To 340B or not to 340B: A Volatile Time in the 340B Program Presents Challenges (and Opportunities) for Stakeholders

These actions have already had (and will likely continue to have) a significant impact on 340B covered entities, many of which are hospitals and clinics serving the country's poorest and most vulnerable patient populations. These actions also negatively impact the numerous retail pharmacies serving as contract pharmacies to these covered entities. Nonetheless, the manufacturers claim that their actions align with the original statutory intent of the 340B Program and represent a long overdue "rightsizing" of the 340B Program.

If one is not already familiar with the 340B Program, the preceding paragraphs are likely little more than health law "alphabet soup." In order to better understand the impact of recent 340B Program developments, it may be helpful to take a step back and start at the beginning.

340B Program History and Intent

A relatively short statute found in Section 340B of the Public Health Service Act, now codified at 42 U.S.C. 256b, created the 340B Program in 1992. The 340B Program requires pharmaceutical manufacturers to enter into an agreement with HHS in exchange for having their drugs covered by Medicaid and Medicare Part B. Under this agreement, the manufacturer agrees to provide significant discounts on certain categories of outpatient drugs (covered outpatient drugs) purchased by statutorily specified providers, called “covered entities,” that, as noted above, serve the nation's poorest and most vulnerable patient populations. According to congressional report language, the purpose of the 340B Program is to enable covered entities “to stretch scarce federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.”³ This seemingly innocuous language has led to spirited debates over the meaning and intent of the 340B Program, which have come to a head over the course of the last year.

As a practical matter, a common and simplified 340B Program encounter involving a covered entity-owned pharmacy works like this:

• A patient receives treatment at an eligible outpatient site of a "covered entity” (e.g., a hospital).
• The patient receives a prescription for a "covered outpatient drug" as a result of the encounter.
• The patient presents the prescription at the covered entity's pharmacy.
• The covered entity’s pharmacy dispenses the drug to the patient and bills the patient's insurance/collects the patient copayment.
• The covered entity’s pharmacy collects the full reimbursement for the drug but purchases the replenishment drug at the steeply discounted 340B price.
• The covered entity pockets the (often significant) difference between the reimbursement and the cost of the discounted drug.

Notably, beyond the "stretch scarce federal resources" language, the 340B Program statute does not dictate how the covered entities must use the revenue from the 340B Program. While the long-prevailing interpretation is that the covered entities are free to use the 340B Program revenue as they best see fit, some critics of the 340B Program suggest that the discount should be passed directly along to patients.⁴ It is also interesting to note that most of the calculations related to the 340B Program (eligibility, billing, etc.) occur on the back end via specialized technology platforms. The prescribers, pharmacists, and patients are not likely aware if any specific encounter is 340B-eligible.

HRSA OPA's Role and the Rise of Contract Pharmacies

Since the 340B Program’s inception, HRSA OPA provided the specific operational guidance and regulatory oversight which allowed the 340B Program to function. As the 340B Program's statute is rather sparse, and HRSA OPA's rulemaking authority is also very narrow, HRSA OPA has "filled in the gaps" in the 340B Program via agency guidance documents, usually published in the Federal Register. While HRSA OPA attempted to promulgate formal and comprehensive rules over the years, the courts roundly rejected these attempts, declaring that HRSA OPA did not have such comprehensive rulemaking authority.⁵

In 1996, HRSA OPA issued guidelines that permitted covered entities participating in the 340B Program to contract with a pharmacy to provide services to the covered entity’s patients.⁶ While the 340B Program statute is silent as to contract pharmacy arrangements, these administrative guidelines permitted a covered entity to use a single point for pharmacy services – either an in-house pharmacy or an individual contract pharmacy.

In 2010, HRSA OPA modified its guidance to allow a covered entity to use as many contract pharmacies as it wanted to provide 340B drugs to patients (in addition to in-house pharmacies).⁷

This 2010 guidance caused an explosion in 340B Program growth over the last 10 years, with the number of contract pharmacy arrangements (and the corresponding 340B drug dispenses) growing exponentially. For instance, according to a 2017 Government Accountability Office (GAO) report, since the release of the 2010 guidance, the number of unique contract pharmacies has increased from about 1,300 at the beginning of 2010 to around 23,000 in 2019.⁸ According to HRSA data, in 2017 there were more than 46,000 contract pharmacy arrangements.⁹

