On November 30, 2018, the Department for Health and Human Services (“HHS”) Health Resources and Services Administration (“HRSA”) will publish its final rule to change the effective date for its 340B Drug Pricing Program ceiling price and manufacturer civil monetary penalty final rule to January 1, 2019.

After two years of proposed rulemaking, HHS published a final rule on January 5, 2017 outlining requirements of manufacturers to calculate the 340B ceiling price for a covered outpatient drug and the process by which HRSA can levy civil monetary penalties on drug manufacturers for knowingly and intentionally charging beyond the statutory ceiling price. This final rule was initially announced to be effective March 6, 2017 but was delayed on several instances. HHS’s most recent delay was announced on June 5, 2018, when HHS published a second final rule delaying the regulation’s effective date until July 1, 2019 so it could develop “comprehensive policies to address the rising costs of prescription drugs.” HHS then issued a proposed rule on November 2, 2018 soliciting comments on potentially changing the effective date from July 1, 2019 to January 1, 2019 to eliminate further delay. HHS’s latest announcement solidifies the effective date as January 1, 2019.

HHS maintains that finalizing the 340B ceiling price and civil monetary penalty rule will not interfere with its plan to develop separate drug pricing policies. Commenters expressed concern that HHS has not established adequate guidance to implement the rule appropriately, responded to public questions, or provided adequate rationale for its change of view on the need for additional rulemaking. HHS addressed these concerns by explaining that issuing additional guidance is unnecessary to implement the rule and that it would be more efficient for the rule to go into effect sooner and to “assess the need for further rulemaking and guidance after the rule is in effect.” Other commenters feared that they would be unable to achieve compliance in time for a January 1, 2019 effective date. HHS responded that, since HHS published the initial final rule in January 2017, these stakeholders have had “sufficient time” to adjust their systems and update their policies and procedures.

After January 1, 2019, drug manufacturers must calculate the 340B ceiling price for covered drugs on a quarterly basis consistent with the January 5, 2017 final rule. Most significantly, drug manufacturers will newly be subject to financial sanctions for knowingly and intentionally overcharging a covered entity, although HRSA anticipates using such penalties in “rare situations.”   For additional information about the issues discussed above, please contact one of the authors or the Epstein Becker Green attorney who regularly handles your legal matters.

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.

The Health Resources and Services Administration (“HRSA”) issued a notice proposing guidance under the 340B Drug Pricing Program.  The proposed Omnibus Guidance was issued in pre-publication format and is available online at https://s3.amazonaws.com/public-inspection.federalregister.gov/2015-21246.pdf.  The notice is scheduled to be published in the Federal Register on August 28, 2015 and will be available at https://www.federalregister.gov/articles/2015/08/28/2015-21246/guidance-340b-drug-pricing-program-omnibus.

HRSA intends to finalize the proposed guidance after consideration of public comments.  The notice is open for a 60-day public comment period, with comments due on or before October 27, 2015.

The proposed Omnibus Guidance notice attempts to clarify current 340B Program requirements for covered entities enrolled in the 340B Program and for drug manufacturers that make their drugs available to covered entities under the 340B Program.  Highlighted below are some of the most notable aspects of the proposed guidance.

A.  340B Program Eligibility and Registration[i]

  • Among other clarifications and areas discussed, HHS is seeking comments on alternatives to demonstrating the eligibility of an offsite outpatient facility or clinic.

B.  Drugs eligible for purchase under the 340B Program[ii]

  • HRSA clarifies that the definition of “covered outpatient drug” excludes only those drugs in the designated sites of service described in the statute that are reimbursed under Medicaid as part of a bundled reimbursement rate for a service (not a drug billed to any other party or reimbursed separately by Medicaid).

