Assessment of latest CMS 340B rules regarding patient access to discounted drugs and challenges between pharma and contracted pharmacies.

CY 2021 Medicare Hospital Outpatient Prospective Payment System and Ambulatory Surgical Center Payment System Final Rule (CMS-1736-FC) Dec 02, 2020

Cutting 340B Drug Discounts

The HHS in December 2020 finalized a rule forcing community health centers to pass 340B drug discounts along to their patients, a move the Trump administration hoped would lower out-of-pocket drug costs. It faced staunch opposition from providers and patient advocates, who worried it could hamper access to care and cut already razor-thin operating margins for community health centers. Status: On pause, January 2021. The rule was slated to take effect January 2022, but the Biden administration delayed until March 2022. The rule could be withdrawn before then.2

The Issue of Contracted Pharmacies

Section 340B of the Public Health Service Act requires pharmaceutical manufacturers participating in Medicaid to sell outpatient drugs at discounted prices to healthcare organizations that care for patients in vulnerable communities, which include low-income patients. These organizations include community health centers, children’s hospitals, hemophilia treatment centers, critical access hospitals, sole community hospitals, rural referral centers, and public and nonprofit disproportionate share hospitals that serve the needy.

The program allows 340B hospitals to stretch limited federal resources to provide more affordable and more expansive health services to the patients and communities they serve. Hospitals use 340B savings to provide free care for uninsured patients, offer free vaccines, provide services in mental health clinics, and implement medication management and community health programs, among other services and programs.

In order to expand the reach of the 340B program, the Health Resources and Services Administration (HRSA) allowed 340B participants to contract with outside pharmacies to dispense drugs to their eligible patients. Contract pharmacies are an extension of the 340B covered entities to provide patients access to prescription drugs outside of the 4 walls of the hospital or community clinic. For hospitals, these arrangements allow them to better serve their vulnerable communities by increasing access to more affordable healthcare services. A number of drug companies have recently taken unprecedented actions, beyond the scope of the statute, to limit the distribution of certain 340B drugs to hospitals and health systems. These actions range from limiting the distribution of certain 340B drugs to demanding, superfluous, detailed reporting of 340B drug claims distributed through hospitals’ contract pharmacies. The Department of Health and Human Services (HHS) is currently reviewing these questionable practices and has warned of possible litigation if the drug manufacturers knowingly overcharge for 340B drugs.4  

Contract Pharmacies and the 340B Drug Discount Program

On December 11, 2020, 5 hospital groups, including the American Hospital Association (AHA), and an organization of hospital pharmacists representing participants in the 340B drug pricing program (340B Program), filed a federal lawsuit (the 340B Program Litigation)5 against the U.S. Department of Health and Human Services (HHS) over HHS’ alleged failure to enforce 340B Program requirements that obligate pharmaceutical manufacturers to provide 340B Program prescription drug discounts to pharmacies contracted by 340B Program-participating hospitals to dispense 340B Program drugs.[1]6

The 340B Program has long been a source of contention between pharmaceutical manufacturers and 340B Program–participating hospitals—called covered entities in the 340B Program. The 340B Program requires manufacturers to sell drugs to 340B-participating hospitals at deep discounts as a condition to Medicaid and Medicare Part B coverage of their outpatient drugs. Manufacturers contend that the 340B Program has been abused, particularly with respect to: (1) drugs sold at 340B Program discounts and also billed to Medicaid, and thus subject to separate rebates through the Medicaid Drug Rebate Program, resulting in “duplicate discounts,” and (2) drugs dispensed by third-party pharmacies contracted with 340B Program–participating hospitals (commonly referred to as contract pharmacies), instead of by the hospitals directly, which manufacturers contend leads to diversion of drugs to individuals who are not hospital patients.

