On April 18, 2024, the U.S. Department of Health and Human Services’ (HHS) Health Resources and Services Administration (HRSA) issued the new 340B Drug Pricing Program Administration Dispute Resolution Final Rule (2024 Final Rule). The 2024 Final Rule was drafted to simplify and expedite the Administrative Dispute Resolution (ADR) process between drug manufacturers and “covered entities” by eliminating certain requirements, restructuring the ADR Panel, and clarifying the claims that can be brought to dispute. The 2024 Final Rule also added the requirements of documented good faith negotiation between the parties and administrative review process in order to encourage communication, and hence a resolution, between the parties themselves. Additionally, the 2024 Final Rule, in order to be more in “line with” the 340B Statute, tracks back to some of the language used in the statute, especially regarding the types of claims that can be brought and what matters can be audited by the manufacturers before the ADR process.
Although the 2024 Final Rule may likely make the ADR process more accessible to the covered entities, it may also open the floodgates to more covered entities and eligible patients. This may be followed by the increase of purchased drugs (at discounted prices) volume and hence increased tension between manufacturers and covered entities. Therefore, it probably will only serve as a more accessible starting point to resolve disputes between covered entities and manufacturers, since it is more likely that more disputes will eventually have to be resolved in courts. New laws should be enacted to preserve the 340B program by making it more transparent and workable for both the manufacturers and covered entities.
The 340B program is a federal drug pricing program established by Congress in 1992. It requires drug manufacturers to offer certain drugs at discounted (sometimes deeply) prices, also known as “ceiling prices,” to a list of qualified entities (i.e., covered entities), which are defined by statute to include certain types of “safety-net” hospitals, also known as critical access hospitals (CAHs), health centers, and clinics receiving federal grants, in exchange for their drugs to be covered by Medicaid and Medicare Part B.
The rationale is that the covered entities purchase the deeply discounted drugs and use them to provide services to patients and bill the third-party payers at regular prices. Some of these covered entities, the so-called 340B hospitals, even purchase their formulary drugs from very comprehensive drug lists regularly to maintain their inventories. The savings will be kept by the covered entities and used to fund the services essential to the communities they serve. The program was created by Congress to, as described at the HRSA website, “stretch scarce Federal resources as far as possible, reaching more eligible patients and providing more comprehensive services.” Essentially, the discounted drugs benefit both patients who are in need by helping them to afford costly drugs, while the covered entities use the savings (profits) accrued to fund a variety of programs and serve a greater number of uninsured and under-insured patients (especially for CAHs). The covered entities, however, are prohibited from diverting discounted drugs in that they may “not resell or otherwise transfer the drug to a person who is not a patient of the entity.”
Since the 340B statute took effect, the program has experienced tremendous growth, both in the number of covered entities, as well as the volume of discounted drug sales. This is especially true after the 340B program had, under the Affordable Care Act, expanded the list of covered entities. According to the Government Accountability Office (GAO), the number of covered entities participating in the program increased from about 9,700 to 13,000 between 2010 and 2019, as more entities sought to enroll in the 340B program to take advantage of the price discounts.
An increase in the number of contract pharmacies has only “poured gasoline on the fire.” Between 1996 and 2010, covered entities could only use one contract pharmacy or their own in-house pharmacy to order 340B drugs. In 2010, HHS issued new guidance that allowed covered entities to use an unlimited number of contract pharmacies. As a result, the use of contract pharmacies increased dramatically. It is estimated that the number of contract pharmacies participating in the program increased from about 1,300 to 23,000.
The combined effect was a dramatic increase in the volume of drug sales. According to a study conducted by Berkeley Research Group, in 2022, total 340B program sales reached $54.6 billion when measured at the discounted 340B price. This figure represents enormous growth—more than double the level of 340B sales compared to just five years prior.
The growth has caused manufacturing deep concern about increasing duplicative discounting and diversion among contract pharmacies, because most of them serve both covered entities as well as other entities. The manufacturers tend to argue that convoluted networks of contract pharmacies lead to diversion of 340B drugs to non-340B patients. Manufacturers have sought greater transparency in the program and also to impose restrictions on covered entities’ ability to acquire drugs with discounted prices. The covered entities, on the other hand, want to keep the status quo by citing the importance of using the profits derived 340B program to fund the essential services for their local communities.
