Sign In
  • December 15, 2021

    District Courts Add to Drug Pricing Upheaval: 340B Pricing and Enforcement Litigation

    In 2020, the federal 340B Drug Pricing Program experienced an upheaval after some manufacturers cut the number of contract pharmacies obtaining drugs at a lower price and federal Health Resources and Services Administration Office of Pharmacy Affairs stepped up its enforcement authority. Richard Davis discusses the program, the surrounding litigation, and what’s next.

    Richard B. Davis

    Over the last year, the federal 340B Drug Pricing Program has seen an immense amount of change and upheaval.

    Many manufacturers have begun to limit 340B pricing available through contract pharmacy relationships, significantly limiting available 340B savings to participating entities and, in some cases, exacerbating financial difficulties caused by the COVID-19 pandemic.

    To add to the uncertainty, the Health Resources and Services Administration Office of Pharmacy Affairs’ (HRSA OPA) enforcement authority to levy penalties or otherwise obligate manufacturers to change their policies is heavily disputed.

    All of this has led to a flurry of legal filings, administrative guidance, and enforcement letters that seek to clarify to what extent manufacturers can legally limit 340B pricing availability.

    Richard Davis Richard "Richie" Davis, U.W. 2015, is an attorney with Quarles & Brady LLP in Milwaukee, where he practices in health care law, with an emphasis on the pharmacy and 340B space.

    Now, conflicting district court opinions have added to the confusion.

    A Brief 340B Program Overview

    As a refresher, the 340B Program requires drug manufacturers to sell certain outpatient drugs to certain categories of health care providers (or covered entities) at reduced prices.

    There are various categories of covered entities, ranging from large hospitals to small clinics – but as a rule, covered entities treat large percentages of vulnerable and underserved patient populations. The drug pricing discounts are intended to enable these covered entities “to stretch scarce federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.”1

    While some argue that the savings should pass directly to the patients, the prevailing statutory interpretation is that the benefit inures to the covered entities themselves. These covered entities, in turn, use the 340B Program savings to sustain and expand their operations to serve their vulnerable patient populations.

    Notably, drug manufacturers, not the taxpayers, pay for the benefits of the 340B Program.

    Recap of Program Upheaval in 2019-20

    Starting in 2019, HRSA began to question its own enforcement authority over the 340B Program. Much of the program parameters, especially those related to contract pharmacies (pharmacies that dispense 340B drugs on behalf of a covered entity via a contractual arrangement), were established through guidance documents, rather than through legislation or formal administrative rulemaking procedures.

    As covered in more detail my Sept. 30, 2020, blog article, manufacturers began significantly limiting when they would offer 340B pricing for prescriptions filled through contract pharmacy relationships. This led to many participating covered entities losing substantial 340B savings previously realized through contract pharmacy relationships.

    In some cases, this severely affected operations that were already complicated by the ongoing COVID-19 pandemic. Unsurprisingly, this manufacturer activity led many covered entities to sue HHS, requesting enforcement of its contract pharmacy guidance and penalties to be levied.

    Nevertheless, HHS did not initially challenge this manufacturer behavior other than through a sternly worded letter sent to Eli Lilly, leading to additional uncertainty as to whether HRSA’s contract pharmacy guidance holds any real weight at all.

    2020 Advisory Opinion

    HHS began to change its tune in late 2020 with its release of a Dec. 30, 2020, Advisory Opinion (AO) arguing that manufacturers do in fact have an obligation to offer 340B pricing through contract pharmacies.

    Although not binding or carrying the force of law, HHS released the AO in an effort to outline the current views of the agency and its interpretation of 340B Program requirements.

    Interestingly, the AO largely avoided addressing the contract pharmacy-specific guidance over which HHS has questionable enforcement authority – instead, it relied on the 340B statute itself:

    Thus, 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. All that is required is that the discounted drug be 'purchased by' a covered entity. In this setting, neither the agency nor a private actor is authorized by section 340B to add requirements to the statute.

    The AO also claimed that the purpose and history of the 340B Program supported this interpretation, pointing to the fact that contract pharmacies have been an integral part of the program since its outset, and that parties involved within the program have recognized these relationships as valid for over 20 years.

