UPDATE: On January 12, 2026, the federal government announced it would drop its appeal of Judge Walker’s order blocking implementation of the Pilot Program and return it back to HRSA for reconsideration. In a court filing submitted to the United States Court of Appeals for the First Circuit, the Department of Justice (DOJ) stated, “[t]he parties are engaged in discussions about returning the approvals challenged in this litigation to the agency for reconsideration. The agency intends to resolve such proceedings promptly. Therefore, the parties do not believe that expediting this appeal is warranted at this time and plan to dismiss the appeal in short order.”
DOJ’s letter to the United States Court of Appeals for the First Circuit can be found here.
A federal district court in Maine has preliminarily enjoined the Health Resources and Services Administration’s (HRSA) 340B Rebate Model Pilot Program (the Pilot Program), finding that HRSA likely violated the Administrative Procedure Act (APA) by failing to reasonably explain a sharp departure from three decades of upfront 340B discounts, resulting in “arbitrary and capricious” agency action. The federal government requested to allow the 340B Rebate Pilot Program to commence pending its appeal of the district court’s preliminary injunction. However, the First Circuit denied this request, thereby preventing the Pilot Program from starting during the appeal.
Since 1992, 340B has mandated upfront discounts for covered entities. In July 2025, HRSA announced the Pilot Program. The Pilot Program was intended to address 340B Medicaid duplicate discounts, drug diversion and duplication with Inflation Reduction Act Maximum Fair Price rebates, with a January 1, 2026 start date. The Pilot Program would require covered entities to pay wholesale prices and later seek rebates.
The American Hospital Association (AHA), the Maine Hospital Association, and four non-profit health systems (the Plaintiffs) filed a lawsuit in the U.S. District Court for the District of Maine challenging the Pilot Program and seeking declaratory and injunctive relief. Judge Lance Walker, Chief U.S. District Judge in Maine, granted a preliminary injunction for Plaintiffs on December 29, 2025.
Judge Walker concluded that the Plaintiffs met the requirements for a preliminary injunction, emphasizing that they were likely to prevail on their claims that the Pilot Program is “arbitrary and capricious” under the APA because HRSA’s implementation of the Pilot Program relied on a “threadbare” administrative record and did not reasonably address or explain how the rebate model would affect covered entities dependent on upfront discounts. Judge Walker found HRSA “fail[ed] to abide the basic requirements” necessary for agency action in implementing the rebate program. Specifically, Judge Walker noted that the federal government did not adequately consider costs, covered entities’ reliance interests on the upfront discount model, public comment, less costly alternatives, and issues with the electronic database used to collect and store rebate claims. While recognizing HRSA’s authority to tackle issues like duplication and to establish a rebate framework, Judge Walker found the agency’s reasoning and its contemporaneous evaluation of key considerations lacking, making the program likely to be seen as “arbitrary and capricious” under the APA. Judge Walker also determined that AHA members faced irreparable harm, citing $400 million in compliance costs. Moreover, Judge Walker concluded that the injunction only preserved the existing system and, therefore, granting the injunction was equitable. Additionally, Judge Walker denied the federal government's request for a stay pending appeal.
The federal government then moved for an emergency stay pending appeal from the United States Court of Appeals for the First Circuit. On January 8, 2026, the First Circuit panel issued a decision denying the government’s motion for an emergency stay. In reaching its conclusion, the First Circuit panel determined that the government had not demonstrated a strong likelihood of success on the merits of its case—a critical factor when evaluating whether to grant a stay. The panel examined the administrative record and found no evidence indicating that HRSA took into account the reliance interests of covered entities or thoroughly assessed the possibility of increased costs and administrative burdens that might result from the Pilot Program, affirming Judge Walker’s order.
Because the preliminary injunction remains in force, covered entities will continue to receive upfront 340B discounts. The Pilot Program’s January 1, 2026 effective date has passed without implementation, and the First Circuit intends to resolve the federal government’s appeal on an expedited schedule. But, HRSA may not implement the Pilot Program during the pendency of the injunction.
Judge Walker’s order granting the preliminary injunction can be found here. Judge Walker’s order denying the federal government’s motion for stay pending appeal can be found here. The First Circuit’s order denying the federal government’s request for an emergency stay pending appeal can be found here.
King & Spalding previously covered the release of the Pilot Program, which can be found here. King & Spalding also previously examined AHA’s lawsuit, which can be found here.
