United States District Court, D. Columbia
PHARMACEUTICAL RESEARCH AND MANUFACTURERS OF AMERICA, Plaintiff,
UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES, et al., Defendants
PHARMACEUTICAL RESEARCH AND MANUFACTURERS OF AMERICA,
Plaintiff: Jeffrey L. Handwerker, ARNOLD & PORTER LLP,
UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES, SYLVIA
M. BURWELL, in her official capacity as Secretary of Health
and Human Services, HEALTH RESOURCES AND SERVICES
ADMINISTRATION, MARY K WAKEFIELD, in her official capacity as
Administrator of the Health Resources and Services
Administration, Defendants: Jean-Michel Voltaire, LEAD
ATTORNEY, U.S. DEPARTMENT OF JUSTICE, Civil Division,
AMERICAN HOSPITAL ASSOCIATION, LEAD ATTORNEY: Daniel C.
Gibson, Diane M. Signoracci, LEAD ATTORNEYS, BRICKER &
ECKLER, LLP, Columbus, OH.
SAFETY NET HOSPITALS FOR PHARMACEUTICAL ACCESS, NATIONAL
RURAL HEALTH ASSOCIATION, Amicuss: Ronald S. Connelly, LEAD
ATTORNEY, POWERS, PYLES, SUTTER & VERVILLE, Washington, DC.
AMERICA'S ESSENTIAL HOSPITALS, Amicus: Barbara D. A.
Eyman, LEAD ATTORNEY, EYMAN ASSOCIATES, PC, Washington, DC;
Ronald S. Connelly, LEAD ATTORNEY, POWERS, PYLES, SUTTER &
VERVILLE, Washington, DC.
Documents No.: 14, 21
CONTRERAS, United States District Judge.
Defendants' Motion for Summary Judgment
and Granting Plaintiff's Motion for Summary
Court previously vacated a Final Rule promulgated by the
Secretary of the Department of Health and Human Services
(" HHS" ) that addressed the circumstances in which
an orphan drug must be offered at a discounted price pursuant
to section 340B of the Public Health Service Act ("
PHSA" ). The Court concluded that HHS lacked the
statutory authority to promulgate that rule. See
Pharm. Research & Mfrs. of Am. v. U.S. Dep't of
Health & Human Servs., 43 F.Supp.3d 28, 42-45 (D.D.C.
2014) (hereinafter " PhRMA " ). HHS has
since issued an interpretive rule (the " Interpretive
Rule" ) identical in substance to the vacated Final Rule
that sets forth the " manner in which section 340B(e) of
the PHSA will be interpreted and implemented by HHS."
A.R. 680. The plaintiff, Pharmaceutical Research and
Manufacturers of America (" PhRMA" ) again
challenges HHS's action, contending that the Interpretive
Rule contravenes section 340B's plain language. HHS has
moved for summary judgment arguing that the Interpretive Rule
does not constitute a final agency action sufficient to state
a claim and that, in any event, its reading of the statute is
at least entitled to deference under Skidmore v. Swift &
Co., 323 U.S. 134, 65 S.Ct. 161, 89 L.Ed. 124 (1944)
because it " reasonably balances Congress's concerns
with maintaining incentives for the development of drugs for
orphan diseases with providing the newly covered 340B
entities with discounts sufficient to make participation in
the program beneficial." Defs.' Mem. Supp. Summ. J.
at 3, ECF No. 14-1. PhRMA has cross-moved for summary
judgment and argues that the Interpretive Rule is a final
agency action subject to immediate challenge and that the
rule conflicts with the statute's plain language. Because
the Court concludes that the Interpretive Rule is a final
agency action and that the Interpretive Rule contravenes the
plain language of section 340B(e), the Court will deny
HHS's motion for summary judgment and grant PhRMA's
motion for summary judgment.
FACTUAL & STATUTORY BACKGROUND
case involves the intersection of two intricate statutory
schemes: the Orphan Drug Act and the 340B Program. Both are
designed, in large part, to ensure greater access to
medications for certain populations. In its prior memorandum
opinion in this dispute, the Court described the statutory
schemes implicated in this case and the Court assumes
familiarity with that discussion. See
PhRMA, 43 F.Supp.3d at 31-33.
