United States: DC District Court Strikes Down 340B Orphan Drug Rule

Last Updated: June 10 2014
Article by Thomas Barker and Igor Gorlach

On May 23, Judge Contreras of the U.S. District Court for the District of Columbia (DC District Court) ruled that the Health Resources and Services Administration (HRSA) did not have the statutory authority to promulgate its Orphan Drug Final Rule (case number 1:13-cv-01501; 78 Fed. Reg. 44016 (July 23, 2013)). HRSA's Rule, titled "Exclusion of Orphan Drugs for Certain Covered Entities Under 340B Program," implemented a provision of the Patient Protection and Affordable Care Act (ACA) that excludes orphan drugs from 340B pricing for the covered entities added to the 340B Program by the ACA. Under the Final Rule, orphan drugs were excluded from the 340B ceiling price only when the drugs were used for the indication for which they were granted the orphan designation.

The Court reviewed the rulemaking authority granted to HRSA under section 340B of the Public Health Service Act (PHSA), and concluded that this authority was very narrow. Absent the broad directive to "carry out" the section, the authority to issue regulations under 340B exists only with respect to limited provisions of the statute. The orphan drug rulemaking was not promulgated under any of these provisions, however, and therefore lacked statutory authority. Accordingly, Judge Contreras granted the plaintiff, Pharmaceutical Research and Manufacturers of America (PhRMA), a permanent injunction blocking the rule and a summary judgment.

Judge Contreras's opinion raises questions regarding the future of the orphan drug exclusion provision and also HRSA's upcoming "mega-rule" that the agency had planned to be published for comments in June 2014. The "mega-rule" was reportedly intended to address four topics: the definition of an eligible patient, compliance requirements for contract pharmacy arrangements, hospital eligibility criteria, and eligibility of off-site facilities. Since these topics are not directly related to HRSA's explicit rulemaking authority in section 340B, one option that HRSA may consider (in lieu of withdrawing the rule in its entirety) is to clarify that the "mega-rule" is in fact a "mega-interpretive-rule," and could convert the rule into a notice.

The 340B Program and the Orphan Drug Rulemaking

The 340B Program, created in 1992, requires manufacturers who participate in the Medicaid program to provide covered outpatient drugs at lower prices to certain safety-net healthcare providers (referred to as "covered entities"). The ACA amended section 340B in several important ways, the most significant of which was the addition of several categories to the covered entities list, including some children's hospitals, free-standing cancer hospitals, critical access hospitals, some rural referral centers, and some sole community hospitals. The ACA also provided HRSA, for the first time, explicit authority to issue regulations to implement certain provisions of the section.

With regard to drugs for rare diseases, the ACA included a provision specifying that, for the new list of covered entities added by the ACA, "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" (§ 340B(e)). In other words, under the provision, manufacturers do not have to provide orphan-designated drugs to some covered entities at the 340B ceiling price.

In 2011, HRSA proposed to interpret the ACA's orphan drug exclusion as only excluding orphan drugs when the drugs are used for the indications for which the orphan designation was granted. After receiving and replying to comments, HRSA finalized its interpretation in the 2013 Final Rule (78 Fed. Reg. 44016 at 44027):

(a) General. For the covered entities described in paragraph (b) of this section, 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 FFDCA. A covered outpatient drug includes drugs that are designated under section 526 of the FFDCA when they are transferred, prescribed, sold, or otherwise used for any medically-accepted indication other than treating the rare disease or condition for which the drug was designated under section 526 of the FFDCA.

This interpretation raised at least two objections from drug manufacturers: first, the interpretation required manufacturers to provide a 340B discount for drugs which have been granted an orphan designation, thus contradicting the statutory language of 340B(e); and second, the initial determination whether a drug is used for the rare indication was left to the covered entities, which directly benefit from determining that an orphan drug is not used for the rare indication for which it received an orphan designation.

