Discounted Drugs under the 340B Program

Alerts / November 21, 2022
Key Takeaways:
  • Pharmaceutical manufacturers argue that the 340B Program is not meant to provide discounted drugs to community pharmacies that contract with hospitals.
  • HHS argues that under the 340B Program, HHS has the authority to require drug companies to offer discounts for drugs purchased by safety-net hospitals and dispensed by community pharmacies.
  • Outcome will affect the size and scope of the 340B Program—potentially saving pharmaceutical manufacturers from providing broad discounts on drugs with no self-imposed restrictions or shifting the ability to obtain these drug discounts to community pharmacies.

The U.S. Court of Appeals for the Third Circuit is currently hearing arguments from pharmaceutical manufacturers Novo Nordisk, Sanofi and AstraZeneca and the Department of Health and Human Services (HHS) on whether the 340B program prohibits pharmaceutical manufacturers from imposing restrictions on how their drugs are distributed. 

What Is the 340B Program?

In 1992, Congress enacted Section 340B of the Public Health Service Act. Section 340B requires pharmaceutical manufacturers to enter into a pharmaceutical pricing agreement (PPA) with HHS. Under a PPA, HHS agrees to have the manufacturer’s drugs covered by Medicaid and Medicare Part B, and in exchange, the manufacturer agrees to provide discounts on certain outpatient drugs purchased by providers (“covered entities”) that serve vulnerable and low-income patient populations.

When the program first started, its primary focus was for hospitals to buy discounted drugs to fill prescriptions at their in-house pharmacies. However, over time, in-hospital pharmacies significantly decreased in number which led to an expansion of the program to allow for the appointment of a sole “contract pharmacy.” Eventually, the guidance grew further to allow for the appointment of any number of pharmacies, to include traditional retail pharmacies, that could purchase drugs through the 340B program at a discount and dispense those drugs to low-income patients.

This case began in 2020, when drugmakers started to limit shipments of the discounted drugs to certain contract pharmacies, claiming pharmacies unfairly profited from these transactions and citing concerns over fraud and duplicated discounts. In response, HHS issued an advisory opinion stating that “there was an actual statutory obligation” for manufacturers to uphold contract pharmacy arrangements. While HHS soon withdrew that opinion after numerous legal challenges, it continued to fight against manufacturers by issuing letters of noncompliance and threatening financial penalties under the Administrative Procedure Act. In November 2021, the U.S. District Court for the District of New Jersey upheld HHS’ claim that drugmakers cannot impose their own limits and conditions on the discounts provided to 340B contract pharmacies. The court did vacate HHS’ determination that the drugmakers face monetary penalties and “owe credits or refunds to covered entities.”

Ultimately, the debate centers on who can decide how many, if any, contract pharmacies can receive the discounted drugs through the 340B program. Drugmakers have tried to limit such shipments, while HHS has tried to penalize them for doing so.

Drugmaker Argument

Drugmakers are arguing there is nothing in 340B that prohibits them from selectively limiting or putting restrictions on discounted drug shipments to contract pharmacies. The program only requires them to “offer” drugs to covered entities at or below a certain price. Novo Nordisk argued that HHS’ stance was a “meritless interpretation” of the law. Sanofi claimed that HHS “acted arbitrarily and capriciously,” while AstraZeneca asserted HHS went beyond its legal authority in attempting to prohibit any limitation on discounts for contracted pharmacies.

Government Argument

Conversely, HHS argued it is not beyond its legal authority and that it is within the statutory interpretation to prohibit such limitations. It argued it was a natural evolution of the 340B program to expand beyond in-hospital pharmacies to include retail pharmacies as “contractors” for 340B covered entities. Additionally, HHS argued the program has grown to be so large – with thousands of covered entities and more than 700 drug manufacturers – that it has to ensure each drugmaker does not implement its own set of regulations and protect the program.

Future Implications

The implications of the court’s decision in this case will reach providers, manufacturers, pharmacies and patients. If the court rules in favor of the drugmakers, it has the potential to dramatically limit the size and scope of the 340B program. However, if it were to find in favor of HHS, the 340B program would likely continue its expansive reach and continue to grow, serving patients across the country.

Authorship credit: Lee H. Rosebush (Partner); Laura Macherelli (Associate) and Marc Wagner (Associate

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