of enforcement. The eventual impact of the new administration on FDA’s approach to off-label communications remains a significant unknown.

In draft guidance on Drug and Device Manufacturer Communications with Payors, Formulary Committees and Similar Entities – Questions and Answers released on January 18, FDA signifies its acceptance of the position long held by industry and payors alike that payors need access to information regarding investigational drugs and devices to help them plan and budget for coverage of these products once they are approved. In the draft guidance, FDA states that it will not object to manufacturers providing payors with “unbiased, factual, accurate and non-misleading” information regarding investigational drugs and medical devices, provided that those communications include a clear statement of the investigational status of the product and that its safety and effectiveness have not been established, along with information regarding the stage of product development of the product.

Information that may be provided by manufacturers in accordance with FDA’s recommendations in the draft guidance includes information about the product such as its drug class or design, the indication sought and the patient population under investigation, a factual presentation of the results of clinical and pre-clinical studies without any conclusions regarding the product’s safety and effectiveness, the anticipated timeline for FDA approval, product pricing information, and anticipated marketing strategies and product-related programs and services, such as patient assistance programs. FDA also recommends that manufacturers update payors with any significant new information about the investigational product that differs from information previously communicated to them.

As suggested by its title, the primary focus of the draft guidance is on the communication of health care economic information (“HCEI”) regarding prescription drugs to payors, interpreting the changes to FDAMA Section 114 included in the 21st Century Cures Act that was signed into law in December. Notably, unlike FDA’s recommendations regarding pre-approval product communications with payors, this portion of the draft guidance does not apply to HCEI regarding medical devices. The draft guidance also makes it clear that the expanded HCEI communications permitted by FDAMA 114, as amended, are limited to payors, and similar flexibility in the levels of evidence required to support HCEI communications to payors do not apply to communications with health care providers or consumers. Additionally, consistent with the statute, the draft guidance limits the HCEI that may be provided to information that “relates to” an approved indication, confirming that FDA does not currently intend to permit the proactive dissemination to payors of HCEI related to off-label use.

In a series of questions and answers, FDA provides recommendations regarding the types of HCEI that may be provided, the scope of the payor audience to which this information may be provided, the types of competent and reliable scientific evidence that may be relied upon, the information that must be disclosed along with HCEI provided to payors, and perhaps mostly usefully, examples of the circumstances under which FDA will determine HCEI to relate, and not to relate, to an approved indication. FDA describes the categories of information that will be deemed to relate to an approved indication, even if they do not appear within, or vary in some respects from, the approved labeling; provided that the information is not inconsistent with the approved labeling. These include, among others, information on duration of treatment, burden of illness, length of hospital stay, information including actual patient use of an approved drug that varies from the approved dosing regimen, and information derived from clinical data demonstrating an effect on a validated surrogate endpoint or a comparison of safety and effectiveness with another drug or intervention.

FDA’s approach to “related” information in the draft guidance is similar to that taken in another draft guidance it released on January 17 on Medical Product Communications that are Consistent with the FDA-Required Labeling – Questions and Answers. In the Medical Product Communications draft guidance, FDA provides recommendations for manufacturers of drugs and medical devices on communications, including communications with health care providers, consumers and payors and in promotional materials, regarding information that is not included within the FDA-approved package labeling, but is consistent with that labeling.

In determining whether information provided by manufacturers is consistent with the product’s approved labeling, FDA will consider three factors. First, FDA will compare the information to the conditions of use in the approved labeling. To comply with the recommendations in the guidance, the information must relate to an indication, patient population, and dosing and administration instructions within the scope of those set forth in approved label, and it must not be inconsistent with any use limitation or directions for handling or using the product in the approved labeling. Second, the suggestions regarding the use of the product in the HCEI information must not increase the potential for patient harm relative to information in the approved labeling or otherwise adversely impact the risk-benefit profile of the product. Finally, the directions for use in the approved labeling must allow the product to be used safely and effectively under the conditions of use suggested in the HCEI information distributed by the manufacturer. If all three of these factors are met, FDA will not view that information, alone, as evidence that the manufacturer intends to promote the drug or device for a new intended use.

To assist manufacturers in applying these factors, the guidance includes examples of the types of communications that are, and are not, consistent with a product’s approved labeling. In describing the types of evidence required to support the disclosure of information that is not included in, but is consistent with, the approved labeling, FDA states that the data must be scientifically and statistically sound to support the representations made by the manufacturer to avoid being false or misleading, but because the safety and effectiveness of the product for the approved indication has already been established, the evidence need not meet the applicable approval or clearance standard for the product. For drug products, this means that two adequate and well-controlled clinical trials will not be required. The evidence must, however, be accurately characterized and any material limitations on the evidence must be clearly and prominently disclosed in language appropriate for the intended audience.

