Vanda Pharm. v. Ctrs. for Medicare & Medicaid Servs.
| Decision Date | 31 March 2023 |
| Docket Number | Civil Action MJM-22-977 |
| Parties | VANDA PHARMACEUTICALS, INC., Plaintiff, v. CENTERS FOR MEDICARE & MEDICAID SERVICES, et al., Defendants. |
| Court | U.S. District Court — District of Maryland |
Plaintiff Vanda Pharmaceuticals, Inc. (“Plaintiff” or “Vanda”) brings this lawsuit against the Centers for Medicare & Medicaid Services (“CMS”) and Chiquita Brooks-LaSure, in her official capacity as Administrator of CMS, (collectively “Defendants”) under the Administrative Procedure Act, 5 U.S.C. § 551 et seq. (“APA”), challenging a final rule of CMS (“the Rule”) interpreting the “line extension” provision of the Medicaid Drug Rebate Program, 42 U.S.C. § 1396r-8(c)(2)(C).[1] Currently pending are Plaintiff's motion for summary judgment (ECF 17) and Defendants' cross-motion for summary judgment (ECF 26). The Court has reviewed the record, as well as the pleadings and exhibits, and finds that no hearing is necessary. Loc. R 105.6. For the reasons stated below, Plaintiff's motion will be DENIED, and Defendants' motion will be GRANTED.
CMS is a federal agency under the U.S. Department of Health and Human Services (“HHS”). CMS administers the federal Medicaid program, and this case rises from CMS's rulemaking process concerning the Medicaid Drug Rebate Program (“MDRP”). This case also implicates the Food, Drug, and Cosmetic Act, 21 U.S.C. § 301 et seq. (“FDCA”), which is administered by the Food and Drug Administration (“FDA”), another federal agency under HHS.
Congress created Medicaid in 1965 when it added Title XIX to the Social Security Act. Pharm. Research & Mfrs. of Am. v. Walsh, 538 U.S. 644, 650 (2003). It is a cooperative federal-state program through which federal financial assistance is provided to states that reimburse certain medical costs for the needy. Id. at 650. In return, participating states must pay a share of the costs and comply with certain federal requirements. The states must have a plan for medical assistance that is approved by CMS. 42 U.S.C. § 1396a. As part of its Medicaid plan, a state may offer optional coverage for prescription drugs. 42 U.S.C. § 1396d(a)(12). All fifty states and the District of Columbia have elected to participate in Medicaid and to include prescription drug coverage in their Medicaid plans.
In 1989, the Senate Special Committee on Aging issued a report on prescription drug prices finding that drug prices were rising far faster than inflation. United States Senate Special Committee on Aging, Prescription Drug Pricing: Are We Getting Our Money's Worth? U.S. Government Printing Office (1989), https://www.aging.senate.gov/imo/media/doc/reports/rpt289.pdf. According to the report, rising drug prices, particularly the prices of new drugs, were driving up State Medicaid program costs and putting prescription drug coverage at risk. Id. at 1. Congress established MDRP, 42 U.S.C. § 1396r-8, to offset federal and state costs of “covered outpatient drugs”[2] dispensed to Medicaid beneficiaries. See In re Namenda Direct Purchaser Antitrust Litig., 331 F.Supp.3d 152, 193 (S.D.N.Y. 2018).
MDRP requires drug manufacturers to enter into drug rebate agreements with the federal government to provide quarterly rebates to the states on Medicaid sales of their covered outpatient drugs. 42 U.S.C. § 1396r-8(a)(1), (b), (c). Federal payments to each state are accordingly reduced by the rebate amounts states receive from manufacturers. Id. This process guarantees to Medicaid “the benefit of the best price” when it comes to paying for prescription drugs. H.R. Rep. No. 101881, at 96 (1990).
The terms of each Medicaid National Drug Rebate Agreement are set by statute, 42 U.S.C. § 1396r-8(b), and participating manufacturers must pay specified rebates to the states, determined by a formula set forth in § 1396r-8(c). The unit rebate amount, or URA, for each drug purchase by a Medicaid beneficiary is the sum of: (1) the basic rebate; and (2) the additional rebate, if applicable. 42 U.S.C. § 1396r-8(c). Both parts of the rebate are calculated based in part on the “average manufacturer price” (“AMP”) of the drug, which is generally defined as the average price paid to the manufacturer for the drug by wholesalers and retail community pharmacies. Id. § 1396r-8(k)(1).
