In an important development for 340B participating providers (“Covered Entities”), the Department of Health and Human Services (“HHS”) Office of General Counsel (“OGC”) published an Advisory Opinion stating its view that drug manufacturers must honor 340B program discounts under contract pharmacy arrangements. The Advisory Opinion was remarkable in the clarity and forcefulness of HHS’s position that drug manufacturers must offer 340B Program discounts for drugs dispensed to Covered Entity patients at contract pharmacies.

This is the latest development in an ongoing dispute involving 340B Covered Entities, drug manufacturers and HHS. Since 1996, HHS guidance has allowed Covered Entities to provide 340B drugs to their patients through contract pharmacies (i.e., retail pharmacies that serve Covered Entity patients). Due to various objections on complex regulatory grounds, drug manufacturers began refusing to ship drugs to contract pharmacies beginning last summer, unilaterally challenging decades of established industry practice and regulatory interpretations by HHS.

According to the Advisory Opinion, both drug manufacturers and Covered Entities asked HHS to clarify the contract pharmacy issue. The Advisory Opinion reaffirms HHS’s longstanding position that drug manufacturers participating in the 340B program are obligated to extend the discounts to Covered Entities using contract pharmacies, provided the contract pharmacy is acting as an agent of the covered entity.

Background

Congress established the 340B program in 1992 to ensure that drug manufacturers’ price increases did not divert public funds away from providing patient care. These price increases, it has been argued, were an unintended effect of the Medicaid Drug Rebate Program (“MDRP”) under which manufacturers have to offer their “best price” to state Medicaid programs. Before Congress created the MDRP in 1990, many manufacturers offered significant discounts to safety net providers. Under the MDRP, those discounts factored into the “best price” that manufacturers would be required to offer to all state Medicaid programs.

To avoid significant losses, manufacturers stopped offering such steep discounts to safety net providers, Congress responded by creating the 340B program, enabling safety net providers (which it called “Covered Entities”) to purchase select drugs at the same price as Medicaid agencies. The 340B program also exempts the prices that manufacturers offered to those entities from the “best price” calculation. Today, Covered Entities are clinics that have received federal grants to provide patient care and hospitals that care for identified, vulnerable patient populations.

Manufacturers are not obligated to participate in the MDRP or the 340B program; they choose to do so. In return for their participation, the federal government pays for their drugs under Medicare Part B and Medicaid.

Advisory Opinion 20-06

In its Advisory Opinion, HHS examined the plain meaning of the 340B statute along with the purpose and history of the program to confirm that drug manufactures must provide the program’s discounts for covered outpatient drugs dispensed through contract pharmacies.

The key arguments of the Advisory Opinion are summarized as follows:

  • HHS determined the text of the 340B statute could not be “less ambiguous” that drug manufacturers are required to offer covered outpatient drugs at or below the ceiling price for drugs “purchased by” the Covered Entity. HHS reasoned this requirement is not contingent upon how the Covered Entity ultimately chooses to have discount drugs distributed through an in-house pharmacy or a contract pharmacy.
  • HHS also determined that the statutory history of the 340B program indicates that Congress clearly intended for Covered Entities to utilize the services of contract pharmacies. It stated that at the outset of the program, less than 5% of Covered Entities had an in-house pharmacy. For drug manufacturers to not extend the discounted pricing to these Covered Entities, HHS reasoned, would undermine the program’s purpose of benefiting providers that are “small, remote, resource-limited, receiving federal assistance, or serving disadvantaged populations.” As reasoned by HHS, if Congress had intended to exclude Covered Entities from serving their patients through contract pharmacies, it would have used language affirmatively precluding the practice, “but it did not.”
  • The Advisory Opinion also addressed drug manufacturers’ concerns that the usage of contract pharmacies leads to diversion or duplicate drug discounts. HHS explained that if a manufacturer is concerned about a Covered Entity’s engagement in either of these, the 340B statute contains remedies to resolve those concerns.
  • The Advisory Opinion also examined manufacturers’ claims that a common industry practice known as “retrospective replenishment” violated the 340B program’s requirements. The Advisory Opinion dismisses these concerns, stating that individual packages of drugs should be considered fungible goods such that the source of a specific package is not a factor when determining overall compliance with 340B program requirements.

Practical Takeaways

  • There are numerous federal cases pending regarding the 340B program and drug manufacturers’ efforts to limit contract pharmacy relationships. Covered Entities should monitor industry news sources for information regarding the progress of those cases.
  • The incoming administration’s view on the 340B program will likely weigh heavily on the eventual outcome of this issue. It may take weeks or months for the Biden administration’s approach to crystalize and be made public.
  • While this Advisory Opinion is a welcomed development for covered entities and indicates HHS’s position on this issue, it does not have force or effect of law. Covered Entities that have been harmed by manufacturers’ recent actions are advised to consult with counsel to determine the best way to preserve and enforce their rights. If you have any questions or would like additional information about this topic, please contact: