On January 30, the U.S. Court of Appeals for the Third Circuit issued a unanimous decision in favor of drug manufacturers, finding that manufacturer restrictions on the use of contract pharmacies under the 340B drug pricing program are allowed, and the federal government’s policy prohibiting such restrictions is unlawful. According to the court, “Congress never said that drug makers must deliver discounted Section 340B drugs to an unlimited number of contract pharmacies.”

The decision is the first from three U.S. circuit courts that are reviewing appeals in four district court cases related to 340B contract pharmacy use – two decisions largely for manufacturers and two largely for the government and in support of 340B providers. The Third Circuit decision reverses one of the decisions for the government and is a disappointment for 340B providers.

Decisions from the U.S. Courts of Appeals for the Seventh Circuit and D.C. Circuit are expected at any time. Meanwhile, two drug manufacturers have announced new restrictions since the decision, raising questions about how other drug manufacturers will respond and what the 340B contract pharmacy model will look like moving forward.

Court’s Consideration of Manufacturer 340B Obligations

At issue was the ability of 340B providers (referred to as covered entities) to access discounted pricing for drugs dispensed through contract pharmacies. 340B covered entities can access program savings by purchasing drugs at 340B prices to be administered or dispensed in several settings – including outpatient clinics, in-house retail pharmacies, and contract pharmacies – that dispense 340B drugs on the entity’s behalf to the entity’s patients.

The question rested on the scope of manufacturers’ obligations under the 340B statute. The statute requires manufacturers to enter into agreements with the Department of Health & Human Services (HHS) under which the amount a 340B covered entity must pay for a 340B covered outpatient drug cannot exceed the discounted 340B ceiling price. The statute also requires manufacturers to offer outpatient drugs to covered entities at or below the ceiling price if the drug is made available to other purchasers.

The Third Circuit considered a consolidated appeal of two district court decisions that addressed three manufacturers’ policies. A judge in the U.S. District Court for the District of New Jersey found two of the policies impermissible, ruling largely in favor of the government. A judge in the U.S. District Court for the District of Delaware upheld the third manufacturer’s policy. Although the policies differed, each placed restrictions on a covered entity’s ability to purchase drugs at 340B pricing if they were to be dispensed through a contract pharmacy, with some exceptions.

The court reviewed the Health Resources and Services Administration’s (HRSA’s) position that the policies were unlawful because the 340B statute prohibits manufacturers from placing any limits on access to 340B pricing for drugs dispensed through contract pharmacies. The court found HRSA’s interpretation of the statute “unpersuasive” and held that the government may not take enforcement actions against the three manufacturers based on this interpretation.

Focus on Statute’s “Silence” Related to Contract Pharmacies and Drug Delivery

The court concluded that the 340B statute does not require manufacturers to deliver 340B drugs to an “unlimited number of contract pharmacies” and based this conclusion on three findings.

First, the court noted that the 340B statute does not reference contract pharmacies or the delivery of drugs to such pharmacies. The government argued that because the statute requires manufacturers to “offer” 340B pricing to covered entities, if an entity purchases a drug at 340B pricing, manufacturers must deliver the drug to wherever the entity chooses to dispense it. However, the court distinguished between a mandate to offer 340B pricing versus deliver a 340B drug. Noting that “offer” means to “present [] something for acceptance,” the court found manufacturers may meet their obligation to offer 340B pricing while restricting the delivery of 340B drugs to contract pharmacies. The court acknowledged 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. However, all three manufacturers’ policies at issue included exceptions allowing entities to access 340B pricing in some cases.

The court was also not persuaded by the government’s position that, because manufacturers agree to sell drugs “purchased by” a covered entity at no more than the 340B price, manufacturers must deliver drugs purchased by a covered entity to any pharmacy location chosen by the entity. The court found that the statute’s reference to drugs “purchased by” a covered entity only relates to the purchase of a drug, not its delivery.

Second, the court concluded that the structure of the 340B statute did not support the government’s interpretation. In particular, the court focused on language found elsewhere in the 340B statute addressing a covered entity’s ability to enter into contracts and in a related statute referencing the delivery of drugs. Congress’ failure to include similar language in the 340B statute confirmed the absence of a statutory obligation to deliver 340B drugs to an unlimited number of contract pharmacies, according to the court.

Third, the court reviewed the legislative history and purpose behind the 340B program and found they too did not support HRSA’s interpretation. The government highlighted the purpose of the program to provide financial resources to providers and argued that allowing manufacturers to limit access to 340B pricing for drugs dispensed in contract pharmacies restricted access to those resources. The court conceded that Congress may have intended for covered entities without their own in-house pharmacy to contract with a single pharmacy, but the court was not persuaded that Congress intended for covered entities to contract with an unlimited number of pharmacies.

Review of Manufacturer Policies and HRSA Enforcement Action

Beginning in the summer of 2020, several manufacturers announced policies to restrict access to 340B pricing for drugs ordered by a covered entity to be shipped to a contract pharmacy location for dispensing. To date, 21 manufacturers have announced policies related to purchases of drugs to be dispensed through contract pharmacies.