C.  Individuals Eligible to Receive 340B Drugs

The proposed guidance clarifies the definition of eligible 340B patients by focusing on the prescriber’s relationship to the covered entity, the patient’s relationship to the covered entity, and the setting of the covered entity.  In HRSA’s interpretation, the criteria that determine if an individual is “a patient of the entity” eligible for the use of 340B drugs must be met on a “prescription-by-prescription or order-by-order basis.”[iii]  An individual is an eligible patient of a covered entity under the proposed guidance if all of the following conditions are met:

  1. The individual receives a health care service at a covered entity site which is registered for the 340B Program and listed on the public 340B database.
  2. The individual receives a health care service from a health care provider employed by the covered entity or who is an independent contractor for the covered entity, such that the covered entity may bill for services on behalf of the provider.
  3. An individual receives a drug that is ordered or prescribed by the covered entity provider as a result of the service described in (2). An individual will not be considered a patient of the covered entity if the only health care received by the individual from the covered entity is the infusion of a drug or the dispensing of the drug.
  4. The individual receives a health care service that is consistent with the covered entity’s scope of the grant, project, or contract.
  5. The individual is classified as an outpatient when the drug is ordered or prescribed. The patient’s classification status is determined by how the services for the patient are billed to the insurer (e.g., Medicare, Medicaid, private insurance). An individual who is self-pay, uninsured, or whose cost of care is covered by the covered entity will be considered a patient if the covered entity has clearly defined policies and procedures that it follows to classify such individuals consistently.
  6. The individual has a relationship with the covered entity such that the covered entity maintains access to auditable health care records which demonstrate that the covered entity has a provider-to-patient relationship, that the responsibility for care is with the covered entity, and that each element of this patient definition in this section is met for each 340B drug.[iv]

In the summary of the proposed guidance, HRSA discusses the applicability to the patient definition to the following scenarios.[v]

  • An individual that sees a physician in private practice for follow-up care from a covered entity is not an eligible patient since the private practice is not listed in the 340B database.
  • An individual is not an eligible patient when the health care is provided by an organization that has an affiliation arrangement with the covered entity (even if the covered entity has access to the affiliate’s records).
  • Privileges or credentials at a covered entity are not sufficient to demonstrate that a patient treated by the privileged provider is an eligible patient of the covered entity.
  • The proposed guidance explains that a covered entity’s employees must independently meet the eligible patient definition and are not automatically eligible patients by status of their employment. Even covered entities with self-funded plans, which are financially responsible for employees’ health care, and contract with loosely affiliated health care professionals, must have its employees independently meet the eligible patient definition.

D.  Covered Entity Responsibilities

Diversion

  • In discussing drug inventory/replenishment models in the summary to the proposed guidance, HRSA definitively states that an improper accumulation, even prior to the placement of an order, equals diversion and constitutes a violation.[vi]

Prohibition of Duplicate Discounts[vii]

  • Covered Entities can select whether to use 340B drugs for its Medicaid Managed Care Organization (“MCO”) patients and can vary the selection at different covered entity sites and MCOs as long as such distinction is made available to HHS. In addition, a covered entity should have mechanisms in place to identify MCO patients.
  • The proposed guidance reserves the right to make the covered entity MCO carve-in or carve-out information publicly available through an Exclusion File or other mechanism.
  • With respect to contract pharmacy arrangements, the default position in the proposed guidance is that contract pharmacies will not dispense 340B drugs for Medicaid Fee-for-Service (“FFS”) or MCO patients. The summary to the proposed guidance states that if a covered entity wishes for its contract pharmacy to dispense 340B drugs to Medicaid FFS or MCO patients, the covered entity will provide HHS a written agreement with its contract pharmacy and State Medicaid agency or MCO that describes a system to prevent duplicate discounts.[viii]

Maintenance of Auditable Records[ix]

  • HRSA is proposing a record retention standard of 5 years for manufacturers and covered entities.
  • For covered entities, a systemic failure to maintain records adequate to permit auditing is considered a failure to meet the statutory audit requirements, and constitutes grounds for a loss of eligibility and termination from the program.

E.  Contract Pharmacy Arrangements[x]

  • The proposed guidance does not include any limitation on the number of contract pharmacies permitted (“one or more licensed pharmacies”) to dispense 340B drugs to the covered entity’s patients.
  • HRSA reiterates its long-standing position that a covered entity “retain complete responsibility” for contract pharmacy compliance with program requirements. The proposed guidance contemplates that Covered Entities will conduct quarterly reviews (i.e., a comparison of the covered entity’s prescribing records to the contract pharmacy’s dispensing records) in addition to independent annual audits.