DC District Court's Opinion in PhRMA v. HHS

Unable to affect the outcome of HRSA's rulemaking, drug manufacturers challenged HRSA in court, filing a complaint with the DC District Court in September 2013. The complaint asserted that HRSA lacked the authority to promulgate rules interpreting the orphan drug exclusion. HRSA retorted that the rulemaking was authorized by HRSA's statutory authority to promulgate regulations to implement an administrative dispute resolution mechanism, because the scope of the orphan drug exclusion provision would inevitably be raised as a dispute. The Court disagreed with HRSA however, concluding that HRSA was not authorized to issue "prophylactic," non-adjudicatory rulemaking. The Court noted that the statute enumerates the specific elements of the dispute resolution mechanism to be included in HRSA's rulemaking, such as designating a decision-making body and establishing deadlines for claims, without mentioning a non-adjudicatory approach. Therefore, the Court ultimately sided with PhRMA, granting a permanent injunction and a summary judgment in plaintiff's favor.

The Court noted that the statute does not grant HRSA a general authority to "carry out" section 340B, and that there are only three provisions in section 340B that authorize HRSA to promulgate any rulemaking: (1) implementation of an administrative dispute resolution mechanism for claims by manufacturers and covered entities, (2) regulatory issuance of standards and methodology for the calculation of ceiling prices, and (3) establishment of standards for the imposition of civil monetary penalties applicable to participating manufacturers.

HRSA also argued that the Orphan Drug Final Rule was an interpretive, as opposed to a legislative, rule. After reviewing the test to determine whether a rule is interpretive or legislative, the Court concluded that the rulemaking was in fact legislative because the rule (1) underwent notice and comment rulemaking and (2) had "legal effect" on the parties by imposing obligations on covered entities and manufacturers. The Court noted that interpretive rules are analyzed under a standard that is far less deferential to the government.

In sum, the Court's opinion re-casted HRSA's authority in administering the 340B Program as follows:

  • HRSA is only authorized to issue rulemaking in implementing the three statutory provisions noted above. HRSA is not authorized to issue legislative rules to implement any other provisions of section 340B.
  • In implementing the rulemaking statutory provisions, HRSA is not authorized to promulgate "prophylactic" rulemaking. In other words, the agency's rulemaking must follow the form prescribed by the statute. 

Next Steps for the Orphan Drug Exclusion

The DC District Court's permanent injunction of the enforcement of HRSA's Orphan Drug Rule brings the parties back to the statutory provision that spurred the rulemaking in the first place. Under the Court's injunction of HRSA's rulemaking, manufacturers of covered outpatient drugs can refuse to grant 340B pricing to newly-added covered entities for drugs that were granted orphan designation, regardless of the indication for which the drugs are used.

Following a defeat in court, HRSA has several avenues going forward. One option was proposed by Judge Contreras, who suggested that HRSA promulgate the rulemaking as an interpretive rule. However, it is not clear how recasting the same rulemaking as an interpretive rule and repeating the same argument would change the opinion of the Court. Importantly, the Court did not address at all the extent of deference to which HRSA's interpretation of the underlying statute is entitled. But even so, unless the interpretation of the statutory exclusion is amended to better comport with the language of the statute, the "interpretive rule" would continue to have a "legal effect" on the parties, and therefore be seen as an impermissible legislative rule.

A second option for HRSA is to file an appeal to the U.S. Court of Appeals for the District of Columbia (DC Circuit). This approach raises the stakes, permitting a more favorable decision but also opening the door to a higher-impact negative decision limiting HRSA's and HHS's authority to implement the other aspects of the 340B Program. Because the agency has already suffered a one-sided setback in court, HRSA may decide that it would be in the long-term interest of the agency to wait for a stronger case to be elevated to the higher courts. Without further action by HRSA, the issue of orphan drug exclusion is likely to be raised in the administrative dispute resolution process as a joint claim by covered entities against a manufacturer of orphan drugs. The question would then be resolved by the decision-making body appointed by HRSA, and that resolution could also be challenged in court, and may be granted very limited deference or no deference at all (depending on whether it represents the agency's position).