Some manufacturer policies have eliminated access to 340B pricing for use in any contract pharmacy unless the covered entity does not have an in-house pharmacy, in which case the entity may use one contract pharmacy location. Other policies impose data-sharing requirements to access discounted pricing for contract pharmacy use, among other exceptions. Certain policies impact all covered entity types, whereas other policies are limited to hospitals and continue to provide access to 340B pricing for federally-qualified health centers (FQHCs) and other providers that qualify for 340B based on their federal grantee status.

Covered entities have argued that the statute does not permit manufacturers to restrict a provider’s access to 340B pricing based on the method of dispensing. The federal government has agreed on multiple occasions. In May 2021, HRSA began sending enforcement letters to manufacturers, notifying them that their policies restricting 340B access violate the 340B statute. HRSA indicated that failure to correct the violations might result in the imposition of Civil Monetary Penalties (CMPs). In September 2021, HRSA began sending follow-up letters to manufacturers notifying them that, due to their continued refusal to comply with the statute, HRSA referred their actions to the Office of Inspector General to consider the imposition of CMPs.

Summary of Legal Challenges to HRSA Enforcement

Nine manufacturers have brought lawsuits challenging HRSAs enforcement actions. Four district courts have issued decisions, each on appeal before three circuit courts. The Third Circuit decision addressed two of the lower court decisions. Below is a summary of the status of the cases:

D.C. Circuit

The D.C. Circuit held oral arguments on October 24, 2022, to consider the appeal of a November 5, 2021, consolidated decision by a judge in the U.S. District Court for the District of Columbia addressing two manufacturers’ policies. The lower court set aside HRSA’s enforcement letters, taking issue with HRSA’s position that the statute does not prohibit manufacturers from imposing any conditions on access to 340B pricing. However, the court declined to declare the manufacturers’ policies permissible, leaving unanswered the question of whether the statute allows the specific conditions under the manufacturers’ policies. Questions raised during oral arguments suggested possible support for allowing manufacturers to set conditions, although it was unclear if the court would weigh in on the conditions at hand.

Seventh Circuit

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. A question was raised during oral arguments about whether the government may need to take additional enforcement actions, such as the imposition of CMPs before the case can proceed.

Third Circuit

The Third Circuit held oral arguments on November 15, 2022, to consider the appeal of two decisions. On November 5, 2021, a judge in the U.S. District Court for the District of New Jersey issued a consolidated decision regarding two manufacturers’ policies, finding that the 340B statute permits contract pharmacy arrangements and that the policies violated the statute because manufacturers cannot unilaterally restrict access to 340B pricing. At the same time, however, the court partially vacated the enforcement letters, taking issue with HRSA’s conclusion that the manufacturers owe credits or refunds to covered entities and face CMPs. The court found an unanswered question about whether HRSA can require manufacturers to deliver their drugs to unlimited contract pharmacies. Instead of deciding the question, the court remanded it to the agency for further consideration.

On February 16, 2022, a judge in the U.S. District Court for the District of Delaware issued a decision vacating HRSA’s enforcement letter to the manufacturer, finding that it was based on an incorrect interpretation of the 340B statute. The court concluded that the statute is unambiguous that manufacturers are not required to offer 340B pricing for an unlimited number of contract pharmacies.

Implications for 340B Contract Pharmacy Use

The Third Circuit decision is unwelcome news for 340B covered entities hoping that the federal courts will back the government’s efforts to stop manufacturers from restricting access to 340B pricing and provide clarity on the use of 340B contract pharmacies. Of the four district court decisions addressing manufacturer restrictions, two were more favorable to the government and covered entities, and two were more favorable to manufacturers. The Third Circuit decision reversed one of the decisions favorable to the government and upheld one of the decisions favorable to manufacturers.

The D.C. Circuit and the Seventh Circuit are expected to issue decisions at any time in the remaining cases, one of which was decided in the lower court largely in the government’s favor and the other in favor of manufacturers. A split in the circuit court decisions could increase the likelihood that the U.S. Supreme Court could take up the issue.

A key question that remains to be directly answered by the courts is whether there may be certain types of restrictions imposed by manufacturers that HRSA is authorized to prohibit. In the New Jersey District Court decision reversed by the Third Circuit, the lower court raised the question of how many contract pharmacies are permitted under the 340B statute, including whether there should be a cap at all. The court remanded this question to HRSA for further explanation, suggesting that the agency was in the best position to “develop guideposts for contract pharmacy use, if necessary, and weigh the tradeoffs.”

On appeal, the Third Circuit found HRSA’s position that all manufacturer restrictions are unlawful to be overly broad but did not directly address whether HRSA could prohibit certain types of restrictions. The decision raised the possibility that a manufacturer’s policy that gave a covered entity “no way to dispense [340B] drugs” may not be permissible, but the court did not definitively address this scenario or others where HRSA may be authorized to find a manufacturer’s policy unlawful.

As the courts continue to consider the scope of manufacturer obligations, covered entities should closely monitor how drug manufacturers react to the Third Circuit decision, including whether additional manufacturers will implement restrictive policies or if manufacturers that have already implemented policies will impose further restrictions. Since the decision, two additional manufacturers have announced new restrictive policies. Covered entities should also monitor the upcoming decisions expected from the D.C. Circuit and Seventh Circuit.

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