Discounts for Orphan Drugs Improperly Nixed

(CN) - Health and Human Services exceeded its authority in nixing pricing discounts for drugs used to treat rare diseases, a federal judge ruled.

Orphan drugs, medications for diseases and other conditions that affect fewer than 200,000 people in the United States, are at the heart of the dispute. Their name comes from the fact that, if not for incentives provided by Congress, drugmakers would abandon research efforts in such products.

Prozac (fluoxetine) is one example of an orphan drug that treats a rare condition but has another nondesignated treatment use. Though designated to treat autism in children, the drug is also frequently prescribed to treat depression.

Section 340(B) of the Public Health Service Act requires drugmakers to abide by statutory price ceilings when selling certain outpatient drugs to health clinics and hospitals covered by the program.

Though the Patient Protection and Affordable Care Act enabled more hospitals to qualify for 340(B) coverage, the new health care law also excluded orphan drugs from the discounts.

In July 2013, the U.S. Department of Health and Human Services issued a new rule that exempted orphan drugs from the 340(B) price ceilings when they are used for their orphan indications. Discounts are still available, however, when the drugs are prescribed for non-orphan treatments.

Safety Net Hospitals for Pharmaceutical Access explained the rule in an amicus brief on behalf of the Pharmaceutical Research and Manufacturers of America, which filed for an injunction last year.

An affected hospital could purchase Prozac "at 340B discounts if it were used to treat depression, its common purpose, but an affected hospital would have to purchase the drug outside the 340B program [and therefore, not at a discounted rate] if it were used to treat either of its two orphan indications," the brief stated (brackets in original).

Citing 2006 U.S. Supreme Court decision Gonzales v. Oregon, U.S. District Judge Rudolph Contreras in Washington, D.C., granted the challenger an injunction Friday.

"The court finds that the statutory provisions HHS has strung together to give it rulemaking authority are much like the provisions in Gonzales ... in that they are specific grants of authority that do not authorize the orphan drug rule implemented here," the 30-page ruling states.

Though the Public Health Services Act gives the secretary of Health and Human Services general rulemaking authority, that authority extends only to administrative issues, not to implementing the act, Contreras found.

Though Health and Human Service claimed to have derived its rulemaking authority from the Federal Food, Drug and Cosmetic Act, Contreras said a "limited grant of rulemaking authority in an entirely different statute ... cannot carry the day for the rulemaking here." (Emphasis in original.)

Contreras used the same logic in tossing the agency's attempt to rely on its statutory authority to issue monetary sanctions.

The Social Security Act and 340(B) also do not give HHS its sought-after authority, according to the ruling.

Though Congress does authorize rulemaking to administer a dispute-resolution process, those rules must specifically pertain to the claims system - such as creating a claims-review board and setting resolution deadlines - and not to carrying out 340(B)'s provisions, the court found.

"While the court agrees that a prophylactic rule like this seems like the most reasonable way for implementing the orphan drug exclusion, unfortunately, Congress did not delegate to HHS broad rulemaking authority as a means of doing so," Contreras wrote.

Health and Human Services also failed to show that defined drug exemptions were necessary to calculate price ceilings, the court found.

"The only relevance the ceiling price has to the definition of 'covered outpatient drugs' is that a covered entity either will get the discount or it will not," Contreras wrote. "Whether the covered outpatient drug gets a discount at all, in other words, in an entirely separate process from the complex calculation involved in determining the ceiling price and the average manufacturer price in the first instance."

Contreras concluded in refusing the government's call to uphold the rule as an interpretive rule rather than a legislative rule.

"The government's argument is half-hearted, and the court is inclined to think it is wrong because the rule (1) underwent notice and comment rulemaking - the hallmark of a legislative rule - and (2) it as a 'legal effect' on the parties so regulated because the interpretation of 'covered outpatient drug,' as well as the compliance procedures impose obligations on covered entities and manufacturers alike," he wrote.

Health and Human Services must submit additional briefs on the topic if it intends "to pursue an interpretive rule theory further," the ruling states.

Health and Human Services redirected a request for comment to the Department of Justice, which has not responded.

Jeffrey Handwerker with Arnold & Porter, counsel for PhRMA, also did not return an request for comment.

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