December 5, 2021

Volume XI, Number 339

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December 03, 2021

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December 02, 2021

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Contract Pharmacies and the 340B Drug Discount Program: New Litigation and an Advisory Opinion Point to Ongoing Skirmishes on the 340B Battlefield

On December 11, 2020, five hospital groups, including the American Hospital Association (“AHA”), and an organization of hospital pharmacists representing participants in the 340B drug pricing program (“340B Program”), filed a federal lawsuit (the “340B Program Litigation”) against the U.S. Department of Health and Human Services (“HHS”) over HHS’ alleged failure to enforce 340B Program requirements that obligate pharmaceutical manufacturers to provide 340B Program prescription drug discounts to pharmacies contracted by 340B Program-participating hospitals to dispense 340B Program drugs.[1]

As discussed in detail in an earlier blog post, the 340B Program has long been a source of contention between pharmaceutical manufacturers and 340B Program-participating hospitals – called “covered entities” in the 340B Program.  The 340B Program requires manufacturers to sell drugs to 340B-participating hospitals at deep discounts as a condition to Medicaid and Medicare Part B coverage of their outpatient drugs.  Manufacturers contend that the 340B Program has been abused, particularly with respect to: (1) drugs sold at 340B Program discounts and also billed to Medicaid, and thus subject to separate rebates through the Medicaid Drug Rebate Program, resulting in “duplicate discounts”, and (2) drugs dispensed by third-party pharmacies contracted with 340B Program-participating hospitals (commonly referred to as, “contract pharmacies”), instead of by the hospitals directly, which manufacturers contend leads to diversion of drugs to individuals who are not hospital patients.

Based on these concerns, several large pharmaceutical manufacturers announced plans in fall 2020 to cease or limit sales of 340B Program discounted drugs to contract pharmacies, as well as to require increased data reporting to allow manufacturers to identify and avoid duplicate discounts.  These announcements were met with indignation by 340B Program-participating hospitals, as well as a bipartisan group of lawmakers, arguing that these measures would be a method to skirt manufacturers’ 340B Program obligations and impose unrealistic expectations on 340B Program-participating hospitals.  The Health Resources and Services Administration (“HRSA”), the component of HHS responsible for administering the 340B Program, issued a statement on September 2, 2020, strongly encouraging manufacturers to continue selling discounted drugs to contract pharmacies.  Nevertheless, HRSA did not take, and has not taken or threatened to take, any enforcement action against manufacturers for failing to do so, asserting that it lacks clear authority to do so.

This dispute came to a head with the 340B Program Litigation, which requests temporary and permanent injunctions directing HHS to require pharmaceutical manufacturers to provide 340B Program discounted drugs to contract pharmacies, and to refund the difference between what 340B Program participants paid for drugs and the 340B ceiling price for such drugs during the time that manufacturers refused to sell them.  Plaintiffs argue that the 340B Program’s authorizing statute clearly requires drug manufacturers to offer 340B Program drugs at mandated discounted prices as a condition of Medicaid and Medicare Part B coverage of their drugs, with no exception based on whether a 340B-participating hospital uses a contract pharmacy to dispense the drugs and no authority for manufacturers to impose such limitations, and that HRSA guidance is consistent with this position.  Further, Plaintiffs argue that HRSA has authority to impose penalties on drug manufacturers that do not comply with this statutory requirement – for instance, by refusing to sell drugs at discounted prices based on a 340B Program-participating hospital’s use of a contract pharmacy – and has nevertheless failed to do so, despite repeated requests, based on an erroneous assertion that it lacks authority.

Plaintiffs argue that HRSA’s decision not to enforce penalties against drug manufacturers that cease or limit sales of 340B Program drugs to contract pharmacies constitutes a final agency action, and should be health unlawful as arbitrary and capricious and an abuse of discretion under the Administrative Procedure Act.  In the alternative, Plaintiffs argue that HRSA has unreasonably delayed in its obligation to ensure that refunds are issued as related to the alleged overcharging.  Plaintiffs also emphasize that both they and public health at-large are fundamentally threatened by the manufacturers’ actions, which they contend prevent the 340B Program from appropriately functioning to contribute to affordable health care in underserved areas.

Notably, the 340B Program’s authorizing statute provides no private right of action for Plaintiffs against drug manufacturers.  Plaintiffs may also face an uphill battle in convincing the court that they have standing to compel government action where they are foreclosed from litigating directly.  Nevertheless, Plaintiffs may have few alternatives for remedying the issue, in the face of HRSA’s inaction, as manufacturers’ restrictions for contract pharmacies may pose a serious threat to the operation and scope of the 340B program, as it has existed for two decades.

On December 30, 2020, possibly in response to the litigation, HHS released Advisory Opinion 20-06 (“Ad. Op. 20-06”), addressing contract pharmacies under the 340B Program.  According to Ad. Op. 20-06, HHS acknowledges the numerous requests for a determination on the issue, and, in a win for hospitals, concludes that, “to the extent contract pharmacies are acting as agents of a covered entity, a drug manufacturer in the 340B Program is obligated to deliver its covered outpatient drugs to those contract pharmacies and to charge the covered entity no more than the 340B ceiling price for those drugs.”  HHS based its decision on the following:

  1. The plain meaning of the 340B Program rules and regulations requires manufacturers to sell covered drugs to covered entities at or below the ceiling price, independent of whether the entity opts to use contract pharmacies to dispense drugs. According to  Op. 20-06, “the core requirement of the 340B statute… is that manufacturers must ‘offer’ covered outpatient drugs at or below the ceiling price for ‘purchase by’ covered entities.  This fundamental requirement is not qualified, restricted, or dependent on how the covered entity chooses to distribute the covered outpatient drugs.”