Over the last few decades, HRSA OPA also routinely audited covered entities for compliance with 340B Program requirements, including those related to contract pharmacy arrangements. If HRSA OPA identified a violation, it would impose a penalty on the covered entity. These penalties ranged from warnings and suggested operational changes to required repayment to manufacturers to removal from the 340B Program.¹⁰

Legal guidance aside, from an operational perspective, a typical contract pharmacy encounter may look like this:

• A patient receives treatment at an eligible outpatient site of a covered entity.
• The patient receives a prescription for a covered outpatient drug as a result of the encounter.
• The patient presents the prescription at a local retail pharmacy (e.g., CVS, Walgreens, or a local independent pharmacy) which has a contract in place with the covered entity. The average patient would not be aware of this contract, though such data is publicly available in HRSA OPA's 340B database.
• The contract pharmacy dispenses the drug to the patient in its usual course of business. Again, the pharmacist dispensing the drug would likely have no idea whether this encounter is 340B-eligible.
• The contract pharmacy would bill the patient's insurance/collect the patient's copayment in the normal course of business.
• At some point after the dispensing of the drug, per the specific terms of the contract pharmacy agreement between the pharmacy and the covered entity, the pharmacy and the covered entity would share data to determine whether the specific encounter was 340B-eligible. This process typically occurs via a third-party administrator (TPA)¹¹ which determines 340B-eligibility based on the data provided by the parties and per the operational parameters established by the parties.
• Once 340B-eligibility is established, the TPA assists in calculating the appropriate reimbursement to the parties. As a general rule, the pharmacy would remit to the covered entity all reimbursement received for the drug minus its "dispensing fee" paid by the covered entity for its services in dispensing the drug. There are a variety of common dispensing fee arrangements, ranging from a flat fee (say, $25 per 340B drug dispensed) to a percentage of reimbursement model (contract pharmacy receives 25 percent of all reimbursement collected) to more complex reference price models. There is no guidance (aside from general anti-kickback law) as to what types of dispensing fee arrangements are permissible, so such arrangements arise solely from negotiations between the covered entity and contract pharmacy. The TPA also receives compensation for its role in adjudicating 340B claims (sometimes involving a significant percentage of the reimbursement received).
• After the contract pharmacy dispenses certain contractually agreed-upon amounts of 340B drugs on behalf of the covered entity, the covered entity would typically replenish the contract pharmacy's stock via a "bill to, ship to" arrangement whereby the covered entity would purchase replenishment drug stock at 340B prices and have the drugs shipped directly to the contract pharmacy location.

Breaking all this down, a typical contract pharmacy encounter may result in the following financial flow for the parties:

• The contract pharmacy receives $100 in reimbursement for a drug dispensed.
• Per the terms of the contract pharmacy agreement, the contract pharmacy is entitled to a $25 dispensing fee.
• The contract pharmacy remits $75 to the covered entity ($100 in reimbursement minus the dispensing fee).
• The covered entity pays the TPA a fee of $10 for its 340B processing services (10 percent of collections, as established in the TPA agreement between the covered entity and the TPA).
• The covered entity purchases a replenishment 340B drug for the contract pharmacy for $40.

As a result, the final financial disposition of the parties is as follows:

• Contract pharmacy: +$25 (dispensing fee). The contract pharmacy's drug stock was replenished by the covered entity, so the contract pharmacy did not spend any money on drug stock.
• TPA: +$10 (TPA fee).
• Covered entity: +$25 ($100 [reimbursement]-$25 [dispensing fee] -$10 [TPA fee] -$40 [340B drug cost].

The specific financials of each contract pharmacy arrangement vary widely, and it is entirely optional for each party to choose whether or not to engage in these arrangements. However, as discussed below, there is growing pushback over the fact that 340B revenue is flowing to for-profit pharmacies and TPAs as opposed to the largely non-profit and governmental covered entities.

Brief Background Leading to the Advisory Opinion

Until recently, the 340B Program stakeholders generally abided by HRSA OPA's guidance documents, including those related to contract pharmacies. Indeed, a covered entity's failure to comply with these guidance documents would result in a punitive action by HRSA OPA if discovered in an audit. Over the past year, however, HRSA OPA seemingly reevaluated its enforcement authority, claiming it only has authority to regulate those few areas of the 340B Program directly covered by the statute.¹²

Due to this pullback by HRSA OPA of its enforcement authority, drug manufacturers decided that they would eliminate or severely curtail their sale of 340B-priced drugs based on contract pharmacy dispensing.