FDA also has, within a ten day period, released two other pieces of information relating to drug and device manufacturers’ communications regarding their products. On January 9, FDA issued a Final Rule on Clarification of When Products Made or Derived From Tobacco Are Regulated as Drugs, Devices, or Combination Products; Amendments to Regulations Regarding “Intended Uses”, clarifying the Agency’s position that a determination of a regulated product’s intended use may be determined based upon the totality of the evidence of the manufacturer’s objective intended use of the product, including the manufacturer’s knowledge of the product’s actual use for an off-label indication in practice.[1]  FDA states in the preamble to the Final Rule, however, that it will not bring an enforcement action based solely on a manufacturer’s knowledge that an approved or cleared product is being prescribed or used for an unapproved use.

The Proposed Rule released in September 2015 deleted from the drug and device intended use regulations at 21 CFR §§ 201.128 and 801.4 a reference to a manufacturer’s knowledge of off-label uses, specifically the statement that “[Intended use] may be shown by the circumstances that the article is, with the knowledge of such persons or their representatives, offered and used for a purpose for which it is neither labeled nor advertised.” Many commenters on the Proposed Rule had interpreted that deletion as excluding a manufacturer’s knowledge of off-label use from the evidence that may be relied upon to establish a manufacturer’s intent to promote a drug or device for an off-label use. The preamble to the Final Rule expresses FDA’s disagreement, and clarifies that FDA proposed deleting that language merely to avoid a potential misinterpretation that a manufacturer’s knowledge of an unapproved use of an approved or cleared medical product, without more, automatically triggers a requirement for that manufacturer to provide additional labeling for the unapproved use. FDA asserts that its intent was not to change the scope of information that could be relied upon as evidence of a manufacturer’s intended use of the product.  The amended language set forth in the Final Rule provides that “”intended use may be shown, for example, by circumstances in which the article is, with the knowledge of such person or their representatives, offered and used for a purpose for which it is neither labeled nor advertised.”

In the preamble to the Final Rule, in response to comments that existing First Amendment jurisprudence restricts FDA from bringing enforcement actions based on truthful and non-misleading speech regarding a product’s off-label use, FDA states that it is separately examining its rules and policies relating to firm communications regarding unapproved uses of approved and cleared medical products, and while those broader policy considerations are being addressed separately from the Final Rule, “[n]evertheless, it is important to note here that we do not agree with the assertion that the current case law allows FDA to consider speech as evidence of intended use only when it is false or misleading.” FDA cites recent Second Circuit precedent[2] to support its view that the Second Circuit’s 2014 Caronia decision does not foreclose the government’s ability to prove misbranding using promotional speech as evidence that a drug is intended for an off-label use. FDA goes on to describe the significant public health considerations that the Agency believes support its approach to limiting manufacturer communications regarding off-label uses of their approved or cleared products.

FDA makes similar assertions in a document posted to the docket for the November public hearing on Manufacturer Communications Regarding Unapproved Uses of Approved or Cleared Medical Products entitled, “Memorandum: Public Health Interests and First Amendment Considerations Regarding Unapproved Uses of Approved or Cleared Medical Products.” In a notice published in the Federal Register on January 19, 2017, FDA announces that it has reopened the comment period that was opened in connection with the public hearing on off-label communications that took place November 9 and 10, 2016 to allow interested parties an opportunity for additional comment based on the content of the memorandum and the two draft guidances discussed above. In this memorandum, FDA describes in detail the public policy considerations guiding its assessment of its restrictions on off-label communications, and the legal authority it believes supports its restriction of these communications and their use as evidence of intended use to support misbranding actions. FDA also describes its views on several alternative approaches to addressing the public health interests at issue.  FDA seeks additional comments on its views expressed in the memorandum and potential alternative approaches to regulating manufacturer communications regarding off-label indications of their approved products.  The docket will remain open until April 19, 2017.

[1] In addition to its provisions specific to determinations of when a tobacco product will be regulated as a drug or device, the Final Rule also amended intended use regulations at 21 CFR §§ 201.128 and 801.4.

[2] United States ex rel. Polansky v. Pfizer, Inc., 822 F.3d 613 n.2 (2d Cir.2016).

On October 24, 2016 the Food and Drug Administration (“FDA”) in conjunction with the Centers for Medicare & Medicaid Services (“CMS”) announced their intention to extend the Parallel Review pilot program indefinitely. The Parallel Review process is intended to provide timely feedback on clinical data requirements from FDA and CMS, and minimize the time required for receiving Medicare coverage nationally.  Sounds good.  So, why have so few manufacturers taken advantage of the program to date?

Despite its admirable goals, the current Parallel Review Process is too limited in scope and involves significant risks for manufacturers.

