340B providers are at a disadvantage after the latest court ruling on contract pharmacies

A decision issued by an appeals court represents the latest setback for 340B providers hoping to secure widespread access to price discounts on Medicare Part B drugs.

The U.S. Court of Appeals for the District of Columbia Circuit on May 21 upheld a district-court ruling that drug manufacturers can impose restrictions on the 340B discounts they offer for drugs dispensed at contract pharmacies.

The outcome makes manufacturers 2-0 in such cases at the appellate level, including a January 2023 decision by the Third Circuit Court of Appeals, which combined two lower-court rulings and reversed one of them.

The prevailing parties in the latest case were plaintiffs Novartis and United Therapeutics, which were among various manufacturers that placed conditions on contract pharmacy discounts beginning in 2020. HHS and the Health Resources and Services Administration (HRSA), the listed defendants, subsequently issued enforcement letters informing manufacturers they should begin providing 340B discounts through contract pharmacies without restrictions. Those letters have been at the center of the ongoing legal disputes.

“We reject HRSA’s position that Section 340B prohibits drug manufacturers from imposing any conditions on the distribution of discounted drugs to covered entities,” wrote a D.C. Circuit Court panel consisting of two Trump-nominated judges and one Biden nominee.

Both the Third and D.C. circuit courts said 340B statutory language essentially is silent on the issue of contract pharmacies and thus does not constrain manufacturers from imposing limits. The D.C. court also said HHS has overreached in attempting to establish regulatory rulemaking authority over the 340B program.

Disappointment, but a silver lining

Hospital advocacy groups disputed the rationale for the D.C. decision, which “allows drug companies to continue their egregious restrictions on 340B discounts for drugs dispensed by contract pharmacies and puts care for disadvantaged patients at risk,” according to a written statement from America’s Essential Hospitals.

But the ruling also includes potentially protective language for 340B providers. The court clarified that restrictions imposed by manufacturers on the distribution of 340B drugs can go too far.

For example, one of the plaintiffs, United Therapeutics, is among manufacturers that have announced a requirement for providers to upload claims data on 340B contract-pharmacy orders to a third-party platform. The idea is to have a better line of sight into any practice of impermissibly diverting 340B drugs or seeking duplicate discounts.

Conceptually, the court did not view the requirement as excessively burdensome. But it sketched out a scenario in which the mandate could be deemed as such.

“We do not foreclose the possibility that these conditions may violate Section 340B as applied in particular circumstances — if, for example, HRSA could show that a specific covered entity for some reason could not supply the claims information demanded by United Therapeutics,” the court wrote.

The provider advocacy group 340B Health expressed disappointment with the overall ruling but said it is “encouraged that the court made clear that conditions violate the 340B statute if, for example, they effectively raise the 340B price or essentially bar access to 340B for a particular provider.”

Increasingly high stakes

The outcomes of such cases are consequential because of the rapidly increasing role of contract pharmacies in 340B. In 2010, guidance from HRSA established that 340B providers could obtain discounts for drugs dispensed through an unlimited number of contract pharmacies.

Thereafter, the number of 340B retail pharmacy locations — often CVS Health and Walgreens stores — grew from 789 to 25,775, and slightly more than half of pharmacies were at least 16 miles away from the covered provider, according to a 2023 study published in JAMA Health Forum.

Examining 2021 data from HRSA, a report by the Drug Channels blog found that providers spent $43.9 billion on 340B drugs that year, while saving just under $50 billion relative to the list prices. Widespread restrictions such as those instituted starting in 2020 thus have major financial implications.

“Unilateral drug company restrictions have siphoned billions of dollars away from providers and into drugmakers’ pockets at the expense of at-risk patients and underserved communities who rely on 340B the most,” 340B Health wrote in its statement.

Ongoing legal developments

Amid a spree of manufacturer lawsuits following HRSA’s issuance of the 2021 enforcement letters, a third case also is at the appellate level, in the Seventh Circuit.

Providers may not have much recourse if manufacturers continue to win at that level. But if the government prevails in the Seventh Circuit, analysts have said, the split could send the matter to the Supreme Court in time for a decisive 2025 ruling.

Federal courts recently have weighed in on questions about state-level 340B policies as well. A 2021 Arkansas law was drafted, in part, to prohibit manufacturers from issuing restrictions on 340B contract-pharmacy usage. Manufacturer advocacy groups filed suit, claiming the 340B federal statute should take precedence.

A district court and the Eighth Circuit Court of Appeals both decided in favor of the state, with the appeals court noting that the 340B statute is essentially silent on the issue of contract pharmacies. Thus, per the court, there is no cause to believe Congress intended to preempt state policies.

The decision potentially protects similar state legislation in Louisiana and West Virginia, the latter of which passed its bill just this year. Roughly a dozen other states have such bills in various stages of development.

Eyes on Capitol Hill

A looming patchwork of state policies puts more of an impetus on Congress to authoritatively address the issue. Some members have been seeking to get that process underway.

A 2024 House bill would establish that drugs dispensed at contract pharmacies are eligible for 340B discounts. Preliminary language drafted in the Senate likewise seeks to clarify the use of such pharmacies. The language is largely in favor of providers but includes stricter requirements around registration of contract pharmacy sites.

On the regulatory front, provider advocates cheered recent changes to the 340B administrative dispute resolution process, seeing a likelihood of increased opportunities to bring disputes that challenge manufacturer-imposed restrictions on contract pharmacy discounts.