May an agency revive a defunct rulemaking without notice, and then immediately promulgate a lightly revised version of the proposed rule as a final rule?  The Department of Health and Human Services (“HSS”) arguably did just that in promulgating its rule specifying the administrative dispute resolution (“ADR”) process[1] for conflicts between drug makers and certain health care providers.  Feeling constrained by the skeletal nature of the APA’s rulemaking provision, 5 U.S.C. 553, and the now long-standing judicial doctrine that courts cannot supplement those provisions, the Third Circuit permitted HHS to do so. But not without vigorous dissent. This post explores the Third Circuit’s decision, Sanofi Adventis v. HHS, 2023 WL 1098017 (Jan. 30, 2023). 

I. The Section 340B Program

Under section 340B, drug companies that provide pharmaceuticals as a part of the Medicare or Medicaid programs must offer their medications at a discount to certain healthcare providers, termed “covered entities.” 42 U.S.C. §§ 256b, 1396r-8(a)(1), (5).[2] Such healthcare providers typically serve low-income and rural populations.  Sanofi, slip op. at 5.  Section 340B was adopted as a part of the Veterans Health Care Act of 1992. Pub. L. No. 102-585, § 602, 106 Stat. 4943, 4967.  Congress amended the provision in 2010 as part of the Patient Protection and Affordable Care Act (“the Affordable Care Act”), Pub. L. No. 111-148, tit. VII.B, §§ 7101–02, 124 Stat. 119, 821–27, establishing a universal health care program commonly referred to as Obamacare.[3]

Section 340B directs the Secretary of HHS to sign an agreement with each drug maker capping prices “for covered outpatient drugs … purchased by a covered entity.”  Each such agreement … “shall require that the manufacturer offer each covered entity covered outpatient drugs for purchase at or below the applicable ceiling price if such drug is made available to any other purchaser at any price.”

When Congress first enacted section 340B in 1992, few covered entities maintained in-house pharmacies. Sanofi, slip op. at 7.  Many covered entities contracted with outside pharmacies to distribute discounted section 340B drugs to their patients. Such covered providers would order and pay for the drugs, for shipment directly to their contract pharmacy, where the covered providers’ patients could pick up the medication.  Id.

In 1996, HHS issued guidance limiting covered entities to using one contract pharmacy. Health Resources and Services Administration, HHS, Notice Regarding Section 602 of the Veterans Health Care Act of 1992; Contract Pharmacy Services, 61 Fed. Reg. 43549 (Aug. 23, 1996). On March 5, 2010, days before the ACA was enacted, HHS revised its 1996 guidance, to permit covered entities to use an unlimited number of contract pharmacies. Health Resources and Services Administration, Notice Regarding 340B Drug Pricing Program—Contract Pharmacy Services, 75 Fed. Reg. 10272, 10277 (Mar. 5, 2010).[4] That change unleashed a dramatic twentyfold increase in the number of contract pharmacies used by covered entities.  Sanofi, slip op. at 7. In response, several pharmaceutical companies, including Sanofi, sought to reinstate HHS’s earlier “one contract pharmacy per covered entity” policy by imposing it in their own rules for covered entities. Id. at 8.[5] 

After covered entities objected, HHS’s General Counsel sought to resolve the issue by issuing an opinion letter.  HHS Office General Counsel, Advisory Opinion 20-06 on Contract Pharmacies Under the 340B Program (Dec. 30, 2020).  In it, he asserted that the statute and the pharmaceutical pricing agreement (“PPA”) provision reflecting the statutory mandate were “unambiguous.”  Id. at 2-3.  The General Counsel viewed the transaction between the drug manufacturer and the covered entity as “a straightforward ‘sale’ which ‘consists of the passing of title from the seller [drug manufacturer] to the buyer [covered entity] for a price.’” Citing the Uniform Commercial Code, he argued, the conventional passage of title at the time of purchase made irrelevant “[t]he situs of delivery,” be it “the lunar surface, low-earth orbit, or a neighborhood pharmacy.”  Id. at 3 (citing U.C.C. § 2-106, defining “sale,” and U.C.C. § 2-401(2), specifying when “title” passes).  (The General Counsel’s references to “spacial” delivery appear a bit incautious, and would ultimately be noted by the Third Circuit).  The General Counsel went on to argue that the purpose and history of the 340B program were consistent with its view of the unambiguous meaning of the statutory/PPA text.   Advisory Opinion 20-06, supra, at 3-5.

