340B Action Heats Up: New Developments From the Courts, Administration and Drug Makers

Health Update

In the courts, in the Administration and in drug maker initiatives, action on the Section 340B prescription drug discount program has heated up this summer. The program, known by its section number of the federal Public Health Service Act, has been the subject of a D.C. District Court of Appeals decision upholding a reduction in Medicare reimbursement for certain 340B-purchased drugs, a regulatory proposal to reduce such reimbursement even further, steps by pharmaceutical manufacturers to address perceived compliance issues in the 340B contract pharmacy context, and an agency notice imposing additional 340B registration requirements for nonprofit hospitals. This article provides details on these issues, as well as on President Trump’s recent executive order regarding federally qualified health center prices for insulin and injectable epinephrine.

Background on the 340B Program

Established in 1992, the 340B program requires pharmaceutical manufacturers that want their drugs covered by Medicaid (virtually all pharmaceutical manufacturers) to provide discounted outpatient drugs to certain healthcare providers and programs. Only individuals who qualify as patients of a 340B covered entity are eligible for 340B drugs. The program is overseen by the Office of Pharmacy Affairs (OPA) within the Department of Health and Human Services’ Health Resources and Services Administration (HRSA).

Reduction in Medicare Part B Reimbursement for 340B Drugs

Beginning January 1, 2018, the Centers for Medicare & Medicaid Services (CMS), in the 2018 hospital outpatient prospective payment system (OPPS) final rule, reduced Medicare Part B payments to hospitals for 340B drugs from Average Sales Price (ASP) plus 6% to ASP minus 22.5%. In doing so, CMS stated that this reduction was intended to reflect hospitals’ true acquisition costs for 340B-purchased drugs. Rural sole community hospitals, OPPS-exempt cancer hospitals, children’s hospitals and critical access hospitals were exempted from this reduction.

Several hospitals and hospital associations challenged CMS’s action and, in two separate decisions, the D.C. District Court found that the reimbursement reduction exceeded CMS’s statutory authority. However, in a significant setback to hospitals, a three-judge panel of the D.C. Court of Appeals, in a decision issued on July 31, 2020, reversed the lower court’s decision by a 2-1 vote.

Shortly thereafter, in the 2021 hospital OPPS proposed rule, CMS advised that it is considering further reducing Medicare Part B reimbursement rates for 340B-purchased drugs, from ASP minus 22.5% to ASP minus 28.7%. The proposed reduction is based on data that CMS obtained through a survey of hospital 340B acquisition costs that it conducted earlier this year. CMS is also soliciting comments on whether, instead, it should retain the current reimbursement rate of ASP minus 22.5%. Comments on the hospital OPPS proposed rule are due on October 5, 2020.

Pharmaceutical Manufacturer Actions With Respect to Contract Pharmacies

340B covered entities have two options for making 340B drugs available to their patients: They can dispense 340B drugs to their patients through in-house pharmacies, or they can enter into arrangements with outside pharmacies, referred to as 340B contract pharmacies, under which the contract pharmacies dispense 340B drugs to covered entity patients.

Pharmaceutical manufacturers have long had compliance concerns about 340B contract pharmacy arrangements, and this summer Eli Lilly took the unprecedented step of issuing a public notice advising that, as of July 1, 2020, it will no longer make certain formulations of Cialis available for dispensing through 340B contract pharmacies. The notice states that 340B covered entities that do not have an in-house pharmacy can contact Eli Lilly for an exception. This is the first time that a pharmaceutical manufacturer has restricted the distribution of 340B drugs to contract pharmacies, and 340B covered entities have questioned the legality of this approach. However, HRSA, which published the Eli Lilly notice on its website, has advised that it does not have the authority to prohibit manufacturers from taking such actions.

A separate contract pharmacy-related issue arises in the context of Medicaid rebates. Under the 340B statute, drugs that are purchased at 340B prices may not also be subject to Medicaid rebates. Accordingly, when 340B covered entities use 340B drugs for Medicaid patients, state Medicaid agencies must be able to identify those drugs and exclude them from their rebate requests to manufacturers. This can present challenges in the contract pharmacy context, as contract pharmacies do not necessarily know whether a person is 340B eligible at the time they dispense a drug to that person and submit a claim for that drug. Instead, contract pharmacies often dispense drugs out of their own stock, and 340B covered entities replenish the pharmacy’s stock with 340B-purchased drugs for patients who are subsequently determined to be 340B eligible.

Spurred by concerns that contract pharmacy arrangements may result in the payment of rebates for 340B-purchased drugs, Merck and Sanofi recently sent letters to 340B covered entities requesting claims data regarding 340B-purchased drugs dispensed by the covered entities’ contract pharmacies. The manufacturers advise that they intend to use the data to identify duplicate discounts not just with respect to the Medicaid program, but with respect to Medicare Part D and commercial utilization as well. Merck’s letter also states that, absent significant cooperation from covered entities, Merck may take further action to address 340B program integrity, which may include seeking 340B program claims information in a manner that may be less collaborative and substantially more burdensome for covered entities. Sanofi’s letter, in contrast, states that covered entities that do not provide the information in question will no longer be eligible to place orders for Sanofi products dispensed through 340B contract pharmacies. Again, 340B covered entities have questioned the legality of this approach, but HRSA has not taken a public position on the issue.

New Registration Requirements for Certain Nonprofit 340B Hospitals

In order to be eligible to participate in the 340B program, private nonprofit hospitals must, among other things, either be formally granted governmental powers by a unit of state or local government or have a contract with a state or local government to provide healthcare services to low-income individuals who are not eligible for Medicare or Medicaid. In December 2019, the Government Accountability Office issued a report that found that HRSA’s processes do not provide reasonable assurances that hospitals in the second category have such contracts in place. On July 20, 2020, HRSA issued a program update with new covered entity registration and recertification requirements, including a requirement that nonprofit hospitals that participate in the 340B program will need to submit documentation verifying their eligibility, including, where applicable, copies of their contracts with state or local governments. 

President Trump’s Executive Order

On July 24, 2020, President Trump issued four Executive Orders intended to address drug pricing, one of which would require federally qualified health centers (FQHCs) to pass the 340B discounts they receive on insulin and injectable epinephrine through to their low-income patients. The Executive Order applies only to FQHCs and not to hospitals or other categories of 340B covered entities, and does not rely on HRSA’s authority under the 340B statute but on HRSA’s grant-making authority under Section 330 of the federal Public Health Service Act. Most FQHCs qualify as 340B entities by virtue of their receipt of Section 330 grant funding, and the Executive Order requires HRSA to take action to ensure that future Section 330 grants are conditioned on FQHCs’ making insulin and injectable epinephrine available at 340B prices to low-income patients who have a high cost-sharing requirement for either insulin or injectable epinephrine, have a high unmet deductible, or have no health insurance.

The actual impact of this order is likely to be limited, because many FQHCs already make 340B-purchased drugs available to low-income patients at or close to cost, and because it will take significant time to roll out. However, the fact that HRSA imposed this requirement only on FQHCs, and not on other 340B covered entities, and relied on HRSA’s Section 330 grant-making authority rather than on HRSA’s role as 340B program administrator, is yet another acknowledgement by HRSA of its limited enforcement authority over the 340B program.

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