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November 18, 2021

Implications of Recent Court Decisions on 340B Contract Pharmacy Program

Ted Slafsky
Founder and Principal, Wexford Solutions, and Publisher and CEO, 340B Report

In this month's column, I am going to touch upon the flurry of recent court decisions in the 340B contract pharmacy standoff and then dive into a key argument made by each of the pharmaceutical manufacturers in their suits against the government.

Mixed Decisions in Court Increase Likelihood of Congressional Action

After five major federal court decisions within a week, it's clear that there will be no quick resolution to the contract pharmacy battle. All five drug companies received a reprieve from having to restore 340B pricing in the contract pharmacy setting. However, the courts have handed the ball back to the Health Resources and Services Administration (HRSA) to make its case that the manufacturers are violating the law.

Two out of the three district court judges ruled largely in favor of 340B providers, siding with HRSA that drug manufacturers cannot impose conditions on the delivery of 340B-discounted drugs. As my colleague Tom Mirga reported in 340B Report, the judges have invited HRSA either to issue new 340B contract pharmacy guidance, publish a carefully reasoned policy describing its 340B contract pharmacy expectations, or take unspecified enforcement action against manufacturers that fixes defects in HRSA's current 340B contract pharmacy policy.

However, Judge Friedrich's ruling largely in favor of Novartis and United Therapeutics narrows the government's enforcement path. "Any future enforcement action," Friedrich said, "must rest on a new statutory provision, a new legislative rule, or a well-developed legal theory that Section 340B precludes the specific conditions at issue here."

There is one area where all the judges concur. All three judges (as well as Judge Stark in a previous decision in the AstraZeneca case) made it clear that they think Congress should clarify the scope of the 340B contract pharmacy program.

I expect the legislative arena could become the final arbiter in this ongoing battle. With all the court rulings likely to be appealed and the cases likely to drag on for years, I suspect that patience will wear thin quickly and Congress will be prompted to act. My bets are that this will take place prior to the midterm elections next fall. 

How Political Philosophy Can Have a Profound Effect on 340B Program Enforcement

The recent decision by Judge Sarah Evans Barker in Indianapolis to vacate the government's order to Eli Lilly to restore 340B discounts in the contract pharmacy setting was based largely on technical grounds. HRSA now has another chance to address the matter and provide much-needed clarity on its enforcement powers.

Barker said in an Oct 29 order that while HRSA's May 17 findings against Lilly were not contrary to law, unconstitutional, or violative of notice and comment procedures, they were arbitrary and capricious and thus violated the Administrative Procedure Act (APA). Barker sided with the government that drug manufacturers are prohibited from restricting discounts to covered entities on drugs dispensed at contract pharmacies. "Congress's use of broad language in enacting this statute and specifically omitting any mention of where 340B drugs are to be delivered does not leave room for drug manufacturers to unilaterally condition or control the availability of their 340B pricing to a particular delivery location of their choosing such that covered entities are prevented from accessing 340B pricing and required to purchase covered outpatient drugs at WAC prices," she said.

Barker concluded: "The fairest and most reasonable interpretation of the 340B statute would not authorize drug manufacturers to impose unilateral restrictions on the distribution of the drugs that 'would frustrate Congress' manifest purpose' in enacting the statute."

HRSA's Evolving Position

Nonetheless, Barker invalidated the May 17 letter based on HRSA's evolving position on its enforcement authority. In 2020, the agency stated on several occasions, including to 340B Report, that it did not have the legal authority to enforce the contract program and compel manufacturers to provide 340B discounts dispensed by contract pharmacies.

The agency's position changed starting in late 2020. Since then, the Health and Human Services Department (HHS) has repeatedly stated that not only have the manufacturers broken the law, but the agency can compel them to comply.

"A careful review of the May 17 letter reveals its failure to acknowledge, never mind explain HRSA's change in position regarding its authority to enforce potential violations of the 340B statute connected to contract pharmacy arrangements," Barker said.

During the Trump administration, HRSA repeatedly said it was hamstrung in enforcing parts of the 340B program, such as the contract pharmacy requirements, since the rules were spelled out in federal guidance rather than through regulations. These statements came under the backdrop of an administration that wanted to weaken the power of sub-regulatory guidance, not only in health care but all areas of government oversight such as banking and the environment.

The Trump administration took a series of steps to undercut federal agency enforcement power, including a 2019 executive order requiring federal agencies to "treat guidance documents as non-binding both in law and in practice, except as incorporated into a contract" and a 2020 regulation aimed at implementing the order.

New Administration, New Outlook

With the election of President Biden came a new administration that has a different view of the role of government. His administration moved quickly to freeze and now rescind Trump administration regulations that have added to doubt about the authority of federal guidance documents, including those for the 340B program. HHS, under Secretary Xavier Becerra, has expressed no qualms that it has strong enforcement powers in the contract pharmacy area.

To be clear, HRSA has wanted broad regulatory authority over the program even prior to the Trump administration, and Barker said she thinks the 340B program should be governed by regulations. However, the agency's belief that it did not have the ability to govern integral aspects of the program only came to the surface recently. Moreover, the judge acknowledged that giving HRSA broad regulatory authority over 340B was a political decision and Congress itself is responsible for making those decisions.

There will be other court decisions soon that may impact HRSA's next move. But the agency's inconsistent messaging on such a fundamental matter as its ability to enforce a central component of the 340B program underscores the challenges that government agencies have when it is at the whim of the administration in power.

The views and opinions expressed in this blog are those of the authors and do not necessarily reflect the official policy or position of any other agency, organization, employer, or company. Assumptions made in the analysis are not reflective of the position of any entity other than the author(s). These views are always subject to change, revision, and rethinking at any time and may not be held in perpetuity.