    Manufacturers were quick to push back against the AO, filing multiple suits challenging its findings and its legal basis as source for future penalties, and manufacturers continued to limit 340B pricing for contract pharmacy relationships. The suits claimed that, among other things:

    • the AO violated notice-and-comment requirements, because the so-called “guidance” issued was actually a legislative rule with the force and effect of law in disguise;

    • the AO failed to comply with the agency's own procedural regulations when issuing an Advisory Opinion; and

    • the agency's interpretation of the 340B statute was wrong and the statute does not require drug manufacturers to provide 340B-priced drugs for contract pharmacies.

    One court, reviewing a case brought by AstraZeneca, at least partially agreed with the manufacturers’ arguments. The court refused to dismiss the suits, and stated that Congress has not spoken clearly and unambiguously in support of the government's interpretation of the 340B statute relating to contract pharmacies.2

    A few days after that decision, HHS opted to formally withdraw the AO:

    [HHS] maintains that the Opinion was not intended to impose new, binding obligations on regulated entities, and we respectfully disagree with the decision of the District Court in AstraZeneca Pharmaceuticals. However, in the interest of avoiding confusion and unnecessary litigation, OGC withdraws the Opinion.3

    Importantly, the AO withdrawal did not impact HHS’s other efforts to obligate manufacturers to offer unrestricted 340B pricing through contract pharmacy relationships, including its enforcement letters (detailed further in the next section).

    May 2021 HHS Enforcement Letters

    On May 17, 2021, HHS sent enforcement letters to six manufacturers who are currently limiting or have stopped offering 340B pricing for otherwise eligible prescriptions filled through contract pharmacy relationships.4 The letters are the most aggressive effort yet by HHS to force manufacturers to change their behavior.

    The letters state that “HRSA determined that their policies that place restrictions on 340B Program pricing to covered entities that dispense medications through pharmacies under contract resulted in overcharges and directly violate the 340B statute.” Moreover, the letters obligate the manufacturer to:

    • begin offering 340B pricing immediately; and

    • make repayments for amounts owed to covered entities or suffer civil monetary penalties.

    HHS sent similar letters to other manufacturers who began limiting 340B drug access through contract pharmacy after May 17, 2021.

    Manufacturers were quick to file suit in various jurisdictions around the country challenging the enforceability of these letters. These suits are ongoing, and have brought little clarity to the situation at hand.

    Ongoing Litigation

    Over the last few weeks, U.S. District Courts in Indiana, New Jersey, and Washington, D.C., have released decisions related to certain drug manufacturers significantly limiting 340B pricing available through contract pharmacy relationships.

    These decisions weigh in on both the permissibility of manufacturers’ pricing limitations and HHS’s authority to enforce penalties if manufacturers don’t offer 340B pricing through these arrangements.

    In short, the courts are split as to whether manufacturers can unilaterally limit the distribution of 340B drugs to exclude most contract pharmacy relationships. However, all three courts agreed that HHS cannot rely on the letters to levy penalties or obligate manufacturers to change their policies.

    These decisions further muddy the waters of HHS’s enforcement authority, and signal that resolution of these disputes is likely far off.

    Manufacturer Obligations in 340B Contract Pharmacy Relationships. Two of the three courts rejected the manufacturers’ argument that requiring manufacturers to offer 340B pricing through contract pharmacy relationships exceeds HHS’s authority and is contrary to the 340B statute. The Indiana District Court agreed with HHS that “[t]he fairest and most reasonable interpretation of the 340B statute would not authorize drug manufacturers to impose unilateral restrictions on the distribution of the drugs” filled through contract pharmacy relationships.

    The court added that “construing the 340B statute not to permit drug manufacturers to impose extra-statutory conditions on covered entities' access [through contract pharmacy relationships] to discounted medications is not only a permissible construction, but, in our view, the construction that best aligns with congressional intent.”

    The New Jersey District Court came to the same conclusion, stating that “[manufacturers] may not unilaterally create and establish policies – whatever the underlying rationale – wherein they dictate how many contract pharmacies a covered entity may designate to receive delivery of covered drugs.”

    On the other hand, the D.C. District Court ruled in favor of the manufacturers, stating that “the plain language, purpose, and structure of the statute do not prohibit the manufacturers from imposing any conditions on their offers of 340B-priced drugs to covered entities.”