In response to these actions, covered entities have filed lawsuits against HHS asking HHS to enforce the existing contract pharmacy guidance. Alternatively, the covered entities are seeking clarification from HHS on the legal status of the 340B guidance so they can react with some certainty moving forward.¹³

On September 21, 2020, possibly in response to the litigation, HHS took the highly unusual step of publishing its response to a manufacturer's request for a pre-enforcement advisory opinion as to whether the manufacturer's actions (concerning the manufacturer’s proposal to significantly limit 340B drug replenishment to contract pharmacies) could subject the manufacturer to sanctions.¹⁴ In this response, HHS indicated that, while it "has significant initial concerns" with the manufacturer's new policy, it "has yet to make a final determination as to any potential action." Nonetheless, HHS did indicate that HRSA's silence on the issue (particularly in light of the pandemic), should not be viewed as acquiescence and threatened potential false claim actions for knowing violations of 340B Program requirements.

Despite this strongly worded response from HHS, all drug manufacturers attempting to limit 340B sales continued to curtail their sales of 340B-priced drugs dispensed via contract pharmacy arrangements.

Finally, on December 30, 2020, HHS issued its Advisory Opinion addressing the recent manufacturer actions, generally indicating that manufacturers are required to sell eligible drugs at 340B prices to covered entities "even if those covered entities use contract pharmacies to aid in distributing those drugs to their patients."

The Advisory Opinion

At its core, the "Advisory Opinion sets forth the current views of the Office of the General Counsel [of HHS]. It is not a final agency action or a final order, and it does not have the force or effect of law."¹⁵

Nonetheless, the Advisory Opinion lays out the key legal arguments supporting the permissibility of contract pharmacy arrangements. These arguments are (very briefly) summarized as follows:

• The plain language of the 340B statute requires merely that the 340B-eligible drug "be purchased by" the covered entity. Colorfully, the Advisory Opinion clarifies that so long as the covered entity "purchases" the drug, the "situs of delivery, be it the lunar surface, low-earth orbit, or a neighborhood pharmacy, is irrelevant."
• HRSA OPA's longstanding interpretation of the 340B statute, as expressed through guidance, is that manufacturers are required to offer ceiling prices even where contract pharmacies are used. As HRSA OPA's guidance has been in effect for decades, and the parties have typically honored contract pharmacy arrangements until now, HRSA OPA's guidance is entitled to deference.
• If the manufacturers believe that the usage of contract pharmacies leads to potential diversion or duplicate discounts, the manufacturers have existing statutory remedies to resolve those concerns.¹⁶

The Manufacturers Strike Back

Within a few weeks after the issuance of the Advisory Opinion, several manufacturers filed separate complaints in different federal courts, generally alleging that the Advisory Opinion is invalid for both procedural and substantive reasons. The complaint filed by Sanofi-Aventis, U.S., for example, seeking declaratory and injunctive relief, makes the following main arguments:

• "HHS failed to comply with the [Administrative Procedure Act’s] notice-and-comment requirement before issuing the Advisory Opinion. The APA requires agencies to provide advance notice and an opportunity to comment on legislative rules having the force and effect of law. The Advisory Opinion contains a legislative rule having the force and effect of law—namely, that manufacturers shall provide 340B discounts to contract pharmacies and shall not impose conditions on these sales—that effectively dooms Sanofi’s integrity initiative."
• "HHS also failed to comply with its own procedural regulations when issuing the Advisory Opinion. In addition to the APA’s notice-and-comment requirement, HHS has adopted regulations governing the issuance of guidance documents such as the Advisory Opinion, yet the agency skirted these procedural requirements, too."
• "The Advisory Opinion’s interpretation of Section 340B is wrong. Section 340B does not require drug manufacturers to provide 340B-priced drugs to contract pharmacies. Nor does Section 340B prohibit manufacturers from imposing conditions on doing so, particularly where those conditions are designed to aid compliance with the statute’s other provisions and are reasonable. Even if manufacturers must provide 340B priced drugs to contract pharmacies, Sanofi’s integrity initiative complies with Section 340B because Sanofi ships discounted drugs to contract pharmacies—and, moreover, will do so for all covered entities under reasonable conditions that are not burdensome and that do not discriminate against covered entities as compared to commercial customers. The Advisory Opinion thus exceeds HHS’s statutory authority, and Sanofi’s integrity initiative is fully consistent with Section 340B."