II. Sanofi Adventis v. HHS

A. Availability of Discounted Drugs Through Contract Pharmacies

The major issue in Sanofi Adventis v. HHS was whether HHS could require drug makers to provide discounted pharmaceutical to any number of contract pharmacies a covered entity chose to use.  On this issue the Court did not accord HHS Chevron deference,[6] because Congress had conferred no rulemaking power upon the Department.  Sanofi, slip op. at 13 (citing Christensen v. Harris County, 529 U.S. 576, 587 (2000)).  The panel’s Chevron Step Zero analysis is arguably flawed.[7] The Court rejected Skidmore deference as well, finding the agency’s interpretation of the statute unpersuasive.[8] Id.  In the panel’s view the statutory text was silent about “delivery,” that is, it simply did not address the question of the number of pharmacies to which a covered entity could “force” drug makers to ship discounted drugs for distribution to the covered entity’s patients.  Id. at 13, 14.  In Judge Bibas’ memorable phrasing, “[s]tatutory silences, like awkward silences, tempt speech. But courts must resist the urge to fill in words that Congress left out.” Id. at 5.

That ruling in itself could be criticized as unnecessarily “wooden.”[9] The text of the statute and post-enactment changes in the health care industry meant that the court could not avoid judging what constituted reasonable availability of discounted pharmaceutical to covered entities.  The Court’s effort to avoid that central interpretive challenge by examining statutory text, structure, and drafting history arguably ultimately failed.  After all, it concluded that pharmaceutical companies could not restrict delivery to covered entities themselves without permitting them to use any contract pharmacies, even though the statutory text is equally silent on that point.  Such a policy, it reasoned, would mean that the drug maker had violated the statutory requirement of “present[ing]” discounted drugs “for acceptance” by all covered entities.  Id. at 14 (emphasis added).

Under a less “wooden” interpretive approach a court might have construed the drug makers’ statutorily-prescribed obligation as a requirement that drug companies provide contract pharmacies with discount price pharmaceuticals in a manner that reasonably fulfilled the needs of the covered entities patients, while complying with the FDA’s requirement for safe distribution of high-risk drugs. See, e.g., 21 U.S.C. § 355-1.[10]  Such flexible interpretation would have been far more faithful to Congress’ evident intent, requiring that pharmaceuticals be made reasonably available to a covered entities’ patients at discounted prices. 

Judges should hardly expect Congress to legislate in the detail apparently demanded by the Third Circuit panel.  Congress might have expected HHS to apply its expertise to resolve such interstitial interpretive questions in the course of resolving disputes between pharmaceutical companies and covered entities through the administrative dispute resolution process discussed below.  Indeed, the panel’s ruling seems to suggest that HHS could not expressly add a requirement that pharmaceutical companies deliver to a reasonable number of contract pharmacies used by a covered entity to distribute medicines to patients. The statute surely cannot be read to preclude HHS from imposing such a condition.

But on to the main issue addressed in this post — revival of defunct rulemakings without notice.

B. The Administrative Dispute Resolution Process

In the ACA, Congress directed HHS to set up a dispute resolution process through which drug makers and covered entities could resolve any Section 340B–related disagreements within 180 days of the ACA’s enactment. 42 U.S.C. § 256b(d)(3). This obligation should be put into context.

The ACA required a massive amount of rulemaking activity.  Simon F. Haeder and Susan Webb Yackee, Regulation, Delegation, and the Affordable Care Act, THE REGULATORY REVIEW (Aug. 4, 2020).[11] By the end of 2019, the ACA had triggered 265 unique rulemaking activities, resulting in 9,000 pages of regulations. And many of the rulemakings had to be done by HHS.