Based on these concerns, several large pharmaceutical manufacturers announced plans in Fall 2020 to cease or limit sales of 340B Program discounted drugs to contract pharmacies, as well as to require increased data reporting to allow manufacturers to identify and avoid duplicate discounts. These announcements were met with indignation by 340B Program–participating hospitals, as well as a bipartisan group of lawmakers, arguing that these measures would be a method to skirt manufacturers’ 340B Program obligations and impose unrealistic expectations on 340B Program–participating hospitals. The Health Resources and Services Administration (HRSA), the component of HHS responsible for administering the 340B Program, issued a statement on September 2, 2020, strongly encouraging manufacturers to continue selling discounted drugs to contract pharmacies. {5} Nevertheless, HRSA did not take, and has not taken or threatened to take, any enforcement action against manufacturers for failing to do so, asserting that it lacks clear authority to do so.

This dispute came to a head with the 340B Program Litigation, which requests temporary and permanent injunctions directing HHS to require pharmaceutical manufacturers to provide 340B Program discounted drugs to contract pharmacies, and to refund the difference between what 340B Program participants paid for drugs and the 340B ceiling price for such drugs during the time that manufacturers refused to sell them. Plaintiffs argue that the 340B Program’s authorizing statute clearly requires drug manufacturers to offer 340B Program drugs at mandated discounted prices as a condition of Medicaid and Medicare Part B coverage of their drugs, with no exception based on whether a 340B–participating hospital uses a contract pharmacy to dispense the drugs and no authority for manufacturers to impose such limitations, and that HRSA guidance is consistent with this position. Further, plaintiffs argue that HRSA has authority to impose penalties on drug manufacturers that do not comply with this statutory requirement—for instance, by refusing to sell drugs at discounted prices based on a 340B Program–participating hospital’s use of a contract pharmacy—and has nevertheless failed to do so, despite repeated requests, based on an erroneous assertion that it lacks authority.

Plaintiffs argue that HRSA’s decision not to enforce penalties against drug manufacturers that cease or limit sales of 340B Program drugs to contract pharmacies constitutes a final agency action, and should be health unlawful as arbitrary and capricious and an abuse of discretion under the Administrative Procedure Act. In the alternative, plaintiffs argue that HRSA has unreasonably delayed its obligation to ensure that refunds are issued as related to the alleged overcharging. Plaintiffs also emphasize that both they and public health at-large are fundamentally threatened by the manufacturers’ actions, which they contend prevent the 340B Program from appropriately functioning to contribute to affordable healthcare in underserved areas.

Notably, the 340B Program’s authorizing statute provides no private right of action for plaintiffs against drug manufacturers. Plaintiffs may also face an uphill battle in convincing the court that they have standing to compel government action where they are foreclosed from litigating directly. Nevertheless, plaintiffs may have few alternatives for remedying the issue, in the face of HRSA’s inaction, as manufacturers’ restrictions for contract pharmacies may pose a serious threat to the operation and scope of the 340B program, as it has existed for 2 decades.

On December 30, 2020, possibly in response to the litigation, HHS released Advisory Opinion 20-06 (Ad. Op. 20-06), addressing contract pharmacies under the 340B Program. {7} According to Ad. Op. 20-06, HHS acknowledges the numerous requests for a determination on the issue, and, in a win for hospitals, concludes that, “To the extent contract pharmacies are acting as agents of a covered entity, a drug manufacturer in the 340B Program is obligated to deliver its covered outpatient drugs to those contract pharmacies and to charge the covered entity no more than the 340B ceiling price for those drugs.”  HHS based its decision on the following:

