September 28, 2021

Volume XI, Number 271

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September 27, 2021

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340B Drug Pricing Discount Program Update: HRSA Now Demands That Drug Manufacturers Provide 340B Discounts To Contract Pharmacies Amid Ongoing Litigation

Now approaching a year-long battle, drug manufacturers and 340B covered entities, which includes hospitals and community health centers, participating in the 340B Drug Pricing Discount Program (“340B Participants”) continue to dispute the issue of whether drug manufacturers are required to give 340B Participants discounts on drugs dispensed through contract pharmacies.  The most recent point of contention involves the U.S. Health Resources and Services Administration’s (“HRSA”) May 17, 2021 letters sent to six drug manufacturers stating that the manufacturers’ actions to limit access to 340B Program pricing for 340B Participants who dispense drugs through contract pharmacies is in direct violation of Section 340B of the Public Health Service Act (also referred to as the “340B Statute”).  The letters also included HRSA’s demand that the manufacturers immediately begin offering their drugs at discounted prices to these 340B Participants as well as credit or refund all 340B Participants for overcharges that resulted from the limiting policies, or be subject to civil monetary penalties.  As anticipated, certain drug manufacturers, including Eli Lilly, have filed motions in federal court to stop the HRSA from placing monetary penalties based on their refusal to provide 340B discounts to contract pharmacies.

BACKGROUND

Section 340B of the Public Health Service Act requires drug manufacturers participating in Medicaid to sell outpatient drugs at discounted prices to health care organizations that care for patients in vulnerable communities.  In order to expand the reach of the 340B Program, the HRSA allows 340B Participants to contract with outside pharmacies (also known as “contract pharmacies”) to dispense drugs to eligible patients.

Despite these provisions, beginning in July 2020, drug manufacturers used certain tactics to limit a 340B Participant’s access to discounted drugs, such as limiting sales by requiring specific data submissions or selling drugs only after a 340B Participant demonstrated 340B compliance, while other manufacturers went as far as refusing to provide the 340B ceiling price on their drug products sold to 340B Participants who contract with outside pharmacies.  Drug manufacturers justified such measures in arguing that, the recent HRSA guidance—requiring manufacturers to provide discounts to contract pharmacies—is unenforceable because (1) it is confusing and inconsistent with the 340B Statute provisions and (2) essentially forces manufacturers to provide duplicate discounts to 340B Participants who dispense drugs through contract pharmacies.

On December 30, 2020, in response to the 340B Program Litigation (as discussed in a previous blog post) and drug manufacturers’ drug discount limiting practices, the U.S. Department of Health and Human Services’ (“HHS”) advised in its Advisory Opinion 20-06 (“Opinion”) that drug manufacturers must provide 340B discount prices to contract pharmacies, stating that “[t]his fundamental requirement is not qualified, restricted, or dependent on how the covered entity chooses to distribute the covered outpatient drugs.  All that is required is that the discounted drug be purchased by a covered entity.”  To date, HHS has yet to penalize drug manufacturers said to be in violation of the 340B Statute.

UPDATES ON ONGOING DISPUTES

1. HRSA’s May 17th Warning Letter

As briefly noted above, HRSA has begun taking steps to intervene to stop the six drug manufacturers’ actions via its May 17, 2021 letters, having specifically warned the manufacturers that failure to provide the 340B price to covered entities utilizing contract pharmacies, and the resultant charges to covered entities of more than the 340B ceiling price, may result in civil monetary penalties as described in the Civil Monetary Penalties Final Rule (“CMP Final Rule”).

The CMP Final Rule states that, any manufacturer with a Pharmaceutical Pricing Agreement that knowingly and intentionally charges a covered entity more than the ceiling price for a covered outpatient drug may be subject to a civil monetary penalty not to exceed $5,000 for each instance of overcharging. Moreover, HRSA requested that the drug manufacturers provide an update on their plans to restart selling, without restriction, covered outpatient drugs at the 340B price to covered entities that dispense medications through contract pharmacies by June 1, 2021. 340B Program advocates, such as the American Hospital Association (“AHA”) and AIDS Healthcare Foundation (“AHF”), commended the HRSA’s recent enforcement efforts and stance that the 340B Statute is clear as the AHA noted that the HRSA has rightfully determined that under the 340B Statute “drug manufacturers must provide 340B pricing to eligible hospitals for any drug. The manner in which the drug is dispensed is irrelevant.”

Following HRSA’s May 17th Letters, three of the manufacturers filed additional pleadings in their ongoing litigation against HHS to seek relief from HRSA’s June 1st deadline. Other manufacturers on HRSA’s watchlist are expected to follow suit in seeking similar relief.

2. ADR Final Rule

Additionally, HHS issued the 340B Administrative Dispute Resolution (“ADR”) Final Rule (the “Final Rule”) in December 2020 that would create an ADR panel to settle disputes between 340B Participants and drug manufacturers on issues pertaining to the 340B drug discount program.

In January 2021, the Final Rule was contested by drug manufacturer Eli Lilly arguing that HHS violated its rights and interests by publishing the Final Rule without providing an opportunity for public comment. On March 16, 2021, a federal judge in the U.S. District for the Southern District of Indiana ruled in favor of the drug manufacturer by issuing a preliminary injunction blocking HHS from implementing the Final Rule holding that HHS failed to follow proper protocol under the Administrative Procedure Act by not providing an additional notice and comment period prior to publishing the Final Rule. In light of other pending lawsuits, the scope of the Court’s decision and status of the rule remain unclear.

3. Advisory Opinion 20-06

Lastly, as discussed in detail in an earlier blog post, HHS concluded in its Opinion that on the issue of whether contract pharmacies are accounted for under the 340B Program, “a drug manufacturer in the 340B Program is obligated to deliver its covered outpatient drugs to those contract pharmacies [acting as an agency of a covered entity] and to charge the covered entity no more than the 340B ceiling price for those drugs.” However, following contentious litigation and in effort to render the litigation against drug manufacturer, AstraZeneca Pharmaceuticals LP, moot, the Office of the General Counsel of HHS withdrew the Opinion on June 18, 2021, stating that “the Opinion was not intended to impose new, binding obligations on regulated entities,” and that the Opinion was withdrawn “in light of ongoing confusion” about its scope and impact.

Copyright © 2021, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XI, Number 183
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About this Author

Kenneth Yood Healthcare Attorney SheppardMullin
Partner

Ken is a partner in the Corporate practice group in the firm's Los Angeles office. Chambers USAranks him highly for Healthcare, where he was commended for his "broad-based ability in the regulatory area." Clients appreciate that "his explanations are clear, and he understands the business side of things," notes Chambers 2016.

Areas of Practice

Ken represents a wide range of healthcare providers and healthcare companies, including specialty and general acute hospitals (including local district, nonprofit and...

310-228-3708
Associate

Ms. Kraus focuses her practice on representing healthcare entities in regulatory compliance matters.  Ms. Kraus advises clients on compliance with federal and state fraud and abuse laws, assists clients in responding to government investigations, and represents clients in False Claims Act litigation.  Ms. Kraus also assists clients with regulatory due diligence in transactional matters, and through advocacy with federal and state regulators, and leverages her background in health policy to help clients maximize opportunities in the changing healthcare landscape...

202-747-2645
Associate

Stephanie I. Awanyai is an associate in the Corporate Practice Group in the firm's Century City office. 

PRACTICES

  • Corporate
  • Healthcare

ADMISSIONS

  • California
310-228-6168
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