chevron-down Created with Sketch Beta.
December 14, 2020

Recent 340B Contract Pharmacy Troubles and the Necessary Solution

By Alaa “Al” Ziad Haidar, Esq., MPH, Hudson Headwaters Health Network, Queensbury, NY


The 340B Drug Pricing Program (340B Program) has served to make drugs more affordable and available to lower-income Americans. Under the 340B Program, which is administered by the U.S. Department of Health and Human Services (HHS) through its agency, the Health Resources and Services Administration (HRSA),1 drug manufacturers are required to sell their covered outpatient drugs at or below the “340B ceiling price.”2 One method of dispensing drugs through the 340B Program which has become more frequent involves covered entities (government-funded facilities providing healthcare to lower-income Americans)3 contracting with pharmacies to dispense drugs purchased through the 340B Program.4 The savings and revenue that covered entities generate from participation in the 340B Program - including by means of contract pharmacy arrangements - largely go towards improving healthcare availability to vulnerable patient populations, increasing healthcare services offered to such populations, and improving outcomes. This underscores how crucial it is for many covered entities to participate in the 340B Program. 

However, several of the largest drug manufacturers have recently announced their intentions to limit the locations of the contract pharmacies where their drugs are dispensed at 340B ceiling prices.  HRSA seemingly lacks the authority to require drug manufacturers to allow their drugs to be dispensed in all of a covered entity’s contract pharmacies. Moreover, covered entities are unable to directly sue drug manufacturers under Section 340B of the Public Health Service Act (Section 340B), and there is no available mechanism for solving disputes like this one.  Furthermore, the confusion caused by state Medicaid policies and procedures regarding 340B drugs has increased the possibility of duplicate discounts due to the intersection of the 340B Program and the Medicaid Drug Rebate Program. Therefore, Congress should amend Section 340B to prevent drug manufacturers from skirting the intent of the 340B Program, HRSA needs to finalize the long-overdue administrative dispute resolution (ADR) process to handle disputes arising from the 340B Program, and the Centers for Medicare & Medicaid Services (CMS) should ensure that state Medicaid programs have concise and publicly-available policies and procedures regarding the 340B Program which specify applicability to contract pharmacy arrangements. 

This article discusses the following: (1) the background of the 340B Program, (2)  contract pharmacies, (3) recent actions taken by drug manufacturers that have endangered the practice of using contract pharmacies, (4) obstacles preventing remedies through enforcement by HRSA or through litigation, and (5) why and how Congress, HRSA, and CMS should act to solve the current problem.  

Background on the  340B Program

Medicaid Drug Rebate Program

Under the Medicaid Drug Rebate Program, which is administered by HHS through CMS, drug manufacturers enter into an agreement with HHS, and in return, state Medicaid plans will cover most of the manufacturer’s drugs for use by Medicaid beneficiaries. These agreements govern rebates that drug manufacturers pay to states on a quarterly basis, and the rebates are shared between state and federal governments to offset overall prescription drug costs under Medicaid.5  Medicaid fee-for-service (FFS) and Medicaid managed care beneficiaries are both eligible under federal law to receive Medicaid drug rebates.6

Drug manufacturers must submit product and pricing data regarding new drugs to CMS’s Drug Data Reporting for Medicaid (DDR) system when they begin marketing new covered outpatient drugs in order to ensure that states are aware of such new drugs. CMS uses a formula established by statute to calculate the amount of Medicaid rebates for a drug. But to participate in the Medicaid Drug Rebate Program and have its drugs covered under Medicaid, a drug manufacturer also needs to participate in the 340B Program.

History and Scope of the 340B Program     

In 1992, Congress passed Section 340B and created a mechanism under which  HHS, through HRSA, enters into an agreement with each drug manufacturer for the amounts to be paid to the manufacturer for covered drugs purchased by a covered entity. Covered entities must register with HRSA to participate in the 340B Program, and covered entities are then subsequently added to HRSA’s database of participating covered entities. The costs of 340B drugs, as determined by agreements with drug manufacturers, are discounted and set at a price ceiling using a formula specified in Section 340B. A covered entity providing drugs to Medicaid beneficiaries through the 340B Program is known as “carving in” and a covered entity excluding Medicaid beneficiaries from receiving drugs through the 340B Program is known as “carving out.”7

Drugs dispensed by covered entities through the 340B Program are drugs for which payment could be made under a state Medicaid program, and Section 340B prohibits covered entities from engaging in duplicate discounts and diversion. Duplicate discounts occur “when a drug manufacturer pays a State Medicaid agency a rebate under the Medicaid drug rebate program on a drug sold at the already-discounted 340B price.”8 A covered entity must ensure that a drug is not subject to both the 340B discount and a Medicaid rebate claim. Diversion is the practice of dispensing 340B-purchased drugs to ineligible patients.9  Section 340B requires covered entities to permit HHS and drug manufacturers to audit covered entities’ records with respect to compliance with the prohibition of duplicate discounts and diversion.10

The Patient Protection and Affordable Care Act of 2010 (PPACA) amended Section 340B to (1) exclude orphan drugs, which are drugs for rare diseases or conditions, from the 340B Program for certain covered entities; (2) add additional categories of covered entities eligible to participate in the 340B Program (critical access hospitals, children’s hospitals, free-standing cancer hospitals, rural referral centers, and sole community centers meeting certain criteria); and (3) improve 340B Program integrity by requiring HHS to establish civil monetary penalties (CMPs), establish ADR procedures, and adopt a system by which ceiling drug prices are set, published, and audited, and by which overpaid costs are refunded.11

The PPACA amendments to Section 340B required that regulations establishing CMPs and adopting ADR procedures be promulgated within 180 days after March 23, 2010.12 This 180-day required deadline was not met, but regulations establishing CMPs were promulgated several years later; those regulations finally took effect on January 1, 2019.13