The standard process for obtaining Medicare coverage involves a sequential review. First, the device manufacturer must obtain approval, 510(k) clearance, or a de novo classification by the FDA.  After FDA approval, clearance, or de novo classification has been received, the manufacturer would seek coverage of the device or procedure using the device from CMS.  The manufacturer has the option of pursuing a National Coverage Determination (“NCD”) from CMS or a local coverage determination (“LCD”) from one or more of the Medicare Administrative Contractors (“MACs”).

In contrast, under the Parallel Review program, FDA and CMS simultaneously review manufacturer’s clinical trial design and data. Parallel Review is broken down into two stages: (1) the pivotal clinical trial design development stage, and (2) the concurrent evidentiary review stage. This two stage process is designed to allow manufacturers to minimize the likelihood of having to conduct additional trial(s) at a later date to meet CMS’s coverage requirements and shorten the overall timeline by having the agencies review the evidence simultaneously.  Although the goal is right, there are some disadvantages.

First, the Parallel Review program is limited to devices that are subject to pre-market approval or de novo classification. This is only a small portion of the market today. To put this in context, for every 140 510(k)s cleared by the FDA, one PMA is approved. In 2014, for example, there were 3203 510(k) clearances compared to only 42 PMAs and 28 de novo classifications. This means that the vast majority of devices will not be eligible for Parallel Review.

The more significant limitation is that the program requires the manufacturer to pursue a NCD. Deciding whether to pursue a NCD or LCD is a significant strategic consideration for any manufacturer.  Requiring that manufacturers apply for a NCD in the Parallel Review process  creates a high degree of risk that manufacturers – and their investors – may not be willing to take. As manufacturers are painfully aware, if CMS issues an unfavorable NCD, Medicare coverage is not available anywhere in the US. Because NCDs apply nationally to all MACs, the LCD option is foreclosed by an unfavorable NCD. Manufacturers can appeal, of course. But reopening an adverse NCD requires a significant amount of new data that may take years to compile through new clinical trials and there is no guarantee that a reopening will be granted or a favorable NCD will be published.  As a result, the lack of a choice between NCDs and LCDs can be a powerful deterrent to the Parallel Review program.

This risk is compounded by the fact that manufacturers are not allowed to drop out of the NCD process after the NCD tracking sheet has been publicly posted by CMS. Although the program is designed to provide early feedback, it is not unusual for CMS to have additional comments throughout the NCD process. Under the current Parallel Review process, manufacturers would be required to pursue NCDs even if they later received new information that made the NCD pathway less desirable.

It is also unclear if the program is appropriately resourced. The Parallel Review Pilot Program was limited to no more than five candidates per year. If the Agencies are serious about accelerating the path to market and payment for even this subcategory of devices, they need to allow more devices into the program and ensure that it is appropriately staffed to adequately address the needs of the participants.

While the Parallel Review program has its challenges, it is a step in the right direction. It just does not go far enough.  In order to have a more predictable and streamlined path to market, manufacturers need clear guidance on coverage criteria that can be leveraged nationally or locally.  Moreover, this guidance should apply to any device that required clinical evidence for coverage, regardless of whether the device is subject to a PMA, de novo or 510(k) clearance.

By focusing on broad based improvements to the coverage determination process, the Agencies would be able to provide patients with access to more devices more quickly using less Agency resources. If, for example, the time frame for the NCD and LCD process could be reduced by 20 days on average by providing more transparent guidance, and if you could apply that to half of the products that received approval, de novo classification, or clearance in 2014, that would save over 32,000 days of review time.  Admittedly, that is spread out over time and among manufacturers but the impact is not insubstantial.

FDA’s expansion of its program to include the opportunity to get feedback from private payors is also a positive development for manufacturers.   While it is still too early to know the impact of this program, commercial payors are another key piece of any manufacturer’s commercial strategy and must be considered early.

The decision to make the Parallel Review Program permanent no doubt reflects a commitment by FDA and CMS to working with manufacturers to help bring new devices to market in a faster and more efficient way.   However, opportunities remain to improve the program to expedite the process in a way that benefits industry – and patients – more broadly.

On July 7, 2016, the Centers for Medicare and Medicaid Services (“CMS”) imposed several administrative penalties on Theranos, a clinical laboratory company that proposed to revolutionize the clinical laboratory business by performing multiple blood tests using a few drops of blood drawn from a finger rather than from a traditional blood draw that relies on needles and tubes. However, after inspecting the laboratory, CMS concluded that the company failed to comply with federal law and regulations governing clinical laboratories and it posed an immediate jeopardy to patient health and safety. CMS has revoked the CLIA certification of the company’s California lab, imposed a civil monetary penalty of $10,000 per day until all deficiencies are corrected, barred Medicare or Medicaid reimbursement for its services, and excluded its founder and CEO from owning or operating a clinical laboratory for two years.