The Orphan Drug Act
Orphan Drug Act involves the designation and marketing of
drugs--called orphan drugs--to treat rare diseases or
conditions.  Orphan drugs are so-named because,
absent the financial and marketing incentives Congress has
provided to pharmaceutical manufacturers for the development
of such drugs, efforts to invest, research, and otherwise
manufacture those drugs would likely be abandoned. Congress
passed the Act after concluding that " because so few
individuals are affected by any one rare disease or
condition, a pharmaceutical company which develops an orphan
drug may reasonably expect the drug to generate relatively
small sales in comparison to the cost of developing the drug
and consequently to incur a financial loss." Act of Jan.
4, 1983, Pub. L. No. 97-414, § 1(b)(4), 96 Stat. 2049,
2040. For that reason, the Orphan Drug Act provides several
incentives to those pharmaceutical manufacturers that develop
orphan drugs, including: a seven-year market exclusivity
period during which no drugs, other than the designated
orphan drug, can be licensed or approved " for such
disease or condition," 21 U.S.C. § 360cc(a); a tax
credit for the clinical testing expenses incurred during the
orphan drug's development, see 26 U.S.C. §
45C; research grants for that clinical testing, see
21 U.S.C. § 360ee; and an exemption from the fees
otherwise applicable to new drug applications, see
21 U.S.C. § 379h(a)(1)(F).
Orphan Drug Act permits the Secretary of Health and Human
Services (the " Secretary" ) to designate a drug as
an orphan drug. According to statute, " [t]he
manufacturer or the sponsor of a drug may request the
Secretary to designate the drug as a drug for a rare disease
or condition." 21 U.S.C. § 360bb(a)(1). The statute
further instructs that, if the Secretary finds that the drug
" is being or will be investigated for a rare disease or
condition" and the approval, certification or licensure
of that drug " would be for use for such a disease or
condition," the Secretary " shall designate the
drug as a drug for such disease or condition."
Id. The Food and Drug Administration, an agency
within HHS, oversees the designation and approval of orphan
drugs. See PhRMA, 43 F.Supp.3d at 41 n.11
(citing 21 C.F.R. § 316.1(a) (regulation promulgated by
the FDA implementing the orphan-drug related sections of the
Federal Food, Drug, and Cosmetic Act and providing "
procedures to encourage and facilitate the development of
drugs for rare diseases or conditions" )); see
also 21 U.S.C. § 393(d)(2).
drug's designation as an orphan drug may not overlap
entirely with its use. Drugs that carry an orphan designation
" can also be used to treat non-rare diseases or
conditions." PhRMA, 43 F.Supp.3d at 30
(discussing, for example, Prozac, which commonly treats
depression but is designated as an orphan drug to treat
autism and body dysmorphic disorder). And a drug may be
designated as an orphan drug even if that drug is also
approved to treat a different disease or condition that does
not qualify for orphan-drug designation. See 21
C.F.R. § 316.23(b). Nor does the designation of a drug
as an orphan drug in and of itself afford a pharmaceutical
manufacturer with the ability to market the drug in the
United States. That a drug has been awarded an orphan
designation " does not alter the standard regulatory
requirements and process for obtaining marketing
approval." Exclusion of Orphan Drugs for Certain Covered
Entities Under 340B Program, 78 Fed.Reg. 44,016, 44,017 (July
23, 2013). Indeed, according to HHS " a large majority
of drugs with orphan designations do not have approval to be
marketed in the United States" at all. Id.