The new ADR procedures were supposed to replace the 340B Program’s 1996 guidelines on the informal dispute resolution process for disputes between covered entities and drug manufacturers.14 Section 340B, as amended by PPACA, stated that the new ADR process was to serve as a mechanism through which covered entities could bring claims of being overcharged by drug manufacturers and where drug manufacturers could bring claims against covered entities with regards to duplicate discounts and resales of drugs after audits have been conducted.15 HRSA issued such a proposed rule on August 12, 2016, during the final months of the Obama Administration, six years after Section 340B required it to do so.16 The proposed rule included an ADR panel that consisted of three voting members, as well as one ex-officio, non-voting member, with members on the ADR panel being alternated for each claim.17 The proposed rule also would have required a covered entity or drug manufacturer to file a claim for ADR in writing to HRSA within three years of the date of an alleged violation.18 The proposed rule even allowed for multiple covered entities to consolidate claims against a drug manufacturer, multiple drug manufacturers to consolidate claims against a covered entity, and for an association or organization of covered entities to file claims against a drug manufacturer.19

The 2016 proposed rule was never finalized, and the Trump Administration withdrew the rule on August 1, 2017 (seemingly without explanation).20 HRSA told the news service 340B Report in March 2020 that it was not going to issue another proposed rule on the ADR process “until such time that HRSA receives regulatory authority for the issues that would be addressed.”21 HRSA further stated the following (possibly, but without certainty, making a veiled reference to contract pharmacy arrangements):

It would be challenging to put forth rulemaking on a dispute resolution process when many of the issues that would arise for dispute are only outlined in guidance….HRSA does not plan to move forward on issuing a regulation due to the challenges with enforcement of guidance.22

However, on November 17, 2020 HRSA sent the White House a final rule for approval regarding the ADR process, although the details or contents of this final rule have not been disclosed as of this writing.23 A consensus among the healthcare attorneys to whom 340B Report reached out state that even though the Trump Administration withdrew the 2016 proposed rule, HRSA may still be able to argue persuasively that it is procedurally sound for this new ADR final rule to be approved if it addresses or incorporates comments received in response to the 2016 proposed rule.24 The rule could still be subject to legal challenges, especially if it does not incorporate such comments, which would give the impression that it skirted the notice-and-comment procedures of the Administrative Procedure Act. The incoming Biden Administration may also suspend the rule’s implementation and/or withdraw it.25

The 340B Program in Practice

Participation in the 340B Program generates significant revenue for covered entities. A 2011 study by the United States Government Accountability Office (GAO) interviewed 29 covered entities and found that the 340B Program allowed all of them “to support their missions by maintaining services and lowering medication costs for patients.”26 Some of them reported that the revenue generated from some patients through the 340B Program was used “to offset losses incurred from other patients, which helped support the financial stability of the organization and allowed them to maintain services.”27 One covered entity interviewed “reported that it would have to close its outpatient pharmacy without the program” and another reported that it would not be able to offer all of the pharmaceutical and clinical services it provides its patients without 340B revenue or the savings on drugs through participation in the 340B Program. Some covered entities  also reported that they passed 340B savings on to patients “by providing lower-cost drugs to uninsured patients.”28 The covered entities that reported 340B revenue exceeding drug-related costs “were able to use the revenue to serve more patients and to provide services that they might not have otherwise provided, including additional service locations, patient education programs, and case management.” One of those covered entities reported that it used the 340B revenue to provide additional service delivery sites throughout its state of operation and subsequently “eliminated the need for some patients to travel more than 60 miles to receive services.”29

The 2011 GAO study also found that different covered entities had different levels of reliance on the 340B Program. One, a federally qualified health center (FQHC), reported that 340B revenue accounted for about five percent of its total budget and that this revenue “was used to provide additional services within the organization,” while another, a hemophilia treatment center, reported that 340B revenue accounted for nearly 97 percent of its total budget “and was used to support all of its program operations.”30

Contract Pharmacies

History and Scope of Contract Pharmacies

In 1996, HRSA issued guidance (not regulations) for the first time to state that covered entities could contract with one or more outside pharmacies (contract pharmacies) to dispense 340B drugs.31 The guidance stated the following in reference to Section 340B:

The statute is silent as to permissible drug distribution systems. There is no requirement for a covered entity to purchase drugs directly from the manufacturer or to dispense drugs itself. It is clear that Congress envisioned that various types of drug delivery systems would be used to meet the needs of the very diversified group of 340B covered entities.32

HRSA expanded its guidance in 2010 by specifying suggested contractual terms and allowing for covered entities to contract with multiple pharmacies without placing a limit on the number of arrangements.33 Additionally, the 2010 guidance prohibits a covered entity from dispensing 340B drugs to a Medicaid beneficiary “unless the covered entity, the contract pharmacy, and the State Medicaid agency have established an arrangement to prevent duplicate discounts” and requires the covered entity to report such arrangements to HRSA.34

However, the 2010 guidance does not impose several particular requirements, which has raised concerns.  For example, HRSA does not require covered entities to submit their policies and procedures to the agency for review. Some have also expressed concern that the guidance does not adequately address safeguards to combat drug diversion and duplicate discounts.35 The 2010 guidance, however, states that HRSA believed at the time the guidance was issued that appropriate safeguards were already in place, especially since HRSA has the ability to exclude covered entities that abuse the program.36

Additionally, while the 2010 guidance allows covered entities to contract with chain pharmacies and requires that a contract specify all participating pharmacy locations, HRSA states in the guidance that it is unable to collect and review each contract.37 While a drug manufacturer is permitted to request copies of such contracts from covered entities, HRSA declined in the guidance to require covered entities to provide a copy upon request.38

A covered entity may purchase drugs and have the manufacturer/wholesaler bill the covered entity for the drug, but ship the drug directly to the contract pharmacy. Also, when a covered entity has more than one site, “it may choose between having each site billed individually or designating a single covered entity billing address for all 340B drug purchases.”39 The 2010 guidance states that “[w]hen a patient obtains a drug from a pharmacy other than a covered entity’s contract pharmacy or the covered entity’s in-house pharmacy, the manufacturer is not required to offer this drug at the 340B price.”40 Regardless of the services provided by a contract pharmacy, access to 340B drugs from a contract pharmacy will always be restricted solely to patients of the covered entity.41

