A recent federal appeals court decision is creating uncertainty for pharmacies and healthcare providers that participate in the federal 340B drug pricing program, which requires drug manufacturers to offer discounted prices for drugs sold to providers serving a high volume of low-income or rural patients.
340B covered entities, including hospitals, federally qualified health centers (FQHCs) and other types of safety net clinics, commonly dispense drugs purchased at 340B prices through pharmacies under contract with a 340B entity. In recent years, however, manufacturers have restricted access to 340B pricing for drugs dispensed through such contract pharmacies. The federal government has advised manufacturers that such restrictions are unlawful, and manufactures have challenged government enforcement actions in federal court.
A recent appellate ruling in favor of manufacturers raises questions about the future of the contract pharmacy model.
Health Benefit Consultants, Share Your Expert Insights in Our Survey
Jeffrey Davis, Michael Hess and Shannon Wiley Jeffrey Davis is a member at Bass, Berry & Sims who advises healthcare organizations on Medicare and Medicaid billing and reimbursement issues, with a special focus on the federal 340B drug pricing program. Michael Hess is a member at Bass, Berry & Sims who leads the firm’s Specialty […]
340B and contract pharmacies
Starting in summer 2020, several drug makers announced policies to restrict access to 340B pricing for drugs ordered by a covered entity for shipment to contract pharmacies. More than 20 manufacturers have announced such policies to date.
In 2021, the Health Resources and Services Administration (HRSA), which oversees the 340B program, began sending enforcement letters to manufacturers that announced these policies. HRSA took the position that these policies were unlawful because the 340B statute prohibits manufacturers from placing any limits on access to 340B pricing for drugs dispensed through contract pharmacies.
Nine manufacturers filed suit against HRSA to dispute this interpretation of the law. Four federal district courts have issued rulings—two in favor of HRSA and two in favor of the manufacturers. In late January, the U.S. Court of Appeals for the Third Circuit, based in Philadelphia, ruled in favor of the manufacturers in an appeal covering two of these cases—one in favor of HRSA and one in favor of the manufacturers.
A Deep-dive Into Specialty Pharma
A specialty drug is a class of prescription medications used to treat complex, chronic or rare medical conditions. Although this classification was originally intended to define the treatment of rare, also termed “orphan” diseases, affecting fewer than 200,000 people in the US, more recently, specialty drugs have emerged as the cornerstone of treatment for chronic and complex diseases such as cancer, autoimmune conditions, diabetes, hepatitis C, and HIV/AIDS.
Below, we summarize the key points of the Third Circuit’s ruling, then outline two other pending appeals. We conclude with tips on what covered entities should be watching out for regarding 340B contract pharmacy use.
Court: HRSA’s position ‘unpersuasive’
The Third Circuit heard a consolidated appeal of two district court cases, one that favored manufacturers’ position and one that favored HRSA’s position. The appellate court called HRSA’s interpretation of the 340B statute “unpersuasive,” concluding that the law does not require manufactures to deliver 340B drugs to an “unlimited number of contract pharmacies.” The court cited three findings as the basis for its ruling:
- The statute requires manufacturers to “offer” 340B pricing to covered entities, but that is not the same thing as requiring delivery of these drugs at the 340B pricing to any pharmacy location requested by a covered entity. The policies in these cases, from three manufacturers, all provided exceptions that allow covered entities to access 340B pricing in some cases.
- Unlike a related statute, the 340B statute does not include language referencing delivery of drugs. This omission does not support HRSA’s interpretation that the 340B statute requires manufacturers to deliver drugs at 340B pricing to an unlimited number of contract pharmacies.
- Finally, the court reviewed the legislative history of the passage of the 340B statute and found nothing, in the court’s view, that supported HRSA’s interpretation.
Since the Third Circuit’s ruling on January 30, two drug manufactures have announced new restrictions on delivery of 340B drugs to contract pharmacies, and a manufacturer that previously implemented restrictions has announced additional limits on contract pharmacy use.
Unresolved appellate cases
Oral arguments took place for the two unresolved appellate cases last October.
The U.S. Court of Appeals for the D.C. Circuit is considering the government’s appeal of a district court decision that set aside HRSA enforcement letters against two manufacturers’ policies. The lower court left open whether the specific restrictions in the manufacturers’ policies are allowed under the 340B statute.
Questions from the judges during oral arguments suggested possible support for allowing manufacturers to set conditions, although it is unclear whether the appellate court would weigh in on the conditions at hand.
Meanwhile, the U.S. Court of Appeals for the Seventh Circuit, based in Chicago, is considering an appeal of a ruling from the Southern District of Indiana. In this October 2021 district court ruling, a judge found HRSA’s enforcement letter was within the agency’s authority and sided with HRSA’s interpretation of the 340B statute regarding contract pharmacies. However, the district court judge also found the enforcement letter invalid under the Administrative Procedures Act because of HRSA’s shifting position over the years regarding contract pharmacy use.
During oral arguments, the question was raised about whether the government may need to take additional enforcement actions, such as the imposition of civil monetary penalties, before the case can proceed.
What’s ahead
Rulings in these two appeals could come any day. Significant differences among the three appellate rulings would increase the chances of the Supreme Court taking up a case that considers all three appellate cases.
In the meantime, 340B provider organizations should be on the lookout for changes in manufacturer policies as a result of the Third Circuit decision. As noted, two manufacturers have announced restrictions since the ruling and more may join them. Manufacturers that already have limited 340B drug delivery to contract pharmacies may tighten their rules further, as one manufacturer has already announced.
The Third Circuit also left unanswered key questions related to what types of manufacturer restrictions on contract pharmacy use may be unlawful. Although the Third Circuit found HRSA’s position that all manufacturer restrictions are unlawful to be overly broad, the court suggested that some restrictions may be unlawful if they effectively eliminate a covered entity’s ability to access 340B pricing. However, the court did not directly address situations where HRSA would be able to prohibit such restrictions. Providers should consider whether they will face challenges accessing 340B pricing moving forward.
Photo: Rawf8, Getty Images
Jeffrey Davis is a member at Bass, Berry & Sims who advises healthcare organizations on Medicare and Medicaid billing and reimbursement issues, with a special focus on the federal 340B drug pricing program.
Michael Hess is a member at Bass, Berry & Sims who leads the firm’s Specialty Pharmacy & Pharmaceuticals Practice Group.
Shannon Wiley is a member at Bass, Berry & Sims who focuses her practice on healthcare regulatory and transactional matters with a specific emphasis on specialty pharmacy, digital pharmacy and infusion providers.