    Order to Vacate HHS Advisory Opinion and Enforcement Letters. However, all three courts determined that HHS cannot rely on the enforcement letters to actually enforce penalties against the manufacturer or otherwise obligate the manufacturer to comply with HHS’s most recent stated policy on 340B drug distribution through contract pharmacy relationships. The D.C. District Court’s rationale was straightforward, setting aside the enforcement letters because they relied on, in the court’s view, an incorrect interpretation of the underlying 340B statute.

    The Indiana District Court also vacated and remanded the enforcement letter, albeit for different reasons. The Indiana District Court noted that HHS has historically indicated that it did not have authority to enforce binding contract pharmacy regulations and enforcement mechanisms. However, according to the court, HHS abruptly changed that stance in the AO and enforcement letter, and that those changes were “arbitrary and capricious” and must be vacated. The court stated that the letters reflect an unexplained change in agency interpretation of its enforcement authority over contract pharmacy relationships and is inconsistent with prior guidance on that enforcement authority. The court remanded the letter to HHS for further consideration, leaving the door open for HHS to develop an acceptable rationale for its enforcement authority over the 340B contract pharmacy space.

    Finally, the New Jersey District Court, in perhaps the most favorable interpretation for covered entities, agreed that the letters accurately described “overcharges” on the part of manufacturers based on the 340B statute. However, it still remanded the letters due to uncertainty surrounding the overall intended scope of contract pharmacy programs under the statute and associated guidance. The court stated that

    HHS must therefore undertake a more complete assessment of the status quo as to contract pharmacy arrangements to determine whether it is permissible under the 340B statute to enforce a one-size-fits-all contract pharmacy policy, or whether more specific and holistic guidance is necessary.

    Conclusion: What’s Next

    The Indiana and New Jersey decisions implicitly indicate that HHS can obligate manufacturers to offer 340B pricing through all contract pharmacy relationships, even if that obligation isn’t unambiguously stated in the statute. However, HHS’s authority to actually enforce such a stance is still unclear.

    HHS would need to utilize new rulemaking protocols before it can levy any enforcement authority and require manufacturers to change their behavior. At the very least, HHS would ostensibly need to further justify its new stance on its enforcement authority over the contract pharmacy space, although it is unclear what that justification would need to look like.

    In the short term, this decision will allow manufacturers to continue limiting 340B pricing available through contract pharmacy relationships. Although multiple courts determined that their limited distribution policies are not authorized by the 340B statute, we don’t expect manufacturers’ stances to voluntarily change until a court explicitly permits HHS to collect penalties for non-compliance and/or new legislation is passed that more clearly gives HHS this authority.

    While each decision only directly relates to the specific manufacturer(s) who brought the suit, we expect these decisions and the rationales contained therein to be used persuasively in upcoming HHS appeals on this issue across different jurisdictions.

    While the situation may always change, there is currently no pending congressional legislation that could provide an imminent solution to all this uncertainty.

    This article was originally published on the State Bar of Wisconsin’s Health Law Blog. Visit the State Bar sections or the Health Law Section webpages to learn more about the benefits of section membership.


    1 H. R. No. 102-384, Part II, pg. 12; 102nd Congress, Second Session.

    2 Memorandum Opinion from June 16, 2021 in AstraZeneca Pharmaceuticals LP v. Xavier Becerra et al., C.A. No. 21-27-LPS.

    3 U.S. Department of Health & Human Services, Withdrawing Advisory Opinion 20-06 on Contract Pharmacies under the 340B Program (issued December 30, 2020), June 18, 2021.

    4 See, e.g., HHS Letter to Lilly, May 17, 2021.

    Need help? Want to update your email address?
    Contact Customer Service, (800) 728-7788

    Health Law Section Blog is published by the State Bar of Wisconsin; blog posts are written by section members. To contribute to this blog, contact Kristen Nelson and review Author Submission Guidelines. Learn more about the Health Law Section or become a member.

    Disclaimer: Views presented in blog posts are those of the blog post authors, not necessarily those of the Section or the State Bar of Wisconsin. Due to the rapidly changing nature of law and our reliance on information provided by outside sources, the State Bar of Wisconsin makes no warranty or guarantee concerning the accuracy or completeness of this content.

    © 2024 State Bar of Wisconsin, P.O. Box 7158, Madison, WI 53707-7158.

    State Bar of Wisconsin Logo

Join the conversation! Log in to leave a comment.

News & Pubs Search

Format: MM/DD/YYYY