HRSA Loses the Battle, and Maybe the War, Over the Orphan Drug Rule

By Jennifer M. Thomas & Michelle L. Butler –

The U.S. District Court for the District of Columbia ruled decidedly in favor of PhRMA and against the government earlier this week in PhRMA v. HHS, No. 14-1685 (Oct. 14, 2015), potentially concluding a protracted fight between the Health Resources and Services Administration (“HRSA”) and PhRMA over the meaning of the so-called “orphan drug exclusion,” a provision of the Affordable Care Act (“ACA”) that excludes orphan drugs from the definition of a covered outpatient drug for certain categories of 340B Covered Entities under the 340B drug discount program (42 U.S.C. § 256b).  

We have followed this dispute as it proceeded before the District Court – not once, but twice (see our previous blog posts here, here, and here) – so we will not belabor the background here.  In brief, the Public Health Service Act (“PHSA”) was amended in 2010 pursuant to the ACA to (1) add additional categories of health care facilities to the categories of 340B Covered Entities eligible to purchase drugs at discounted prices pursuant to the 340B program, and (2) exclude “drug[s] designated . . . for a rare disease or condition” from the 340B program with respect to those new categories (with the exception of free-standing children’s hospitals) (the “orphan drug exclusion”). 

At issue in the present iteration of this case before the District Court was an “interpretive rule” under which HRSA stated that it would apply the exclusionary phrase “drug designated . . . for a rare disease or condition” narrowly, such that the exclusion would only apply to orphan drugs when used for their orphan indication, and not for any other use.  (See our previous blog post about the interpretive rule here.)  Pharmaceutical manufacturers that failed to make orphan drugs available to eligible 340B Covered Entities for non-orphan uses would be deemed in violation of the PHSA and could be subject to statutory penalties, refunds of overcharges, or termination of their Pharmaceutical Pricing Agreements.  PhRMA brought suit challenging HRSA’s interpretation, arguing that the orphan drug exclusion must apply to orphan drugs regardless of the particular use.  On cross motions for summary judgment, the District Court ruled that:

1. HRSA’s “interpretive rule” was final agency action subject to judicial review under the Administrative Procedure Act;
2. the Agency’s statutory interpretation did not deserve deference beyond its ability to persuade; and 
3. the Agency’s interpretation of the orphan drug exclusion conflicted with the plain language of the statute.

The Court focused a great deal of attention on the question of finality, and its extensive discussion of the Circuit case law on pre-enforcement review of agency interpretations would merit reading the opinion in full even apart from the underlying substance of the case.  The most salient facts (among the “constellation of factors”) weighing in favor of finality in this case were the significant practical and legal ramifications stemming from HRSA’s interpretive rule, even prior to any actual enforcement action by the Agency.  Slip. Op. at 21-27.

The Court also took the relatively unusual step of stating that the Agency’s interpretation deserved no deference, because HRSA lacks authority to issue regulations carrying the force of law in this context (see our discussion of the Court’s prior ruling on that point).  This statement, while consistent with the Court’s previous opinion, is nevertheless surprising because the Court arguably did not need to reach the issue of deference in light of its finding that the statutory language clearly and unambiguously forecloses the HRSA interpretation.

Specifically, the Court found that, while HRSA’s interpretation appears “plausible at first glance” when confined to the orphan drug exclusion provision alone, it “runs counter to the way Congress has used the phrase ‘a drug designated . . . for a rare disease or condition’” elsewhere throughout the U.S. Code.  Slip. Op. at 30.   The Court noted repeated instances in which Congress had used that phrase, or something similar, and then had gone on to specify that it only intended to include (or exclude, as the case may be) the particular orphan-designated indications of an orphan drug, rather than the orphan drug in general.  See Slip. Op. at 30-33 (citing 42 U.S.C. § 1395l(t)(6)(A)(i); 21 U.S.C. § 379h(a)(1)(F); 26 U.S.C. § 45C(b)(2)(B)).  According to the Court, if the phrase “a drug designated . . . for a rare disease or condition” had the narrow meaning ascribed to it by the HRSA interpretive rule, all these specifying phrases elsewhere in the Code would be rendered superfluous, contrary to basic principles of statutory construction.

Addressing policy concerns raised by the government and amici, the Court was dismissive.  It recognized the fact that excluding orphan drugs altogether from application of the 340B program could make the program less attractive for the newly covered 340B Covered Entities, but noted that “it is simply ‘not for [this Court] to rewrite the statute.’”  Slip. Op. at 37 (quoting Hall v. United States, 132 S. Ct. 1882, 1893 (2012)).  The Court addressed in a footnote the government’s argument that a broad reading of the orphan drug exclusion could create perverse incentives for pharmaceutical manufacturers to seek orphan drug designations for their best-selling drugs, but dismissed it as an unfounded fear.  Slip. Op. at 37 n. 20.

The government has 60 days to notice an appeal of the District Court’s ruling.  Given the history of this case and the importance of the issue, we would be surprised if the government does not pursue an appeal.