Health Reform WK-EDGE Drug manufacturers entitled to preliminary injunction over 340B ADR rule enforcement
Monday, April 5, 2021

Drug manufacturers entitled to preliminary injunction over 340B ADR rule enforcement

By Jeffrey H. Brochin, J.D.

HHS violated the notice-and-comment rulemaking requirements in promulgating the ADR Rule for 340B Program complaints, thereby rendering the ADR Rule procedurally invalid under the APA.

A federal district court in Indiana has granted the motion for preliminary injunction filed by Eli Lilly and Company (Lilly or manufacturer) and its co-plaintiffs in a lawsuit filed against HHS and its various regulatory enforcement bodies challenging the validity of the Administrative Dispute Resolution Regulation (ADR Rule). By the time the ADR Rule was promulgated, more than three years had passed since the agency removed its 2016 Notice of Proposed Rulemaking (NPRM) from the Unified Agenda, no new NPRM had appeared in the Federal Register, and no other action had been taken by the agency with regard to ADR rulemaking. Therefore, the NPRM had been effectively withdrawn, and HHS was required to provide a new notice and comment period in order to comply with the APA (Eli Lilly and Company v. CochranMarch 16, 2021, Barker, S.).

340B drug discount program. In 1992 Congress established the 340B Drug Price Program (340B Program), a drug-discount regime administered by HHS, which required as a condition of participating in Medicaid and Medicare Part B that pharmaceutical manufacturers sell outpatient drugs at a heavily discounted price to "covered entities," including providers serving low-income patients. Pharmaceutical manufacturers participating in the 340B Program were required to offer covered entities outpatient drugs for purchase at or below the applicable ceiling price. A participating manufacturer who did not comply with the 340B Program requirements was liable for a $5,000 civil money penalty for each occurrence of non-compliance.

1996 and 2010 Advisory Opinions. Because fewer than five percent of the covered entities operated their own in-house pharmacies for processing 340B Program drug orders, many began relying on outside contract pharmacies to take delivery from manufacturers of 340B drugs. In 1996, HHS issued non-binding guidance directing that if a covered entity used a contract pharmacy to purchase a covered drug, the manufacturer was required to sell the drug at the discounted price, regardless of whether the covered entity directed that the 340B drugs be shipped for handling and dispensing to a contract pharmacy. In a 2010 Advisory Opinion, HHS expanded this guidance to permit covered entities to utilize an unlimited number of contract pharmacies for 340B Program drugs.

ADR Rule put on hold. When Congress passed the Patient Protection and Affordable Care Act (ACA) (P.L. 111–148) in 2010, they instructed HHS to establish within 180 days an ADR process for reviewing claims by covered entities who claimed they were overcharged for covered 340B Program drugs, and for claims by manufacturers that duplicate discount or drug diversion violations had occurred. Despite the 2010 directive, HHS did not issue an NPRM proposing ADR procedures until August 12, 2016. On August 1, 2017, the NPRM was removed from the Unified Agenda without any explanation.

Then, on December 14, 2020, HHS published ADR final rule procedures but did not provide advance notice nor an opportunity for public comment. On December 30, 2020, HHS's General Counsel issued an Advisory Opinion reiterating that a drug manufacturer in the 340B Program was obligated to deliver its covered outpatient drugs to a contract pharmacy at the 340B Program ceiling price.

Abuses documented. Although covered entities were prohibited from requesting duplicate discounts (i.e., both a 340B discount and a Medicaid rebate for the same drug), and were prohibited from engaging in "diversion," meaning, reselling or transferring a covered outpatient drug to a person who was not a patient of the entity, by the summer of 2020, Lilly determined that abuses of those two prohibitions were widespread. Lilly therefore announced that they were discontinuing the practice of voluntarily honoring requests for 340B "contract pharmacies" for orders on all Lilly products, subject to certain exceptions.

Petitions pursuant to ADR Rule. Following Lilly’s announcement (and a similar policy change by other manufacturers), several covered entities filed lawsuits against HHS, seeking to compel HHS to reverse the drug manufacturers' new policies, and/or to promulgate regulations establishing an ADR process as Congress had directed in 2010. (Two months after these lawsuits were filed, HHS published the ADR final rule noted above.)

Lilly filed the instant action in January 2021 challenging the December 2020 Advisory Opinion and seeking injunctive relief enjoining HHS and its related bodies from implementing or enforcing the ADR Rule on the grounds that it violated the Appointments Clause of Article II and usurped the exclusive power of the judiciary in violation of Article III of the United States Constitution, and/or that it was procedurally and substantively invalid under the APA.

NPRM deemed withdrawn. Although HHS argued that the NPRM had merely been "paused" for three years and was never formally withdrawn, the court disagreed, finding that after the comment period ended, HHS removed the NPRM from the Unified Agenda but never published a notice of withdrawal in the Federal Register. The Unified Agenda entry for the NPRM on the OMB’s website displayed "Withdrawn" as of August 1, 2017, and identified the Agenda Stage of Rulemaking for the NPRM as a "Completed Action," which is a term used to describe rulemakings that are withdrawn or ending their lifecycle with a regulatory action that completes the rulemaking. More than three years after the NPRM was removed from the Unified Agenda, HHS issued its final ADR Rule without providing any additional notice or comment period, and the ADR Rule was issued under a different Regulatory Identification Number (RIN) than the NPRM.

Based on the foregoing, the court concluded that Lilly was in fact entitled to a notice and comment period for the NPRM, and that HHS’s failure to provide that violated the APA, thereby rendering the ADR Rule invalid. Lilly was accordingly granted the preliminary injunctive relief.

The case is No. 1:21-cv-00081-SEB-MJD.

Attorneys: Andrea Roberts Pierson (Faegre Drinker Biddle & Reath LLP) for Eli Lilly and Co. and Lilly USA, LLC. Kate Talmor, U.S. Department of Justice, for Robert P. Charrow., U.S. Department of Health and Human Services, Health Resources and Services Administration and Norris Cochran.

Companies: Eli Lilly and Co.; Lilly USA, LLC; U.S. Department of Health and Human Services; Health Resources and Services Administration

Cases: CaseDecisions 340BNews AccessNews AgencyNews DrugNews MedicaidNews MedicarePartBNews IndianaNews

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