F.  Manufacturer Responsibilities[xi]

  • HRSA includes guidance regarding limited distribution plans, such as specialty pharmacy or restricted distribution networks, and requires advance written notification of such plans to HRSA in advance of their implementation.
  • HRSA proposes to require manufacturer credits or refunds both in routine instances of retroactive adjustment to relevant pricing data as well as exceptional circumstances such as erroneous or intentional overcharging for covered outpatient drugs. Manufacturers would not be allowed to calculate refunds in any manner other than by individual NDC including (but not limited to) aggregating purchases, de minimis amounts, and netting purchases.  This refund or credit is expected to occur within 90 days of the determination by the manufacturer or HHS that an overcharge occurred.
  • HRSA proposes to extend the requirement for an annual recertification to manufacturers, in which case they would be required to review and update their 340B database information, including the NDCs subject to 340B pricing.

G.  Rebate Option for AIDS Drug Assistance Programs[xii]

  • HRSA proposes that AIDS Drug Assistance Programs seeking access to 340B prices  either purchase directly (i.e., at the 340B ceiling price) or, in order to receive a rebate after the purchase, make an election at the time of registration and inform HRSA that the it intends to pursue a rebate mechanism.
  • In addition, AIDS Drug Assistance programs choosing the rebate or hybrid option are expected to make a “qualified payment” and submit claims-level data to the manufacturer to support that payment. A “qualified payment” for a covered outpatient drug includes (i) a direct purchase at a price greater than the 340B ceiling price or (ii) a payment of the health insurance premiums that cover the covered outpatient drug purchases at issue and payment of a copayment, coinsurance, or deductible for the covered outpatient drug.

H.  Program Integrity[xiii]

  • Expanded program integrity provisions clarify HRSA audits of covered entities (including their child sites and contract pharmacies) and manufacturers and their contractors (such as wholesalers). All HRSA audits require the auditee’s provision of auditable records, HRSA’s initiation of notice and hearing procedures prior to making a final determination regarding compliance, and the opportunity to submit a corrective action plan to HRSA to address noncompliance.

In addition to the areas highlighted above, the proposed guidance contains additional clarifications regarding fundamental 340B Program issues, such as covered entity eligibility and registration, annual recertification, the GPO prohibition, and duplicate discounts.

_____

[i] Omnibus Guidance, Section II.A, p.8.

[ii] Id. at Section III.B, p.72.

[iii] Id. at Section III.C(a). p. 72.

[iv] Id. at Section III.C(a)(1)-(6), p. 72-3.

[v] Id. at Section II.C.(a)(1)-(6), p. 24-8.

[vi] Id.at Section II.C Drug inventory/replenishment models, p. 29.

[vii] Id. at Section III.D Prohibition of duplicate discounts (a)(2) and (c), p.74-5; Section III.E at (b)(2), p.78-9.

[viii] Id. at Section II.D Contract pharmacy, p. 35,

[ix] Id. at Section III.D Maintenance of auditable records, p. 76-7.

[x] Id. at Section III.E(b)(3), p. 79.

[xi] Id. at Section III.F Obligation to offer 340B prices to covered entities at (c), p. 81; Procedures for issuance of refunds and credits, p.82; and Manufacturer recertification, p. 82.

[xii] Id. at Section III.G(a)-(c), p. 83.

[xiii] Id. at Section III.H HHS audit of a manufacturer and its contractors (a)-(b), p. 88-9.

On November 13, 2014, the Health Resources and Services Administration (“HRSA”) announced its plans to abandon the much anticipated “mega-reg” amid questions concerning HRSA’s rule-making authority.  The “mega-reg” was expected to provide much needed clarity to the 340B drug discount program (the “340B Program”) by addressing, among other things, the definition of an eligible patient, compliance requirements for contract pharmacy arrangements, hospital eligibility, and criteria for hospital off-site facilities.

