The 340B Contract Pharmacy Saga

We are back again with another 340B post. The 340B program has recently been a regular feature on the blog in the context of ongoing litigation discussed here and here. Today, we wanted to provide readers the details of an ongoing saga on a different aspect of the 340B program – the growing presence of contract pharmacies in the 340B space, and recent efforts by drug companies to curb this trend. This saga has featured an extended back and forth between the drug industry on the one hand, and 340B providers, stakeholders and members of Congress on the other.  The agency that regulates the 340B program – the Health Resources and Services Agency, or HRSA – is stuck in the middle.

Starting in July, several drug manufacturers began notifying 340B participants of their intentions to limit 340B participant use of contract pharmacies and impose additional reporting requirements. Things have only escalated since then. 340B providers have responded in kind, urging HRSA to halt the drug maker actions. Thus far, HRSA has stated it is reviewing the recent actions but has also cautioned that its hands may be somewhat tied as it believes the agency itself cannot step in unless there is a clear violation of the 340B statute. That said, in a September 21st letter, HHS warned one drug manufacturer that it should not “interpret HRSA’s responses as tantamount to definitive agency agreement” with the drug manufacturer’s position.

This issue has caught the attention of Congress – and the response has been both bipartisan and bicameral. The most recent move comes in the form of a September 17th letter from a bipartisan group of 30 Senators to HHS Secretary Alex Azar calling on HRSA “to take appropriate, prompt enforcement action to address violations” of the 340B statute. In a September 15th letter, a group of Democratic senators asked the Pharmaceutical Research and Manufacturers of America (PhRMA) to stop what they allege are likely illegal moves by drug makers. Furthermore, a bipartisan group of more than 240 House lawmakers have also sent a letter to Secretary Azar condemning the drug manufacturer actions, as have several members of the House Committee on Energy and Commerce.

What is the Issue?

As we have previously discussed, the 340B program requires drug manufacturers participating in Medicaid to provide discounts on outpatient prescription drugs to certain safety net health providers, called “covered entities.” This policy is in part intended to help covered entities use the savings from these discounts to address the health care needs of the uninsured and underinsured. Many 340B providers have entered into arrangements with “contract pharmacies” that dispense discounted drugs on behalf of the covered entities. These providers state that contract pharmacies help them expand the reach of their services. The use of contract pharmacies has been blessed via HRSA sub-regulatory guidance since the 1990s.

In 1996, HRSA issued guidelines that permitted covered entities participating in the 340B program to contract with a pharmacy to provide services to the covered entity’s patients. Those guidelines permitted a covered entity to use only a single point for pharmacy services, either an in-house pharmacy or an individual contract pharmacy. However, in 2010, HRSA issued additional guidance allowing covered entities to use multiple contract pharmacy options. This guidance was in part intended to address covered entity concerns over some patients facing transportation barriers or other obstacles that limited their ability to fill their prescriptions. In theory, allowing for covered entities to use more than one contract pharmacy would permit them to more effectively utilize the 340B program and create broader patient access by having more inclusive arrangements in their communities which would benefit covered entities, pharmacies and patients served.

At the time, however, opponents argued that the guidelines did not adequately describe safeguards that would combat major issues such as drug diversion and duplicate discounts. Since then, there has been growing concern regarding what many deem a lack of oversight over contract pharmacies participating in the 340B program. A 2014 HHS Office of the Inspector General (OIG) report found that contract pharmacy arrangements complicated efforts to prevent diversion and duplicate discounts.

A recent Government Accountability Office (“GAO”) report also found “weaknesses in HRSA’s oversight that impede its ability to ensure compliance with 340B Program requirements at contract pharmacies.”  Specifically, GAO found that HRSA audits did “not fully assess compliance with the 340B Program prohibition on duplicate discounts for drugs prescribed to Medicaid beneficiaries.” In this context, the term “duplicate discounts” refers to the potential that manufacturers might have to provide both 340B discounts and Medicaid drug rebates. As readers of the blog may know, under the statute, drug manufacturers cannot be required to provide both the 340B discount and a rebate through the Medicaid Drug Rebate Program.

HRSA’s Regulatory Authority

Drug manufacturers cite the concerns expressed in the OIG and GAO reports in support of their recent actions to limit 340B participant use of contract pharmacies and impose additional reporting requirements. According to the manufacturers, the use of contract pharmacies is allowing providers to surreptitiously benefit from duplicate discounts without the knowledge or approval of drug manufacturers. They also argue that the additional reporting requirements are necessary to adequately protect against the risk of duplicate discounts. From a legal perspective, the drug makers assert that they do not have to comply with the 2010 HRSA guidance because it is contrary to law. According to this argument, the 340B statute provides that drug makers must provide discounts only to “covered entities,” and contract pharmacies do not fall into this category.  Manufacturers also argue that the HRSA 1996 and 2010 policies were adopted without following the appropriate administrative process.

340B providers, on the other hand, argue that the statutory language and regulatory guidance are on their side. Specifically, the providers rely on the 2010 HRSA guidance allowing covered entities to use multiple contract pharmacy options. The providers have called on HHS to step in and put an end to these recent moves, arguing that “if the administration permits pharmaceutical companies to continue these practices, 340B hospitals will face increased difficulties serving high volumes of patients living with low incomes in our rural and urban communities.”

HRSA, for its part, has stated that it is “considering whether manufacturer policies … violate the 340B statute and whether sanctions may apply.” However, whether this is the case is not entirely clear, given that there is nothing in the 340B statute requiring drug manufacturers to provide discounts to contract pharmacies.

The agency has also made clear that it believes it lacks the regulatory authority to enforce many provisions of the 340B program. Indeed, the 340B statute is silent as to whether HRSA has the authority to promulgate regulations governing many aspects of the program, including the use of contract pharmacies. Thus, although the 2010 guidance is technically still in effect, HRSA may not believe it is legally enforceable.

Likely Path Forward

This leaves us with a situation where stakeholders and members of Congress are calling on HRSA to act, and the agency itself claiming – or at least uncertain whether –  it lacks the legal authority to do so. If the agency is correct to think its regulatory authority really is hamstrung, then a legislative solution is likely the only path forward. Given the strong, bipartisan and bicameral condemnation of these recent drug manufacturer actions, legislation that would expand HRSA regulatory authority may very well come in the next year.

In the meantime, providers are not waiting on Congress to address this issue. The National Association of Community Health Centers (NACHC) recently informed HHS of its plans to sue the agency if it does not intervene and penalize the drug manufacturers by October 1st. Readers of the blog may find it strange that NACHC plans to sue HHS, and not the drug manufacturers themselves. This peculiarity is explained by a 2010 Supreme Court case – Astra USA Inc. v. Santa Clara County – that held there is no private right of action under the 340B statute. Thus, providers would likely have to bring suit against HHS/HRSA seeking a writ of mandamus – i.e., an order stating the government has a non-discretionary duty to act and the plaintiff has no other remedy. However, it is not exactly clear what the non-discretionary duty to act is, as the there is no reference to contract pharmacies in the 340B statute.

So for now – the saga continues. We will keep an eye on any movement in this area moving forward, and provide readers with updates as they come.

One thought on “The 340B Contract Pharmacy Saga

  1. Pingback: The 340B Contract Pharmacy Saga Continues | Medicaid and the Law

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