The 340B Program and the 2010 Extension
second statutory scheme, section 340B of the Public Health
Services Act, " imposes ceilings on prices drug
manufacturers may charge for medications sold to specified
health facilities." Astra U.S.A., Inc. v. Santa
Clara Cnty., Cal., 563 U.S. 110, 131 S.Ct. 1342, 1345,
179 L.Ed.2d 457 (2011); see generally 42 U.S.C.
§ 256b. The program was first enacted as part of the
Veterans Health Care Act of 1992, see
PhRMA, 43 F.Supp.3d at 31, and is managed by the
Health Resources Services Administration (" HRSA"
), an agency within HHS, see Astra, 131
S.Ct. at 1345. In order for a pharmaceutical
manufacturer's products to be covered under the 340B
Program, and therefore eligible for reimbursement from
Medicaid, manufacturers are required to enter into a
Pharmaceutical Pricing Agreement with the Secretary
calculating a specified ceiling price that covered entities
must pay for the manufacturer's drugs. See 42
U.S.C. § 256b(a). A manufacturer must offer drugs "
for purchase at or below the applicable ceiling price"
to any entity covered by the 340B Program " if such drug
is made available to any other purchaser at any price."
setting ceiling prices for covered drugs, section 340B is
designed to " stretch scarce Federal resources as far as
possible, reaching more eligible patients and providing more
comprehensive services." H.R. Rep. No. 102-384, pt. 2,
at 12 (1992). Many of the eligible health care facilities are
" providers of safety net services to the poor."
Astra, 131 S.Ct. at 1345. As initially enacted in
1992, the covered entities included health care facilities
receiving certain federally-funded grants, state-operated
AIDS drug purchasing assistance programs, black lung clinics,
Native Hawaiian health centers, and urban Indian
organizations, among other entities. See 42 U.S.C.
§ 256b(a)(4)(A)-(L); see also Veterans Health
Care Act of 1991, Pub. L. No. 102-585, Title VI, §
602(a), 106 Stat. 4943, 4967-68. Disproportionate share
hospitals (those hospitals that serve indigent populations)
are also included as covered entities. See 42 U.S.C.
of the Patient Protection and Affordable Care Act ("
ACA" ) Congress added a significant number of new
categories to the list of covered entities. Those entities
are enumerated in what became subsections (M), (N), and (O)
of section 340B(a)(4). Specifically, in section 7101 of the
ACA Congress added to the 340B Program children's
hospitals that are excluded from the Medicare prospective
payment system, free-standing cancer hospitals that are
excluded from the Medicare prospective payment system,
critical access hospitals, rural referral centers, and sole
community hospitals. See 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. §
of the ACA, Congress also directed HHS to create an
administrative dispute resolution process for the 340B
Program. The ACA directed the Secretary to " promulgate
regulations to establish and implement an administrative
process for the resolution of claims by covered entities that
they have been overcharged" for drugs or of "
claims by manufacturers" following a
statutorily-permitted audit of a covered entity. Id.
at § 7102 (codified at 42 U.S.C. § 256b(d)(3)).
Congress further instructed that the dispute resolution
process should " includ[e] appropriate procedures for
the provision of remedies and enforcement of determinations
made pursuant" to that process--which could include
sanctions of civil monetary penalties of up to $5,000 "
for each instance of overcharging a covered entity that may
have occurred." Id. (codified at 42 U.S.C.
§ § 256b(d)(3), (d)(1)(B)(vi)(I)). Although the ACA
directed the Secretary to promulgate those regulations within
180 days of the ACA's passage (March 23, 2010), and the
Secretary did issue a notice of proposed rulemaking to
establish that administrative dispute resolution process, HHS
has not yet issued a final rule implementing the process.
See 340B Drug Pricing Program Administrative Dispute
Resolution Process, 75 Fed.Reg. 57,233 (Sept. 20, 2010). In
omnibus guidance issued last month, HHS indicated only that
" [f]uture rulemaking will address the administrative
dispute resolution process." 340B Drug Pricing Omnibus
Guidance, 80 Fed.Reg. 52,300, 52,301 (Aug. 28, 2015).
