The WasteWatcher: The Staff Blog of Citizens Against Government Waste

Judge Tells Federal Agency to Obey the Law for Drug Discount Program

The WasteWatcher is the staff blog of Citizens Against Government Waste (CAGW) and the Council for Citizens Against Government Waste (CCAGW). For questions, contact blog@cagw.org.


On October 14, the United States District Court for the District of Columbia struck down the Health Resources and Services Administration’s (HRSA) interpretive rule that ordered pharmaceutical manufacturers to provide substantial drug discounts under the 340B program for orphan drugs that were used off-label.  The agency had first written a proposed rule in 2011 that was in clear violation of the Affordable Care Act (ACA), better known as Obamacare, and had stubbornly fought to implement it.  This is not the first time the administration has changed ACA's requirements without congressional approval.  While it is being called a win for pharmaceutical companies, it is also a win for consumers, taxpayers, and the rule of law.

I have written about the 340B drug discount program before, including the orphan drug issue, and why the program needs real reform.  You can find some of the articles herehere, and here.

Here is a brief background on this particular issue:

The 340B drug discount program was created in 1992 to help certain healthcare entities that serve large populations of uninsured, indigent people.  These entities include specific hospitals, health centers, and health clinics. Drug manufacturers, as a requirement to be able to participate in Medicaid, had to provide heavily discounted outpatient drugs to these entities.  There was an understanding, when the law was written, that the discounts would be passed along to the indigent patients that utilized the entities.  Since 1992, the entities that can participate in the program have greatly expanded, especially under ACA.

As a result of the vaguely written drug discount law and unclear definition of a 340B-eligible patient, the program turned into a money making scheme for many hospitals and their contract pharmacies.  Reports from the Department of Health and Human Services Office of the Inspector General and the Government Accountability Office showed, for example, that 340B-eligible patients were not getting the discounts due to them, that the program lacked appropriate oversight, and that there was drug diversion.  The Charlotte Observer also ran a series of articles on non-profit hospitals that made huge earnings at the expense of patients while providing little charity care, in part though using the 340B program.

Taxpayers and consumers end up paying for the misuse of the 340B program through higher insurance premium costs, increased drug prices, and taxes.

HRSA, the federal agency that oversees the 340B program, decided to compound the problem by proposing a regulation in 2011 and finalizing the regulation in 2013, that would have forced pharmaceutical companies to provide discounts on orphan drugs used “off-label”, even though the ACA explicitly forbids discounts  of any kind for these types of drugs.  An orphan drug, as designated by the Food and Drug Administration (FDA), treats rare diseases that affects less than 200,000 people.  Drug research companies are given special incentives to create these drugs because the populations are so small.  If a drug is used off-label, it is being used for an indication that it has not been approved for by the FDA.  Thus, the rule opened the door to discounts that were not valid based on ACA’s requirements.

The pharmaceutical industry brought this issue before the District Court three times, starting in 2013.  In 2014, the judge sided with the industry and declared HRSA’s rule was invalidated.  But the judge also suggested the HRSA could offer an interpretive rule instead.  Later in 2014, the agency released an interpretive rule that was essentially the same rule that had been previously invalidated by the court.  The pharmaceutical industry asked the same judge to throw out the interpretive rule but the judge refused, saying the interpretive rule was a new action and not part of the earlier lawsuit.  However, the judge said the industry could file a new lawsuit, which they did.  Finally, four years later after HRSA originally wrote an invalid rule, the judge’s opinion stated that the “interpretive rule is contrary to the plain language of the statute."

Unfortunately, a lot of money and time has been wasted because a federal agency simply did not follow the law.

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