Contract Pharmacies Statistics

The number of contract pharmacies dispensing drugs under the 340B Program has skyrocketed over the past decade, rising from about 1,300 at the beginning of 2010 to around 23,000 in 2019.42 As of 2017, about one-third of all covered entities had a relationship with at least one contract pharmacy. A much higher percentage of hospitals (69.3 percent) had a relationship with at least one contract pharmacy than federal grantees (22.8 percent). Among the six types of hospitals that can be a covered entity, the percentage with at least one contract pharmacy ranged from 39.2 percent of children’s hospitals to 74.1 percent of critical access hospitals. Fully 75.2 percent of FQHCs had a relationship with at least one contract pharmacy.43

While only slightly over half of all pharmacies across the country are chain pharmacies, as of 2017 75 percent of all 340B contract pharmacies were chain pharmacies, 20 percent were independent pharmacies, and five percent other pharmacies, such as government pharmacies and alternative drug dispensing sites like physicians’ offices. Combined, CVS, Walgreens, Walmart, Rite-Aid, and Kroger represented only 35 percent of all pharmacies in the United States, but 60 percent of 340B contract pharmacies.44

Lack of Proper Oversight of the 340B Program and Contract Pharmacies by the Federal Government and Covered Entities

Multiple reports have highlighted the lack of proper oversight of contract pharmacies by covered entities and the federal government, which is necessary for preventing duplicative discounts and diversion. The 2010 guidance on contract pharmacy arrangements calls for covered entities to (1) take measures ensuring that contract pharmacy arrangements prevent diversion of 340B drugs to patients who are not eligible to receive them; (2) take steps to prevent duplicate discounts; and (3) conduct oversight of contract pharmacies to monitor and take remedial action in the event of any diversion, duplicate discount, or other violation.45 HRSA’s recommended oversight activities for covered entities include monitoring contract pharmacy arrangements by comparing their prescribing records with dispensing records to detect diversion or duplicative discounts and retaining independent auditors for annual audits.46

2014 OIG Report Findings

A 2014 memorandum report by the HHS Office of Inspector General (OIG) highlighted the complications that contract pharmacy arrangements pose regarding the prevention of diversions and duplicate discounts. In addition to finding that most covered entities in the OIG’s study did not conduct all of the oversight activities recommended by HRSA, the report found “inconsistency within the 340B Program as to which prescriptions filled at contract pharmacies are treated as 340B-eligible.”47 Covered entities also differed greatly on how to interpret the requirements of HRSA’s guidance on contract pharmacies, as the guidance lacks clarity.48

The OIG report additionally found that even though most covered entities in the study reported that they do not dispense 340B drugs to Medicaid beneficiaries through their contract pharmacies in order to prevent duplicate discounts, administrators reported difficulties in identifying beneficiaries who were covered under Medicaid managed care plans rather than under FFS; to avoid duplicate discounts they need to be identified properly. Some covered entities dispensing 340B drugs to Medicaid beneficiaries through their contract pharmacies also did not report a method of avoiding duplicate discounts.49 The OIG report found that because neither Section 340B nor the 2010 guidance on contract pharmacy arrangements specify any requirement for covered entities to offer 340B prices to uninsured patients, there is inconsistency among covered entities as to whether they choose to do so. If they choose not to, then uninsured patients pay the full cost of their prescription drugs at contract pharmacies.50

2018 GAO Report Findings

A 2018 GAO report found that HRSA oversight is impeded because HRSA’s audit process fails to identify compliance issues or ensure that such issues are corrected when necessary. HRSA’s only mechanism to ensure that covered entities that have been audited have implemented corrective action plans is to re-audit the covered entities.51

Covered entities are required to register their contract pharmacies with HRSA, as per the 2010 guidance. However, there is no uniform way for covered entities to register their contract pharmacies. For example, HRSA does not require covered entities to separately register contract pharmacies for each child site (an offsite facility that is an integral part of a covered entity but that is at a separate physical location than the parent site),52 and as a result, HRSA lacks information regarding which sites of a covered entity have contract pharmacies for dispensing 340B drugs. This lack of information ultimately impedes HRSA’s oversight efforts.53 The 2018 GAO report recommended that HRSA issue guidance regarding matters such as preventing duplicate discounts,  require covered entities to register each child site, and require covered entities to provide proof that they implemented corrective action plans before closing audits.54

2020 GAO Report Findings

A 2020 GAO report explained that another factor limiting oversight by HRSA is the frequent lack of sufficient documentation of state Medicaid programs’ policies related to 340B drugs and the fact that “some states’ policies may not prevent duplicate discounts.”55 Some states lacked written policies for dispensing 340B drugs using contract pharmacies, and “covered entities in those states may not be aware of the requirements for dispensing and identifying 340B drugs, increasing the risk of duplicate discounts.”56 While Medicaid managed care and FFS beneficiaries are both eligible under federal law to participate in the Medicaid drug rebate program, states differ as to whether to carve out 340 Program drugs for FFS beneficiaries, Medicaid managed care beneficiaries, or both. Moreover, some states did not document their policies requiring covered entities to carve out 340B drugs for Medicaid managed care beneficiaries at contract pharmacies, and covered entities in some of those states dispensed 340B drugs to Medicaid managed care beneficiaries at contract pharmacies because they did not know that it was not allowed in those states.57 This makes it possible that duplicate discounts occurred in those states.

The report also found that the policies which some states have adopted may not prevent duplicate discounts.  For instance, HRSA maintains a list, called the Medicaid Exclusion File (MEF) that lists all of the covered entities that choose to bill Medicaid for the 340 drugs used for Medicaid patients to facilitate the prevention of duplicate discounts. Covered entities are only required to be listed in the MEF if they carve in 340B drugs for Medicaid FFS beneficiaries.58 Moreover, the MEF is only required to show the provider numbers used by covered entities that carve in Medicaid FFS beneficiaries, without including information on whether covered entities are dispensing 340B drugs to Medicaid managed care beneficiaries. Additionally, the MEF might not include information on contract pharmacies dispensing 340B drugs to Medicaid beneficiaries, and the claim-level data in the MEF may only list the provider number of the dispensing pharmacy, rather than that of the prescribing entity.59 But some states use the MEF to identify and exclude 340B drugs with regards to Medicaid managed care, which increases the risk of duplicate discounts and foregone rebates unless states require covered entities to use the same approach for both FFS and Medicaid managed care.60  The 2020 report concluded that state Medicaid programs and covered entities must coordinate extensively to prevent duplicate discounts and that without knowing state Medicaid programs’ 340B policies, HRSA is not able to perform comprehensive reviews of whether covered entities are doing what is necessary to prevent duplicate discounts.61  CMS does not assess whether states have 340B policies and procedures, and when contacted for purposes of the 2020 report, CMS officials told GAO that it does “not track which procedures states use to prevent duplicate discounts.”62 The GAO recommended that CMS ensure that state Medicaid programs have written policies and procedures that are made publicly available; explain the extent to which 340B drugs can be dispensed to Medicaid beneficiaries (and that policies cover FFS, managed care, and all dispensing methods); and identify if 340B drugs are used, and if so how beneficiaries should be excluded from Medicaid rebate requests.63