When the ACA was adopted, there were extant guidelines for an informal dispute resolution process developed to resolve disputes between covered entities and manufacturers, which had been published on December 12, 1996. Health Resources and Services, Manufacturer Audit Guidelines and Dispute Resolution Process 0905–ZA– 19: Final Notice, 61 Fed. Reg. 65406. See, 340B Drug Pricing Program Administrative Dispute Resolution Process: Final Rule, supra, 85 Fed. Reg. at 80633; accord, Health Resources and Services Administration, 340B Drug Pricing Program Administrative Dispute Resolution Process: Notice of Proposed Rulemaking, 87 Fed. Reg. 73516 (Nov. 30, 2022).[12]  These guidelines, and the paucity of use of the process,[13] might explain the agency delay in completing the ADR rule that may otherwise appear quite appalling.

The agency’s effort to craft ADR rules started well.  Shortly after the ACA’s enactment, HHS’s Health Resources and Services Administration published an advanced notice of proposes rulemaking regarding the administrative dispute resolution process,[14] Health Resources and Services Administration, 340B Drug Pricing Program Administrative Dispute Resolution Process: Advance Notice of Proposed Rulemaking and Request for Comments, 75 Fed. Reg. 57233 (September 20, 2010),[15] setting November 19, 2010 as the deadline for comments.[16]  

But then matters remained quiescent for nearly six years.[17] Only in 2016 did HHS finally issue a notice of proposed rulemaking. Health Resources and Services Administration, 340B Drug Pricing Program Administrative Dispute Resolution Process: Notice of Proposed Rulemaking, 81 Fed. Reg. 53,381 (Aug. 12, 2016). The agency received 31 public comments (which were due within 60 days of the notice of proposed rulemaking).

HHS appears to have abandoned the proposed ADR Rule, permitting it to be listed as withdrawn in the Unified Agenda. 340B Drug Pricing Program; Administrative Dispute Resolution Process, RIN 0906-AA90 (Spring 2017) (noting “NPRM Withdrawn” on “08/01/2017”, with no subsequent listing of revival).  This notation is from a version of the Unified Agenda archived on December 22, 2022.    

But appearances can be deceiving, or so HHS’ account of its rulemaking suggests. HHS asserted in its 2020 notice of final rule that the NPRM had been removed from HHS’ Regulatory Agenda in accordance with a January 20, 2017 memorandum from the Office of the President, directing an executive-branch-wide freeze of all pending regulatory actions pending review.  Reince Preibus, Memorandum for the Heads of Executive Departments and Agencies:  Regulatory Freeze Pending Review 82 Fed. Reg. 8346 (Jan. 24, 2017)(issued Jan. 20, 2017).  In HHS’ view, the memo merely mandated a pause in consideration of the proposed rule, which simply ^“had the effect of pausing action on the proposed rule.” Health Resources and Services Administration, 340B Drug Pricing Program Administrative Dispute Resolution Process: Final Rule, 85 Fed. Reg. 80632, 80633 (Dec. 14, 2020)(emphasis added).[18] The Secretary, maintained that HHS never “formally withdrew the NPRM — the Unified Agenda reference notwithstanding — but rather had “left it open as a viable option.”  Id.

On December 14, 2020, over three years after it had issued a proposed notice of rulemaking and received comments, HHS issued a proposed ADR rule, without offering a further opportunity for public comment.  Id. In the notice of rulemaking, HHS responded to the comments it had received in response to the 2016 notice of proposed rulemaking. Id.[19]

In resolving Sanofi’s challenge to the validity of the rule given HHS’s apparent withdrawal of the rulemaking proposal, District Judge Wolfson concluded, after a very fact-sensitive inquiry, that the agency had just barely comported with the obligation, implicit in the APA, to avoid promulgating surprise edicts. Sanofi-Aventis U.S. v. Department of Health & Human Services, 570 F.Supp.3d 129, 161-67 (D.N.J. 2021), rev’d, Sanofi Adventis v. HHS, —F.4^th —,2023 WL 1098017 (3d Cir. Jan. 30, 2023)

1. The Panel Majority’s Approach

Sanofi argued that when an agency withdraws a rule, as it believed HHS had done, the agency must initiate notice and comment proceedings from the beginning. The agency must thus promulgate a new notice of proposed rulemaking, followed by the normal period of comment, and only then can it proceed with promulgating a rule.  See Sanofi, slip op. at 19.  The panel majority rejected the argument.

Judge Bibas noted that the APA does not mention “withdrawing proposed rules.” Nor was there Supreme Court precedent on the issue. The majority pronounced its reluctance to give “withdrawal” separate legal significance under the APA. To it, an agency’s designation of a rule as withdrawn for purposes of the Unified Agenda “seem[ed] to be just a message about [the] agency’s intent.”  Id.

