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Drug Manufacturers Unlawfully Target 340B Program Reductions

Recently, several brand drug manufacturers (“Manufacturers”) have taken actions in direct conflict with the 340B Program, and unlawful under a plain reading of the 340B statute enacted by Congress in 1992. If left unchecked, these actions could establish very dangerous and long-lasting precedent that may cause significant reductions to the 340B program benefit — the same benefit that safety-net hospitals rely on to treat their patients regardless of ability to pay while offering other critical community benefits. Arguably, only Congress is authorized to make such changes. Absent Congressional action, Health Resources and Services Administration (“HRSA”) and other stakeholders must adhere to and uphold the 340B statute.

As detailed below, these Manufacturers’ actions violate the 340B statute and related program guidance that require Manufacturers to sell covered outpatient drugs to covered entities at or below the statutorily-defined ceiling price. The 340B statute1 and related pharmaceutical pricing agreements (“PPA”) between Manufacturers and the U.S. Department of Health and Human Services (“HHS”) require Manufacturers to provide covered outpatient drugs to covered entities at or below the 340B ceiling price. The statute and the PPA simply refer to covered entities, and provide no basis to discriminate against certain covered entities dispensing methods/venues, such as contract pharmacies. Certain Manufacturers also claim that the HRSA’s 2010 Contract Pharmacy Guidance is unenforceable. However, HRSA’s guidance creates no new rights and simply recognizes Manufacturers’ existing statutory obligation to provide 340B pricing even when a covered entity contracts with retail pharmacies to dispense 340B drugs pursuant to the covered entity’s rights under state agency law.2 Thus, nothing in the 340B statute limits where and how covered entities may provide 340B drugs to their patients, so long as the covered entity is complying with the statutory prohibitions against diversion and duplicate discounts.

HHS recently issued a letter to Eli Lilly cautioning Eli Lilly that its actions are under review and were poorly timed.3 Alternatives, such as designating a single 340B-eligible contract pharmacy, are unreasonable, and likely include overly burdensome terms. For example, EIi Lilly’s 340B Limited Distribution Contract Pharmacy Selection Form includes overly broad audit language — “Institution agrees to allow Lilly and/or its auditor to have access to any information in Institution’s control that relates to Lilly Products necessary to audit 340B purchases.” This language exceeds audit rights under HRSA’s existing audit policies.

Similarly, some Manufacturers are unlawfully conditioning 340B pricing on receipt of extensive confidential data via 340B ESP™. These Manufacturers have no authority to request protected health information and confidential claims data relative to 340B drug use in the contract pharmacy environment. The 340B ESP data collection effort also contradicts current rules and regulations, including HRSA’s 1996 Manufacturer Audit Guidelines and its non-discrimination policy. Under the guidelines, Manufacturers may only conduct audits where a valid business concern pertains to a covered entity’s compliance with the 340B program’s prohibitions against diversion and duplicate discounts.4 Manufacturers have failed to provide reasonable cause for the data collection that applies to thousands of safety-net providers across the country.

The 340B ESP effort exceeds Manufacturers’ legal authority because it requests information pertaining to issues that are not the covered entity’s responsibility under the 340B statute. In particular, the 340B statute’s duplicate discount prohibition only addresses the prevention of duplicate discounts billed to Medicaid fee-for-service (“FFS”).5 Manufacturers have no authority to access information from covered entities related to potential duplicate discounts on commercial claims, Medicare Part D claims, and Medicaid managed care claims, and covered entities have no responsibility to provide this information. Forcing covered entities to provide this information to access 340B pricing presents a clear violation of the 340B statute and related PPAs.

Complying with the 340B ESP request would further require covered entities to breach some or all of their contracts with 340B third-party administrators and contract pharmacies. Many contain confidentiality restrictions that prevent covered entities from disclosing claims information to third parties. Covered entities have already received notifications from several contract pharmacies and 340B third-party administrators indicating that they 1) do not consent to covered entities providing the data and/or 2) will not provide the data on behalf of covered entity unless limited to Medicaid FFS. If 340B ESP includes pricing or payor information, this data is also subject to confidentiality restrictions in pharmacy benefit manager agreements and federal regulations. Manufacturers’ data collection effort interferes with covered entity obligations on several levels.

Finally, Kalderos recently introduced its 340B Pay rebate model to the covered entity community.6 Kalderos’s intent is to collect 340B-discount eligible transaction data, collate that data, then work with manufacturers to confirm that each transaction was 340B eligible and not subject to a public or private rebate. Meanwhile, covered entities must purchase all products at a non-340B price and carry the higher cost of goods until the downstream rebate process is completed by Kalderos. Kalderos contends this waiting period will be approximately 35 days, but we believe that is unrealistic as the process relies heavily on manufacturers reviewing and approving claims within that window. For many of the same legal and policy reasons outlined above, we believe 340B Pay is inappropriate.

1 42 U.S.C. § 256b.

2 75 Fed. Reg. 10272, 10278 (March 5, 2010) available at https://www.govinfo.gov/content/pkg/FR-2010-03-05/pdf/2010-4755.pdf.

3 See HHS letter to Eli Lilly available at https://www.hrsa.gov/sites/default/files/hrsa/opa/pdf/hhs-eli-lilly-lett....

4 HRSA Final Notice, Manufacturer Audit Guidelines and Dispute Resolution Process, 61 Fed. Reg. 65,406 (Dec. 12, 1996).

5 42 U.S.C. § 256b(a)(5)(A).

6 See Kalderos 340B Pay available at https://www.kalderos.com/solutions/340bpay.

© Polsinelli PC, Polsinelli LLP in CaliforniaNational Law Review, Volume X, Number 295



About this Author

Kyle A. Vasquez, Polsinelli, Compliance Support Lawyer, Health Care Reform Attorney

Kyle Vasquez provides pragmatic legal and compliance support to a wide range of health care clients. He utilizes his background in health law and his prior experience as a health care consultant to develop creative approaches that address the unique challenges that health care providers face. Kyle works collaboratively with health care stakeholders to assist in identifying forward-thinking models that meet their financial and operational needs. Kyle represents a broad set of health care entities including multi-hospital health systems, community hospitals, FQHCs,...

William D. Galvin III Polsinelli Associate Kansas City HealthCare

William D. Galvin is dedicated to providing effective, efficient and innovate legal solutions to health care clients. He applies his understanding of health care issues towards representing hospitals, physician groups, and other health care professionals and organizations in a variety of health care matters.

William’s past experience includes working for a large health information technology vendor negotiating contracts with third party suppliers and coordinating with internal stakeholders and the legal and finance departments. While pursuing his Master of Laws (“LL.M.”) William...