Top Takeaways and Predictions
- 340B covered entities will continue to expand 340B patient qualification following the Genesis decision, subject to audits and ongoing discussions in Congress regarding the scope of the program.
- Use of contract pharmacies to distribute 340B drugs will remain limited.
- Multiple drug manufacturers are seeking court approval to convert 340B Program discounts into a rebate model, which would drastically change the program.
Introduction: The 340B Drug Pricing Program
The 340B Program is a federally mandated drug pricing program that requires drug manufacturers to sell outpatient drugs at discounted prices to covered entities — a small, narrowly defined set of providers who treat primarily low-income or uninsured patients — for the manufacturers’ drugs to be covered by Medicaid.
Congress created the 340B Program in 1992 through the Veterans Health Care Act to enable health care providers that serve low-income and uninsured patients to purchase drugs at lower costs.
According to the United States Health Resources and Services Administration (HRSA), the administering agency of the 340B Program, the purpose of the program remains enabling covered entities to stretch federal resources to reach more eligible patients and provide more comprehensive services.
The 340B Program provides significant discounts on outpatient drugs to covered entities, offering prices at least as low as those paid by state Medicaid agencies.
These entities often negotiate further discounts beyond the program’s price ceiling. While there have been some high profile allegations of program abuse, surveys show high satisfaction among participants. Studies also indicate that 340B prices can be 25% to 50% lower than the average wholesale price.
Eligible participants in the 340B Program include federally qualified health centers and other federal grantees that serve medically underserved populations, such as Ryan White HIV/AIDS Program grantees, hemophilia treatment centers, and STD clinics.
Public or non-profit hospitals that primarily serve low-income, medically underserved populations may also be eligible based on their Medicare Disproportionate Share Hospital (DSH) percentage. For-profit hospitals are not eligible for the program.
340B Program Updates Throughout 2024
Covered Entity Flexibility to Define Patient Eligibility
Recent court rulings have hampered HRSA’s efforts to administratively constrain 340B patient eligibility determinations.
The 340B statute includes a requirement that 340B covered entities may not resell or otherwise transfer drugs purchased under the 340B Program to individuals who are not patients of the covered entity but does not attempt to define who is a “patient.”
HRSA published its interpretation of who is a patient in guidance in 1996, which the industry has largely followed over the past several decades.
The agency began auditing covered entity policies on patient qualification more than 10 years ago. Additionally, HRSA and its auditors developed policies and interpretations that were more detailed than the published 1996 guidance.
In November 2023, the US District Court for the District of South Carolina sided with a covered entity, Genesis Healthcare, Inc., in a challenge over one of the interpretations applied during a program audit. The court ruled that HRSA’s interpretation was inconsistent with the common (dictionary) meaning of the term patient.
Although the Genesis ruling technically applied only to the parties in the case, many 340B covered entities view it as a signal that HRSA’s power to enforce restrictive limits on 340B patient qualification through audits is limited, and that covered entities may establish policies defining who their patients are and the circumstances in which they can receive 340B drugs.
The dispute has attracted congressional attention. Multiple bills have been introduced that may codify a definition of the term “patient” for purposes of the 340B Program.
These bill include notable bipartisan efforts like the Supporting Underserved and Strengthening Transparency, Accountability, and Integrity Now and for the Future of 340B Act (SUSTAIN 340B Act), or the 340B Affording Care for Communities and Ensuring a Strong Safety-net Act (340B ACCESS Act).
Restrictions on Use of Contract Pharmacies Upheld
In 2010, HRSA published guidance indicating that it would permit 340B covered entities to distribute drugs purchased under the 340B Program through networks of multiple contracted pharmacies.
This guidance led retail pharmacy chains to develop 340B distribution services for covered entities and expanded the scope of drugs purchased under the program, particularly for hospital covered entities.
Starting in 2020, more than two dozen manufacturers began publishing limitations on the shipment of 340B drugs to contract pharmacies. These policies were challenged by HRSA as a violation of its policies and led to protracted litigation.
Two appellate court decisions to date, the Third Circuit and DC Circuits, have ruled against HRSA and in favor of the drug manufacturers. A third appellate decision in the Seventh Circuit remains pending.
The two rulings agreed with manufacturers’ claims that HRSA’s 2010 guidance was not grounded in the 340B statute, which is silent on methods of distribution of 340B drugs.
The Third Circuit concluded that the manufacturers' restrictions on contract pharmacy use were lawful, noting that “[n]o… language in Section 340B requires delivery to an unlimited number of contract pharmacies.”
Similarly, the DC Circuit reasoned that, the statute's silence on contract pharmacies “implies that manufacturers may impose distribution conditions by contract,” aligning with the Supreme Court's decision in Christensen v. Harris County, which held that silence in a federal employment statute about contractual conditions did not implicitly prohibit them.
Big Pharma’s Rebate System Rejection and Subsequent Litigation
In a move that likely signaled the next high stakes 340B dispute, in August 2024, Johnson & Johnson (J&J) announced a new rebate system intended to go into effect on October 15, 2024, for 340B purchases of certain drugs.