  1. The plain meaning of the 340B Program rules and regulations requires manufacturers to sell covered drugs to covered entities at or below the ceiling price, independent of whether the entity opts to use contract pharmacies to dispense drugs. According to Op. 20-06, “The core requirement of the 340B statute… is that manufacturers must ‘offer’ covered outpatient drugs at or below the ceiling price for ‘purchase by’ covered entities. This fundamental requirement is not qualified, restricted, or dependent on how the covered entity chooses to distribute the covered outpatient drugs.”
  2. Contract pharmacies have been an integral part of the 340B Program since its outset. “[A]t the outset of the 340B Program only approximately 500 out of 11,500 covered entities (less than 5 percent) used in-home pharmacies. This is not surprising: the Program is aimed at benefiting providers that are small, remote, resource-limited, receiving federal assistance, or serving disadvantaged populations. These are the poster children of providers that one would expect to lack an in-house pharmacy. To champion a policy, ungrounded in the language of the statute, that would foreclose 340B discounts to 95 percent of covered entities and foreclose discounts to the neediest of this cohort is inconsistent with purpose of the Program and common sense.” (Internal citations omitted.)
  3. HHS’ longstanding interpretation of Section 340B reflects the plain language of the section by recognizing the use of contract pharmacies. “In 1996, HRSA… stated, ‘[i]t has been the Department’s position that if a covered entity using contract pharmacy services requests to purchase a covered drug from a participating manufacturer, the statute directs the manufacturer to sell the drug at the discounted price.’… Here, contract-pharmacy arrangements have been utilized, and honored by manufacturers, since 1996 and earlier.”
  4. Manufacturers’ rationale for precluding the use of contract pharmacies is not supported by the language of the statute and leads to absurd results. “The primary rationale offered for cutting off contract pharmacies—that such arrangements lead to a heightened risk of diversion and duplicate discounts—makes clear that manufacturers are attempting to circumvent section 340B’s [audit] procedures for resolving disputes between manufacturers and covered entities…. Moreover, the Department specifically rejected this reasoning when issuing regulations regarding the calculation of the 340B ceiling price. In responding to a comment regarding perceived 340B violations, HRSA stated ‘[m]anufacturers cannot condition sale of a 340B drug at the 340B ceiling price because they have concerns or specific evidence of possible non-compliance by a covered entity.’”

For these reasons, HHS concludes in Ad. Op. 20-06 that 340B Program–participating hospitals are entitled to purchase covered outpatient drugs at no more than the 340B Program ceiling price, and manufacturers are required to offer covered outpatient drugs at no more than the 340B Program ceiling price, even if those covered entities use contract pharmacies to aid in distributing those drugs to their patients.

At first blush, Ad. Op. 20-06 may seem dispositive on the issues underlying the 340B Program litigation and, in turn, render the litigation moot. However, this is far from the case. First, advisory opinions are not final agency action or final order, nor do they have the force or effect of law. Therefore, whereas a court judgement would be binding upon the litigants, Ad. Op. 20-06 is not. Second, Ad. Op. 20-06 does not address a key aspect of the litigation—enforcement against manufacturers who fail to abide by HRSA’s past guidance and the conclusions reached in Ad. Op. 20-06. So, while HHS through Ad. Op. 20-06 advises manufacturers that they may not refuse to offer the ceiling price to covered entities, even when the covered entity at issue uses distribution systems involving contract pharmacies, Ad. Op. 20-06 is silent as to the enforcement mechanism that HHS will use to compel compliance.

The absence of enforcement language in Ad. Op. 20-06 was recognized by the AHA in its December 30, 2020 press release (the “Press Release”) applauding Ad. Op. 20-06.  (8)  In the Press Release, AHA noted that they now expect HRSA to, “Take swift and decisive action to halt these pernicious tactics from drug companies and ensure that 340B drugs remain available and accessible to vulnerable communities across the country.” AHA also called for HRSA to, “Ensure that hospitals are made whole as a result of being denied appropriate discounts since these illegal practices began earlier this year.”

Based upon the above and the positions taken by the other plaintiffs, if HRSA does not proceed with action beyond the release of Ad. Op. 20-06, it seems unlikely that the 340B Program litigation will be dropped anytime soon.


[1] On December 14, 2020, 3 days after the 340B Program litigation commenced, attorney generals in 27 states and Washington, D.C. sent a letter to HHS urging HHS to hold accountable drug manufacturers that are, “Unlawfully refusing to provide discounts to hospitals, federally qualified health centers and other providers that serve vulnerable patient populations through the 340B program.” (7)