On the policy side, Sanofi also stresses the fact that the contract pharmacies (usually for-profit retail chain pharmacies) are receiving a significant portion of the 340B savings in the form of dispensing fees. As these savings are intended for non-profit and governmental entities, the manufacturers argue, the usage of these for-profit contract pharmacies is an improper extension of the 340B Program.

GAO Report Provides Insight into HRSA OPA’s Position

One of the most frustrating aspects of HRSA OPA’s apparent enforcement pullback (before the Advisory Opinion at least) is that HRSA OPA never explicitly published a statement explaining the scope and implications of such a pullback. However, a new report published by the GAO provides some insight into HRSA OPA’s positions on specific 340B Program issues.

Some of the more interesting language follows:

• “HRSA officials told us [GAO] that, beginning in fall 2019, the agency started issuing findings, which require covered entities to take corrective action, only when audit information presents a clear and direct violation of the requirements outlined in the 340B Program statute. HRSA officials explained that 340B Program guidance, which is used to interpret provisions of the 340B statute for the purposes of promoting program compliance among covered entities, does not provide the agency with appropriate enforcement capability. Following a covered entity’s 2019 legal challenge to HRSA’s authority to enforce audit findings, HRSA evaluated its ability to require and enforce corrective action, and it concluded that in the absence of binding and enforceable regulations, the agency would no longer issue findings based solely on noncompliance with guidance.”
• For example, HRSA officials reported that there were instances among fiscal year 2019 audits in which the agency:

-  “did not issue diversion findings for dispensing 340B drugs to ineligible individuals as defined by HRSA guidance because the 340B statute does not provide criteria for determining patient eligibility; and

-  did not issue eligibility findings for a failure to oversee 340B Program compliance at contract pharmacies through internal audits and other measures as set forth in guidance because the 340B statute does not address contract pharmacy use.”

• “HRSA officials also said that there were instances among fiscal year 2019 audits in which the agency also did not issue duplicate discount findings for a failure to follow a state’s Medicaid requirements, including billing the state Medicaid office for a 340B drug without using a claim identifier to indicate a drug purchased at the 340B discounted price. HRSA officials said that these findings were not issued because the agency does not have statutory authority to enforce state Medicaid requirements.”

The GAO report also provides a detailed crosswalk outlining HRSA OPA’s positions on more granular aspects of 340B compliance in Appendix I.

While it is helpful to see HRSA OPA’s position published in a government document, the author notes that HRSA OPA has not been consistent in applying its new interpretation regarding 340B Program enforcement. For example, the author has worked with covered entities undergoing audits in January 2020 in which the HRSA auditors extensively relied on HRSA guidance to issue findings related to contract pharmacy arrangements and eligible patient standards – neither of which are explicitly addressed in the statute.

Lastly, despite these statements by HRSA OPA earlier this year, HHS seemingly defended the validity of the guidance documents in the Advisory Opinion. It remains to be seen whether HRSA OPA will return to its former enforcement position regarding the guidance documents based on the Advisory Opinion.

So What's Next?

The next steps will depend largely on the outcome of the manufacturers' lawsuits, and whether HHS decides to penalize the manufacturers for their refusal to honor existing contract pharmacy arrangements.

At the highest level, if a manufacturer continues to curtail 340B-priced sales based on pharmacy encounters, HHS will have the option to impose a civil monetary penalty "not to exceed $5,000 for each instance of overcharging a covered entity."¹⁷ In order to be subject to such a penalty, the overcharge must occur "knowingly and intentionally." Any civil monetary penalty assessed will be in addition to repayment for an instance of overcharging. The manufacturers would likely argue that any failures to provide 340B-priced drugs for contract pharmacy encounters prior to the Advisory Opinion were not "knowing and intentional" because the manufacturer "acted on a reasonable interpretation of agency guidance." While the merits of this argument are far from ironclad, this argument would be quite the uphill battle for overcharges occurring after the issuance of the Advisory Opinion.

Of course, if a court agrees with the manufacturers' lawsuits, HHS will have to decide whether to defend its position in court, or stand down.