Although Theranos’s history has received an outsize amount of media attention, its experience with regulatory agencies highlights several important issues for start-up and emerging health care entities:

What Do Regulators Want?

It is no surprise that health care is one of the most highly regulated sectors of the U.S. economy, and that noncompliance with health care laws and regulations can result in penalties that can cripple an organization or force it to shut down. As a result, even in an environment that encourages innovation, health care organizations must understand the scope of regulatory oversight at the federal and state levels, and the range of remedies available to regulators for noncompliance. Every organization should also have a protocol in place for responding to regulatory inquiries or inspections.

What Do Health Care Providers and Payors Want?

Adopting a new health care technology is an intensely data-driven process. This is especially the case with clinical laboratories, which are subject to rigorous requirements for proficiency, quality assurance, and training. This burden is greater for laboratory-developed tests, commonly known as “home brew” tests, because they are currently exempt from FDA oversight.

In most cases, the innovator sponsors clinical studies subject to peer review and publication to demonstrate the efficacy of the new technology. These trials can also generate the clinical and cost data needed to convince practitioners that the test has reliable diagnostic or clinical value, and to persuade payors that the test is medically necessary.

However, Theranos declined requests to sponsor studies or disclose data. This was a red flag for many clinicians. In the interim, a group of independent investigators published a study based on a small sample of patients and found that the Theranos’s results were more variable than the results obtained from the same blood samples sent to laboratories using standard equipment. These variations were significant enough that they had the potential to affect clinical decision-making and jeopardize patients.

Who Is Investing in the Venture?

For start-up companies, committed investors are indispensable. Although early-stage investors are accustomed to risk, they also depend on reliable data to gauge whether health care professionals will adopt a new technology, and whether health plans will cover and pay for that technology. In Theranos’s case, several investors with experience in health care start-ups did not invest in the company because it did not release data on its proprietary technology and did not conduct or sponsor well-controlled clinical trials.

Who’s on Board?

The critical role of health care regulations demands that a company’s management and board be familiar with the key challenges and potential barriers to entry under the applicable regulatory framework. Nevertheless, at the time of the CMS survey Theranos’s board reportedly lacked individuals with specific experience in health care operations or clinical laboratories; however, it included two former Secretaries of State (one of whom had also been the dean of a business school), two former U.S. senators, the CEO of a bank, and retired military officers. While it is unclear how much the board knew of potential regulatory risks, the fact that CMS determined that the company had not made a “credible allegation of compliance” in response to any of the deficiencies in the initial survey report is an indicator that CMS did not believe that the company’s management and directors may not have appreciated the regulatory requirements or how to avoid or minimize these significant risks.

In its recent decision in U.S. House of Representatives v. Burwell,[1] the U.S. District Court for the District of Columbia ruled that the Obama administration’s payment of cost-sharing subsidies for enrollees in plans offered through the Affordable Care Act’s Exchanges is unauthorized for lack of Congressional appropriation. The decision would affect future cost-sharing subsidies, though the court immediately stayed the decision pending its outcome on appeal.[2]

In its decision, the court found in favor of the members of the House of Representatives, based upon its interpretation of the applicable law. Specifically, the court found that, when Congress passed the Affordable Care Act, including Sections 1401 (premium subsidies) and 1402 (cost-sharing subsidies), it permanently appropriated funds for the former but not the latter.

The court examined prior Office of Management and Budget submissions to the House Appropriations Committee, finding that the administration had explicitly acknowledged the lack of appropriated funds for the cost-sharing reduction payments. After the Republican-controlled Congress declined the administration’s appropriations requests for the cost-sharing reduction funds, President Obama signed an appropriations bill without it. Treasury subsequently paid the cost-sharing subsidies to issuers without an appropriation. As of December 2015, 56.4% of Exchange plan enrollees were receiving the subsidies.[3]

The court rejected the administration’s arguments that, under King v. Burwell, the Act must be read for its intended effect. While King identified “three key reforms”—guaranteed coverage and community rating, individual mandate and premium tax credits—the court found that King did not treat the section 1402 cost-sharing reduction provisions as integral to those reforms. Moreover, King found the Exchange statute nonfunctional due to drafting failure and thus in need of saving. By contrast, the district court found that, here, Congress’s simple failure to appropriate cannot be remedied by a court.

The case will almost certainly be appealed to the D.C. Circuit Court of Appeals.

Ultimately, if the ruling is affirmed, absent a Congressional fix, new legal problems would arise for the Affordable Care Act’s Exchanges. Regardless of an appropriation, the Act still requires issuers to reduce cost-sharing for eligible enrollees, which would likely shield consumers but leave issuers financially exposed.

Moreover, notwithstanding the apparent lack of appropriation, the Act requires the government to pay issuers for the cost-sharing subsidies. This raises questions concerning the government’s ability to recoup payments already made. Should the government elect to discontinue the payments going forward, issuers could seek legal redress.