The idea of ADR originated from a 1996 notice published by HRSA and started to catch steam amidst the growing tension between the manufacturers and the covered entities. Under the Affordable Care Act (ACA), the ADR process was mandated, but no final rule was published until 2022. Even though the 2022 ADR Final Rule (2022 Final Rule) was designed to provide a platform for the manufacturers and covered entities to sort out their differences, it was not adequately utilized due to certain hurdles such as the $25,000 minimum dispute threshold, compliance to complicated laws such Federal Rule of Civil Procedure (FRCP), as well as the Federal Rule of Evidence (FRE) the covered entities have to overcome.
The 2024 Final Rule represents the agencies’ latest effort to make the ADR procedure more accessible to covered entities, in the hope to relieve the tension between the manufacturers and the covered entities.
The following is a list of some of the noticeable points of the 2024 Final Rule HRSA released. It modifies certain requirements and procedures for the 340B program ADR process and aims to make the process more accessible, administratively feasible, and timely. It will:
The Final Rule went into effect on June 18, 2024. The following is a discussion of the potential impacts of the “modifications” to the 2024 Final Rule.
HRSA stated that many covered entities, especially CAHs serving mostly the rural communities, lack resources and are likely to be discouraged by the minimum monetary threshold to engage in the ADR process in order to maximize their benefits from the 340B program. The modification removes the monetary hurdle for these entities. However, it is reasonable to assume that even minor disputes may now be worthy of being disputed because the procedure becomes a lot more affordable. This may result in increased workload and burden the panel if it is not being supported adequately by funds and labor.
The 2024 Final Rule requires the parties to submit a documented good-faith effort to resolve issues between them before engaging the ADR process. This is to encourage the manufacturers and covered entities to communicate before presenting their cases to the panel. This also decreases the likelihood of filing frivolous claims as the monetary dispute threshold is no longer required. Essentially, this serves as the basic screening process for the complaints received.
Related to the previous points, CAHs’ lack of resources also prevents them from employing legal experts to help them navigate the complexities of federal rules, just to get engaged in the ADR process. Thus, the elimination of the monetary and legal requirement will likely encourage the covered entities to resolve issues through the ADR process and let their voices be heard.
However, complicated federal procedural laws are designed to screen out frivolous cases and allow only cases with merit to move forward. As the covered entities increasingly use the ADR process due to the removal of monetary and procedural hurdles, the importance of some kind of screening process cannot be overemphasized.
As the ADR process will be less formal, or “trial-like” in HRSA’s words, legal experts from the Office of General Counsel (OGC) will no longer be appointed to the ADR panel, which will now only consist of 340B subject matter experts from the Office of Pharmacy Affairs (OPA). By doing so, panel members can focus on the subject matter without having to consult opinion from legal experts before making decisions on the issues brought to them. The elimination of the requirement for the legal review will likely shorten the time for reaching a decision. HRSA also, in the 2024 Final Rule, lays out the vetting, appointing, and removal process of panel members to ensure the integrity of the panel.
However, disputes may have, to some extent, legal elements such as statutory language interpretation and even contractual issues. The panel experts may still prefer to reference a court decision for legal guidance. Also, although the panel is not required to suspend the case if a similar issue is being litigated in a court, it is reasonable to assume that the panel may prefer not to contradict the court’s decision and only decide after a court’s decision has been thoroughly analyzed.
The ADR process will essentially have three layers of review. The OPA will conduct a screening process by reviewing the documents submitted by the parties and deciding whether the filing requirements set out in the 2024 Final Rule have been met. Additional documents will be requested before a decision is made on whether the claims will be forwarded to the ADR panel for review. The panel will conduct reviews and issue a decision letter (not opinion of precedential value) within one year of receiving the claim. To be consistent with the expected one year timeline set out in the 2024 Final Rule, a proposed suspension of issues that are being litigated was not adopted, as mentioned earlier. Finally, the HRSA administrator may initiate a reconsideration process on its own, or upon request by any parties in the claim. The final agency decision will be binding unless invalidated by a federal court. The ADR process is thus buttressed by screening and reviewing processes to enhance the decision’s robustness.
Here, although the ADR process is streamlined and final decisions will have a better chance to be sound after review, it may also be delayed due to added layers. Also, cases decided and reviewed without publishing and precedential materials may likely cause uncertainty, even though it is essential for the legal community to be able to analyze the rationales the agency used to come to the decisions.
One noticeable change is in the language regarding disputable claims related to the prohibition of covered outpatient drugs diversion. HRSA chose to track back to the language used in the 340B statute instead:
340B Statute
(B) PROHIBITING RESALE OF DRUGS.—With respect to any covered outpatient drug that is subject to an agreement under this subsection, a covered entity shall not resell or otherwise transfer the drug to a person who is not a patient of the entity.