The APA’s text merely required (1) putting a notice of proposed rulemaking in the Federal Register, (2) accepting comments on that proposal, and (3) considering those comments. Id. (citing 5 U.S.C. § 553(b)–(c)).  HHS had completed each of those steps; the listing of the rule as withdrawn did not negate that fact.  Withdrawn or not, “the public knew about the proposed rule and had a chance to comment on it, and the agency considered those comments.”  Id.  The majority explained “[t]he APA prescribes the ‘maximum procedural requirements that an agency must follow in order to promulgate a rule.’” Id. (quoting Little Sisters of the Poor Saints Peter & Paul Home v. Pennsylvania, — U.S. —, 140 S. Ct. 2367, 2385, (2020); accord, Vermont Yankee Nuclear Power Corp. v. Natural Resources Defense Council, Inc., 435 U.S. 519, 524 (1978). It might have added, gone are the days in which courts could impose supplemental rulemaking procedures on agencies.

Sanofi could not complain that it was “caught off guard” by the ADR Rule’s promulgation — the APA-mandated thirty-day period between promulgations and the rule becoming effective provided such notice, and that was all a court could require.  Sanofi, slip op. at 19.

Moreover, the Court explained, even if an agency could irrevocably nullify a prior notice proposed rulemaking and accompanying comments, such a nullification would “require something more than what happened here.”  Id. at 20.  It noted that the Unified Agenda “was not created as part of the APA,” observing that “[i]t would be odd if agencies could nullify past steps taken to comply with the APA in a publication that has little if anything to do with the APA.”  Id.  Moreover, the Introduction to the Unified Agenda for 2021 explicitly noted that the document does “not create a legal obligation on agencies … to confine their regulatory activities to those regulations that appear within it.” Id. (citing Regulatory Information Service Center, Introduction to the Unified Agenda of Federal Regulatory and Deregulatory Actions, 86 Fed. Reg. 41166, 41167 (June 30, 2021)).

It noted that other rulemaking concluded in 2020 had involved long delays, citing FDA, Food Labeling; Gluten-Free Labeling of Fermented or Hydrolyzed Foods: Final Rule, 85 Fed. Reg. 49240, 49243 (Aug. 13, 2020) (promulgation nearly five years after notice of proposed rulemaking); FDA, Banned Devices; Electrical Stimulation Devices for Self-Injurious or Aggressive Behavior: Final Rule, 85 Fed. Reg. 13312, 13314 (Mar. 6, 2020). Id. at 20.

The majority might have, but did not, note that the agency’s statutory obligation to promulgate a rule might also relate to the question of notice.  The public might reasonably be expected to act based on the assumption that at some point the agency would comply with the clear statutory mandate — and presumably another drug maker, a covered entity, a covered entity’s patient, or just a member of the public could have either successfully petitioned the agency to promulgate the ADR rule, 5 U.S.C. § 553(e), or brought an action under the APA’s judicial review provisions alleging that agency action “unlawfully withheld or unreasonably delayed,” 5 U.S.C. § 706(1).  Of course, the obligation to comply with the statutory mandate does not necessarily mean that the agency would merely revive a proposed rule it has promulgated rather than craft a radically different rule to propose in an entirely new rulemaking. 

The majority also might have noted that in the very rulemaking before it an even longer period of time has passed between the agency’s publication of the ANPRM (and accompanying receipt of comments) and the publication of the NPRM — granted it appears that the Unified Agenda never indicated that the ANPRM had been withdrawn or the rulemaking otherwise terminated.

2. The Dissenter’s Approach

In dissent, Judge Ambro noted that agencies’ “usual practice,” when abandoning a proposed rulemaking, is to publish a notice of withdrawal of the notice of proposed rulemaking in the Federal Register. Sanofi, slip op. at 1 (Ambro, J., dissenting)(citing 83 Fed. Reg. 60804 (Nov. 27, 2018), and 84 Fed. Reg. 37821 (Aug. 2, 2019).[20] Moreover, he noted, the APA’s notice-and-comment requirements are meant to “ensure fairness to affected parties.” Id. at 1-2 (referencing Council Tree Communications, Inc. v. F.C.C., 619 F.3d 235, 250 (3d Cir. 2010), and United Mine Workers v. Mine Safety & Health Administration, 407 F.3d 1250, 1259-60 (D.C. Cir. 2005)). In his view, “[s]ome agency actions short of formal notice in the Federal Register should constitute withdrawal because they make any reasonable person believe the proposed rule would not take effect.”  Sanofi, slip op. at 2 (Ambro, J., dissenting)(emphasis added).