Notably, an affirmation of the district court could impact Exchange premiums. Many issuers have already raised premium rates for 2017, citing a high proportion of costlier, sicker enrollees. Should the courts ultimately place the burden on issuers to subsidize cost sharing, these costs are also likely to be shifted to premiums.

______

[1] House of Representatives v. Burwell, No. 14-1967 (D.D.C. May 12, 2016), available at https://ecf.dcd.uscourts.gov/cgi-bin/show_public_doc?2014cv1967-73.

[2] In an earlier, controversial ruling in this proceeding, the same court allowed members of the Republican majority of the U.S. House of Representatives to proceed with the suit against the Secretaries of Treasury and Health and Human Services. The administration had argued that the House members did not standing to sue, but the court disagreed and declined to dismiss the suit.

[3] According to CMS, as of December 31, 2015, the ten highest states by percentage of Exchange plan enrollees receiving cost sharing subsidies were Mississippi (76.7%), Alabama (72.2%), Florida (70.1%), Georgia (68.1%), Hawaii (67.90%), North Carolina (63.9%), South Dakota (63.3%), Idaho (62.9%), Tennessee (62.7%) and Utah (62.6%). See CMS, Effectuated Enrollment Snapshot (Mar. 11, 2016), https://www.cms.gov/Newsroom/MediaReleaseDatabase/Fact-sheets/2016-Fact-sheets-items/2016-03-11.html.

In its Fiscal Year 2017 Private Insurance Legislative Proposals, President Obama’s Budget contains a provision seeking to “eliminate surprise out-of-network healthcare charges for privately insured patients.” Described as an attempt to “promote transparency on price, cost, and billing for consumers,” this measure requires hospitals and physicians to collaborate so that patients receiving treatment at in‐network facilities do not face unexpected charges from out‐of‐network practitioners. This provision could have far-reaching effects, potentially impacting enrollees in traditional commercial plans, Exchange plans and government plans (such as Medicare Advantage plans).

A surprise bill situation arises when patients incur unexpected, out‐of‐network charges when receiving health care services at an “in-network” or “participating” hospital. For example, a surprise bill may arise from a situation where certain physicians (e.g., anesthesiologists or emergency room physicians) who provide services to the patient during an episode of care are not participating with a health plan, even if other providers who see the patient and the hospital itself are participating. In such scenarios, the non-participating providers may charge patients for both cost sharing and any unpaid balances for those specific services, as if the patient had gone to an “out-of-network” or “non-participating” provider.

The proposal in the Budget would change that and require hospitals and physicians to “work together to ensure that patients receiving treatment at in‐network facilities do not face unexpected out‐of‐network charges from out‐of‐network practitioners that cannot be avoided by the patient.” This would be accomplished by requiring hospitals to take “reasonable steps” to match patients with providers who are considered in‐network for the patient’s plan. Also, all physicians who regularly provide services in hospitals would be required to accept the contracted, in‐network rate as payment‐in‐full, even though no actual contract is in place. Thus, in situations where a hospital failed to match a patient to an in‐network provider, safeguards would still be in place to protect the patient from surprise out‐of‐network charges. How such amount would be calculated and enforced is not yet clear at this stage.

On a state level, legislation has been passed that affords patients protections against surprise bills in California, Texas, Florida, Illinois, Colorado, Maryland, West Virginia and New Jersey, but the state with the most rigorous protections is New York. A New York law went into effect in March 2015, protecting patients from surprise bills when services are performed by a non-participating doctor at a participating hospital or ambulatory surgical center or when a participating doctor refers an insured patient to a non-participating provider (the law also protects consumers from bills for emergency services).

Many particulars regarding the proposal in the Budget remain unclear, as limited information was presented around the proposed provision. Besides the need for legislative action, specific questions exist around what standards would be used for calculating new payment rates, implementation and enforcement mechanisms, provider appeal and dispute resolution processes, managed care contracting implications, state versus federal jurisdictional issues and impacts on plan premium pricing. However, what is clear is that the federal government has begun to follow states’ leads in introducing protections for patients from unforeseen medical expenses.