HRSA submitted draft regulations to OMB in April 2014, and the proposed “mega-reg” was expected to be released in June 2014.  However, several legal challenges to other 340B Program regulations undermined HRSA’s legal posture to proceed.  A federal district court ruling in May 2014 determined that HRSA did not have the statutory authority to issue regulations concerning the Orphan Drug provision of the 340B Program.[1] This decision called into question HRSA’s authority for promulgating regulations for the 340B Program, except for limited rulemaking authority granted to it under the Affordable Care Act.[2]  In response to the May 2014 decision, on July 23, 2014, HRSA released a nonbinding Interpretive Rule that set forth the same Orphan Drug policies as the challenged regulation.[3]  EBG has previously posted more in-depth detail as to the court’s decision on the PhRMA lawsuit and the Interpretative Rule here.

After release of the Interpretative Rule, PhRMA filed a motion for miscellaneous relief arguing that the challenged regulation was outside of HRSA’s rulemaking authority and incapable of surviving as an Interpretive Rule.[4]  The court decided to limit its initial decision to whether HRSA had the authority to issue the Orphan Drug rule as a legislative rule, and PhRMA filed a second lawsuit on October 9, 2014, challenging HRSA’s Interpretive Rule as violative of the plain language of the statutory Orphan Drug exclusion.[5]  Despite questions concerning its rulemaking authority, HRSA has updated its frequently asked questions asserting that the failure to comply with statutory requirements as interpreted by HRSA could be considered a violation of the Orphan Drug statute and subjects the drug manufacturer to enforcement action.[6]

Despite the withdrawal of the “mega-reg,” HRSA has stated that it will pursue proposed rules where it has clear legislative rulemaking authority.  To this end, the HRSA Office of Pharmacy Affairs website includes a statement that HRSA will issue proposed rules pertaining to civil monetary penalties for manufacturers, calculation of the 340B ceiling price, and administrative dispute resolution in 2015.[7]  In addition, the website states that HRSA will issue proposed guidance to address “key policy issues,” which are surmised to include the areas that would have been addressed by the “mega-reg.”  Historically, HRSA has not issued regulations, but has issued program guidance through a series of Notices issued through the Federal Register, as well as other sub-regulatory guidance, including FAQs on its website.

HRSA’s ability to issue and enforce guidance will likely be impacted by ongoing litigation and challenges brought forth by the drug industry.  In addition, calls from the drug industry, and a new conservative majority in the Senate, may cause the Senate to reopen the original 340B statute to address the policy debates, lack of clarity regarding the permissible interpretation of 340B Program requirements and standards and HRSA’s rulemaking authority.  Thus, even in the absence of the “mega-reg,” significant changes to the 340B Program should be expected by stakeholders in 2015.

 


[1]Pharm. Research & Mfrs. of Am. v. United States HHS, No. 13-1501, 2014 U.S. Dist. LEXIS 70894 (D.D.C. May 23, 2014).

[2]As codified in the Public Health Service Act 42 U.S.C.§ 256b(d) (administrative dispute resolution), § 256b(d)(1)(B)(i)‒(ii) (calculation of 340B ceiling price), and § 256b(d)(1)(B)(vi)(I) (civil monetary penalties).

[3] HRSA, Notice Regarding Availability of Interpretive Rule: Implementation of the Exclusion of Orphan Drugs for Certain Covered Entities Under the 340B Program, 79 Fed. Reg. 42801 (July 23, 2014).  See also HRSA Freqeuntly Asked Questions, available at http://www.hrsa.gov/opa/faqs/index.html.

[4] PhRMA Supplemental Memorandum in Support of PhRMA’s Mot. for Misc. Relief, PhRMA v. HHS, No. 13-1501, ECF No. 52.

[5] PhRMA Complaint PhRMA v. HHS, Case No. 14-1685, ECF No. 1.

[6] HRSA, Office of Pharmacy Affairs website, Freqeuntly Asked Questions, available at http://www.hrsa.gov/opa/faqs/index.html (last visited Nov. 20, 2014) (follow link to”Orphan Drugs”).

[7]HRSA Office of Pharmacy Affairs website, available at http://www.hrsa.gov/opa/index.html (last visited Nov. 20, 2014).