Recent Actions by Drug Manufacturers Affecting Covered Entities

In July 2020, drug manufacturer giant Eli Lilly and Co. announced that it would stop distribution of its drug Cialis to 340B contract pharmacies and would only distribute such drugs to covered entities and their child sites. Eli Lilly told 340B Report that there is “no statutory obligation to provide 340B priced product to contract pharmacies.” The drug manufacturer also argued that the 2010 guidance on contract pharmacies is “not legally binding” and that it is inconsistent with the statute.64 Eli Lilly stated the following in a set of frequently asked questions:

[Eli] Lilly has concerns regarding contract pharmacy compliance and seeks to minimize the risk of certain penalties and repayment obligations associated with its participation in the 340B program. To address these concerns, [Eli] Lilly is seeking to limit the number of 340B transactions to only those that are required by statute.65

Soon afterward, AstraZeneca placed restrictions on discounts for all of its drugs dispensed through contract pharmacies, effective October 1, 2020.66 Eli Lilly and AstraZeneca both had the intentions of continuing to dispense 340B drugs at covered entities’ in-house pharmacies, and if a covered entity lacked an in-house pharmacy, then at a single contract pharmacy for that covered entity.67

Merk, Sanofi, and Novartis subsequently demanded that covered entities provide them with data regarding claims.68 Merck stated in its letter to covered entities that it was requesting contract pharmacy claims data to ensure that Merck was not paying duplicate discounts.69 Novartis told 340B Report on August 18, 2020 that it sought contract pharmacy claims data to mitigate duplicate discounts and “ineligible rebates.”70 A letter from Sanofi to the American Hospital Association (AHA) on August 28, 2020 (which was in response to a letter sent from the AHA to Sanofi on August 21, 2020) stated that Sanofi was requesting the data “to identify and resolve duplicate Medicaid and commercial rebates.” Sanofi’s Senior Vice President Adam Gluck even said in response to the AHA that while Sanofi supports the objectives of the 340B Program,  the goal was only supported and advanced through Sanofi’s “initiative to prevent illegal and/or inappropriate duplicate discounts.”71  Novartis sent a letter to covered entities on October 30, 2020 saying that it would continue to honor contract pharmacy arrangements as long as the contract pharmacy “is located within a 40-mile radius of its parent facility for all Novartis Pharmaceuticals Corporation products.”72

Following the decision by multiple large drug manufacturers to limit their participation in 340B contract pharmacies, HRSA stated the following to 340B Report:  

The 2010 guidance is still in effect. However, guidance is not legally enforceable.  Regarding the 340B Program’s guidance documents, HRSA’s current authority to enforce certain 340B policies contained in guidance is limited unless there is a clear violation of the 340B statute. Without 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.73

The reactions to the decisions taken by the drug manufacturers exhibit different approaches and have come from trade organizations, legislators, and even HHS itself. Hospital groups and legislators have written to HHS Secretary Alex Azar asking for HRSA to take enforcement action. The AHA sent a letter to Secretary Azar on July 30, 2020 stating that “Neither the 340B statute nor the HRSA guidance would allow Eli Lilly to deny 340B pricing to a covered entity, or to require that a drug purchased by a covered entity be shipped only to locations that the manufacturer approved.”74 The AHA sent Secretary Azar another letter on September 8, 2020 urging action against the decisions of the drug manufacturers. The AHA also stated in the September 8 letter that it had written to the leadership of each drug manufacturer at issue.75

A bipartisan group of senators wrote a letter on September 15, 2020 to the President and chief executive officer of pharmaceutical trade association Pharmaceutical Research and Manufacturers of America (PhRMA) criticizing the decision of certain drug manufacturers to end participation in contract pharmacies and stating that the requirement imposed by other drug manufacturers that 340B covered entities submit claims data is not a compliance obligation.76 The letter asked for a response from PhRMA by September 29, 2020 addressing what steps PhRMA would be taking to address such matters, but it is not clear whether such a response was ever provided. On September 17, 2020, another bipartisan group of senators sent a letter to Secretary Azar calling on HRSA to take enforcement actions  to “address violations of the Public Health Service Act.”77

Connecticut Attorney General William Tong sent cease and desist letters to the five drug manufacturers on October 6, 2020, stating:

There is no legal basis for [these] actions. Denying outpatient access to appropriate 340B drug pricing is a clear violation of federal law. Nothing in the Act allows [Eli Lilly, Astra Zeneca, Merck, Sanofi, and Novartis] to impose conditions or restrictions on covered entities’ access to 340B drug pricing, including that data be provided to a third party for reasons unrelated to patient care and unrelated to any reasonable belief that any covered entity has acted improperly.78

Perhaps most significantly, Robert P. Charrow, the General Counsel of HHS, wrote a letter to the General Counsel of Eli Lilly on September 21, 2020 in response to a previous letter by Eli Lilly asking for a pre-enforcement advisory opinion “as to whether [Eli] Lilly’s new unilateral policy involving the 340B program would subject [Eli] Lilly to sanctions.” Charrow’s letter criticized the drug manufacturer’s actions, but did not state that HHS was going to take any action and did not actually state that the guidance was enforceable. Charrow’s letter, however, did say that a “similar suit” to a qui tam lawsuit was “a potential consequence in the event that [Eli] Lilly knowingly violates a material condition of the program that results in over-charges to grantees and contractors.”79

