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Pharmaceutical Research and Manufacturers of America v. United States Health & Huuman Service

United States District Court, D. Columbia

October 14, 2015

PHARMACEUTICAL RESEARCH AND MANUFACTURERS OF AMERICA, Plaintiff,
v.
UNITED STATES DEPARTMENT OF HEALTH AND HUMAN SERVICES, et al., Defendants

          For PHARMACEUTICAL RESEARCH AND MANUFACTURERS OF AMERICA, Plaintiff: Jeffrey L. Handwerker, ARNOLD & PORTER LLP, Washington, DC.

         For 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, Washington, DC.

         For AMERICAN HOSPITAL ASSOCIATION, LEAD ATTORNEY: Daniel C. Gibson, Diane M. Signoracci, LEAD ATTORNEYS, BRICKER & ECKLER, LLP, Columbus, OH.

         For SAFETY NET HOSPITALS FOR PHARMACEUTICAL ACCESS, NATIONAL RURAL HEALTH ASSOCIATION, Amicuss: Ronald S. Connelly, LEAD ATTORNEY, POWERS, PYLES, SUTTER & VERVILLE, Washington, DC.

         For 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.

         Re Documents No.: 14, 21

         MEMORANDUM OPINION

         RUDOLPH CONTRERAS, United States District Judge.

         Denying Defendants' Motion for Summary Judgment and Granting Plaintiff's Motion for Summary Judgment.

         I. INTRODUCTION

         The 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.

         II. FACTUAL & STATUTORY BACKGROUND

         This 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.

         A. The Orphan Drug Act

         The Orphan Drug Act involves the designation and marketing of drugs--called orphan drugs--to treat rare diseases or conditions. [1] 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).

         The 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).

         A 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.

         B. The 340B Program and the 2010 Extension

         The 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." Id.

         In 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. § 256b(a)(4)(L).

         As part 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. § 256b(a)(4)(M)-(O)).

         As part 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).

         C. The Orphan Drug Exclusion and HHS's Interpretive Rule

         At the 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." [2] 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.

         The 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).

         HHS 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.

         This 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.

         Nevertheless, 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.[3] 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.

         In its 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.

         In line 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. 11-4.[4]

         PhRMA 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.

         III. LEGAL STANDARD

         A court 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 ...


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