HHS must end unauthorized administration of the 340B drug rebate program

Last September, a subagency of the Department of Health and Human Services (HHS) threatened to exclude a pharmaceutical company from Medicare because the company offered discounts on two of its drugs to a health care provider in accordance with federal law. This unprecedented turn of events is just the latest example of the Health Resources and Service Administration's (HRSA) distortion of Public Health Service Act Section 340B and the agency's broader statutory overreach. The new administration would do a real service to public health, and particularly low-income patients, by realigning HRSA's administration of the 340B program.

340B background

Section 340B imposes only two requirements on drug manufacturers. If they want to sell their drugs to the federal government, drug manufacturers must do so Offer certain healthcare providers have the opportunity to do so buy Medicines at or below a price cap set in a pricing agreement. The providers, or “insured facilities,” serve low-income patients and include certain hospitals, black lung clinics, and rural referral centers.

To protect the integrity of the program, Congress imposed two requirements on covered companies. First, the law prohibits diversion when covered companies resell or transfer a 340B drug to someone who is not a patient of the company. Second, companies cannot receive a double discount, such as a Medicaid discount. The law allows hospitals and other insured entities to make a profit when commercial and Medicare Part B and Part D payers reimburse providers at a higher price. Consistent with the purpose of the program, HRSA assumed that covered entities would “pass on all or a significant portion of the discounts to their patients.”

Consequences of HRSA's tinkering

After four years of relative success, HRSA could no longer resist the urge to tinker with the 340B program. Because the law limits HRSA's rulemaking authority, the agency sought change through nonbinding guidance documents. A 2007 guidance note indicated that covered businesses that do not have an in-house pharmacy could contract with third parties to purchase under the 340B program. Due to concerns about increased risk of diversion and double discounting associated with the involvement of additional third parties, HRSA limited the contract award to a single pharmacy. Then, in 2010, the agency inexplicably removed the one-pharmacy limit in a new policy, allowing covered entities to use an unlimited number of contracted pharmacies.

An explosion in third-party participation led to a dramatic expansion of the 340B program. The GAO reported that the number of pharmacies contracted by covered entities increased from 1,300 in 2010 to 23,000 in 2020. As HRSA's own audits have found, the increased use of unlimited contract pharmacy arrangements by covered entities has led to a sharp increase in illegal drug diversion and duplicate discounting. As recently as 2020, the GAO reported that there were over 1,500 findings of 340B violations by covered entities in HRSA audits during fiscal year 2012-2019. Neither HRSA nor covered entities monitor whether third parties intentionally or unintentionally provide discounted 340B drugs to patients not being treated by a covered entity and whether third parties increase the price of those drugs. Nothing prevents contract pharmacies from replenishing their drug supplies through the 340B program. HRSA can terminate covered entities for noncompliance with 340B, but has done so only once in the program's history.

Drug manufacturers are taking action

In light of HRSA's inaction, some manufacturers, including Sanofi Aventis and Novartis, have implemented policies for their 340B deals with covered entities to limit diversions and double discounting. Sanofi's policies require insured companies to submit anonymized claims data if those companies wish to contract with more than one pharmacy. Novartis announced that for 340B hospitals, it would only work with contract pharmacies within 40 miles of the contract hospital.

HRSA sent violation letters to four companies and asked each company to rescind the policies. The companies challenged HRSA's lawsuit in court. The cases made their way to the U.S. Court of Appeals for the Third Circuit and the D.C. District.

The Third Circuit unanimously ordered the HRSA violation letters in an opinion dated January 30, 2023. The court quipped that “legal silence, like awkward silence, encourages speech.” Section 340B is silent on contract pharmacies and provides no regulation for HRSA to restrict how and to whom drugs must be delivered when they are “purchased” from a covered entity. become. HRSA, the court said, could not simply insert the words it wanted. The court added that drug manufacturers' policies provide all covered entities with the opportunity to purchase discounted drugs, “even though the covered entities are no longer able to extract as much revenue as they once did.”

The DC District also unanimously ruled against HRSA on May 21, 2024. Like the Third Circuit, the D.C. Circuit noted Section 340B's silence on delivery terms and reasoned that silence cannot prohibit otherwise lawful conduct. The court explained that the inclusion of non-price terms in a contract, such as place or manner of delivery, was not only typical but also necessary under contract law “to be clear enough to bind the parties.”

HRSA undeterred

Instead of reflecting on its decisive legal defeats, HRSA increased its opposition to drug delivery methods designed to protect the integrity of the 340B program. In September, Johnson & Johnson (J&J) announced a rebate model for 340B sales of two drugs to certain large 340B participating hospitals. J&J would offer discounts for drug purchases after A hospital submits data showing that a hospital-owned facility (including a contract pharmacy) purchased and dispensed the medicine. HRSA issued a letter warning that the proposal violates J&J's 340B obligations, a violation that the agency wrote could result in termination of its Pharmaceutical Pricing Agreement (PPA) and fines. On September 30, J&J told HRSA that while it “continues to believe that the rebate model is legally permissible,” it would refrain from implementing it.

HRSA's strict approach to J&J's limited model that would have advanced the goals of Section 340B is troubling. Instead of accepting J&J's request for a meeting, HRSA reminded the company that “aside from a breach of the agreement,” HHS could terminate its PPA “for any other good reason.” Exclusion from Medicare would be a death sentence not only for the company, but potentially for Medicare and Medicaid patients who rely on J&J drugs. Such a measure, or even the threat of one, should be used with great caution and not as a form of bureaucratic muscle-flexing.

HRSA's nuclear threat may reflect the agency's concern that J&J could successfully fight allegations of violations in court. J&J would have had as good a chance of success as Sanofi and the other companies that have overcome their challenges, if not better. These companies successfully argued that Section 340B's silence about how and to whom drugs must be delivered deprived HRSA of the authority to prohibit delivery terms. HRSA accused J&J of violating a law that specifically provides for rebates as a method of offering $340 billion to insured companies. However, Section 340B does not dictate how drug manufacturers should provide discounts if they offer a 340B price. As the DC and Third Circuits concluded, HRSA cannot claim enforcement powers that the statute does not provide. Finally, HRSA argued in its infringement letter that J&J did not obtain the agency's approval for the pricing mechanism. Because each pharmaceutical company's PPA governs 340B pricing, J&J could credibly argue that HRSA can only exercise its authority over the rebate model by renegotiating the PPA.

A reset required

The 340B program has evolved from a laudable patient assistance program narrowly focused on specific health care providers into an unrecognizable, revenue-generating behemoth, second only to Medicare Part D in size and cost. Instead of focusing on asserting the powers granted to it by Section 340B, HRSA has turned its attention to drug manufacturers' efforts to limit their financial losses and return the program to its original beneficiaries: patients. Manufacturers have shown a willingness to defy HRSA when it grants itself powers not provided for in the statute. Supreme Court rulings such as Loper Bright vs. Raimondo will further strengthen the backbone of companies against such overreach by the authorities.

Drugmakers and others involved in the 340B program, as well as HRSA itself, have called on Congress to reform the statute and clarify the agency's authority. In the meantime, new leaders at HHS should put an end to HRSA's pursuit of apparent lack of power and emphasize collaboration with program participants to reduce distractions and double discounting. Public health will be much better as a result.