As stated above, HRSA has yet to finalize any regulations to create an ADR process regarding the 340B program, even though such a process was required to be implemented a decade ago.  On October 9, 2020, Ryan White Clinics for 340B Access (RWC-340B), Matthew 25 AIDS Services, Inc. and Chattanooga C.A.R.E.S filed suit against HHS and HRSA for the failure to promulgate regulations to implement an ADR process, stating that this failure deprived them of an adequate remedy in response to the drug manufacturers’ actions to limit their participation in contract pharmacy arrangements.80 The National Association of Community Health Centers also filed suit against HHS on October 21, 2020, alleging the same grounds.81 These lawsuits may ultimately be successful in pushing HRSA to implement an ADR process. But because HRSA was never authorized by Congress to regulate contract pharmacy arrangements, a future ADR process implemented by HRSA might not successfully force drug manufacturers to abide by the 2010 guidance.  It is unknown whether these lawsuits played any role in HRSA sending the Trump Administration a final rule on ADR for approval, and as noted above, the contents of that final rule are still unknown.

Existing Case Law Hindering a Resolution

Existing case law not only prevents covered entities from being able to sue drug manufacturers directly, but also indicates that HRSA lacks the authority to promulgate certain regulations unless Congress explicitly gave HRSA the authority to do so in Section 340B. The lack of an available mechanism for a resolution makes it extremely difficult to solve the current problem regarding contract pharmacy arrangements.

Astra USA, Inc. et al. v. Santa Clara County, Cal.

In 2011, the U.S. Supreme Court unanimously held in Astra USA, Inc. et al. v. Santa Clara County, Cal. that covered entities lacked the right to directly sue drug manufacturers for charging in excess of 340B ceiling prices.82 The rationale behind this ruling was that the statute did not give covered entities such a right to sue drug manufacturers. The case was initially filed before PPACA amended the statute in 2010. Santa Clara County, California, an operator of several 340B covered entities, had sued Astra and eight other drug manufacturers for overcharging 340B covered entities in violation of the drug pricing agreement between Astra and HHS.83 The Supreme Court opinion stated:

Congress placed the Secretary (acting through her designate, HRSA) in control of §340B’s drug-price prescriptions. That control could not be maintained were potentially thousands of covered entities permitted to bring suits alleging errors in manufacturers’ price calculations. If 340B entities may not sue under the statute, it would make scant sense to allow them to sue on a form contract implementing the statute, setting out terms identical to those contained in the statute.84

While the Supreme Court held that Congress did not allow covered entities to privately sue drug manufacturers, it also referenced PPACA’s amendments to Section 340B, which would create other avenues for covered entities to seek redress, stating “Congress directed HRSA to create a formal dispute resolution procedure, institute refund and civil penalty systems, and perform audits of manufacturers.”85


In  PhRMA v. HHS, the U.S. District Court for the District of Columbia granted a motion for summary judgment for PhRMA after it sued HHS challenging the agency’s authority under Section 340B to promulgate the “Orphan Drug Exclusion Rule.”86 That Rule, issued in 2013, stated that “a covered outpatient drug does not include orphan drugs,” and that an orphan drug purchased by a covered entity for non-orphan use would not receive the 340B discount price.87 The Orphan Drug Exclusion Rule also stated that if a covered entity “cannot or does not wish to maintain auditable records sufficient to demonstrate compliance with this rule, [it] must notify HRSA and purchase all orphan drugs outside of the 340B Program regardless of the indication for which the drug is used.”88 The Rule additionally stated that not complying with it would be considered a violation of Section 340B.

The District Court held that Congress clearly did not authorize HHS to promulgate regulations such as the Orphan Drug Exclusion Rule. After listing the powers explicitly granted to HHS under Section 340B, the Court said:

            The rule making authority granted HHS by Congress under the 340B program has thus been specifically limited, and HHS has not been granted broad rule making authority to carry out all the provisions of the 340B program. Instead, Congress has limited HHS’s rule making authority to creating a system for resolving disputes between covered entities and manufacturers-not engaging in prophylactic non-adjudicatory rule making regarding the 340B program altogether. While the Court agrees that a prophylactic rule like this seems like the most reasonable way for implementing the orphan drug exclusion, unfortunately, Congress did not delegate to HHS broad rule making authority as a means of doing so.89

The Astra USA and PhRMA cases not only indicate that it is unlikely that legal action against drug manufacturers will prevail, but also further highlight the limited nature of HRSA’s authority regarding 340B contract pharmacy arrangements. The fact that the District Court held that HHS had no authority to promulgate regulations on orphan drugs strengthens the assertion that the 2010 guidance on contract pharmacy arrangements was unauthorized and not binding.

Necessity for Action by Congress, HRSA, and CMS

It is important that contract pharmacies continue to expand because of the savings and revenue that they bring to covered entities, especially covered entities like FQHCs which play an important role in providing care to low-income Americans. Covered entities use the savings and revenue that they generate through the 340B Program - including through contract pharmacy arrangements - to provide 340B drugs at lower costs to uninsured patients, eliminate the need for some patients to travel to receive care, and provide services that they might otherwise not have been able to offer to their patients.

At the same time, the concerns that drug manufacturers have with contract pharmacy arrangements, which largely stem from the lack of oversight by HRSA and the lack of clarity in state Medicaid policies, must also be addressed. However, since covered entities have no private right of action against the manufacturers, and an ADR process has not yet been established, there is no formal method for resolving disputes. Moreover, even if HRSA had implemented an ADR  process, the PhRMA case supports HRSA’s argument that the agency lacks the authority to enforce its guidance on contract pharmacy arrangements.

To correct these deficiencies with the 340B Program, Congress should amend Section 340B to specifically grant authority to the HHS Secretary (through the HRSA Administrator) to promulgate regulations to enforce Section 340B.  Congress should amend Section 340B to (1) specifically address contract pharmacy arrangements as a method through which drugs can be dispensed through the 340B Program, and (2) authorize HHS to promulgate binding regulations regarding contract pharmacy arrangements, which should include regulatory oversight of such arrangements by HHS through HRSA. Once this has been accomplished, HRSA needs to actually promulgate the regulations that it is called upon to promulgate, and do so in the timeframe mandated by statute. HRSA should also finally implement the ADR process that it was required to implement a decade ago.