The Orphan Drug Exclusion and HHS's Interpretive
same time that Congress added those new entities to the 340B
Program, Congress also narrowed the categories of drugs to
which the newly added entities would have access at reduced
prices. In the Health Care and Education Reconciliation Act
(" HCERA" )--which amended the ACA--Congress added
an additional subsection to the Act entitled " Exclusion
of Orphan Drugs for Certain Covered Entities." That
subsection (" section 340B(e)" ) provides that:
" [f]or covered entities described in subparagraph (M),
(N), or (O) of subsection (a)(4), the term 'covered
outpatient drug' shall not include a drug designated by
the Secretary under section 526 of the Federal Food, Drug,
and Cosmetic Act for a rare disease or condition."
Health Care and Education Reconciliation Act, Pub. L. No.
111-152, § 2303, 124 Stat. 1029, 1083 (codified as
amended at 42 U.S.C. § 256b(e)). As a result of section
340B(e), newly covered entities do not have access to "
a drug designated . . . for a rare disease or condition"
at a discounted price.
parties contest the reach of the term " a drug
designated . . . for a rare disease or condition." In
addition, in the immediate aftermath of the ACA's passage
covered entities expressed concern and confusion about the
phrase's meaning, while pharmaceutical manufacturers
contended that all orphan-designated drugs, whatever their
particular use, were intended to be excluded from the 340B
Program for the newly added covered entities. See,
e.g., A.R. 38-39, 65-68, 70, 85-87, 91-96. In part to
eliminate that confusion and to provide " clarity in the
marketplace," the Secretary issued a notice of proposed
rulemaking. See Notice of Proposed Rulemaking,
Exclusion of Orphan Drugs for Certain Covered Entities Under
340B Program, 76 Fed.Reg. 29,183, 29,184 (May 20, 2011).
published its Final Rule on July 23, 2013. That Final Rule
interpreted section 340B(e) to provide that, with respect to
the newly covered entities, " a covered outpatient drug
does not include orphan drugs that are transferred,
prescribed, sold, or otherwise used for the rare condition or
disease for which that orphan drug was designated under
section 526 of the [Federal Food, Drug, and Cosmetics
Act]." 42 C.F.R. § 10.21(a). The " practical
effect" of that rule is that, while " the
discounted 340B price is not available to newly-added covered
entities when purchasing orphan drugs for their intended
orphan use," when a covered entity instead purchases a
drug for a non-orphan use, it " does receive the 340B
discount price." PhRMA, 43 F.Supp.3d at 32.
Court previously found the Final Rule invalid because "
HHS has not been granted broad rulemaking authority to carry
out all the provisions of the 340B program" and the
statutory provisions HHS relied on as authority to promulgate
the rule were " specific grants of authority that do not
authorize the orphan drug rule." Id. at 42, 39.
Instead, the Court noted that Congress granted HHS only
" a specific delegation of rulemaking authority to
establish an adjudication procedure to resolve disputes
between covered entities and manufacturers."
Id. at 45. In an alternative, "
half-hearted" argument HHS contended that the Final Rule
could be upheld as an interpretive rule. Id. at
45-46. But the Court expressed some skepticism that the rule
as expressed in the specific regulation before the
court--which was promulgated by notice and comment and
purported to have a binding legal effect--could properly be
classified as an interpretive rule. Id. at 46. The
Court invited HHS to offer further briefing on the issue,
including to address the question of whether " HHS must
first promulgate the rule as interpretive for it to then be
challenged under Skidmore." Id. at
46-47 & n.19 (citing Kelley v. EPA, 15 F.3d 1100,
304 U.S.App.D.C. 369 (D.C. Cir. 1994)). HHS declined the
Court's invitation. See Defs.' Resp. to
Court's May 23, 2014, Order, PhRMA, No.
1:13-cv-1501-RC (D.D.C. June 12, 2014), ECF No. 45.
HHS has since issued the Interpretive Rule explaining "
how HHS interprets section 340B(e)." See
Availability of Interpretive Rule: Implementation of the
Exclusion of Orphan Drugs for Certain Covered Entities Under
the 340B Program, 79 Fed.Reg. 42,801, 42,801 (July 23, 2014).
That interpretation--effective as of July 21, 2014--restates,
in substantively identical terms, the interpretation that HHS
had reached in its prior Final Rule. A.R. 680-86.
