This week, the U.S. District Court for the Southern District of Indiana issued a preliminary injunction in Eli Lilly & Co. v. Cochran to prevent the U.S. Department of Health & Human Services (HHS) from implementing an alternative dispute resolution rule that applied to the 340B drug pricing program, on the grounds that the agency had previously effected a withdrawal of the rule. 

The district court judge’s opinion may also have broader implications for another drug pricing rule finalized at the end of the Trump Administration. Last year one of us blogged here about the ambiguous withdrawal of a proposed rule on Medicare drug rebates by HHS. The post speculated that if the proposed rule was finalized after its ambiguous withdrawal, we might see some litigation, and, indeed, we are starting to see it. 

District court: Agency actions and statements were effective withdrawal of 340B ADR proposed rule

In Eli Lilly & Co. v. Cochran, the district court judge found that the plaintiffs were likely to succeed in showing that the government had effectively withdrawn the August 2016 proposed rule and that therefore the December 2020 final rule was invalid. The rule, which was required by the Affordable Care Act, would have established an alternative dispute resolution program to resolve complex and high-value issues involving price, diversion, and duplicate discount disputes between 340B program participants.

The opinion notes the absence of case law, Administrative Procedure Act (APA), or Federal Register requirements that require a withdrawal notice to be formally published in the Federal Register before a withdrawal is effective. Instead, drawing on the APA’s “object” of fair notice, the court turned to whether, “through their actions and statements, Defendants effectively communicated a withdrawal of the proposed rule to the public” (slip op. at 21). The court found four facts persuasive: (1) an HHS official’s public statement that HHS did not plan to move forward with the rule, (2) the agency’s choice to withdraw the rule from the unified agenda in August 2017, (3) the length of time with no action after the proposed rule, and (4) the issuance of a new RIN for the final rule. In sum, these were strong enough signals “to regulated entities” and the “reasonable observer” that the proposed rule was withdrawn and no longer under consideration. 

The opinion concludes that “the agency’s message regarding the ongoing rulemaking related to the ADR Rule was ambiguous, confusing, duplicitous, and misleading—the antithesis of fair notice under the APA” (slip op. at 23). 

Pending: Drug rebate rule

This decision may have ramifications for a different legal dispute involving whether the Trump Administration “withdrew” a second drug pricing rule. In Pharmaceutical Care Management Ass’n v. HHS, a trade association is challenging this final rule on APA and other grounds in the U.S. District Court for the District of Columbia.

In late November 2020, the Trump Administration issued a final rule aiming to reform the rebate process in Medicare Part D. The rule applied to pharmacy benefit managers (PBMs), which work on behalf of health insurers to negotiate discounts off of the list prices of prescription drugs. These negotiated discounts are often used by insurers to lower premiums overall or provide other benefits. The rebate rule was designed to eliminate the legal safe harbor enabling the existing rebate system, hoping to pass along these discounts to Part D beneficiaries at the pharmacy counter.

The rebate rule was proposed in January 2019. The NPRM faced substantial public criticism, after the CMS Office of the Actuary predicted that the rule would lead to increased premiums for all Part D beneficiaries and increased government spending (as the government subsidizes many beneficiaries’ premiums), even as it lowered out-of-pocket costs for a subset of beneficiaries. As a result, in the summer of 2019, the White House publicly stated that “based on careful analysis and thorough consideration, the President has decided to withdraw the rebate rule.” The HHS Secretary confirmed the decision. OMB’s Unified Agenda entry for the rule similarly lists it as “withdrawn” as of July 2019. Yet instead of re-proposing a new NPRM, the President issued an executive order directing HHS to “complete the rulemaking process” on the topic. HHS issued the final rule after the presidential election. 

After the executive order was released, some argued that actions short of a withdrawal notice in the Federal Register likely do not effectuate a withdrawal for APA purposes. One of us argued on this blog that the government’s actions, taken together, should best be understood as an effective withdrawal. Writing before the final rule was issued, another expert expressed concern that, if the government’s statements about withdrawals were not treated seriously unless followed by a Federal Register notice, agencies could propose controversial rules, announce their withdrawal “to avoid negative political consequences,” and finalize the rules after an election, i.e., the exact scenario at hand.

Applying the reasoning of the district court’s decision in Eli Lilly & Co. v. Cochran to the facts in the rebate rule context, the government’s actions seem to go beyond what would be needed to constitute an effective withdrawal of the rebate rule. In particular, the White House and HHS Secretary statements present even stronger evidence of the government’s intent. HHS had withdrawn the drug rebate rule from its agenda, adding it back on only after the executive order directed them to proceed. On the other hand, the time between the proposal and final rule was not as long, and HHS used the same RIN for proposed and final rules. 

A good subject for another post is whether the judge weighed these facts correctly. We take the analysis as given for purposes of thinking about how the decision could turn out in Pharmaceutical Care Management Ass’n v. HHS.

Another example: MFAR

The 340B and rebate rules are not the only examples in which the Trump Administration has raised questions about the meaning of regulatory withdrawals. On September 14, 2020, CMS Administrator Seema Verma recognized the criticisms around the controversial proposed Medicaid Fiscal Accountability Rule (MFAR) and publicly announced that the agency would be “withdrawing the rule from the regulatory agenda.” Trade press covered this as a withdrawal. On November 3, 2020, an industry group asked CMS to publish a withdrawal notice in the Federal Register. On January 7, 2021, Administrator Verma announced that she was taking action to “withdraw the proposed [MFAR] from the federal register.” The agency published a withdrawal notice in the Federal Register on January 19, 2021. 

These facts suggest that unless the public, including regulated entities, are savvy enough to press for the formal step of Federal Register withdrawal, the government might try to hedge its bets. While this might work in the interests of sophisticated parties, it suggests a slide into the kind of opportunistic behavior that was noted as a concern above. 

With two cases that involve similar issues about ambiguous regulatory withdrawal, it will be interesting to see how this issue evolves in the courts.

Bridget C.E. Dooling (@BridgetDooling) is a Research Professor at the George Washington University Regulatory Studies Center. Rachel E. Sachs (@RESachs) is an Associate Professor at the Washington University School of Law.