Even if the final rule on an ADR for the 340B Program that was sent to the White House for approval on November 17, 2020 is reflective of the proposed rule issued in 2016, it may not be a sufficient avenue for the resolution of any dispute between covered entities and drug manufacturers which involve contract pharmacy arrangements if requirements for such arrangements only exist in the form of guidance. As stated earlier, this final rule (which could possibly be approved prior to the publication of this article) may be withdrawn by the Biden Administration if the Trump Administration does not act upon it during the administration’s final weeks, and even if the rule is finalized, it could be subject to legal challenges due to its procedural route.

Per GAO’s recommendations in its 2020 report, CMS needs to ensure that state Medicaid programs have publicly accessible written policies and procedures that specify the availability of 340B drugs for Medicaid FFS and managed care beneficiaries.90 These policies and procedures need to specify applicability to contract pharmacies so that covered entities will have a clear understanding of when and how to dispense 340B drugs to Medicaid beneficiaries through contract pharmacies. This will make it easier for HRSA to audit whether the covered entities are complying with their obligation to prevent duplicate discounts.

PPACA amended Section 340B in multiple ways. However, PPACA is at risk of being entirely overturned in a legal challenge brought by 18 state attorneys general and the Trump Administration, claiming that it is unconstitutional. The Supreme Court heard oral arguments on the case, California, et al. v. Texas, et al., on November 10, 2020.91 Therefore, Congress should consider replacing the amendments to Section 340B which were added by PPACA with identical language to ensure that the provisions would survive any repeal of  PPACA.

By amending Section 340B to speak directly to HRSA’s authority regarding contract pharmacy arrangements, Congress will preserve the means through which covered entities generate savings and revenue, and create a  mechanism through which HRSA can regulate contract pharmacy arrangements to ease concerns of drug manufacturers regarding potential diversion or duplicate discounts. If Section 340B is amended as described herein and if HRSA implements an ADR process, there will finally be a formal route for both covered entities and drug manufacturers to seek remedies regarding contract pharmacy arrangements, as well as for other disputes involving the 340B Program.


Recent actions by the largest drug manufacturers have made it clear that contract pharmacy arrangements must be governed by a legally enforceable means, rather than by simple guidance, to protect covered entities and their patients. Additionally, drug manufacturers’ concerns must be addressed through effective oversight of contract pharmacy arrangements by HRSA and by  CMS’s ensuring that state Medicaid programs have thorough and written policies and procedures on dispensing 340B drugs which specify the applicability to contract pharmacy arrangements. Therefore, Congress must directly address contract pharmacy arrangements and authorize the HHS Secretary to promulgate regulations governing them. The current lawsuits seeking to force implementation of the required ADR process will hopefully prevail and provide the much-needed mechanism for covered entities and drug manufacturers to resolve disputes.

HRSA stated in its 2010 guidance on contract pharmacy arrangements that even though the arrangements were not specifically mentioned in Section 340B, such arrangements were in line with the intent of Congress to have various types of delivery systems for dispensing 340B drugs. But even if such arrangements were within the scope of what was envisioned when Section 340B was initially enacted, they currently cannot be enforced to fulfill their purpose. Congressional and regulatory action to address these gaps would protect covered entities’ abilities to use savings and revenues from participation in the contract pharmacy arrangements to continue improving the care provided to vulnerable patient populations.

The opinions expressed herein are solely those of the author and do not necessarily represent the views of the author’s employer. 

