The Court’s opinion follows an earlier decision from 2014 (see here), in which the Court held that HRSA did not have the requisite statutory authority to issue formal rules on the subject of the orphan drug exclusion.
The 340B Program allows certain providers (Covered Entities) to purchase “covered outpatient drugs” from drug manufacturers at discounted prices. The Affordable Care Act (ACA) extended eligibility to participate in the 340B Program to certain additional types of hospitals (including critical access hospitals, sole community hospitals, rural referral centers and freestanding cancer hospitals). The ACA also added a provision to the 340B statute (codified at 42 U.S.C. § 256b(e)), applicable only to those newly eligible hospitals, that specifically excluded from the definition of “covered outpatient drugs” certain drugs designated by the U.S. Food and Drug Administration (FDA) for a rare disease or condition (orphan drugs). As a result of this “orphan drug exclusion,” those newly eligible hospitals are unable to purchase orphan drugs at the 340B price.
As noted briefly above, HRSA previously sought to issue a formal rule interpreting the orphan drug exclusion. HRSA’s formal rule provided that affected hospitals that track drugs by indication could purchase orphan drugs at the 340B price if such drugs were to be used for non-orphan indications. If the drugs were to be used for orphan indications, or if an affected hospital did not track drugs by indication, then orphan drugs could not be purchased at the 340B price. Thus, those affected hospitals were able to purchase orphan drugs at the 340B price where such orphan drugs were to be used for non-orphan indications. In the 2014 opinion referenced above, the Court held that HRSA did not have the requisite statutory authority to issue a formal rule interpreting the orphan drug exclusion. Notably, in that 2014 decision, the Court did not give an opinion on the validity of HRSA’s interpretation of the orphan drug exclusion.
Following the 2014 decision, HRSA reissued the content of the formal rule — specifically, that ACA-eligible hospitals could purchase orphan drugs at 340B prices if the drugs were to be used for non-orphan indications — as interpretive guidance (Orphan Drug Guidance). PhRMA again brought suit against HRSA, this time challenging the substance of the Orphan Drug Guidance.
At the outset of its decision, the Court acknowledged HRSA’s authority to generally interpret the 340B statute, and to make public its interpretations through guidance. Prior to ruling on the substance of the Orphan Drug Guidance, the Court made a threshold determination that the guidance was a “final agency action” and therefore was subject to judicial review. To arrive at this conclusion, the Court found that (i) the Orphan Drug Guidance was clearly the “consummation” of HRSA’s decision-making process, and was not tentative or interlocutory in nature; and (ii) that the Orphan Drug Guidance would create legal rights and consequences for drug manufacturers. In finding that the Orphan Drug Guidance would in fact create legal rights and consequences, the Court rejected HRSA’s argument that since HRSA had not yet enforced the requirements of the Orphan Drug Guidance against any drug manufacturer, that no legal rights had been created by the guidance. The Court acknowledged that so-called “pre-enforcement” challenges to agency review were legally acceptable in certain instances, and found that the Orphan Drug Guidance was subject to challenge despite the fact that HRSA had not yet undertaken any enforcement activities for noncompliance with the Orphan Drug Guidance.
After determining that the Orphan Drug Guidance was a “final agency action” subject to judicial review, the Court sought to determine whether the substance of the guidance was a valid interpretation of the 340B statute. After weighing the appropriate level of deference to be given to HRSA’s interpretation, the Court concluded that HRSA’s orphan drug guidance was “contrary to the plain language of section 340B(e).” In reaching this conclusion, the Court looked to the language of the statute, which states the orphan drug exclusion applies to those drugs that are “designated… for a rare disease or condition.” Although acknowledging that HRSA’s interpretation “might appear plausible at first glance, and when confined solely to section 340B(e),” the Court examined the interpretation in the context of related provisions of federal law. Thereafter, the Court pointed out that in related areas of federal law, language is used to differentiate specifically the use of a drug and such drug’s designation as an orphan drug. Since Section 340B(e) does not include such differential language, the Court concluded that the statute would not permit HRSA’s interpretation that drugs which have orphan designations but are not used for the rare disease or condition for which the designation was made, could be purchased at the 340B price.
In light of the Court’s decision to invalidate HRSA’s Orphan Drug Guidance, it is possible that HRSA will be vulnerable to legal challenges to its recently issued proposed omnibus guidance related to the 340B Program. Such proposed omnibus guidance covers a wide array of 340B Program topics, including definitions of eligible “patient” and eligible “covered outpatient drugs” as well as guidance pertaining to the group purchasing organization (GPO) prohibition and Medicaid managed care prescriptions. (For further discussion, see here.) It is important to note, however, that the proposed omnibus guidance has been issued pursuant to a more formal notice and comment process and as such may be accorded more judicial deference than the Orphan Drug Guidance. The Court decision does, however, bring to the forefront the ability of affected 340B Program participants (covered entities and drug manufacturers alike) to challenge portions of the proposed omnibus guidance with which such participants disagree.
Since the Court issued its decision, HRSA has removed the Orphan Drug Guidance from its website. At this time, it is unclear as to how HRSA will approach compliance with the orphan drug exclusion.