2024 Final Rule
…section 340B(a)(50(B) of PHS Act, (claims) regarding the prohibition of the resale or transfer of covered outpatient drugs to a person, who is not a patient of the covered entity
2020 Final Rule
..section 340B (a)(5)(B) of the PHSA regarding the diversion prohibition, including claims that an individual does not qualify as a patient for 340B Program purposes, and claims that a covered entity is not eligible for the 340B program.
The removal of phrases such as “…qualify as a patient for 340B program…” and “…covered entity is not eligible for the 340B program…” potentially can be read as HRSA meant to deprive manufacturers of tools to audit on the eligibility bases.
Also, by readopting the languages used in the 340B Statute, HRSA, as it had promised, positions itself more “in-line with the 340B Statute.” This is probably done in response to the federal district court decision made on November 3, 2023, in Genesis HealthCare, Inc. v. Becerra. In that case, the court adopted a broader definition of “patient” after textual interpretation of statute for the legislators’ intent. According to the court, “nothing in the Statute conditions an individual’s eligibility as a 340B patient on whether the health care service resulting in the prescription was initiated by the ‘covered entity.’” In other words, “nor does it require that a prescription originate from a covered entity in order for an individual to be considered a ‘patient.’” The court also observed that the legislators intentionally left the statue silent regarding the definition of “patient” in order to “make covered entities profitable so they can stretch scarce federal resources.’ It is notable that neither temporal nor durational limits were specified regarding the “patient” status.
The changes, therefore, theoretically, may open the door to just about everybody because the language seems to broaden the definition of “patients” rather comprehensively. As HRSA stated in the comment sections, one of its intentions was to modify the 2020 Final Rule to be “aligned with the 340B Statute.” With intentional omission of certain limitations such as patient and entity qualification, it is more likely to carry out Congress’ intent, which was to “stretch scarce Federal resources.” So, theoretically, without temporal and durational limitations, anybody can become a patient of the covered entity once admitted, either as outpatient or inpatient, before even receiving any treatment. Also, because the medication does not have to originate from the covered entity, healthcare shopping and traveling patients are not too far-fetched. This is because, theoretically, a non-local person can take advantage of the 340B program and travel with his/her prescription from his/her own provider to the covered entity to receive medication since the patient status can be readily obtained upon admission. The person will receive care such as examination and minor workup by the attending physicians who have privilege of the entity, thus becoming a patient of the provider already affiliated with the covered entity. Therefore, it seems like just about everyone can become eligible.
As the broadened definition of patient will likely lead to more eligible patients, hence increase in the volume of discounted drug purchased by the covered entities, it will increase the likelihood of drug diversion.
Diversion can occur when 340B drugs are dispensed to ineligible patients or written by providers not affiliated with the covered entity. The drugs can even be in the possession of ineligible entities sometimes. To prevent the diversion of drugs acquired with 340B discounts to ineligible patients and entities, keeping separate inventories for drugs purchased with and without 340B discounts is necessary. The already complicated process gets more complicated when a broadened definition of patient is adopted.
First of all, although any drug can be used in an inpatient setting, only some drugs are safe to use in an outpatient setting because they do not require rigorous monitoring and have more convenient dosing intervals. Examples of these drugs include certain daily antibiotics (more suitable for outpatient use due to its simple dosing interval) and certain monoclonal antibodies, just to name a few. These drugs may be purchased at regular price, along with the drugs purchased via the 340B program, by the same entity and should be inventoried separately. As a matter of fact, some covered entities, such as CAHs, are allowed to purchase any drugs under the 340B program at discounted prices. These scenarios demonstrate how easy it is to commingle 340B drugs and non-340B drugs without effective inventory systems. Moreover, it is also not uncommon for hospitals to borrow small quantities of drugs for reasonable purposes (e.g., for emergency uses) among themselves, especially when the problem of drug shortages has persisted for years now. Since it is preferred to have drugs in stock for immediate use, it can be assumed that hospitals typically will try to minimize their reliance on drug borrowing. So it is also possible that a hospital not qualified for 340B program might borrow and subsequently administer to its patients drugs purchased at discounted price by a covered entity. The patients may have never been admitted by the said covered entity before and thus are not eligible to receive the 340B drugs. This custody exchange of 340B drugs from a covered entity to ineligible entity and patient constitutes diversion. Indeed, the more the volume of 340B drugs purchased, the more likely this kind of diversion can occur.