  1. U.S. DEP’T of HEALTH & HUMAN SVCS., HHS Agencies & Offices, (last accessed Nov. 11, 2020). HRSA, an agency of HHS which is part of the Public Health Service, “provides health care to people who are geographically isolated, economically or medically vulnerable.”
  2. 42 U.S.C. § 256b(a)(1).
  3. 42 U.S.C. § 256b(a)(4). One of the following may be a covered entity: (1) a federally qualified health center, (2) an entity receiving a patient navigator grant, (3) a family planning project receiving a grant or contract, (4) an entity receiving a categorical grant for outpatient early intervention services for HIV, (5) a state-operated AIDS purchasing assistance program, (6) a black lung clinic, (7) a comprehensive hemophilia diagnostic treatment center, (8) a Native Hawaiian Health Center, (9) an urban Indian organization, (10) a certified HIV healthcare services program other than a state or unit of local government or an entity providing outpatient early intervention services, (11) a certified entity receiving federal funds relating to the treatment of sexually transmitted diseases or the treatment of tuberculosis through a state or local government, (12) a hospital that (i) is owned or operated by a unit of state or local government, is a public or private non-profit corporation which is formally granted governmental powers by a unit of state or local government, or is a private non-profit hospital which has a contract with a state or local government to provide healthcare services to low income individuals who are not entitled to Medicare or Medicaid, (ii) had for the cost reporting period that ended before the calendar quarter involved a certain disproportionate share adjustment percentage, and (iii) does not obtain covered outpatient drugs through a group purchasing organization or other arrangement, (13) a children’s hospital or free-standing cancer hospital excluded from the Medicare prospective payment system, (14) a critical access hospital, or (15) a rural referral center or sole community center having a certain disproportionate share adjustment percentage.
  4. Notice Regarding 340B Drug Pricing Program-Contract Pharmacy Services, 75 Fed. Reg. 10272 (Mar. 5, 2010).
  5. U.S. DEP’T of HEALTH & HUMAN SVCS., Cntrs for Medicare & Medicaid Srvcs., “Medicaid Drug Rebate Program”, available at (last visited Oct. 26, 2020); 42 U.S.C.A. § 1396r-8.
  6. Id.
  7. U.S. Gen. Accounting Office, GAO-20-212, 340B Drug Discount Program: Oversight of the Intersection with the Medicaid Drug Rebate Program Needs Improvement, p. 8.
  8. Wright, S., DEPT OF HEALTH AND HUMAN SERVICES, OFFICE OF INSPECTOR GENERAL, Memorandum Report: Contract Pharmacy Arrangements in the 340B Program, OEI-05-13-00431 (2014), at 4.
  9. Id.
  10. 42 U.S.C. § 256b(a)(5)(C).
  11. Pub.L. 111-148, Title II, § 2501(f)(1), Title VII, §§ 7101(a) to (d), 7102, Mar. 23, 2010, 124 Stat. 309, 821, 823.
  12. 42 U.S.C. § 256b(d)(1)(B)(vi)(I); 42 U.S.C. § 256b(d)(3)(A).
  13. 42 C.F.R. §§  10.10, 10.11.
  14. 340B Drug Pricing Program: Administrative Dispute Resolution, 81 Fed. Reg. 53381, 53382 (proposed Aug. 12, 2016).
  15. 42 U.S.C. § 256b(d)(3)(A).
  16. 340B Drug Pricing Program: Administrative Dispute Resolution, supra n. 14.
  17. Id. at 53386-53387. The three voting members would be chosen from a roster of eligible individuals and the one ex-officio, non-voting member would be chosen from the staff of HRSA’s Office of Pharmacy Affairs (OPA).
  18. Id. at 53387.
  19. Id.
  20. Executive Office of the President, 340B Drug Pricing Program; Administrative Dispute Resolution, RIN: 0906-AA90 (Aug. 1, 2017), available at
  21. Mirga, T., HRSA: 340B Dispute Resolution Will Stay on Hold Until We Get Broader Regulatory Authority, 340B Report (Mar. 12, 2020), available at 340B Report is an independent, subscription-based news service that is focused on the 340B Program.
  22. Id.
  23. Executive Office of the President, 340B Drug Pricing Program; Administrative Dispute Resolution, RIN: 0906-AB26, Pending EO 12866 Regulatory Review (Nov. 17, 2020), available at; Mirga, T., BREAKING: A Decade Overdue, HRSA Puts 340B Dispute Resolution in Motion, 340B Report (Nov. 18, 2020), available at
  24. Mirga, T., Stakeholders Weigh in on Forthcoming 340B Dispute Resolution Rule, 340B Report (Nov. 19, 2020),
  25. Id.; 5 U.S.C. § 553. The Administrative Procedure Act generally requires an agency to issue a notice of proposed rulemaking and allow interested persons a chance to submit comments before a final rule is approved.
  26. U.S. Gen. Accounting Office, GAO-11-836, DRUG PRICING: Manufacturer Discounts in the 340B Program Offer Benefits, but Federal Oversight Needs Improvement (2011), at 17.
  27. Id.
  28. Id.
  29. Id.
  30. Id. at 18.
  31. Notice Regarding Section 602 of the Veterans Health Care Act of 1992; Contract Pharmacy Services, 61 Fed. Reg. 43549 (Aug. 23, 1996).
  32. Id.
  33. Notice Regarding 340B Drug Pricing Program-Contract Pharmacy Services, 75 Fed. Reg. 10272 (Mar. 5, 2010).
  34. Id. at 10278.
  35. Id. at 10274-10275.
  36. Id.
  37. Id. at 10276.
  38. Id.
  39. Id. at 10277.
  40. Id. at 10278.
  41. Id.
  42. U.S. Gen. Accounting Office, GAO-20-212, 340B Drug Discount Program: Oversight of the Intersection with the Medicaid Drug Rebate Program Needs Improvement (2020), p. 2.
  43. U.S. Gen. Accounting Office, GAO-18-480, Drug Discount Program: Federal Oversight at 340B Contract Pharmacies Needs Improvement (2018), pp. 2, 10, 16. The statistics regarding contract pharmacy arrangements in the 2018 GAO report appear to be the most recent data regarding these arrangements.
  44. Id. at 21.
  45. Notice Regarding 340B Drug Pricing Program-Contract Pharmacy Services, 75 Fed. Reg. 43,10272, 10278 (Mar. 5, 2010)
  46. Id.
  47. Stuart Wright, DEPT OF HEALTH AND HUMAN SERVICES, OFFICE OF INSPECTOR GENERAL, Memorandum Report: Contract Pharmacy Arrangements in the 340B Program, OEI-05-13-00431 (2014), at 2.
  48. Id.
  49. Id.
  50. Id. at 16.
  51. U.S. Gen. Accounting Office, GAO-18-480, Drug Discount Program: Federal Oversight at 340B Contract Pharmacies Needs Improvement (2018), pp. 40-42.
  52. Human Resources & Services Administration, Office of Pharmacy Affairs, 340B OPAIS User Guide, page 55,  available at: (last accessed Nov. 15, 2020). 
  53. U.S. Gen. Accounting Office, GAO-18-480, Drug Discount Program: Federal Oversight at 340B Contract Pharmacies Needs Improvement (2018), pp. 36-37.
  54. Id. at 46-49.
  55. U.S. Gen. Accounting Office, GAO-20-212, supra n. 42,  p. 17.
