3 Things Hospitals and Grantees Need to Know about the Genesis Decision

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The much-awaited decision in the Genesis Health Care patient definition case in federal district court in South Carolina provides 340B hospitals and federal grantees welcome re-affirmations of the importance of the vital safety-net care they provide as well as Congress’s intent to support that care through the 340B program. Although the court limited its decision solely to the Genesis health center, and its decision is potentially subject to appeal, the ruling provides a strong indication that future courts reviewing attempts by HRSA to enforce an overly-restrictive “patient definition” could similarly reject the agency’s restrictions.

Here are 3 things hospitals and grantees need to know regarding their 340B programs from the Genesis decision:

1. Hospitals and grantees should revisit their 340B prescription eligibility criteria.

For more than a quarter century, HRSA relied upon informal guidance to interpret the otherwise undefined term “patient” in the 340B statute to restrict prescriptions 340B hospitals and other covered entities could potentially claim as eligible for 340B pricing. HRSA’s “patient definition” restricted not only potentially eligible patient encounters but also potentially eligible locations, provider-patient relationships, determinations of primary responsibility of care for the patient, and—for providers who qualify for 340B participation through their federal grant—whether the patient care that prompted the prescription was within the grant’s scope.

The Genesis court rejected HRSA’s “patient definition” as applied to the Genesis health center in favor of a common-sense definition of the word “patient.” The court cited dictionaries and healthcare associations that define “patient” to mean nothing more than some variation on “a person who is receiving medical care.” Although the court limited its ruling to the specific issue that HRSA raised in its audit of the Genesis health center—whether the provider “initiated” the care that prompted the prescription—the common-sense definitions that the court cited would appear to apply equally to many, if not all, the restrictions that HRSA’s “patient definition” imposes.

In short, the Genesis ruling should prompt 340B providers to revisit the criteria they and their third-party administrators use to establish 340B eligibility for prescriptions, and to consider whether there are other criteria beyond those within HRSA’s prior “patient definition” that could document an eligible patient relationship.

2. 340B hospitals and clinics should continue to establish and document the criteria they use to determine 340B-eligible prescriptions.

Despite the potentially broad implications of the Genesis ruling, 340B entities should not conclude that any prescription is now eligible for 340B pricing. The 340B statute prohibits resale or transfer of 340B drugs to a person other than a “patient” of the 340B provider. HRSA and manufacturers can still audit 340B providers, and an audited 340B provider still must establish eligibility for its 340B prescriptions. Merely claiming that the person who filled the prescription appears in the hospital’s or clinic’s patient records is unlikely to pass audit scrutiny.

Absent the bright-line rules of HRSA’s prior “patient definition,” 340B hospitals and grantees should review carefully what documentation they do retain that helps establish a “patient” relationship under the totality of the circumstances. As ever, 340B hospitals and clinics should consult with experienced 340B counsel, in conjunction with their TPA and other 340B resource providers, to consider whether and how to revise their 340B eligibility criteria.

3. 340B hospitals and clinics should demand HRSA act through the 340B Administrative Dispute Resolution process.

While rejecting HRSA’s “patient definition,” the Genesis court also rejected the health center’s (and manufacturers’) request to rule that HRSA possesses no authority to interpret the 340B statute. To the contrary, the court said not only that HRSA does possess such authority, but also that HRSA “necessarily will be obliged to set forth its understanding of various stakeholder’s obligations under the 340B Program” to administer the 340B Administrative Dispute Resolution process (bold and italics added for emphasis).

HRSA has delayed for over a decade carrying out the ADR mechanism that Congress mandated the agency to implement by fall 2010, despite the agency representing to the Supreme Court in 2010 that it would implement ADR on time—and the Supreme Court relying on that representation in its ruling in the 2010 Astra case that ADR was the primary mechanism for 340B providers to challenge manufacturer practices. Last fall, HRSA refused to rule on providers’ ADR challenge to manufacturers’ unilateral restrictions on contract pharmacy, and in doing so, asserted that it would not issue ADR rulings while manufacturers were bringing associated lawsuits. HRSA’s proposed final ADR rule, currently under review by the White House, adopts a similar position—effectively, abandoning the agency’s responsibilities that Congress mandated and upon which the Supreme Court relied.

The Genesis decision turns HRSA’s faulty ADR reasoning on its head. As Congress, the Supreme Court, and now the Genesis court have re-affirmed, HRSA’s ability to “set forth its understanding of various stakeholder’s obligations under the 340B Program” comes through the ADR process. That includes not only the scope of the term “patient” (should that issue arise in an ADR matter) but also, notably, whether manufacturers can impose unilateral restrictions on 340B providers’ common law contractual or other rights.

As the Genesis court states, the statutory interpretations HRSA sets forth in ADR decisions must still possess the “power to persuade” a reviewing court under the so-called Skidmore standard of review. However, the agency’s statutory interpretations, when provided in the context of a well-reasoned ADR decision following a contested process, would better meet the Skidmore requirements to demonstrate “the thoroughness evident in [the agency’s] consideration, the validity of its reasoning,” and “the degree of the agency’s care, its consistency, formality, and relative expertness.” Indeed, such decisions meet the expectations of the Skidmore standard of review far better than informal guidance that an agency publishes in the Federal Register or that it states for the first time in federal court filings.

Not only should the Genesis case prompt 340B covered entities to revisit their eligibility criteria for 340B prescriptions, but it should also embolden them to demand that HRSA fully implement and utilize the ADR mechanism Congress provided for 340B providers to enforce their rights and protect the original purpose of the 340B program.

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Steve Kuperberg is partner at Feldesman Leifer LLP. He can be reached at skuperberg@feldesman.com.

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