On Wednesday, October 14, 2015, the U.S. District Court for the District of Columbia (the “Court”), Judge Rudolph Contreras, vacated the Health Resources and Services Administration’s (“HRSA”) interpretive rule on Orphan Drugs (“the Interpretative Rule”) as “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”[1]  As a result of the ruling, pharmaceutical manufacturers are not required to provide 340B discounts to certain types of covered entities for Orphan Drugs, even when the drugs are prescribed for uses other than to treat the rare conditions for which the Orphan Drug designation was given.[2]  This issue has been the subject of long and protracted litigation including a previous court ruling that invalidated HRSA’s Final Rule on Orphan Drugs because HRSA lacked the authority to promulgate the rule.[3] [HRSA Issues Interpretive Rule on 340b Orphan Drug in Response to Court Vacating Final Rule]

By way of background, the Affordable Care Act (“ACA”) amended the Public Health Service Act (“PHSA” or “the statute”) and expanded access to 340B discounts by creating new categories of eligible covered entities including freestanding cancer hospitals, children’s hospitals, critical access hospitals, rural referral centers and sole community hospitals.[4]  For these categories of covered entities only, the amendment also excluded drugs  “designated by the Secretary under section 360bb of Title 21 for a rare disease or condition” (“Orphan Drugs”) from the definition of covered outpatient drugs subject to mandatory 340B pricing requirements (“the orphan drug exclusion”).[5]

In the Interpretive Rule issued on July 24, 2014, HRSA narrowly interpreted the exclusion and required pharmaceutical manufacturers to provide 340B discounts to the new types of covered entities for Orphan Drugs when they are used to treat something other than the rare diseases and conditions they were developed to target.[6] In addition, HRSA sent letters to pharmaceutical manufacturers stating that failure to provide 340B discounts to eligible 340B covered entities for non-orphan uses would be deemed a violation of the statute.[7]  The lawsuit challenged HRSA’s interpretation, arguing that the orphan drug exclusion must apply to Orphan Drugs regardless of their particular use.[8]  The Court denied HRSA’s motion for summary judgment and granted PhRMA’s motion for summary judgment because it determined HRSA’s Interpretive Rule was contrary to the plain language of the statute.[9]

Analysis in the Court’s Opinion

Initially, the Court recognized HRSA’s authority to offer its interpretation of the statute and noted that PhRMA was not challenging HRSA’s authority to issue the Interpretive Rule.  Although the Court determined in the previous litigation that HRSA did not have authority under the statute to promulgate its Final Rule, the Court recognized that HRSA would need to provide interpretation of a pharmaceutical manufacturer’s obligations under the 340B Program.[10]

The Court determined that the Interpretive Rule constituted “final agency action” under the Administrative Procedure Act (“APA”).[11]  The Court focused the majority of its analysis on whether HRSA’s Interpretive Rule was “final.”[12]  Based on the two-part test set forth in Bennett v. Spear, the Court analyzed whether the action was the “consummation of the agency’s decision-making process” and whether “the action must be one by which rights or obligations have been determined or from which legal consequences will flow.”[13]  Since HHS conceded that the Interpretive Rule met the first element, the Court focused on the second element and determined that even prior to enforcement action, there were significant practical and legal burdens for covered entities and pharmaceutical manufacturers in the Interpretive Rule that impacted their business practices.  Additionally, since HRSA sent the manufacturers letters informing them that they were non-compliant with the statute unless the requirements in the Interpretive Rule were followed, potential penalties would accrue until HRSA pursued an enforcement action.[14]  The Court stated that “[h]aving thus flexed its regulatory muscle, [HHS] cannot now evade judicial review.”[15]  The Court concluded that the Interpretive Rule met the second element of the Bennett test.[16]

When analyzing the merits, the Court held that the Interpretive Rule “conflicts with the statute’s plain language.”[17]  Because of the conflict, the Court afforded the Interpretive Rule no deference.[18]   The Court relied on how Congress used the Orphan Drug terminology in other parts of the U.S. Code.[19]  Previously, in other contexts Congress included additional language to specify that the applicability was limited to occasions when the designated drug was used to treat the rare disease or condition, rather than the use of the Orphan Drug in general.  The Court noted that if it adopted the narrow meaning HRSA intended under the Interpretive Rule, the identified phrases elsewhere in the Code would be rendered superfluous based on the principle of statutory construction to give effect to every word in the statute.  Because of its conflict with the plain language of the statute, the Court held that the Interpretative Rule was “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”[20]

Implications from the Decision

This decision means that pharmaceutical manufacturers are not required to provide 340B discounts on Orphan Drugs, whatever their use, to the types of covered entities added by the ACA. The Court acknowledged concerns that the amount of lost savings for these drugs could impact a covered entity’s decision to participate in the 340B Program.[21]

Additionally, this decision has implications for HRSA’s proposed Omnibus Guidance published on August 28, 2015, the comment period for which is open until October 27, 2015.  The Omnibus Guidance provides comprehensive guidance for the 340B Program. [HRSA Issues Proposed “Omnibus Guidance”].  While the Court recognized HRSA’s ability to issue interpretive guidance,[22] such guidance could be vulnerable to challenge if HRSA, after consideration of the comments submitted, finalized an Omnibus Guidance that is not consistent with the 340B statute.  Industry stakeholders should consider highlighting these types of inconsistences in the proposed Omnibus Guidance as they formulate comments for submission next week.