Not only had HHS allowed the ADR proposal to be designed as “withdrawn” in the Unified Agenda, in March 2020, but in addition an official from the Health Resources and Services Administration (“HRSA””) had asserted that HRSA did “not plan to move forward on issuing [an ADR] regulation due to the challenges with enforcement of guidance.”  (Apparently, the reference is to statements reported in a trade publication, Tom Mirga, HRSA: 340B Dispute Resolution Will Stay on Hold Until We Get Broader Regulatory Authority, 340B Report (Mar. 12, 2020), which is currently behind a paywall). Moreover, when HHS ultimately issued the final ADR Rule in December 2020, it did so under a new Regulatory Identification Number (“RIN”).  Id. at 2.

Judge Ambro concluded: “Any one of these facts alone may not be sufficient to constitute a withdrawal of the NPRM. But when an agency consistently takes the position for three years that it will not turn that proposed rule into a final rule, the public should be able to take what the agency says at face value.” Id. at 3.

An Indiana district had taken much the same approach in an earlier decision. Eli Lilly & Co. v. Cochran, 526 F. Supp. 3d 393, 407 (S.D. Ind. 2021)(describing the agency’s messaging regarding the status of the ADR rule as “ambiguous, confusing, duplicitous, and misleading—the antithesis of fair notice under the APA”).

III. Observations

HHS’s apparent abandonment and apparently sudden resurrection of its ADR rulemaking in this case presents a fundamental problem that both the majority and the dissenter recognized, but only the dissenter believed the courts possessed the authority to address.

When an agency has indicated that it has terminated a proposed rulemaking by, in effect, abandoning the proposal, there is a notice problem when it abruptly revives the rulemaking and promulgates a final rule without warning.

First, circumstances may have changed during the extended period that the rule lay fallow within the agency.  This might particularly be true in the case of the health care industry in general, and the pharmacy sector in particular.  Stale comments submitted without knowledge of the circumstances at the time of initial promulgation of a rule do not suffice to allow the public to give meaningful comments on the rule.  Granted, this concern is more applicable to the controversy regarding the scope of drug company’s obligations to provide pharmaceuticals to covered entities at discount rates, and much less so with regard to the appropriate ADR mechanism.  An agency could provide a modest period during which it will receive comments directed at changed circumstances since the promulgation of the NPRM that commenters believe the agency should take into account.

Moreover, when a proposed rulemaking is withdrawn, commenters have no reason to request a supplemental round of comments to update their views to respond to changes in events or merely a change of mind.  If the public has been told that the agency has abandoned the notice of proposed rulemaking to which comments were made, supplemental comment would seem unwarranted, and indeed, pointless.  If the rulemaking is simply lengthy, but still active, commenters know that the agency may still be relying on their comments and have every incentive to seek to have the agency reopen the comment period if necessary, due to a change in circumstances or otherwise.

The thirty-day period to prepare for compliance provided by the APA does not really address concerns, nor is it primarily designed to do so.  First, in certain circumstances, that thirty-day notice period is not even required. 5 U.S.C. 553(d).[21] Second, that brief period does not allow parties to offer comments due to changed circumstances, and it is unlikely that the agency will re-open the rulemaking proceedings for an additional round of comments at that point.  Third, thirty days is only a modest amount of time to prepare to comply with a rule when the rule is under active consideration and the public can inquire into the timeframe in which the rule might be adopted.  The compliance problem is magnified when entities whose rights and obligation are affected must craft their compliance efforts with no notice at all that any rule on a subject is forthcoming.  Again, stakeholders (both regulated entities and regulatory beneficiaries) have no reason to inquire about the agency’s timeline for promulgating a rulemaking proposal the agency has withdrawn.

