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On April 19, 2024—fourteen years after the Congressional deadline—the Health Resources and Services Administration published its final rule for the 340B Administrative Dispute Resolution process. The rule goes into effect today, June 18. Although HRSA restarted its stalled ADR rulemaking in 2020 after two 340B grantee organizations sued, HRSA “encountered policy and operational challenges with implementation” and started over in November 2022.
As HRSA stated, “the purpose of the 340B ADR process is to resolve (1) claims by covered entities that they have been overcharged for covered outpatient drugs by manufacturers and (2) claims by manufacturers, after a manufacturer has conducted an audit … that a covered entity has violated the prohibition on diversion or duplicate discounts.” In either case, the parties must engage in good faith efforts to resolve the dispute before filing.
The long-awaited final ADR rule represents a welcome development for 340B hospitals and grantees, but it is not without caveats. Here are three things 340B hospitals and grantees need to know about the new 340B ADR rule:
1. 340B Hospitals and Grantees Can Dispute Manufacturer Contract Pharmacy Restrictions (And Other Issues) Through ADR—Even While Manufacturer Lawsuits are Pending.
HRSA’s final rule permits covered entities to bring ADR disputes involving issues similar to those in pending federal lawsuits, such as those currently being litigated regarding the unilateral restrictions drug manufacturers have imposed on 340B contract pharmacy rights. (The U.S. Circuit Court for the District of Columbia recently issued an opinion upholding certain manufacturer restrictions, while declining to rule on others. A similar case remains pending in the Seventh Circuit.)
Under its previous ADR process, HRSA infamously refused to decide covered entity disputes regarding manufacturer restrictions on contract pharmacy rights. In an unpublished opinion, HRSA claimed it would be inappropriate to rule on issues similar to those in pending federal lawsuits—namely, those that manufacturers had preemptively filed to prevent HRSA from levying penalties for refusing to honor contract pharmacy rights.
By denying covered entities their statutory remedy because manufacturers had sued, the ADR panel contradicted both Congress’s mandate as well as the U.S. Supreme Court’s 2011 decision in Astra USA v. Santa Clara County that the 340B ADR process constitutes covered entities’ remedy for manufacturer overcharges. Nevertheless, HRSA included its flawed reasoning in its proposed rulemaking for the new ADR rule, where commenters fiercely criticized HRSA’s position.
While HRSA’s proposed ADR rulemaking was ongoing, in November 2023, the South Carolina federal district court in the Genesis case observed that the ADR process was HRSA’s statutory vehicle for providing its interpretation of the 340B statute. The Genesis court stated that statutory interpretations provided through ADR, while still subject to judicial review, would better meet the judicial review standard 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.” In its recent opinion, the D.C. Circuit, too, urged the agency to review other manufacturer restrictions and to provide its reasoning whether those restrictions, among other things, were consistent with terms of a bona fide “offer” under the manufacturers’ Pharmaceutical Pricing Agreements with HHS.
In its final ADR rule, HRSA reversed its previous, flawed position, concluding: “By allowing claims that are the same as or similar to those pending in Federal court to move through the 340B ADR process, HHS is proceeding consistent with the Astra decision and meeting its statutory mandate.”
Now, covered entities may bring disputes through the ADR process including manufacturers’ unilateral contract pharmacy restrictions. Permitting covered entities the means Congress intended to seek a remedy for manufacturer overcharges constitutes a welcome development for 340B hospitals and grantees.
2. HRSA Can (and Should) Provide Its Interpretation of “Patient” Through ADR.
Covered entities, too, can be subject to manufacturer ADR disputes after a manufacturer audit and good faith efforts to resolve the issue. Those disputes can address whether (a) the covered entity has committed “diversion,” that is, provided 340B drugs to a person who is not a “patient” under the statute, or (b) the covered entity caused the manufacturer to be subject to duplicate discounts (the ostensible purposes for manufacturer’s contract pharmacy restrictions). Regarding diversion, as has been widely reported, the Genesis court rejected HRSA’s longstanding informal guidance regarding its “patient definition” in favor of a broad, common-sense understanding of the word “patient” as Congress used the word in the 340B statute.
The Genesis case limited its ruling to the litigants, and HRSA has since stated it will continue applying its restrictive “patient definition.” However, in what may signal a shift in policy, HRSA’s final ADR rule provided two examples of potential “diversion”: “(1) transferring of covered outpatient drugs to a patient where there was no record of the individual’s health care or no provider relationship or (2) transferring covered outpatient drugs to an individual who is an inpatient.” Neither of those examples are either controversial or apply HRSA’s restrictive “patient definition.”
If HRSA interprets “patient” in the 340B statute as something other than a broad, common-sense meaning, then the Genesis opinion makes clear that HRSA should justify its interpretation through reasoned ADR decisions subject to judicial review.
3. Don’t Expect Immediate Results Through ADR.
340B covered entities should not expect ADR to provide immediate relief to pressing issues. HRSA’s ADR rule is effective today but two lawsuits that manufacturers filed to block the previous ADR process—or new lawsuits against the final ADR rule—could slow the new rule’s implementation. The parties to one of those pending lawsuits indicated in a May 20 status report that they would update the court again on July 18, and so 340B stakeholders may soon learn if renewed ADR litigation is imminent.
Even though the new ADR rule takes effect today, HRSA cautioned it expects to take a year—or more—to issue decisions. Moreover, the final ADR process includes rights to appeal internally within HHS, as well as a right to judicial review. In short, HRSA’s final ADR rule opens a welcome pathway to resolving 340B disputes, but it may take time to contribute to resolving those disputes.
Steve Kuperberg is a partner at Feldesman. He can be reached at skuperberg@feldesman.com.