A third option for HRSA is to bring the issue back to Congress and lobby for a narrower orphan drug exclusion provision.

Under each of these options, it is likely that manufacturers and covered entities will continue dueling over all aspects of the 340B Program, including the exclusion of orphan drugs from 340B pricing. If HRSA decides to lobby Congress for greater rulemaking authority, manufacturers are likely to lobby against the proposal.

Future 340B Rulemaking

In addition to invalidating HRSA's Orphan Drug Final Rule, the DC District Court's ruling is also likely to impact the upcoming 340B "mega-rule" planned by HRSA for publication for comments in June 2014. According to HRSA's website, the agency is "working to formalize existing program guidance through regulation, designed to cover a number of aspects of the 340B Program." The upcoming regulation—which began Office of Management and Budget review on April 9—will address four topics, all of which have been the subjects of HRSA's past notices: (1) the definition of an eligible patient, (2) compliance requirements for contract pharmacy arrangements, (3) hospital eligibility criteria, and (4) eligibility of off-site facilities.

It is likely that HRSA will now review the "mega-rule" against the limits that the DC District Court's opinion placed on HRSA's rulemaking authority—a review that would delay the issuance of the rule.

HRSA's first inquiry must be whether the agency has the statutory authority to promulgate regulations addressing the four topics in the "mega-rule." More specifically, do the topics fall under either of section 340B's three rulemaking provisions, namely, administrative dispute resolution, the calculation of ceiling prices, and standards for civil monetary penalties? Based on the DC District Court's and HRSA's previous interpretation of these rulemaking provisions, the answer to this inquiry is negative. Neither of the four topics is directly related to the calculation of the ceiling price for a drug, nor are the topics included in any aspects of the process for civil monetary penalties for participating manufacturers. HRSA could mount an argument that the four topics are instrumental to the administrative dispute resolution mechanism because the topics provide much needed clarity to terms that are not defined in statute. While this is true, the DC District Court ruled that the rulemaking authority to implement an administrative dispute resolution process is limited "to creating a system for resolving disputes between covered entities and manufacturers—not to engaging in prophylactic non-adjudicatory rulemaking regarding the 340B program altogether." It appears therefore that HRSA does not have the statutory authority to promulgate legislative rulemaking addressing the four topics to be included in the "mega-rule."

Without the authority to promulgate rulemaking on these four topics, HRSA could instead implement the changes proposed in the "mega-rule" by converting it into an interpretive rule, such as a notice with guidelines, similarly to HRSA's existing notices. Downgrading the "mega-rule" to a notice would protect the notice from being invalidated by a court on the grounds that HRSA lacked authority to issue the document, but it would also present two weaknesses for HRSA that exist currently with all of its notices: (1) the changes in the notice may not effect substantive regulatory change to the statutory requirements, and (2) if challenged in court, HRSA's interpretation in the notice would only be granted limited deference. Despite these weaknesses, it appears that HRSA does not have the statutory authority to regulate these topics through a more authoritative rulemaking process. Therefore, the industry is likely to see another notice (or interpretive rule) from the agency rather than a legislative rule.

As with the orphan drug exclusion provision, HRSA has the option of requesting additional rulemaking authority from Congress to be included in section 340B, along with the consequent political considerations that would attend such a request. Until then, HRSA must continue administering the Program by guidance rather than rulemaking, with the three exceptions enumerated in the statute.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
14 Dec 2017, Seminar, Boston, United States

The trustees of The Foley Hoag Foundation invite you to the upcoming Speaker Series event with David Friedman, Senior Vice President, Legal & Government Affairs of the Boston Red Sox.

15 Dec 2017, Seminar, Boston, United States

The New England Electricity Restructuring Roundtable has been meeting bimonthly since 1995 to discuss current topics related to important changes in the electric power industry in Massachusetts and throughout New England.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.