  2. Contract pharmacies have been an integral part of the 340B Program since its outset. “[A]t the outset of the 340B Program only approximately 500 out of 11,500 covered entities (less than 5 percent) used in-home pharmacies.  This is not surprising: the Program is aimed at benefiting providers that are small, remote, resource-limited, receiving federal assistance, or serving disadvantaged populations.  These are the poster children of providers that one would expect to lack an in-house pharmacy.  To champion a policy, ungrounded in the language of the statute, that would foreclose 340B discounts to 95 percent of covered entities and foreclose discounts to the neediest of this cohort is inconsistent with purpose of the Program and common sense.” (internal citations omitted).

  3. HHS’ longstanding interpretation of Section 340B reflects the plain language of the section by recognizing the use of contract pharmacies. “In 1996, HRSA… stated, ‘[i]t has been the Department’s position that if a covered entity using contract pharmacy services requests to purchase a covered drug from a participating manufacturer, the statute directs the manufacturer to sell the drug at the discounted price.’ …  Here, contract-pharmacy arrangements have been utilized, and honored by manufacturers, since 1996 and earlier.”

  4. Manufacturers’ rationale for precluding the use of contract pharmacies is not supported by the language of the statute and leads to absurd results. “The primary rationale offered for cutting off contract pharmacies—that such arrangements lead to a heightened risk of diversion and duplicate discounts—makes clear that manufacturers are attempting to circumvent section 340B’s [audit] procedures for resolving disputes between manufacturers and covered entities….  Moreover, the Department specifically rejected this reasoning when issuing regulations regarding the calculation of the 340B ceiling price. In responding to a comment regarding perceived 340B violations, HRSA stated ‘[m]anufacturers cannot condition sale of a 340B drug at the 340B ceiling price because they have concerns or specific evidence of possible non-compliance by a covered entity.’”

For these reasons, HHS concludes in Ad. Op. 20-06 that 340B Program-participating hospitals are entitled to purchase covered outpatient drugs at no more than the 340B Program ceiling price, and manufacturers are required to offer covered outpatient drugs at no more than the 340B Program ceiling price, even if those covered entities use contract pharmacies to aid in distributing those drugs to their patients.

At first blush, Ad. Op. 20-06 may seem dispositive on the issues underlying the 340B Program Litigation and, in turn, render the litigation moot.  However, this is far from the case.  First, advisory opinions are not final agency action or final order, nor do they have the force or effect of law.  Therefore, whereas a court judgement would be binding upon the litigants,, Ad. Op. 20-06 is not.  Second, Ad. Op. 20-06 does not address a key aspect of the litigation – enforcement against manufacturers who fail to abide by HRSA’s past guidance and the conclusions reached in Ad. Op. 20-06.  So while HHS through Ad. Op. 20-06 advises manufacturers that they may not refuse to offer the ceiling price to covered entities, even when the covered entity at issue uses distribution systems involving contract pharmacies, Ad. Op. 20-06 is silent as to the enforcement mechanism that HHS will use to compel compliance.

The absence of enforcement language in Ad. Op. 20-06 was recognized by the AHA in its  December 30, 2020 press release (the “Press Release”) applauding Ad. Op. 20-06.  In the Press Release, AHA noted that they now expect HRSA to, “take swift and decisive action to halt these pernicious tactics from drug companies and ensure that 340B drugs remain available and accessible to vulnerable communities across the country.”  AHA also called for HRSA to, “ensure that hospitals are made whole as a result of being denied appropriate discounts since these illegal practices began earlier this year.”

Based upon the above and the positions taken by the other Plaintiffs, if HRSA does not proceed with action beyond the release of Ad. Op. 20-06, it seems unlikely that the 340B Program Litigation will be dropped anytime soon.

As always, stay tuned.

FOOTNOTES

[1] On December 14, 2020, three days after the 340B Program Litigation commenced, attorneys general in 27 states and Washington, D.C. sent a letter to HHS urging HHS to hold accountable drug manufacturers that are, “unlawfully refusing to provide discounts to hospitals, federally qualified health centers and other providers that serve vulnerable patient populations through the 340B program.”

Copyright © 2021, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XI, Number 8
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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.

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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
Theresa E. Thompson, Sheppard Mullin Law Firm, Washington DC, Corporate Law Attorney
Associate

Theresa E. Thompson is an associate in the Corporate and Securities Practice Group in the firm's Washington, D.C. office.

Areas of Practice

Ms. Thompson's practice focuses on such areas as health care fraud and abuse, particularly in matters relating to the civil False Claims Act, physician self-referral (Stark law), and anti-kickback issues, as well as telehealth and telemedicine. She has experience in government investigations, litigation, and regulatory compliance, including in response to government...

202-747-3217
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