Finally, the recent decision might provide impetus for Congress to take legislative action.  The Court noted that it “would not rewrite the statute,” suggesting that Congress needs to take action if its intent was to limit the orphan drug exclusion.[23]  Given Congress’ recent focus on the 340B Program, it is possible that Congress could either amend the statute to clarify the orphan drug exclusion or to provide HRSA with additional rulemaking authority to allow it to address this issue and other oversight issues.


[1] 5 U.S.C. § 706(2)(A).  Pharm. Research & Mfrs. of Am. v. U.S. Dep’t of Health & Human Servs, No. 1:14-cv-01685-RC at 38 (D.D.C October 14, 2015) (hereinafter “PhRMA“).

[2] PhRMA at 36-8. HRSA may appeal the District Court’s decision within 60 days of the decision date.

[3] Pharm. Research & Mfrs. of Am. v. U.S. Dep’t of Health & Human Servs., 43 F. Supp. 3d 28 (D.D.C. 2014).

[4] Patient Protection and Affordable Care Act, Pub. L. No. 111-148, § 7101(a), 124 Stat. 119, 821–22 (codified as amended at 42 U.S.C. § 256b(a)(4)(M)–(O)).

[5] 42 U.S.C. § 256b(e).  The orphan drug exclusion does not apply to disproportionate share hospitals.

[6] HHS HRSA, Interpretive Rule: Implementation of the Exclusion of Orphan Drugs for Certain Covered Entities Under the 340B Program, (July 21, 2014), http://www.hrsa.gov/opa/programrequirements/interpretiverule/

[7] PhRMA at 10.  Additionally, the HRSA website explained that manufacturers could be subject to statutory penalties, refunds of overcharges, or termination of their Pharmaceutical Pricing Agreements. Id.

[8] Id.  at 1-2.

[9] Id. at 1-2.

[10] Id. at 12-13.

[11] The APA mandates that judicial review is permitted only when there is “final agency action.”

[12] Id. at 14, 15-27.

[13] Id. at 14.

[14] Id. at 22-26.

[15] Id. at 27.

[16] Id. at 23-27. 

[17] Id. at 2.

[18] Id. at 29.  The Court explained that if the statute were ambiguous, the Interpretive Rule was entitled to Skidmore deference, which means the Court would only follow the Interpretive Rule to the extent it is persuasive. HRSA’s Interpretive Rule would not receive Chevron deference because HRSA lacked the authority to promulgate regulations related to the orphan drug exclusion (as decided in the prior litigation).  Id.

[19] Id. at 30.

[20] Id. at 38.

[21] Id. at 36-37.

[22] Id. at 12-13.

[23] Id. at 37.

On September 28, 2015, the Centers for Medicare & Medicaid Services (“CMS”) issued a request for information (“RFI”) seeking comments on two key components of the physician payment reform provisions included in the Medicare Access and CHIP Reauthorization Act of 2015 (“MACRA”), the law enacted on April 16, 2015, repealing the sustainable growth rate formula used to update payment rates under the Medicare Physician Fee Schedule.  The RFI was originally open for a 30-comment period.  However, CMS has announced that it is extending the comment period for an additional 15 days.  Comments to the RFI are now due to CMS on November 17, 2015.

The RFI included an extensive list of questions related to the implementation of the Merit-Based Incentive Program System (“MIPS”), as well as adoption and physician participation in Alternative Payment Models (“APMs”) and Physician-Focused Payment Models (“PFPMs”).  More details on the questions that CMS has raised and the areas where CMS is seeking input in the RFI are discussed in the Epstein Becker Green Client Alert, “New Opportunity to Comment on Key Components of Medicare Physician Payment Reform: CMS Issues 30-Day Request for Information on MIPS and APMs.”

Importantly, in the CMS announcement extending the public comment period released on October 15, 2015, CMS identified sections and questions in the RFI that are of higher priority to the agency.  For example, CMS has ranked questions about how physicians should be identified to determine eligibility, participation, and performance under the MIPS performance categories, and what measures and reporting mechanisms should be used for each of the four MIPS performance categories (quality, resource use, clinical practice improvement activities, and meaningful use of certified electronic health record technology), above questions about public reporting requirements, use of measures from other payment systems, and the weighting of performance categories and the determination of performance scores and thresholds.  Similarly, for questions related to the adoption of APMs, CMS has prioritized questions about how to define the amount of services furnished through an eligible APM entity, how to determine the Medicare and other payer payment thresholds used to identify qualifying and partial qualifying APM participants, and how to compare state Medicaid medical home models to medical home models expanded under Section 1115A(c) of the Social Security Act.  Given the short period of time to provide comments to CMS, stakeholders should consider the priority rankings that CMS has assigned to the various topics that it is seeking input on.