The basic rebate for drugs is calculated by multiplying the number of units of each dosage form and strength of the drug paid for under the state plan during the rebate period by the greater of (1) 23.1% of the AMP or (2) the difference between the AMP and the “best price” (which is akin to the lowest price offered) of the drug for the rebate period. Id. § 1396r-8(c)(1).
The additional rebate applies when a drug's AMP rises faster than inflation. It is calculated by taking a drug's “Base Date AMP,” the drug's AMP during the first full calendar quarter after the product launch and adjusting it for inflation to the current quarter. As such, the additional rebate is the difference between the drug's AMP and Base Date AMP for that quarter. 42 U.S.C. § 1396r-8(c)(2)(A)(ii). In other words, the additional rebate requires manufacturers to rebate the amount that the manufacturer has increased its drug prices beyond the amount necessary to account for inflation. See id. § 1396r-8(c)(2). A manufacturer that keeps its drug prices in line with inflation are not required to pay any additional rebate. ECF 26-1 at 1.
For purposes of the inflation-based additional rebate, the Base Date AMP is significant because it is used to calculate the additional rebate due (if any) for the life of each dosage form and strength of a covered outpatient drug. Manufacturers thus had an incentive to create putative “modifications to existing drugs” which were considered “new” products for purposes of seeking new base dates in order to avoid paying some or all of the additional rebate. See H. Rep. No. 111299, Pt. 1, at 635 (2009). When these “new” products were released, manufacturers were able to “set their base period [AMP] to any price, so they are able to set new higher prices that will not incur Medicaid's additional rebates.” Id.
To curtail this practice, as part of the Affordable Care Act, Congress amended the Medicaid rebate statute to establish an alternative rebate formula for any “drug that is a line extension of a single source drug or an innovator multiple source drug that is an oral solid dosage form.” Section 2501(d) of the Patient Protection and Affordable Care Act (Pub. L. 111-148, enacted March 23, 2010), section 1206 of the Health Care and Education Reconciliation Act of 2010 (Pub. L. 111-152, enacted March 30, 2010) (collectively referred to as the Affordable Care Act).
“[T]he term ‘line extension' means, with respect to a drug, a new formulation of the drug, such as an extended release formulation.” Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152, § 1206, 124 Stat. 1029, 1057-58 (codified at 42 U.S.C. § 1396r-8(c)(2)(C)). As relevant here, “[t]he term ‘single source drug' means a covered outpatient drug ... which is produced or distributed under a new drug application approved by the [FDA],” 42 U.S.C. § 1396r-8(k)(7)(iv), and “[t]he term ‘innovator multiple source drug' means a multiple source drug that is marketed under a new drug application approved by the [FDA],” 42 U.S.C. § 1396r-8(k)(7)(ii). “The term ‘multiple source drug' means, with respect to a rebate period, a covered outpatient drug ....” 42 U.S.C. § 1396r-8(k)(7)(i). Congress did not define the term “new formulation.”
Under the line extension provision, a manufacturer must compare the total rebate amount under the standard rebate calculation of a line extension to the “alternative” rebate amount for the line extension, and the greater of two is the line extension drug's total unit rebate amount. 42 U.S.C. § 1396r-8(c)(2)(C)(i); Compl. ¶ 52. The alternative rebate formula is found at 42 U.S.C. § 1396r-8(c)(2)(C)(iii)(I) through (III).[3] The alternative rebate formula results in a higher rebate amount only when the original drug's cost outpaces inflation. ECF 26-1 at 11. If the original drug's price does not increase faster than the rate of inflation, then the alternative calculation for the line extension would not produce a higher rebate amount than the standard rebate amount. Id.
Section 1396r-8(c)(2)(C) of the Act was further amended by section 705 of the Comprehensive Addiction and Recovery Act of 2016 (“CARA”) (Pub. L. 114-198, enacted July 22, 2016) to exclude from the definition of line extension an abuse deterrent formulation of the drug. As such, “the term ‘line extension' means, with respect to a drug, a new formulation of the drug, such as an extended release formulation, but does not include an abuse-deterrent formulation of the drug (as determined by the Secretary), regardless of whether such abuse-deterrent formulation is an extended release formulation.” 42 U.S.C. § 1396r-8(c)(2)(C). Abuse-deterrent formulations (“ADF”) of prescription drugs were exempted from the definition of “line extension” when calculating Medicaid rebates in order to “incentivize the development of ADF to combat opioid abuse.” H.R. Rep. No. 114-559, at 3 (2016).
During its Covered Outpatient Drug (“COD”) rulemaking in 2012, CMS proposed a definition of “line extension”:
Line extension means a single source or innovator multiple source drug that is in an oral solid dosage form that has been approved by the FDA as a change to the initial...
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