Back in 1992, Congress created a program to require agencies within the Department of Health and Human Services to contract with drug manufacturers to secure price discounts for drugs provided to certain government supported hospitals and clinics. Under the law, the drug manufacturers were required by these contracts to sell drugs to those hospitals and clinics at no higher than “ceiling prices,” which were based on average prices offered for the same drugs.

However, thanks to a decision by the Obama Administration’s Department of Justice in siding with drug manufacturers, those price discounts are now in jeopardy.

The ability of government-supported hospitals, clinics and their patients to get the benefit of these price “discounts” depended on the government writing and enforcing the contracts. But over the years, The agencies became lax in their efforts, and investigations by various inspectors general found persistent over-pricing in setting the ceilings and/or enforcing them through sales to the health care providers.

This is a classic case where the beneficiaries of a regulatory program ought to have the ability to bring enforcement actions against the parties to make sure the benefits intended by Congress actually occur. Thus, a group of supported hospitals/clinics (e.g., Santa Clara County et al) sued the drug makers to compel them to stop overcharging and provide the discounts Congress intended.

Initially brought in State trial court, the case was removed to federal court, and the initial District Court decision dismissed, partly because the federal statute did not explicitly create a private right of action — that is, the Act didn’t say third parties could sue even though they were intended beneficiaries.

But when the case got to the Ninth Circuit Court of Appeals in 2008, the Court reversed, holding that while there was no private enforcement of the statute, per se, Santa Clara County et al could proceed under standard contract law. In other words, since these plaintiffs were the Congressionally intended beneficiaries of the discount pricing contracts between the government agency and the drug manufacturers, contract law gave these beneficiaries a right to sue to obtain the benefits which they were promised under the contracts. Good decision.

The Ninth Circuit’s decision is now on appeal to the US Supreme Court, so the question has been, what would the Obama Justice Department do? Would it side with the hospitals and clinics and allow them, and potentially other beneficiaries of Congressionally mandated drug discount contracts, to enforce these contracts through the courts? Or would it side with the drug manufacturers and argue the hospitals didn’t have the right to sue?

The New York Times today reports DoJ’s decision to side with the drug makers:

The Obama administration, following a lengthy internal debate, has unexpectedly come down on the side of pharmaceutical companies that are accused of overcharging public hospitals and clinics that care for large numbers of poor people.

The administration has told the Supreme Court that the hospitals and clinics cannot sue drug companies to enforce their right to deep discounts on drugs or to obtain reimbursement from companies that overcharge.

It is a classic conflict: a political imperative for the administration — to ensure that inexpensive drugs are available to the poor people who need them — rubbing up against the Justice Department’s fear of an onslaught of lawsuits by clinics and hospitals if the Supreme Court allows them to sue.

Classic conflict? I don’t think so. There are hundreds of affected hospitals and clinics that are exactly the beneficiaries Congress intended for the discount contracts Congress mandated. They are the entities most directly affected by, and most fully aware of, whether the discounts are actually provided. Rather than conflict with the DHHS efforts, private actions by these parties will supplement and perfect DHHS enforcement, and their ability to do so will serve as a deterrent against contract violations by drug makers. So it makes perfect sense to allow these entities to help DHHS enforce the contracts under standard contract law. And that’s why this idea is fairly standard in contract law.

The Inspector Generals’ reports already demonstrate the DHHS hasn’t done an effective enforcement job. And there’s no reason to believe DHHS will significantly improve things, especially when Congress is looking to make dramatic budget cuts in every corner. DHHS should thus welcome the help of private enforcement efforts by the very people the Act was intended to help and who have the greatest stake in effective enforcement.

But as we’ve seen in other cases, this Administration can’t seem to leave well enough alone when it has a favorable, common sense court decision. It insists on maintaining control, even though it has no intention or capability of exercising that control in an effective manner. What were they thinking?

John Chandley

Text of the Ninth Circuit decision in County of Santa Clara vs. Astra USA Inc. . . .