Secondly, as mentioned before, potentially unusual phenomena such as traveling healthcare can occur. Since the prescription of any 340B drugs does not need to originate from the visitation at the covered entity, it is possible for a non-local patient to visit the covered entity for a drug because it is unavailable at his or her local covered entity or just because it is convenient. Upon admission, the patient will be eligible to receive 340B medication. The patient does not have to be a patient of any covered entity or live anywhere near the said covered entity. To some extent, medical tourism for drugs that are difficult to obtain yet critical for the health condition of a certain patient population is completely realistic. The result is that, potentially, patients from the community the covered entity serves may be deprived of receiving the drugs they need, creating health equity issues.
“Medical tourism” as described above is technically within the legal boundary, as the 340B savings do provide a source of income for the covered entity to fund comprehensive services to the community it serves; it may incentivize, though, the covered entities to seek out and recruit potential patients. Covered entities’ over-aggressiveness from the potential may just lead to issues involving the Anti-Kickback Statute (AKS).
It is reasonable to assume that as the volume of patients treated by the covered entities increases, resources will be needed to handle the patients’ private information properly. Manufacturers, on the other hand, may require the covered entities to disclose billing information for the purpose of duplicate discounts and diversion audits. Covered entities’ limited resources to maintain a robust compliance process may potentially create more “openings” for the manufacturers.
The manufacturers have been unilaterally imposing restrictions on covered entities to minimize their ability to acquire discounted drugs. A glance at the websites that track such restrictions reveal the effort manufacturers have put in and how they approach it. Some of the restrictions require limitations on the number of contract pharmacies. Others restrict the drugs that can be purchased at discounted prices. Some even restrict access to the 340B price based on the previously narrower interpretation of patient eligibility. Manufacturers also often put restrictions on the contract pharmacies covered entities can use. The manufacturers now will likely be emboldened by the current favorable court decisions and even more aggressive in imposing these unilateral restrictions.
As a matter of fact, manufacturers now have an even stronger argument, as they secured an important victory on May 21, 2024, when the U.S. Court of Appeals for the District of Columbia Circuit upheld the U.S. District Court for the District of Columbia’s decision in United Therapeutics Corporation v. Carole Johnson, et al./Novartis Pharmaceuticals v. Carole Johnson. The case was about manufacturers’ unilaterally imposed contract pharmacies limitation, and the court expressed its uneasiness regarding HRSA’s position that “Section 340B prohibits drug manufacturers from imposing any conditions on the distribution of discounted drugs to covered entities.” The court ruled that the 340B statute does not categorically prohibit manufacturers from imposing conditions on the distribution of covered drugs to covered entities. The court also observed that although the statute requires manufacturers to “offer” to sell covered drugs to covered entities at or below a specified price, but is silent about delivery, as Congress intending to allow the manufacturers to enforce certain delivery conditions by imposing at least some delivery conditions.
Although manufacturers are emboldened by the favorable decisions from the federal courts, they are facing a growing number of states seeking to protect the 340B program by passing laws to prohibit drug manufacturers from imposing restrictions on 340B contract pharmacies. Six states have enacted contract pharmacy protections into law: Kansas, Maryland, Mississippi, and West Virginia in 2024; Louisiana in 2023; and Arkansas in 2021. Bills are pending in other states, including Missouri and New York. Development at the federal level is relatively slow, but not completely stagnant, as hearings are being conducted. A couple of bills have been introduced by the House Representatives with the intention to modify the 340B program.
Whether the 2024 Final Rule will be successful in reducing the tension between manufacturers and covered entities remains to be seen. However, given the likely improved accessibility to the ADR process for the covered entities to bring their cases, it is possible to see a significant jump in the number of cases brought to the process. On the other hand, because of the jump, coupled with the continual increase in purchase volume of discounted drugs owing to factors such as the broadening definition of patients, manufacturers are likely to be pressured to act more aggressively and impose more (even stricter) unilateral restrictions to minimize their economic liability. In response, covered entities will continue their effort at the state legislative level.
Actions at the federal level should be closely monitored as well. Congress has shown interest in legislative measures to modify the 340B programs and has held hearings to collect information. Representative Doris Matsui (D-CA-07) has introduced a bill to protect the 340B program. Representative Larry Bucshon (R-IN-08) introduced a bill to address the transparency aspect by requiring covered entities to report their 340B margin, as well as to clarify Congress’ intent of the 340B program. Therefore, it is essential for the legal community to closely monitor the latest developments of the 340B program.
