CRA’s Life Sciences Litigation team provides periodic summaries of notable developments in litigation. In this issue, we share an update on a Supreme Court decision on reimbursements in the 340B program and a skinny labeling case of significance.
American Hospital Association, et al., v. Xavier Becerra, US Supreme Court, No. 20-1114
On September 5, 2018, the American Hospital Association filed a complaint in the US District Court for the District of Columbia challenging certain aspects of a final rule issued by the US Department of Health and Human Services (HHS) for Medicare hospital outpatient services. The final rule reduced Medicare reimbursements to public and not-for-profit hospitals and clinics under the 340B Drug Pricing Program (340B program) by nearly 30%. The 340B program requires drug manufacturers to offer participating hospitals and clinics discounts on their drugs as a condition of having each manufacturer’s drugs covered by Medicaid. Participating hospitals are then reimbursed the full price of the drug by insurers. On May 6, 2019, the District Court concluded that both the 2018 and 2019 340B reimbursement rates were unlawful. A panel of the US Court of Appeals for the DC Circuit reversed this decision, and the Appellate Court chose not to reopen the decision in October 2020. Plaintiffs submitted a petition for a writ of certiorari to the US Supreme Court on February 10, 2021, and the Supreme Court granted certiorari on July 2, 2021.
Under federal law, the reimbursement rate paid by Medicare for specified covered outpatient drugs is based on one of two payment methodologies. If HHS has collected adequate data, HHS sets the reimbursement rate equal to the average acquisition cost for the drug and may vary that rate by hospital group. However, if HHS has not collected such data, HHS must set a reimbursement rate equal to the average price for the drug, as calculated by HHS. In 2017, HHS proposed lowering this calculated reimbursement rate for drugs purchased under the 340B program from Average Sales Price (ASP) plus 6% to ASP minus 22.5%, stating that a lower reimbursement rate would better reflect the acquisition cost of the drugs. The case centered around whether HHS could set different reimbursement rates for 340B hospitals without collecting adequate hospital acquisition cost survey data.
On June 15, 2022, the Supreme Court unanimously ruled that HHS could not vary reimbursement rates only for 340B hospitals without first conducting a survey of hospitals’ acquisition costs. Specifically, the decision noted that “HHS’s power to increase or decrease the price is distinct from the power to set different rates for different groups of hospitals” and that the provision of the statute detailing the requirements for a survey of hospitals’ acquisition costs would be rendered irrelevant under HHS’s interpretation of the statute. It further noted that the law “requires the reimbursement rate to be set drug by drug, not hospital by hospital.”
Additional takeaways and potential implications
Though the Supreme Court decision only concerned the 2018 and 2019 reimbursement rates, the implications of the decision are likely relevant beyond this period. HHS conducted a survey of hospitals’ acquisition costs in 2020, after the litigation commenced; it is not yet clear whether HHS intends to use the survey results as the basis for lower reimbursement rates for 340B hospitals. If HHS continues to apply an across-the-board rate instead of reimbursing based on survey results from 2020, 340B hospitals will continue to realize greater returns than their non-340B counterparts from the dispensing of drugs. Because HHS implemented the payment cuts to be “budget neutral,” the results of the decision are complicated and will likely take time to sort out. Regardless of the immediate results of this decision, we expect the 340B program will likely continue to be open to scrutiny and criticism from manufacturers and hospitals alike.
A case to watch in the second half of 2022
Teva Pharmaceuticals USA, Inc., v. GlaxoSmithKline LLC, SmithKline Beecham (Cork) Limited, US Supreme Court, No. 22-37
In July 2014, GlaxoSmithKline LLC, SmithKline Beecham (Cork) Limited (collectively GSK) filed a complaint against Teva Pharmaceuticals USA Inc. (Teva) for induced infringement of patents relating to Coreg (carvedilol). In 2017, a jury awarded $235 million to GSK that was subsequently dismissed by a US district court judge in 2018. In October 2020, the US Federal Circuit Court of Appeals overturned the ruling, reinstating the $235 million verdict for induced infringement against Teva. In August 2021, after the original panel reheard the case, the US Federal Circuit Court of Appeals affirmed the $235 million award against Teva.
Teva filed a petition for a writ of certiorari on July 11, 2022, requesting that the US Supreme Court overturn the current ruling of the US Court of Appeals for the Federal Circuit. Teva asked the justices to consider, “If a generic drug’s FDA-approved label carves out all of the language that the brand manufacturer has identified as covering its patented uses, can the generic manufacturer be held liable on a theory that its label still intentionally encourages infringement of those carved-out uses?”
The Hatch-Waxman Act allows generic drug manufacturers to seek abbreviated new drug application (ANDA) approval from the US Food and Drug Administration (FDA) to market a generic version of a drug for non-patented indications of a reference listed drug when the indication is not covered by a method-of-use patent. To obtain approval, the generic manufacturer must file a “Section VIII Statement” with its ANDA for indications not covered by indications with exclusivity listed in the Orange Book. Additionally, the applicant must propose labeling for its generic product that “carves out” the patented methods of use. The proposed carve-out or “skinny” label cannot overlap with the “use code” listed in the Orange Book for the reference drug. Additionally, the FDA must determine that the modified label will not make the generic drug product less safe or effective than the reference listed drug.
Additional takeaways and potential implications
While Section VIII Statements effectively allow for label carve-outs and shield generic drug companies from infringement lawsuits, as a practical matter, “skinny labels” do little to discourage AB-rated generic drug substitution for any or all approved indications of a branded drug and may result in patent litigation based on induced infringement. The outcome of this case may provide clarity as to what constitutes induced infringement when labeling carve-outs are used.