On May 21, the U.S. Court of Appeals for the D.C. Circuit issued a unanimous decision in favor of drug manufacturers, finding that certain manufacturer restrictions on the use of contract pharmacies under the 340B drug pricing program are permissible. In upholding a lower court decision that set aside enforcement actions taken by the federal government to stop the manufacturer restrictions, the court rejected the government’s position that the 340B statute prohibits any restrictions on the use of contract pharmacies. However, the court did acknowledge that the statute may prohibit “more onerous” manufacturer restrictions, including the conditions at issue in the case, if applied under certain circumstances, leaving the door open for future controversy.

The decision is the second U.S. circuit court opinion favoring manufacturer restrictions on contract pharmacy use, following a decision last year from the U.S. Court of Appeals for the Third Circuit (see our alert here). A third decision evaluating contract pharmacy restrictions is expected from the U.S. Courts of Appeals for the Seventh Circuit at any time.

Meanwhile, 340B providers continue to look to Congress and state legislatures to pass laws prohibiting contract pharmacy restrictions; the D.C. Circuit decision is likely to continue this trend.

Courts Consideration of Manufacturer 340B Obligations

At issue was whether drug manufacturer policies restricting the ability of 340B providers (referred to as “covered entities”) to access 340B prices for drugs dispensed through contract pharmacies violated manufacturers’ obligations under the 340B statute, which include a requirement for manufacturers to “offer” outpatient drugs to covered entities at or below the ceiling price if the drug is made available to other purchasers.

The D.C. Circuit considered a November 5, 2021, consolidated decision by a judge in the U.S. District Court for the District of Columbia addressing two manufacturers’ restrictions. The policies had the effect of restricting the number and types of contract pharmacies to which covered entities could have 340B drugs shipped, including, in one case, limiting contract pharmacy use to a single contract pharmacy location for those covered entities that did not have an in-house pharmacy. The policy also required covered entities to provide 340B claims data through an online platform in order to access 340B pricing through a contract pharmacy. As these types of policies have become more common, the decision has wide-sweeping implications.

Both the Health Resources and Services Administration (HRSA), the agency that administers the 340B program, and 340B covered entities have argued that the 340B statute prohibits drug manufacturers from imposing restrictions on the ability of covered entities to purchase drugs at 340B prices, including those dispensed through contract pharmacies because to do so would conflict with the manufacturer’s obligations to offer 340B pricing to 340B covered entities. However, the D.C. Circuit found that the 340B statute “does not categorically prohibit manufacturers from imposing conditions on the distribution of covered drugs to covered entities” and that “the conditions at issue here do not violate section 340B on their face.”

In rejecting HRSA’s position, the court focused on the plain language of the 340B statute. The court noted that the statutory requirement for manufacturers to “offer each covered entity covered outpatient drugs for purchase” at or below the 340B price “merely requires manufacturers to propose to sell covered drugs to covered entities at or below a specified monetary amount” and is silent as to the delivery of 340B drugs.

In support of this conclusion, the court considered that an “offer” under a contract can include both terms related to pricing as well as terms unrelated to pricing, which can include terms related to a product’s delivery. Because the statute does not address the delivery of 340B drugs, the court found that the statute allows manufacturers to “impose distribution conditions by contract.”

The court’s decision is similar to that of the Third Circuit, which concluded that the 340B statute does not require manufacturers to deliver 340B drugs to an “unlimited number of contract pharmacies.” The Third Circuit based its decision on the fact that the 340B statute does not reference contract pharmacies or the delivery of drugs to such pharmacies. The Third Court also noted that because “offer” means to “present [] something for acceptance,” manufacturers may meet their obligation to offer 340B pricing while restricting the delivery of 340B drugs to contract pharmacies.

Acknowledgment that the Statute May Prohibit “More Onerous” Restrictions and the Restrictions at Issue in Certain Circumstances

Muddying the waters, the court acknowledged that the statute may prohibit “other, more onerous conditions.” The court also recognized that the specific conditions at issue in the case could violate the 340B statute “in particular circumstances.” To determine whether a specific restriction violates the 340B statute, the court indicated that the focus should be on whether the manufacturer has made a “bona fide offer” and whether the restriction is “onerous enough to effectively increase the contract ‘price’” above the 340B price. The court also suggested that a manufacturer restriction could violate the statute if a covered entity is unable to comply with the restriction, such as if an entity is unable to provide claims data as required by the manufacturer.

The Third Circuit came to similar conclusions, also acknowledging the possibility that a manufacturer would not meet its obligation to offer 340B pricing if the manufacturer eliminated a covered entity’s ability to purchase a drug at the 340B price in all cases.

Seventh Circuit Decision Could Create a Circuit Court Split

The Seventh Circuit is expected to issue a decision at any time in the remaining case related to contract pharmacy restrictions. The Seventh Circuit held oral arguments on October 31, 2022, to consider the appeal of an October 29, 2021, decision issued by a judge in the U.S. District Court for the Southern District of Indiana. The lower court found that HRSA’s enforcement letter did not exceed the agency’s authority and that the agency’s interpretation of the statute was the most reasonable. However, in light of HRSA’s changing position over the years regarding contract pharmacy use, the court found the enforcement letter arbitrary and capricious under the Administrative Procedures Act (APA) and, therefore, invalid. If the Seventh Circuit finds in favor of the government, a split in the circuit court decisions could increase the likelihood that the U.S. Supreme Court could take up the issue.

Implications for 340B Contract Pharmacy Use

This latest decision is unwelcome news for 340B covered entities who had hoped that the federal courts would back the government’s efforts to stop manufacturers from restricting contract pharmacy use. The development is likely to increase 340B covered entity pressure on Congress and state legislatures for relief.

At the federal level, H.R. 7635, the 340B PATIENTS Act, introduced by Rep. Doris Matsui (D-CA), would codify contract pharmacy use into the 340B statute and clarify that manufacturers may not restrict access to 340B pricing for drugs dispensed through contract pharmacies. A bipartisan working group of six U.S. Senators has also released a draft legislation, the SUSTAIN 340B Act, that would codify contract pharmacy use but would also make significant changes to the 340B statute, some of which could restrict access to 340B pricing. The working group solicited feedback from the public and is expected to release an updated draft or introduce legislation.

Meanwhile, 340B providers are increasingly finding success in addressing contract pharmacy restrictions at the state level. To date, five states (Arkansas, Louisiana, Maryland, Mississippi, and West Virginia) have enacted laws preventing manufacturers from interfering with 340B contract pharmacy use. Similar legislation is pending in 13 states. Legislation was introduced but not enacted in the most recent legislative sessions in nine other states. So far, the state laws are proving to be successful, with more than half of manufacturers with restrictions in place nationwide having loosened their restrictions in at least some of the states that have enacted contract pharmacy laws.

Covered entities should closely monitor how drug manufacturers react to the D.C. Circuit decision, including whether additional manufacturers will implement restrictive policies or if manufacturers that have already implemented policies will impose further restrictions. To date, 32 drug manufacturers have announced contract pharmacy restrictions, up from 19 restrictions when the Third Circuit issued its decision. Covered entities should also monitor the upcoming decision expected from the Seventh Circuit.

If you have any questions about the 340B contract pharmacy model and related litigation, please contact the authors.