The 340B drug pricing program has been booming, according to the Health Resources and Services Administration (“HRSA”), the agency under the U.S. Department of Health and Human Services (“HHS”), which reported that discounted purchases totaled $38 billion in 2020, a 27% increase compared to 2019. The 340B program, authorized under Section 340B of the Public Health Services Act and administered by HRSA, imposes a ceiling price on pharmaceutical manufacturer sales to “covered entities,” which are certain health clinics that receive federal funding and certain types of safety net hospitals to provide them drugs at lower prices. Manufacturers may choose not to participate in this program, but the federal government will not reimburse for their outpatient drugs under Medicaid or Medicare Part B if they do not.
A growing list of drug manufacturers are claiming that the discounts meant for low-income patients of 340B covered entities are instead contributing to profits for pharmacies that contract with covered entities to dispense 340B drugs.
Use of contract pharmacies ballooned after a guidance issued by HRSA in 2010 allowed covered entities to use multiple contract pharmacies to dispense drugs to covered entity patients. By 2014, the HHS Office of Inspector General (“OIG”) found that the rise of contract pharmacy arrangements resulted in duplicate discounts and drug diversion, and a lack of access to 340B pricing at the contract pharmacies. A 2018 report by the Government Accountability Office (“GAO”) found similar issues, as well as contract pharmacy noncompliance and poor federal oversight.
Drug Manufacturers Fight Back Against Proliferation of Contract Pharmacy Arrangements
Drug manufacturers raised their concerns about the 340B program with HRSA with no success. Starting August 2020, several drug manufacturers announced that they would offer 340B prices only to covered entities that have an in-house pharmacy or contract with a single contract pharmacy, essentially reverting to a 1996 HRSA guidance. The companies asserted that their position fully complied with applicable law, and objected that the practice of using multiple contract pharmacies, based on HRSA’s nonbinding interpretive guidance, has resulted in widespread contract pharmacy noncompliance, and has affected costs, distorted prescribing decisions, and hurt patient care.
In response to this trend, the HRSA general counsel issued an Advisory Opinion (“Opinion”) on December 30, 2020 reaffirming that the 340B program allows covered entities to distribute discounted drugs through multiple contract pharmacies—and that manufacturers are required to sell them those drugs. HRSA based its opinion on the statute and agency precedents over the last 25 years. In January 2021, several companies and the Pharmaceutical Research and Manufacturers of America (PhRMA) sued the agency on various statutory and procedural grounds. See, e.g., AstraZeneca Pharmaceuticals v. Becerra, No. 1:21-cv-00027-LPS, 2021 WL 2458063 (D. Del. Jan. 12, 2021).
Despite the ongoing legal proceedings, HRSA sent letters to the drug companies on May 17, 2021 stating that their 340B restrictions violated the 340B statute and that they “must immediately begin offering its covered outpatient drugs at the 340B ceiling price to covered entities through their contract pharmacy arrangements.” (see for example, this letter to Astra Zeneca). The letters also stated that a refusal to do so may result in civil monetary penalties of around $5,883 for each instance of overcharging—over and above repaying the covered entity the amount overcharged. In AstraZeneca v. Becerra, the company requested, but the Court refused to an administrative stay of these fines until the lawsuit was settled. According to AstraZeneca’s court filings, the fines alone would accrue to the tune of $530 million per month.
Federal Court Found HRSA’s Advisory Opinion Was Based on Faulty Legal Grounds
On June 16, 2021, the District Court of Delaware issued a memorandum opinion denying HRSA’s motion to dismiss AstraZeneca’s case, finding that the Advisory Opinion was based on faulty legal grounds. Judge Stark found that, although HRSA’s interpretation of the statute was permissible, the Advisory Opinion unjustifiably assumed that Congress imposed this interpretation as a statutory requirement. According to the court, the relevant language of the Act was ambiguous and neither the plain meaning of the statute, nor the context of the statutory provisions or the legislative intent, explicitly supported HRSA’s Opinion (or, for that matter, AstraZeneca’s position). Because “the agency wrongly believes that interpretation is compelled by Congress,” the court refused to give agency deference to HRSA. The court also disagreed with HRSA’s arguments regarding longstanding agency precedents. The court noted that HRSA “dramatically expanded how covered entities may purchase 340B drugs” in the past 25 years. In fact, the Advisory Opinion was the first agency document to explicitly conclude that manufacturers are required by statute to provide 340B drugs to multiple contract pharmacies. According to the court, “because the government has changed what covered entities may do,” HRSA “has consequently changed what drug manufacturers must do” (emphasis in original).
Two days after the court’s opinion, HHS withdrew the December 30, 2020 Opinion, but the parties agreed that the lawsuit was not moot because HRSA did not withdraw the May 17 letters and continued to maintain that companies must sell to covered entities through contract pharmacies. AstraZeneca was permitted to amend its complaint to focus on the unlawfulness of the May 17 letters instead of the Advisory Opinion. As of this writing, the court is still deliberating on the relief to be granted to the manufacturer. A decision is expected in the coming months.
HRSA Ploughs on With Enforcement Despite Federal Court Decision
Despite the ongoing litigation, on Wednesday, September 22, 2021, HRSA signaled its continued intention to enforce its own interpretation of the 340B program requirements by referring the alleged violations of six drug companies to the HHS OIG. In its letters to the companies informing them of the referral, HRSA notes that, “given [the companies’] continued refusal to comply, HRSA has referred this issue to the HHS Office of Inspector General (OIG) in accordance with the 340B Program Ceiling Price and Civil Monetary Penalties Final Rule.” OIG enforcement would provide HHS another opportunity to impose fines and restitution while avoiding the procedural issue of lack of notice-and-comment rulemaking. The OIG will nevertheless have to account for the federal court’s conclusion that the requirement to sell 340B drugs to multiple contact pharmacies is not contained in the statute. The drug companies can be expected to challenge any OIG penalties.
At some point, Congress may cure the statutory ambiguity by clarifying the scope of permitted contract pharmacy use under the 340B program, but such a clarification does not appear in the White House drug pricing plan (summarized here) or the major drug pricing bills currently being considered by Congress.