Of course, there are complex rulemakings with sizable records and numerous public comments, as well as attendant regulatory obligations under executive orders, that may result in long delays between the initial promulgation and receipt of comments and the issuance of a final rule.  See, JEFFREY S. LUBBERS, A GUIDE TO FEDERAL AGENCY RULEMAKING 362 (6^th ed. 2018)(citing various reasons for the “numerous delays” that can occur “in the later stages of rulemaking).  And the APA itself does not impose upon agencies any deadlines on acting on its notices of proposed rulemaking. 

Surely in cases in which various regulatory challenges result in long delays, there should be no generally applicable deadline imposed upon the agency in proceeding from receipt of comments to proposing a final rule.  It may be wise for agencies to consider whether commenters need to be accorded an opportunity to update their comments in light of changes. See, GUIDE TO FEDERAL AGENCY RULEMAKING, supra, at 301; see, Idaho Farm Bureau Federation v. Babbitt, 58 F.3d 1392, 1404 (9^th Cir. 1995).[22] And commenters might be expected to seek such an opportunity from an agency. Nevertheless, there is no reason to require the agency to start the arduous rulemaking process all over again in such a circumstances merely due to the passage of time.[23]  Any rule or supporting rationale with regard to “withdrawn” rules should not undermine or serve as a basis for challenging the validity of rules that are so complex that they simply take a long time to promulgate, or are delayed because of a change in presidential administrations.

Indeed, two established judicially created doctrine may limit an agencies’ ability to rely on comments made in response to a dated NPRM.  An agency may rely on new studies completed after the NPRM and accompanying comment period, or significantly changes its approach for other reasons. If the agency does not open a supplemental round of comments before promulgating its final rule, the rule might be invalidated on one or both of two grounds. First, agencies must provide the scientific and technical studies underlying a rule — which the agency would fail to do if it did not reopen the comment period.  See, GUIDE TO FEDERAL AGENCY RULEMAKING, supra, at 289-91. Second, if intervening events prompt the agency to significantly alter its approach, the final rule will not be a “logical outgrowth” of the initial proposal.  See, id at 291-295; e.g., Sanofi-Aventis U.S. v. HHS, supra, 570 F.Supp.3d at 167-171 (conducting “logical outgrowth” analysis of 2020 ADR rule).  Application of neither of these doctrines require agencies to start the entire rulemaking process call over again.

The dissent’s rule appears to be imprecise and heavily fact dependent.  It is not clear which combination of acts would suffice to constitute adequate notice of withdrawal,[24] and so “the rule” may become a trap for unwary agencies.  Agencies may be subject to surprise in ways that will negate the considerable effort the agency has put into a rulemaking.  Such a prospect is all the more troubling if the remedy for withdrawal is not a merely required brief supplemental comment period, but treating the prior rulemaking as completely void and requiring the agency to begin all over again (as Sanofi urged).[25]

At the very least some particular action should be a minimum threshold requirement for a determination that the rule has been withdrawn.  That might be, for instance, indicating in the Unified Agenda that the rule has been withdrawn (or publishing a notice of withdrawal in the Federal Register, which should ordinarily suffice by itself).  Such a clear threshold requirement would avoid creating situations in which an agency, or particular officials within the agency, unwittingly take actions that constitute withdrawal and forfeit the agency’s right to continue pursuing a rulemaking.  After all, Judge Ambro’s approach, in which an agency official’s statement might provide significant evidence of withdrawal, gives individual agency officials considerable power to undermine a rulemaking.  And indeed, the statement might only be accessible to only a subset of those interested persons (such as a statement made at a meeting of an industry association).  In addition, it may be that the choice to use the same RIN number is viewed as a mundane one which agency heads and even the agency heads’ immediate subordinates leave to lower-level agency officials.  (Indeed, whether a different RIN number may be required may be determined by some entity other than the agency itself.)

Conclusion

Given that the rule at issue in Sanofi involves ADR procedures, perhaps the harm resulting from allowing an agency to revive a rulemaking without notice after comments have been received and then immediately promulgate a rule is not great.  But it is easy to imagine other cases involving the substantive obligations and rights of members of the public, where the unfair surprise to either regulated entities or regulatory beneficiaries may prove quite significant.

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[1] At times the agency appears to refer to the process as an “alternative dispute resolution” process.

