Appeals court sides with drug manufacturers in 340B case

Photo: Kinga Krzeminska/Getty Images 

An appeals court has upheld a lower court ruling on 340B that sided with drug manufacturers.

At issue is whether pharmaceutical companies can limit distribution of discounted drugs in the 340B program. The U.S. Court of Appeals for the District of Columbia has said that they can.

The May 21 ruling issued by Circuit Court Judge Gregory Katsas found for Novartis Pharmaceuticals Corporation and United Therapeutics Corporation over the Department of Health and Human Services and the Health Resources and Service Administration.

WHY THIS MATTERS

Providers benefit from 340B through insurance reimbursements that exceed the marked-down cost of the drugs.

The ceiling price is fixed by a statutory formula strikingly generous to purchasers, the court said. In some cases, the price can be as low as a penny per unit.

According to drug manufacturers, there's abuse in the system from diversion and duplication when pharmacies distribute the drugs.

Manufacturers said everyone has a financial incentive, according to court documents. The covered entity, the pharmacy and the third party administrator often divvy up the spread between the discounted price and the higher insurance reimbursement rate, the court said.

Because of this, manufacturers imposed their own contractual terms on providers, such as limits on the number of pharmacies to which they make shipments.

The government argued this practice violates the statute.

The district court held that 340B does not prohibit manufacturers from limiting the distribution of discounted drugs by contract. The appeals court agreed.

"In sum, we hold that section 340B does not categorically prohibit manufacturers from imposing conditions on the distribution of covered drugs to covered entities. We further hold that the conditions at issue here do not violate section 340B on their face. We do not foreclose the possibility that other, more onerous conditions might violate the statute. Likewise, we do not foreclose the possibility that these conditions may violate section 340B as applied in particular circumstances – if, for example, HRSA could show that a specific covered entity for some reason could not supply the claims information demanded by United Therapeutics."

Judge Katsas wrote, "The district court correctly set aside the enforcement letters for review, while reserving the possibility of future enforcement under theories of liability narrower than the one pressed here."

THE LARGER TREND

Section 340B of the Public Health Service Act requires drug manufacturers to sell certain drugs at discounted prices to healthcare providers that serve vulnerable and other specific populations.

To facilitate distribution of these drugs, the providers often contract with outside pharmacies.

340B was enacted in 1992 and expanded under the Affordable Care Act to expand the list of covered entities.

The Government Accountability Office said the number of covered entities participating in the program increased from about 9,700 to 13,000 between 2010 and 2019. Over the same period, the number of contract pharmacies participating in the program increased from about 1,300 to 23,000.

By 2017, the country's largest chain pharmacies – such as Walgreens and CVS – accounted for most of this market, the GAO said, according to court documents. Covered purchases have similarly expanded from roughly $6.9 billion in 2012 to $24.3 billion by 2018. 

In 2020, pharmaceutical companies began to limit the number and kinds of contract pharmacies to which they would ship orders. For covered entities that are hospitals, Novartis planned to work only with contract pharmacies located within 40 miles of the hospital. United Therapeutics planned to work only with contract pharmacies previously used.

In response, while the HHS secretary lacks rulemaking authority over the 340B program, according to the court, HHS issued an advisory opinion stating that section 340B requires manufacturers to deliver covered drugs to any contract pharmacies with which a covered entity chooses. While it withdrew the opinion, HRSA sent enforcement letters to Novartis, United Therapeutics and other large drug manufacturers asserting that the statutory duty to offer drugs to covered entities at or below the ceiling price "is not qualified, restricted, or dependent on how the covered entity chooses to distribute the covered outpatient drugs."

ON THE RECORD

Beth Feldpush, senior vice president of Policy and Advocacy America's Essential Hospitals said, "Today's decision by the U.S. Court of Appeals for the District of Columbia allows drug companies to continue their egregious restrictions on 340B discounts for drugs dispensed by contract pharmacies and puts care for disadvantaged patients at risk. This ruling notwithstanding, we remain firm in our position these restrictions violate the 340B Drug Pricing Program statute, an opinion shared by the U.S. Department of Health and Human Services.

"Essential hospitals depend on 340B savings to meet their safety net mission, and they extend their reach into communities by partnering with pharmacies to make 340B drugs more accessible. This is consistent with Congress' intent for the 340B program. We urge HHS to continue its efforts to end these harmful drug company policies immediately and restore savings lost to these restrictions."

340B Health President and CEO Maureen Testoni said, "We respectfully disagree with the D.C. Circuit's decision. We are disappointed the court found that the 340B statute does not categorically prohibit manufacturers from imposing conditions. However, we are encouraged that the court made clear that conditions violate the 340B statute if, for example, they effectively raise the 340B price or essentially bar access to 340B for a particular provider. 

"Unilateral drug company restrictions have siphoned billions of dollars away from providers and into drugmakers' pockets at the expense of at-risk patients and underserved communities who rely on 340B the most," Testoni said. "It's important to recognize that 340B hospitals provide 77% of hospital care to Medicaid patients and 67% of the nation's unpaid hospital care, making it an indispensable resource for America's most vulnerable patients and the entire health care safety net. As we await the Chicago appellate court decision, we remain steadfast in our advocacy for the protection of 340B and urge the Biden administration to vigorously defend the law."

Email the writer: SMorse@himss.org