  56. Id.
  57. Id. at 17, 24.
  58. Id. at 18.
  59. Id. at 32-33.
  60. Id. at 32; Id. at 18. “Since the MEF may not accurately reflect covered entities’ use of 340B drugs for Medicaid managed care, states’ use of the MEF in this instance may increase the risk of duplicate discounts or forgone rebates unless states require covered entities to make the same decisions on the use of 340B drugs for FFS and managed care….a state’s use of the MEF for managed care would likely result in a duplicate discount if covered entities carve out 340B drugs for Medicaid FFS, but carve in these drugs for managed care, as those entities would not be listed on the MEF. Consequently, the state would not know to exclude drugs provided by those entities from the managed care plans’ utilization data that are used for requesting rebates. If covered entities did the opposite-carved in for FFS and carved out for Medicaid managed care-then the state would likely forgo Medicaid rebates as it would exclude drugs from its rebate request that were not purchased through the 340B Program.” 
  61. Id. at 30-31.
  62. Id. at 19.
  63. Id. at 28.
  64. Mirga, T., Eli Lilly Says It Doesn’t Have to Provide 340B-Priced Drugs to Contract Pharmacies, 340B Report (July 7, 2020),
  65. Id.; FAQs/Verbatims on Cialis Limited Distribution Program, Eli Lilly and Company, available at
  66. Mirga, T., AstraZeneca Raises the Ante in Drug Industry Push Against 340B Contract Pharmacy, 340B Report (Aug. 17, 2020),; Letter from Odalys Caprisecca, Exec. Director, Strategic Operations, AstraZeneca (Aug. 17, 2020), available at
  67. Id., FAQs/Verbatims on Cialis Limited Distribution Program, Eli Lilly and Company, available at
  68. Mirga, T., Sanofi Joins Growing List of Drug Companies Challenging 340B Contract Pharmacy, 340B Report (July 28, 2020),; Letter from Gerald Gleeson, Vice Pres., Sanofi U.S. Market Access Shared Services (no date), available at; Letter from Phil Rinnander, Exec. Director, Finance, Merck Sharpe & Dohme Corp. (June 29, 2020), available at; Mirga, T., Novartis the Latest to Seek 340B Contract Pharmacy Claims Data, 340B Report (Aug. 18, 2020), available at
  69. Letter from Phil Rinnander, Exec. Director, Finance, Merck Sharpe & Dohme Corp. (June 29, 2020), available at
  70. Mirga, T., Novartis the Latest to Seek 340B Contract Pharmacy Claims Data, 340B Report (Aug. 18, 2020), available at
  71. Mixter, B., Sanofi Responds to AHA’s Complaints About 340B Claims Demand, 340B Report (Sept. 1, 2020), available at
  72. Letter from David Lopuch, Vice Pres. Novartis Managed Markets Finance, Novartis Pharmaceuticals Corporation (Oct. 30, 2020), available at
  73. Mirga, T., HRSA Says its 340B Contract Pharmacy Guidance Is Not Legally Enforceable, 340B Report (July 9, 2020), available at
  74. Letter from Thomas P. Nickels, Exec. Vice Pres., American Hospital Association, to Alex Azar, U.S. Sec. of Health and Human Svcs. (July 30, 2020), available at
  75. Letter from Richard J. Pollack., Pres. and C.E.O., American Hospital Association, to Alex Azar, U.S. Sec. of Health and Human Svcs. (Sept. 8, 2020), available at
  76. Letter from 24 U.S. Senators to Stephen J. Ubl, Pres. and C.E.O., Pharmaceutical Research and Manufacturers of America (Sept. 15, 2020), available at; Mirga, T., 22 U.S. Senate Democrats Want Answers from PhRMA About its Members’ 340B Actions, 340B Report (Sept. 15, 2020), available at
  77. Letter from 28 U.S. Senators to Alex Azar, U.S. Sec. of Health and Human Svcs. (Sept. 17, 2020), available at
  78. Office of the Attorney General, Connecticut: “AG Tong Demands Drug Makers Abandon Unlawful Actions Imperiling Access to Affordable Prescriptions for Low-Income Patients” (Oct. 6, 2020), (last visited Oct. 26, 2020); Letters from William Tong, A.G. of C.T., to Vasant Narasimhan, C.E.O. of Novartis Pharmaceuticals, Kenneth C. Frazier, Chairman & C.E.O. of Merck, Paul Hudson, CEO of Sanofi U.S., Karen Linehan, Executive V.P., Legal Affairs and General Counsel of Sanofi U.S., and Gerald Gleeson, V.P. and Head of Sanofi U.S., U.S. Market Access Shared Devices of Sanofi U.S., Pascal Soriot, Exec. Director and C.E.O. of Astra Pharmaceuticals, L.P. and Jeff Pott, General Counsel of Astra Pharmaceuticals, L.P., David A. Ricks, Chairman and C.E.O. of Eli Lilly and Company and Anat Hakim, Senior V.P. & General Counsel of Eli Lilly and Company  (Oct. 5, 2020), available at
  79. Letter from Robert P. Charrow, General Counsel, U.S. DEP’T of HEALTH & HUMAN SERVICES, to Anat Hakim, Senior Vice President and General Counsel, Eli Lilly and Company (Sept. 21, 2020), available at
  80. Ryan White Clinics for 340B Access and Matthew 25 AIDS Services, Inc. and Chattanooga C.A.R.E.S., DBA CEMPA Community Care vs. Alex M. Azar II, U.S, DEP’T of HEALTH & HUMAN SERVICES, and Thomas J. Engels, Civil Action No. 1:20-cv-02906 (D.S.C. 2020).
  81. National Association of Community Health Centers v. Alex M. Azar II and U.S. DEP’T of HEALTH & HUMAN SERVICES, Civil Action No: 1:20-cv-03032 (D.S.C. 2020).
  82. Astra USA, Inc. v. Santa Clara County, Cal., 563 U.S. 110 (2011).
  83. Id.
  84. Id. at 114.
  85. Id. at 121-122.
  86. Pharmaceutical Research and Manufacturers of America v. U.S. DEP’T of HEALTH & HUMAN SERVICES, 43 F.Supp.3d 28 (D.D.C. 2014). PPACA’s amendment excluded orphan drugs from the 340B Program but did not give HHS authority to promulgate rules on it.
  87. Id. at 32.
  88. Id. at 33.
  89. Id. at 37.
  90. U.S. Gen. Accounting Office, GAO-20-212, 340B Drug Discount Program: Oversight of the Intersection with the Medicaid Drug Rebate Program Needs Improvement (2020), p. 28.
  91. California, et al. v. Texas, et al., Petition for a Writ of Certiorari, filed Jan. 3, 2020, available at (last accessed Nov. 16, 2020); California, et al. v. Texas, et al., Oral Arguments, Heritage  Reporting Corporation, Nov. 10, 2020 available at  (last accessed Nov. 16, 2020). 
The material in all ABA publications is copyrighted and may be reprinted by permission only. Request reprint permission here.

About the Author

Alaa “Al” Haidar, Esq., MPH is an in-house Staff Attorney at Hudson Headwaters Health Network, a federally qualified health center with multiple locations throughout the Adirondack Region of New York. Prior to joining Hudson Headwaters in July 2020, he served as in-house counsel at a multistate provider of outpatient physical and occupational therapy and athletic training services. He can be contacted at [email protected].