The 340B Contract Pharmacy Saga Continues

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Foley Hoag LLP - Medicaid and the Law

Hello readers of Medicaid and the Law! First and foremost, we here at the blog would like to wish our readers a very happy and healthy new year. We are looking forward to continuing to provide essential insight into some of the most important Medicaid and related health law issues to come in 2021.

Today, we will be providing an update on the “340B Contract Pharmacy Saga.” Back in September, we told you about the growing tension between the drug industry and 340B providers over the issue of contract pharmacies. We like to discuss the 340B program in this blog given the link between the Medicaid drug rebate program and 340B. To recap – starting last July, several drug manufacturers began notifying 340B covered entities of their intention to cease offering some or all of their 340B priced products to contract pharmacies. Many 340B covered entities utilize contract pharmacies to dispense discounted drugs on their behalf. 340B covered entities argue that contract pharmacies help them expand the reach of their services. Drug manufacturers, on the other hand, argue that contract pharmacies are not “covered entities” under the 340B statute (obviating any requirement to offer them 340B priced drugs), and that the growing use of contract pharmacies complicate efforts to combat issues such as drug diversion and duplicate discounts.

Notably, a 2010 guidance document issued by the federal agency tasked with administering the 340B program – the Health Resources and Services Administration (HRSA) – gave 340B covered entities the green light to use multiple contract pharmacies. 340B covered entities had been relying on this guidance ever since. However, in light of questions about the enforceability of this guidance due to federal court decisions that held that HRSA lacked authority to issue binding guidance governing the 340B program, some manufacturers have chosen not to recognize contract pharmacies as covered entities.

A lot has happened since our last post. For one, several 340B covered entities have filed suit across the country asking federal courts to compel HHS to intervene to enforce compliance with the 2010 guidance document. Particularly, in the United States District Court for the District of Columbia, a group of 340B providers filed suit asking the court to require HHS to issue administrative dispute resolution regulations within 60 days and enforce the 340B providers’ rights to purchase drugs via contract pharmacies with 340B discounts.

Subsequently, on December 10, 2020, HHS revived and finalized a long-dormant regulation entitled “340B Drug Pricing Program; Administrative Dispute Resolution Regulation (Final Rule). The Final Rule, originally proposed by the Obama Administration in 2016 and withdrawn from the regulatory agenda by the incoming Trump Administration in 2017, creates a separate decision-making body tasked exclusively with adjudicating disputes between manufacturers and covered entities. In the Final Rule, HHS specifies that this process will resolve claims regarding manufacturer overcharging for 340B drugs, as well as covered entity diversion of 340B drugs and duplicate discounts. Notably, HHS also clarifies that the separate decision-making body – the 340B Administrative Dispute Resolution (ADR) Panel – also has the authority to review claims regarding “covered entity eligibility, patient eligibility, or manufacturer restrictions on 340B sales that the 340B ADR Panel deems relevant for resolving an overcharge, diversion, or duplicate discount claim.” The Final Rule is scheduled to become effective January 13th.

Most recently, the HHS Office of General Counsel (OGC) issued an advisory opinion siding with 340B covered entities and concluding that “covered entities under the 340B Program are entitled to purchase covered outpatient drugs … and manufacturers are required to offer covered outpatient drugs” at the 340B price “even if those covered entities use contract pharmacies to aid in distributing those drugs to their patients.” According to the General Counsel, “the situs of delivery, be it the lunar surface, low-earth orbit, or a neighborhood pharmacy, is irrelevant.” That said, the opinion notes that it is “not a final agency action or a final order, and it does not have the force or effect of law.” On this note, some drug manufacturers have already indicated that the new opinion may not change their behavior.

Although the recent actions by HHS to provide some clarity on these issues seem to favor 340B covered entities, the future viability of contract pharmacies is not guaranteed. That said – once the dust settles, it seems likely that 340B covered entities will maintain their advantage going into 2021 and the new Administration.

Moving forward, it is possible pharmaceutical manufacturers will challenge the ADR Final Rule. As mentioned above, HHS finalized a proposed rule that was originally published during the Obama Administration in 2016 (2016 Proposed Rule). HHS’s action on this rule is peculiar, given that the 2016 Proposed Rule was removed from the regulatory agenda when the Trump Administration came into office in January of 2017. Addressing this issue in the Final Rule, HHS states that this move simply “had the effect of pausing action on the proposed rule.” According to HHS, the Secretary did not formally withdraw the 2016 Proposed Rule, “but rather left it open as a viable option.” However, whether a rule can be finalized several years after being removed from the regulatory agenda without a new round of notice-and-comment rulemaking raises interesting administrative law questions that may comprise the heart of a future drug manufacturer legal challenge. We know that if this were a Medicare regulation, HHS could not re-issue the rule after a dormancy period of more than four years.

Furthermore, although OGC’s advisory opinion is favorable to 340B covered entities, it is strictly the legal position of the current General Counsel of HHS, and is not binding moving forward. A subsequent HHS Secretary and General Counsel could theoretically reverse course and announce an alternative legal interpretation.

Notwithstanding the above, the incoming Biden Administration is likely to favor 340B covered entities. Notably, President-elect Biden’s pick for HHS Secretary – California Attorney General Xavier Becerra – recently led a bipartisan coalition urging HHS to hold “non-compliant drug manufacturers accountable and provide immediate relief for healthcare centers and the Americans they serve” and to stop drug manufacturers from “withholding or threatening to withhold” 340B discounts. Given this stance, it is likely the incoming HHS Secretary will hold the line against drug manufacturers and maintain the current OGC’s legal interpretation. Moreover, in the event the ADR Final Rule is struck down in the courts for the procedural reasons described above, it is likely the incoming HHS Secretary will prioritize issuing a new ADR rule as well as other regulations that are favorable to 340B providers.

So for now – the future looks brighter for 340B covered entities, although given the recent volatility in the public health and political landscape, nothing is guaranteed. Stay tuned!

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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