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BREAKING: PhRMA Asks Court to Strike Down 340B Dispute Resolution Rule and Manufacturer Audit Guidelines

Pharmaceutical Research and Manufacturers of America (PhRMA) sued yesterday in federal district court in Maryland to strike down the federal final rule that established the new 340B program administrative dispute resolution (ADR) process. It also wants the court to declare federal 340B program guidelines governing drug manufacturer audits of 340B covered entities illegal.

“The Trump Administration rushed to finalize a flawed ADR rule and ignored the program’s larger issues,” PhRMA Executive Vice President and General Counsel James C. Stansel said Friday.

340B covered entities and the U.S. Health Resources and Services Administration (HRSA) likely will push back hard against PhRMA’s portrayal of the ADR rule and defend the process used to finalize the regulation. They can be expected to point out that Congress told the U.S. Health and Human Services (HHS) secretary to issue the rule in March 2010, and lawmakers wanted it done by that September.

The ADR rule marked just the third time in 340B program history that HRSA released a final rule. HRSA published an ADR notice of proposed rulemaking for public comment in August 2016, under the Obama administration. The Trump administration the next spring withdrew it from the executive branch’s agenda of forthcoming regulatory actions, published every spring and fall. HRSA published the 340B ADR final rule, under a White House Office of Management and Budget regulatory information number (RIN) different from that of the 340B ADR proposed rule, on Dec. 14, 2020. The final rule took effect Jan. 13.

The drug industry trade group argues in its legal complaint that the 340B ADR rule is arbitrary and capricious, not the product of reasoned decision-making, and unconstitutional. PhRMA wants the court to declare that the ADR rule is contrary to law; that HRSA’s 1996 drug manufacturer audit guidelines are contrary to law; and that the mode of appointment for ADR Board members violates the U.S. Constitution’s appointments clause.

PhRMA seeks a permanent injunction prohibiting the U.S. Health and Human Services Department (HHS) and HRSA from implementing or enforcing the ADR rule and vacating setting the rule aside.

At least two petitions for 340B dispute resolution have been submitted, both on behalf of health centers, and both in connection with suits by covered entities again HRSA seeking to force it punish drug manufacturers for denying 340B pricing on covered outpatient drugs dispensed by contract pharmacies.

On Thursday, the Biden administration withdrew a notice ex-U.S. Health and Human Services (HHS) Secretary Alex Azar posted for public inspection Wednesday morning—his last half-day in office—announcing the appointment of six voting and two ex-officio non-voting members to the 340B ADR Board.

The Biden administration withdrew Azar’s notice about his appointees, but it has not frozen the underlying ADR final rule itself. Soon after President Biden was inaugurated, his administration froze numerous other Trump administration “midnight regulations”—including the published but not yet finalized rule requiring health centers to provide insulin and injectable epinephrine to low-income patients at the price centers pay for those drugs under the 340B program.

PhRMA released a summary of its lawsuit. It says:

The ADR Rule is Arbitrary and Capricious in Violation of the Administrative Procedure Act

By rushing out a previously withdrawn proposed rule and finalizing it on a stale record, the agency failed to appropriately consider comments and changed circumstances. Instead, the ADR Final Rule creates a biased process that improperly hampers the ability of manufacturers to address violations of program requirements by covered entities. Specifically

  • HRSA failed to adequately address comments regarding the audit guidelines, which govern the audit prerequisite for manufacturers to initiate ADR claims and present a blocked gateway to manufacturers trying to use the ADR process to seek relief from covered entity violations (diversion and duplicate discounts)
  • HRSA failed to consider the changed program environment and the evidence in PhRMA’s petition filed in November 2020.
The Manufacturer Audit Guidelines Are Contrary to Law

The audit guidelines exceed the limited grant of authority in the statute that authorizes HHS to create “procedures … relating to the number, duration, and scope of audits” conducted by manufacturers.

  • First, the audit guidelines impermissibly require manufacturers to establish “reasonable cause” to HRSA that a covered entity has violated the prohibitions on diversion or duplicate discounts before they can even commence an audit, a requirement that is not a “procedure[] … relating to the number, duration, [or] scope” of audits.
  • Second, the guidelines’ requirement that manufacturers employ third parties to conduct audits conflicts with the plain language of the statute, which directs covered entities to “permit the Secretary and the manufacturer” to audit the covered entities’ records.
The ADR Rule is in Violation of the Appointments Clause of the U.S. Constitution

Under the final ADR rule, ADR Board members are “principal officers” of the United States because they independently determine how to conduct proceedings and make final precedential determinations for HHS that are not subject to any further executive branch review. Because ADR Board Members function as principal officers under the ADR Rule even though they are not appointed by the President with the Senate’s advice and consent, the ADR Rule violates the Appointments Clause of Article II of the U.S. Constitution.

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