Their proposed policy directed covered entities to buy these drugs at commercial prices through wholesalers and then apply for rebates via a new, to-be-developed J&J claims platform.
HRSA promptly pushed back. On September 17, 2024, HRSA sent a letter to J&J directing the manufacturer to withdraw its proposal to implement a rebate model for those drugs.
In the letter, HRSA threatened to take enforcement action against the manufacturer by either revoking its pharmaceutical pricing agreement or referring J&J to the HHS Office of Inspector General to consider imposing civil monetary penalties for not honoring the 340B ceiling price. (Congress also jumped into the fray when 189 members of Congress wrote to HHS Secretary, Xavier Beccera, to express their opposition to J&J’s proposed rebate model.)
While J&J has backed off its immediate implementation of the rebate model, it has not retreated from pursuing its legal right to implement one in the future. Other pharmaceutical companies have also followed suit.
In a September 30 response, J&J emphasized their position that “the Rebate Model is not only legally permissible but sorely needed to improve the integrity of the 340B Program and provide an effective mechanism for manufacturers to comply with their obligations….”
The matter is now playing out in the courts. J&J’s recent lawsuit filed against HRSA on November 12, 2024, claimed that “HRSA’s attempts to bar J&J from bringing transparency to the 340B Program through implementation of the Rebate Model are fundamentally at odds with the 340B statute, the Administrative Procedure Act, and HRSA’s own stated program integrity goals.”
Several other drug manufacturers, like Eli Lilly, Bristol Myers Squibb, and Sanofi, have filed similar lawsuits defending the use of a rebate model.
The resolution of these lawsuits will be enormously consequential to the 340B Program and the healthcare industry.
Conversion of the 340B discounts into a rebate model will require covered entities to increase spending on initial purchases of outpatient drugs and to incur administrative costs pursuing discounts through the manufacturer platforms, which have yet to be developed.
It is also unclear what types of audits, appeals, or other processes will be available through these mechanisms, or how they will be overseen by HRSA.
Congress is aware of the litigation, and the ongoing disputes may prompt Congress to clarify the 340B statute.
Reintroducing Registration Requirements and the Consequential Delays on Additional 340B Eligible Hospital Sites
Prior to the COVID-19 public health emergency, HRSA guidance caused significant delays in 340B hospitals’ ability to access 340B drugs for patients treated at new off-campus hospital locations.
These delays stemmed from HRSA’s requirement that off-campus sites could not be registered until the calendar quarter after they appeared on a filed Medicare cost report, which often meant operating the site for up to 21 months before becoming eligible for 340B drugs.
During the COVID-19 public health emergency, these delays were temporarily waived, but HRSA reinstated them through the issuance of a Notice in October 2023. Hospitals planning to open new outpatient departments should be aware of these delays.
A group of 340B hospitals filed a lawsuit challenging the reinstatement of this policy. The hospitals claimed that requiring those entities to wait roughly eight to 23 months before new, outpatient, offsite facilities owned and operated by the entities were eligible for discounts as part of the 340B Program was a substantial injury costing millions of dollars and contrary to the governing statute. The case is still pending.
Remedy for 340B Pricing Adjustments Announced
Following years of litigation focusing on Medicare Outpatient Prospective Payment System (OPPS) payments on 340B covered drugs from 2018-2022, CMS will address payment reductions made to 340B participating covered entities during from 2018 to 2022.
Under CMS’ final rule, CMS instructed Medicare Administrative Contractors to issue lump sum payments of approximately $9 billion to the affected 340B hospitals to remedy the unlawful payment cuts in 2024.
Additionally, beginning in 2026, CMS will reduce all payments for non-drug items and services to all Outpatient Prospective Patient System providers (except new providers) by 0.5% each year until the $7.8 billion is offset.
CMS estimated that this recoupment will take approximately 16 years. No payments will be made to offset payment reductions that had been made under Medicare Advantage (MA) plans, however.
CMS has not yet finalized its approach for addressing the 340B payment cut remedy as it relates to MA plans. The agency expects to provide further guidance in future policy communications, and we are already seeing litigation on the topic.
340B Stakeholders Should Monitor Decisions of Agencies, Courts, and Legislators
As we look forward , it is clear that the 340B Program will continue to face controversy and uncertainty related to its intended scope and requirements.
Stakeholders involved in the 340B Program – including both covered entities, drug manufacturers, PBMs, patient advocacy groups, and others – should track the cases identified above.
Both the Government Accountability Office and the HHS Office of the Inspector General have recommended improved oversight to ensure that the program is operating as intended. This enforcement can be expected, including through HRSA’s new Administrative Dispute Resolution (ADR) process for hearing disputes related to the 340B Program, which may begin issuing opinions on key areas.
However, with the recent decision in Loper Bright Enterprises, it may become easier to successfully challenge agency enforcement efforts. As a result, in addition to oversight from HRSA and HHS, stakeholders should be aware of the key role of judicial decisions as well as the role of state and federal legislators in establishing legal requirements.
Authors: Adria Warren, Partner, Foley & Lardner LLP, Anil Shankar, Partner, Foley & Lardner LLP, and Madeline Knight, Associate, Foley & Lardner LLP