[2] The current HHS webpage for the program can be found here.

[3] For a more complete history of the origins of the program, see Astra USA, Inc. v. Santa Clara County, 563 U.S. 110, 114-116 (2011).

[4] The notice did not set forth the legal basis for the change in policy.

[5] Depending on how pharmacy chains, such as CVS or Rite-Aid are characterized, this “one contract pharmacy” policy could provide an artificial competitive advantage to chain pharmacies over independent pharmacies, as covered providers could expand their patients option by choosing a chain as their contract pharmacy.

[6] Chevron v. Natural Resources Defense Council, 467 U.S. 837 (1984).

[7] One might wonder whether the standard Step Zero analysis must be varied (or discarded) with regard to statutes that sets forth minimum requirements for contracts federal agencies enter into with providers as part of a program in which provider perform services under an entitlement program.  In particular, the section 340B Program form pharmaceutical pricing agreements (PPAs) are not “transactional, bargained-for contracts,’” but uniform agreements that “recite the responsibilities § 340B imposes, respectively, on drug manufacturers and the Secretary of HHS.” Astra v. Santa Clara County, supra, 563 U.S. at 113.  

When an agency crafts standardized provider agreements, it acts in a proprietary, not a regulatory, capacity, and the contract can impose obligations independent of the statute. Granted such provider agreements would ordinarily impose independent obligations on the basis of mutual agreement (or at least mutual understanding), but perhaps the argument that the agency is entitled to deference is stronger when it unilaterally interprets obligations such agreements precisely because the PPAs are standardized, not “bargained-for” agreements.  (Indeed, HHS’ General Counsel references the Auer framework of analyzing an agency’s interpretation of its own regulations, as well as the Chevron framework, in conducting his analysis. Opinion 20-06, at 3 (citing Kizor v. Wilkie).

But there are three obstacles to applying Auer or Chevron deference based on the General Counsel’s opinion. First, the provider participation agreement apparently “parrots” the statute.  See, Kizor v. Wilkie, — U.S. —, 139 S.Ct. 2400, 2417 n.5 (2019); Gonzalez v. Oregon, 546 U.S. 243, 257 (2006), making Auer deference inappropriate. Second, the General Counsel specified that his opinion letter did not have “the force of law,” Advisory Opinion 20-06, supra, at 8, thus the General Counsel did not invoke any power to act with the force of law agency possessed in issuing the opinion letter.  See, U.S. v. Mead, 533 U.S. 218, 229 (2001); Christensen v. Harris County, supra, 529 U.S. at 587.  Accordingly, Chevron deference is inappropriate.  Third, the agency asserted that the statute was unambiguous, a conclusion with which the Third Circuit panel disagreed, and that itself might well have undermined any claim of Chevron deference.  See, e.g., Baltimore & Ohio R.R. v. ICC, 826 F.2d 1125, 1128-29 (D.C. Cir. 1987).  

[8] Skidmore v. Swift & Co., 323 U. S. 134, 140 (1944).

[9] Granted HHS General Counsel’s interpretation of the statutory/PPA text could similarly be described as “wooden.”  It did, however, facilitate patients’ freedom to choose their own pharmacies.

[10] As the Third Circuit panel remarked, “[d]rug makers often comply by limiting distribution to a few pharmacies that are specially trained to educate and monitor patients.” Sanofi, slip op. at 16. But, of course, these limits do not require drug makers to refuse to ship non-risky pharmaceuticals to a wider range of contract pharmacies chosen by “covered entities.” 

[11] For the full Haeder and Yackee study, see Simon F. Haeder and Susan Webb Yackee, A Look Under the Hood: Regulatory Policy Making and the Affordable Care Act, 45 J. HEALTH POLIT. POLICY LAW 771 (2020).

[12] The 2020 final rule replaced those guidelines. 

[13] Moreover, few disputes appeared to require resolution through the process, only four were filed under the 1996 ADR process.  87 Fed. Reg. at 73518.

[14] The Secretary of Health and Human Services (Secretary) delegated the authority to establish and administer the 340B Program to the Administrator of HRSA.  Health Resources and Services Administration, 340B Drug Pricing Program Administrative Dispute Resolution Process: Final Rule, 85 Fed. Reg. 80632, 80632 (Dec. 14, 2020).

