HHS Advisory Opinion Rejects Drug Manufacturers’ Attempts to Limit Contract Pharmacy Use by 340B Covered Entities

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On December 30, 2020, the HHS Office of General Counsel (OGC) issued Advisory Opinion No. 20-06 finding the 340B Federal Drug Pricing Program requires drug manufacturers to extend 340B pricing to covered outpatient drugs dispensed through contract pharmacies.

Recently, certain drug manufacturers have declined to distribute covered outpatient drugs through contract pharmacies at 340B pricing. The OGC concluded that this practice is impermissible and that drug manufacturers must offer covered drugs at no more than the 340B ceiling price, even if covered entities use contract pharmacies for distribution.

Many covered entities enter into written agreements with pharmacies (Contract Pharmacies) to distribute their covered outpatient drugs to the entities’ patients. Under those agreements, the covered entity orders and pays for the 340B drugs, which are then shipped from the manufacturer to the Contract Pharmacy. As previously reported in Health Headlines, beginning in summer 2020, manufacturers participating in the 340B Drug Pricing Program started to push back on the use of Contract Pharmacies by providers. At least one major manufacturer refused to sell drugs for shipment to Contract Pharmacies, and others sent letters to providers requesting pharmacy claims data for 340B eligible prescriptions. Following these actions, numerous covered entities and manufacturers requested guidance from the OGC about the extent to which such actions are permissible under 340B.

OGC concluded 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 Contract Pharmacies and charge no more than the 340B ceiling price. The OGC cited three rationales in support of this conclusion.

First, OGC reasoned the plain meaning of Section 340B of the Public Health Service Act 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. The plain language of the statute requires manufacturers to “offer” covered outpatient drugs at or below the ceiling price for “purchase by” covered entities. This requirement is not qualified, restricted, or dependent on how the covered entity chooses to distribute the covered outpatient drugs, and the site of delivery is irrelevant. All that is required is that the discounted drug be “purchased by” a covered entity.

Additionally, OGC cited the purpose and history of the 340B Program for support of this interpretation. At the outset of the 340B program, less than 5 percent of providers used in-house pharmacies; to disallow the use of Contract Pharmacies would exclude 95 percent of covered entities. In 1996, HRSA issued guidance stating, “[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.” 61 Fed. Reg. at 43,549. HRSA reaffirmed this interpretation of the statute in guidance issued in 2010.

Finally, OGC rejected manufacturers rationales to support disallowing the use of Contract Pharmacies. Manufacturers primarily cited concerns that the use of Contract Pharmacies would lead to a heightened risk of diversion and duplicate accounts. OGC explained the legitimate transfer of drugs to Contract Pharmacies so that they can be dispensed to patients is a function of the principal-agent relationship, not diversion or illicit transfer. Any concerns by the manufacturers about double-discounting or diversion should be resolved by the 340B Administrative Dispute Resolution procedures detailed at 85 Fed. Reg. 80,632. The Administrative Dispute Resolution procedures for the 340B program, published in December 2020, are discussed in detail in the December 14, 2020 issue of Health Headlines.

The Advisory Opinion is available here.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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