All stakeholders, not just physicians, should consider how the fundamental shift in Medicare physician payments, from traditional fee-for-service to value-based models, will impact them.  It is important to engage with CMS now by submitting comments to the RFI, in order to shape how these new payment mechanisms are implemented in the years to come.  For additional information about the physician payment reforms implemented in MACRA, or if you are interested in submitting comments to CMS, please contact Lesley Yeung or the Epstein Becker Green attorney who regularly handles your legal matters.

As we ended the summer of 2012, the Obama administration touted one of the more popular aspects of the Affordable Care Act – the requirement that health insurers spend at least 80 cents of every premium dollar on medical care and health care quality (85 cents for large employer groups purchasing health insurance), and if they do not, requiring these insurers to rebate the difference back to subscribers or their employers. According to the Administration, the “80/20 Rule” or the “Medical Loss Ratio (MLR) Rule,” as it alternately known, resulted in 12.8 million Americans receiving directly or indirectly more than $1.1 billion in health insurance rebates this past August. The 80/20 Rule sets this national minimum MLR standard that can only be lowered by a state’s insurance commissioner applying for, and receiving, a waiver from HHS. To receive a waiver, the state has to demonstrate that the application of the 80 percent threshold may destabilize the individual market. These waivers have been hard to come by – at least 18 states and territories have sought HHS approval to permit their insurers to spend below the 80 percent threshold on medical care and quality in the individual and/or small group markets (and therefore to spend more than 20 percent for administrative expenses and profits). Yet HHS has only approved six of these waivers, and most at levels, and for durations, different than requested by the state. On the flip side, states that want to impose a higher MLR threshold – like Massachusetts at 90 percent, and New York at 82 percent — have done so without federal approval.

Meanwhile, this past month, House Republicans have advanced legislation that would give states the authority to adjust the MLR down in the individual and small group markets in their state without federal approval, thereby giving insurers greater flexibility to spend more on administrative expenses, and to earn higher profits. House Bill 1206 is primarily designed to allow insurers to count broker fees as “medical expenses” in their MLR calculation, a policy choice that continues to be hotly debated between the broker industry and consumer advocates. But buried in the bill is a provision that would require the Secretary of HHS to “defer to the State’s findings and determinations regarding destabilization” of their individual and small group markets in justifying lower MLR thresholds. The bill has over 200 sponsors, bipartisan support, and was recently approved by the House Energy and Commerce Subcommittee.  

What is particularly interesting in following the proposed tweaking of the MLR Rule is that there appears to be an acknowledgment by lawmakers on both sides of the aisle, and many stakeholders across the health care spectrum, that some minimum MLR requirement on insurers makes sound public policy. But does it?

Not necessarily. As recently posted by David Kestenbaum on NPR’s Planet Money Blog, “as is sometimes the case, what is popular with the people is not so popular with economists.” Kestenbaum spoke with six health care economists, and he claims that none thought the MLR would do much good, “and several thought it could be harmful.” In particular, he cites Jonathan Gruber, an MIT economist who helped write the ACA, as opposing the idea of a minimum MLR requirement, and indicating that “the rule has the potential to do exactly the wrong thing — to drive up the cost of health care.” Here are a couple of my own thoughts on some of the problems with relying on a minimum national MLR requirement as opposed to addressing health care costs directly:

  • It assumes there are no competitive health insurance markets   in competitive insurance markets (like in Massachusetts), competitive forces provide the incentives that drive insurers to offer consumers the highest quality products at the lowest possible premium rates. Massachusetts insurers are consistently the highest quality insurance plans in the country (as ranked by the NCQA), while having among the lowest administrative costs and margins. This has been the case even before Massachusetts lawmakers recently required these insurers to meet a 90 percent MLR for 2012 and 2013 – by far the most stringent threshold in the country. Ironically, some of the states with the least competitive insurance markets (the ones that, arguably, would benefit from a more stringent MLR requirement), are those states that received waivers from HHS that allow their insurers to meet lower MLR thresholds. 
  • It penalizes the most efficient insurance carriers – in a competitive market (without an MLR requirement), if an insurer is able to reduce medical expenses below targets, it is rewarded with additional margin that it can invest in innovation and infrastructure, making it an even more competitive and efficient market participant. But under the MLR Rule, it must give that money back. As one insurance executive has observed, the MLR Rule gives plans the incentive to spend money on staff and systems that could reduce medical expenses and improve quality, but little incentive to actually achieve those savings and quality improvements.

Of course, many stakeholders and policy makers believe health insurance markets are far from competitive, and argue that the MLR requirement – which is essentially a form of rate regulation – is necessary to force insurers to become more efficient. They may be right – in the short term. But in the long term, as Professor Gruber observed, the MLR requirement may prove counter-productive in the fight to reduce actual health care costs. 

EBG counsels insurance carriers on MLR compliance as well as ACA implementation requirements. For more information, contact the author at jcaplan@ebglaw.com.