[15] Areas for which HRSA is expressly seeking comment regarding the appropriate: (a) administrative procedures, (b) threshold requirements for a party’s initial submission (including requirements regarding adequacy of the party’s allegations, (c) hearings procedure, (d) decision-making official or body, (e) the appeals procedures, (f) deadlines, (g) discovery procedures, and (h) integration of dispute resolutions with other provisions in the Affordable Care Act, inter alia.

[16] HRSA received 14 comments. See, Rulemaking Docket: 340B Drug Pricing Program Administrative Dispute Resolution, HR-2010-0005, Regulations.gov.

[17] In the interim, the Supreme Court finally resolved the issue of whether covered providers could sue pharmaceutical companies for violations of PPA provisions, an issue which had occupied the lower courts since at least 2001.  Astra v. Santa Clara County, supra, 563 U.S. at 117 n.3 (describing the circuit conflict regarding the issue). The Court concluded that covered providers had no such private right of action.

[18] Certainly nothing in the now typical memo from the Chief of Staff of a new Administration suggests that a regulatory freeze does any more than pause rulemaking activity for a short time until the new Administration can review ongoing rulemaking initiatives for consistency with its policies.  See, Jack M. Beerman, Midnight Rules: A Reform Agenda, 2 MICH. J. ENVTL. & ADMIN. L. 285 289, 322 n.122 (2013)(such regulatory freezes by a new administration are typical).  For the Department of Justice Office of Legal Counsel’s view on the legality of such regulatory freezes imposed by incoming administrations, see Presidential Memorandum Delaying Proposed and Pending Regulations, 5 Op. O.L.C. 55 (1981).

[19] The panel noted that after it had heard oral argument, HHS had proposed a new rule to revise the 2020 ADR Rule’s procedures. Health Resources and Services Administration, 340B Drug Pricing Program Administrative Dispute Resolution Process: Notice of Proposed Rulemaking, 87 Fed. Reg. 73516 (Nov. 30, 2022).  HHS explained that the 2020 final rule, promulgated under the Trump Administration, had posed at least five “policy and operational challenges.” Id. at 73517-18.

[20] Given this practice at the very agency that promulgated the ADR rule, the fact that the agency did not publish a notice of withdrawal might actually have served as a hint that the agency did not consider the rulemaking withdrawn.

[21] Granted, the first exception, for “substantive rule[s] which grants or recognizes an exemption or relieves a restriction” will probably not harm regulated entities who filed comments, but may harm regulatory beneficiaries protected by the rule constraining regulated entities.  The second exemption, for “interpretative rules and statements of policy” could harm regulated entities as well as regulatory beneficiaries.

[22] Lubbers notes that “an agency notice of proposed rulemaking may become ‘to old’ at some point . . ., at least without an additional opportunity to comment.”  GUIDE TO FEDERAL AGENCY RULEMAKING, supra, at 301 n. 112.  In Idaho Farm Bureau Federation, the Ninth Circuit observed:

Although the public comments obtained during 1985 through 1987 are part of the record, we determine the adequacy of the comment period by looking to the comment periods provided in late 1992. After a gap of nearly six years, the public may have new or different information to offer for consideration, particularly given rapid advances in scientific knowledge. The Secretary also may have new information. The opportunity to participate is not meaningful unless it occurs reasonably close to the time in which the Secretary makes a decision.

[23] Indeed, this may encourage agencies to invoke exceptions exempting it from notice-and-comment obligations at all the second time around. See note 25 supra.

[24] It may not even be clear from whose perspective that determination is to be made — from the perspective or regulated entities or regulatory beneficiaries.  Granted, this difference in perspective may make little difference in most cases.

[25] Of course, such an approach could “backfire” when the potential rule is a “procedural” rule of one that fits under any of the exemptions from the obligation to engage in the notice and comment process set forth in 5 U.S.C. 553(b)(3)(A), or in 553(a), including any “matter relating to agency management or personnel or to public property, loans, grants, benefits, or contracts,” inter alia. Thus, starting over again could allow the agency to promulgate the rule with little notice and opportunity for public comment.  Of course, HHS had already begun a new notice and comment rulemaking in the case of the section 340B ADR rule.