According to HHS, " interpreting the statutory language
to exclude all indications for a drug that has an orphan drug
designation would be contrary to the Congressional intent of
section 340B(e) to balance the interests of orphan drug
development and the expansion of the 340B Program to new
entities." A.R. 684. Thus, HHS 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." A.R. 685 (emphasis
added). For the same reason, HHS construed section 340B(e) to
" not exclude drugs that are transferred, prescribed,
sold, or otherwise used for conditions or diseases other than
for which the drug was designated." A.R. 685-86.
notice, HHS acknowledged that its interpretation would
require covered entities and manufacturers to identify those
drugs that have an orphan designation and are used to treat
that designation. To facilitate that process, HHS proposed to
" publish a listing of orphan drug designations,
providing the name of the drug and the designated
indication" on " the first day of the month prior
to the end of the calendar quarter." A.R. 685.
Furthermore, HHS cautioned that " [i]f a covered entity
lacks the ability to track drug use by indication, such
entity would be unable to purchase drugs with orphan
designations through the 340B Program." A.R. 685.
with its Interpretive Rule, HHS, through HRSA, has also sent
letters to pharmaceutical manufacturers advising them that
HRSA had been informed by one or more covered entities that
" the 340B price is not available for at least one of
[the manufacturers'] products with an orphan
designation." See First Am. Compl. Ex. E, ECF
No. 11-5. In those letters, HRSA set forth its interpretation
of the statute and stated that the recipient manufacturer
" is out of compliance with statutory
requirements as described in HRSA's interpretive
rule." Id. (emphasis added). HRSA further
cautioned that " [m]anufacturers that do not offer the
340B price for drugs with an orphan designation when those
drugs are used for an indication other than the rare
condition or disease for which the drug was designated . . .
are violating section 340B(a)(1) of the
PHSA and the terms of their Pharmaceutical Pricing
Agreement." Id. (emphasis added). Finally, HRSA
noted that section 340B(d) requires manufacturers to "
refund covered entities charged more than the statutory
ceiling price for covered outpatient drugs" and
requested the recipients to " respond within 30 days to
notify HRSA of your plan to repay affected covered entities
and to institute the offer of the discounted price in the
future." Id. On its website, HRSA has also
stated that " [a] manufacturer or covered entity's
failure to comply with the statutory requirements could
subject a manufacturer or covered entity to an enforcement
action by HRSA, which could include refunds to covered
entities in the case of overcharges, as well as termination
of a manufacturer's Pharmaceutical Pricing Agreement
(PPA)." See First Am. Compl. Ex. D, ECF No.
filed a complaint on October 9, 2014, challenging the
Interpretive Rule under the Administrative Procedure Act
(" APA" ) as " arbitrary, capricious, an abuse
of discretion, or otherwise not in accordance with law."
See 5 U.S.C. § 706(2)(A); see also
Compl., ECF No. 1; First Am. Compl., ECF No. 11. Pending
before the Court are HHS's motion for summary judgment,
See ECF No. 14, and PhRMA's cross-motion for
summary judgment, see ECF No. 21.
may grant summary judgment when " the movant shows that
there is no genuine dispute as to any material fact and the
movant is entitled to judgment as a matter of law."
Fed.R.Civ.P. 56(a). When assessing a motion for summary
judgment in an APA case, however, " the district judge
sits as an appellate tribunal." Am. Bioscience, Inc.
v. Thompson, 269 F.3d 1077, 1083, 348 U.S.App.D.C. 77
(D.C. Cir. 2001). In such cases the complaint " actually
presents no factual allegations, but rather only arguments
about the legal conclusion to be drawn about the agency
action." Marshall Cnty. Health Care Auth. v.
Shalala, 988 F.2d 1221, 1226, 300 U.S.App.D.C. 263 (D.C.
Cir. 1993). Therefore, " [t]he entire case on review is
a question of law, and only a question of law."
Id. The Court's review " is based on the
agency record and limited to determining whether the agency
acted arbitrarily or ...