Lastly, there is always the chance that Congress decides to step in and take legislative action to resolve these conflicts in the 340B Program. While relying on legislative action in the current political climate is always a long shot, it is worth noting that 27 state attorneys general sent a letter in support of the covered entities’ lawsuit to uphold contract pharmacy arrangements. One of these attorneys general is former California Attorney General Xavier Becerra, President Joe Biden’s newly confirmed Secretary of HHS. Mr. Becerra had issued the following statement in support of the lawsuit: “Discounts afforded under the 340B Drug Pricing Program are more critical now than ever. We call on HHS to hold these non-compliant drug manufacturers accountable and provide immediate relief for healthcare centers and the Americans they serve."¹⁸ Based on this, there is seemingly fairly widespread political support for returning to "pre-2020" 340B Program operations.

In any event, 340B stakeholders will no doubt continue to monitor this fast-moving issue as the interplay between the Advisory Opinion and the manufacturers' lawsuits becomes clear, and the new administration begins to set its priorities.

Endnotes

1. Advisory Opinion 20-06 on Contract Pharmacies Under the 340B Program December 30, 2020, HHS--2020-F-5528, available at https://www.hhs.gov/guidance/document/ao-contract-pharmacies-under-340b-program-12-30-2020-2.
2. Complaint, Sanofi-Aventis U.S., LLC, v. United States Department of Health and Human Services et al. (D.N.J. 2021) (Case 3:21-cv-00634), available at https://aboutblaw.com/U4J.
3. H.R. REP. No. 102–384(II), at 12 (1992).
4. National Infusion Center Association, Concerns Surrounding 340B Program Abuse and Impact on Patient
   Access to Provider-Administered Drugs, available at http://infusioncenter.org/wp-content/uploads/2020/11/Concerns-Surrounding-the-340B-Program-Kindyl-Boyer.pdf (last visited Feb. 24, 2021).
5. See, e.g., Pharmaceutical Research and Manufacturers of America v. U.S. Department of Health and Human Services et. al (June 18, 2014) (Civil Action No.: 13-1501 (RC)), available at https://ecf.dcd.uscourts.gov/cgi-bin/show_public_doc?2013cv1501-43.
6. 61 Fed. Reg. 43549 (Aug. 23, 1996).
7. 75 Fed. Reg. 10272 (Mar. 5, 2010).
8. GAO-20-212, Oversight of the Intersection with the Medicaid Drug Rebate Program Needs Improvement
   (January 2020).
9. GAO-17-749T, Drug Discount Program (July 18, 2017).​ More recent data regarding the number and type of contract pharmacy arrangements may be obtained via tailored searches at https://340bopais.hrsa.gov/.
10. See, e.g., the HRSA OPA audit findings for FY2020 at https://www.hrsa.gov/opa/program-integrity/audit-results/fy-20-results.
11. A TPA is usually an unrelated third party or an affiliate of the retail pharmacy.
12. “HRSA explained that its ‘current authority to enforce certain 340B policies contained in guidance is limited unless there is a clear violation of the 340B statute,’ and that ‘[w]ithout comprehensive regulatory authority, HRSA is unable to develop enforceable policy that ensures clarity in program requirements across all the interdependent aspects of the 340B Program.’” Complaint at 17, The American Hospital Ass'n et al, v. United States Department of Health and Human Services et al. (N.D. Cal.)(Case 3:20-cv-08806), available at https://www.340bhealth.org/files/2020-12-11_Complaint_(stamped).pdf.
13. Id.
14. A copy of the HHS response is available at https://www.hrsa.gov/sites/default/files/hrsa/opa/pdf/hhs-eli-lilly-letter.pdf.
15. Advisory Opinion 20-06 on Contract Pharmacies Under the 340B Program (Dec. 30, 2020), HHS--2020-F-5528, available at https://www.hhs.gov/guidance/document/ao-contract-pharmacies-under-340b-program-12-30-2020-2.
16. As required by the 340B Program statute, HRSA recently adopted an administrative dispute resolution rule, which is aptly explained at https://www.hrsa.gov/opa/340b-administrative-dispute-resolution. Unsurprisingly, the validity of this rule is now being challenged in the federal courts. Eli Lilly and Company et al. v. Norris Cochran et al., case number 1:21-cv-00081, in the U.S. District Court for the Southern District of Indiana.
17. https://www.govinfo.gov/content/pkg/FR-2017-01-05/pdf/2016-31935.pdf (42 C.F.R. § 10.11).
18.  https://www.fiercehealthcare.com/hospitals/27-states-and-d-c-call-for-hhs-to-rein-drug-makers-over-340b-moves-after-hospital-group.